# SI-BONE, Inc. (SIBN) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from SI-BONE, Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1459839/000145983922000016/sibn-20211231.htm
Accession: 0001459839-22-000016
Filing date: 2022-03-01
Report date: 2021-12-31
Extracted from a substantive MD&A body after the formal Item 7 span was a TOC or reference stub.
Confidence: high

Company profile: /company/SIBN/
All MD&A years: /company/SIBN/mda/
Next year: /company/SIBN/mda/fy2022/ (FY 2022)

Overview

We are a medical device company dedicated to solving musculoskeletal disorders of the sacropelvic anatomy. We have pioneered a proprietary minimally invasive surgical implant system, which we call iFuse, to addresss sacroiliac joint dysfunction and degeneration, adult deformity, pelvic ring traumatic fractures. Since we introduced iFuse in 2009, as of December 31, 2021, approximately 65,000 procedures have been performed by over 2,600 surgeons, in the U.S. and 36 other countries.

Our iFuse Implant System includes a series of patented 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 first-generation iFuse implant has a triangular cross section that resists twisting or rotation of the implant within the bone within 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 facilitates biologic fixation of the bone onto the implant, or bony ongrowth and ingrowth, that results in fusion. The implant has at least three times the strength of a typical eight-millimeter cannulated surgical screw, and the large porous surface area of our implants allows for bony ingrowth. We hold issued patents on implants with cross-sections of many non-round shapes, including the triangular shape of our first-generation 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, 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.

In April 2019, we received clearance from the United States Food and Drug Administration, or FDA, to promote the use of our iFuse-3D implants 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 iFuse for this indication and surgical technique in Europe in December 2019. In March 2020, we received FDA 510(k) clearance for an expanded indication for our triangular iFuse implants to support our trauma program.

In February 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. iFuse-TORQ is targeted to address an unmet clinical need 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 capture 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 the U.S., and with a combination of a direct sales force and distributors in other countries.

In October 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 and February 2020, we received a total of $63.0 million of net proceeds, after deducting the underwriting discounts, commissions and offering expenses, from our first follow-on public offering of our common stock. In October 2020, we received a total of $71.6 million of net proceeds from our second follow-on offering of our common stock.

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Impact of 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 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 our customers reside. Quarantines, shelter-in-place, elective procedure moratoria 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. Periodic resurgence of the COVID-19 pandemic negatively impacted our revenues at various periods throughout 2020 and 2021 as evidenced by case deferrals attributed to COVID-19.

We have taken 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 our Santa 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 our Santa Clara headquarters worked from home. We also restricted non-essential travel to protect the health and safety of our employees and customers. Starting June 15, 2021, we began the return to work for many of our headquarter-based personnel based upon new guidelines from the State of California. In December 2021, amid the rising cases related to the Omicron variant, we again required non-essential staff to work remotely. 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.

While we have not experienced material disruptions to our supply chain to date, certain of our third-party suppliers have faced delays, product shortages and rising costs resulting from disruptions in the global supply chain, primarily related to our instruments. As a result, we are continuing to work closely with our manufacturing partners and suppliers, as well as determining alternative sourcing strategies to enable us to source key components and maintain appropriate inventory levels to meet customer demand.

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. Accordingly, the COVID-19 pandemic 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 expand the market and deliver revenue growth. 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 and into 2021.

As of December 31, 2021, our U.S. sales force consisted of 85 territory sales managers and 65 clinical support specialists directly employed by us and 59 third-party distributors, compared to 64 territory sales managers and 58 clinical support specialists directly employed by us and 41 third-party distributors as of December 31, 2020. As of December 31, 2021, our international sales force consisted of 20 sales representatives directly employed by us and 32 exclusive third-party distributors, compared to 20 sales representatives directly employed by us and 31 exclusive third-party distributors as of December 31, 2020.

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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 of December 31, 2021 and 2020, in the U.S. more than 1,800 surgeon and 1,600 surgeons, respectively, have been trained on iFuse and have treated at least one patient. Outside the U.S., as of December 31, 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 the U.S., as well as international surgeons for training in the future.

The COVID-19 pandemic has 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 in July 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 in June 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 triangular 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 in Europe in November 2019 and we launched the promotion of this technique in select European markets in December 2019.

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 two 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 the U.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 the U.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 160 academic programs in the U.S., resulting in the training of over 850 surgical residents and fellows since August 1, 2018.

Leverage broad coverage

We made significant progress in the number of covered lives for minimally invasive sacroiliac fusion in the U.S.

