SI-BONE, Inc. (SIBN) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
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 implants 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 distributors in the U.S., and with a combination of a direct sales force and distributors in other countries. As of December 31, 2022, more than 75,000 procedures have been performed by over 3,000 surgeons in the United States and 38 other countries since we introduced iFuse in 2009.
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 was impacted by prevalence of COVID-19, which negatively impacts our ability to promote the use of our products with physicians. Additionally, many hospitals and ambulatory surgery centers have in the past suspended and may suspend 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 2021 and 2022 as evidenced by case deferrals attributed to COVID-19.
Throughout the pandemic, we have taken a variety of steps to address the impact of the COVID-19, while attempting to minimize business disruption. 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.
Certain of our third-party suppliers have faced delays, product shortages and rising costs resulting from disruptions in the global supply chain, related to instruments and shop capacity issues impacting lead-time and quantities of implants available. 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.
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.
The existence and further duration of the COVID-19 pandemic may also further exacerbate certain risks as described in “Item 1A - Risk Factors.”
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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 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 drive productivity by adding more clinical support specialists and implement hybrid models, including selectively adding distributors for case coverage and consign instrument trays and implants at selective sites of service
As of December 31, 2022, our U.S. sales force consisted of 88 territory sales managers and 73 clinical support specialists directly employed by us and 105 third-party distributors, compared to 85 territory sales managers and 65 clinical support specialists directly employed by us and 59 third-party distributors as of December 31, 2021. As of December 31, 2022, our international sales force consisted of 18 sales representatives directly employed by us and 30 third-party distributors, compared to 20 sales representatives directly employed by us and 32 third-party distributors as of December 31, 2021.
With the steady increase in the numbers of minimally invasive procedures, including sacroiliac joint fusion procedures, being performed at 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 December 31, 2022, 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.
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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 December 31, 2022 and 2021, in the U.S. more than 2,200 surgeons and 1,800 surgeons, respectively, have been trained on iFuse and have treated at least one patient. Outside the U.S., as of December 31, 2022 and 2021, more than 800 surgeons and 700 surgeons, respectively, have been trained on iFuse and have treated at least one patient. We will continue to pursue approximately 5,300 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 200 academic programs in the U.S., resulting in the training of approximately 1200 surgical residents and fellows.
Expand Addressable Markets
Expanding our platform of sacropelvic solutions to address SI 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.
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 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. In 2022, we spent $13.6 million on R&D, equating to 13% of our 2022 revenue.
Enhance Employee Experience and Engagement
Our ability to recruit, develop and retain highly skilled talent is a significant determinant of our success. To facilitate talent attraction, retention, and development, we strive to make SI-BONE an inclusive, diverse, and safe workplace with opportunities for our employees to grow and develop in their careers, supported by strong compensation, benefits, and health and wellness programs, as well as by programs that build connections between our employees and the communities in which they live and work.
In addition to ensuring workforce diversity as well as fair and equitable pay to our employees, we remain focused on enhancing employee retention and job satisfaction. To that effect, we have created a feedback framework to monitor and respond to employee sentiment on an ongoing basis. Leveraging the insights from this feedback, we are focused on implementing strategies to enhance productivity and increase employee empowerment to drive quick decision making and prioritization across the organization. Additionally, we offer ongoing learning and leadership training opportunities that support growth and development. In 2022 we conducted a formal management training program and implemented a new career development program which includes a formalized framework that reflects how an employee can advance their career within the company. Through our engagement programs and voluntary and giving activities, we are also focused on building connections between our employees, their families, and our communities to create a more meaningful and fulfilling workplace. We experienced a decrease in voluntary employee attrition during 2022, which we believe was at least in part to due to our actions to improve employee experience.
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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.
While we will continue to selectively expand our sales force, we are also focused on increasing our sales managers capacity and drive productivity by adding more clinical support specialists and implement hybrid models, including selectively adding distributors for case coverage and consign instrument trays and implants at selective sites of service. Our average revenue per territory manager has increased to approximately $1.21 million in FY2022, from $1.06 million in FY2021.
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 turn rate over time and use capital more effectively. Given the macro supply chain disruption, we are working closely with our suppliers to reduce lead time for our implant 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 a newer products, to reduce the overall cost of the implants as we scale, 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.
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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, 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, 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.
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
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, 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.
