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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 001-38701
SI-BONE, INC.
(Exact Name of Registrant as Specified in its Charter)
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Delaware | | 26-2216351 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification Number) |
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471 El Camino Real, Suite 101, Santa Clara, California | | 95050 |
(Address of principal executive offices) | | (Zip Code) |
Registrant's telephone number, including area code: (408) 207-0700
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.0001 per share | SIBN | The Nasdaq Global Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☐ | | Accelerated filer | ☐ | | Non-accelerated filer | ☒ |
Smaller reporting company | ☒ | | Emerging growth company | ☐ | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
The number of shares outstanding of the registrant’s Common Stock was 40,501,023 as of October 31, 2023.
TABLE OF CONTENTS
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| | PART I-FINANCIAL INFORMATION | |
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| | PART II-OTHER INFORMATION | |
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our future results of operations and financial position, business strategy, prospective products and product candidates, sales force expansion, surgeon adoption, reimbursement determinations, clinical trial results, and U.S. Food and Drug Administration ("FDA") approvals, are forward-looking statements.
These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these identifying words. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of risks, uncertainties and assumptions, including those described under the sections in this Quarterly Report titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These forward-looking statements include, but are not limited to, statements about the following:
•our ability to continue to diversify our product mix, including identification of new opportunities and access the capital required to fund adequate new inventory of instruments and implants to address these opportunities;
•our expectation that a significant portion of our revenues will be derived from sales from a small family of products and a single family of procedures;
•our ability to develop and commercialize additional revenue opportunities, including new indications for use and new devices;
•our ability to retain and grow our sales team based on the demand for our products;
•our ability to identify, train, and retain surgeons to perform procedures using our products;
•our ability to obtain and maintain favorable coverage and reimbursement determinations from third-party payors;
•our estimates of our market opportunities;
•our expectations regarding the scope of protection from intellectual property rights covering our products;
•developments or disputes concerning our intellectual property or other proprietary rights;
•timing of and results from clinical and other trials;
•marketing clearances and authorization from the FDA and regulators in other jurisdictions;
•timing of regulatory filings and feedback;
•competition in the markets we serve;
•our expectations of the reliability and performance of our products;
•our expectations of the benefits to patients, providers, and payors of our products;
•factors impacting the supply chains we rely on, including the availability of raw materials and skilled labor serving our suppliers, and the cost of these factors of production which may in turn impact the prices we pay for our devices;
•our reliance on a limited number of suppliers, including sole source suppliers, which may impact the availability of instruments and materials;
•our ability to sustain or increase demand for our products;
•our estimates regarding our costs and risks associated with our international operations and expansion;
•our expectations regarding our ability to retain and recruit key personnel;
•our ability to attract and retain employees, including those with specialized skills and experience;
•our ability to successfully manage the supply chain and operational challenges, as well as governmental responses or mandates, associated with a disease outbreak, including epidemics, pandemics or similar widespread public health concerns;
•the continuing impact of COVID-19 or other disease outbreaks on the demand for, and timing of, our procedures;
•our ability to attract and retain a force of third party sales agents who sell our products in the U.S;
•our expectations regarding acquisitions and strategic operations;
•our ability to access capital markets;
•our ability to fund our working capital requirements;
•our compliance with, and the cost of, federal, state, and foreign regulatory requirements;
•the factors that may impact our financial results; and
•anticipated trends and challenges in our business and the markets in which we operate.
Forward-looking statements are based on management’s current expectations, estimates, forecasts, and projections about our business and the industry in which we operate, and management’s beliefs and assumptions are not guarantees of future performance or development and involve known and unknown risks, uncertainties, and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this report may turn out to be inaccurate. Furthermore, if the forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” and elsewhere in this report. These statements, like all statements in this report, speak only as of their date. We caution investors that our business and financial performance are subject to substantial risks and uncertainties. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future, except as may be required by law.
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
SI-BONE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 53,492 | | | $ | 20,717 | |
Short-term investments | 113,261 | | | 76,573 | |
Accounts receivable, net of allowance for credit losses of $750 and $400, respectively | 19,988 | | | 20,674 | |
Inventory | 22,335 | | | 17,282 | |
Prepaid expenses and other current assets | 1,943 | | | 2,365 | |
Total current assets | 211,019 | | | 137,611 | |
| | | |
Property and equipment, net | 16,487 | | | 15,564 | |
Operating lease right-of-use assets | 3,034 | | | 4,002 | |
Other non-current assets | 338 | | | 375 | |
TOTAL ASSETS | $ | 230,878 | | | $ | 157,552 | |
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 4,420 | | | $ | 6,279 | |
Accrued liabilities and other | 13,549 | | | 13,511 | |
| | | |
Operating lease liabilities, current portion | 1,403 | | | 1,388 | |
Total current liabilities | 19,372 | | | 21,178 | |
Long-term borrowings | 36,022 | | | 35,171 | |
Operating lease liabilities, net of current portion | 1,865 | | | 2,871 | |
Other long-term liabilities | 19 | | | 30 | |
TOTAL LIABILITIES | 57,278 | | | 59,250 | |
| | | |
Commitments and contingencies (Note 6) | | | |
| | | |
STOCKHOLDERS’ EQUITY | | | |
Preferred stock, $0.0001 par value; 5,000,000 shares authorized; no shares issued and outstanding | — | | | — | |
Common stock, $0.0001 par value; 100,000,000 shares authorized; 40,377,691 and 34,731,577 shares issued and outstanding, respectively | 4 | | | 3 | |
Additional paid-in capital | 562,698 | | | 455,172 | |
Accumulated other comprehensive income | 356 | | | 232 | |
Accumulated deficit | (389,458) | | | (357,105) | |
TOTAL STOCKHOLDERS’ EQUITY | 173,600 | | | 98,302 | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 230,878 | | | $ | 157,552 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SI-BONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share amounts)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, |
| 2023 | | 2022 | | | | | | 2023 | | 2022 |
Revenue | $ | 34,014 | | | $ | 26,432 | | | | | | | $ | 100,027 | | | $ | 74,456 | |
Cost of goods sold | 7,041 | | | 4,168 | | | | | | | 19,283 | | | 10,616 | |
Gross profit | 26,973 | | | 22,264 | | | | | | | 80,744 | | | 63,840 | |
Operating expenses: | | | | | | | | | | | |
Sales and marketing | 26,512 | | | 25,669 | | | | | | | 81,317 | | | 80,117 | |
Research and development | 3,919 | | | 3,089 | | | | | | | 10,866 | | | 10,147 | |
General and administrative | 7,711 | | | 7,072 | | | | | | | 22,986 | | | 21,891 | |
Total operating expenses | 38,142 | | | 35,830 | | | | | | | 115,169 | | | 112,155 | |
Loss from operations | (11,169) | | | (13,566) | | | | | | | (34,425) | | | (48,315) | |
Interest and other income (expense), net: | | | | | | | | | | | |
Interest income | 2,174 | | | 346 | | | | | | | 4,689 | | | 555 | |
Interest expense | (884) | | | (755) | | | | | | | (2,573) | | | (1,938) | |
Other expense | (143) | | | (183) | | | | | | | (44) | | | (383) | |
Net loss | $ | (10,022) | | | $ | (14,158) | | | | | | | $ | (32,353) | | | $ | (50,081) | |
Other comprehensive income (loss): | | | | | | | | | | | |
Changes in foreign currency translation | 53 | | | 25 | | | | | | | 34 | | | 11 | |
Unrealized gain (loss) on marketable securities | 5 | | | 100 | | | | | | | 90 | | | (206) | |
Comprehensive loss | $ | (9,964) | | | $ | (14,033) | | | | | | | $ | (32,229) | | | $ | (50,276) | |
