SI-BONE(SIBN) - 2022 Q4 - Annual Report

Part I Business SI-BONE specializes in proprietary minimally invasive surgical implant systems for sacropelvic disorders, marketed globally Overview SI-BONE focuses on minimally invasive surgical implant systems for sacropelvic disorders, with over 75,000 procedures performed by year-end 2022 - The company specializes in minimally invasive surgical implant systems for sacropelvic anatomy, with key product lines including iFuse, iFuse-3D, iFuse-TORQ, and iFuse Bedrock Granite[20] - As of year-end 2022, over 75,000 procedures have been performed by more than 3,000 surgeons across the U.S. and 38 other countries since the first iFuse launch in 2009[21] Product and Applications The company's iFuse product line has evolved to include 3D-printed and threaded implants, with the Bedrock Granite receiving FDA Breakthrough Device Designation and NTAP - The iFuse product line includes the original machined titanium implant (2009), the iFuse-3D with a proprietary 3D-printed porous surface (2017), and the iFuse-TORQ threaded implant for trauma and SI joint applications (2021)[22][24] - The iFuse Bedrock Granite implant, launched in May 2022, is designed for sacroiliac fusion and sacropelvic fixation. It received FDA Breakthrough Device Designation and a CMS New Technology Add-on Payment (NTAP) effective October 1, 2022[25] - The company also provides enabling technologies compatible with Medtronic's surgical navigation and Mazor robotic systems[26] Market Opportunity SI-BONE estimates its total U.S. addressable market at approximately $3.0 billion, segmented across sacroiliac joint dysfunction, adult deformity, and pelvic trauma U.S. Total Addressable Market Estimate | Market Segment | Estimated Annual Market Size | | :--- | :--- | | Sacroiliac Joint Dysfunction & Degeneration | ~$2.4 billion | | Adult Deformity & Degeneration | ~$250 million | | Pelvic Trauma | ~$350 million | | Total | ~$3.0 billion | Clinical Evidence The company's iFuse implants are supported by over 100 publications and multiple clinical trials demonstrating safety, effectiveness, and economic utility - The company's products are supported by over 100 publications, including two randomized controlled trials (INSITE and iMIA) and long-term follow-up studies (LOIS) showing sustained improvements in pain, disability, and quality of life for up to five years[32][33][34][36] - The SILVIA trial, a randomized study of iFuse-3D in multilevel spine fusion, completed enrollment in 2022 with long-term results expected in 2024[38] - The SAFFRON trial, a randomized study comparing iFuse-TORQ to non-surgical management for sacral fragility fractures, is currently enrolling with results anticipated in late 2024[39] Coverage and Reimbursement Substantially all U.S. payors reimburse for sacroiliac joint fusion, with many providing exclusive positive coverage for SI-BONE's patented triangular implants - A significant number of U.S. payors provide exclusive positive coverage for SI-BONE's patented triangular titanium implants for sacroiliac joint fusion, based on the company's clinical evidence[43] Healthcare Professional Training and Education SI-BONE invests in educating healthcare professionals using a portable simulator, training over 2,200 U.S. surgeons and 800 international surgeons by year-end 2022 - The company utilizes 25 portable, computer-based SI-BONE SImulators worldwide for surgeon training on SI joint fusion and Bedrock techniques without needing an operating room[47] Number of Trained Surgeons (Cumulative) | Region | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | U.S. | >2,200 | >1,800 | | International | >800 | >700 | Sales and Marketing The company primarily uses a direct sales force in the U.S. and a mix of direct sales and distributors internationally, complemented by digital marketing efforts Sales Force Composition (as of Dec 31, 2022) | Region | Direct Employees (Managers & Specialists) | Third-Party Distributors | | :--- | :--- | :--- | | U.S. | 161 (88 managers, 73 specialists) | 105 | | International | 18 | 30 | Competition SI-BONE faces competition from larger medical device companies but differentiates itself through its unique implant design and extensive clinical evidence - Primary competitors in the U.S. are Globus Medical, Inc. and Medtronic plc. In Europe, they are Globus Medical and SIGNUS Medizintechnik GmbH[54] - The company differentiates itself through its triangular titanium implant design and extensive clinical evidence, including over 100 published papers, which has resulted in exclusive reimbursement coverage from certain U.S. payors[55] Intellectual Property As of year-end 2022, the company held 51 U.S. and 16 foreign patents, with key original iFuse patents expiring in November 2024 and iFuse-3D patents in September 2035 - As of year-end 2022, the company held 51 issued U.S. patents and 16 issued foreign patents, with 32 U.S. and 18 foreign applications pending[56] - Key U.S. patents on the original iFuse triangular shape expire in November 2024, while patents on the iFuse-3D design expire in September 2035[56] Regulation The company's products are subject to extensive FDA and international regulations, including 510(k) clearance, QSR, fraud and abuse laws, and data privacy compliance - The company's products are regulated by the FDA, primarily through the 510(k) premarket notification process for Class II devices[62][64][66] - The iFuse Bedrock Granite implant received FDA breakthrough device designation in November 2021 and 510(k) clearance in May 2022, which facilitated obtaining a New Technology Add-on Payment (NTAP) from CMS[88] - Internationally, the company must comply with regulations such as the EU's Medical Device Regulation (MDR), the UK's UKCA mark requirements, and Swiss medical device ordinances[80][91][92] - The company is