UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM TO
Commission File Number 001-38701
SI-BONE, Inc.
(Exact name of Registrant as specified in its Charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
26-2216351
(I.R.S. Employer
Identification No.)
471 El Camino Real, Suite 101, Santa Clara, California 95050
(Address of principal executive offices including zip code)
Registrant’s telephone number, including area code: (408) 207-0700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.0001 per share
Trading Symbol(s)
SIBN
Name of each exchange on which registered
The Nasdaq Global Market
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No x
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No x
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes x No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
Smaller reporting company
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☒
Accelerated filer
Emerging growth company
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☒
Non-accelerated filer
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐ No x
The aggregate market value of the shares of common stock held by non-affiliates of the registrant as of June 30, 2020, the last business day of the registrant’s most recently completed second
fiscal quarter, was approximately $394.1 million, calculated based on the closing price of the registrant’s common stock as reported by the Nasdaq Global Market. Shares of common stock held
by each officer and director, and each entity affiliated with a director, have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not a
conclusive determination for other purposes.
The number of shares of Registrant’s Common Stock outstanding as of March 5, 2021 was 32,727,666 shares.
Portions of the Registrant’s Definitive Proxy Statement relating to the Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission within 120 days after
the end of the Registrant’s fiscal year ended December 31, 2020, are incorporated by reference into Part III of this Report.
DOCUMENTS INCORPORATED BY REFERENCE
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
TABLE OF CONTENTS
PART I
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
PART III
Exhibits and Financial Statement Schedules
Form 10-K Summary
PART IV
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
Item 10
Item 11
Item 12
Item 13
Item 14
Item 15
Item 16
SIGNATURES
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In this Annual Report on Form 10-K, “we,” “our,” “us,” “SI-BONE,” and “the Company” refer to SI-BONE, Inc. and its consolidated subsidiaries. The
SI-BONE logo and other trade names, trademarks or service marks of SI-BONE are the property of SI-BONE, Inc. This report contains references to our
trademarks and to trademarks belonging to other entities. Trade names, trademarks and service marks of other companies appearing in this report are the
property of their respective holders. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or
endorsement or sponsorship of us by, any other companies.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10‑K contains forward-looking statements. In some cases, you can identify forward-looking statements by terms such as
“may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential”
or “continue” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these identifying words.
These forward-looking statements speak only as of the date of this Annual Report on Form 10-K and are subject to a number of risks, uncertainties and
assumptions, including those described under the sections in this Annual Report on Form 10-K entitled “Risk Factors” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.” These forward-looking statements include, but are not limited to, statements about the
following:
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the impact the COVID-19 pandemic and governmental actions taken to combat the COVID-19 pandemic will have on us, including our
operations, financial results, liquidity and capital resources, the existence and duration of state and local orders temporarily prohibiting elective
procedures including procedures using the iFuse Implant System, the ability and desire of patients and physicians to undergo and perform such
procedures, the duration and any potential resurgence of the COVID-19 pandemic, and whether the COVID-19 pandemic will recur in the future;
our ability to maintain a healthy workforce in light of the ongoing COVID-19 pandemic;
our expectation that a significant portion of our revenues will be derived from sales of the iFuse Implant System, or iFuse;
our ability to develop additional revenue opportunities, including new indications for use and new devices;
our ability to retain and grow our sales team based on the demand for our products;
our ability to identify, train, and retain surgeons to perform procedures using our products;
our ability to obtain and maintain favorable coverage and reimbursement determinations from third-party payors;
our estimates of our market opportunity;
our expectations regarding the scope of protection from intellectual property rights covering our products;
developments or disputes concerning our intellectual property or other proprietary rights;
timing of and results from clinical and other trials;
• marketing clearances and authorization from the FDA and regulators in other jurisdictions;
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timing of regulatory filings and feedback;
competition in the markets we serve;
our expectations of the reliability and performance of our products;
our expectations of the benefits to patients, providers, and payors of our products;
our reliance on a limited number of suppliers, including sole source suppliers, which may impact the availability of instruments and materials;
our ability to sustain or increase demand for our products;
our estimates regarding our costs and risks associated with our international operations and expansion;
our expectations regarding our ability to retain and recruit key personnel;
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our expectations regarding acquisitions and strategic operations;
our ability to fund our working capital requirements;
our compliance with, and the cost of, federal, state, and foreign regulatory requirements;
the factors that may impact our financial results; and
anticipated trends and challenges in our business and the markets in which we operate.
Forward-looking statements are based on management’s current expectations, estimates, forecasts, and projections about our business and the
industry in which we operate, and management’s beliefs and assumptions are not guarantees of future performance or development and involve known and
unknown risks, uncertainties, and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this
report may turn out to be inaccurate. Furthermore, if the forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the
significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other
person that we will achieve our objectives and plans in any specified time frame, or at all. In addition, statements that “we believe” and similar statements
reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Annual Report on
Form 10-K, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our
statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information.
These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors”
and elsewhere in this report. These statements, like all statements in this report, speak only as of their date. We caution investors that our business and
financial performance are subject to substantial risks and uncertainties. Except as required by law, we assume no obligation to update or revise these
forward-looking statements for any reason, even if new information becomes available in the future, except as may be required by law.
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Item 1. Business.
Overview
PART I
We are a medical device company focused on the development of implantable devices used in the surgical treatment of the sacropelvic anatomy. We
have pioneered a proprietary minimally invasive surgical implant system, which we call iFuse, to fuse the sacroiliac joint to treat sacroiliac joint
dysfunction that often causes severe lower back pain. As of December 31, 2020, more than 53,000 procedures implanting iFuse have been performed by
over 2,300 surgeons in the United States and more than 35 other countries since we introduced iFuse in 2009.
The sacroiliac joint, which is the largest joint in the human body, can cause debilitating pain. Clinical studies have shown that 15% to 30% of all
chronic lower back pain is associated with the sacroiliac joint. Studies have also shown that the disability that results from disease of the sacroiliac joint is
comparable to the disability associated with a number of other serious orthopedic conditions, such as knee and hip arthritis and degenerative disc disease,
each of which has surgical solutions in which an implant is used and a multi-billion dollar market exists. We believe iFuse is currently the market leading
implantable device used in minimally invasive surgical fusions of the sacroiliac joint in the United States.
Our iFuse Implant System includes a series of patented triangular 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, or hip, 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
in the Bedrock technique.
Our iFuse implants have 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. We hold issued patents on
implants with cross-sections of many non-round shapes, including the triangular shape of the 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. Each titanium iFuse 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 introduced iFuse-3D, our second-generation implant, in 2017. This patented titanium implant combines the triangular cross-section of the iFuse
implant with the proprietary 3D-printed porous surface and a 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 in cell culture and 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 Implant System
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 our iFuse Implant System 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 the iFuse Implant System to support our trauma program. In January
2021, we received CE marking for a similarly expanded indication for use to support our trauma program in Europe.
We market our products primarily with a direct sales force as well as a number of distributors in the United States, and with a combination of a direct
sales force and distributors in other countries. We generate substantially all of our revenues from sales of the iFuse Implant system.
In 2020 and 2019, we generated revenue of $73.4 million and $67.3 million, respectively, a growth rate of 9%, and incurred net losses of $43.7
million and $38.4 million, respectively. Our gross margins were 88% and 90% for 2020 and 2019, respectively.
In October 2018, we completed our initial public offering (“IPO”) with net proceeds to us of $113.4 million. In January and February 2020, we
received a total of $63.0 million of net proceeds 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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Market Opportunity
Over 30 million American adults are estimated to have chronic lower back pain. Our experience in both clinical trials and commercial settings
indicates that at least 30% of patients whose chronic lower back pain stems from the sacroiliac joint may be candidates for surgery with iFuse. Based on
our market experience and internal estimates, and the assumption that the average person suffering from sacroiliac joint dysfunction has been in pain for
five years, we estimate that the potential market for iFuse in the United States could be 279,000 patients annually, for a potential annual market in the
United States of approximately $2.5 billion. While we have made significant progress in penetrating this market, U.S. patients received approximately
7,500 and 6,400 iFuse procedures in 2020 and 2019, respectively. Globally, the number of iFuse procedures performed in 2020 and 2019 was
approximately 8,900 and 8,000, respectively.
We believe that Americans spend approximately $85.9 billion per year on spine problems and that approximately 65% of people who suffer from
sacroiliac pain are women. Sacroiliac joint patients may have experienced one or more of the following events that have contributed to disruption and/or
degeneration of the sacroiliac joint: pregnancy, falls, previous lumbar surgery, automobile accidents, and aging, which may cause degeneration of the
cushioning in the joint much like other joints. In patients with traumatic injury to the sacroiliac joint, surgeons are increasingly using iFuse for treatment of
the initial traumatic injury, rather than using it to treat chronic sacroiliac joint dysfunction and the pain that it causes as the disease and pain progresses. We
recently received FDA clearance for expanded indications for the use of iFuse in the treatment of pelvic trauma, including for stabilization of the sacroiliac
joint in conjunction with the treatment of fractures involving the sacroiliac joint. We continue to invest in the development of products and techniques to
help surgeons improve the treatment of these patients, and anticipate continuing to build products and pursue indications that can be used to treat pelvic
trauma patients.
Diagnosis
It is often difficult to identify the source of lower back pain. As a result, some surgical procedures performed on the spine have a sub-optimal success
rate. For example, published studies of lumbar fusion have shown success rates of only approximately 60%. Unsuccessful spine surgery may result in failed
back surgery syndrome, which has been shown to result in high healthcare costs with poor overall relief of pain. Published studies have shown that the
sacroiliac joint is a cause of the pain in 32% to 43% of patients who have previously had lumbar fusion surgery and are experiencing recurrent low back
pain. We believe low success rates of lumbar fusion are likely related, in many cases, to failure to diagnose the sacroiliac joint as the correct cause of pain.
Since we launched iFuse, we have made considerable investments in teaching healthcare professionals to accurately diagnose sacroiliac joint
disorders. We provide instruction and training on how to perform the provocative maneuvers in a physician’s office that can help establish the sacroiliac
joint as the source of pain. If provocative tests are positive, surgeons confirm the diagnosis by injecting a small amount of local anesthetic into the joint
under fluoroscopic guidance. The sacroiliac joint is confirmed as a pain source if the local anesthetic produces immediate and significant pain reduction. In
addition to the differentiated characteristics of our iFuse procedure and triangular iFuse implants, we believe that more accurate diagnosis is part of the
reason for the high success and patient satisfaction rates of the iFuse procedure.
Surgical Treatment of Sacroiliac Joint Disease
Patients with sacroiliac joint dysfunction frequently experience significant pain simply from sitting, standing, or rolling over in bed. These activities
result in small movements of the sacroiliac joints and pressure transferred across the joints. The pain can be exacerbated with activity - when a patient
walks or runs, for example, the shock from each step is transmitted up the leg, through the iliac bones of the pelvis to the sacroiliac joint. The initial goal in
fusion of the sacroiliac joint is to immediately stabilize the joint which rapidly reduces the pain. Following initial stabilization of the sacroiliac joint, the
goal is to permanently fuse the joint. We believe our proprietary triangular implants stabilize the joint better and more quickly than competing technologies.
Surgical fusion of the sacroiliac joint with an open surgical technique was first reported in 1908, with further reports in the 1920s. The open procedure
uses plates and screws, requires a 6- to 12-inch incision and is extremely invasive. The iFuse procedure involves a 1- to 2-inch incision and is much less
invasive. Due to its infrequent use and invasive nature, resulting in post-operative pain and lengthy recovery, the open sacroiliac joint fusion procedure was
rarely taught in medical school or residency programs. Prior to our launch of iFuse, most spine surgeons were unfamiliar with the sacroiliac joint and had
never performed a sacroiliac joint fusion. As a result, when patients presented with lower back pain, spine surgeons often did not include evaluation of the
sacroiliac joint in their diagnostic work-up. Surgeons who did recognize the condition typically told their patients they had nothing to offer surgically.
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Non-Surgical Treatment of Sacroiliac Joint Disease
Although a number of non-surgical treatments exist for sacroiliac joint pain, they did not provide the level of pain or disability relief seen with the
iFuse procedure for the patients participating in our randomized controlled clinical trials. Non-surgical treatments include:
• Medical therapy, including opiates and non-steroidal anti-inflammatory medications.
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Physical therapy, which can involve exercises as well as massage.
Intra-articular injections of steroid medications, which are typically performed by physicians who specialize in pain treatment or anesthesia.
Radiofrequency ablation, or the cauterizing, of the lateral branches of the sacral nerve roots.
Our Solution - The iFuse Implant System
Our iFuse system, which includes our implants and instruments, is designed to address the shortcomings of alternative treatments, including open
surgery, non-surgical management, and screw-based and other minimally invasive stabilization and fusion procedures. As shown in the graphic below, our
iFuse implants are triangular, and three implants are typically used in each procedure. Our implants are made of titanium and have a porous surface. Each
iFuse implant is at least three times the strength of a typical eight-millimeter surgical screw, and the large porous surface area allows adherence of the bone
to the implants. We introduced the original iFuse implants in 2009, and our second-generation iFuse-3D implants in 2017.
The iFuse procedure is typically performed under general anesthesia. The surgeon uses a custom instrument set we provide to prepare a triangular
channel for each implant through the ilium, across the sacroiliac joint, and into the sacrum. An iFuse implant is then pressed into the triangular channel,
which is slightly smaller than the implant, creating what is known as an interference fit. The triangular cross section of our iFuse implants, as shown below,
prevents them from rotating. Our triangular iFuse implants cross the sacroiliac joint and provide immediate joint stability, which is why we believe pain
diminishes soon after the iFuse procedure. Over time, bone grows onto, and in the case of iFuse-3D into, the implants and across the joint, permanently
stabilizing or fusing the joint.
By contrast, open and other techniques for sacroiliac joint fusion typically use screws, plates and/or bone graft for fixation. When placed across the
sacroiliac joint, standard orthopedic screws, which lack features to encourage biologic fixation, tend to rotate and loosen over time. Because of the
triangular shape, porous surface, strength, and other differentiating factors of our iFuse implants, we believe that our published clinical data do not apply to
other minimally invasive solutions. Little published evidence of safety, clinical effectiveness, durability, or economic utility currently exists for sacroiliac
fusion devices other than iFuse. We are unaware of any data to show that our competitors’ sacroiliac joint screws, with features allowing biologic fixation,
have a lower rate of loosening than standard orthopedic screws. In addition, placement of plates for open fusion procedures typically requires larger
incisions and more invasive dissection, which results in longer recovery times and increased morbidity. We believe that the differences between iFuse and
other products, as well as the substantial published clinical evidence showing the safety and effectiveness of iFuse, are the reason why a growing number of
payors have recommended that iFuse be reimbursed for sacroiliac surgery to the exclusion of other technologies that are designed for the procedure.
Typically, surgeons recommend protected weight-bearing for three weeks. However, post-operative instructions are patient-specific and some patients
are allowed to perform weight-bearing activities sooner. Follow-up studies have shown that bony bridging across the sacroiliac joint is present in the
majority of cases five years after the iFuse procedure.
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Three implants are used in most lateral iFuse procedures. Each implant crosses the joint from the iliac bone into the sacrum. Placing each implant
requires four basic steps:
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Pin. The surgeon inserts a guide pin through the iliac bone, across the sacroiliac joint and into the sacrum.
• Drill. Surgeons drill over the guide pin, through the iliac bone, across the sacroiliac joint and just into the sacrum.
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Broach. The surgeon impacts a triangular broach over the pin which prepares a triangular channel that is slightly smaller than the iFuse implant.
Implant. The surgeon impacts the implant into the triangular channel thereby spanning the sacroiliac joint and docking the implant in the
sacrum. The channel is slightly smaller than the implant, which produces an interference fit.
iFuse is a cannulated system, which means that the drill, broach and implants have hollow channels which fit over the pin for guidance purposes. As
is typical in many orthopedic procedures, a member of our team is normally present in the operating suite during surgery to provide technical assistance for
the use of iFuse.
We offer three custom instrument sets for surgical placement of iFuse implants in the body. The standard set comprises largely stainless steel
materials; the XL (Extra Long) set is the same as the standard set but most instruments are elongated by three inches for treatment of larger patients; and
the radiolucent set comprises instruments made with more radiolucent (transparent to X-rays) materials, such as PEEK and aluminum, to improve
visualization under fluoroscopy during an iFuse procedure.
In addition to our iFuse and iFuse-3D platform technologies, we also provide enabling technologies for our surgeons. We introduced an instrument set
that is cleared for use with Medtronic’s surgical navigation system, allowing the surgeon to visualize the 3D positioning of certain instruments intra-
operatively. In March 2018, we introduced surgical pins cleared for use with the Mazor surgical robot, allowing the surgeon to robotically place the guide
pin according to a computer-generated surgical plan. In early 2019, we introduced our Decortication and Graft Delivery Systems that allow surgeons to
remove intra-articular cartilage and deliver flowable bone graft materials.
In April 2019, we received clearance from the United States Food and Drug Administration, or FDA, to promote the use of our iFuse Implant System
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 our iFuse Implant System 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 the iFuse Implant System to support our trauma program. The Bedrock
technique utilizes our proprietary 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, in which
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 the overall strength and stability at the base of a long construct for multilevel spinal fusion. Biomechanical testing has
shown that iFuse implants placed in this position reduce sacroiliac joint motion by approximately 30% in conjunction with a long construct.
In addition to our iFuse and iFuse-3D platform technologies, we also provide enabling technologies for our surgeons. We introduced an instrument set
that is cleared for use with Medtronic’s surgical navigation system, allowing the surgeon to visualize the 3D positioning of certain instruments intra-
operatively. In March 2018, we introduced surgical pins cleared for use with the Mazor surgical robot, allowing the surgeon to robotically place the guide
pin according to a computer-generated surgical plan. In early 2019, we introduced our Decortication and Graft Delivery Systems that allow surgeons to
remove intra-articular cartilage and deliver flowable bone graft materials. In mid-2019, we introduced the iFuse Bedrock technique that supplements pelvic
fixation in deformity and degeneration cases and provides enhanced initial stabilization and long-term SI joint fusion. In late-2019, we introduced iFuse
Bone, an implantable bone product manufactured from sterilized recovered cadaveric bone tissue, to meet the demand of some of our surgeon customers to
use implantable bone products to support and augment the patient's own bone tissue in orthopedic procedures.
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Our Published Studies
iFuse is the only minimally invasive product for sacroiliac joint fusion commercially available in the United States that, to our knowledge, is
supported by substantial high-quality published evidence of safety, clinical effectiveness, durability, and economic utility. Our implants have a triangular
cross section, which resists rotation of the implant within the bone in which it is implanted, helping stabilize the joint even before fixation of the bone onto
the implant, or bony ingrowth, which results in fusion. Products from our competitors use screws to treat the sacroiliac joint, which we believe do not resist
rotation within the bone as effectively as our patented triangular implants. A study we performed showed that our iFuse implants have more than six times
the rotation resistance of a screw designed for sacroiliac joint fusion. We hold issued patents on implants with cross-sections of many non-round shapes,
including the triangular shape we use for iFuse. 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. Each titanium iFuse implant is at least three times the strength of a typical eight-millimeter surgical screw and the larger
porous surface area of our implants allows for bony ingrowth. Three of our implants are typically used in each procedure.
The safety, durable effectiveness and cost effectiveness of iFuse are all supported by a large number of studies that have resulted in more than 90
published papers. Several of these papers publish results from five prospective multi-center studies (INSITE, iMIA, SIFI, LOIS and SALLY) that we
sponsored, two of which were randomized controlled clinical trials. LOIS provided long-term (5-year) data to support sustained improvements in pain,
disability and quality of life, as well as radiographic evidence of progressive fusion of the joint. Additionally, there have been several studies showing
longer-term follow-up of up to six years.
INSITE Clinical Trial
INSITE is a randomized controlled study conducted in the United States. Positive 24-month follow-up results were published in August 2016 in the
International Journal of Spine Surgery showing statistically significant and clinically important reduction in pain and disability after sacroiliac joint fusion
but very little response to maximal non-surgical treatment.
The INSITE clinical trial included 148 subjects treated at 19 centers in the United States, with subjects randomized in a two-to-one ratio to either
immediate sacroiliac joint fusion with iFuse or non-surgical management. The study design allowed subjects in the non-surgical management group to
cross over and have surgery after six months. By 24 months after the start of the clinical trial, 89% of the non-surgical management group subjects still
participating in the trial had elected to cross over to have the iFuse procedure, primarily because they derived little clinical benefit from non-surgical
treatments. The study’s results can be summarized as follows:
• Reduction in Pain. There was statistically significant and clinically important pain reduction in subjects treated with iFuse as compared to very
small responses in the same measures in those treated with non-surgical management. Subjects surgically treated with iFuse had mean 52- 54-
and 55-point reductions in sacroiliac joint pain at 6, 12 and 24 months, respectively, as measured by the Visual Analog Scale (“VAS”). By
contrast, subjects in the non-surgical management group had only a mean 12-point reduction (p<0.0001) at six months. 12 points is below the
commonly accepted 20-point threshold for clinically important improvement. In addition, the non-surgical management group subjects who
elected after six months to cross over to have the iFuse procedure had pain reduction similar to that seen in subjects originally assigned to
sacroiliac joint fusion with iFuse. At 24 months, the proportion of subjects with a reduction in VAS sacroiliac joint pain of 20 or more points due
to the assigned treatment only was 83% in the iFuse group and 10% in the non-surgical management group.
• Reduction in Disability. There was a statistically significant and clinically important reduction in disability in subjects treated with iFuse as
compared to very little response in those treated with non-surgical management. Subjects surgically treated with iFuse had a mean 27-point
reduction in disability at six months, on the 0–100 Oswestry Disability Index (“ODI”), while subjects in the non-surgical management group had
only a mean five-point reduction (p<0.0001). Five points is less than the commonly accepted 15-point threshold to denote a clinically important
response. At 24 months, the iFuse group had a mean 28-point reduction in ODI. At six months, the proportion of subjects with ODI
improvements of at least 15 points was 72.5% with iFuse treatment and only 13.0% in those undergoing non-surgical management (p<0.0001 for
difference in response rate). In addition, the subjects who elected after six months to cross over to have the iFuse procedure had similar reduction
in disability as the subjects originally assigned to sacroiliac joint fusion with iFuse. At 24 months, the proportion of subjects with an ODI
improvement of at least 15 points with the assigned treatment only was 68.2% and 7.5% in the iFuse and non-surgical management groups,
respectively (p<0.0001 for difference in response rate).
8
iMIA European Clinical Trial
iFuse Implant System Minimally Invasive Arthrodesis ("iMIA") is a second prospective, randomized clinical trial of sacroiliac joint fusion using
iFuse compared to non-surgical management with a design very similar to that of INSITE. iMIA is a randomized controlled study conducted in Europe.
Positive 24-month results were published in March 2019 in The Journal of Bone and Joint Surgery. Like INSITE, results from iMIA show statistically
significant and clinically profound reduction in pain and disability after SI joint fusion but little improvement after non-surgical treatment.
SIFI Clinical Trial
Sacroiliac Joint Fusion with iFuse Implant System (“SIFI”), is a prospective, multicenter single-arm clinical trial. Eligibility criteria and endpoints
were identical to INSITE. SIFI is a single-arm study conducted in the United States. Positive 24-month follow-up results were published in the
International Journal of Spine Surgery in April 2016, showing substantial and sustained reduction in pain and disability.
LOIS Clinical Trial
Long-term follow-up in INSITE/SIFI ("LOIS") is a prospective follow-on study, enrolling subjects at a subset of INSITE and SIFI sites treated with
iFuse. Study outcomes at four years were published in July 2018 in the medical journal Medical Devices: Evidence and Research. In September 2019, we
announced the publication of the 5-year results, which showed excellent durability of clinical responses and positive radiographic outcomes for SI joint
fusion using triangular titanium implants. Among 103 enrolled subjects, mean sacroiliac joint pain scores decreased 54 points from baseline prior to
surgery. Disability scores decreased 26 points and quality of life improved 0.29 points, all of which are statistically significant, clinically meaningful and
consistent with previously published LOIS 4-year results. The 5-year results from LOIS demonstrated that improvements in pain, patient function and
quality of life demonstrated at two years in INSITE and SIFI were durable and sustained at five years. Independent radiographic analysis of CT scans at
five years showed a high rate of bony apposition to implants on both the sacral and iliac sides (98%) as well as a high rate of SI joint fusion (88% bridging
bone). Patient satisfaction remained high for patients treated with the iFuse Implant. There were no reported adverse events related to the study device or
procedure at five years.
SALLY Clinical Trial
Study of Bone Growth in the Sacroiliac Joint After Minimally Invasive Surgery with Titanium Implants ("SALLY") is a prospective single-arm
multicenter trial of iFuse-3D for the treatment of sacroiliac joint dysfunction. The enrolled patient population was very similar to that of INSITE, SIFI and
iMIA. A one-year manuscript, published in early 2020, showed improvements in pain, disability and quality of life similar to prior studies as well as CT
evidence of earlier fusion of the SI joint. The study also showed marked reduction in opioid use and improvement in objective functional tests.