| | | | | | | | | | | |
Net loss per share, basic and diluted | $ | (0.25) | | | $ | (0.41) | | | | | | | $ | (0.86) | | | $ | (1.47) | |
| | | | | | | | | | | |
Weighted-average number of common shares used to compute basic and diluted net loss per share | 40,265,520 | | | 34,356,850 | | | | | | | 37,702,207 | | | 34,069,357 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SI-BONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
(Unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income | | Accumulated Deficit | | Total Stockholders’ Equity | | |
| | Shares | | Amount | | | | | | |
Balance as of December 31, 2022 | | 34,731,577 | | | $ | 3 | | | $ | 455,172 | | | $ | 232 | | | $ | (357,105) | | | $ | 98,302 | | | |
Issuance of common stock upon exercise of stock options, net of shares withheld | | 120,266 | | | — | | | 520 | | | — | | | — | | | 520 | | | |
Issuance of common stock upon vesting of restricted stock units | | 254,320 | | | — | | | — | | | — | | | — | | | — | | | |
Stock-based compensation | | — | | | — | | | 6,194 | | | — | | | — | | | 6,194 | | | |
| | | | | | | | | | | | | | |
Foreign currency translation | | — | | | — | | | — | | | (22) | | | — | | | (22) | | | |
Net unrealized gain on marketable securities | | — | | | — | | | — | | | 90 | | | — | | | 90 | | | |
Net loss | | — | | | — | | | — | | | — | | | (11,125) | | | (11,125) | | | |
Balance as of March 31, 2023 | | 35,106,163 | | | 3 | | | 461,886 | | | 300 | | | (368,230) | | | 93,959 | | | |
Issuance of common stock from public offerings, net of underwriting discounts, commissions and offering costs | | 4,068,497 | | | 1 | | | 83,671 | | | — | | | — | | | 83,672 | | | |
Issuance of common stock upon exercise of stock options, net of shares withheld | | 497,926 | | | — | | | 3,515 | | | — | | | — | | | 3,515 | | | |
Issuance of common stock related to employee stock purchase plan | | 130,867 | | | — | | | 1,471 | | | — | | | — | | | 1,471 | | | |
Issuance of common stock upon vesting of restricted stock units | | 261,709 | | | — | | | — | | | — | | | — | | | — | | | |
Issuance of common stock upon exercise of warrant, net of shares withheld | | 22,603 | | | — | | | — | | | — | | | — | | | — | | | |
Stock-based compensation | | — | | | — | | | 5,998 | | | — | | | — | | | 5,998 | | | |
Foreign currency translation | | — | | | — | | | — | | | 3 | | | — | | | 3 | | | |
Net unrealized loss on marketable securities | | — | | | — | | | — | | | (5) | | | — | | | (5) | | | |
Net loss | | — | | | — | | | — | | | — | | | (11,206) | | | (11,206) | | | |
Balance as of June 30, 2023 | | 40,087,765 | | | 4 | | | 556,541 | | | 298 | | | (379,436) | | | 177,407 | | | |
Issuance of common stock upon exercise of stock options, net of shares withheld | | 52,302 | | | — | | | 229 | | | — | | | — | | | 229 | | | |
Issuance of common stock upon vesting of restricted stock units | | 237,624 | | | — | | | — | | | — | | | — | | | — | | | |
Stock-based compensation | | — | | | — | | | 5,928 | | | — | | | — | | | 5,928 | | | |
Foreign currency translation | | — | | | — | | | — | | | 53 | | | — | | | 53 | | | |
Net unrealized gain on marketable securities | | — | | | — | | | — | | | 5 | | | — | | | 5 | | | |
Net loss | | — | | | — | | | — | | | — | | | (10,022) | | | (10,022) | | | |
Balance as of September 30, 2023 | | 40,377,691 | | | $ | 4 | | | $ | 562,698 | | | $ | 356 | | | $ | (389,458) | | | $ | 173,600 | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income | | Accumulated Deficit | | Total Stockholders’ Equity | | |
| | Shares | | Amount | | | | | | |
Balance as of December 31, 2021 | | 33,674,085 | | | $ | 3 | | | $ | 429,914 | | | $ | 352 | | | $ | (295,849) | | | $ | 134,420 | | | |
Issuance of common stock upon exercise of stock options, net of shares withheld | | 34,798 | | | — | | | 169 | | | — | | | — | | | 169 | | | |
Issuance of common stock upon vesting of restricted stock units | | 163,480 | | | — | | | — | | | — | | | — | | | — | | | |
Stock-based compensation | | — | | | — | | | 5,507 | | | — | | | — | | | 5,507 | | | |
| | | | | | | | | | | | | | |
Net unrealized loss on marketable securities | | — | | | — | | | — | | | (248) | | | — | | | (248) | | | |
Net loss | | — | | | — | | | — | | | — | | | (17,410) | | | (17,410) | | | |
Balance as of March 31, 2022 | | 33,872,363 | | | 3 | | | 435,590 | | | 104 | | | (313,259) | | | 122,438 | | | |
Issuance of common stock upon exercise of stock options, net of shares withheld | | 4,469 | | | — | | | 30 | | | — | | | — | | | 30 | | | |
Issuance of common stock related to employee stock purchase plan | | 112,773 | | | — | | | 1,199 | | | — | | | — | | | 1,199 | | | |
Issuance of common stock upon vesting of restricted stock units | | 232,009 | | | — | | | — | | | — | | | — | | | — | | | |
Stock-based compensation | | — | | | — | | | 5,751 | | | — | | | — | | | 5,751 | | | |
Foreign currency translation | | — | | | — | | | — | | | (14) | | | — | | | (14) | | | |
Net unrealized loss on marketable securities | | — | | | — | | | — | | | (58) | | | — | | | (58) | | | |
Net loss | | — | | | — | | | — | | | | | (18,513) | | | (18,513) | | | |
Balance as of June 30, 2022 | | 34,221,614 | | | 3 | | | 442,570 | | | 32 | | | (331,772) | | | 110,833 | | | |
Issuance of common stock upon exercise of stock options, net of shares withheld | | 24,944 | | | — | | | 106 | | | — | | | — | | | 106 | | | |
Issuance of common stock upon vesting of restricted stock units | | 192,751 | | | — | | | — | | | — | | | — | | | — | | | |
Stock-based compensation | | — | | | — | | | 5,922 | | | — | | | — | | | 5,922 | | | |
Foreign currency translation | | — | | | — | | | — | | | 25 | | | — | | | 25 | | | |
Net unrealized gain on marketable securities | | — | | | — | | | — | | | 100 | | | — | | | 100 | | | |
Net loss | | — | | | — | | | — | | | | | (14,158) | | | (14,158) | | | |
Balance as of September 30, 2022 | | 34,439,309 | | | $ | 3 | | | $ | 448,598 | | | $ | 157 | | | $ | (345,930) | | | $ | 102,828 | | | |
| | | | | | | | | | | | | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SI-BONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 |
Cash flows from operating activities | | | |
Net loss | $ | (32,353) | | | $ | (50,081) | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | |
Stock-based compensation | 18,120 | | | 17,180 | |
Depreciation and amortization | 3,855 | | | 2,450 | |
Accounts receivable credit losses | 352 | | | 50 | |
Accretion (amortization) of discount and premium on marketable securities | (2,417) | | | 625 | |
| | | |
Amortization of debt issuance costs | 165 | | | 152 | |
| | | |
Loss on disposal of property and equipment | 941 | | | 133 | |
Changes in operating assets and liabilities: | | | |
Accounts receivable | 344 | | | (2,001) | |
Inventory | (5,039) | | | (5,178) | |
Prepaid expenses and other assets | 460 | | | 1,401 | |
Accounts payable | (876) | | | 1,476 | |
Accrued liabilities and other | 32 | | | (1,087) | |
Net cash used in operating activities | (16,416) | | | (34,880) | |
Cash flows from investing activities | | | |
Maturities of marketable securities | 93,500 | | | 90,200 | |
| | | |
Purchases of marketable securities | (127,680) | | | (85,257) | |
Purchases of property and equipment | (6,706) | | | (7,847) | |
Net cash used in investing activities | (40,886) | | | (2,904) | |
Cash flows from financing activities | | | |
Proceeds from public offering, net of discounts, commissions and offering costs | 83,671 | | | — | |
Proceeds from debt financing | 36,000 | | | — | |
Repayments of debt financing | (35,275) | | | — | |
Payments of debt issuance costs | (40) | | | — | |
| | | |
Proceeds from issuance of common stock under employee stock purchase plan | 1,471 | | | 1,199 | |
Proceeds from the exercise of stock options | 4,264 | | | 305 | |
| | | |
| | | |
Net cash provided by financing activities | 90,091 | | | 1,504 | |
Effect of exchange rate changes on cash and cash equivalents | (14) | | | (840) | |
Net increase (decrease) in cash and cash equivalents | 32,775 | | | (37,120) | |
Cash and cash equivalents at | | | |
Beginning of period | 20,717 | | | 63,419 | |
End of period | $ | 53,492 | | | $ | 26,299 | |
| | | |
| | | |
| | | |
Supplemental disclosure of non-cash information | | | |
| | | |
Unpaid purchases of property and equipment | 120 | | | 593 | |
| | | |
| | | |
| | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SI-BONE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. The Company and Nature of Business
SI-BONE, Inc. (the “Company”) was incorporated in the state of Delaware on March 18, 2008 and is headquartered in Santa Clara, California. The Company is a medical device company that has pioneered a proprietary minimally invasive surgical implant system to fuse the sacroiliac joint for treatment of musculoskeletal disorders of the sacropelvic anatomy. The Company introduced its first generation iFuse implant in 2009 in the U.S., in 2010 in certain countries in the European Union, and in 2015 in certain countries in the rest of the world. The second generation iFuse implant, iFuse-3D, was introduced in 2017 followed by iFuse-TORQ in 2021 and iFuse Bedrock Granite in 2022.
