SI-BONE, Inc. — Q3 2018 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2018. SI-BONE sells the iFuse minimally invasive implant system for sacroiliac joint fusion; substantially all revenue comes from iFuse, and most revenue is U.S.-based. The company reported more than 35,000 procedures performed by over 1,700 surgeons in the U.S. and 33 other countries as of quarter-end.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $13.4 million, up 15% from $11.7 million | $39.8 million, up 16% from $34.2 million |
| Gross profit / gross margin | $12.2 million / 91%, versus $10.4 million / 89% | $36.3 million / 91%, versus $30.3 million / 89% |
| Operating expenses | $15.2 million, versus $15.4 million | $44.0 million, versus $46.0 million |
| Loss from operations | $3.0 million, versus $5.0 million | $7.7 million, versus $15.7 million |
| Net loss | $4.8 million, versus $5.7 million | $12.1 million, versus $18.1 million |
| Operating cash flow | Not presented for the quarter | Cash used of $8.2 million, versus $13.5 million |
For the nine months, cash used in investing was $0.8 million and financing provided $0.6 million. Cash and cash equivalents were $14.0 million at September 30, down from $22.4 million at December 31, 2017. Total assets were $28.4 million; current assets were $24.9 million and current liabilities $8.9 million. Long-term borrowings, net of discount, were $38.9 million. The accumulated deficit was $151.9 million. Basic and diluted net loss per share was $1.29 for Q3 and $3.34 for the nine months, adjusted for the subsequent 1-for-18 reverse stock split.
Material changes versus prior periods
- Revenue growth reflected higher U.S. sales, attributed to improved sales-force productivity and reimbursement coverage; nine-month international revenue also grew, particularly through the U.K., Germany, Australia and Taiwan.
- Gross margin increased by two percentage points in both comparisons. Management attributed lower cost of goods sold partly to instrument sets becoming fully depreciated; higher case volumes increased direct product costs.
- Nine-month operating expenses declined 4%, mainly due to lower general and administrative and R&D costs. Sales and marketing expense increased modestly as the company invested in its commercial organization.
- Interest expense rose to $3.8 million for the nine months from $2.9 million, primarily reflecting the higher borrowings under the Pharmakon term loan entered into in October 2017.
- Other expense included a $0.7 million increase in the fair value of preferred-stock warrant liabilities for the nine months. The Q3 comparison also reflected foreign-currency losses and warrant remeasurement, versus other income in Q3 2017.
Outlook, liquidity, risks and unusual items
- IPO after quarter-end: In October 2018, SI-BONE sold 8.28 million shares at $15 per share, receiving net proceeds of approximately $113.7 million. Preferred shares converted to common stock, and the preferred-stock warrant liability was reclassified to additional paid-in capital. Management said IPO proceeds and existing cash were expected to fund operating expenses and capital needs for at least the next 12 months, based on its current operating plan.
- Outlook: The company expected additional operating losses and said it anticipated higher operating expenses in absolute dollars as it expanded commercialization, R&D and public-company capabilities. It expected operating expenses to decline as a percentage of revenue over time. No specific revenue or earnings guidance was provided.
- Debt and covenants: The $40 million Pharmakon loan carries a fixed 11.5% rate, with interest-only payments through September 2020 and principal payments thereafter through December 2022. It is secured by a first lien on company assets and includes a $5 million minimum-cash requirement and revenue targets. Beginning with Q1 2019, the company must meet revenue or earnings targets. It reported compliance at September 30; failure to meet covenants could make the debt immediately due. A further $10 million tranche was available through January 2019 subject to revenue milestones.
- Commercial and operating risks: Reimbursement decisions remain important to adoption. As of September 30, payors covering 254 million U.S. lives reimbursed for iFuse; 41 of 65 major private payors tracked covered or had announced coverage, while major payors remained non-covering. The filing also highlights competition, possible pricing pressure, dependence on a single principal product, third-party and in some cases single-source suppliers, and the possibility of slower-than-expected sales or additional capital needs.
- Unusual items and contingencies: Q3 2017 included $1.3 million of IPO costs written off after offering delays, helping explain lower year-over-year Q3 2018 G&A. The nine-month 2017 comparison also included expense associated with forgiveness of a CEO loan. Management reported no known legal proceedings expected to have a material adverse effect. The filing disclosed $5.7 million of future minimum lease payments and $0.3 million of inventory purchase commitments at September 30.
- Controls: Management concluded disclosure controls were effective at September 30, 2018, and reported no material quarterly change in internal control over financial reporting.
Investor verification points
- Confirm post-IPO cash, share count and use of proceeds in subsequent filings, and assess whether the stated 12-month runway remains supported by actual spending and sales.
- Track revenue and earnings covenant performance, the $5 million minimum-cash condition, and the availability or use of the additional loan tranche.
- Verify whether reimbursement coverage continues to expand and translates into procedure growth, including coverage policies for iFuse-3D and decisions by major non-covering payors.
- Assess revenue concentration in iFuse and the company’s ability to maintain supply, particularly from identified single-source implant manufacturers.
- Review the effects of ongoing losses, high-cost debt, sales-force investment and public-company costs on cash burn and progress toward profitability.