SILVIA Clinical Trial
We are currently enrolling subjects in SI Joint Stabilization in Long Fusion to the Pelvis: Randomized Controlled Trial ("SILVIA"), a prospective,
single-blinded international multicenter randomized controlled trial of use of iFuse during multilevel spine fusions with fixation to the pelvis. This patient
population is distinct from prior studies in the following ways: 1) the patients have degenerative scoliosis of the spine and are in need of complex spine
surgery to correct spine malalignment, which is associated with substantial low back symptoms and disability; 2) all are undergoing pelvic fixation,
meaning anchoring of the spine constructs into the pelvis; and 3) some, but not all, have diagnosed SI joint pain. The goal of this study is to show that
placement of iFuse in the Bedrock configuration reduces the rate of postoperative SI joint pain and improves the longevity of pelvic fixation hardware,
failures of which are fairly common.
Other Published Clinical Studies
To date, several studies, some of which we did not sponsor, have been published on the safety and effectiveness of sacroiliac joint fusion using iFuse.
These are prospective or retrospective, single site or multi-site, and U.S. or Europe-based. These clinical studies demonstrate the iFuse procedure to be safe
and effective. These studies demonstrate pain reduction and/or ODI improvement that is statistically significant and clinically important. These additional
studies are consistent with the results of INSITE, iMIA, and SIFI, including the types and rates of adverse events observed.
A study in Neurosurgery published in April 2017 showed similar improvements in pain and disability in patients followed for up to six years. The
study also showed a substantial reduction in the number of subjects using opioids in patients treated with iFuse at their last follow-up visit. At the last
follow-up visit, 84% of patients who received non-surgical management were using opioids, while only 7% of patients treated with iFuse were using
opioids.
9
In addition to clinical evidence, a number of economic publications we financially supported, including those in ClinicoEconomics and Outcomes
Research, demonstrate that the iFuse procedure provides a cost savings to the healthcare system when compared to non-surgical management over time.
10
Coverage and Reimbursement
Coverage and reimbursement for iFuse products and related procedures vary by setting of care, payor type and region. In the United States, healthcare
providers that purchase iFuse products look to various third-party payors, such as Medicare, Medicaid, private commercial insurance companies, health
maintenance organizations, accountable care organizations, and other healthcare-related organizations, to cover and pay for all or part of the costs of these
procedures. These providers bill patients for any applicable deductibles or co-payments. Sales volumes and prices of company products will continue to
depend in large part on the availability of coverage and reimbursement from such third-party payors for both the surgeon's professional fee and the facility
fee which covers, among other things, the cost of implants used in iFuse procedures.
The Medicare program is commonly used as a model for how private payors and other governmental payors develop their coverage and
reimbursement policies for healthcare items and services, including iFuse procedures. Unless a national coverage policy exists for a particular technology,
each of the Medicare Administrative Contractors is permitted to make its own determination of whether that item or service is covered by Medicare.
Medicare’s reimbursement rates for the iFuse procedure vary due to geographic location, the nature of facility in which the procedure is performed (i.e.,
hospital inpatient department, hospital outpatient department, or ambulatory surgical center) and other factors. Medicare reviews and updates its payment
rates and methodologies for these settings of care annually, and rates can change from year to year. In addition, Congress can alter reimbursement rates at
any time by mandating changes to Medicare’s payment methodologies.
Similarly, private payor coverage policies and reimbursement rates tend to vary across payors and settings of care. Payors continually review the
clinical evidence for new technologies and can change their coverage policies without notice or deny payment if the product was not used in accordance
with the payor’s coverage policy. Payors also review and challenge the prices charged for products and procedures.
In the United States, the American Medical Association (“AMA”), generally creates specific billing codes for surgical procedures under a coding
system known as Current Procedural Terminology (“CPT”), which surgeons must use to bill and receive reimbursement for our iFuse procedure. Once a
CPT code is established, the Centers for Medicare & Medicaid Services (“CMS”), typically establishes payment levels under Medicare while private
payors establish rates and coverage rules independently.
Prior to our launch of iFuse, Medicare and most private insurance companies reimbursed surgeons for sacroiliac joint fusions using either an
established Category I CPT code or an unlisted code. A Category I CPT code is typically assigned to procedures that are consistent with contemporary
medical practice and are widely performed. Procedures with a longstanding Category I CPT code are usually reimbursed. However, effective July 1, 2013,
the AMA’s CPT Editorial Panel created a new Category III CPT code for fusion of the sacroiliac joint using a minimally invasive or percutaneous
approach. Category III CPT codes are used for new and emerging technologies and are reimbursed sporadically. This new code functionally redefined
coding for sacroiliac joint fusions because it meant that minimally invasive or percutaneous fusion procedures should not be billed by the surgeon using the
general Category I CPT code for sacroiliac fusion surgery. This coding change was accompanied by the establishment of a Medicare hospital outpatient
prospective payment rate for facilities to bill for procedures with the new code. Following the creation of the new Category III CPT code, a number of
papers demonstrating the clinical success of the iFuse procedure were published. As a result of these studies, along with the support of several professional
medical specialty societies and leading academic surgeons, the AMA CPT Editorial Panel established a new Category I CPT code specifically for sacroiliac
joint fusion surgery using a minimally invasive or percutaneous approach. This new Category I CPT code became effective on January 1, 2015. However,
the new code did not immediately lead to positive coverage decisions by payors. In many cases, the payors wanted additional published evidence before
deciding to cover the procedure. As a result, positive reimbursement decisions covering the procedure have occurred over the last few years, and some
payors are still in the process of making decisions based on the most recent evidence.
In March 2015, six-month follow-up results from our INSITE randomized controlled clinical trial were published. In June 2015, the largest spine
society in the world, the North American Spine Society (“NASS”), published a positive coverage recommendation, based on the clinical evidence,
signaling to insurance companies and Medicare Administrative Contractors that sacroiliac joint fusion using a minimally invasive surgical approach should
be routinely reimbursed. In March 2015, the International Society for Advancement of Spine Surgery (“ISASS”), also published a similar, updated positive
coverage document signaling to insurance companies in the U.S. that evidence supports reimbursement for the procedure.
Coverage decisions for this code are made independently by each private insurance company and each of the Medicare Administrative Contractors
that help manage Medicare. Around the second quarter of 2016, because of the iFuse clinical evidence, all Medicare Administrative Contractors were
covering the procedure. At the time, very few private payors were covering. As of December 31, 2020 and 2019, U.S. payors covering 311.6 million and
282.7 million lives, respectively, regularly reimbursed for the iFuse procedures.
Third-party payors, whether governmental or commercial, are also developing increasingly sophisticated methods of controlling healthcare costs. No
uniform policy of coverage and reimbursement for medical device products and services exists among third-
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party payors in the United States. Therefore, coverage and reimbursement for medical device products and services can differ significantly from payor to
payor. In addition, payors continually review new technologies for possible coverage and can, without notice, deny coverage for these products and
procedures. As a result, the coverage determination process is often a time-consuming and costly process that requires us to provide scientific and clinical
support for the use of our products to each payor separately, with no assurance that coverage and adequate reimbursement will be obtained or maintained if
obtained.
In addition to uncertainties surrounding coverage policies, there are periodic changes to reimbursement. Third-party payors regularly update
reimbursement amounts and sometimes revise the methodologies used to determine reimbursement amounts. This includes annual updates to payments to
physicians, hospitals, and ambulatory surgical centers for procedures during which our products are used. For example, the Medicare program updates
hospital and physician payments annually pursuant to applicable law and regulations.
Specialty benefit managers and companies which perform healthcare technology assessments have significant influence on coverage decisions. In
May 2016, the ECRI Institute Health Technology Assessment Information Service published a positive review of the iFuse Implant System, citing our
clinical evidence. In January 2018, the Blue Cross Blue Shield Association, the licensor to all 36 Blue Cross and Blue Shield insurers across the United
States, wrote a favorable review of the clinical evidence conferring a positive coverage recommendation for minimally invasive sacroiliac fusion, but only
when performed with iFuse. In February 2018, Milliman Care Guidelines, a Hearst Company publication, also recommended coverage and in May 2018,
AIM Specialty Health, owned by Anthem, established coverage for only iFuse and none of our competitors. In October 2018, eviCore recommended our
iFuse system exclusively for sacroiliac joint fusion or stabilization. In 2020, Magellan Healthcare issued surgery guidelines for percutaneous sacroiliac
joint fusion, which requires case-by-case review of authorization requests and follows NASS guidelines.
Private Payors. Private payors decide whether to cover and how much to pay on an individual basis. We target and track 65 of the largest U.S.
private payors. As of December 31, 2020, of the targeted and tracked U.S. private payors, 56 were covering regularly, or had announced coverage for, the
iFuse procedure, while the remaining U.S. private payors were reevaluating their coverage policies. As of December 31, 2020, of the U.S. private payors
covering regularly, 35 have issued positive coverage policies exclusive to iFuse for sacroiliac joint fusion and 21 U.S. private payors are covering iFuse and
other sacroiliac joint fusion products.
The table below summarizes the total covered lives with access to minimally invasive SI joint fusion and those with coverage exclusive to iFuse as of
December 31, 2020:
Covered lives (in millions)
Commercial
Medicaid
Medicare
Military/Federal
Total coverage
195.8
62.5
38.2
15.1
311.6
Exclusive iFuse
coverage
74.1
—
—
5.6
79.7
Note that because many individuals are covered by more than one health insurance plan or may switch plans during the year, the total number of
covered lives reported by the payors represented above may be larger than the number of individuals who have access to the iFuse procedure through their
health insurance provider at any given time.
In December 2019, CIGNA established a positive coverage policy for minimally invasive SI joint fusion using the iFuse Implant System. CIGNA is
the fourth largest commercial health plan in the United States with approximately 14.6 million members. In May 2020, Aetna adopted a new coverage
policy for minimally invasive arthrodesis of the sacroiliac joint for sacroiliac joint syndrome and sacroiliac joint pain. Aetna is the third largest commercial
health plan in the United States with over 22 million members. Currently, covered lives counts do not include Anthem, which covers minimally invasive
sacroiliac fusion procedures in the event of pelvic girdle trauma only. On October 1, 2020, Anthem published an update to its sacroiliac joint fusion
medical policy. This update retained policy language limiting indications for iFuse to cases involving a history of pelvic girdle trauma, similar to earlier
versions of the policy, and did not reflect the feedback from specialists Anthem received in mid-2020, or other substantive updates to the evidence base.
Anthem has communicated to us that this feedback and additional evidence may be taken into consideration in future policy updates in 2021. In December
2020, Humana adopted a new coverage policy for minimally invasive arthrodesis of the sacroiliac joint exclusively when using titanium triangular implants
(e.g., iFuse).
There are other large and small private payors that have not published positive coverage policies for the procedure. Some of these non-covering
payors are reevaluating coverage given the latest data, but there can be no assurance they will reach positive coverage decisions. In most cases, the payors
who are not covering are reevaluating coverage. Many payors will only review their coverage policies for a procedure on a scheduled basis, which can be
every few months or as infrequently as once per year.
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Prior to payor coverage, surgeons have been reluctant to get trained on a procedure for which they could not reliably be reimbursed. While we believe
the increased coverage described above will have a positive effect on the number of iFuse procedures and our associated revenue in the future, the effect
likely will happen with a lag time because, after a positive coverage decision is made, a number of months may pass before it impacts the number of
procedures and associated revenue, since the surgeons have to be made aware of the coverage decision, in some cases attend one of our training courses to
learn the surgical technique, schedule re-examinations of patients who were candidates for surgery, and then schedule surgeries for the patients who are still
candidates.
We believe that it generally takes between six and 24 months for a surgeon to fully incorporate iFuse into his or her practice after payors initiate
coverage and the surgeon is trained. Further, the administrative burden on surgical practices can be substantial for patients where reimbursement coverage
is new, and some surgeons do not believe that the current average surgeon reimbursement is yet adequate to compensate them. However, as reimbursement
coverage has improved, surgeon interest in learning to diagnose the sacroiliac joint and perform iFuse procedures has been increasing.
Coverage Outside the United States
Outside the United States, reimbursement levels vary significantly by country, and by region within some countries. Reimbursement is obtained from
a variety of sources, including government-sponsored and private health insurance plans, and combinations of both. Some countries will require us to
gather additional clinical data before recognizing and granting broader coverage and reimbursement for our products.
Health Technology Assessment (“HTA”) of medical devices is, however, becoming an increasingly common part of the pricing and reimbursement
procedures in some EU Member States, including the United Kingdom, France, Germany, Ireland, Italy, Spain and Sweden. HTA is the procedure
according to which the assessment of the public health impact, therapeutic impact and the economic and societal impact of use of a given medical device in
the national healthcare systems of the individual country is conducted. HTA generally focuses on the clinical efficacy and effectiveness, safety, and
cost‑effectiveness of individual products as well as their potential implications for the healthcare system. Those elements of medical devices are compared
with other treatment options available on the market. The outcome of HTA regarding specific medical devices will often influence the pricing and
reimbursement status granted to these products by the competent authorities of individual EU Member States. The extent to which pricing and
reimbursement decisions are influenced by the HTA of the specific medical device varies between EU Member States. In addition, pursuant to Directive
2011/24/EU on the application of patients’ rights in cross‑border healthcare, a voluntary network of national authorities or bodies responsible for HTA in
the individual EU Member States was established. The purpose of the network is to facilitate and support the exchange of scientific information concerning
HTAs. This may lead to harmonization of the criteria taken into account in the conduct of HTAs between EU Member States and in pricing and
reimbursement decisions and may negatively affect price in at least some EU Member States.
As a further step in this direction, on January 31, 2018, the European Commission adopted a proposal for a regulation on HTA. This legislative
proposal is intended to increase cooperation among EU Member States in assessing health technologies, including new medical devices, and providing the
basis for cooperation at the EU level for joint clinical assessments in these areas. The proposal would permit EU Member States to use common HTA tools,
methodologies, and procedures across the EU, working together in four main areas, including joint clinical assessment of the innovative health technologies
with the most potential impact for patients, joint scientific consultations whereby developers can seek advice from HTA authorities, identification of
emerging health technologies to identify promising technologies early, and continuing voluntary cooperation in other areas. Individual EU Member States
will continue to be responsible for assessing non-clinical (e.g., economic, social, ethical) aspects of health technology, and making decisions on pricing and
reimbursement. The European Commission has stated that the role of the draft HTA regulation is not to influence pricing and reimbursement decisions in
the individual EU Member States. However, this consequence cannot be excluded.
In April 2017, the UK’s National Institute for Health and Care Excellence (“NICE”), published guidance on minimally invasive sacroiliac joint
fusion, recommending that the procedure be available to properly diagnosed patients in the UK National Health System. NICE develops guidance and
quality standards in health and social care and is a worldwide leader in technology evaluations. The recommendation states that the safety and efficacy of
minimally invasive sacroiliac joint fusion surgery is adequate provided that standard arrangements are in place. Use with standard arrangements is the most
positive recommendation that NICE can make for an interventional procedure such as minimally invasive SI joint fusion. In October 2018, NICE published
medical technology guidance specific to the iFuse Implant System, recommending that it be used in the National Health System because of the evidence
demonstrating that treatment with iFuse improves pain, quality of life, and disability in properly selected patients. The continued relevance of the NICE
guidance following the departure of the UK from the EU on January 31, 2020 is yet to be determined. Additionally, in August 2018, the public hospital
system in France announced it would initiate coverage for iFuse exclusively beginning September 6, 2018. Some countries will require us to gather
additional clinical data before recognizing and granting broader coverage and reimbursement for our products. It is our intent to complete the requisite
clinical studies and obtain coverage and reimbursement approval beyond what we have today in countries where it makes economic sense to do so.
13
Medical Affairs and Education
Our medical affairs team provides high quality educational programs internally and externally. Internally, specialized medical knowledge, and
practical experience with iFuse are used to help educate our sales, marketing, quality, reimbursement, clinical, regulatory, engineering, and product
development teams. This same specialized medical knowledge and practical iFuse experience provides the foundation for a wide variety of educational
programs provided to both surgeons who will perform the iFuse procedure and the broader medical community that see and treat these patients. The
medical affairs team is led by a fellowship trained orthopedic spine surgeon. As of December 31, 2020, we contracted with over 300 healthcare
practitioners in various medical specialties, such as surgeons, pain management physicians, nurse practitioners/physician’s assistants and physical
therapists, to help educate healthcare professionals about the sacroiliac joint as a component of lower back pain, proper diagnosis of SI joint dysfunction,
non-surgical treatment options and surgical treatment with iFuse.
Our surgeon training programs are for orthopedic spine surgeons, neurosurgeons, general orthopedic surgeons, and orthopedic trauma surgeons. Since
we began training surgeons, over 2,300 surgeons have treated patients with iFuse. We grew our active surgeon base to 588 surgeons as of December 31,
2020, compared to 539 active surgeons as of December 31, 2019. We define an active surgeon to be a surgeon who has performed at least one iFuse case in
the last three months. The increase in active surgeons is primarily due to training of additional surgeons throughout the year. We will continue to pursue the
remainder of the approximately 7,500 target surgeons in the United States, as well as international surgeons for training in the future. The COVID-19
outbreak challenged our traditional method of hands-on cadaveric and dry-lab training. In early 2020, the medical affairs team implemented a virtual
education series for surgeons and mid-level practitioners. In July 2020, we began using an innovative, fully portable surgeon training simulator. This
training platform allows us to train surgeons without need for an operating room or a fluoroscope. The computer-based surgeon training simulator provides
quality haptics, or the realistic feel during the surgeon’s use of the instruments, and the training is performed without any radiation. One key advantage of
this surgeon training simulator is that the surgeon can now be trained locally in their office or a hospital conference room in 2 to 3 hours, and the surgeon
does not need to travel to a cadaver lab, which sometimes requires being away from their practice for as much as a day and a half. The simulator uses the
same instruments and implants as those that are used during surgery. The simulator is used to train surgeons to perform SI joint injections and iFuse
sacroiliac joint fusions, as well as the iFuse Bedrock procedure. We plan to expand the use of simulators for training purposes both in the United States and
internationally. We will utilize the simulators and our existing programs to train new surgeons, increase the knowledge and proficiency of existing iFuse
surgeons, and re-engage inactive surgeons.
We conduct a large number of educational programs for the broader medical community including primary care physicians, pain management
physicians and other healthcare practitioners that may manage a sacroiliac joint patient non-surgically, such as physical therapists and chiropractors. In
addition to these general educational programs, we provide continuing education programs focused on SI joint diagnosis and treatment to physical
therapists and case managers. We are able to provide these programs for both groups in all 50 states and the District of Columbia. We have trained over
6,600 physical therapists through our continuing education program as of December 31, 2020. Case managers, who typically are nurses, work in facilities
where the iFuse procedure is performed, such as hospitals, or for payors or health plans. Case managers help patients navigate the healthcare system so that
they receive the most appropriate treatment. As of December 31, 2020, we have trained over 1,300 case managers in the United States through our
continuing education program. Our medical affairs team works with leading spine surgeons to educate other orthopedic and neurosurgeons on the
differential diagnosis of sacroiliac joint disorders and the use of iFuse. We also work closely with medical specialty societies to raise the awareness of and
teach the appropriate diagnosis of sacroiliac joint dysfunction and the associated treatment options.
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Sales and Marketing
We market and sell iFuse primarily through a direct sales force and a small number of third-party distributors. Our target customer base includes
approximately 7,500 surgeons who perform spine and/or pelvic surgery, including orthopedic spine surgeons, neurosurgeons, general orthopedic surgeons,
and orthopedic trauma surgeons.
Our direct sales organization in the United States covered twelve sales regions as of December 31, 2020. In each region, a number of territory sales
managers act as the primary customer contact. Our territory sales managers have extensive training and experience selling medical devices for spine
problems and pain management, generally focusing on emerging technologies and markets. For large and/or high volume territories, we also employ
territory associate representatives who cover cases. As of December 31, 2020, our U.S. sales force consisted of 64 territory sales managers and 58 clinical
specialists directly employed by us, and 41 third-party distributors. As of December 31, 2020, we had 39 employees working in our European operations,
and have established operations in Italy (2010), Germany (2014), the United Kingdom (2015) and France (2019). As of December 31, 2020, our
international sales force consisted of 20 sales representatives directly employed by us and 31 exclusive third-party distributors, which together had sales in
35 countries through December 31, 2020. As of December 31, 2020, beyond Europe and the U.S., surgeons had performed the first iFuse procedures in
Australia, Bahrain, Canada, Cayman Islands, Hong Kong, Israel, Japan, Kuwait, New Zealand, Saudi Arabia, South Africa, and Turkey.
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 the recovery we expect following the pandemic. As such, we have made it a top priority to support and retain our sales force through
this challenging period. 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 based upon our favorable financial
position and opportunity for future revenue growth. Our sales and marketing spending reflected normal business activities into mid-March 2020. Due to the
COVID-19 pandemic, we focused on protecting key investments in our field force while curtailing most other areas of sales and marketing spend during
the second and third quarter of 2020. For example, we guaranteed certain levels of incentive compensation to members of our field sales organization in
order to retain these employees and partially mitigate the impact of the pandemic to their compensation. In contrast, we reduced certain other spending
during the COVID-19 pandemic, such as travel and related expenses, regional surgeon training, trade shows, and discretionary marketing. As revenue
growth returned to the levels that we were experiencing prior to the pandemic, we increased our sales and marketing expense accordingly in the third and
fourth quarters of 2020.
We intend to continue to grow our specialized sales force to foster relationships with surgeons and support revenue growth. Our territory sales
managers are senior representatives who educate surgeons on the sacroiliac joint as a primary cause of lower back pain. The territory sales manager
identifies new surgeons who are interested in learning more about the sacroiliac joint and the iFuse procedure and/or the Bedrock technique. The sales
representative works closely with our medical affairs team to train surgeons on the anatomy, diagnosis, and surgical technique. Once trained, the sales
representative works with the surgeon to incorporate into their practices the diagnosis of sacroiliac joint pain and the iFuse procedure to treat patients
suffering from sacroiliac joint pain. Our clinical support specialists assist the territory sales managers to identify surgeons interested in training. The clinical
support specialists also regularly cover cases, bringing our implants and instrument trays into the operating room for use by surgeons.
Over 30 million American adults are estimated to have chronic lower back pain. It is often difficult to identify the source of the pain and traditional
methods of spine surgery do not have high success rates. We believe it is essential to raise awareness among lower back pain sufferers that their symptoms
may be the result of sacroiliac joint disorders and that minimally invasive surgical treatments are available. We have implemented targeted marketing,
education and direct outreach programs. We continually update our social media initiatives and post content to educate and engage patients who may be
candidates for the iFuse procedure. We plan to make additional investments to further increase patient awareness, primarily through digital and broadcast
marketing, including TV and radio ads, paid search, display advertising, social media and public relations.
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.
Research and Development
Since our initial launch of the iFuse Implant System, we have introduced a number of new product and procedure enhancements. An example is the
iFuse-3D implant, which we developed over several years and launched in 2017. The most notable instrument enhancement was the release of the
revamped instrument set that included a number of radiolucent instruments.
15
In 2017, we also introduced an instrument set that is cleared for use with Medtronic’s surgical navigation system, allowing the surgeon to visualize
the 3D positioning of certain instruments intra-operatively. In March 2018, we introduced surgical pins which may be used with the Mazor surgical robot,
allowing the surgeon to robotically place the guide pin according to a computer-generated surgical plan. In early 2019, we introduced our Decortication and
Graft Delivery Systems that allow surgeons to remove intra-articular cartilage and deliver flowable bone graft materials. In mid-2019, we introduced the
iFuse Bedrock technique that supplements pelvic fixation in deformity and degeneration cases and provides enhanced initial stabilization and long-term SI
joint fusion.
We expect to continue developing enhancements to iFuse to meet our customers’ changing needs and improve the surgery’s effectiveness. For
example, we know that some surgeons use iFuse to treat trauma patients post-stabilization. We are developing products and techniques to help surgeons
improve the treatment of these patients. We may seek regulatory clearances for additional indications as required.
We continued our research and development activities during the COVID-19 pandemic. Clinical study expenses declined during mid-March through
April due to hospital postponement of trials as a result of the COVID-19 pandemic. However, most hospitals allowed the resumption of clinical trials
starting in May 2020. As such, we anticipate that research and development expenses will continue to increase in the future.
Competition
We believe that we were the first company to develop, manufacture, and market a minimally invasive implant cleared by the FDA expressly for
sacroiliac joint fusion other than a modified screw. Over the past several years, other companies have subsequently recognized the opportunity and have
entered the minimally invasive sacroiliac joint fusion market. We expect more competitors to enter into the market and an increased number of new product
introductions by existing competitors. Many of our competitors are large, publicly traded companies that can dedicate far greater resources to the minimally
invasive sacroiliac joint market than we can. These companies often have wide product offerings for spine and orthopedic surgery, which allow them to
bundle products in order to win large hospital group contracts and can create a barrier to entry for us. For example, some of our competitors offer sacroiliac
joint fusion products which integrate with their surgical navigation and robotics platforms, enabling navigation of their procedures or performance of
aspects of these procedures by surgical robots. Many of these companies also have much larger sales forces than ours, which allow them to reach more
surgeons. We also expect there to be a continued push for non-surgical alternatives.
In the United States, we believe that our primary competitors currently are Globus Medical, Inc. and Medtronic plc. Our primary competitors in
Europe are Globus Medical and SIGNUS Medizintechnik GmbH. However, these competitors sell screw-based products, which we believe to be weaker
and less able to resist rotation than our triangular iFuse implants. We also compete against non-hardware products, such as allograft bone implants. These
allograft products comprise human cells or tissues and are generally regulated by the FDA differently from implantable medical devices made of metallic
or other non-tissue based materials, unless these competitors' allograft products fail to meet the FDA's criteria for regulation as a human cell or tissue
product.