Our gross profit and gross margin are affected by factors impacting revenue and cost of goods sold. In addition, our gross margins are typically higher on products we sell directly as compared to products we sell through third-party distributors. As a result, changes in the mix of direct versus distributor sales can directly influence our gross margins.
Operating Expenses
Our operating expenses consist of sales and marketing, research and development, and general and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, sales commissions and other cash and stock-based compensation related expenses. We 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 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.
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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 Solar and SVB Term Loans. See “Liquidity and Capital Resources - Term Loan” below for a description of these term loans.
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 consolidated financial statements:
| Year ended December 31, 2022 | Year ended December 31, 2021 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % | Amount | % | ||||||||||
| (in thousands, except for percentages) | |||||||||||||
| Consolidated Statements of Operations Data: | |||||||||||||
| Revenue | $ | 106,409 | 100 | % | $ | 90,152 | 100 | % | |||||
| Cost of goods sold | 15,705 | 15 | % | 10,428 | 12 | % | |||||||
| Gross profit | 90,704 | 85 | % | 79,724 | 88 | % | |||||||
| Operating expenses: | |||||||||||||
| Sales and marketing | 107,726 | 101 | % | 93,884 | 104 | % | |||||||
| Research and development | 13,627 | 13 | % | 12,441 | 14 | % | |||||||
| General and administrative | 28,960 | 27 | % | 25,069 | 28 | % | |||||||
| Total operating expenses | 150,313 | 141 | % | 131,394 | 146 | % | |||||||
| Loss from operations | (59,609) | (56) | % | (51,670) | (58) | % | |||||||
| Interest and other income (expense), net: | |||||||||||||
| Interest income | 1,304 | 1 | % | 186 | — | % | |||||||
| Interest expense | (2,819) | (3) | % | (5,365) | (6) | % | |||||||
| Other income (expense), net | (132) | — | % | 277 | — | % | |||||||
| Net loss | $ | (61,256) | (58) | % | $ | (56,572) | (64) | % |
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:
| Year ended December 31, 2022 | Year ended December 31, 2021 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % | Amount | % | ||||||||||
| (in thousands except for percentages) | |||||||||||||
| United States | $ | 98,751 | 93 | % | $ | 82,739 | 92 | % | |||||
| International | 7,658 | 7 | % | 7,413 | 8 | % | |||||||
| $ | 106,409 | 100 | % | $ | 90,152 | 100 | % |
Comparison of the years ended December 31, 2022 and 2021
Revenue, Cost of Goods Sold, Gross Profit, and Gross Margin:
| Year Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | $ Change | % Change | |||||||||||
| (in thousands except for percentages) | ||||||||||||||
| Revenue | $ | 106,409 | $ | 90,152 | $ | 16,257 | 18 | % | ||||||
| Cost of goods sold | 15,705 | 10,428 | 5,277 | 51 | % | |||||||||
| Gross profit | $ | 90,704 | $ | 79,724 | $ | 10,980 | 14 | % | ||||||
| Gross margin | 85 | % | 88 | % |
Revenue. The increase in revenue for the year ended December 31, 2022 compared to the year ended December 31, 2021 comprised a $16.0 million increase in our U.S. revenue and an increase of $0.2 million in our international revenue. The increase in revenue is due to the increase in domestic and international case volumes, driven by a seasoned and expanding sales force and growing base of active surgeons. This increase was partially offset by lower average selling prices, challenges in certain international markets and impact of foreign exchange on our international revenue.
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Gross Profit and Gross Margin. Gross profit increased $11.0 million for the year ended December 31, 2022 compared to the year ended December 31, 2021 driven by higher revenue. Gross margin was 85% for the year ended December 31, 2022 compared to 88% in the prior year. Gross margin decreased due to lower average selling prices driven by procedure and product mix, as well as type of medical facilities where the procedures were performed. Gross margin also included the impact of higher costs of newly launched implants and the increase in cost to support the growth of the business, including increase in depreciation from instrument trays for newly launched products.
Operating Expenses:
| Year Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | $ Change | % Change | |||||||||||
| (in thousands, except for percentages) | ||||||||||||||
| Sales and marketing | $ | 107,726 | $ | 93,884 | $ | 13,842 | 15 | % | ||||||
| Research and development | 13,627 | 12,441 | 1,186 | 10 | % | |||||||||
| General and administrative | 28,960 | 25,069 | 3,891 | 16 | % | |||||||||
| Total operating expenses | $ | 150,313 | $ | 131,394 | $ | 18,919 | 14 | % |
Sales and Marketing Expenses. The increase in sales and marketing expenses for the year ended December 31, 2022 as compared to the year ended December 31, 2021 was due to increases in employee related costs, commissions and stock-based compensation of $11.0 million driven by increased headcount and higher revenues, and increased travel, marketing and other related costs resulting in an increase of $3.1 million, partially offset by lower consulting fees of $0.3 million associated with more targeted surgeon programs.