As of December 31, 2021, substantially all U.S. payors reimburse for sacroiliac joint fusion. As of December 31, 2021, over 35 U.S. payors have issued positive coverage policies exclusive to our patented design of triangular titanium implants for sacroiliac joint fusion because of the clinical evidence.

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Effective July 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. Anthem adopted coverage guidelines that are exclusive to triangular titanium implants for minimally invasive SI joint fusion which begin taking effect on July 30, 2021. Anthem is the second largest private payor in the U.S. with over 40 million members. Effective October 1, 2021, UnitedHealthcare has changed its minimally invasive SI joint fusion policy from covering all devices to covering exclusively our triangular titanium implants. UnitedHealthcare is the largest commercial payor in the U.S. with over 45 million members. With this updated policy, UnitedHealthcare joins more than 35 other health plans that collectively cover approximately 160 million insured, requiring the use of titanium triangular implants for minimally invasive SI joint fusion. We believe that the full impact of each coverage decision grows over time as surgeons gain confidence that they will receive reimbursement for the majority of their diagnosed patients. With recent payor decisions, over 300 million people in the U.S. now have access to minimally invasive SI joint fusion, representing nearly universal coverage of the procedure.

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Components of Results of Operations

Revenue

We generate most of our revenue from sales of iFuse triangular titanium implants. Our revenue from sales of implants fluctuate based on volume of cases (procedures performed), discounts, mix of international and U.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, seasonality, and the impact of COVID-19. 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 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 the U.S. dollar (our reporting currency) and the local currency.

Starting March 2020, the impact of COVID-19 pandemic 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.

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, 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. 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 and throughout 2021. We intend to make investments to execute our strategic plans and operational initiatives. We anticipate 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 distributors.

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.

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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, accretion of final fees on the Solar and SVB Term Loan and the loss on extinguishment on the Pharmakon and 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 consolidated financial statements:

[[GREPCENT_TABLE]]
[["","Year ended December 31, 2021","","Year ended December 31, 2020"],["","Amount","","%","","Amount","","%"],["","(in thousands, except for percentages)"],["Consolidated Statements of Operations Data:"],["Revenue","$","90,152","","","100","%","","$","73,387","","","100","%"],["Cost of goods sold","10,428","","","12","%","","8,902","","","12","%"],["Gross profit","79,724","","","88","%","","64,485","","","88","%"],["Operating expenses:"],["Sales and marketing","93,884","","","104","%","","73,790","","","101","%"],["Research and development","12,441","","","14","%","","9,459","","","13","%"],["General and administrative","25,069","","","28","%","","19,803","","","27","%"],["Total operating expenses","131,394","","","146","%","","103,052","","","141","%"],["Loss from operations","(51,670)","","","(58)","%","","(38,567)","","","(53)","%"],["Interest and other income (expense), net:"],["Interest income","186","","","\u2014","%","","1,097","","","1","%"],["Interest expense","(5,365)","","","(6)","%","","(6,101)","","","(8)","%"],["Other income (expense), net","277","","","\u2014","%","","(126)","","","\u2014","%"],["Net loss","$","(56,572)","","","(64)","%","","$","(43,697)","","","(60)","%"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["","Year ended December 31, 2021","","Year ended December 31, 2020"],["","Amount","","%","","Amount","","%"],["","(in thousands except for percentages)"],["United States","$","82,739","","","92","%","","$","68,118","","","93","%"],["International","7,413","","","8","%","","5,269","","","7","%"],["","$","90,152","","","100","%","","$","73,387","","","100","%"]]
[[/GREPCENT_TABLE]]

Comparison of the years ended December 31, 2021 and 2020

Revenue, Cost of Goods Sold, Gross Profit, and Gross Margin:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","$ Change","","% Change"],["","(in thousands except for percentages)"],["Revenue","$","90,152","","","$","73,387","","","$","16,765","","","23","%"],["Cost of goods sold","10,428","","","8,902","","","1,526","","","17","%"],["Gross profit","$","79,724","","","$","64,485","","","$","15,239","","","24","%"],["Gross margin","88","%","","88","%"]]
[[/GREPCENT_TABLE]]

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Revenue. The increase in revenue for the year ended December 31, 2021 compared to the year ended December 31, 2020 comprised a $14.6 million increase in our U.S. revenue and an increase of $2.1 million in our international revenue. The increase in revenue is due to the increase in domestic and international case volumes, higher number of sales personnel as we continue to invest in our sales organization and increased active surgeons, which benefited from the use of our SImulator to train both new surgeons and re-engage inactive surgeons. This increase was partially offset by lower average selling prices in the U.S. Fiscal year 2021 continued to be impacted by deferral of elective surgeries due to COVID-19, but the impact was lower compared to the deferral of elective cases in fiscal year 2020.