Based on our commercial experience and market research, we believe iFuse is currently used in the majority of minimally invasive surgical fusions of
the sacroiliac joint in the United States. Our triangular titanium implant is differentiated from other screw-based technologies on the market. iFuse is the
only minimally invasive product for sacroiliac joint fusion commercially available in the United States that, to our knowledge, is supported by published
clinical evidence including randomized controlled studies that demonstrate the safety, clinical effectiveness, durability, and economic utility. These benefits
are supported by more than 90 published papers. We have received exclusive reimbursement coverage in the United States by certain payors based upon
our differentiated product and quality of our evidence. We believe these factors provide competitive advantages to us in the market. The following are the
primary competitive factors on which companies compete in our industry:
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product and clinical procedure effectiveness;
ease of surgical technique and use of associated instruments;
safety;
published clinical outcomes and evidence;
sales force knowledge;
product support and service, and customer service;
comprehensive training, including disease, anatomy, diagnosis and treatment;
product innovation and the speed of innovation;
intellectual property;
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accountability and responsiveness to customers’ demands;
pricing and reimbursement;
scientific (biomechanics) data; and
attracting and retaining key personnel.
Intellectual Property
We protect our intellectual property through our pending patent applications and issued patents. As of December 31, 2020, we had been issued 40
patents in the United States, and 14 patents outside of the United States. Also, as of December 31, 2020, we have 29 pending patent applications in the
United States and six pending patent applications outside of the United States. We have focused the majority of our foreign patent efforts in China, Europe,
and Japan. Our current U.S. patents on iFuse, including the triangular shape, expire in November 2024. Competitors may market similar triangular shaped
devices upon the expiration of the patents in late 2024. Our current U.S. patents on iFuse-3D, including the fenestrated design, expire in September 2035.
Our foreign patents will expire between August 2025 and October 2031.
We have 13 registered trademarks in the United States and have filed for 16 more. In other countries, we have focused on registering three primary
trademarks: “iFuse Implant System,” “SI-BONE,” and the SI-BONE logo. As of December 31, 2020, we have sought protection for at least two of these
trademarks in 60 countries including the 27 European member countries of the Madrid Protocol. The trademarks registered in the EU are also now
protected by “clone” registrations in the U.K.
We also rely upon trade secrets, know-how and continuing technological innovation, and may rely upon licensing opportunities in the future, to
develop and maintain our competitive position. We may seek to protect our proprietary rights through a variety of methods, including confidentiality
agreements and proprietary information agreements with suppliers, employees, consultants and others who may have access to proprietary information,
under which they are bound to assign to us inventions made during the term of their agreements.
The term of individual patents depends on the legal term for patents in the countries in which they are granted. In most countries, including the United
States, the patent term is generally 20 years from the earliest claimed filing date of a non-provisional patent application in the applicable country. There can
be no assurance that patents will be issued from any of our pending applications or that, if patents are issued, they will be of sufficient scope or strength to
provide meaningful protection for our technology. Notwithstanding the scope of the patent protection available to us, a competitor could develop treatment
methods or devices that are not covered by our patents but that compete with our proprietary technology and products. Furthermore, numerous U.S. and
foreign issued patents and patent applications owned by third parties exist in the fields in which we are developing products. Because patent applications
can take many years to issue, there may be applications currently unknown to us, which may later result in issued patents that our existing or future
products or proprietary technologies may be alleged and/or found to infringe.
There has been substantial litigation regarding patent and other intellectual property rights in the medical device industry. In the future, we may need
to engage in litigation to enforce patents issued or licensed to us, to protect our trade secrets or know-how and brands, to defend against claims of
infringement of the rights of others or to determine the scope and validity of the proprietary rights of others. Litigation could be costly and could divert our
attention from other functions and responsibilities. Adverse determinations in litigation could reduce the barriers to entry that we have established for
iFuse, or subject us to significant liabilities to third parties, require us to seek licenses from third parties or prevent us from manufacturing, selling or using
iFuse, any of which could severely harm our business.
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Regulation
Domestic Regulation of Our Products and Business
Our research, development and clinical programs, as well as our manufacturing and marketing operations, are subject to extensive regulation in the
United States and other countries. Most notably, all of our products sold in the United States are subject to the Federal Food, Drug, and Cosmetic Act
(“FDCA”) as implemented and enforced by the FDA. The processes for obtaining regulatory approvals in the United States and in foreign countries and
jurisdictions, along with subsequent compliance with applicable statutes and regulations and other regulatory authorities, require the expenditure of
substantial time and financial resources. The FDA governs the following activities that we perform or that are performed on our behalf, to ensure that
medical products distributed domestically or exported internationally are safe and effective for their intended uses:
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product design, research, development, and manufacture;
product safety, testing, labeling, and storage;
record keeping procedures;
product marketing, promotion, advertising, sales, distribution, export, and import; and
post-marketing surveillance, complaint handling, medical device reporting, reporting of deaths, serious injuries or device malfunctions, and
repair or recall of products.
There are numerous FDA regulatory requirements governing the clearance or approval and marketing of our products. These include:
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product listing and establishment registration, which helps facilitate FDA inspections and other regulatory action;
investigational device exemptions to conduct premarket clinical trials, which include extensive monitoring, recordkeeping, and reporting
requirements;
• Quality System Regulation (“QSR”), which requires manufacturers, including third-party manufacturers, to follow stringent design, testing,
control, documentation and other quality assurance procedures during all aspects of the manufacturing process;
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labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label use or indication;
clearance of product modifications that could significantly affect safety or effectiveness or that would constitute a major change in intended use
of one of our cleared devices;
approval of product modifications that affect the safety or effectiveness of one of our approved devices;
• medical device reporting regulations, which require that manufacturers comply with FDA requirements to report if their device may have caused
or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the
malfunction of the device or a similar device were to recur;
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post-approval restrictions or conditions, including post-approval study commitments;
post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness
data for the device;
the FDA’s recall authority, whereby it can ask, or under certain conditions order, device manufacturers to recall from the market a product that is
in violation of governing laws and regulations;
regulations pertaining to voluntary recalls; and
notices of corrections or removals.
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FDA Premarket Clearance and Approval Requirements
Unless an exemption applies, each medical device we wish to commercially distribute in the United States will require either premarket notification,
or 510(k), clearance or approval of a pre-market approval (“PMA”) from the FDA. The FDA classifies medical devices into one of three classes. Devices
deemed to pose lower risks are placed in either Class I or II, which typically requires the manufacturer to submit to the FDA a premarket notification
requesting permission to commercially distribute the device. This process is generally known as 510(k) clearance. Some low risk devices are exempted
from this requirement. Devices deemed by the FDA to pose the greatest risks, such as life-sustaining, life-supporting or implantable devices, or devices
deemed not substantially equivalent to a previously cleared 510(k) device, are placed in Class III, requiring a PMA.
Class I devices are those for which safety and effectiveness can be assured by adherence to FDA’s “general controls” for medical devices, which
include compliance with the applicable portions of the FDA’s Quality System Regulation, or QSR, facility registration and product listing, reporting of
adverse medical events, and appropriate, truthful and non-misleading labeling, advertising, and promotional materials. Some Class I devices also require
premarket clearance by the FDA through the 510(k) premarket notification process described below.
Class II devices are subject to FDA’s general controls, and any other “special controls” deemed necessary by FDA to ensure the safety and
effectiveness of the device, such as performance standards, product-specific guidance documents, special labeling requirements, patient registries or post-
market surveillance. Premarket review and clearance by the FDA for Class II devices is accomplished through the 510(k) premarket notification procedure,
though certain Class II devices are exempt from this premarket review process. When a 510(k) is required, the manufacturer must submit to the FDA a
premarket notification submission demonstrating that the device is “substantially equivalent” to a legally marketed device, which in some cases may
require submission of clinical data. Unless a specific exemption applies, 510(k) premarket notification submissions are subject to user fees. If the FDA
determines that the device, or its intended use, is not substantially equivalent to a legally marketed device, the FDA may place the device, or the particular
use of the device, into Class III, and the device sponsor must then fulfill much more rigorous premarketing requirements.
Class III devices, consisting of devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or
devices deemed not substantially equivalent to a predicate device. The safety and effectiveness of Class III devices cannot be assured solely by general or
special controls. Submission and FDA approval of a premarket approval, or PMA, application is required before marketing of a Class III device can
proceed. As with 510(k) submissions, unless subject to an exemption, PMA submissions are subject to user fees. The PMA process is much more
demanding than the 510(k) premarket notification process. A PMA application, which is intended to demonstrate that the device is safe and effective, must
be supported by extensive data, typically including data from preclinical studies and human clinical trials.
510(k) Clearance
To obtain 510(k) clearance for a medical device, an applicant must submit to the FDA a premarket notification submission demonstrating that the
proposed device is “substantially equivalent” to a legally marketed device, known as a “predicate device.” A legally marketed predicate device may include
a device that was legally marketed prior to May 28, 1976 for which a PMA is not required (known as a “pre-amendments device” based on the date of
enactment of the Medical Device Amendments of 1976), a device that has been reclassified from Class III to Class II or Class I, or a device that was found
substantially equivalent through the 510(k) process. A device is substantially equivalent if, with respect to the predicate device, it has the same intended use
and has either (i) the same technological characteristics, or (ii) different technological characteristics, but the information provided in the 510(k) submission
demonstrates that the device does not raise new questions of safety and effectiveness and is at least as safe and effective as the predicate device. A showing
of substantial equivalence sometimes, but not always, requires clinical data.
Before the FDA will accept a 510(k) submission for substantive review, the FDA will first assess whether the submission satisfies a minimum
threshold of acceptability. If the FDA determines that the 510(k) submission is incomplete, the FDA will issue a “Refuse to Accept” letter which generally
outlines the information the FDA believes is necessary to permit a substantive review and to reach a determination regarding substantial equivalence. An
applicant must submit the requested information before the FDA will proceed with additional review of the submission. By regulation, the FDA has 90
days from acceptance of the 510(k) submission for review to review and issue a determination. As a practical matter, clearance often takes longer. The FDA
may require additional information, including clinical data, to make a determination regarding substantial equivalence.
After a device receives 510(k) marketing clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute
a major change or modification in its intended use, will require a new 510(k) marketing clearance or, if the modification changes the classification of the
product to Class III, PMA approval. The determination as to whether or not a modification could significantly affect the device’s safety or effectiveness is
initially left to the manufacturer using available FDA
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guidance. Many minor modifications today are accomplished by a “letter to file” in which the manufacturer documents the rationale for the change and
why a new 510(k) is not required. However, the FDA may review such letters to file to evaluate the regulatory status of the modified product at any time
and may require the manufacturer to cease marketing and recall the modified device until 510(k) clearance is obtained. The manufacturer may also be
subject to significant regulatory fines or penalties.
PMA Approval
A PMA must be submitted to the FDA for any device that is classified in Class III or otherwise cannot be cleared through the 510(k) process
(although the FDA has discretion to continue to allow certain pre-amendment Class III devices to use the 510(k) process). PMA applications must be
supported by, among other things, valid scientific evidence demonstrating the safety and effectiveness of the device, which typically requires extensive
data, including technical, preclinical, clinical and manufacturing data. The PMA must also contain a full description of the device and its components, a full
description of the methods, facilities, and controls used for manufacturing, and proposed labeling. Following receipt of a PMA application, once the FDA
determines that the application is sufficiently complete to permit a substantive review, the FDA will formally accept the application for review. The FDA,
by statute and by regulation, has 180 days to review an “accepted” PMA application, although the review of an application more often occurs over a
significantly longer period of time, and can take up to several years. During the review period, the FDA will typically request additional information or
clarification of the information already provided. Also, an advisory panel of experts from outside the FDA may be convened to review and evaluate the
application and provide recommendations to the FDA as to the approvability of the device. The FDA may or may not accept the panel’s recommendation.
In addition, the FDA will generally conduct a pre-approval inspection of the manufacturing facility or facilities to ensure compliance with the QSR. If
the FDA evaluations of both the PMA application and the manufacturing facilities are favorable, the FDA will either issue an approval letter or an
approvable letter, which usually contains a number of conditions that must be met in order to secure final approval of the PMA. If the FDA’s evaluation of
the PMA or manufacturing facilities is not favorable, the FDA will deny approval of the PMA or issue a not approvable letter. A not approvable letter will
outline the deficiencies in the application and, where practical, will identify what is necessary to make the PMA approvable. The FDA may also determine
that additional clinical trials are necessary, in which case the PMA approval may be delayed for several months or years while the trials are conducted.
Once granted, PMA approval may be withdrawn by the FDA if compliance with post-approval requirements, conditions of approval or other regulatory
standards is not maintained or problems are identified following initial marketing. In approving a PMA the FDA may also require some form of post-
market surveillance when necessary to protect the public health or to provide additional safety and effectiveness data for the device. In such cases, the
manufacturer might be required to follow certain patient groups for a number of years and makes periodic reports to the FDA on the clinical status of those
patients.
New PMAs or PMA supplements are required for modifications that affect the safety or effectiveness of a PMA-approved device, including, for
example, certain types of modifications to the device’s indication for use, manufacturing process, labeling and design. PMA supplements often require
submission of the same type of information as a PMA, except that the supplement is limited to information needed to support any changes from the device
covered by the original PMA and may not require as extensive clinical data or the convening of an advisory panel.
De Novo Classification
Medical device types that the FDA has not previously classified as Class I, II or III are automatically classified into Class III regardless of the level of
risk they pose. The Food and Drug Administration Modernization Act of 1997 established a new route to market for low to moderate risk medical devices
that are automatically placed into Class III due to the absence of a predicate device, called the “Request for Evaluation of Automatic Class III Designation,”
or the de novo classification procedure. This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-
classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission
and approval of a PMA application. Manufacturers may request de novo classification directly without first submitting a 510(k) premarket notification to
the FDA and receiving a not substantially equivalent determination. The FDA is required to classify the device within 120 days following receipt of the de
novo application. If the manufacturer seeks reclassification into Class II, the manufacturer must include a draft proposal for special controls that are
necessary to provide a reasonable assurance of the safety and effectiveness of the medical device. In addition, the FDA may reject the reclassification
petition if it identifies a legally marketed predicate device that would be appropriate for a 510(k) or determines that the device is not low to moderate risk
or that general controls would be inadequate to control the risks and special controls cannot be developed.
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Regulation of Human Cell and Tissue Based Products
Our iFuse Bone products are derived from human tissue (demineralized bone tissue). The FDA has specific regulations governing human cells,
tissues, and cellular and tissue-based products ("HCT/Ps"). HCT/Ps regulated by the FDA under the authority of section 361 of the Public Health service
Act must be not more than minimally manipulated and be for homologous use. They are subject to requirements relating to registering facilities and listing
products with the FDA, screening and testing for tissue donor eligibility, Good Tissue Practice when processing, storing, labeling and distributing HCT/Ps,
including required labeling information, stringent record keeping and adverse event reporting. Our bone tissue products are regulated as 361 HCT/Ps.
The AATB has issued operating standards for tissue banking. Accreditation is voluntary, but compliance with these standards is a requirement to
become an AATB-accredited tissue establishment. In addition, some states have their own tissue banking regulations. We are licensed or have permits for
tissue banking in California, Florida, New York, Maryland, and other states that require specific licensing or registration.
Procurement of certain human organs and tissue for transplantation is subject to the restrictions of the National Organ Transplant Act (NOTA),
which prohibits the transfer of certain human organs, including bone tissue for valuable consideration, but permits reasonable payments associated with
removal, transportation, implantation, processing, preservation, quality control and storage.
Clinical Trials
Clinical trials are generally required to support a PMA application and are sometimes required for 510(k) clearance. Such trials for implanted devices
such as iFuse generally require an investigational device exemption application (“IDE”), approved in advance by the FDA for a specified number of
subjects and study sites, unless the product is deemed a nonsignificant risk device eligible for more abbreviated IDE requirements. Clinical trials are subject
to extensive monitoring, recordkeeping and reporting requirements. Clinical trials must be conducted under the oversight of an institutional review board
(“IRB”), and the relevant clinical trial sites and must comply with FDA regulations, including but not limited to those relating to good clinical practices. To
conduct a clinical trial, we also are required to obtain the subjects’ informed consent in form and substance that complies with both FDA requirements and
state and federal privacy and human subject protection regulations. We, the FDA, or the IRB, could suspend a clinical trial at any time for various reasons,
including a belief that the risks to study subjects outweigh the anticipated benefits. Even if a trial is completed, the results of clinical testing may not
adequately demonstrate the safety and effectiveness of the device or may otherwise not be sufficient to obtain FDA clearance or approval to market the
product in the United States. Similarly, in Europe the clinical study must be approved by a local ethics committee and in some cases, including studies with
high- risk devices, by the ministry of health in the applicable country.
Pervasive and Continuing Regulation
After a device is placed on the market, numerous regulatory requirements continue to apply. These include:
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Product listing and establishment registration, which helps facilitate FDA inspections and other regulatory action;
• QSR, which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation, and other
quality assurance procedures during all aspects of the manufacturing process;
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labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label use or indications;
clearance of product modifications that could significantly affect safety or effectiveness or that would constitute a major change in intended use
of one of our cleared devices;
approval of product modifications that affect the safety or effectiveness of one of our approved devices;
• medical device reporting regulations, which require that manufacturers comply with FDA requirements to report if their device may have caused
or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the
malfunction of the device or a similar device were to recur;
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post-approval restrictions or conditions, including post-approval study commitments;
post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness
data for the device;
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the FDA’s recall authority, whereby it can ask, or under certain conditions order, device manufacturers to recall from the market a product that is
in violation of governing laws and regulations;
regulations pertaining to voluntary recalls; and
notices of corrections or removals.
We have registered our facility with the FDA as a medical device manufacturer. The FDA has broad post-market and regulatory enforcement
powers. We are subject to announced and unannounced inspections by the FDA to determine our compliance with the QSR and other regulations, and these
inspections may include the manufacturing facilities of some of our subcontractors. Failure by us or by our suppliers to comply with applicable regulatory
requirements can result in enforcement action by the FDA or other regulatory authorities, which may result in sanctions including, but not limited to:
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untitled letters, warning letters, fines, injunctions, consent decrees, and civil penalties;
unanticipated expenditures to address or defend such actions;
customer notifications for repair, replacement, refunds;
recall, detention or seizure of our products;
operating restrictions or partial suspension or total shutdown of production;
refusing or delaying our requests for 510(k) clearance or PMA approval of new products or modified products;
operating restrictions;
• withdrawing 510(k) clearances or PMA approvals that have already been granted;
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refusal to grant export approval for our products; or
criminal prosecution.
The FDA inspected our facilities again in December 2016. No findings were noted.
Promotional Materials - “Off-Label” Promotion
Advertising and promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission and by
state regulatory and enforcement authorities. If the FDA determines that our promotional materials or training constitutes promotion of an unapproved use,
it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an
untitled letter, a warning letter, injunction, seizure, civil fine, or criminal penalties. It is also possible that other federal, state, or foreign enforcement
authorities might take action if they consider our promotional or training materials to constitute promotion of an unapproved use, which could result in
significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement. In that event, we could be subject to
additional significant penalties, such as exclusion from participation in federal healthcare programs, and our reputation could be damaged and adoption of
the products would be impaired.
In addition, under the federal Lanham Act and similar state laws, competitors, and others can initiate litigation relating to advertising claims.
International Regulation of Our Products
Our research, development and clinical programs, as well as our manufacturing and marketing operations, are subject to extensive regulation in other
countries. For example, in the European Economic Area (“EEA”) our devices are currently required to comply with the Essential Requirements concerning
medical devices that are imposed by the Medical Device Directive (Council Directive 93/42/EEC) and the related national implementing legislation of
individual EU member states as well as related guidance. Demonstration of compliance with these requirements entitles us to affix the CE mark to our
medical devices, without which they cannot be commercialized in the EEA.
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To demonstrate compliance with the Essential Requirements, we must undergo a conformity assessment procedure, which varies according to the type
of medical device and its classification. Except for low risk medical devices, a conformity assessment procedure requires a Notified Body to conduct
conformity assessments. The Notified Body typically audits and examines products’ Technical File and the quality system for the manufacture, clinical
evaluation report, design and final inspection of our devices before issuing a CE Certificate of Conformity. Following the issuance of this CE Certificate of
Conformity, we can draw up an EC Declaration of Conformity and affix the CE mark to the products covered by this CE Certificate of Conformity and the
EC Declaration of Conformity. We have successfully completed several Notified Body audits since our original certification in November 2010. Following
these audits, our Notified Body issued International Standards Organization Certificates and CE Certificates of Conformity allowing us to draw up an EC
Declaration of Conformity and affix the CE mark to certain of our devices.
After the product has been CE marked and placed on the market in the EEA, we must comply with a number of regulatory requirements relating to:
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registration of medical devices in individual EEA countries;
pricing and reimbursement of medical devices;
establishment of post-marketing surveillance and adverse event reporting procedures;
Field Safety Corrective Actions, including product recalls and withdrawals; and
interactions with physicians.
Failure to comply with these requirements may result in enforcement measures being taken against us by the competent authorities of the EEA
countries. These can include fines, administrative penalties, compulsory product withdraws, injunctions, and criminal prosecution. Such enforcement
measures would have an adverse effect on our capacity to market our products in the EEA and, consequently, on our business and financial position.
From May 26, 2021, the Medical Device Regulation (Regulations 2017/745) will repeal and replace the Medical Device Directive and the Active
Implantable Medical Device Directive and will apply in the EU Member States, Iceland, Lichtenstein and Norway. The Medical Device Regulation is,
among other things, intended to establish a uniform, transparent, predictable and sustainable regulatory framework across the EEA for medical devices and
ensure a high level of safety and health while supporting innovation. Once applicable, the Medical Device Regulation will, among other things:
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strengthen the rules on placing medical devices on the market and reinforce surveillance once they are available;
establish explicit provisions on manufacturers’ responsibilities for the follow-up of the quality, performance and safety of devices placed on the
market;
improve the traceability of medical devices throughout the supply chain to the end-user or patient through a unique identification number;
set up a central database to provide patients, healthcare professionals and the public with comprehensive information on products available in the
European Union; and
strengthen the rules for the assessment of certain high-risk devices, such as implants, which may have to undergo an additional check by experts
before they are placed on the market.
The Medical Device Regulation substantially augments those aspects of the Medical Device Directive governing clinical investigations of medical
devices. In addition to detailed provisions concerning the authorization and conduct of clinical investigations, the Regulation imposes on non-EU sponsors
a responsibility to appoint a legal representative established in the EU and an obligation on EU Member States to ensure that systems exist to compensate
clinical investigation participants who are harmed in that jurisdiction due to their participation.
Once applicable, the Medical Device Regulation will impose increased compliance obligations, which we must respect if we wish to continue to
access the EU market. This includes the up-classification of some of our devices. Moreover, the scrutiny imposed by Notified Bodies for the technical
documentation related these devices will increase considerably.
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Further, the advertising and promotion of our products in the EEA is currently subject to the provisions of the Medical Devices Directive, Directive
2006/114/EC concerning misleading and comparative advertising, Directive 2005/29/EC on unfair commercial practices, and from 26 May 2020, the
Medical Device Regulation, as well as other national legislation in the EEA countries governing the advertising and promotion of medical devices. These
laws may limit or restrict the advertising and promotion of our products to the general public and may impose limitations on our promotional activities with
healthcare professionals.
Regulatory Status
In November 2008, we received 510(k) clearance to market our first generation iFuse implant from the FDA. Since 2008, we have received additional
FDA 510(k) clearances for new instruments, additional implant sizes and labeling changes. In the United States, the iFuse Implant System is intended for
sacroiliac fusion for the following conditions: sacroiliac joint dysfunction that is a direct result of sacroiliac joint disruptions and degenerative sacroiliitis,
which includes conditions where symptoms began during pregnancy or in the peripartum period and have persisted postpartum for more than six months;
to augment immobilization and stabilization of the sacroiliac joint in skeletally mature patients undergoing sacropelvic fixation as part of a lumbar or
thoracolumbar fusion; and acute, non-acute, and non-traumatic fractures involving the sacroiliac joint. In the future, we plan to pursue additional 510(k)
clearances for new products and changes to the current indication for iFuse.
In November 2010, we obtained a CE Certificate of Conformity and affixed a CE mark to our iFuse Implant System to allow commercialization of
iFuse in the EEA. In the EEA and Switzerland, iFuse is intended for sacroiliac joint fusion, including use in high and low energy fractures of the pelvic
ring. Since 2010, we have added additional instruments, implant sizes and labeling updates and iFuse-3D, our second generation iFuse implant, to our
product offerings in Europe. We plan to continue to work with our Notified Body to incorporate new products and labeling updates in our Technical Files
for CE marking in Europe. Current delays in the revisions to the current bilateral agreement between the EU and Switzerland necessary to ensure the
ongoing supply of our CE marked medical devices in Switzerland following entry into application of the Medical Device Regulation may, however, affect
this plan.
Since July 2013, we have obtained approval for iFuse in regions beyond the United States and the EEA, including Australia, Canada, Hong Kong,
Israel, Malaysia, New Zealand, Saudi Arabia, Singapore and Taiwan. We are currently collecting information to determine our regulatory strategy in Japan.