Research and Development Expenses. The increase in research and development expenses for the year ended December 31, 2022 as compared to the year ended December 31, 2021 was due to an increase of $1.5 million in employee related costs and stock-based compensation driven by increased headcount, partially offset by a decrease of $0.3 million in consulting and research and development activities related to the timing of new product development.
General and Administrative Expenses. The increase in general and administrative expenses for the year ended December 31, 2022 as compared to the year ended December 31, 2021 was due to an increase of $3.8 million in employee related costs and stock-based compensation driven by increased headcount, an increase of $0.3 million in consulting primarily associated with Sarbanes-Oxley compliance requirements, and an increase of $0.2 million for the allowance for credit losses, partially offset by a decrease of $0.4 million in insurance costs.
Interest and Other Income (Expense), Net:
| Year Ended December 31, | $ Change | % Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||||||||||
| (in thousands, except for percentages) | ||||||||||||||
| Interest income | $ | 1,304 | $ | 186 | $ | 1,118 | 601 | % | ||||||
| Interest expense | (2,819) | (5,365) | 2,546 | 47 | % | |||||||||
| Other income (expense), net | (132) | 277 | (409) | (148) | % | |||||||||
| Total interest and other income (expense), net | $ | (1,647) | $ | (4,902) | $ | 3,255 | 66 | % |
Interest Income. The increase in interest income for the year ended December 31, 2022 as compared to the year ended December 31, 2021 was mainly due to higher interest earned on our investments in marketable securities, primarily as a result of higher interest rates.
Interest Expense. The decrease in interest expense for the year ended December 31, 2022 as compared to the year ended December 31, 2021 was primarily due to $0.7 million of lower interest associated with the SVB Term Loan in 2022 compared to the SVB Term Loan and Solar Term Loan in 2021, offset in part by the loss on extinguishment of the Solar Term Loan of $1.8 million in 2021.
Other Income (Expense), Net. Other income (expense), net changed from income to expense for the year ended December 31, 2022 as compared to the year ended December 31, 2021 due to foreign currency fluctuations.
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Liquidity and Capital Resources
As of December 31, 2022, we had cash and marketable securities of $97.3 million compared to $147.0 million as of December 31, 2021. We have financed our operations primarily through our public offerings and debt financing arrangements. As of December 31, 2022 and 2021 we had $35.2 million and $35.0 million outstanding debt, respectively.
As of December 31, 2022, we had an accumulated deficit of $357.1 million. During the years ended December 31, 2022 and 2021, we incurred a net loss of $61.3 million and $56.6 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 impact of future pandemics or economic downturn, 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, may 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
On May 29, 2020, we entered into a term loan with Solar Capital Partners (“Solar”). Pursuant to the Loan and Security Agreement, Solar provided an aggregate principal amount of $40.0 million term loan (the “Solar Term Loan”). We paid in full and terminated the Solar Term Loan in August 2021.
The outstanding debt as of December 31, 2022 is related to a term loan entered into by us with Silicon Valley Bank (“SVB”). Pursuant to the Loan and Security Agreement (“Loan Agreement”) dated August 12, 2021 (the “Effective Date”), SVB provided an aggregate principal amount of $35.0 million to us (the “SVB Term Loan”). We used the proceeds of the SVB Term Loan to repay in full and terminate the Solar Term Loan, which was accounted for as debt extinguishment in accordance with the accounting standards. We recognized the unamortized debt issuance costs and unaccreted value of final fee of $1.3 million and the prepayment penalty and lender fees of $0.5 million related to Solar Term Loan as a loss on debt extinguishment. The costs and fees are reflected as interest expense in the consolidated statement of operations for the year ended December 31, 2021. The total debt issuance costs of $0.1 million associated with the SVB Term Loan were recorded in the consolidated balance sheet as a direct deduction from the carrying amount of the loan, and are amortized as a component of interest expense using straight-line method over the life of the term loan.