In May 2023, the Company received a total of $83.7 million of net proceeds after deducting the underwriting discounts and commissions from the offering of 3,775,000 shares of the Company’s common stock and the exercise of underwriter's option to purchase from the Company an additional 566,250 shares of the Company's common stock, at a public offering price of $22.00 per share. Of these shares, 272,753 shares were offered by a selling stockholder, and the Company did not receive any proceeds from the sale by the selling stockholder.
Risks and Uncertainties
The Company is subject to uncertainties related to liquidity, the ability to meet covenants and access to funding for its capital needs as the financial service industry has experienced disruptions characterized by the bankruptcy, failure, collapse or sale of various financial institutions. The Company’s cash and cash equivalents are primarily invested in deposits and money market accounts with two major financial institutions in the U.S. Deposits in these banks may exceed the federally insured limits or any other insurance provided on such deposits, if any. The Company had accounts with Silicon Valley Bank (“SVB”). On March 10, 2023, California regulators shut down SVB and the FDIC was appointed as SVB’s receiver. On March 26, 2023, the FDIC announced that it had entered into a purchase and assumption agreement with First-Citizens Bank & Trust Company (“First-Citizens”) under which all deposits of the former Silicon Valley Bank were assumed by First-Citizens. First-Citizens acquired the rights as lender under the Company’s Loan and Security Agreement as amended. To date, the Company has not experienced any losses on its deposits of cash, cash equivalents and marketable securities and continues to have access to these funds.
The Company's future results of operations and liquidity could be adversely impacted by a variety of factors including those discussed in the section titled "Risk Factors" in this report. As of the date of issuance of these condensed consolidated financial statements, the extent to which the current macroeconomic environment may materially impact the Company's financial condition, liquidity, or results of operations remains uncertain.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP have been condensed or omitted, and accordingly the balance sheet as of December 31, 2022 has been derived from the audited consolidated financial statements at that date but does not include all of the information required by GAAP for complete financial statements. These unaudited interim condensed consolidated financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments that are necessary for a fair statement of the Company’s consolidated financial information. The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023 or for any other interim period or for any other future year.
The accompanying condensed consolidated financial statements should be read in conjunction with the audited financial statements and related notes thereto for the year ended December 31, 2022 contained in the Company’s Annual Report on Form 10-K filed with the SEC on March 2, 2023.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant accounting estimates and management judgments reflected in the condensed consolidated financial statements primarily includes the fair value of performance-based restricted stock unit awards. Estimates are based on historical experience, where applicable and other assumptions believed to be reasonable by the management. Actual results could differ from those estimates.
SI-BONE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Significant Accounting Policies
The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. The Company updated the accounting policies related to the property and equipment and revenue recognition, as follows:
Property and Equipment
Construction in progress includes assets that have not yet been placed into service including the cost of individual components of an instrument tray. Once an instrument tray is placed into service, the Company transfers its carrying value into machinery and equipment and begins depreciating the cost of the instrument tray over its useful life. Leasehold improvements are amortized over the lesser of their useful lives or the life of the lease. Upon the sale or retirement of these assets, the cost and related accumulated depreciation are removed from the consolidated balance sheet and the resulting gain or loss is recognized in the consolidated statement of operations. Maintenance and repairs are charged to operations as incurred.
Revenue Recognition
The Company’s revenue is derived from the sale of its products to medical groups and hospitals through its direct sales force and third-party sales agents and resellers throughout the U.S. and Europe. The Company receives payment for its implants consumed during the surgery and does not receive additional or separate consideration for the use of the instrument tray furnished by the Company for the surgeon’s use. The Company identifies the instrument trays as a lease component and the implants as a non-lease component in its arrangements with its customers. The Company determines that the non-lease component is qualitatively predominant, and as such, elected the practical expedient to not separate the lease and non-lease components. Therefore, the overall arrangement is accounted for under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”).
In accordance with ASC 606, the Company recognizes revenue when control is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for the goods or services. Under the revenue recognition standard, the Company applies the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied. As it relates to product sales where the Company's sales representative delivers the product at the point of implantation at the hospital or medical facilities, the Company continues to recognize the revenue upon completion of the procedure and authorization by the customer, net of rebates and price discounts. This represents the majority of the Company's consolidated revenue. The Company also generates a small portion of revenue from the sale of products through distributors and to certain hospital or medical facilities where the products are ordered in advance of a procedure. The performance obligation is the delivery of the products and therefore, revenue is recognized upon shipment to the customers, net of rebates and price discounts. The Company accounts for rebates and price discounts as a reduction to revenue, calculated based on the terms agreed to with the customer. Sales prices are specified in either the customer contract or agreed price list, which is executed prior to the transfer of control to the customer. For certain hospitals and medical facilities, the Company has agreements in place consists of either a master services agreement or an agreed price list, which defines the terms and conditions of the arrangement, including the pricing information, payment terms and pertinent aspects of the relationship between the parties. The Company also has agreements in place with its distributors, which include standard terms that do not allow for payment contingent on resale of the product, obtaining financing, or other terms that could impact the distributor’s payment obligation. The Company's standard payment terms are generally net 30 to 90 days.
Segments
The Company's chief operating decision makers are the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). The CEO and the CFO review financial information presented on a consolidated basis, accompanied by information about revenue by geographic region, for purposes of evaluating financial performance. The Company has one business activity and there are no segment managers who are held accountable for operations, operating results or plans for levels or components below the consolidated unit level. Accordingly, the Company has determined that it has a single reportable and operating segment structure.
The Company derives substantially all of its revenue from sales to customers in the U.S. Revenue by geography is based on billing address of the customer. International revenue accounted for less than 10% of the total revenue during the periods presented. Long-lived assets held outside the U.S. are immaterial. Following table summarizes the Company's revenue by geography:
SI-BONE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | | Nine Months Ended September 30, | | |
| 2023 | | 2022 | | | | | 2023 | | 2022 | | |
| (in thousands) | | |
United States | $ | 32,300 | | | $ | 24,627 | | | | | | $ | 93,967 | | | $ | 68,765 | | | |
International | 1,714 | | | 1,805 | | | | | | 6,060 | | | 5,691 | | | |
| $ | 34,014 | | | $ | 26,432 | | | | | | $ | 100,027 | | | $ | 74,456 | | | |
Recent Accounting Pronouncements
No recently issued accounting standards are expected to have a material impact on the Company’s consolidated financial statements.
SI-BONE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
3. Marketable Securities
All of the Company's marketable securities were available-for-sale and were classified based on their maturities. Marketable securities with remaining maturities at the date of purchase of three months or less are classified as cash equivalents. Short-term investments are securities that original maturity or remaining maturity is greater than three months and not more than twelve months. Long-term investments are securities for which the original maturity or remaining maturity is greater than twelve months.