Environmental Regulations
We outsource substantially all the manufacturing of our products, therefore we have not incurred significant expenses relating to our compliance
with federal, state, or local environmental laws and do not expect to incur significant expenses in the foreseeable future. However, due to the nature of our
operations and the frequently changing nature of environmental compliance standards and technology, we cannot predict with any certainty that future
material capital or operating expenditures will not be required in order to comply with applicable environmental laws and regulations.
Healthcare Fraud and Abuse
Federal and state governmental agencies and equivalent foreign authorities subject the healthcare industry to intense regulatory scrutiny, including
heightened civil and criminal enforcement efforts. These laws constrain the sales, marketing and other promotional activities of medical device
manufacturers by limiting the kinds of financial arrangements we may have with hospitals, physicians and other potential purchasers and prescribers of our
products. Federal healthcare fraud and abuse laws apply to our business when a customer submits a claim for an item or service that is reimbursable under
Medicare, Medicaid, or other federally funded healthcare programs. The laws that may affect our ability to operate include:
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the federal Anti-Kickback Statute, which prohibits, among other things, knowingly and willfully soliciting, receiving, offering or paying
remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, lease, order,
arrangement for, or recommendation of, items or services for which payment may be made, in whole or in part, under federal healthcare programs,
such as the Medicare and Medicaid programs. The term “remuneration” has been broadly interpreted to include anything of value, and the
government can establish a violation of the Anti-Kickback Statute without proving that a person or entity had actual knowledge of, or a specific
intent to violate, the law;
the federal civil False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be
presented, false or fraudulent claims for payment of government funds; knowingly making, using, or causing to be made or used, a false record or
statement to get a false claim paid or to avoid, decrease, or conceal an obligation to pay money to the federal government. A claim including items
or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims
Act. Actions under the False Claims Act may be brought by the government or as a qui tam action by a private individual in the name of the
government and to share in
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any monetary recovery. There are also criminal penalties for making or presenting a false or fictitious or fraudulent claim to the federal
government;
•
•
•
the federal Health Insurance Portability and Accountability Act of 1996, which imposes criminal and civil liability for, among other actions,
knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program including private third-party
payors, or knowingly and willfully falsifying, concealing, or covering up a material fact or making a materially false, fictitious, or fraudulent
statement or representation, or making or using any false writing or document knowing the same to contain any materially false, fictitious, or
fraudulent statement or entry in connection with the delivery of or payment for healthcare benefits, items, or services;
the federal Physician Payment Sunshine Act, implemented by CMS as the Open Payments program, which requires manufacturers of drugs,
devices, biologics and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program to
report annually to the CMS, information related to payments and other “transfers of value” made to physicians (currently defined to include
doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and requires applicable manufacturers to report annually to
CMS ownership and investment interests held by physicians and their immediate family members and payments or other “transfers of value” to
such physician owners. Beginning in 2022, applicable manufacturers also will be required to report information regarding payments and transfers
of value provided (beginning in 2021) to physician assistants, nurse practitioners, clinical nurse specialists, anesthesiologist assistants, certified
nurse anesthetists, and certified nurse-midwives; and
analogous state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws, which may apply to
items or services reimbursed by any third-party payor, including commercial insurers and patients; state laws that require device companies to
comply with the industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government or
otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state beneficiary inducement laws, and
state laws that require device manufacturers to report information related to payments and other transfers of value to physicians and other
healthcare providers or marketing expenditures, many of which differ from each other in significant ways and may not have the same effect, thus
complicating compliance efforts.
If we or our employees are found to have violated any of the above laws we may be subject to administrative, civil and criminal penalties, including
imprisonment, exclusion from participation in federal health care programs, such as Medicare and Medicaid, significant fines, monetary penalties and
damages, the restructuring or curtailment of our operations, imposition of compliance obligations and monitoring, and damage to our reputation. For a
more detailed description of the federal and state health care fraud and abuse laws, see the risk factor “We and our sales representatives must comply with
U.S. federal and state fraud and abuse laws, including those relating to healthcare provider kickbacks and false claims for reimbursement, and other
applicable federal and state healthcare laws, as well as equivalent foreign laws, and failure to comply could negatively affect our business” in the Risks
Related to Our Legal and Regulatory Environment section of Item 1A of this Annual Report on Form 10-K.
The U.S. Foreign Corrupt Practices Act (“FCPA”) and similar anti-bribery laws in other countries, such as the United Kingdom Bribery Act
(“UKBA”), generally prohibit companies and their intermediaries from making improper payments to government officials and/or other persons for the
purpose of obtaining or retaining business. Our policies mandate compliance with these anti-bribery laws.
Data Privacy and Security Laws
We are also subject to various federal, state and foreign laws that protect the confidentiality of certain patient health information, including patient
medical records, and restrict the use and disclosure of patient health information by healthcare providers, such as the Health Insurance Portability and
Accountability Act, and its implementing regulations, as amended by Health Information Technology for Economic and Clinical Health Act enacted under
the American Recovery and Reinvestment Act 2009 (“ARRA”) (collectively, “HIPAA”), in the United States.
HIPAA imposes obligations on “covered entities,” including certain healthcare providers, health plans, and healthcare clearinghouses, and their
respective “business associates” that create, receive, maintain or transmit individually identifiable health information for or on behalf of a covered entity as
well as their covered subcontractors, with respect to safeguarding the privacy, security and transmission of individually identifiable health information.
HIPAA also requires the notification of patients, reporting to the U.S. Department of Health and Human Services (“HHS”), and other compliance actions,
in the event of a breach of unsecured Protected Health Information (“PHI”). Required notification must be provided without unreasonable delay and in no
event later than 60 calendar days after discovery of the breach, under HIPAA. In addition, if the PHI of 500 or more individuals is improperly used or
disclosed, HHS would post the notification on its website, and we may be required to notify the media. Failure to comply with the
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HIPAA privacy and security standards can result in significant civil monetary penalties, and, in certain circumstances, criminal penalties, including
imprisonment.
In addition, even when HIPAA does not apply other federal and state laws impose security obligations. For example, according to the Federal Trade
Commission (“FTC”), failing to take appropriate steps to keep consumers’ personal information secure constitutes unfair acts or practices in or affecting
commerce in violation of Section 5(a) of the FTCA, 15 U.S.C § 45(a). The FTC expects a company’s data security measures to be reasonable and
appropriate in light of the sensitivity and volume of consumer information it holds, the size and complexity of its business, and the cost of available tools to
improve security and reduce vulnerabilities. Medical data is considered sensitive data that merits stronger safeguards.
In the European Union (“EU”), we are subject to laws relating to our collection, control, processing and other use of personal data (i.e. data relating to
an identifiable living individual). We process personal data in relation to our operations. We process data of our employees, consultants, certain individuals
who may be affiliated with our customers, including physician users of our products and, in the context of clinical investigations, patients. The personal
data may include sensitive personal data including health information. The data privacy regime in the EU includes the EU General Data Protection
Regulation, or the GDPR, effective on May 25, 2018 and the E-Privacy Directive 2002/58/EC and the national laws implementing it. Each EU Member
State may adopt additional legislation implementing these regulations into its own national data privacy regime and therefore the laws may differ by
jurisdiction, sometimes significantly. We need to ensure compliance with the rules in each jurisdiction where we are established or are otherwise subject to
local privacy laws.
The GDPR is directly applicable in each EU Member State. This should, in principle, result in a more uniform application of data privacy laws across
the EU. The GDPR imposes onerous accountability obligations requiring data controllers and processors to maintain a record of their data processing and
policies. It requires data controllers to be transparent and to disclose to data subjects (in a concise, intelligible and easily accessible form) how their
personal information is to be used, imposes limitations on retention of information, increases requirements pertaining to pseudonymized (i.e., key-coded)
data, introduces mandatory data breach notification requirements and sets higher standards for data controllers to demonstrate that they have obtained valid
consent for certain data processing activities. Fines for non-compliance with the GDPR will be significant-the greater of € 20 million or 4% of global
turnover. The GDPR provides that EU Member States may introduce further conditions, including limitations, to the processing of genetic, biometric, or
health data, which could limit our ability to collect, use and share personal data, or could cause our compliance costs to increase, ultimately having an
adverse impact on our business. Each EU Member State may also adopt additional related legislation and guidance in its own national data privacy regime
and therefore the laws may differ by jurisdiction, sometimes significantly. We need to ensure compliance with the rules in each jurisdiction where we are
established or are otherwise subject to local privacy laws.
We are subject to the supervision of local data protection authorities in those jurisdictions where we are established or otherwise subject to applicable
law. We depend on a number of third parties in relation to our provision of our services, a number of which process personal data on our behalf. With each
such provider we enter into contractual arrangements to ensure that they only process personal data according to our instructions and applicable laws, and
that they have sufficient technical and organizational security measures in place to fulfil their related obligations. Where we transfer personal data outside
the EEA, we do so in compliance with the relevant data export requirements. We take our data protection obligations seriously, as any improper disclosure,
particularly with regard to our customers’ sensitive personal data, could negatively impact our business and/or our reputation.
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Manufacturing and Supply
We use third-party manufacturers to produce our implants and instruments. Our primary supplier for implants is rms Company (“RMS”) for iFuse-
3D. To mitigate supply risk, we use a rolling twelve month forecast and take into consideration production lead times to maintain adequate levels of
inventory for both our iFuse-3D and iFuse. Most of our instruments have secondary manufacturing suppliers and we continually work with additional
manufacturers as our secondary suppliers. Substantially all of our products, including all of our implants, are manufactured in the United States.
We entered into a non-exclusive Manufacturing, Quality and Supply Agreement with RMS in January 2017, which was amended in July 2020.
Pursuant to such agreement, RMS manufactures certain of our implants in accordance with our specifications, including both purchased and sterilized
iFuse-3D implants, as well as uncoated machined implants which are subsequently coated to become our finished first generation iFuse implants. While the
agreement provides that we are required to purchase the amounts forecasted in a blanket purchase order, we are not required to purchase product in excess
of such forecasted amounts. The prices we pay for products are fixed under the agreement provided that if order volumes deviate from forecasted amounts
beyond certain thresholds, we or RMS may request to negotiate further price changes. The agreement automatically renews for successive one-year
periods; provided, however, the agreement may be terminated early by either party, as specified in the agreement. RMS is currently our only supplier of
iFuse-3D implants.
We believe that our manufacturing operations, and those of our suppliers, comply with regulations mandated by the FDA, as well as Medical Devices
Directive regulations in the EEA. Manufacturing facilities that produce medical devices or component parts intended for distribution world-wide are
subject to regulation and periodic planned and unannounced inspection by the FDA and other domestic and international regulatory agencies.
In the United States, products we sell are required to be manufactured in compliance with the FDA's Quality System Regulation, codified at 21 CFR
Part 820, which covers the methods used in, and the facilities used for, the design, testing, control, manufacturing, labeling, quality assurance, packaging,
storage, and shipping. In international markets, we are required to obtain and maintain various quality assurance and quality management certifications,
including those issued by DEKRA Certification, B.V., our notified body. DEKRA has issued the following international certifications: Quality
Management System ISO13485:2016 for our locations in Santa Clara, California, and Gallarate Italy; Full Quality Assurance Certification for the design
and manufacture of iFuse; and a Design Examination certificate for iFuse.
We are required to demonstrate continuing compliance with applicable regulatory requirements to maintain these certifications and will continue to be
periodically inspected by international regulatory authorities for certification purposes. Further, we and certain of our suppliers are required to comply with
all applicable regulations and current good manufacturing practices. As set forth above, these FDA and international regulations cover, among other things,
the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage, and shipping of our
products. Compliance with applicable regulatory requirements is subject to continual review and is monitored rigorously through periodic inspections. If
we or our manufacturers fail to adhere to current good manufacturing practice requirements, this could delay production of our products and lead to fines,
difficulties in obtaining regulatory approvals, recalls, enforcement actions, including injunctive relief or consent decrees, or other consequences, which
could, in turn, have a material adverse effect on our financial condition or results of operations.
Our operations ran at suboptimal capacity as a result of decreased iFuse demand from worldwide restrictions on elective procedures due to the
COVID-19 pandemic during the second quarter of 2020. Accordingly, in the second quarter of 2020, we expensed certain labor and overhead costs as
incurred which impacted our gross profit and gross margin. We saw a more normalized operations capacity during the second half of 2020 as case volumes
began to recover. We may experience similar issues in future quarters due to the COVID-19 pandemic.
Product Liability and Insurance
The manufacture and sale of our products subjects us to the risk of financial exposure to product liability claims. Our products are used in situations
in which there is a risk of serious injury or death. We carry insurance policies which we believe to be customary for similar companies in our industry. We
cannot assure you that these policies will be sufficient to cover all or substantially all losses that we experience.
We endeavor to maintain executive and organization liability insurance in a form and with aggregate coverage limits that we believe are adequate for
our business purposes, but our coverage limits may prove not to be adequate in some circumstances.
Human Capital Resources
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Maintaining a sufficient number of skilled employees in each respective department is a key focus of our human capital efforts. 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.
As of December 31, 2020, we had 295 employees, including sales and marketing, product development, general administrative and accounting, both
domestically and internationally. As of December 31, 2020, we had a direct field sales organization of 122 in the United States and 20 in Europe. During
2020, our turnover rate was less than 10%.
Diversity and Inclusion
In order to realize our mission and vision, we are committed to actively fostering workforce diversity and an environment of cultural inclusion
throughout the company. In 2020, we adopted a Diversity and Inclusion Plan, overseen by our Nominating and Corporate Governance Committee. Our
program goal is to increase gender and ethnic diversity in our workforce and leadership over three years, while continuing to provide equal employment
opportunities to all candidates and employees without regard to any protected status. Accordingly, we track gender diversity among our global and U.S.
workforce, the percentage of employees above director level who are female, the representation of women and underrepresented communities on our Board
of Directors and the diversity of our U.S. workforce.
We aim to maintain a mix of backgrounds, skills and experiences in our board composition to understand and reflect the needs of our diverse
stakeholders. Currently, three of our nine board members are women and one of our board members self-identifies as Asian American.
Health, Safety, and Wellness
The health, safety, and wellness of our employees is a priority in which we have always invested and intend to continue to do. We provide our
employees and their families with access to a variety of innovative, flexible, and convenient health and wellness programs. These benefits are intended to
provide protection and security, so employees can have peace of mind concerning events that may require time away from work or that may impact their
financial well-being. Additionally, we offer programs to help support employee physical and mental health by providing tools and resources to help them
improve or maintain their health status, encourage engagement in healthy behaviors, and offer choices where possible so they are customized to meet their
needs and the needs of their families.
In light of the COVID-19 pandemic, the prioritization of employee health, safety, and wellness took on particular significance in 2020. We
implemented significant changes that we determined were in the best interest of our employees, as well as the communities in which we operate, in
compliance with government regulations. This includes having the majority of our office-based employees work from home, while implementing additional
safety measures for employees continuing critical on-site work or work at customer facilities. A number of employees critical to maintaining our essential
operating functions have continued to work from our office in Santa Clara, California. To protect and support our essential team members, we have
implemented health and safety measures that include maximizing personal workspaces, adopting shift-based schedules to mitigate contagion risk, providing
personal protective equipment (PPE), and instituting mandatory screening before accessing our offices.
Compensation and Benefits
We provide compensation and benefits programs to help meet the needs of our employees. In addition to base compensation, these programs, which
vary by country, include annual bonuses, restricted stock unit awards, an Employee Stock Purchase Plan, 401(k), healthcare and insurance benefits, health
savings and flexible spending accounts, paid time off, family leave, and flexible work schedules, among many others. As a response to the COVID-19
pandemic, we supported employees with standard merit increases, paid full-time wages to hourly employees when they were not able to access our
facilities, and guaranteed certain commissions to our salespeople. We did not furlough or terminate any of our employees due to economic concerns arising
from COVID-19 in 2020.
Ensuring fair and equitable pay is integral to our commitment to our employees. Our executive team and Board of Directors strongly support this
commitment. In 2020, we conducted our first pay equity review with the assistance of an independent consulting firm. The consultant reviewed our
employee compensation to determine whether any statistically significant pay differences existed between women and men and between minorities and
non-minorities performing similar job functions. The review provided
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information to help us understand whether our compensation structure was appropriate and to identify what improvements can be made. In areas where pay
disparities were identified, we conducted further evaluation to determine where adjustments were appropriate.
As part of our Diversity and Inclusion Program, we implemented an applicant tracking system in 2020. In addition to automating our recruiting and
onboarding processes, the applicant tracking system also helps us determine whether there is a mix of new hire candidates in the system from different
genders and ethnicities for open positions.
Talent Development
We value our employees and the passion, commitment, and professional depth they provide. To enhance employee retention and job satisfaction, we
offer ongoing learning and leadership training opportunities that support growth.
Our human resources and sales enablement teams transitioned much of our leadership training from in-person sessions to remote learning with the
emergence of COVID-19 in 2020. Our scaled learning platforms of on-demand and virtual classroom learning eliminates travel and allows employees to
access development at their convenience.
We have robust annual performance review processes for reviewing employees’ performance and pay. To support our managers, we train them on
conducting effective performance reviews and making compensation recommendations, which take into consideration market pay data and performance, as
well as experience in an employee’s respective role.
Community Programs
We believe that building connections between our employees, their families, and our communities creates a more meaningful, fulfilling, and
enjoyable workplace. Through our engagement programs, our employees can pursue their interests and hobbies, connect to volunteering and giving
opportunities, and enjoy unique recreational experiences with family members.
Our employees engage in a variety of activities to support their local communities. We acknowledge that community involvement is important to our
employees and we support their interests in the communities in which they live. Prior to COVID-19, we hosted events at our corporate campus, including
food, clothing, and toy drives. During 2020, we organized employee cash donations to food banks to support the neediest individuals in San Francisco Bay
Area communities.
We encourage you to review our ESG Shareholder Letter in the Governance Documents of the Corporate Governance section of our Investor website
for more detailed information regarding our human capital programs and initiatives. Nothing on our website, including our ESG Shareholder Letter, shall
be deemed part of or incorporated by reference into this Annual Report.
Emerging Growth Company Status
We qualify as an “emerging growth company” as defined in Section 101 of the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”). We will
continue to be an emerging growth company until December 31, 2023, unless one of the following occurs: (i) if our total annual gross revenues are $1.07
billion or more; or (ii) if we issued more than $1.0 billion in non-convertible debt in the past three years; or (iii) if we become a “large accelerated filer,” as
defined in Rule 12b-2 of the Exchange Act.
As an emerging growth company under the JOBS Act, we can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the
Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting
standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption and, therefore, we will
not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
As an emerging growth company, we are also exempt from Section 404(b) of the Sarbanes-Oxley Act of 2002 and Section 14A(a) and (b) of the
Exchange Act. Section 404(b) of the Sarbanes-Oxley Act of 2002 requires a public company’s auditor to attest to, and report on, management’s assessment
of its internal controls. Sections 14A(a) and (b) of the Exchange Act, implemented by Section 951 of the Dodd-Frank Act, require companies to hold
shareholder advisory votes on executive compensation and golden parachute compensation. As long as we qualify as an emerging growth company, we will
not be required to comply with the requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002 and Section 14A(a) and (b) of the Exchange Act.
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Smaller Reporting Company Status
We qualify as a “smaller reporting company” as defined under Rule 12b‑2 of the Exchange Act. We will continue to qualify as a smaller reporting
company if: (i) our public float is less than $250.0 million; or (ii) our annual revenues is less than $100.0 million and our public float is less than $700.0
million. As per guidance, we determine whether we qualify as a smaller reporting company annually as of the last business day of our second fiscal quarter.
As a smaller reporting company, we may use the smaller reporting company scaled disclosure accommodations of Regulation S-K and S-X in our filings,
including among others:
•
•
•
•
•
•
two years of income statements rather than three years as required by Rule 8-02 of Regulation S-X;
two-year management discussions and analysis comparison rather than three-year comparison as required by Item 303 of Regulation S-K;
no requirement to provide selected financial data table required by Item 301 of Regulation S-K;
no requirement to provide market risk disclosures required by Item 305 of Regulation S-K;
no requirement to provide supplemental financial information required by Item 302 of Regulation S-K; and
less extensive narrative disclosure than required of other reporting companies, particularly in the description of executive compensation as
required by Item 402 of Regulation S-K.
Company History
SI-BONE was founded in 2008 by the main inventor of iFuse, orthopedist Mark A. Reiley, M.D., our President, Chief Executive Officer, and
Chairman, Jeffrey W. Dunn, and orthopedic surgeon Leonard Rudolf, M.D. Dr. Reiley previously invented balloon kyphoplasty and founded Kyphon Inc.,
which was sold to Medtronic plc in 2007. Dr. Reiley also invented the INBONE total ankle replacement system, which was sold to Wright Medical
Technology, Inc. in 2008.
Corporate Information
We were incorporated in March 2008 in Delaware. Our principal executive offices are located at 471 El Camino Real, Suite 101, Santa Clara,
California 95050 and our telephone number is (408) 207-0700. Our website address is www.si-bone.com. We completed our initial public offering in
October 2018, and our common stock is listed on the Nasdaq Global Market under the symbol “SIBN.”
Our Annual Report on Form 10-K, Quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge on our website. The information contained on or that can be accessed
through our website is not incorporated by reference into this report, and you should not consider information on our website to be part of this report.
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Item 1A. Risk Factors
Investing in our common stock involves a high degree of risk. Investors should carefully consider the risks described below, as well as the other
information in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes and the section “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” before deciding whether to invest in our common stock. The occurrence of any
of the events or developments described below could materially and adversely affect our business, financial condition, results of operations, and growth
prospects. In such an event, the market price of our common stock could decline, and our stockholders may lose all or part of their investment. Additional
risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.
Risk Factor Summary
• We have incurred significant operating losses since inception, we expect to continue to incur operating losses in the future and we may not be able
to achieve or sustain future profitability;
•
•
•
Epidemic diseases, or the perception of their effects, or extreme weather events have had and could have (or, in the case of the COVID-19
pandemic, will continue to have during its duration) a material adverse effect on our business, financial condition, results of operations, or cash
flows;
If hospitals, surgeons, and other healthcare providers are unable to obtain and maintain coverage and reimbursement from third-party payors for
procedures performed using our products, adoption of our products may be delayed, and it is unlikely that they will gain further acceptance;
If healthcare payors reverse decisions to cover minimally invasive sacroiliac joint fusion exclusively when performed with iFuse and choose to
reimburse for procedures performed with competitive products, our market share could decline, adversely affecting our revenues;
• We may not be able to demonstrate to physicians that iFuse is an attractive alternative to our competitors’ products and that our procedure is an
attractive alternative to existing surgical and non-surgical treatments of the sacroiliac joint;
•
•
•
Surgeons and payors may not find our clinical evidence to be compelling, which could limit our sales and revenue, and ongoing and future
research may prove our products to be less safe and effective than currently thought;
Pricing pressure from our competitors, changes in third-party coverage and reimbursement, healthcare provider consolidation, payor consolidation
and the presence of “physician-owned distributorships” may impact our ability to sell our product at prices necessary to support our current
business strategies;
Practice trends or other factors, including the COVID-19 pandemic, may cause procedures to shift from the hospital environment to ambulatory
surgical centers, or ASCs, where pressure on the prices of our products is generally more acute;
• We operate in a very competitive business environment and if we are unable to compete successfully against our existing or potential competitors,
our sales and operating results may be adversely affected;
• We currently manufacture and sell a single family of products focused on procedures, the goal of which is to stabilize and fuse the sacroiliac joint.
Reliance on a single family of products and single procedure could negatively affect our results of operations and financial condition;
•
•
If clinical experience with our iFuse Bedrock technique does not result in positive outcomes for patients, or if clinical trials involving the use of
iFuse Bedrock fail to show meaningful patient benefit, sales of our iFuse implants could be adversely impacted;
If we are unable to maintain our network of direct sales representatives and third-party distributors, we may not be able to generate anticipated
sales;
• We are dependent on a limited number of third-party suppliers, some of them single-source and some of them in single locations, for most of our
products and components, and the loss of any of these suppliers, or their inability to provide us with an adequate supply of materials in a timely
and cost-effective manner, could materially adversely affect our business;
• We, our suppliers, and our third-party manufacturers are subject to extensive governmental regulation both in the U.S. and
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abroad, and failure to comply with applicable requirements could cause our business to suffer;
• We and our sales representatives must comply with U.S. federal and state fraud and abuse laws, including those relating to healthcare provider
kickbacks and false claims for reimbursement, and other applicable federal and state healthcare laws, as well as equivalent foreign laws, and
failure to comply could negatively affect our business; and
•
If we or our licensors fail to adequately protect or enforce our intellectual property rights or secure rights to patents of others, the value of our
intellectual property rights would diminish and our ability to successfully commercialize our products may be impaired.
Risks Related to Our Business and Our Industry
We have incurred significant operating losses since inception, we expect to continue to incur operating losses in the future, and we may not be able to
achieve or sustain future profitability.