subject to federal and state fraud and abuse laws, including the Anti-Kickback Statute and the Physician Payment Sunshine Act, as well as data privacy laws like HIPAA in the U.S. and GDPR in the EU[95][96][100][103] Manufacturing and Supply SI-BONE outsources all manufacturing to third parties, primarily rms Company (RMS) as a sole source for key implants, requiring compliance with FDA QSR and ISO 13485:2016 standards - The company relies on third-party manufacturers for all its products, with rms Company (RMS) being the primary and sole supplier for iFuse-3D and iFuse-TORQ implants[107][108] - Manufacturing facilities are subject to FDA's Quality System Regulation (QSR) and international standards, and the company holds ISO 13485:2016 certification for its Santa Clara and Gallarate locations[110][111] Human Capital Resources As of December 31, 2022, the company had 357 employees, emphasizing diversity, competitive compensation, and career development programs to manage attrition - As of December 31, 2022, the company had 357 employees, with a direct field sales organization of 161 in the U.S. and 18 in Europe[116] - The voluntary employee attrition rate was approximately 11% in 2022[116] - The company promotes diversity, with four of nine board members being women and two identifying as Asian American. It implemented a new career development program in 2022 to enhance employee retention[118][124] Risk Factors The company faces significant risks including a history of operating losses, reliance on the iFuse product family, supply chain disruptions, and extensive regulatory and intellectual property challenges - The company has a history of significant operating losses ($61.3M in 2022) and may not achieve or sustain profitability[132] - Business is highly dependent on revenue from the iFuse family of products, making it vulnerable to market shifts or issues with this single product line[164] - Risks include dependence on third-party payor coverage and reimbursement, which can be uncertain and subject to change, and pricing pressure from competitors and ambulatory surgical centers (ASCs)[137][154][157] - The company faces extensive governmental regulation (FDA, international bodies), and failure to comply with complex rules, including fraud and abuse laws, could result in severe penalties[211][223] - Key patents for the original iFuse triangular shape expire in November 2024, which may allow competitors to market similar devices[272] Properties The company's headquarters and additional R&D/warehouse space are leased in Santa Clara, California, with smaller offices supporting European operations - The company leases its headquarters in Santa Clara, CA (approx. 21,848 sq. ft., lease expires May 2025) and has additional leased facilities in California, Italy, Germany, and the UK[297] Legal Proceedings The company is not currently a party to any material legal proceedings that would have a significant adverse effect on its operations - The company is not currently involved in any material legal proceedings[298] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq Global Market under 'SIBN', with no cash dividends ever paid or planned for the foreseeable future - Common stock is listed on the Nasdaq Global Market under the symbol "SIBN"[302] - The company has never declared or paid cash dividends and does not plan to in the foreseeable future[304] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, revenue grew 18% to $106.4 million, but net loss widened to $61.3 million due to increased operating expenses, though liquidity is deemed sufficient for the next 12 months Impact of COVID-19 Pandemic The COVID-19 pandemic continues to negatively impact revenues through case deferrals and disrupt the global supply chain for instruments and implants - The COVID-19 pandemic has negatively impacted revenues through case deferrals and has caused disruptions in the global supply chain, leading to delays, product shortages, and rising costs for instruments and implants[312][314] Factors Affecting Results of Operations and Key Performance Indicators Performance is driven by expanding solutions access, increasing surgeon penetration, and new product launches, supported by sales force growth and R&D investment - The U.S. sales force grew to 88 territory managers and 73 clinical support specialists by the end of 2022, up from 85 and 65 respectively at the end of 2021[319] - Average revenue per U.S. territory manager increased to approximately $1.21 million in FY2022, up from $1.06 million in FY2021[332] - The number of U.S. surgeons trained on iFuse grew from over 1,800 at YE 2021 to over 2,200 at YE 2022[325] - R&D spending was $13.6 million in 2022, representing 13% of revenue, focused on new solutions and clinical trials like SILVIA and SAFFRON[328] Results of Operations For 2022, revenue increased 18% to $106.4 million, but gross margin declined and operating expenses rose, leading to a wider net loss of $61.3 million Comparison of Operations (2022 vs 2021) | Metric | 2022 (in thousands) | 2021 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Revenue | $106,409 | $90,152 | 18% | | Gross Profit | $90,704 | $79,724 | 14% | | Gross Margin | 85% | 88% | -3 pts | | Total Operating Expenses | $150,313 | $131,394 | 14% | | Loss from Operations | ($59,609) | ($51,670) | 15% | | Net Loss | ($61,256) | ($56,572) | 8% | - The $16.3 million revenue increase was primarily driven by a $16.0 million rise in U.S. revenue due to higher case volumes from an expanding sales force and surgeon base[349] - Sales and marketing expenses increased by $13.8 million (15%) mainly due to higher employee-related costs and commissions from increased headcount and revenue[351] Liquidity and Capital Resources As of December 31, 2022, the company had $97.3 million in cash and marketable securities, with a net loss of $61.3 