The table below summarizes the marketable securities:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Aggregate Fair Value |
| (in thousands) |
Money market funds | $ | 38,760 | | | $ | — | | | $ | — | | | $ | 38,760 | |
| | | | | | | |
| | | | | | | |
Cash equivalents | 38,760 | | | — | | | — | | | 38,760 | |
| | | | | | | |
U.S. treasury securities | 104,348 | | | 5 | | | (13) | | | 104,340 | |
Corporate bonds | — | | | — | | | — | | | — | |
Commercial paper | 4,484 | | | — | | | — | | | 4,484 | |
U.S. agency bonds | 4,440 | | | — | | | (3) | | | 4,437 | |
Short-term investments | 113,272 | | | 5 | | | (16) | | | 113,261 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total marketable securities | $ | 152,032 | | | $ | 5 | | | $ | (16) | | | $ | 152,021 | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Aggregate Fair Value |
| (in thousands) |
Money market funds | $ | 8,002 | | | $ | — | | | $ | — | | | $ | 8,002 | |
| | | | | | | |
Cash equivalents | 8,002 | | | — | | | — | | | 8,002 | |
| | | | | | | |
U.S. treasury securities | 48,636 | | | 4 | | | (105) | | | 48,535 | |
U.S. agency bonds | 2,918 | | | 3 | | | — | | | 2,921 | |
Corporate bonds | 2,914 | | | — | | | (3) | | | 2,911 | |
Commercial paper | 22,206 | | | — | | | — | | | 22,206 | |
Short-term investments | 76,674 | | | 7 | | | (108) | | | 76,573 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total marketable securities | $ | 84,676 | | | $ | 7 | | | $ | (108) | | | $ | 84,575 | |
The amortized cost of the Company's available-for-sale securities approximates their fair value. Unrealized losses are generally due to interest rate fluctuations, as opposed to credit quality. However, the Company reviews individual securities that are in an unrealized loss position in order to evaluate whether or not they have experienced or are expected to experience credit losses. During the nine months ended September 30, 2023 and 2022, unrealized gains and losses from the investments were not material and were not the result of a decline in credit quality. As a result, the Company did not recognize any credit losses related to its investments and that all unrealized gains and losses on available-for-sale securities are recorded in accumulated other comprehensive income (loss) on the condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022.
The Company elected to present accrued interest receivable separately from short-term and long-term investments on its condensed consolidated balance sheets. Accrued interest receivable was $0.1 million as of September 30, 2023, and was recorded in prepaid expenses and other current assets. The Company also elected to exclude accrued interest receivable from the estimation of expected credit losses on its marketable securities and reverse accrued interest receivable through interest income (expense) when amounts are determined to be uncollectible. The Company did not write off any accrued interest receivable as of September 30, 2023 or December 31, 2022.
SI-BONE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
4. Fair Value Measurement
Carrying amounts of certain of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities and market interest rates, if applicable. The carrying value of the Company’s long-term debt also approximates fair value based on management’s estimation that a current interest rate would not differ materially from the stated rate. There were no other financial assets and liabilities that require fair value hierarchy measurements and disclosures for the periods presented.
The table below summarizes the fair value of the Company’s marketable securities measured at fair value on a recurring basis based on the three-tier fair value hierarchy:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (in thousands) |
Marketable securities | | | | | | | |
Money market funds | $ | 38,760 | | | $ | — | | | $ | — | | | $ | 38,760 | |
U.S. treasury securities | 104,340 | | | — | | | — | | | 104,340 | |
| | | | | | | |
U.S. agency bonds | — | | | 4,437 | | | — | | | 4,437 | |
Commercial paper | — | | | 4,484 | | | — | | | 4,484 | |
Total marketable securities | $ | 143,100 | | | $ | 8,921 | | | $ | — | | | $ | 152,021 | |
| | | | | | | |
| December 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (in thousands) |
Marketable securities | | | | | | | |
Money market funds | $ | 8,002 | | | $ | — | | | $ | — | | | $ | 8,002 | |
U.S. treasury securities | 48,535 | | | — | | | — | | | 48,535 | |
U.S. agency bonds | — | | | 2,921 | | | — | | | 2,921 | |
Corporate bonds | — | | | 2,911 | | | — | | | 2,911 | |
Commercial paper | — | | | 22,206 | | | — | | | 22,206 | |
Total marketable securities | $ | 56,537 | | | $ | 28,038 | | | $ | — | | | $ | 84,575 | |
SI-BONE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
5. Balance Sheet Components
Inventory
As of September 30, 2023, inventory consisted of finished goods of $20.4 million and work-in-progress of $1.9 million. As of December 31, 2022, inventory consisted of finished goods of $15.6 million and work-in-progress and components of $1.7 million.
Property and Equipment, net:
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| (in thousands) |
Surgical equipment and instrument trays | $ | 17,552 | | | $ | 13,092 | |
Machinery and equipment | 3,127 | | | 1,828 | |
Construction in progress | 3,449 | | | 7,854 | |
Computer and office equipment | 2,008 | | | 976 | |
Leasehold improvements | 3,873 | | | 1,631 | |
Furniture and fixtures | 390 | | | 390 | |
| 30,399 | | | 25,771 | |
Less: Accumulated depreciation and amortization | (13,912) | | | (10,207) | |
| $ | 16,487 | | | $ | 15,564 | |
As of September 30, 2023, construction in progress pertains to the cost of individual components of an instrument tray used for surgical placement of the Company's products that have not yet been placed into service of $3.4 million and software costs of $0.1 million. Depreciation expense was $1.5 million and $0.9 million for the three months ended September 30, 2023 and 2022, respectively. Depreciation expense was $3.9 million and $2.4 million for the nine months ended September 30, 2023 and 2022, respectively.
Accrued Liabilities and Other:
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| (in thousands) |
Accrued compensation and related expenses | $ | 10,208 | | | $ | 11,365 | |
| | | |
Accrued royalty | 1,158 | | | 818 | |
Accrued professional services | 692 | | | 355 | |
| | | |
Others | 1,491 | | | 973 | |
| $ | 13,549 | | | $ | 13,511 | |
Accounts Receivable and Allowance for Credit Losses:
The movement in the allowance for credit losses was as follows:
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| (in thousands) |
Balance at beginning of period | $ | 400 | | | $ | 264 | |
Provision | 352 | | | 150 | |
Write-offs | (2) | | | (14) | |
Balance at end of period | $ | 750 | | | $ | 400 | |
SI-BONE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
6. Commitments and Contingencies
Operating Leases
The Company has a non-cancelable operating lease for an office building space, located in Santa Clara, California which expires in May 2025 and a building used for research and development and warehouse space in Santa Clara, California which expires in October 2026. The Company also has a non-cancelable operating lease for its office building spaces in Gallarate, Italy which expires in August 2027.
The Company also leases vehicles under operating lease arrangements for certain of its personnel in Europe which expire at various times throughout 2023 to 2027.
Supplemental information related to lease expense and valuation of the lease assets and lease liabilities are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | |
| 2023 | | 2022 | | 2023 | | 2022 | | |
Operating lease expense | $ | 386 | | $ | 396 | | $ | 1,170 | | $ | 1,202 | | |
Variable lease expense | 140 | | 118 | | 340 | | 341 | | |
Total lease expense | $ | 526 | | $ | 514 | | $ | 1,510 | | $ | 1,543 | | |
| | | | | | | | | |
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 401 | | $ | 396 | | $ | 1,237 | | $ | 1,201 | | |
Leased assets obtained in exchange for new operating lease liabilities
| $ | 19 | | $ | — | | $ | 143 | | $ | 77 | | |
| | | | | | | | | |
| September 30, 2023 | | December 31, 2022 | | | | | | |
Weighted average remaining lease term (in years) | 2.42 | | 3.05 | | | | | | |
Weighted average discount rate | 5.87% | | 5.77% | | | | | | |
Future minimum lease payments under non-cancelable operating leases as of September 30, 2023 was as follows:
| | | | | |
Year Ending December 31, | (in thousands) |
Remainder of 2023 | $ | 393 | |
2024 | 1,538 | |
2025 | 1,017 | |
2026 | 547 | |
2027 | 8 | |
Thereafter | — | |
Total operating lease payments | 3,503 | |
Less: imputed interest | (235) | |
Total operating lease liabilities | $ | 3,268 | |
| |
As of September 30, 2023, the Company had no operating lease liabilities that had not commenced.
Purchase Commitments and Obligations
The Company has certain purchase commitments related to its inventory management with certain manufacturing suppliers wherein the Company is required to purchase the amounts forecasted in a blanket purchase order. The contractual obligations
SI-BONE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
represent future cash commitments and liabilities under agreements with third parties and exclude orders for goods and services entered into in the normal course of business that are not enforceable or legally binding. These outstanding commitments amounted to $0.4 million and $0.8 million as of September 30, 2023 and December 31, 2022, respectively.