Gross Profit and Gross Margin. Gross profit increased $15.2 million for the year ended December 31, 2021 compared to the year ended December 31, 2020 driven by higher revenue. Gross margin remained consistent at 88% for the year ended December 31, 2021 compared to the prior year mainly due to higher employee related costs of $0.8 million to support the growth of the business, partially offset by $0.8 million decrease in inventory write-downs due to the write-down of iFuse related inventory in 2020 resulting from the faster than anticipated adoption of iFuse-3D.

Operating Expenses:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","$ Change","","% Change"],["","(in thousands, except for percentages)"],["Sales and marketing","$","93,884","","","$","73,790","","","$","20,094","","","27","%"],["Research and development","12,441","","","9,459","","","2,982","","","32","%"],["General and administrative","25,069","","","19,803","","","5,266","","","27","%"],["Total operating expenses","$","131,394","","","$","103,052","","","$","28,342"]]
[[/GREPCENT_TABLE]]

Sales and Marketing Expenses. The increase in sales and marketing expenses for the year ended December 31, 2021 as compared to the year ended December 31, 2020 was due to (a) increases in employee related costs, commissions and stock-based compensation of $11.2 million driven by increased headcount and higher revenues, (b) higher consulting fees of $1.1 million associated with more surgeon training programs and (c) as COVID-19 pandemic restrictions eased, we experienced higher levels of travel, marketing, training activities, facilities and other related costs resulting in an increase of $7.8 million.

Research and Development Expenses. The increase in research and development expenses for the year ended December 31, 2021 as compared to the year ended December 31, 2020 was due to an increase of $1.6 million in employee related costs and stock-based compensation driven by increased headcount and an increase of $1.4 million due to consulting, clinical study and research and development activities driven by investments in our product roadmap and progress of our SILVIA clinical trial.

General and Administrative Expenses. The increase in general and administrative expenses for the year ended December 31, 2021 as compared to the year ended December 31, 2020 was due to an increase of $3.4 million in employee related costs and stock-based compensation driven by increased headcount, and an increase of $1.9 million in consulting, accounting and audit fees primarily associated with SOX compliance requirements.

Interest and Other Income (Expense), Net:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","$ Change","","% Change"],["","2021","","2020"],["","(in thousands, except for percentages)"],["Interest income","$","186","","","$","1,097","","","$","(911)","","","(83)","%"],["Interest expense","(5,365)","","","(6,101)","","","736","","","(12)","%"],["Other income (expense), net","277","","","(126)","","","403","","","nm"],["Total interest and other income (expense), net","$","(4,902)","","","$","(5,130)","","","$","228","","","(4)","%"]]
[[/GREPCENT_TABLE]]

*not meaningful

Interest Income. The decrease in interest income for the year ended December 31, 2021 as compared to the year ended December 31, 2020 was mainly due to lower interest earned on our investments in marketable securities, primarily as a result of lower interest rates.

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Interest Expense. The decrease in interest expense for the year ended December 31, 2021 as compared to the year ended December 31, 2020 was primarily due to $1.0 million of lower interest associated with the SVB Term Loan and Solar Term Loan in 2021 compared to the Pharmakon and Solar Term Loans in 2020, offset in part by the loss on extinguishment of the Solar Term Loan of $1.8 million in 2021 compared to the loss on extinguishment of the Pharmakon Term Loan of $1.5 million in 2020.

Other Income (Expense), Net. Other income, net increased for the year ended December 31, 2021 as compared to the year ended December 31, 2020 due to foreign currency fluctuations.

Liquidity and Capital Resources

As of December 31, 2021, we had cash and marketable securities of $147.0 million compared to $196.4 million as of December 31, 2020. We have financed our operations through our public offerings and debt financing arrangements. As of December 31, 2021 and 2020 we had $35.0 million and $39.5 million outstanding debt, respectively.