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. As of December 31, 2022, we achieved the performance milestone, therefore the Maturity Date was extended to August 1, 2026. We accounted for this change in Maturity Date as a debt modification, and accordingly, the unamortized discount and debt issuance costs associated with the SVB Term Loan are being amortized to interest expense using straight-line method over the remaining term of the loan through August 1, 2026. 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 Agreement. 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.
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, 2022, we were in compliance with all debt covenants.
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In January 2023, our outstanding amount under the SVB Term Loan was refinanced on a long-term basis and is accordingly classified as term note, noncurrent as of December 31, 2022. See Note 15 in the accompanying Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for a discussion of our full repayment and termination of the SVB Term Loan and entry into a new term loan and revolving credit facility.
Cash Requirements
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:
| 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 | $ | 4,861 | $ | 23,334 | $ | 7,505 | $ | — | ||||||||
| Interest obligations (2) | 7,541 | 3,466 | 3,847 | 228 | — | |||||||||||||
| Operating leases obligations | 4,645 | 1,590 | 2,517 | 538 | — | |||||||||||||
| Purchase obligations | 821 | 821 | — | — | — | |||||||||||||
| Total | $ | 48,707 | $ | 10,738 | $ | 29,698 | $ | 8,271 | $ | — |
(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 10.0% as of December 31, 2022.
This compared to $48.4 million of contractual obligations as of December 31, 2021.
Cash Flows
The following table sets forth the primary sources and uses of cash for each of the periods presented below:
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | $ Change | ||||||||
| (in thousands, except for percentages) | ||||||||||
| Net cash provided by (used in): | ||||||||||
| Operating activities | $ | (41,655) | $ | (39,533) | $ | (2,122) | ||||
| Investing activities | (2,815) | 51,580 | (54,395) | |||||||
| Financing activities | 2,197 | (1,711) | 3,908 | |||||||
| Effects of exchange rate changes on cash and cash equivalents | (429) | (498) | 69 | |||||||
| Net increase in cash and cash equivalents | $ | (42,702) | $ | 9,838 | $ | (52,540) |
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Cash Used in Operating Activities
Net cash used in operating activities for the year ended December 31, 2022 of $41.7 million resulted from cash outflows due to net loss of $61.3 million, adjusted for $27.2 million of non-cash items and cash outflows from changes in operating assets and liabilities of $7.6 million. Net cash used in operation 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. The increase in net loss, net of non-cash items for the year ended December 31, 2022 compared to the year ended December 31, 2021 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, 2022 were primarily due to higher inventory build-up related to our iFuse-TORQ and iFuse Bedrock Granite implants and higher accounts receivable due to timing of collections and the increase in revenue in the fourth quarter of 2022, offset in part by a decrease in prepaid expenses due to timing of payments for software subscriptions and lower prepaid annual insurance premiums, an increase in accounts payable due to the timing of vendor payments, and 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, 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.
Cash (Used In) Provided by Investing Activities
Net cash used in investing activities in the year ended December 31, 2022 was $2.8 million compared to net cash provided by investing activities of $51.6 million in the year ended December 31, 2021. Net cash used in investing activities for the year ended December 31, 2022 consisted of purchases of property and equipment of $9.5 million related to individual components in instrument sets to support increased case volumes, increased demand for iFuse-TORQ and the launch of iFuse Bedrock Granite, as well as capitalized costs related to the lease in Santa Clara, partially offset by maturities of our marketable securities, net of purchases of $6.7 million. 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 for individual components in instrument sets, primarily for the launch of iFuse-TORQ and capitalized costs related to the lease in Santa Clara.
Cash Provided by (Used In) Financing Activities
Cash provided by financing activities in the year ended December 31, 2022 was $2.2 million related to proceeds from the issuance of common stock under our stock-based incentive compensation plans. Cash used in financing activities for 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.
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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 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.
Stock-Based Compensation
We grant restricted stock unit awards subject to market and service vesting conditions to certain executive officers. This type of grant consists of the right to receive shares of common stock, subject to achievement of time-based criteria and certain market-related performance goals over a specified period, as established by the Compensation Committee of the Company’s Board of Directors. The fair value of our market-related performance awards is estimated using a Monte-Carlo simulation, which incorporates the probability of the achievement of the market-related performance goals at the date of grant. If such performance goals are not ultimately met, the expense is not reversed. Stock-based compensation expense is recognized ratably over the requisite service period.
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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