million, and refinanced its term loan in January 2023 Cash and Debt Position (Year-End) | Metric | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash and Marketable Securities | $97.3 million | $147.0 million | | Outstanding Debt | $35.2 million | $35.0 million | | Accumulated Deficit | ($357.1 million) | ($295.8 million) | Cash Flow Summary | Cash Flow Activity | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Net cash used in operating activities | ($41,655) | ($39,533) | | Net cash (used in) provided by investing activities | ($2,815) | $51,580 | | Net cash provided by (used in) financing activities | $2,197 | ($1,711) | - In January 2023, the company refinanced its debt, repaying a $35.0 million SVB term loan and entering into a new agreement with SVB for a $36.0 million term loan and a $15.0 million revolving credit facility[364][537] Critical Accounting Policies, Significant Judgments, and Use of Estimates Critical accounting policies involve significant judgments in revenue recognition upon procedure completion and valuing stock-based compensation using Monte-Carlo simulations - Revenue is primarily recognized upon completion of a surgical procedure and customer authorization, as this is when control of the product is transferred[374][375] - The fair value of performance-based restricted stock units with market conditions is estimated using a Monte-Carlo simulation, a key area of management judgment[376] Financial Statements and Supplementary Data The consolidated financial statements, audited by PricewaterhouseCoopers LLP with an unqualified opinion, detail the company's financial position and results, highlighting revenue recognition as a critical audit matter Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP issued an unqualified opinion on the financial statements, identifying U.S. implantation product sales revenue recognition as a critical audit matter - The auditor, PricewaterhouseCoopers LLP, issued an unqualified (clean) opinion on the company's consolidated financial statements[384] - The auditor identified Revenue Recognition for U.S. implantation product sales as a Critical Audit Matter, citing the high degree of auditor effort involved in testing these transactions[389][390] Consolidated Financial Statements The financial statements show total assets of $157.6 million and a net loss of $61.3 million for 2022, with stockholders' equity decreasing to $98.3 million Consolidated Balance Sheet Data (in thousands) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash, cash equivalents & short-term investments | $97,290 | $146,979 | | Accounts receivable, net | $20,674 | $14,246 | | Inventory | $17,282 | $11,498 | | Total Assets | $157,552 | $190,506 | | Liabilities & Equity | | | | Total current liabilities | $21,178 | $16,890 | | Long-term borrowings | $35,171 | $34,973 | | Total Liabilities | $59,250 | $56,086 | | Total Stockholders' Equity | $98,302 | $134,420 | Consolidated Statement of Operations Data (in thousands) | Account | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Revenue | $106,409 | $90,152 | | Gross Profit | $90,704 | $79,724 | | Loss from Operations | ($59,609) | ($51,670) | | Net Loss | ($61,256) | ($56,572) | | Net Loss Per Share | ($1.79) | ($1.71) | Notes to Consolidated Financial Statements Notes detail revenue recognition, debt agreements including a January 2023 refinancing, significant NOL carryforwards with a full valuation allowance, and a related party joint development agreement - The majority of revenue is recognized upon completion of the surgical procedure and customer authorization, net of any rebates or discounts[434] - As of Dec 31, 2022, the company had a $35.0 million term loan with SVB, which was refinanced in January 2023. The loan is secured by substantially all company assets except intellectual property[483] - As of Dec 31, 2022, the company had federal and state Net Operating Loss (NOL) carryforwards of $298.6 million and $238.7 million, respectively. A full valuation allowance is maintained against these deferred tax assets[521] - The company has a joint development agreement with SeaSpine, a related party, for a next-generation device, involving reimbursement payments and future royalties[533][534][535] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022, with no auditor attestation required as a smaller reporting company - Management concluded that as of December 31, 2022, the company's disclosure controls and procedures were effective at the reasonable assurance level[545] - Management concluded that internal control over financial reporting was effective as of December 31, 2022. An auditor's attestation report was not included as the company is exempt as a "smaller reporting company"[546] Part III Directors, Executive Compensation, Security Ownership, and Principal Accountant Fees This section incorporates information on directors, executive compensation, security ownership, and principal accountant fees by reference from the forthcoming 2023 Proxy Statement - Information for Items 10 (Directors, Executive Officers and Corporate Governance), 11 (Executive Compensation), 12 (Security Ownership), 13 (Certain Relationships and Related Transactions), and 14 (Principal Accountant Fees and Services) is incorporated by reference from the company's 2023 Proxy Statement, to be filed within 120 days of the fiscal year-end[551][553][554][555][556] Part IV Exhibits and Financial Statement Schedules This section lists all exhibits filed with the 10-K, including corporate governance documents, material agreements, and various certifications - This section provides an index of all exhibits filed with the 10-K, including corporate governance documents, material agreements (such as the loan agreement with SVB and manufacturing agreement with rms Company), and executive compensation plans[559][560][563]