We have incurred net losses since our inception in 2008. For the years ended December 31, 2020 and 2019, we had net losses of $43.7 million and
$38.4 million, respectively. As of December 31, 2020, we had an accumulated deficit of $239.3 million. We have financed our operations primarily through
the net proceeds of our public offerings of our common stock, private placements of equity securities, certain debt-related financing arrangements, and
from sales of our products. We have devoted substantially all of our resources to research and development of our products, sales and marketing activities,
investments in training and educating surgeons and other healthcare providers, and clinical and regulatory matters for our products. There can be no
assurances that we will be able to generate sufficient revenue from our existing products or from any of our product candidates in development, and to
transition to profitability and generate consistent positive cash flows, and even if we are able to do so, our ability to do so has been delayed by the COVID-
19 pandemic. As COVID-19-related restrictions are lifted and as we are able to resume more normalized levels of operations, we expect that our operating
expenses will continue to increase as we continue to build our commercial infrastructure, develop, enhance, and commercialize our existing and new
products. As a result, we expect to continue to incur operating losses for the foreseeable future and may never achieve profitability. Furthermore, even if we
do achieve profitability, we may not be able to sustain or increase profitability on an ongoing basis. If we do not achieve profitability, it will be more
difficult for us to finance our business and accomplish our strategic objectives.
Our expected future capital requirements may depend on many factors including expanding our surgeon base, the expansion of our sales force, and
the timing and extent of spending on the development of our technology to increase our product offerings. We may need additional funding to fund our
operations but additional funds may not be available to us on acceptable terms on a timely basis, if at all. We may seek funds through borrowings or
through additional rounds of financing, including private or public equity or debt offerings. If we raise additional funds by issuing equity securities, our
stockholders may experience dilution. Any future debt financing into which we enter may impose upon us additional covenants that restrict our operations,
including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments, and engage in
certain merger, consolidation or asset sale transactions. Any future debt financing or additional equity that we raise may contain terms that are not favorable
to us or our stockholders. Furthermore, we cannot be certain that additional funding will be available on acceptable terms, if at all. If we are unable to raise
additional capital or generate sufficient cash from operations to adequately fund our operations, we will need to curtail planned activities to reduce costs,
which will likely harm our ability to execute on our business plan and continue operations.
Epidemic diseases, or the perception of their effects, or extreme weather events have had and could have (or, in the case of the COVID-19
pandemic, will continue to have during its duration) a material adverse effect on our business, financial condition, results of operations, or cash flows.
Outbreaks of infectious diseases, such as COVID-19, and historically, the Ebola virus, Middle East Respiratory Syndrome, Severe Acute Respiratory
Syndrome, or the H1N1 influenza virus, could divert medical resources and priorities towards the treatment of that disease. An outbreak of an infectious
disease, or continued escalation of the outbreak of COVID-19 could also negatively affect hospital admission rates and the decision by patients to undergo
elective surgery, which could decrease demand for procedures using our iFuse implants and cause other disruptions to our business. Business disruptions
could include disruptions or restrictions on our ability to travel or to distribute our products, government orders suspending the performance of elective
surgical procedures such as the iFuse procedure, inability of our customers to meet their financial commitments due to strain on the healthcare system, as
well as temporary closures of our facilities or the facilities of our suppliers and their contract manufacturers, and a reduction in the business hours of
hospitals and ambulatory surgery centers. Any disruption of our suppliers and their contract manufacturers or our customers would likely impact our sales
and operating results. In addition, a significant outbreak of an infectious disease in the human population could result in a widespread health crisis that
could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our
products. Any of these events could negatively impact the number of procedures using our iFuse implants that are performed and have a material adverse
effect on our business, financial condition, results of operations, or cash flows.
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To date, COVID-19 has had, and we expect will continue to have, an adverse impact on our operations as a result of preventive and precautionary
measures that we, other businesses, health systems and governments are taking. Due to these impacts and measures, we have experienced and expect to
continue to experience significant and unpredictable reductions in the demand for our products, negatively impacted hospital admission rates and the
decision by patients to undergo elective surgery, each of which has decreased and may continue to impact the demand for procedures using our iFuse
implants. These developments and effects are expected to continue and may also significantly affect our business across the United States and other
countries where COVID-19 has spread and may continue to spread. There are numerous uncertainties associated with this COVID-19 outbreak, including
the number of individuals who will become infected, when vaccines or one or more therapies that mitigate the effect of the virus will be widely available,
the extent of the protective and preventative measures that have been put in place by both governmental entities and other businesses and those that may be
put in place in the future, the effect that testing for COVID-19 and antibodies will enable relaxation of protective measures for a subset of the population,
and numerous other uncertainties. We intend to continue to execute on our strategic plans and operational initiatives during the COVID-19 outbreak.
However, the aforementioned uncertainties may result in delays or modifications to these plans and initiatives.
Existing travel restrictions, and the risk that countries may continue to close borders, impose prolonged quarantines, and further restrict travel, limit
our ability to reach surgeons with our goal of increasing surgeon activity by educating them to include the sacroiliac joint in their differential diagnosis of
lower back pain and to regularly perform the iFuse procedure for patients for whom the procedure is indicated.
In addition, the COVID-19 pandemic has adversely affected, and may continue to adversely affect, the economies and financial markets of many
countries, which may result in a period of regional, national, and global economic slowdown or regional, national, or global recessions that could curtail or
delay spending by hospitals and affect demand for our products as well as increased risk of customer defaults or delays in payments. These market
disruptions could impair our ability to raise capital, should our business experience a prolonged period of reduced revenue requiring additional capital to
sustain the business. COVID-19 and the current financial, economic, and capital markets environment, and future developments in these and other areas
present material uncertainty and risk with respect to our performance, financial condition, results of operations, and cash flows. Due to the uncertain scope
and duration of the pandemic and uncertain timing of global recovery and economic normalization, we are unable to estimate the long-term impacts on our
operations and financial results.
The existence and further duration of the COVID-19 pandemic may also further exacerbate certain of the risks described below.
If hospitals, surgeons, and other healthcare providers are unable to obtain and maintain coverage and reimbursement from third-party payors for
procedures performed using our products, adoption of our products may be delayed, and it is unlikely that they will gain further acceptance.
Maintaining and growing sales of our products depends on the availability of adequate coverage and reimbursement from third-party payors,
including government programs such as Medicare and Medicaid, private insurance plans, and managed care programs. Hospitals, surgeons, and other
healthcare providers that purchase or use medical devices generally rely on third-party payors to pay for all or part of the costs and fees associated with the
procedures performed with these devices.
Adequate coverage and reimbursement for procedures performed with our products is central to the acceptance of our current and future products. We
may be unable to sell our products on a profitable basis if third-party payors deny coverage or reduce their current levels of payment, or if reimbursement
levels are insufficient to support use of our products or compensate surgeons for their time spent diagnosing patients and performing procedures using our
products. For example, our sales decreased significantly after minimally invasive sacroiliac joint fusion was assigned to a Category III Current Procedural
Terminology (“CPT”) code effective July 1, 2013. After implementation of this Category III CPT Code, surgeons were no longer able to consistently obtain
reimbursement for procedures performed using our products. However, effective January 1, 2015, minimally invasive sacroiliac joint fusion was assigned
to a Category I CPT Code.
Many private payors refer to coverage decisions and payment amounts determined by the Centers for Medicare & Medicaid Services (“CMS”), which
administers the Medicare program, as guidelines for setting their coverage and reimbursement policies. By December 31, 2016, all Medicare
Administrative Contractors were regularly reimbursing for minimally invasive sacroiliac joint fusion. Private payors that do not follow the Medicare
guidelines may adopt different coverage and reimbursement policies for procedures performed with our products. Private commercial payors have been
slower to adopt positive coverage policies for minimally invasive sacroiliac joint fusion, and some private payors still have policies that treat the procedure
as experimental or investigational and do not regularly reimburse for the procedure. Future action by CMS or third-party payors may further reduce the
availability of payments to physicians, outpatient surgery centers, and/or hospitals for procedures using our products.
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The healthcare industry in the United States has experienced a trend toward cost containment as government and private insurers seek to control
healthcare costs. Payors are imposing lower payment rates and negotiating reduced contract rates with service providers and being increasingly selective
about the technologies and procedures they chose to cover. For example, several Blue Cross Blue Shield payors have adopted policies that treat 3D-printed
orthopedic implants that come in standard sizes, rather than customized to the patient’s anatomy, such as our iFuse-3D implant, as experimental and
investigational and therefore not eligible for reimbursement. There can be no guarantee that we will be able to provide the scientific and clinical data
necessary to overcome these policies. Such policies may contribute to a decrease in sales of our iFuse-3D implants. Payors may adopt policies in the future
restricting access to medical technologies like ours and/or the procedures performed using such technologies. Therefore, we cannot be certain that the
procedures performed with each of our products will be reimbursed. There can be no guarantee that, should we introduce additional products in the future,
payors will cover those products or the procedures in which they are used.
Market acceptance of our products in foreign markets may depend, in part, upon the availability of coverage and reimbursement within prevailing
healthcare payment systems. Reimbursement and healthcare payment systems in international markets vary significantly by country and include both
government-sponsored healthcare and private insurance. We may not obtain additional international coverage and reimbursement approvals in a timely
manner, if at all. Our failure to receive such approvals would negatively impact market acceptance of our products in the international markets in which
those approvals are sought.
If the reimbursement provided by third-party payors to hospitals, surgeons, and other healthcare providers for procedures performed using our
products is insufficient, adoption and use of our products and the prices paid for our implants may decline.
The sales of our products depend in part on the availability of coverage and reimbursement from third-party payors such as government health
administration authorities, private health insurers, health maintenance organizations, and other healthcare-related organizations. When an iFuse procedure
is performed, both the surgeon and the healthcare facility, either a hospital or ambulatory surgical center, submit claims for reimbursement to the healthcare
payor. Generally, the facility obtains a lump sum payment, or facility fee, for minimally invasive sacroiliac joint fusions. Our products are purchased by the
facility, along with other supplies used in the procedure. The facility must also pay for its own fixed costs of operation, including certain operating room
personnel involved in the procedure. If these costs exceed the facility fee reimbursement, the facility’s managers may discourage or restrict surgeons from
performing the procedure in the facility or using certain technologies, such as our iFuse implants, to perform the procedure.
Effective January 1, 2021, the national average Medicare payment to hospital outpatient departments is $15,868 and the Medicare payment to an
ambulatory surgery center for a sacroiliac joint fusion is $12,974. We believe that payments to facilities are generally adequate for these facilities to offer
the iFuse procedure. However, there can be no guarantee that these facility fee payments will not decline in the future. The number of iFuse procedures
performed and the prices paid for our implants may in the future decline if payments to facilities for minimally invasive sacroiliac joint fusions decline.
Surgeons are reimbursed separately for their professional time and effort to perform a surgical procedure. Prior to reassignment of minimally invasive
sacroiliac joint fusion to a Category III CPT Code, the national average Medicare physician fee schedule payment to surgeons for CPT codes commonly
used to submit claims for reimbursement for the iFuse procedure was approximately $1,000 and the procedure was commonly covered by both government
and private commercial payors in the United States. Effective January 1, 2021, the average Medicare payment for the Category I CPT code for minimally
invasive SI joint fusion is $888. Many private payors set their payment amounts with reference to the Medicare payment, often approximately 10% to 33%
higher than the Medicare payment for a procedure. For some governmental programs, such as Medicaid, coverage and reimbursement differ from state to
state, and some state Medicaid programs may not pay an adequate amount for the procedures performed with our products, if any payment is made at all.
We believe that some surgeons may continue to view the Medicare and commercial reimbursement amounts as insufficient for the procedure, given
the work effort involved with the procedure, including the time to diagnose the patient and obtain prior authorization from the patient’s health insurer if
necessary. Many private payors require extensive documentation of a multi-step diagnosis before authorizing minimally invasive sacroiliac joint fusion for
a patient. We believe that some private payors apply their own coverage policies and criteria inconsistently, and surgeons may not be able to consistently
have minimally invasive sacroiliac fusions approved and covered. The perception by physicians that the reimbursement for minimally invasive sacroiliac
joint fusion is insufficient to compensate them for the work required, including diagnosis, documentation, obtaining payor approval for the procedure, and
burden on their office staff, may negatively affect the number of procedures performed and may therefore adversely affect our revenues.
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Recent political, economic, and regulatory influences are subjecting the healthcare industry to fundamental changes that can impact coverage and
reimbursement from third-party payors. For example, Patient Protection and Affordable Care Act, as amended by the Health Care and Education
Reconciliation Act of 2011, or collectively, the Affordable Care Act, among other things, reduced and/or limited Medicare reimbursement to certain
providers. Legislative changes to the Affordable Care Act remain possible. We expect that the Affordable Care Act, as currently enacted or as it may be
amended in the future, and other healthcare reform measures that may be adopted in the future, could have a material adverse effect on our industry
generally and on our ability to maintain or increase sales of our existing products. There have been executive, legislative and judicial challenges to the
Affordable Care Act. For example, the United States Supreme Court is currently reviewing the constitutionality of the Affordable Care Act, but it is unclear
when a decision will be made. Other federal laws further reduce Medicare’s payments to providers by two percent through 2030. However, COVID-19
relief support legislation suspended the 2% Medicare reductions from May 1, 2020 through March 31, 2021. These reductions may reduce reimbursement
for procedures performed using our products, which could potentially negatively impact our revenue, and may reduce providers’ revenues or profits, which
could affect their ability to purchase new technologies. Both the federal and state governments in the U.S. and foreign governments continue to propose and
pass new legislation and regulations designed to contain or reduce the cost of healthcare. Such legislation and regulations may result in decreased
reimbursement for medical devices, which may further exacerbate industry-wide pressure to reduce the prices charged for medical devices. This could
harm our ability to market our products and generate sales, which could adversely affect our business, results of operations and financial condition.
If healthcare payors reverse decisions to cover minimally invasive sacroiliac joint fusion exclusively when performed with iFuse and choose to
reimburse for procedures performed with competitive products, our market share could decline, adversely affecting our revenues.
As of December 31, 2020, 37 of the largest 65 U.S. payors that we track and target have issued positive coverage policies covering the patented
triangular design of our iFuse implants and excluding coverage of other products that are intended to fuse the sacroiliac joint because of the clinical
evidence supporting the use of iFuse and the lack of clinical evidence supporting the use of other products. Additionally, the public hospital system in
France initiated coverage for iFuse exclusively beginning September 6, 2018. We believe that payors have adopted these exclusive coverage decisions due
to the strength of our clinical evidence and in part due to recommendations of specialty benefit managers and healthcare technology assessment
organizations. In 2018, AIM Specialty Health, Blue Cross Blue Shield Association Evidence Street, and eviCore Healthcare published positive coverage
recommendations to their constituents and payor customers, recommending that iFuse be covered exclusively. Clinical trials of the type and size necessary
to offer evidence of the safety and efficacy of competing products could be performed and could show that other products for sacroiliac joint fusion are as
effective as, or more effective than, iFuse. Payors could also abandon their decisions to cover iFuse exclusively for other reasons. If healthcare payors
covering a significant number of covered lives reverse their policies of covering minimally invasive sacroiliac joint fusion exclusively when performed
with the iFuse system, sales of our iFuse implants could decline or fail to grow, which could adversely affect our business, results of operations and
financial condition.
We may not be able to demonstrate to physicians that iFuse is an attractive alternative to our competitors’ products and that our procedure is an
attractive alternative to existing surgical and non-surgical treatments of the sacroiliac joint.
Surgeons, in consultation with their patients, play the primary role in determining the course of treatment and, ultimately, any product that will be
used in treatment. In order for us to sell our iFuse system successfully, we must demonstrate to surgeons through education and training that treatment with
iFuse is beneficial, safe, and cost-effective for patients as compared to our competitors’ products. If we are not successful in demonstrating the merits of
iFuse to surgeons, their use of our products may decline, adversely affecting our revenues and profitability.
Historically, most spine surgeons did not include an evaluation of the sacroiliac joint in their diagnostic work-up because they did not have an
adequate surgical procedure to perform for patients diagnosed with sacroiliac joint dysfunction. As a result, some patients with lower back pain resulting
from sacroiliac joint dysfunction have been misdiagnosed. We believe that educating surgeons and other healthcare professionals about the clinical merits
and patient benefits of iFuse is an important element of building our business. If we fail to effectively educate surgeons and other medical professionals,
they may not include a sacroiliac joint evaluation as part of their diagnosis and, as a result, those patients may continue to receive unnecessary surgical
procedures or only non-surgical treatment.
Surgeons may also hesitate to change their medical treatment practices for other reasons, including the following:
• lack of experience with minimally invasive procedures;
• perceived liability risks generally associated with the use of new products and procedures;
• costs associated with the purchase of new products; and
• time commitment that may be required for training.
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Furthermore, we believe surgeons will not widely use iFuse unless they determine, based on experience, clinical data, and published peer-reviewed
publications, that surgical intervention provides benefits or is an attractive alternative to non-surgical treatments of sacroiliac joint dysfunction. In addition,
we believe support of our products relies heavily on long-term data showing their benefits. If we are unable to provide that data, surgeons may not use our
products. In such circumstances, we may not achieve expected sales and may be unable to achieve profitability.
Many patients with sacroiliac joint dysfunction are cared for by pain physicians, who are generally trained as anesthesiologists or physical medicine
and rehabilitation specialists. Pain physicians often offer a variety of non-surgical and surgical interventions to sacroiliac joint dysfunction patients,
including, but not limited to, steroid injections, radiofrequency ablation of the nerves serving the sacroiliac joint and implantation of neurostimulation
devices and other products intended to treat the sacroiliac joint or the pain it can cause. Our professional education program seeks to teach pain physicians,
and other health care providers, about the benefits of iFuse, in order to prompt these providers to refer their patients with sacroiliac joint dysfunction to
surgeons who have been trained to perform the iFuse procedure. These providers may, however, prefer to continue to treat these patients with the
interventions they offer. If we are unable to demonstrate to potential referring health care providers of the comparative benefits of iFuse, and we are
therefore unable to prompt sufficient numbers of these providers to refer their patients with sacroiliac joint dysfunction for treatment by surgeons trained to
perform the iFuse procedure, sales of our iFuse implants could decline or fail to grow, which could adversely affect our business, results of operations and
financial condition.
Surgeons and payors may not find our clinical evidence to be compelling, which could limit our sales and revenue, and ongoing and future research
may prove our products to be less safe and effective than currently thought.
The products we currently market in the United States have either received premarket clearance under Section 510(k) of the United States. Federal
Food, Drug, and Cosmetic Act (“FDCA”), or are exempt from premarket review. Those marketed in the European Union (“EU”) have been the subject of a
CE Certificate of Conformity. The 510(k) clearance process of the U.S. Food and Drug Administration (“FDA”) requires us to document that our product is
“substantially equivalent” to another 510(k)-cleared product. The 510(k) process is shorter and typically requires the submission of less supporting
documentation than other FDA approval processes, such as a premarket approval (“PMA”), and does not usually require pre-clinical or clinical studies.
Additionally, to date, we have not been required to complete clinical studies in connection with the sale of our products outside the United States. As a
result, while there are a number of published studies relating to iFuse and minimally invasive sacroiliac joint surgery that support the safety and
effectiveness of our products and the benefits they offer, our clinical studies may lack the size and scope of randomized controlled clinical trials required to
support approval of a PMA. For these reasons, surgeons may be slow to adopt our products, third-party payors may be slow to provide coverage, and we
may be subject to greater regulatory and product liability risks. Further, future patient studies or clinical experience may indicate that treatment with our
products does not improve patient outcomes. Such results would slow the adoption of our products by surgeons, significantly reduce our ability to achieve
expected sales, and could prevent us from achieving profitability. Moreover, if future results and experience indicate that our products cause unexpected or
serious complications or other unforeseen negative effects, we could be subject to mandatory product recalls, suspension, or withdrawal of FDA clearance,
and suspension, variation, or withdrawal of our CE Certificates of Conformity, significant legal liability or harm to our business reputation, which could
have a material adverse effect on our results or operations and financial condition. Similar risks apply to product approvals and registrations in other
countries outside the Unites States and the EU as well.
Pricing pressure from our competitors, changes in third-party coverage and reimbursement, healthcare provider consolidation, payor consolidation
and the presence of “physician-owned distributorships” may impact our ability to sell our product at prices necessary to support our current business
strategies.
If competitive forces drive down the prices we are able to charge for our product, our profit margins will shrink, which will adversely affect our
ability to invest in and maintain and grow our market share. The sacroiliac joint fusion market has attracted numerous new companies and technologies. As
a result of this increased competition, we believe there will be continuing increased pricing pressure, resulting in lower gross margins, with respect to our
products.
Even to the extent our product and procedures using our product are currently covered and reimbursed by third-party private and public payors,
adverse changes in coverage and reimbursement policies that affect our products, discounts, and number of implants used may also drive our prices down
and harm our ability to market and sell our products.
We are unable to predict what changes will be made to the reimbursement methodologies used by third-party payors. We cannot be certain that under
current and future payment systems, in which healthcare providers may be reimbursed a set amount based on the type of procedure performed, such as
those utilized by Medicare and in many privately managed care systems, the cost of our products will be justified and incorporated into the overall cost of
the procedure. In addition, to the extent there is a shift from inpatient setting to outpatient settings, we may experience increased pricing pressure.
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Consolidation in the healthcare industry, including both third-party payors and healthcare providers, could lead to demands for price concessions or
to the exclusion of some suppliers from certain of our markets, which could have an adverse effect on our business, results of operations, or financial
condition. Because healthcare costs have risen significantly over the past several years, numerous initiatives and reforms initiated by legislators, regulators,
and third-party payors to curb these costs have resulted in a consolidation trend in the healthcare industry to aggregate purchasing power. As the healthcare
industry consolidates, competition to provide products and services to industry participants has become and will continue to become more intense. This in
turn has resulted and will likely continue to result in greater pricing pressures and the exclusion of certain suppliers from important market segments as
group purchasing organizations, independent delivery networks, and large single accounts continue to use their market power to consolidate purchasing
decisions for hospitals. We expect that market demand, government regulation, third-party coverage, and reimbursement policies and societal pressures will
continue to change the worldwide healthcare industry, resulting in further business consolidations and alliances among our customers, which may reduce
competition, exert further downward pressure on the prices of our products, and adversely impact our business, results of operations, or financial condition.
As we continue to expand into international markets, we will face similar risks relating to adverse changes in coverage and reimbursement procedures and
policies in those markets.
Physician-owned distributorships (“POD”), are medical device distributors that are owned, directly or indirectly, by physicians. These physicians
profit from selling or arranging the sale of medical devices for use in procedures they perform on their own patients at hospitals that purchase the devices
from the POD. We do not engage with PODs. The proliferation of PODs could result in increased pricing pressure on our products or harm our ability to
sell our products to physicians who own or are affiliated with those distributorships and therefore choose to use competing products.
Practice trends or other factors, including the COVID-19 pandemic, may cause procedures to shift from the hospital environment to ambulatory
surgical centers, or ASCs, where pressure on the prices of our products is generally more acute.
To protect health care professionals involved in surgical care and their patients, we anticipate that more outpatient eligible procedures will be
performed in ASCs during the COVID-19 pandemic, and as its acuity declines and the healthcare system returns to a more normalized state. Since patients
do not stay overnight in ASCs and COVID-19 patients would not otherwise be treated in ASCs, it is likely that the ASC will be viewed as a safer site of
service for patients and health care providers, where the risk of transmission of the novel coronavirus can be more effectively controlled. Because ASC
facility fee reimbursement is typically less than facility fee reimbursement for hospitals, we typically experience more pressure on the pricing of our
products by ASCs than by hospitals, and the average price for which we sell our products to ASCs is less than the average prices we charge to hospitals. An
accelerated shift of procedures using our products to ASCs as a result of the COVID-19 pandemic could adversely impact the average selling prices of our
products and our revenues could suffer as a result.
We operate in a very competitive business environment and if we are unable to compete successfully against our existing or potential competitors, our
sales and operating results may be adversely affected.
Our currently marketed products are, and any future products we commercialize will likely be, subject to intense competition. Our field is subject to
rapid change and highly sensitive to the introduction of new products or other market activities of industry participants. Our ability to compete successfully
will depend on our ability to develop proprietary products that reach the market in a timely manner, receive adequate coverage and reimbursement from
third-party payors, and are safer, less invasive, and more effective than alternatives available for similar purposes as demonstrated in peer-reviewed clinical
publications. Because of the size of the potential market, we anticipate that other companies will dedicate significant resources to developing competing
products.
The number of competitors that we are aware of marketing sacroiliac joint fusion products in the Unites States has grown from zero to more than 20
since 2008. Some of our current and potential competitors are major medical device companies that have substantially greater financial, technical, and
marketing resources than we do, and they may succeed in developing products that would render our products obsolete or noncompetitive. In addition,
many of these competitors have significantly longer operating history and more established reputations than we do. Some of these companies sell a broad
suite of products that can be used together in the operating room in order to facilitate surgery, such as surgical imaging, navigation and robotic systems, or a
large number of implants intended to treat different conditions affecting the spine and pelvis. The ability of these competitors to sell these products together
or as part of larger purchasing arrangements may put us at a disadvantage.
In the Unites States, we believe that our primary competitors currently are Medtronic plc and Globus Medical, Inc. Our primary competitors in
Europe are Globus Medical, Inc. and SIGNUS Medizintechnik GmbH. At any time, these or other industry participants may develop alternative treatments,
products or procedures for the treatment of the sacroiliac joint that compete directly or indirectly with our products. The may also develop and patent
processes or products earlier than we can, or obtain domestic and international regulatory clearances or approvals and CE Certificates of Conformity for
competing products in the European Economic Area (“EEA”), more rapidly than we can, which could impair our ability to develop and commercialize
similar processes or products. If alternative treatments are, or are perceived to be, superior to our products, sales of our products and our results of
operations could be negatively affected.