As of December 31, 2021, we had an accumulated deficit of $295.8 million. During the years ended December 31, 2021 and 2020, we incurred a net loss of $56.6 million and $43.7 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 over the next 12 months and beyond. 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, need to raise additional capital as 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 of December 31, 2021 is related to a term loan pursuant to the Loan and Security Agreement dated

August 12, 2021, entered into by us with Silicon Valley Bank (“SVB”). Pursuant the Loan and Security Agreement with SVB, SVB provided a term loan with an aggregate principal amount of $35.0 million to us. Prior to Loan and Security Agreement with SVB, our outstanding debt was related to a $40.0 million term loan (the “Solar Term Loan”) with Solar Capital Partners (“Solar”) entered into in May 2020. In accordance with the Loan and Security Agreement with SVB, we paid in full and terminated the Loan and Security Agreement with Solar, which we accounted for as debt extinguishment in accordance with the accounting standards. As of December 31, 2021 and 2020, there was no amount available that could be borrowed under the applicable credit facility. We paid in full the principal outstanding and final fee totaling of $41 million and terminated the Solar Term Loan in August 2021.

The SVB Term Loan matures (the “Maturity Date”) on either (a) August 1, 2025 or (b) August 1, 2026 dependent on our achievement of a certain financial performance milestone as of December 31, 2022, as set forth in the Loan Agreement. Interest on the SVB Term Loan will be payable monthly at an annual rate set at the greater of (a) 5.75% and (b) prime rate as published in the Wall Street Journal plus 2.5%. Commencing on September 1, 2023, we will be required to make monthly principal amortization payments. We may elect to prepay the SVB Term Loan prior to the Maturity Date subject to a prepayment fee equal to 1% if the prepayment occurs prior to the second anniversary of the Effective Date and 0% if the prepayment occurs on or at any time after the second anniversary of the Effective Date. The SVB Term Loan is secured by substantially all our assets other than our intellectual property. We are also obligated to pay a final payment equal to $0.7 million or 2% of the aggregate principal amount of the SVB Term Loan, which was fully earned by SVB on the effective date of the Loan and Security Agreement with SVB. With respect to the SVB Term Loan, this final payment shall be due and payable on the earliest of (i) the maturity date, (ii) the full repayment of the loan, (iii) permitted prepayment and mandatory prepayment upon an acceleration as specified in the agreement or (iv) the termination of the agreement. The final payment was included within the long-term borrowings and is accreted to interest expense using straight-line method over the life of the term loan.

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The Loan Agreement includes affirmative and negative covenants applicable to us and certain of our foreign subsidiaries. The affirmative covenants include, among others, covenants requiring us to maintain our legal existence and governmental compliance, deliver certain financial reports, and maintain insurance coverage. The negative covenants include, among others, restrictions regarding transferring collateral, pledging our intellectual property to other parties, engaging in mergers or acquisitions, paying dividends or making other distributions, incurring indebtedness, transacting with affiliates, and entering into certain investments, in each case subject to certain exceptions. As of December 31, 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.

Our material cash requirements include various contractual and other obligations consisting of long-term debt obligations with SVB, operating lease obligations and purchase obligations with some of our suppliers. Expected timing of those payments are as follows:

[[GREPCENT_TABLE]]
[["","","","Payments Due By Period"],["","Total","","Less than 1 year","","1-3 years","","4-5 years","","More than 5 years"],["","(in thousands)"],["Principal obligations and final fee on long-term debt (1)","$","35,700","","","$","\u2014","","","$","24,792","","","$","10,908","","","$","\u2014"],["Interest obligations (2)","5,356","","","2,040","","","3,119","","","197","","","\u2014"],["Operating leases","6,186","","","1,620","","","3,035","","","1,521","","","10"],["Purchase obligations","1,194","","","1,194","","","\u2014","","","\u2014","","","\u2014"],["Total","$","48,436","","","$","4,854","","","$","30,946","","","$","12,626","","","$","10"]]
[[/GREPCENT_TABLE]]

(1)Represents the principal obligations and the final fee at maturities of our SVB Term Loan.

(2)Represents the future interest obligations on our SVB Term Loan estimated using an interest rate of 5.75% as of December 31, 2021.

This compared to $59.2 million of contractual obligations as of December 31, 2020.