Indemnification
The Company enters into standard indemnification arrangements in the ordinary course of business. Pursuant to these arrangements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified party, in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third-party with respect to the Company’s technology. The term of these indemnification agreements is generally perpetual. The maximum potential amount of future payments the Company could be required to make under these agreements is not determinable because it involves claims that may be made against the Company in the future, but have not yet been made.
The Company has entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct of the individual.
The Company has not incurred costs to defend lawsuits or settle claims related to these indemnification agreements. No liability associated with such indemnifications has been recorded to date.
Legal Contingencies
From time to time, the Company may become involved in legal proceedings arising in the ordinary course of its business. The Company is not presently a party to any material legal proceedings that, if determined adversely to the Company, would have a material adverse effect on the Company.
7. Borrowings
Term Loan
The following table summarizes the outstanding borrowings from the term loan as of periods presented:
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| (in thousands) |
Principal outstanding and final fee | $ | 36,720 | | | $ | 35,700 | |
Less: Unamortized debt issuance costs | (88) | | | (73) | |
Unaccreted value of final fee | (610) | | | (456) | |
Outstanding debt, net of debt issuance costs and unaccreted value of final fee | $ | 36,022 | | | $ | 35,171 | |
Classified as: | | | |
| | | |
Long-term borrowings | $ | 36,022 | | | $ | 35,171 | |
The outstanding debt is related to a term loan pursuant to the Loan and Security Agreement dated August 12, 2021 entered into by the Company with Silicon Valley Bank (“SVB”). Pursuant the agreement, SVB provided an aggregate principal amount of $35.0 million to the Company (the “SVB Term Loan”).
On January 6, 2023, the Company entered into a First Amendment to Loan and Security Agreement (the “Amendment”) with SVB, which amended the Company's SVB Term Loan pursuant to which the Company had a term loan facility in an aggregate principal amount of $35.0 million (the “Original Loan Agreement” and with the Amendment, collectively the “Amended Loan Agreement”). Upon entry into the Amended Loan Agreement, the Company borrowed $36.0 million pursuant to a term loan (the "Term Loan"), which was substantially used to repay in full the $35.0 million term loan facility outstanding under the Original Loan Agreement and secured a revolving credit facility in an aggregate principal amount of up to $15.0 million (the “Revolver”). On March 14, 2023 all of SVB’s assets and liabilities, including all of SVB’s rights as the lender pursuant to the Amended Loan Agreement, were assigned to Silicon Valley Bridge Bank. On March 27, 2023, all of Silicon Valley Bridge Bank’s assets and liabilities were assigned and assumed by First-Citizens Bank & Trust Company (“First-Citizens”). The Amended Loan Agreement also includes an uncommitted accordion term loan in an aggregate principal amount of up to $15.0 million, which accordion may be approved by First-Citizens solely in its discretion, upon the Company’s request. The Term Loan matures on December 1, 2027 (the “Term Loan Maturity Date”). Interest on the Term Loan will be payable monthly at a floating annual rate set at the greater of the prime rate as
SI-BONE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
published in the Wall Street Journal plus 0.5% or 6.75%. Commencing on July 1, 2025, the Company will be required to make monthly principal Term Loan amortization payments. A final fee payment of 2% of the original principal amount of the Term Loan is due upon the earlier of the Term Loan Maturity Date, termination, acceleration by First-Citizens following an event of default, or prepayment of the Term Loan. The Company may elect to prepay the Term Loan in whole prior to the Term Loan Maturity Date subject to a prepayment fee equal to 2% of the principal amount of the Term Loan prepaid at such time. No prepayment fee would be due if the Term Loan is refinanced by First-Citizens. Pursuant to the terms of the Amended Loan Agreement, revolving loans may be borrowed, repaid and reborrowed until the maturity date, which will be July 6, 2025 (the “Revolver Maturity Date”). Borrowings under the Revolver are based on 80% of eligible domestic accounts receivable borrowing base. Interest on the outstanding balance of the Revolver will be payable monthly at a floating annual rate set at the greater of the prime rate as published in the Wall Street Journal or 6.25%. Interest on borrowings is due monthly and any principal balance is due on the Revolver Maturity Date, provided that when Revolver Advances are outstanding, in the event the Company does not maintain an adjusted quick ratio of at least 1.5 to 1.0, then falling below such threshold will allow First-Citizens to apply accounts receivable collections to outstanding Revolver borrowings. The Company will pay a total commitment fee of $187,500 on account of the Revolver payable in installments, but fully earned at close. The Company will also be required to pay a fee of $150,000 if it terminates the Amended Loan Agreement or Revolver prior to Revolver Maturity Date. No termination fee would be due if the Revolver is replaced with a new facility with First-Citizens. No amounts were outstanding under the Revolver as of September 30, 2023.
The Company accounted for the Amended Loan Agreement as a debt modification. Accordingly, the remaining unamortized debt issuance costs related to the Original Loan Agreement together with any lender fees incurred in connection with the entry of the Amended Loan Agreement are amortized to interest expense using the straight-line method over the new term of the loan through December 2027.
The effective interest rate related to the First-Citizens Term Loan for the three and nine months ended September 30, 2023 was 9.3% and 8.9%, respectively. The effective interest rate related to the SVB Term Loan for the three and nine months ended September 30, 2022 was 8.3% and 7.1%, respectively.
The table below summarizes the future principal and final fee payments under the Fist-Citizens Term Loan as of September 30, 2023:
| | | | | |
Year ending December 31, | (in thousands) |
Remainder of 2023 | $ | — | |
2024 | — | |
2025 | 8,400 | |
2026 | 14,400 | |
2027 | 13,920 | |
| |
Total principal and final fee payments | $ | 36,720 | |
The Amended Loan Agreement contains customary events of default, including bankruptcy, the failure to make payments when due, the occurrence of a material impairment on First-Citizens's security interest over the collateral, a material adverse change, the occurrence of a default under certain other indebtedness of the Company and its subsidiaries, the rendering of certain types of judgments against the Company and its subsidiaries, the revocation of certain government approvals, violation of covenants, and incorrectness of representations and warranties in any material respect. In addition, the Amended Loan Agreement contains a financial covenant which requires the Company to maintain, at all times when the Financial Covenant Measuring Period is in effect, certain net revenue levels as agreed upon by the Company and First-Citizens. If the Company does not comply with the various covenants under the Amended Loan Agreement and an event of default occurs under the Amended Loan Agreement, the interest rate on outstanding amounts can increase by 3% and First-Citizens may, subject to various customary cure rights, decline to provide additional advances under the Revolver, require the immediate payment of all amounts outstanding under the Amended Loan Agreement, and foreclose on all collateral.
SI-BONE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
On March 10, 2023, the Company violated one of the terms of the credit facility by opening bank accounts with another financial institution and transferring funds from SVB. The Company entered into a letter agreement with Silicon Valley Bridge Bank waiving enforcement of this covenant and providing the Company the right to hold a portion of its cash at other financial institutions. A future violation of any covenants could result in a default under the Amended Loan Agreement that would permit First-Citizens to restrict the Company’s ability to further access the Revolving Line of Credit for loans and require the immediate repayment of any outstanding loans under the agreement. As of September 30, 2023, the Company was in compliance with all debt covenants, provided, however, that in order to access future credit advances under the Revolving Line of Credit, the Company will be required to transfer certain cash management accounts back to First-Citizens. As of September 30, 2023, the Company had cash management accounts with a financial institution other than First-Citizens and instructed its customers to direct payments to these separate operating accounts. Until such operating accounts are closed and the funds moved back to cash collateral accounts held at First-Citizens, the Company will be unable to obtain credit advances under the Revolver.
8. Stock-Based Incentive Compensation Plans
Stock Options
The table below summarizes the stock option activity for the nine months ended September 30, 2023:
| | | | | | | | | | | | | | |
| | Number of Shares | | Weighted- Average Exercise Price |
Outstanding as of December 31, 2022 | | 1,903,341 | | | $8.82 |
| | | | |
Exercised | | (670,494) | | | 6.36 |
Canceled and forfeited | | (16,006) | | | 21.22 |
Outstanding as of September 30, 2023 | | 1,216,841 | | | 10.84 |
As of September 30, 2023, there is no unrecognized compensation cost related to stock options.
There were no stock options granted during the three and nine months ended September 30, 2023 and 2022.