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Some of our competitors are considerably larger than us, or are subsidiaries of larger companies. These competitors may enjoy several competitive
advantages over us, including:
• greater financial, human, and other resources for product research and development, sales and marketing, and legal matters;
• significantly greater name recognition;
• established relationships with surgeons, hospitals, and other healthcare providers;
• large and established sales and marketing and distribution networks;
• greater experience in obtaining and maintaining domestic and international regulatory clearances or approvals, or CE Certificates of Conformity
for products and product enhancements;
• more expansive portfolios of intellectual property rights; and
• greater ability to cross-sell their products or to incentivize hospitals or surgeons to use their products.
New participants have increasingly entered the medical device industry. Many of these new competitors specialize in a specific product or focus on a
particular market segment, making it more difficult for us to increase our overall market position. The frequent introduction by competitors of products that
are or claim to be superior to our current or planned future products may make it difficult to differentiate the benefits of our products over competing
products. In addition, the entry of multiple new products and competitors may lead some of our competitors to employ pricing strategies that could
adversely affect the pricing of our products and pricing in the market generally.
As a result, without the timely introduction of new products and enhancements, our products may become obsolete over time. If we are unable to
develop innovative new products, maintain competitive pricing, and offer products that surgeons and other physicians perceive to be as reliable as those of
our competitors, our market share or product margins could decrease, thereby harming our business.
We currently manufacture and sell a single family of products focused on procedures, the goal of which is to stabilize and fuse the sacroiliac joint.
Reliance on a single family of products and single procedure could negatively affect our results of operations and financial condition.
Substantially all of our revenue comes from the sale of iFuse-3D and iFuse implants, and related tools and instruments. Therefore, we are dependent
on widespread market adoption of iFuse and we will continue to be dependent on the success of this single product family for some time. There can be no
assurance that iFuse will maintain a substantial degree of market acceptance among surgeons, patients or healthcare providers. Our failure to successfully
grow the market for iFuse and increase our share within that market or any other event impeding our ability to sell iFuse, could adversely affect our results
of operations, financial condition and continuing operations.
If clinical experience with our iFuse Bedrock technique does not result in positive outcomes for patients, or if clinical trials involving the use of iFuse
Bedrock fail to show meaningful patient benefit, sales of our iFuse implants could be adversely impacted.
In November 2018, we introduced our iFuse Bedrock technique, in which spine surgeons place iFuse implants across the sacroiliac joint using a
different surgical approach to treat sacroiliac joint dysfunction at the same time they are fusing multiple levels of the spine above and affixing those spinal
fusion devices to the pelvis. In April 2019, the FDA cleared promotion of iFuse Bedrock for a broader and more general purpose, to provide additional
stability and immobilization of the sacroiliac joint in connection with a thoracolumbar fusion procedure. To date, clinical experience with the iFuse
Bedrock technique is limited and we have yet to complete a clinical trial to evaluate the iFuse Bedrock technique. Surgeons do not know if the addition of
iFuse implants to the implants used to fuse multiple levels of the lumbar spine will result in patient benefit. If surgeons' clinical experience with iFuse
Bedrock is not positive, or if our clinical trials do not show meaningful benefits to the patients undergoing this procedure, sale of our iFuse implants for this
indication could be adversely impacted, which could negatively affect our operations and financial condition.
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If we are unable to maintain our network of direct sales representatives and third-party distributors, we may not be able to generate anticipated sales.
As of December 31, 2020, our U.S. sales force consisted of 64 territory sales managers and 58 clinical support specialists directly employed by us and
41 third-party distributors. As of December 31, 2020, our international sales force consisted of 20 sales representatives directly employed by us and 31
exclusive third-party distributors, which together have had sales in 35 countries through December 31, 2020. Our operating results are directly dependent
upon the sales and marketing efforts of both our direct sales force and of our third-party distributors.
As we launch new products and increase our marketing efforts with respect to existing products, we will need to expand the reach of our marketing
and sales networks. Our future success will depend largely on our ability to continue to hire, train, retain and motivate skilled direct sales representatives
and third-party distributors with significant technical knowledge in various areas, such as spine health and treatment. New hires require training and take
time to achieve full productivity. If we fail to train new hires adequately, or if we experience high turnover in our sales force in the future, we cannot be
certain that new hires will become as productive as may be necessary to maintain or increase our sales. Our intention is for our direct sales representatives
and third-party distributors to develop long-lasting relationships with the surgeons they serve. If our direct sales representatives or third-party distributors
fail to adequately promote, market and sell our products or decide to leave or cease to do business with us, our sales could significantly decrease.
We face significant challenges and risks in managing our geographically dispersed distribution network and retaining the individuals who make up
that network. Some of our international third-party distributors account for a significant portion of our international sales volume, and if any such third-
party distributor were to cease to distribute our products, our sales could be adversely affected. In such a situation, we may need to seek alternative third-
party distributors or increase our reliance on our direct sales representatives, which may not prevent our sales from being adversely affected. If a direct
sales representative or third-party distributor were to depart and be retained by one of our competitors, we may be unable to prevent them from helping
competitors solicit business from our existing customers, which could further adversely affect our sales. Because of the intense competition for their
services, we may be unable to recruit or retain additional qualified third-party distributors or to hire additional direct sales representatives to work with us.
Furthermore, we may not be able to enter into agreements with them on favorable or commercially reasonable terms, if at all. Failure to hire or retain
qualified direct sales representatives or third-party distributors would prevent us from expanding our business and generating sales.
If we are unable to expand our sales and marketing capabilities domestically and internationally, we may not be able to effectively commercialize our
products, which would adversely affect our business, results of operations, and financial condition.
Our business could suffer if we lose the services of key members of our senior management, key advisors or personnel.
We are dependent upon the continued services of key members of our senior management and a limited number of key advisors and personnel. The
loss of members of our senior management team, key advisors or personnel, or our inability to attract or retain other qualified personnel or advisors, could
have a material adverse effect on our business, results of operations, and financial condition. We do not maintain “key person” insurance for any of our
executives or employees. In addition, several of the members of our executive management team are not subject to non-competition agreements that restrict
their ability to compete with us. Accordingly, the adverse effect resulting from the loss of certain executives could be compounded by our inability to
prevent them from competing with us.
Our products may have undesirable side effects which may require them to be taken off the market, require them to include safety warnings or
otherwise limit their sales.
Unforeseen adverse events related to our products could arise either during clinical development or, if cleared, approved, or subject to CE Certificate
of Conformity, after the product has been marketed. In clinical research, the most common adverse event related to our implant was leg pain resulting from
misplacement. The most common adverse event for our implant procedure has been minor wound infections. Additional adverse effects from iFuse or any
of our other products could arise either during clinical development or, if approved, cleared, or subject to CE Certificate of Conformity, after the product
has been marketed.
If we or others later identify adverse events caused by our products:
• sales of the product may decrease significantly, and we may not achieve the anticipated market share;
• regulatory authorities or our Notified Body may require changes to the labeling of our product. This may include the addition of labeling
statements, specific warnings, and contraindications and issuing field alerts to physicians and patients;
• we may be required to change instructions regarding the way the product is implanted or conduct additional clinical trials;
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• we may be subject to limitations on how we may promote the product;
• regulatory authorities may require us to temporarily or permanently take our approved product off the market or to conduct other field safety
corrective actions;
• we may be required to modify our product;
• we may be subject to litigation fines or product liability claims; and
• our reputation may suffer.
Any of these events could prevent us from achieving or maintaining market acceptance of the affected product or could substantially increase
commercialization costs and expenses, which in turn could delay or prevent us from generating significant revenue from the sale of our products.
Unfavorable media reports or other negative publicity concerning both alleged improper methods of tissue recovery from donors and disease
transmission from donated tissue could limit widespread acceptance of some of our products.
In late-2019, we introduced iFuse Bone, an implantable bone product manufactured from sterilized recovered cadaveric bone tissue, to meet the
demand of some of our surgeon customers to use implantable bone products to support and augment the patient's own bone tissue in orthopedic procedures.
Unfavorable reports of improper or illegal tissue recovery practices, both in the United States and internationally, as well as incidents of improperly
processed tissue leading to the transmission of disease, may affect the rate of future tissue donation and market acceptance of technologies incorporating
human tissue. In addition, negative publicity could cause the families of potential donors to become reluctant to donate tissue to for-profit tissue processors.
For example, the media has reported examples of alleged illegal harvesting of body parts from cadavers and resulting recalls conducted by certain
companies selling human tissue-based products affected by the alleged illegal harvesting. These reports and others could have a negative effect on sales of
iFuse Bone.
Various factors outside our direct control may adversely affect manufacturing, sterilization, and distribution of our products.
The manufacture, sterilization, and distribution of our products is challenging. Changes that our suppliers may make outside the purview of our direct
control can have an impact on our processes, quality of our products, and the successful delivery of products to our customers. Mistakes and mishandling
are not uncommon and can affect supply and delivery. Some of these risks include:
• failure to complete sterilization on time or in compliance with the required regulatory standards;
• transportation and import and export risk;
• delays in analytical results or failure of analytical techniques that we will depend on for quality control and release of products;
• large-scale epidemics of communicable diseases such as COVID-19;
• natural disasters, labor disputes, financial distress, raw material availability, issues with facilities and equipment, or other forms of disruption to
business operations affecting our manufacturers or suppliers; and
• latent defects that may become apparent after products have been released and that may result in a recall or field safety corrective action with
respect to such products.
If any of these risks were to materialize, our ability to provide our products to customers on a timely basis could be adversely impacted.
We are dependent on a limited number of third-party suppliers, some of them single-source and some of them in single locations, for most of our
products and components, and the loss of any of these suppliers, or their inability to provide us with an adequate supply of materials in a timely and
cost-effective manner, could materially adversely affect our business.
We rely on third-party suppliers to manufacture and supply substantially all of our products. For us to be successful, our suppliers must be able to
provide us with products and components in substantial quantities, in compliance with regulatory requirements, in accordance with agreed upon
specifications, at acceptable prices, and on a timely basis. We do not have long-term supply contracts for some of our suppliers, and in some cases, even
where we do have agreements in place, we purchase important parts of the iFuse Implant System from a single supplier. Therefore, we cannot assure
investors that we will be able to obtain sufficient quantities of product in the future.
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In addition, future growth could strain the ability of our suppliers to deliver an increasingly large supply of products, materials, and components.
Suppliers often experience difficulties in scaling up production, including financial issues, or problems with production yields and quality control and
assurance. For example, from time to time, we have experienced certain delays and may experience delays from our suppliers in the future.
We generally use a small number of suppliers for our instruments and currently rely on RMS for iFuse-3D implants and Orchid for iFuse implants.
Our dependence on such a limited number of suppliers exposes us to risks, including, among other things:
• third-party contract manufacturers or suppliers may fail to comply with regulatory requirements or make errors in manufacturing that could
negatively affect the safety or effectiveness of our products or cause delays in shipments of our products;
• third-party contract manufacturers or suppliers may fail to maintain good manufacturing practices, leading to quality control problems or
regulatory findings that could cause disruptions in their manufacturing processes and lead to delays in shipments of our products;
• we or our third-party manufacturers and suppliers may not be able to respond to unanticipated changes in customer orders, and if orders do not
match forecasts, we or our suppliers may have excess or inadequate inventory of materials and components;
• we or our key component suppliers may not currently be or may not continue to be in compliance with all applicable regulatory requirements;
• we or our third-party manufacturers and suppliers may be subject to price fluctuations due to a lack of long-term supply arrangements for key
components;
• we or our third-party manufacturers and suppliers may lose access to critical services and components, resulting in an interruption in the
manufacture, assembly and shipment of our systems;
• we or our third-party manufacturers could experience plant closures due to local epidemics of communicable diseases, such as COVID-19, or
local outbreaks of such diseases among their workforce, thereby shuttering a plant in which our products are manufactured;
• we may experience delays in delivery by our third-party manufacturers and suppliers due to changes in demand from us or their other customers;
• fluctuations in demand for products that our third-party manufacturers and suppliers manufacture for others may affect their ability or willingness
to deliver components to us in a timely manner;
• our third-party manufacturers and suppliers may wish to discontinue supplying components or services to us for risk management reasons;
• we may not be able to find new or alternative components or reconfigure our system and manufacturing processes in a timely manner if the
necessary components become unavailable; and
• our third-party manufacturers and suppliers may encounter financial hardships unrelated to our demand, which could inhibit their ability to fulfill
our orders and meet our requirements.
If any one or more of these risks materialize, it could significantly increase our costs and impact our ability to meet demand for our products. If we
are unable to satisfy commercial demand for our system in a timely manner, our ability to generate revenue would be impaired, market acceptance of our
products could be adversely affected, and customers may instead purchase or use our competitors’ products. Additionally, we could be forced to seek
alternative sources of supply.
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In addition, most of our supply and manufacturing agreements do not have minimum manufacturing or purchase obligations. As such, with many of
our suppliers, we have no obligation to buy any given quantity of products, and the suppliers have no obligation to sell us or to manufacture for us any
given quantity of components or products. As a result, our ability to purchase adequate quantities of components or our products may be limited and we
may not be able to convince suppliers to make components and products available to us in some instances. Our suppliers may also encounter problems that
limit their ability to supply components or manufacture products for us, including financial difficulties, damage to their manufacturing equipment or
facilities, product discontinuations or adverse findings in quality audits. As a result, there is a risk that certain components could be discontinued and no
longer available to us. We may be required to make significant “last time” purchases of component inventory that is being discontinued by the supplier to
ensure supply continuity. If we fail to obtain sufficient quantities of high quality components to meet demand for our products in a timely manner or on
terms acceptable to us, we would have to seek alternative sources of supply. Securing a replacement third-party manufacturer or supplier could be difficult.
The introduction of new or alternative manufacturers or suppliers also may require design changes to our iFuse system that are subject to domestic and
international regulatory clearances or approvals and the review of our Notified Body.
Because of the nature of our internal quality control requirements, regulatory requirements, and the custom and proprietary nature of the parts, we
may not be able to quickly engage additional or replacement suppliers for many of our critical components. We may also be required to assess any potential
new manufacturer’s compliance with all applicable regulations and guidelines, which could further impede our ability to manufacture our products in a
timely manner. As a result, we could incur increased production costs, experience delays in deliveries of our products, suffer damage to our reputation, and
experience an adverse effect on our business and financial results. Failure of any of our third-party suppliers to meet our product demand level would limit
our ability to meet our sales commitments to our customers and could have a material adverse effect on our business.
We may also have difficulty obtaining similar components from other suppliers that are acceptable to the FDA, our Notified Body and the competent
authorities in the countries of the EEA, or other foreign regulatory authorities, and the failure of our suppliers to comply with strictly enforced regulatory
requirements could expose us to delays in obtaining clearances or approvals, regulatory action including warning letters, product recalls, termination of
distribution, product seizures, civil, administrative, or criminal penalties and the suspension, variation, or withdrawal of our CE Certificates of Conformity.
We could incur delays while we locate and engage qualified alternative suppliers, and we may be unable to engage alternative suppliers on favorable terms
or at all. Any such disruption or increased expenses could harm our commercialization efforts and adversely affect our ability to generate sales.
In addition, each of our third-party suppliers operates at a facility in a single location and substantially all of our inventory of component supplies and
finished goods is held at these locations. We, and our suppliers, take precautions to safeguard facilities, including acquiring insurance, employing back-up
generators, adopting health and safety protocols, and utilizing off-site storage of computer data. However, a local outbreak of COVID-19 cases, vandalism,
terrorism, or a natural or other disaster, such as an earthquake, fire, or flood, could damage or destroy equipment or our inventory of component supplies or
finished products, cause substantial delays in our operations, result in the loss of key information, and cause us to incur additional expenses. Our insurance
may not cover our losses in any particular case. In addition, regardless of the level of insurance coverage, damage to our or our suppliers’ facilities could
harm our business, financial condition, and operating results.
We may encounter problems or delays in the assembly of our products or fail to meet certain regulatory requirements which could result in an adverse
effect on our business and financial results.
To become profitable, we must assemble our products in adequate quantities in compliance with regulatory requirements and at an acceptable cost.
Increasing our capacity to assemble and test our products will require us to improve internal efficiencies. We may encounter a number of difficulties in
increasing our assembly and testing capacity, including:
• managing production yields;
• maintaining quality control and assurance;
• providing component and service availability;
• maintaining adequate control policies and procedures;
• hiring and retaining qualified personnel; and
• complying with state, federal, and foreign regulations.
If we are unable to satisfy commercial demand for our iFuse system due to our inability to assemble and test, our ability to generate revenue would
be impaired, market acceptance of our products could be adversely affected and customers may instead purchase or use our competitors’ products.
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If we do not enhance and broaden our product offerings through our research and development efforts, we may be unable to compete effectively.
In order to increase our market share in the sacroiliac joint fusion and related markets, we must enhance and broaden our product offerings in
response to changing customer demands and competitive pressures and technologies. We might not be able to successfully develop, obtain domestic and
international regulatory clearances or approvals, or CE Certificates of Conformity for, or market new products, and our future products might not be
accepted by the surgeons or the third-party payors who reimburse for many of the procedures performed with our products. The success of any new product
offering or enhancement to an existing product will depend on numerous factors, including our ability to:
• properly identify and anticipate surgeon and patient needs;
• develop and introduce new products or product enhancements in a timely manner;
• adequately protect our intellectual property and avoid infringing upon the intellectual property rights of third parties;
• demonstrate the safety and effectiveness of new products; and
• obtain the necessary domestic and international regulatory clearances or approvals and CE Certificates of Conformity for new products or
product enhancements.
If we do not develop and obtain domestic and international regulatory clearances or approvals and CE Certificates of Conformity for new products or
product enhancements in time to meet market demand, or if there is insufficient demand for these products or enhancements, our business could be
adversely affected. Our research and development efforts may require a substantial investment of time and resources before we are adequately able to
determine the commercial viability of a new product, technology, material, or other innovation. In some cases, following a successful product development
effort, we may need to invest substantial resources in surgical instrumentation and implant inventory, prior to launch of the product, and before we
understand the demand for such product. If we overestimate the demand for such products and invest too heavily in inventory to support the product line,
the additional revenue and product margins may not produce a positive return on such investments, which could cause our financial results to suffer. In
addition, even if we are able to successfully develop enhancements or new generations of our products, these enhancements or new generations of products
may not produce sales in excess of the costs of development and they may be quickly rendered obsolete by changing customer preferences or the
introduction by our competitors of products embodying new technologies or features.
We are required to maintain adequate levels of inventory, the failure of which could consume our resources and reduce our cash flows.
As a result of the need to maintain adequate levels of inventory, we are subject to the risk of inventory obsolescence. Many of our products come in
sets, which feature components in a variety of sizes so that the implant or device may be chosen for size based on the patient’s needs. In order to market our
products effectively, we often maintain and provide surgeons and hospitals with back-up products and products of different sizes. For each surgery, fewer
than all of the components of the set are used, and therefore certain portions of the set may become obsolete before they can be used. In addition, as we
introduce new implants and instruments with the same intended uses as existing products, the older products may fall out of favor with our customers,
causing them to become obsolete. In the event that a substantial portion of our inventory becomes obsolete, it could have a material adverse effect on our
earnings and cash flows due to the resulting costs associated with the inventory impairment charges and costs required to replace such inventory
The size and future growth in the market for iFuse has not been established with precision and may be smaller than we estimate, possibly materially. In
addition, we estimate cost savings to the economy and healthcare system as a result of the iFuse procedure based on our market research. If our
estimates and projections overestimate the size of this market or these benefits and cost savings, our sales growth may be adversely affected.
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We are not aware of an independent third-party study that reliably reports the potential market size for iFuse or cost savings as a result of the iFuse
procedure. Therefore, our estimates of the size and potential for future growth in the market for our iFuse products, cost savings to patients, the healthcare
system and the economy overall from its use, and the number of people currently suffering from lower back pain who may benefit from and be amenable to
our iFuse procedure, is based on a number of internal and third-party studies, surveys, reports, and estimates. While we believe these factors have
historically provided and may continue to provide us with effective tools in estimating the total market for our iFuse products and procedures and health
cost savings, these estimates may not be correct and the conditions supporting our estimates may change at any time, thereby reducing the predictive
accuracy of these underlying factors. The actual incidence of lower back pain, and the actual demand for our products or competitive products, could differ
materially from our projections if our assumptions and estimates are incorrect. As a result, our estimates of the size and future growth in the market for our
iFuse products may prove to be incorrect. In addition, actual health cost savings to the healthcare system as a result of the iFuse procedure may materially
differ from those we expect. If the actual number of people with lower back pain who would benefit from our iFuse products and the size and future growth
in the market for iFuse products and related costs savings to the healthcare system is smaller than we have estimated, it may impair our projected sales
growth and have an adverse impact on our business.
Our results of operations could suffer if we are unable to manage our international business effectively.
Expansion into international markets is an element of our business strategy and involves risk. The sale and shipment of our products across
international borders, as well as the purchase of components and products from international sources, subject us to extensive U.S. and foreign governmental
trade, import, and export and customs regulations and laws. Compliance with these regulations and laws is costly and exposes us to penalties for non-
compliance. Other laws and regulations that can significantly affect us include various anti-bribery laws, including the U.S. Foreign Corrupt Practices Act
(“FCPA”), and the United Kingdom Bribery Act (“UKBA”), anti-boycott laws, anti-money laundering laws, and regulations relating to economic sanctions
imposed by the U.S., including the Office of Foreign Asset Control of the U.S. Treasury. Any failure to comply with applicable legal and regulatory
obligations in the U.S. or abroad could adversely affect us in a variety of ways that include, but are not limited to, significant criminal, civil and
administrative penalties, including imprisonment of individuals, fines and penalties, denial of export privileges, seizure of shipments and restrictions on
certain business activities. Also, the failure to comply with applicable legal and regulatory obligations could result in the disruption of our distribution and
sales activities.
In addition, some of the countries in which we sell or plan to sell our products are, to some degree, subject to various risks, including:
• exposure to different legal and regulatory standards;
• lack of stringent protection of intellectual property;
• obstacles to obtaining domestic and foreign export, import, and other governmental approvals, permits, and licenses and compliance with foreign
laws;
• potentially adverse tax consequences and the complexities of foreign value-added tax systems;
• adverse changes in tariffs and trade restrictions;
• limitations on the repatriation of earnings;
• difficulties in staffing and managing foreign operations;
• transportation delays and difficulties of managing international distribution channels;
• longer collection periods and difficulties in collecting receivables from foreign entities;
• increased financing costs;
• currency risks; and
• political, social, and economic instability and increased security concerns.
These risks may limit or disrupt our expansion, restrict the movement of funds or result in the deprivation of contractual rights or the taking of
property by nationalization or expropriation without fair compensation.
Our successful conduct of our international business depends, in part, on our ability to develop and implement policies and strategies that are
effective in anticipating and managing these and other risks in the countries in which we plan to do business. Failure to manage these and other risks may
have a material adverse effect on our operations in any particular country and on our business as a whole.
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In the future our products may become obsolete, which would negatively affect operations and financial condition.
The medical device industry is characterized by rapid and significant change. There can be no assurance that other companies will not succeed in
developing or marketing devices, and products that are more effective than our iFuse system or that would render the iFuse system obsolete or
noncompetitive. Additionally, new surgical procedures, medications and other therapies could be developed that replace or reduce the importance of our
product. Accordingly, our success will depend in part on our ability to respond quickly to changes in technology and the practice of medicine through the
development and introduction of new products. Product development involves a high degree of risk and there can be no assurance that our new product
development efforts will result in any commercially successful products.
If we experience significant disruptions in our information technology systems, our business, results of operations, and financial condition could be
adversely affected.
The efficient operation of our business depends on our information technology systems. We rely on our information technology systems to
effectively manage:
• sales and marketing, accounting, and financial functions;
• inventory management;
• engineering and product development tasks; and
• our research and development data.
Our information technology systems are vulnerable to damage or interruption from:
• earthquakes, fires, floods, and other natural disasters;
• terrorist attacks and attacks by computer viruses or hackers or breach of our cybersecurity;
• power losses; and
• computer systems, or Internet, telecommunications, or data network failures.
The failure of our information technology systems to perform as we anticipate or our failure to effectively implement new systems could disrupt our
entire operation and could result in decreased sales, increased overhead costs, excess inventory and product shortages, and legal liability issues, all of which
could have a material adverse effect on our reputation, business, results of operations, and financial condition.
In addition, we accept payments for many of our sales through credit card transactions, which are handled through a third-party payment processor.
As a result, we are subject to a number of risks related to credit card payments. As a result of these transactions, we pay interchange and other fees, which
may increase over time and could require us to either increase the prices we charge for our products or experience an increase in our costs and expenses. In
addition, as part of the payment processing process, we transmit our customers’ credit card information to our third-party payment processor. We may in
the future become subject to lawsuits or other proceedings for purportedly fraudulent transactions arising out of the actual or alleged theft of our customers’
credit card information if the security of our third-party credit card payment processor is breached. We and our third-party credit card payment processor
are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, which could change
or be reinterpreted to make it difficult or impossible for us to comply. If we or our third-party credit card payment processor fail to comply with these rules
or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit card payments from our customers, and there
may be an adverse impact on our business.
We may seek to grow our business through acquisitions of or investments in new or complementary businesses, products or technologies, and the
failure to manage acquisitions or investments, or the failure to integrate them with our existing business, could have a material adverse effect on us.