Cash Flows

The following table sets forth the primary sources and uses of cash for each of the periods presented below:

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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Cash Used in Operating Activities

Net cash used in operating activities for the year ended December 31, 2021 of $39.5 million resulted from cash outflows due to net loss of $56.6 million, adjusted for $22.8 million of non-cash items and cash outflows from changes in operating assets and liabilities of $5.7 million. Net cash used in operation activities for the year ended December 31, 2020 of $30.7 million resulted from cash outflows due to net loss of $43.7 million, adjusted for $15.6 million of non-cash items and cash outflows from changes in operating assets and liabilities of $2.5 million. The increase in net loss, net of non-cash items for the year ended December 31, 2021 compared to the year ended December 31, 2020 was mainly due to the higher operating expenses from the growth of the business. Net cash outflows from changes in operating assets and liabilities for year ended December 31, 2021 were primarily due to higher inventory build-up related to our iFuse-TORQ implants and timing of accounts receivable collections due to the increase in revenue in the fourth quarter of 2021, an increase in prepaid expenses due to higher prepaid insurance related to annual insurance premiums, and a decrease in accounts payable due to the timing of vendor payments, partially offset by an increase in accrued liabilities and other due to timing of other third-party payments and higher compensation and benefits accruals. Net cash outflows from changes in operating assets and liabilities for the year ended December 31, 2020 were primarily due to timing of prepayments of certain expenses, higher accounts receivable due to the timing of collections, higher inventory due to the timing of inventory build-up, higher accounts payable due to timing of vendor payments, and a decrease in accrued liabilities and other due to timing of payments

Cash Provided by (Used In) Investing Activities

Net cash provided by investing activities in the year ended December 31, 2021 was $51.6 million compared to net cash used in investing activities of $62.9 million in the year ended December 31, 2020. Net cash provided by investing activities for the year ended December 31, 2021 consisted of maturities of our marketable securities, net of purchases of $58.0 million, partially offset by purchases of property and equipment of $6.4 million related to individual components in instrument to support increased case volumes and the launch of iFuse-TORQ, as well as capitalized costs related to the new lease in Santa Clara. Net cash used in investing activities for the year ended December 31, 2020 consisted of maturities of our marketable securities, net of purchases of $60.4 million, partially offset by purchases of property and equipment of $2.6 million for individual components in instrument sets.

Cash Provided by (Used In) Financing Activities

Cash used in financing activities in the year ended December 31, 2021 was $1.7 million and includes the paydown of our debt by $5.0 million and $1.6 million of other payments associated with refinancing of our debt, partially offset by proceeds from the issuance of common stock under our stock-based incentive compensation plans of $4.9 million. This compares to the cash provided by financing activities in the year ended December 31, 2020 of $136.4 million which consisted of proceeds, net of underwriting discounts, commissions and offering costs of $134.6 million from our follow-on public offerings in January and October 2020 and proceeds from the issuance of common stock under our stock-based incentive compensation plans of $3.4 million, partially offset by payments associated with refinancing of our debt of $1.6 million.

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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 with generally accepted accounting principles in the United States of America (“U.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. We base our estimates on our historical experience, current market conditions 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. We believe that the accounting policy discussed below is critical to understanding our historical and future performance, as it relates to the more significant area involving management's judgments. For more comprehensive discussion of our significant accounting policies, refer to “Note 2 - Summary of Significant Account Policies” in the accompanying Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.

Revenue Recognition

We adopted ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”) effective January 1, 2019. The adoption of ASC 606 did not have a material effect on our revenue recognition. We derive our revenue from the sale of our products to medical groups and hospitals through our direct sales force and distributors throughout the U.S. and Europe. In accordance with ASC 606, we recognize revenue when control is transferred to the customer, in an amount that reflects the consideration we expect to be entitled to in exchange for the goods or services. To recognize revenue, we apply 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 majority of our revenue consisting of product sales where our sales representative delivers the product at the point of implantation at hospital or medical facilities, we recognize the revenue upon completion of the procedure and authorization by the customer, net of rebates and price discounts. We also generate a small portion of our revenue from sale of products through distributors and hospital or medical facilities where the product is ordered in advance of a procedure. The performance obligation is the delivery of the product and therefore, we recognize revenue upon shipment to the customers, net of rebates and price discounts. We account for rebates and price discounts as reduction to revenue, calculated based on the terms agreed to with the customer. Historically, there had been no significant price discounts. Sales prices are specified in either customer contract, agreed price list, or purchase order, which is executed prior to the transfer of control to the customer. For certain hospitals and medical facilities, we have agreements in place consisting of either a master services agreement or an approved 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. We also have 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. Our standard payment terms are generally net 30 to 90 days. We consider sales commissions and related expenses as incremental and recoverable costs of acquiring customer contracts. Our sales commissions paid to our sales representatives commensurate for each surgery performed. The period of benefit is concurrent when we recognize our revenue, as such, we also recognize sales commission as expense when incurred.

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.

Recent Accounting Pronouncements

See Note 2 of Notes to Consolidated Financial Statements for related discussions on recently adopted accounting standards and updates on recently issued accounting standards not yet effective, which information is incorporated by reference here.

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