SI-BONE, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. SI-BONE is a medical-device company whose business is centered on the iFuse system for minimally invasive sacroiliac joint fusion.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $16.2m | $13.4m | $47.5m | $39.8m |
| Gross profit | $14.6m | $12.2m | $42.7m | $36.3m |
| Gross margin | 89.9% | 90.9% | 90.0% | 91.3% |
| Operating expenses | $25.1m | $15.2m | $70.3m | $44.0m |
| Loss from operations | $(10.6)m | $(3.0)m | $(27.5)m | $(7.7)m |
| Net loss | $(11.3)m | $(4.8)m | $(29.3)m | $(12.1)m |
| Operating cash flow | Not separately provided | Not separately provided | $(22.6)m | $(8.2)m |
Q3 revenue increased 21%; nine-month revenue increased 19%. Management attributed growth mainly to higher U.S. procedure volumes, improved sales-force productivity and more active surgeons as reimbursement coverage expanded. U.S. revenue was $14.9m in Q3 and $43.3m year to date. The company remained loss-making, and operating expenses grew faster than revenue. Sales and marketing expense rose 55% in Q3, reflecting commercial expansion, commissions and related costs. General and administrative expense more than doubled, including a $2.5m litigation accrual. Gross margin declined, which management attributed to additional operations personnel supporting growth.
Liquidity, debt and cash flow
- At September 30, cash and cash equivalents were $12.6m, short-term investments $83.6m and long-term investments $5.3m: approximately $101.5m in total cash and investments, versus $122.2m at December 31, 2018.
- Cash used in operations was $22.6m for the first nine months, compared with $8.2m in 2018. Investing activities provided $7.9m, primarily reflecting marketable-security maturities net of purchases; financing activities provided $2.2m.
- Long-term borrowings, net of issuance costs, were $39.2m. The term loan bears fixed interest of 11.5%, is secured by substantially all company assets, and has an interest-only period through September 2020, followed by scheduled principal payments through December 2022.
- Debt terms require at least $5.0m in cash and compliance with either minimum net-sales or trailing-12-month EBITDA targets. The company reported covenant compliance at quarter-end. It stated that available cash and investments were expected to fund operating and capital needs for at least the next 12 months, based on its current plan.
Material changes, outlook and risks
- Operating losses widened as SI-BONE invested in sales, marketing, research and development, and public-company infrastructure. Management expects operating expenses to increase as the business grows and expects further losses; the filing provides no formal revenue or earnings guidance.
- Coverage was expanding: U.S. payors covering 268 million lives, including private payors covering 133 million, regularly reimbursed for the procedure at September 30. However, some major private insurers continued to classify it as experimental, and coverage decisions remain subject to change.
- The company received FDA clearance in April 2019 to promote the iFuse Bedrock technique for additional stabilization of the sacroiliac joint in connection with multi-level spinal fusion. Management noted that clinical experience with this technique remained limited.
- A putative class action alleges violations of the Telephone Consumer Protection Act involving fax invitations to an educational dinner. The court denied SI-BONE’s motion to dismiss. The company accrued $2.5m for probable, estimable costs associated with mediation and settlement discussions; any additional reasonably possible loss could not be estimated.
- Key risks include continued losses and cash use; the debt covenant and repayment requirements; dependence on iFuse; reimbursement and clinical-evidence uncertainty; competition and pricing pressure; and reliance on a limited number of third-party suppliers, including single-source suppliers.
Most important facts for investors to verify
- Whether procedure volumes, surgeon adoption and reimbursement coverage continue to support revenue growth, including the status of major payors that do not cover the procedure.
- Whether revenue or EBITDA will satisfy the loan’s applicable covenant thresholds, and whether liquidity remains adequate as operating cash use continues.
- How the TCPA case is resolved and whether losses exceed the $2.5m accrual.
- Whether higher commercial spending produces sustainable growth and whether gross margins stabilize as the business scales.
- Whether clinical evidence and adoption support the iFuse Bedrock technique and SI-BONE’s ability to manage product supply and single-source supplier risks.