Restricted Stock Units (“RSUs”)
RSUs are share awards that entitle the holder to receive freely tradable shares of the Company’s common stock upon vesting. RSUs generally vest over two to four years based upon continued services and are settled at vesting in shares of the Company's common stock. Certain RSUs vest based upon continued services and the achievement of financial milestones. The grant date fair value of the RSUs is equal to the closing price of the Company’s common stock on the grant date. As of September 30, 2023, the unrecognized compensation cost related to the RSUs was $34.4 million, which is expected to be recognized over a period of approximately 2.5 years.
The Company granted performance-based restricted stock unit awards subject to market and service vesting conditions to certain executive officers under SI-BONE's 2018 Equity Incentive Plan (“PSUs”). The shares subject to PSUs vest over a three-year performance period. The actual number of PSUs that will vest in each measurement period will be determined by the Compensation Committee based on the Company’s total shareholder return (“TSR”) relative to the TSR of the Median Peer Companies (as defined in the award agreement). The grant date fair value of each stock award with a market condition was determined using the Monte Carlo valuation model. The table below summarizes the assumptions used to estimate the grant date fair value of the PSUs granted:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Nine Months Ended September 30, |
| | | | | | | | | | | | | 2023 | | 2022 |
Expected volatility of common stock | | | | | | | | | | | 58.0% | to | 73.0% | | 48.9% | to | 58.7% |
Expected volatility of peer companies | | | | | | | | | | | | | 33.0% | to | 141.0% | | 24.2% | to | 152.5% |
Correlation coefficient of peer companies | | | | | | | | | | | (0.15) | to | 1.00 | | (0.13) | to | 1.00 |
Risk-free interest rate | | | | | | | | | | | | | 3.9% | to | 5.0% | | 0.4% | to | 1.2% |
Dividend yield | | | | | | | —% | to | 1.3% | | —% | to | 1.0% |
SI-BONE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
As of September 30, 2023, the unrecognized compensation cost related to the PSUs was $2.8 million, which is expected to be recognized over a period of approximately 2.0 years.
The table below summarizes RSU and PSU activity for the nine months ended September 30, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | RSUs | | PSUs |
| | Number of Shares | | Weighted Average Grant Date Fair Value | | Number of Shares | | Weighted Average Grant Date Fair Value |
Outstanding as of December 31, 2022 | | 1,794,928 | | $22.72 | | 155,596 | | $19.50 |
Granted | | 1,204,086 | | 16.85 | | 255,458 | | 12.33 |
Vested | | (727,721) | | 20.99 | | (25,932) | | 19.50 |
Canceled and forfeited | | (155,208) | | 21.46 | | — | | — |
Outstanding as of September 30, 2023 | | 2,116,085 | | 20.07 | | 385,122 | | 14.74 |
Employee Stock Purchase Plan
The Company’s 2018 Employee Stock Purchase Plan (the “ESPP”) allows eligible employees to purchase shares of the Company's common stock through payroll deductions at the price equal to 85% of the lesser of the fair market value of the stock as of the first date or the ending date of each six month offering period. The offering period generally commences in May and November. On March 26, 2020, the Company's Compensation Committee approved the amendment of the terms of future offerings under the ESPP which, among other things, increased the maximum number of shares that may be purchased on any single purchase date, provided for automatic enrollment in a new offering, and provided that the offering which commenced in May 2020 be twelve months in duration and consist of two purchase periods.
The fair value of the ESPP shares is estimated using the Black-Scholes option pricing model, which is being amortized over the requisite service period. The Company issued 130,867 and 112,773 shares under ESPP, representing approximately $1.5 million and $1.2 million in employee contributions for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023 and December 31, 2022, total accumulated ESPP related employee payroll deductions amounted to $0.6 million and $0.3 million, respectively, which were included within accrued compensation and related expenses in the condensed consolidated balance sheets.
SI-BONE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Stock-Based Compensation
The table below presents the detail of stock-based compensation expense amounts included in the condensed consolidated statements of operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | (in thousands) |
Cost of goods sold | | $ | 172 | | | $ | 121 | | | $ | 471 | | | $ | 360 | |
Sales and marketing | | 2,655 | | | 2,836 | | | 8,267 | | | 8,177 | |
Research and development | | 699 | | | 672 | | | 2,198 | | | 1,968 | |
General and administrative | | 2,402 | | | 2,293 | | | 7,184 | | | 6,675 | |
| | $ | 5,928 | | | $ | 5,922 | | | $ | 18,120 | | | $ | 17,180 | |
Warrants
During the three months ended June 30, 2023, a warrant holder exercised warrants, and the Company issued 22,603 net shares of common stock through a cashless exercise of the warrants in accordance with the conversion terms. The table below summarizes common stock warrants activity for the nine months ended September 30, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Date | | Outstanding Balance at December 31, 2022 | | Price per Share | | Warrants Issued | | Warrant Exercised | | Warrant Expired | | Outstanding Balance at September 30, 2023 |
Issuance | | Expiration | | | | | |
3/1/2017 | | 3/1/2027 | | 1,388 | | | $ | 5.94 | | | — | | — | | — | | 1,388 | |
7/22/2013 | | 7/22/2023 | | 32,983 | | | $ | 9.10 | | | — | | (32,983) | | | — | | — | |
11/26/2014 | | 11/26/2024 | | 6,680 | | | $ | 16.47 | | | — | | — | | — | | 6,680 | |
10/20/2015 | | 10/20/2025 | | 41,650 | | | $ | 16.47 | | | — | | — | | — | | 41,650 | |
11/9/2015 | | 11/9/2025 | | 25,709 | | | $ | 16.47 | | | — | | | | — | | 25,709 | |
12/22/2016 | | 12/22/2026 | | 9,712 | | | $ | 10.03 | | | — | | — | | — | | 9,712 | |
| | | | 118,122 | | | | | — | | (32,983) | | — | | 85,139 | |
9. Net Loss Per Share of Common Stock
The table below summarizes the computation of basic and diluted net loss per share:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in thousands, except share and per share data) |
Net loss | $ | (10,022) | | | $ | (14,158) | | | $ | (32,353) | | | $ | (50,081) | |
| | | | | | | |
Weighted-average shares used to compute basic and diluted net loss per share | 40,265,520 | | | 34,356,850 | | | 37,702,207 | | | 34,069,357 | |
| | | | | | | |
Net loss per share, basic and diluted | $ | (0.25) | | | $ | (0.41) | | | $ | (0.86) | | | $ | (1.47) | |
Because the Company has reported a net loss in all periods presented, outstanding stock options, restricted stock units, ESPP purchase rights and common stock warrants are anti-dilutive and therefore diluted net loss per common share is the same as basic net loss per common share for the periods presented. The following anti-dilutive common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented:
SI-BONE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SI-BONE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Stock options | 1,216,841 | | 1,921,065 | | 1,216,841 | | 1,921,065 | |
Restricted stock units | 2,501,207 | | 2,182,030 | | 2,501,207 | | 2,182,030 | |
| | | | | | | |
ESPP purchase rights | 38,727 | | 59,688 | | 38,727 | | 59,688 | |
Common stock warrants | 85,139 | | 118,122 | | 85,139 | | 118,122 | |
| 3,841,914 | | | 4,280,905 | | | 3,841,914 | | | 4,280,905 | |
| | | | | | | |
10. Related Party Transaction
On February 24, 2020, the Company entered into a joint development agreement (the “Development Agreement”) with SeaSpine Orthopedics Corporation (“SeaSpine”), which merged with Orthofix Medical, Inc., to develop a next generation device for sacropelvic fixation. Mr. Keith Valentine, who served as President and Chief Executive Officer until September 11, 2023, and a member of the board of directors until October 4, 2024, respectively, also serves as a member of the Company's Board of Directors since August 2015. On April 27, 2021, Addendum No.1 to the Development Agreement was entered into by and between the Company and SeaSpine to extend certain obligations as described under the Development Agreement to a consultant of the Company.
Pursuant to the development plan, SeaSpine shall use reasonable efforts to assist in the development of the potential product offering, including licensing certain existing intellectual property to be incorporated into such product. Under the terms of the Development Agreement, the Company agreed to make monthly payments to SeaSpine to reimburse for full time resources employed by SeaSpine responsible to conduct the development activities. For the nine months ended September 30, 2023, the Company did not incur any reimbursement charges but purchased an immaterial amount of instrument components from Seaspine. For the nine months ended September 30, 2022, the Company expensed approximately $6,000 of the reimbursement charges from SeaSpine. The reimbursement charges were recorded within research and development expense in the condensed consolidated statements of operations.