From time to time, we expect to consider opportunities to acquire or make investments in other technologies, products, and businesses that may
enhance our capabilities, complement our current products, or expand the breadth of our markets or customer base. Potential and completed acquisitions
and strategic investments involve numerous risks, including:
• problems assimilating the purchased technologies, products, or business operations;
• issues maintaining uniform standards, procedures, controls, and policies;
• unanticipated costs and liabilities associated with acquisitions;
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• diversion of management’s attention from our core business;
• adverse effects on existing business relationships with suppliers and customers;
• risks associated with entering new markets in which we have limited or no experience;
• potential loss of key employees of acquired businesses; and
• increased legal and accounting compliance costs.
We have no current commitments with respect to any acquisition or investment. We do not know if we will be able to identify acquisitions we deem
suitable, whether we will be able to successfully complete any such acquisitions on favorable terms or at all, or whether we will be able to successfully
integrate any acquired business, product, or technology into our business or retain any key personnel, suppliers, or distributors. Our ability to successfully
grow through acquisitions depends upon our ability to identify, negotiate, complete, and integrate suitable target businesses and to obtain any necessary
financing. These efforts could be expensive and time consuming, and may disrupt our ongoing business and prevent management from focusing on our
operations. If we are unable to successfully integrate any acquired businesses, products, or technologies effectively, our business, results of operations, and
financial condition will be materially adversely affected.
We may enter into collaborations, in-licensing arrangements, joint ventures, strategic alliances, or partnerships with third-parties that may not result in
the development of commercially viable products or the generation of significant future revenue.
In the ordinary course of our business, we may enter into collaborations, in-licensing arrangements, joint ventures, strategic alliances, partnerships, or
other arrangements to develop products and to pursue new markets. Proposing, negotiating, and implementing collaborations, in-licensing arrangements,
joint ventures, strategic alliances, or partnerships may be a lengthy and complex process. Other companies, including those with substantially greater
financial, marketing, sales, technology, or other business resources, may compete with us for these opportunities or arrangements. We may not identify,
secure, or complete any such transactions or arrangements in a timely manner, on a cost-effective basis, on acceptable terms or at all. We have limited
institutional knowledge and experience with respect to these business development activities, and we may also not realize the anticipated benefits of any
such transaction or arrangement. In particular, these collaborations may not result in the development of products that achieve commercial success or result
in significant revenue and could be terminated prior to developing any products.
Additionally, we may not be in a position to exercise sole decision-making authority regarding the transaction or arrangement, which could create the
potential risk of creating impasses on decisions, and our future collaborators may have economic or business interests or goals that are, or that may become,
inconsistent with our business interests or goals. It is possible that conflicts may arise with our collaborators, such as conflicts concerning the achievement
of performance milestones, or the interpretation of significant terms under any agreement, such as those related to financial obligations or the ownership or
control of intellectual property developed during the collaboration. If any conflicts arise with any future collaborators, they may act in their self- interest,
which may be adverse to our best interest, and they may breach their obligations to us. In addition, we may have limited control over the amount and
timing of resources that any future collaborators devote to our or their future products.
Disputes between us and our collaborators may result in litigation or arbitration which would increase our expenses and divert the attention of our
management. Further, these transactions and arrangements will be contractual in nature and will generally be terminable under the terms of the applicable
agreements and, in such event, we may not continue to have rights to the products relating to such transaction or arrangement or may need to purchase such
rights at a premium. If we enter into in-bound intellectual property license agreements, we may not be able to fully protect the licensed intellectual property
rights or maintain those licenses. Future licensors could retain the right to prosecute and defend the intellectual property rights licensed to us, in which case
we would depend on the ability of our licensors to obtain, maintain and enforce intellectual property protection for the licensed intellectual property. These
licensors may determine not to pursue litigation against other companies or may pursue such litigation less aggressively than we would. Further, entering
into such license agreements could impose various diligence, commercialization, royalty, or other obligations on us. Future licensors may allege that we
have breached our license agreement with them, and accordingly seek to terminate our license, which could adversely affect our competitive business
position and harm our business prospects.
Our term loan contains covenants that may restrict our business and financing activities.
On May 29, 2020, we entered into a Loan and Security Agreement with Solar Capital Ltd. (“Solar”), pursuant to which we borrowed $40.0 million
pursuant to a term loan (the “Solar Term Loan”). The Loan and Security Agreement with Solar contains customary events of default, including bankruptcy,
the failure to make payments when due, the occurrence of a material impairment on the lenders’ security interest over the collateral, a material adverse
change, the occurrence of a default under certain other indebtedness of us or our subsidiaries, the rendering of certain types of judgments against us or our
subsidiaries, the revocation of certain government approvals, violation of covenants, and incorrectness of representations and warranties in any material
respect. The Loan and Security Agreement with Solar also contains certain restrictive covenants that limit our ability to incur additional indebtedness and
liens, merge with other companies or consummate certain changes of control, acquire other companies, engage in
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new lines of business, make certain investments, pay dividends, transfer or dispose of assets, amend certain material agreements or enter into various
specified transactions, as well as financial reporting requirements.
The Solar Term Loan is secured by substantially all of our assets. The Loan and Security Agreement with Solar also contains a financial covenant
related to our liquidity based on our trailing twelve-month net product revenues. We are required to hold at least $15.0 million in cash and cash equivalents
so long as trailing twelve-month net product revenues are less than $75.0 million and at least $7.5 million in cash and cash equivalents so long as trailing
twelve-month net product revenues are greater than or equal to $75.0 million but less than $100.0 million (collectively “Minimum Liquidity
Requirements”). We are not subject to a Minimum Liquidity Requirement when trailing twelve-month net product revenues exceeds $100.0 million.
The covenants in the Solar Term Loan, as well as any future financing agreements that we may enter into, may restrict our ability to finance our
operations, engage in, expand, or otherwise pursue our business activities and strategies. Our ability to comply with these covenants may be affected by
events beyond our control, and future breaches of any of these covenants could result in a default under our credit facility agreements. Due to uncertainties
surrounding the impact of COVID-19 pandemic, there is a substantial risk that we may not meet the minimum trailing 12-month product revenue in future
period. If not waived, future defaults could cause all of the outstanding indebtedness under our Loan and Security Agreement to become immediately due
and payable.
If we do not have or are unable to generate sufficient cash available to repay our debt obligations when they become due and payable, either upon
maturity or in the event of a default, we may not be able to obtain additional debt or equity financing on favorable terms, if at all, which may negatively
impact our ability to operate our business.
Risks Related to Our Legal and Regulatory Environment
We, our suppliers, and our third-party manufacturers are subject to extensive governmental regulation both in the U.S. and abroad, and failure to
comply with applicable requirements could cause our business to suffer.
The medical device industry is regulated extensively by governmental authorities, principally the FDA and corresponding state and foreign
regulatory agencies. The FDA and other U.S. and foreign governmental agencies regulate, among other things, with respect to medical devices:
• design, development, and manufacturing;
• testing, labeling, content, and language of instructions for use and storage;
• clinical trials;
• product safety;
• marketing, sales, and distribution;
• premarket clearance and approval;
• conformity assessment procedures;
• record keeping procedures;
• advertising and promotion;
• compliance with good manufacturing practices requirements;
• recalls and field safety corrective actions;
• post-market surveillance, including reporting of deaths or serious injuries and malfunctions that, if they were to recur, could lead to death or
serious injury;
• post-market approval studies; and
• product import and export.
The regulations to which we are subject are complex and have tended to become more stringent over time. Regulatory changes could result in
restrictions on our ability to carry on or expand our operations, difficulties achieving new product clearances, higher than anticipated costs or lower than
anticipated sales.
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Before we can market or sell a new regulated product or make a significant modification to an existing product in the U.S., with only limited
exceptions, we must obtain either clearance under Section 510(k) of the FDCA for Class II devices or approval of a PMA application from the FDA for a
Class III device. Both the 510(k) and PMA processes can be expensive and lengthy and require the payment of significant fees, unless exempt. The FDA’s
510(k) clearance process usually takes from three to 12 months, but may last longer. The process of obtaining a PMA is much more costly and uncertain
than the 510(k) clearance process and generally takes from one to three years, or even longer, from the time the application is submitted to the FDA until an
approval is obtained. The process of obtaining domestic and international regulatory clearances or approvals to market a medical device can be costly and
time consuming, and we may not be able to obtain these clearances or approvals on a timely basis, if at all.
In the U.S., our currently commercialized products have either received premarket clearance under Section 510(k) of the FDCA or are exempt from
premarket review. If the FDA requires us to go through a lengthier, more rigorous examination for future products or modifications to existing products
than we had expected, our product introductions or modifications could be delayed or canceled, which could cause our sales to decline. In addition, the
FDA may determine that future products will require the more costly, lengthy, and uncertain PMA process. Although we do not currently market any
devices under PMA, the FDA may demand that we obtain a PMA prior to marketing certain of our future products. In addition, if the FDA disagrees with
our determination that a product we currently market is subject to an exemption from premarket review, the FDA may require us to submit a 510(k) or
PMA in order to continue marketing the product. Further, even with respect to those future products where a PMA is not required, we cannot assure
investors that we will be able to obtain the 510(k) clearances with respect to those products.
The FDA can delay, limit or deny clearance or approval of a device for many reasons, including:
• we may not be able to demonstrate to the FDA’s satisfaction that our products are safe and effective for their intended uses;
• the data from our pre-clinical studies and clinical trials may be insufficient to support clearance or approval, where required; and
• the manufacturing process or facilities we use may not meet applicable requirements.
In addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions
which may prevent or delay clearance or approval of our products under development or impact our ability to modify our currently approved or cleared
products on a timely basis.
Any delay in, or failure to receive or maintain, clearance or approval for our products under development could prevent us from generating revenue
from these products or achieving profitability.
In addition, even after we have obtained the proper regulatory clearance or approval to market a product, the FDA has the power to require us to
conduct post-marketing studies. These studies can be very expensive and time consuming to conduct. Failure to comply with those studies in a timely
manner could result in the revocation of the 510(k) clearance for a product that is subject to such a 522 Order and the recall or withdrawal of the product,
which could prevent us from generating sales from that product in the U.S.
In the EEA, our medical devices must currently comply with the Essential Requirements set forth in Annex I to the EU Medical Devices Directive
(Council Directive 93/42/EEC). Compliance with these requirements is a prerequisite to being able to affix the CE mark to our medical devices, without
which they cannot be marketed or sold in the EEA. Compliance with the Essential Requirements is confirmed by a Notified Body, a third party
organization designated by the competent authorities of a EEA country to conduct conformity assessments.
As part of the conformity assessment process, medical device manufacturers must carry out a clinical evaluation of their medical devices to verify
that they comply with the relevant Essential Requirements covering safety and performance. A clinical evaluation includes an assessment of whether a
medical device’s performance is in accordance with its intended use and that the known and foreseeable risks linked to the use of the device under normal
conditions are minimized and acceptable when weighed against the benefits of its intended purpose. The clinical evaluation conducted by the manufacturer
must also address any clinical claims, the adequacy of the device labeling and information (particularly claims, contraindications, precautions/ warnings)
and the suitability of related Instructions for Use. This assessment must be based on clinical data, which can be obtained from (i) clinical studies conducted
on the devices being assessed; (ii) scientific literature from similar devices whose equivalence with the assessed device can be demonstrated; or (iii) both
clinical studies and scientific literature. With respect to implantable devices, or devices classified as Class III in the EU, the manufacturer must conduct
clinical studies to obtain the required clinical data, unless the relying on existing clinical data from similar devices can be justified. As part of the
conformity assessment procedure, depending on the type of devices, the Notified Body will review the manufacturer’s clinical evaluation for the medical
device. The conduct of clinical studies to obtain clinical data that might be required as part of the described clinical evaluation process can be expensive
and time consuming.
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In May 2017, the EU Medical Device Regulation, (Regulation 2017/745) was adopted, as described in “Item 1. Business - Regulation - International
Regulation of Our Products.”
The FDA and other regulatory authorities, including foreign authorities, have broad enforcement powers. Regulatory enforcement or inquiries, or
other increased scrutiny on us, could dissuade some surgeons from using our products and adversely affect our reputation and the perceived safety and
effectiveness of our products.
Failure to comply with applicable regulations could jeopardize our ability to sell our products and result in enforcement actions such as:
• warning letters;
• fines;
• injunctions;
• civil penalties;
• termination of distribution;
• recalls or seizures of products;
• delays in the introduction of products into the market;
• total or partial suspension of production;
• facility closures;
• refusal of the FDA or our Notified Body or other regulator to grant future clearances or approvals or to issue CE Certificates of Conformity;
• withdrawals, variation, or suspensions of current clearances or approvals and CE Certificates of Conformity, resulting in prohibitions on sales of
our products; and
• in the most serious cases, criminal penalties.
Adverse action by an applicable regulatory agency, our Notified Body or the FDA could result in inability to produce our products in a cost-effective
and timely manner, or at all, decreased sales, higher prices, lower margins, additional unplanned costs or actions, damage to our reputation, and could have
material adverse effect on our reputation, business, results of operations, and financial condition.
We and our sales representatives must comply with U.S. federal and state fraud and abuse laws, including those relating to healthcare provider
kickbacks and false claims for reimbursement, and other applicable federal and state healthcare laws, as well as equivalent foreign laws, and failure to
comply could negatively affect our business.
Healthcare providers, distributors and third-party payors play a primary role in the distribution, recommendation, ordering, and purchasing of any
implant or other medical device for which we have or obtain marketing clearance or approval. Through our arrangements with customers and third-party
payors, we are exposed to the risk that our employees, independent contractors, principal investigators, consultants, vendors, or third-party distributors may
engage in fraudulent or other illegal activity. Misconduct by these parties could include, among other infractions or violations, intentional, reckless and/or
negligent conduct or unauthorized activity that violates FDA regulations, manufacturing standards, federal and state healthcare fraud and abuse laws and
regulations, laws that require the true, complete, and accurate reporting of financial information or data, other commercial or regulatory laws or
requirements, and equivalent foreign rules. We have a compliance program, Code of Conduct, and associated policies and procedures, but it is not always
possible to identify and deter misconduct by our employees and other third parties, and the precautions we take to detect and prevent this activity may not
be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits
stemming from a failure to be in compliance with such laws or regulations, and government authorities may conclude that our business practices do not
comply with applicable fraud and abuse or other healthcare laws and regulations or guidance despite our good faith efforts to comply.
There are numerous U.S. federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback and false claims laws. Our
relationships and our distributors’ relationships with surgeons, other healthcare professionals, and hospitals are subject to scrutiny under these laws. For
example, we are subject to the federal health care Anti-Kickback Statute, the federal civil False Claims Act, the Health Insurance Portability and
Accountability Act (“HIPAA”) and the federal Physician Payment Sunshine Act, each of which is described in detail in Item 1 Business - Healthcare Fraud
and Abuse” and “-Data Privacy and Security Laws”.
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Certain states also mandate implementation of corporate compliance programs, require compliance with the industry’s voluntary compliance
guidelines, impose restrictions on device manufacturer marketing practices, and/or require tracking and reporting of gifts, compensation, and other
remuneration to healthcare professionals and entities. analogous state and foreign law equivalents of each of the above federal laws, such as anti-kickback
and false claims laws, which may apply to items or services reimbursed by any third-party payor, including commercial insurers and patients; state laws
that require device companies to comply with the industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the
federal government or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state beneficiary
inducement laws, and state laws that require device manufacturers to report information related to payments and other transfers of value to physicians and
other healthcare providers or marketing expenditures, many of which differ from each other in significant ways and may not have the same effect, thus
complicating compliance efforts.
If we or our employees are found to have violated any of the above laws we may be subject to significant administrative, civil and criminal penalties,
including imprisonment, exclusion from participation in federal healthcare programs, such as Medicare, Medicaid, and equivalent foreign programs,
significant fines, monetary penalties and damages, imposition of compliance obligations and monitoring, the curtailment or restructuring of our operations,
and damage to our reputation.
We have entered into consulting agreements and royalty agreements with surgeons, including some who are customers. We also engage in co-
marketing arrangements with certain surgeons who use our products. In addition, prior to our IPO, a small number of our current customer surgeons
acquired from us less than 1.0% of our current outstanding common stock, which they either purchased in an arm’s length transaction on terms identical to
those offered to others or received from us as fair market value consideration for consulting services performed. While all of these transactions were
structured with the intention of complying with all applicable laws, including the federal Anti-Kickback Statute, state anti-kickback laws and other
applicable laws, it is possible that regulatory agencies may view these transactions as prohibited arrangements that must be restructured, or discontinued, or
for which we could be subject to significant penalties and criminal, civil and administrative liability. We would be materially and adversely affected if
regulatory agencies interpret our financial relationships with surgeons who order our products to be in violation of applicable laws and we were unable to
comply with such laws, which could subject us to, among other things, monetary penalties for non-compliance, the cost of which could be substantial.
In certain cases, federal, state and foreign authorities pursue actions for false claims on the basis that manufacturers and distributors are promoting
unapproved, or “off-label” uses of their products. Pursuant to FDA regulations, we can only market our products for cleared or approved uses. Although
surgeons are permitted, in their independent medical judgement, to use medical devices for indications other than those cleared or approved by the FDA,
we are prohibited from promoting products for “off-label” uses. We market our products and provide promotional materials and training programs to
surgeons regarding the use of our products. If it is determined that our marketing, promotional materials or training programs constitute promotion of
unapproved uses, we could be subject to significant fines in addition to regulatory enforcement actions, including the issuance of a warning letter,
injunction, seizure, criminal penalty, and damage to our reputation. Federal, state and foreign authorities also pursue actions for false claims based upon
improper billing and coding advice or recommendations, as well as decisions related to the medical necessity of procedures, including the site-of-service
where procedures are performed, which could result in significant penalties.
Various state and federal regulatory and enforcement agencies continue actively to investigate violations of health care laws and regulations, and the
U.S. Congress continues to strengthen the arsenal of enforcement tools. The Bipartisan Budget Act of 2018 increased the criminal and civil penalties that
can be imposed for violating certain federal health care laws, including the federal Anti- Kickback Statute. To enforce compliance with the federal laws, the
U.S. Department of Justice has continued its scrutiny of interactions between healthcare companies and healthcare providers, which has led to a number of
investigations, prosecutions, convictions and settlements in the healthcare industry. Dealing with investigations can be time- and resource-consuming and
can divert management’s attention from the business. Additionally, if a healthcare company settles an investigation with the Department of Justice or other
law enforcement agencies, it may need to agree to additional onerous compliance and reporting requirements as part of a consent decree, deferred or non-
prosecution agreement, or corporate integrity agreement. Any such investigation or settlement could increase our costs or otherwise have an adverse effect
on our business. Even if we are not determined to have violated these laws, government investigations into these issues typically require the expenditure of
significant resources and generate negative publicity, which could harm our financial condition and divert resources and the attention of our management
from operating our business.
The scope and enforcement of these laws is uncertain and subject to rapid change. The shifting compliance environment and the need to build and
maintain robust and expandable systems and processes to comply with different compliance and/or reporting requirements in multiple jurisdictions increase
the possibility that we may run afoul of one or more of the requirements or that federal or state regulatory authorities might challenge our current or future
activities under these laws. Additionally, we cannot predict the impact of any changes in these laws, whether or not retroactive.
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Our failure to adequately protect personal information in compliance with evolving legal requirements could harm our business.
In the ordinary course of our business, we collect and store sensitive data, including legally protected personally identifiable information. We collect
this kind of information during the course of clinical trials and for post-marketing safety vigilance, helping enable surgeons and their patients to pursue
claims for reimbursement for procedures using iFuse and servicing potential warranty claims. In doing so, we are subject to various federal, state and
foreign laws that protect the confidentiality of certain patient health information, including patient medical records, and restrict the use and disclosure of
patient health information by healthcare providers, such as HIPAA, in the U.S. and regulations in the European Union (“EU”), which are described in detail
in Item 1 Business - Data Privacy and Security Laws”.
In June 2018, California enacted the California Consumer Privacy Act (“CCPA”). The CCPA, which became effective on January 1, 2020, requires a
broad range of businesses to honor the requests of California residents to access and require deletion of their personal information, opt out of certain
personal information sharing, and receive detailed information about how their personal information is used and shared. The CCPA provides for civil
penalties of up to $7,500 for intentional violations, and a private right of action for data breaches that allows private plaintiffs to seek the greater of actual
damages or statutory damages of up to $750 per consumer per data breach. These remedies are expected to increase data breach litigation. Although the
CCPA includes exemptions for certain clinical trials data, and protected health information governed by HIPAA, the law may increase our compliance costs
and potential liability with respect to other personal information we collect about California residents. The CCPA has prompted a number of proposals for
new federal and state privacy legislation that, if passed, could increase our potential liability, increase our compliance costs and adversely affect our
business.
Our failure to comply with applicable laws and regulations, or to protect such data, could result in enforcement actions against us, including fines,
imprisonment of company officials and public censure, claims for damages by end-customers, and other affected individuals, and the imposition of
integrity obligations and agency oversight, damage to our reputation, and loss of goodwill, any of which could harm our operations, financial performance,
and business. Evolving and changing definitions of personal data and personal information, within the European Union, the U.S., and elsewhere, may limit
or inhibit our ability to operate or expand our business, including limiting strategic partnerships that may involve the sharing of data. Moreover, if the
relevant laws and regulations change, or are interpreted and applied in a manner that is inconsistent with our data practices or the operation of our products,
or if we expand into new regions and are required to comply with new requirements, we may need to expend resources in order to change our business
operations, data practices, or the manner in which our products operate. Even the perception of privacy concerns, whether or not valid, may harm our
reputation and inhibit adoption of our products.
We are subject to risks associated with our non-U.S. operations.
The FCPA prohibits companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining
business. Other anti-corruption or anti-bribery laws, such as the UKBA, prohibit companies and their intermediaries from making improper payments for
the purpose of obtaining or retaining business in foreign countries. The FCPA also imposes accounting standards and requirements on publicly traded U.S.
corporations and their foreign affiliates, which are intended to prevent the diversion of corporate funds to the payment of bribes and other improper
payments, and to prevent the establishment of slush funds from which such improper payments can be made. Because of the predominance of government-
sponsored healthcare systems around the world, many of our customer relationships outside of the U.S. are with governmental entities and are therefore
subject to such anti-bribery laws. Our internal control policies and procedures may not always protect us from reckless or criminal acts committed by our
employees or agents. Violations of these laws, or allegations of such violations, could disrupt our operations, involve significant management distraction,
and result in a material adverse effect on our business, results of operations, and financial condition. We also could suffer severe penalties, including
criminal and civil penalties, disgorgement, and other remedial measures, including further changes or enhancements to our procedures, policies, and
controls, as well as potential personnel changes and disciplinary actions.
Furthermore, we are subject to anti-boycott laws, anti-money laundering laws, and the export controls and economic embargo rules and regulations
of the U.S., including, but not limited to, the Export Administration Regulations and trade sanctions against embargoed countries, which are administered
by the Office of Foreign Assets Control within the Department of the Treasury, as well as the laws and regulations administered by the Department of
Commerce. These regulations limit our ability to market, sell, distribute, or otherwise transfer our products or technology to prohibited countries or
persons. A determination that we have failed to comply, whether knowingly or inadvertently, may result in substantial penalties, including fines and
enforcement actions and civil and/or criminal sanctions, the disgorgement of profits, and the imposition of a court-appointed monitor, as well as the denial
of export privileges, and may have an adverse effect on our reputation.
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Even if our products are approved by regulatory authorities or CE marked, if we, our contractors, or our suppliers fail to comply with ongoing FDA or
other foreign regulatory requirements, or if we experience unanticipated problems with our products, these products could be subject to restrictions or
withdrawal from the market.
Any product for which we obtain regulatory clearance or approval, or a CE Certificate of Conformity, and the manufacturing processes, reporting
requirements, post-approval clinical data, and promotional activities for such product, will be subject to continued regulatory review, oversight and periodic
inspections by the FDA, our Notified Body and other domestic and foreign regulatory bodies. In particular, we and our suppliers are required to comply
with FDA’s Quality System Regulations (“QSR”), and International Standards Organization, regulations for the manufacture of our products and other
regulations which cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage, and
shipping of any product for which we obtain regulatory clearance or approval, or a CE Certificate of Conformity.
The failure by us or one of our suppliers to comply with applicable statutes and regulations, or the failure to timely and adequately respond to any
adverse inspectional observations or product safety issues, could result in, among other things, any of the following enforcement actions:
• untitled letters, warning letters, fines, injunctions, consent, and civil penalties;
• unanticipated expenditures to address or defend such actions;
• customer notifications for repair, replacement, refunds;
• recall, detention, or seizure of our products;
• operating restrictions or partial suspension or total shutdown of production;
• refusing or delaying our requests for 510(k) clearance or premarket approval and conformity assessments of new products or modified products;
• limitations on the intended uses for which the product may be marketed;
• operating restrictions;
• withdrawing 510(k) clearances or PMA approvals that have already been granted;
• suspension, variation or withdrawal of CE Certificates of Conformity;
• refusal to grant export approval for our products; and
• criminal prosecution.