Certain intellectual property developed pursuant to the project plan will be owned by the Company, certain intellectual property developed pursuant to the project plan will be owned by SeaSpine, and other intellectual property developed pursuant to the project plan will be jointly owned by SeaSpine and the Company. The Company also agreed to provide SeaSpine a royalty-free, worldwide, perpetual, non-exclusive license of certain of the Company's intellectual property incorporated into the product to be developed. The Company also agreed to pay SeaSpine a product royalty, in an amount specified in the Development Agreement, for each resulting product sold for a period of 10 years beginning on the initial market launch. The term of the Development Agreement shall continue until the expiration of all royalty terms, unless earlier terminated by either party, as provided for by the Development Agreement. The Company recorded $0.1 million of royalty for the three months ended September 30, 2023 and $0.2 million for the nine months ended September 30, 2023. The Company recorded an immaterial amount of royalty for the three and nine months ended September 30, 2022.
The outstanding liability to SeaSpine as of September 30, 2023 and December 31, 2022 was $0.1 million and was recorded within accrued liabilities and other in the condensed consolidated balance sheet.
11. Income Taxes
In determining quarterly provisions for income taxes, the Company uses the annual estimated effective tax rate applied to the actual year-to-date profit or loss, adjusted for discrete items arising in that quarter. The Company updates its estimate of its annual effective tax rate at the end of each quarterly period. The estimate takes into account annual forecasted income (loss) before income taxes, the geographic mix of income (loss) before income taxes and any significant permanent tax items. The Company did not have provision for income taxes for the three and nine months ended September 30, 2023 and 2022. The Company continues to maintain a full valuation allowance against its net deferred tax assets due to the uncertainty surrounding realization of such assets.
Under an Organization for Economic Co-operation and Development Inclusive Framework, countries that agreed to enact a two-pillar solution aim to address the challenges arising from the digitalization of the world economy (Pillar Two). Pillar Two sets out a global minimum Effective Tax Rate (ETR) rules to ensure that large multinational businesses with consolidated revenue over €750 million are subject to a minimum ETR of 15% on income arising in low-tax jurisdictions. Rules under Pillar Two are expected to be enacted beginning January 1, 2024. The Company will continue to monitor the impact of Pillar Two; however, the Pillar Two is currently not applicable as the Company does not meet the threshold of having consolidated revenue over €750 million.
The Company accounts for the uncertainty in income taxes by utilizing a comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of any uncertain tax positions that have been taken or are expected to be taken on an income tax return. There had been no changes in the estimated uncertain tax benefits recorded as of September 30, 2023 compared to December 31, 2022.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 the SEC on March 2, 2023. 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 sacropelvic anatomy. Leveraging our knowledge of pelvic anatomy and biomechanics, we have pioneered proprietary minimally invasive surgical implant systems to address sacroiliac joint dysfunction as well as address unmet clinical needs in pelvic fixation and management of pelvic fractures. Our products include a series of patented titanium implants and the instruments used to implant them. Since launching our first generation iFuse in 2009, we have launched three new implant product lines, iFuse-3D in 2017, iFuse-TORQ in 2021 and iFuse Bedrock Granite in 2022. Within the United States, our iFuse, iFuse-3D and iFuse-TORQ have clearances for applications across sacroiliac joint dysfunction and fusion, adult deformity and degeneration, and pelvic trauma.
We market our products primarily with a direct sales force as well as a number of third-party sales agents in the U.S., and with a combination of a direct sales force, and sales agents and resellers in other countries. As of September 30, 2023, more than 90,000 procedures have been performed by over 3,500 surgeons in the United States and 38 other countries since we introduced iFuse in 2009.
In May 2023, we received a total of $83.7 million of net proceeds from the offering of 3,775,000 shares of our common stock, and the exercise of underwriter's option to purchase an additional 566,250 shares of our common stock, at a public offering price of $22.00 per share. Of these shares, 272,753 shares were offered by the selling stockholder, and we did not receive any proceeds from the sale by the selling stockholder.
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 expand access to solutions, increase surgeon penetration, launch new products, address human capital needs and gain operational efficiencies.
Expand Access to Solutions
As we expand our portfolio, the experience, caliber, and strong clinician relationships of our sales force, including our network of third-party sales agents, will be crucial to drive adoption of our future products and procedures. Since our initial public offering in 2018, we have made significant investments in our commercial infrastructure to build a valuable sales team to expand the market, drive surgeon engagement and deliver revenue growth.
While we will continue to selectively expand our sales force, we are also focused on increasing our sales managers capacity and driving sales force productivity by adding more clinical support specialists and implementing hybrid models, including selectively adding third-party sales agents for case coverage and by placing instrument trays and implants at selective sites of service. This expansion of our sales force is one aspect of increasing the overall number of procedures in a given period that we can support with products, which is what we call “surgical capacity.” Our surgical capacity is also limited by the volume of implant inventory and the number of instrument trays held ready for surgery, either at our headquarters facility, forward deployed with our sales force or placed at customer facilities. As we grow, and as adoption of our solutions continues to mature, our overall surgical capacity may become an important driver of the amount of revenue that we can generate.
As of September 30, 2023, our U.S. sales force consisted of 83 territory sales managers and 68 clinical support specialists directly employed by us and 160 third-party sales agents, compared to 85 territory sales managers and 72 clinical support specialists directly employed by us and 89 third-party sales agents as of September 30, 2022. As of September 30, 2023, our international sales force consisted of 13 sales representatives directly employed by us and a total of 30 third-party sales agents and resellers, compared to 18 sales representatives directly employed by us and a total of 30 third-party sales agents and resellers as of September 30, 2022.
With the steady increase in the numbers of minimally invasive procedures, including sacroiliac joint fusion procedures, being performed at ambulatory surgical centers, or ASCs, we continue to actively engage the ASCs to educate them on our clinical evidence, exclusive commercial payor coverage and focus on driving improved education and pathways between pain physicians and surgeons. As of September 30, 2023, over 20 percent of procedures for sacroiliac joint dysfunction using our products were performed at ASCs.
We have been making targeted investments in digital marketing initiatives to drive patient awareness, to empower and educate patients as they manage their sacroiliac joint dysfunction and associated pain. These marketing programs are targeted at patients in chronic, severe sacroiliac joint pain who have been in conservative care for an extended period of time. We are focused on connecting patients with surgeons in their area who perform minimally invasive SI-Joint procedures through our Find-a-Doctor website tool. Through a variety of channels, including search, social and display, we have deployed a number of campaigns and are continually optimizing to maximize patient awareness and to connect patients with surgeons. Our data-driven approach enables us to focus our investment on the most cost-effective programs.
Surgeon Engagement
Engaging and educating surgeons and other healthcare professionals about the clinical merits and patient benefits of our solutions will be important to grow surgeon adoption. Our medical affairs team works closely with our sales team to increase surgeon engagement and activation. Surgeon activity includes both the number of surgeons performing our procedures as well as the number of procedures performed per surgeon. In addition to training new surgeons, we have several initiatives to re-engage inactive surgeons.
We utilize a combination of hands-on cadaveric and dry-lab training, as well as SI-BONE SImulator - a portable, radiation-free, haptics and computer-based simulator for training purposes, and optimize our programs to improve adoption rate, time to first case and ultimately surgeon productivity.
As of September 30, 2023 and 2022, in the U.S. more than 2,500 and 2,100 surgeons, respectively, have been trained on our solutions and have treated at least one patient. Outside the U.S., as of September 30, 2023 and 2022, more than 1,000 and 800 surgeons, respectively, have been trained on iFuse and have treated at least one patient. We will continue to pursue approximately 5,000 target surgeons in the U.S., as well as international surgeons to train and retrain in the future. Since launching our academic training program in August 2018, we have trained residents and fellows in over 220 academic programs in the U.S., resulting in the training of over 1,400 surgical residents and fellows.
Expand Addressable Markets
Expanding our platform of sacropelvic solutions to address sacroiliac joint dysfunction, pelvic fixation and pelvic trauma has been a key tenet of our strategy, and we have made substantial progress on this mission. With iFuse-3D, iFuse-TORQ and iFuse Bedrock Granite, we believe that the value of our innovative, versatile, and complementary product portfolio provides surgeons with a comprehensive set of alternatives, and positions us as the top choice for surgeons for sacropelvic solutions. We also offer an allograft bone implant called iFuse-Bone for surgeons who believe that this kind of implant can be important to obtaining fusion.
In June 2022, we completed enrollment in SILVIA, a two-year prospective international multi center randomized controlled trial of two different methods for pelvic fixation in adult patients undergoing long-construct spinal fusion. We anticipate the results for the primary endpoint in 2024. In September 2022 we enrolled the first of the targeted 120 patients in our SAFFRON study, a prospective randomized controlled trial of surgery using our iFuse-TORQ device vs. non-surgical management in patients with debilitating sacral fragility or insufficiency fractures. We anticipate results to be available in late 2024. We are working with a select group of physicians on STACI, a prospective study on the use of iFuse TORQ in patients with sacroiliac joint dysfunction. The purpose of STACI is to provide post-market information on the safety and effectiveness of minimally invasive sacroiliac joint fusion procedures performed with TORQ.
We continue to invest in R&D initiatives to bring new and differentiated solutions to the market that deliver on our vision of improving patient quality of life through differentiated solutions to target segments with a clear unmet clinical need. Robust clinical evidence is central to drive adoption and favorable reimbursement, and we remain focused on continuing to set the industry standard in delivering evidence-based care through best-in-class clinical trials that demonstrate the efficacy, safety, and economic benefit of our solutions. During nine months ended September 30, 2023, we spent $10.9 million on R&D, equating to 11% of our revenue.
Enhance Employee Experience and Engagement
Our ability to recruit, develop and retain highly skilled talent is a significant determinant of our success. To attract, retain, and develop our talent, we seek to create a diverse and inclusive workplace with opportunities for our employees to thrive and advance in their careers. We support this with market-competitive compensation, comprehensive benefits, and health and wellness programs.
In addition to ensuring workforce diversity and equitable compensation for our employees, we maintain a strong focus on enhancing employee retention and job satisfaction. To achieve this, we have established a feedback mechanism to continually monitor and respond to employee sentiment. Using this feedback, we deploy strategies that enhance the skills of our people managers and improve internal communications with employees. Furthermore, we provide ongoing learning and leadership training opportunities to support professional growth.
In 2023 we conducted instructor-led trainings designed to build people leadership capabilities and train managers on delivering actionable feedback. We have also adopted a goal for each of our managers to have regular check-ins with employees to discuss their personal goals and career plans in furtherance of our commitment to career and professional development.
We maintain a commitment to employee retention by leveraging insights from exit interviews and engagement surveys to continuously enhance the workplace experience.
Gain operational efficiency
To support our growing portfolio of solutions, we continue to evolve our business processes to identify, measure and improve operational efficiency. The information developed will allow us to optimize processes, increase sales force productivity and improve asset utilization.
We are focused on increasing our sales managers and sales representatives capacity, efficiency and productivity. We may do this by adding more clinical support specialists and third-party sales agents as part of hybrid arrangements for case coverage, and by consigning instrument trays and implants at selective sites of service. As of September 30, 2023, our trailing twelve-month average revenue per territory in the U.S. was approximately $1.5 million.
We have made significant investments in instrument sets used to perform surgeries. Our goal is to deploy instrument sets to the market where the demand exists to increase our asset utilization rates over time and use capital more effectively by having our instrument sets used in more surgeries in any given time period. Given supply chain disruptions impacting the industry, we are working closely with our suppliers to reduce lead time for our implants to ensure we can support our expanding surgeon footprint and over time build the resilience in our supply chain to reduce our cash investment in inventory. Additionally, we are partnering with our suppliers around design for manufacturing, specifically for newer products, to reduce the overall cost of the implants as we scale, and reduce waste and rework. Lastly, we are integrating our demand planning and manufacturing systems, to ensure we leverage actual usage trends as we build surgical capacity to support our growth.
Components of Results of Operations
Revenue
Our revenue from sales of implants fluctuate based on volume of cases (procedures performed), discounts, mix of international and U.S. sales, different implant pricing 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 between U.S. and international sales mix of our products used, and the sales channel through which each procedure is supported. Our revenue from international sales is impacted by fluctuations in foreign currency exchange rates between the U.S. dollar (our reporting currency) and the local currency.
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 as patients have more time in the winter months to have the procedure completed or want to take advantage of their annual insurance coverage limits. However, taken as a whole, seasonality does not have a material impact on our financial results from year to year.
Since March 2020, the impact of COVID-19 on our revenue has varied by period and region based on various factors, including stage of containment, resurgence of variants, success of regional vaccination campaigns, and associated government and hospital
actions around elective procedures, and the direct and indirect impacts of economic and financial measures taken to mitigate the economic impacts of the pandemic.
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 implants and instruments, instrument set depreciation, royalties, 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 and from changes in our product mix.
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 intend to make investments to execute our strategic plans and operational initiatives. We anticipate certain operating expenses will continue to increase to support our growth.
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, as well as certain commission guarantees paid to our senior sales management, direct territory sales managers, clinical support specialists and third-party sales agents.
Research and Development Expenses
Our research and development expenses primarily consist of engineering, product development, clinical and regulatory expenses (including clinical study expenses), 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. 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 fees on the First-Citizens Term Loan.
Other Income (Expense), Net
Other income (expense), net consists primarily of net foreign exchange gains and losses on foreign transactions.
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 September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Amount | | % | | Amount | | % | | Amount | | % | | Amount | | % |
| (in thousands, except for percentages) |
Consolidated Statements of Operations Data: | | | | | | | | | | | | |
Revenue | $ | 34,014 | | | 100 | % | | $ | 26,432 | | | 100 | % | | $ | 100,027 | | | 100 | % | | $ | 74,456 | | | 100 | % |
Cost of goods sold | 7,041 | | | 21 | % | | 4,168 | | | 16 | % | | 19,283 | | | 19 | % | | 10,616 | | | 14 | % |
Gross profit | 26,973 | | | 79 | % | | 22,264 | | | 84 | % | | 80,744 | | | 81 | % | | 63,840 | | | 86 | % |
Operating expenses: | | | | | | | | | | | | | | | |
Sales and marketing | 26,512 | | | 78 | % | | 25,669 | | | 97 | % | | 81,317 | | | 81 | % | | 80,117 | | | 108 | % |
Research and development | 3,919 | | | 12 | % | | 3,089 | | | 12 | % | | 10,866 | | | 11 | % | | 10,147 | | | 14 | % |
General and administrative | 7,711 | | | 23 | % | | 7,072 | | | 27 | % | | 22,986 | | | 23 | % | | 21,891 | | | 29 | % |
Total operating expenses | 38,142 | | | 113 | % | | 35,830 | | | 136 | % | | 115,169 | | | 115 | % | | 112,155 | | | 151 | % |
Loss from operations | (11,169) | | | (34) | % | | (13,566) | | | (52) | % | | (34,425) | | | (34) | % | | (48,315) | | | (65) | % |
Interest and other income (expense), net: | | | | | | | | | | | | | | |
Interest income | 2,174 | | | 6 | % | | 346 | | | 1 | % | | 4,689 | | | 5 | % | | 555 | | | 1 | % |
Interest expense | (884) | | | (3) | % | | (755) | | | (3) | % | | (2,573) | | | (3) | % | | (1,938) | | | (3) | % |
Other income (expense), net | (143) | | | — | % | | (183) | | | (1) | % | | (44) | | | — | % | | (383) | | | (1) | % |
Net loss | $ | (10,022) | | | (31) | % | | $ | (14,158) | | | (55) | % | | $ | (32,353) | | | (32) | % | | $ | (50,081) | | | (68) | % |
We derive the majority of our revenue from sales to customers in the U.S. Revenue by geography is based on billing address of the customer. The table below summarizes our revenue by geography:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Amount | | % | | Amount | | % | | Amount | | % | | Amount | | % |
| (in thousands except for percentages) |
United States | $ | 32,300 | | | 95 | % | | $ | 24,627 | | | 93 | % | | $ | 93,967 | | | 94 | % | | $ | 68,765 | | | 92 | % |
International | 1,714 | | | 5 | % | | 1,805 | | | 7 | % | | 6,060 | | | 6 | % | | 5,691 | | | 8 | % |
| $ | 34,014 | < |