In addition, we are required to conduct costly post-market testing and surveillance to monitor the safety or effectiveness of our products, and we must
comply with medical device reporting requirements, including the reporting of adverse events and malfunctions related to our products. Later discovery of
previously unknown problems with our products, including unanticipated adverse events or adverse events of unanticipated severity or frequency,
manufacturing problems, or failure to comply with regulatory requirements such as QSR, may result in changes to labeling, restrictions on such products or
manufacturing processes, withdrawal of the products from the market, voluntary or mandatory recalls, a requirement to repair, replace, or refund the cost of
any medical device we manufacture or distribute, fines, suspension, variation, or withdrawal of regulatory approvals or CE Certificates of Conformity,
product seizures, injunctions, or the imposition of civil, administrative, or criminal penalties which would adversely affect our business, operating results,
and prospects.
If the FDA determines that our promotional materials, labeling, training or other marketing or educational activities constitute promotion of an
unapproved use, it could request that we cease or modify our training or promotional materials or subject us to regulatory enforcement actions. It is also
possible that other federal, state or foreign enforcement authorities might take action if they consider our training or other promotional materials to
constitute promotion of an unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting
false or fraudulent claims for payment of government funds. Any of these actions would harm our reputation and cause our product sales and profitability
to suffer and may prevent us from generating revenue.
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Our employees, independent contractors, consultants, manufacturers, and third-party distributors may engage in misconduct or other improper
activities, relating to regulatory standards and requirements.
We are exposed to the risk that our employees, independent contractors, consultants, manufacturers, and third-party distributors may engage in
fraudulent conduct or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of
unauthorized activities to us that violates FDA regulations, including those laws requiring the reporting of true, complete and accurate information to the
FDA, manufacturing standards, federal, state and foreign healthcare laws and regulations, data privacy laws and laws that require the true, complete and
accurate reporting of financial information or data. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and
promotion, sales commission, customer incentive programs, and other business arrangements. Misconduct by these parties could also involve the improper
use of individually identifiable information, including, without limitation, information obtained in the course of clinical trials, which could result in
regulatory sanctions and serious harm to our reputation. We have a compliance program, code of conduct and associated policies and procedures, but it is
not always possible to identify and deter misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling
unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in
compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our
rights, those actions could have a significant impact on our business, including the imposition of significant civil, criminal, and administrative penalties,
including, without limitation, damages, fines, disgorgement of profits, imprisonment, exclusion from participation in government healthcare programs,
such as Medicare and Medicaid, and the curtailment or restructuring of our operations.
We may be subject to enforcement action, including fines, penalties or injunctions, if we are determined to be engaging in the off-label promotion of
our products.
Our promotional materials and training methods must comply with FDA and other applicable national and foreign laws and regulations, including the
prohibition of the promotion of off-label use. Physicians may use our products off-label, as the FDA and equivalent third country authorities do not restrict
or regulate a physician’s choice of treatment within the practice of medicine. In the U.S., the full indication for the iFuse Implant System is: “The iFuse
Implant System is intended for sacroiliac fusion for the following conditions: (i) Sacroiliac joint dysfunction that is a direct result of sacroiliac joint
disruption and degenerative sacroiliitis. This includes conditions whose symptoms began during pregnancy or in the peripartum period and have persisted
postpartum for more than 6 months. (ii) To augment immobilization and stabilization of the sacroiliac joint in skeletally mature patients undergoing
sacropelvic fixation as part of a lumbar or thoracolumbar fusion. (iii) Acute, non-acute, and non-traumatic fractures involving the sacroiliac joint.” In the
U.S., our marketing strategies must adhere to the above statements. In all other countries, the indication statement for the iFuse Implant System (including
iFuse-3D) more broadly indicates that the device is indicated for sacroiliac joint fusion. The above-described potential limitation in indication statements in
the U.S. does not apply in other geographies.
We believe that the specific surgical procedures for which our products are marketed fall within the scope of the surgical applications that have been
cleared by the FDA and our notified body. However, if the FDA or an equivalent third country authority determines that our promotional materials or
training constitutes promotion of an off-label use, it could request that we modify our training or promotional materials, require us to stop promoting our
products for those specific procedures until we obtain FDA or third country authority clearance or approval for them, or subject us to regulatory or
enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fines, and criminal penalties. It is also possible
that other federal, state or foreign enforcement authorities might take action if they consider our promotional or training materials to constitute promotion
of an unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false or fraudulent
claims for payment of government fund. In that event, our reputation could be damaged and adoption of the products would be impaired. Although our
policy is to refrain from statements that could be considered off-label promotion of our products, the FDA or another regulatory agency could disagree and
conclude that we have engaged in off-label promotion. In addition, the off-label use of our products may increase the risk of injury to patients, and, in turn,
the risk of product liability claims. Product liability claims are expensive to defend and could divert our management’s attention, result in substantial
damage awards against us and harm our reputation.
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We are required to report certain malfunctions, deaths, and serious injuries associated with our products, which can result in voluntary corrective
actions or agency enforcement actions.
Under the FDA’s medical device reporting, regulations, and equivalent rules of other countries we are required to report to the FDA or a similar
authority in such other country, any information that our product may have caused or contributed to a death or serious injury or in which our product
malfunctioned and, if the malfunction were to recur, would likely cause or contribute to death or serious injury. If we fail to report these events to the FDA
or applicable authority in another country within the required timeframes, or at all, FDA, or the applicable authority in the other country could take
enforcement action against us. Any such adverse event involving our products or repeated product malfunctions may result in voluntary or involuntary
corrective actions, such as recalls or customer notifications, or agency action, such as inspection or enforcement action. Any corrective action, whether
voluntary or involuntary, as well as defending ourselves in a lawsuit could divert managerial and financial resources, impair our ability to manufacture our
products in a cost-effective and timely manner, and have an adverse effect on our reputation, results of operations, and financial condition.
In the EEA, we must comply with the EU Medical Device Vigilance System. Under this system, incidents must be reported to the relevant authorities
of the Member States of the EEA, and manufacturers are required to take Field Safety Corrective Actions (“FSCAs”), to reduce a risk of death or serious
deterioration in the state of health associated with the use of a medical device that is already placed on the market. An incident is defined as any
malfunction or deterioration in the characteristics and/or performance of a device, as well as any inadequacy in the labeling or the instructions for use
which, directly or indirectly, might lead to or might have led to the death of a patient or user or of other persons, or to a serious deterioration in their state of
health. An FSCA may include the recall, modification, exchange, destruction or retrofitting of the device. FSCAs must be communicated by the
manufacturer or its legal representative to its customers and/or to the end users of the device through Field Safety Notices. The entry into application in
May 2021 of the Medical Device Regulation will increase the obligation that we must fulfill in relation to vigilance and post-market surveillance
obligations.
Any adverse event involving our products, whether in the U.S. or abroad could result in future voluntary corrective actions, such as recalls, including
corrections, or customer notifications, or agency action, such as inspection or enforcement actions. If malfunctions do occur, we may be unable to correct
the malfunctions adequately or prevent further malfunctions, in which case we may need to cease manufacture and distribution of the affected products,
initiate voluntary recalls, and redesign the products. Regulatory authorities may also take actions against us, such as ordering recalls, imposing fines, or
seizing the affected products. Any corrective action, whether voluntary or involuntary, will require the dedication of our time and capital, distract
management from operating our business, and may harm our reputation and financial results.
A recall of our products, either voluntarily or at the direction of the FDA or another governmental authority, including foreign governmental
authorities, or the discovery of serious safety issues or malfunctions with our products, can result in voluntary corrective actions or agency
enforcement actions, which could have a significant adverse impact on us.
The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material
deficiencies or defects in design or manufacture or in the event that a product poses an unacceptable risk to health. Manufacturers may, under their own
initiative, recall a product if any material deficiency in a device is found.
In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is an unreasonable risk of substantial public
harm. In addition, foreign governmental bodies have the authority to require the recall of our products in the event of material deficiencies or defects in
design or manufacture. A government-mandated or voluntary recall by us or one of our third-party distributors could occur as a result of an unacceptable
risk to health, component failures, manufacturing errors, design or labeling defects, or other deficiencies and issues. Recalls of any of our products would
divert managerial and financial resources and have an adverse effect on our reputation, results of operations, and financial condition, which could impair
our ability to produce our products in a cost-effective and timely manner in order to meet our customers’ demands. We may also be required to bear other
costs or take other actions that may have a negative impact on our future sales and our ability to generate profits.
The FDA requires that certain classifications of recalls be reported to FDA within 10 working days after the recall is initiated. Companies are
required to maintain certain records of recalls, even if they are not reportable to the FDA. We may initiate voluntary recalls involving our products in the
future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions
as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take
enforcement action for failing to report the recalls when they were conducted. Equivalent procedures and penalties have been established in other countries
including EU Member States.
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Modifications to our products may require new 510(k) clearances or premarket approvals and new conformity assessment by our Notified Body, or may
require us to cease marketing or recall the modified products until clearances, approvals, or CE Certificates of Conformity are obtained.
Any modification to a 510(k)-cleared device that could significantly affect its safety or effectiveness, or that would constitute a major change in its
intended use, design, or manufacture, requires a new 510(k) clearance or, possibly, a PMA. The FDA requires every manufacturer to make and document
this determination in the first instance. A manufacturer may determine that a modification could not significantly affect safety or effectiveness and does not
represent a major change in its intended use, so that no new 510(k) clearance is necessary. FDA may review any manufacturer’s decision and may not agree
with our decisions regarding whether new clearances or approvals are necessary. The FDA may also on its own initiative determine that a new clearance or
approval is required.
We have modified some of our 510(k) cleared products and have determined based on our review of the applicable FDA guidance that in certain
instances new 510(k) clearances or PMAs are not required. If the FDA disagrees with our determination and requires us to submit new 510(k) clearances or
PMAs for modifications to our previously cleared products for which we have concluded that new clearances or approvals are unnecessary, we may be
required to cease marketing or to recall the modified product until we obtain clearance or approval. In these circumstances, we may be subject to significant
enforcement actions, regulatory fines, or penalties, which could require us to redesign our products and harm our operating results.
If a manufacturer determines that a modification to an FDA-cleared device could significantly affect its safety or effectiveness, or would constitute a
major change in its intended use, then the manufacturer must file for a new 510(k) clearance or possibly a premarket approval application. Where we
determine that modifications to our products require a new 510(k) clearance or premarket approval application, we may not be able to obtain those
additional clearances or approvals for the modifications or additional indications in a timely manner, or at all. FDA’s ongoing review of the 510(k) program
may make it more difficult for us to make modifications to our previously cleared products, either by imposing more strict requirements on when a new
510(k) for a modification to a previously cleared product must be submitted, or applying more onerous review criteria to such submissions.
In the EEA, we must inform the Notified Body that carried out the conformity assessment of the medical devices we market or sell in the EEA of any
planned substantial changes to our quality system, manufacturing process, or changes to our devices which could affect compliance with the essential
requirements or the devices’ intended use. The Notified Body will then assess the changes and verify whether they affect the products’ conformity with
Essential Requirements and related applicable laws. There can be no assurances that the assessment will be favorable and that the Notified Body will attest
to our compliance with the essential requirements, which will prevent us from selling our products in the EEA. Moreover, any substantial changes that take
place in the coming years may impact the continuing effectiveness of our CE Certificates of Conformity that were issued on the basis of the Medical
Device Directive.
There is no guarantee that the FDA will grant 510(k) clearance or premarket approval of our future products or that our Notified Body will issue the
required CE Certificate of Conformity, and failure to obtain necessary clearances or approvals for our future products would adversely affect our
business prospects.
We are in the process of developing our regulatory strategies for obtaining clearance or approval for future products. Some of them may require
510(k) clearance by the FDA or a new CE Certificate of Conformity. Other future products may require premarket approval. In addition, some of our new
products may require clinical trials or significant clinical evidence to support regulatory approval and we may not successfully complete these clinical
trials. Obtaining regulatory clearances or approvals and CE Certificates of Conformity can be a time-consuming process, and delays in obtaining required
future regulatory clearances or approvals, and CE Certificates of Conformity would adversely affect our ability to introduce new or enhanced products in a
timely manner, which in turn would adversely affect our business prospects. The FDA may not approve or clear these products or our Notified Body may
not issue CE Certificate of Conformity for the indications that are necessary or desirable for successful commercialization. Indeed, the FDA may refuse our
requests for 510(k) clearance or premarket approval of new products, new intended uses, or modifications to existing products and our Notified Body may
refuse to issue new CE Certificates of Conformity. Failure to receive clearance, approval, or Certificates of Conformity for our new products would have an
adverse effect on our ability to expand our business.
We may fail to obtain or maintain foreign regulatory approvals to market our products in other countries.
We currently market our products in a number of jurisdictions internationally. International jurisdictions require separate regulatory approvals and
compliance with numerous and varying regulatory requirements. The approval procedures vary among countries and may involve requirements for
substantial additional testing, and the time required to obtain approval may differ from country to country and from that required to obtain FDA clearance
or approval or to obtain CE Certificates of Conformity.
Clearance or approval by the FDA or obtaining a CE Certificate of Conformity does not ensure approval or certification by regulatory authorities in
other countries or jurisdictions, and approval or certification by one foreign regulatory authority does not ensure approval or certification by regulatory
authorities in other foreign countries or by the FDA, and the CE marking of our products in the EEA. The foreign regulatory approval or certification
process may include all of the risks associated with obtaining FDA
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clearance or approval, or a CE Certificate of Conformity for a medical device in the EEA in addition to other risks. In addition, the time required to obtain
foreign approval may differ from that required to obtain FDA clearance or approval, or a CE Certificate of Conformity in the EEA and we may not obtain
foreign regulatory approvals on a timely basis, if at all. We may not be able to file for regulatory approvals or certifications and may not receive necessary
approvals to commercialize our products in any market. If we fail to receive necessary approvals or certifications to commercialize our products in foreign
jurisdictions on a timely basis, or at all, our business, results of operations, and financial condition could be adversely affected.
Clinical trials necessary to support a De Novo 510(k) or PMA application or a conformity assessment procedure will be expensive and may require the
enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Delays or failures in our clinical trials will
prevent us from commercializing any modified or new products, or new indications for use for existing products, and will adversely affect our business,
operating results and prospects.
Initiating and completing clinical trials necessary to support a De Novo 510(k) or PMA application for our future products and additional safety and
effectiveness data beyond that typically required for a 510(k) clearance for iFuse, as well as other possible future product candidates, and to support a
conformity assessment procedure to support a new CE Certificate of Conformity, would be time consuming and expensive and the outcome uncertain.
Moreover, the results of early clinical trials are not necessarily predictive of future results, and any product, or new indication for use, we advance into
clinical trials may not have favorable results in later clinical trials.
Conducting successful clinical studies may require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and
recruit. Patient enrollment in clinical trials and completion of patient participation and follow-up depends on many factors, including the size of the patient
population, the nature of the trial protocol, the attractiveness of, or the discomforts and risks associated with, the treatments received by enrolled subjects,
the availability of appropriate clinical trial investigators, support staff, and proximity to clinical sites, and the ability to comply with the inclusion and
exclusion criteria for participation in the clinical trial and patient compliance. Development of sufficient and appropriate clinical protocols to demonstrate
safety and effectiveness are required and we may not adequately develop such protocols to support clearance and approval. Further, the FDA or our
Notified Body may require us to submit data on a greater number of patients than we originally anticipated and/or for a longer follow-up period or change
the data collection requirements or data analysis applicable to our clinical trials. Delays in patient enrollment or failure of patients to continue to participate
in a clinical trial may cause an increase in costs and delays in the approval and attempted commercialization of our products or result in the failure of the
clinical trial. For example, the COVID-19 pandemic has caused substantial delays in site initiation and patient enrollment in our SILVIA trial designed to
assess the safety and efficacy of our Bedrock technique. In addition, despite considerable time and expense invested in our clinical trials, the FDA or our
Notified Body may not consider our data adequate to demonstrate safety and effectiveness. Such increased costs and delays or failures could adversely
affect our business, operating results and prospects.
Our facility and our clinical investigational sites operate under procedures that govern the conduct and management of FDA-regulated clinical
studies under 21 CFR Parts 50 and 812, and Good Clinical Practices. The FDA may conduct Bioresearch Monitoring inspections of us and/or our clinical
sites to assess compliance with 21 CFR Parts 50 and 812, our procedures, and the clinical protocol. If the FDA were to find that we or our clinical
investigators are not operating in compliance with applicable regulations, we could be subject to the above FDA enforcement action, as well as refusal to
accept all or part of our data in support of our 510(k) or PMA, or we may need to conduct additional studies.
The results of our clinical trials may not support our product candidate claims or may result in the discovery of adverse side effects.
Even if our clinical trials are completed as planned, or on a delayed basis, we cannot be certain that their results will support our product candidate
claims or that the FDA, foreign authorities, or our Notified Body will agree with our conclusions regarding them. Success in pre-clinical studies and early
clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the later trials will replicate the results of prior trials and
pre-clinical studies. The clinical trial process may fail to demonstrate that our product candidates are safe and effective for the proposed indicated uses,
which could cause us to abandon a product candidate and may delay development of others. Any delay or termination of our clinical trials will delay the
filing of our product submissions and, ultimately, our ability to commercialize our product candidates and generate revenue. It is also possible that patients
enrolled in clinical trials will experience adverse side effects that are not currently part of the product candidate’s profile.
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U.S. legislative or FDA or foreign regulatory reforms may make it more difficult and costly for us to obtain regulatory clearances or approvals, or CE
Certificates of Conformity for our product candidates and to manufacture, market, and distribute our products after approval is obtained.
From time to time, Congress introduces legislation that could significantly change the statutory provisions governing the regulatory approval,
manufacture, and marketing of regulated products or the reimbursement thereof. In addition, FDA regulations and guidance are often revised or
reinterpreted by the FDA in ways that may significantly affect our business and our products. Moreover, the new Medical Device Regulation will enter into
application on May 26, 2021. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review
times of future products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance, or interpretations changed,
and what the impact of such changes, if any, may be.
Leadership, personnel and structural changes within the FDA as well as recent federal election outcomes could result in significant legislative and
regulatory reforms impacting the FDA's regulation of our products. Any change in the laws or regulations that govern the clearance and approval processes
relating to our current and future products could make it more difficult and costly to obtain clearance or approval for new products, or to produce, market
and distribute existing products. Significant delays in receiving clearance or approval, or the failure to receive clearance or approval for our new products
would have an adverse effect on our ability to expand our business.
Another example can be found in the EEA. The Medical Devices Regulation became effective on May 25, 2017. Following its entry into application
on May 26, 2021, the Medical Devices Regulation will introduce substantial changes to the obligations with which medical device manufacturers must
comply in the EEA. High risk medical devices will be subject to additional scrutiny during the conformity assessment procedure. Specifically, the Medical
Devices Regulation repeals and replaces the EU Medical Devices Directive. Unlike directives, which must be implemented into the national laws of the
EEA Member States, regulations are directly applicable, i.e., without the need for adoption of national legislation in EEA Member States implementing
them. The purpose of regulations is to eliminate current differences in regulation of medical devices among EEA Member States. The Medical Devices
Regulation, among other things, is intended to establish a uniform, transparent, predictable and sustainable regulatory framework across the EEA for
medical devices to ensure a high level of safety and health while supporting innovation. These regulations will substantially impact medical devices
manufacturers. Examples of the changes which will be introduced by these regulations include the following:
• additional scrutiny during the conformity assessment procedure for high risk medical devices;
• strengthening of the clinical data requirements related to medical devices;
• strengthening of the designation and monitoring processes governing notified bodies;
• the obligation for manufacturers and authorized representative to have a person responsible for regulatory compliance continuously at their
disposal;
• authorized representatives would be held legally responsible and liable for defective products placed on the EU market;
• increased traceability of medical devices following the introduction of a Unique Device Identification (“UDI”), system;
• new rules governing the reprocessing of medical devices; and
• increased transparency with the establishment of European database on medical devices (“EUDAMED”) III as information from several
databases concerning economic operators, CE Certificates of Conformity, conformity assessment, clinical investigations, the UDI system,
adverse event reporting and market surveillance would be available to the public.
The Medical Device Regulation substantially augments the provisions of the Medical Device Directive governing clinical investigations of medical
devices. Among other things, it imposes specific obligations concerning incapacitated subjects, minors, pregnant or breastfeeding women and clinical
investigations in emergency situations. In addition to detailed provisions concerning the authorization and conduct of clinical investigations, the Regulation
imposes on non-EU sponsors a responsibility to appoint a legal representative established in the EU and an obligation on EU Member States to ensure that
systems for compensation for any damage suffered by a subject resulting from participation in a clinical investigation conducted on their territory are in
place and places on sponsors and investigators the obligation to ensure they make use of these systems.
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Transition from the regulation of our products under the current Medical Device Directive, and implementing legislation in each EU Member State,
to regulation under the Medical Devices Regulation may require a substantial transition effort by us. In addition, detail as to how certain aspects of the
Medical Devices Regulation will be applied remains unclear. Failure to update our quality system and regulatory documentation could delay our transition
to compliance with the Medical Devices Regulation and delay or prevent us from obtaining new CE Certificates of Conformity under the Regulation.
Transition from compliance with the Medical Device Directive to the Medical Devices Regulation could result in disruption to our business in the EEA
which could adversely affect our business, results of operation and financial condition. In addition, any changes to the membership of the European Union,
such as the departure of the United Kingdom from the EU, may impact the regulatory requirements for the impacted countries and impair our business
operations and our ability to market products in such countries.
We may incur product liability losses, and insurance coverage may be inadequate or unavailable to cover these losses.
Our business exposes us to potential product liability claims that are inherent in the testing, design, manufacture, and sale of surgical devices.
Sacroiliac joint and other orthopedic spine surgeries involve significant risk of serious complications, including bleeding, nerve injury, paralysis, and even
death. Surgeons may misuse or ineffectively use our products, which may result in unsatisfactory patient outcomes or patient injury. In addition, if longer-
term patient results and experience indicate that our products or any component of a product cause tissue damage, motor impairment, or other adverse
effects, we could be subject to significant liability. We could become the subject of product liability lawsuits alleging that component failures,
manufacturing flaws, design defects, or inadequate disclosure of product-related risks or product-related information resulted in an unsafe condition or
injury to patients. Product liability lawsuits and claims, safety alerts, or product recalls, regardless of their ultimate outcome, could have a material adverse
effect on our business and reputation, our ability to attract and retain customers and our results of operations or financial condition.
Although we maintain third-party product liability insurance coverage, it is possible that claims against us may exceed the coverage limits of our
insurance policies or cause us to record a self-insured loss. Even if any product liability loss is covered by an insurance policy, these policies typically have
substantial retentions or deductibles that we are responsible for. Product liability claims in excess of applicable insurance coverage could have a material
adverse effect on our business, results of operations, and financial condition.
In addition, any product liability claim brought against us, with or without merit, could result in an increase of our product liability insurance rates.
Insurance coverage varies in cost and can be difficult to obtain, and we cannot guarantee that we will be able to obtain insurance coverage in the future on
terms acceptable to us or at all.
We are subject to environmental laws and regulations that can impose significant costs and expose us to potential financial liabilities.
The manufacture of certain of our products, including our implants and products, and the handling of materials used in the product testing process
involve the use of biological, hazardous and/or radioactive materials and wastes. Our business and facilities and those of our suppliers are subject to
foreign, federal, state, and local laws and regulations relating to the protection of human health and the environment, including those governing the use,
manufacture, storage, handling, and disposal of, and exposure to, such materials and wastes. We own and operate certain x-ray equipment at our facilities
which requires adoption of a radiation safety plan. Our failure to follow such safety plan or otherwise use this equipment properly could be hazardous to
our employees and expose us to liability as the employer. In addition, under some environmental laws and regulations, we could be held responsible for
costs relating to any contamination at our past or present facilities and at third-party waste disposal sites even if such contamination was not caused by us.
A failure to comply with current or future environmental laws and regulations could result in severe fines or penalties. Any such expenses or liability could
have a significant negative impact on our business, results of operations, and financial condition.
Certain of our products are derived from human tissue and are or could be subject to additional regulations and requirements.
Our iFuse Bone product is derived from human bone tissue, and as a result is subject to FDA and certain state regulations regarding human cells,
tissues and cellular or tissue-based products, or HCT/Ps. To date, iFuse Bone is our only HCT/P product, and as a product regulated under Section 361 of
the Public Health Service Act, we have not been required to file a 510(k) with respect to iFuse Bone. However, the FDA could require us to obtain a 510(k)
clearance for future tissue products not regulated as 361 HCT/Ps. The process of obtaining a 510(k) clearance could take time and consume resources, and
failing to receive such a clearance would render us unable to market and sell such products, which could have a material and adverse effect on our business.
In addition, procurement of certain human organs and tissue for transplantation is subject to the National Organ Transplant Act, or NOTA, which
prohibits the transfer of certain human organs, including skin and related tissue, for valuable consideration, but permits the reasonable payment for costs
associated with the removal, transportation, implantation, processing, preservation, quality control and storage of human tissue and skin. We reimburse
tissue banks for their expenses associated with the recovery, storage and transportation of donated human tissue they provide to us for processing. We
include in our pricing structure amounts paid to tissue banks to reimburse them for their expenses associated with the recovery and transportation of the
tissue, in addition to certain costs
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associated with processing, preservation, quality control and storage of the tissue, marketing and medical education expenses and costs associated with
development of tissue processing technologies. NOTA payment allowances may be interpreted to limit the amount of costs and expenses we can recover in
our pricing for our products, thereby reducing our future revenue and profitability. If we were to be found to have violated NOTA’s prohibition on the sale
or transfer of human tissue for valuable consideration, we would potentially be subject to criminal enforcement sanctions, which could materially and
adversely affect our results of operations.
The UK’s withdrawal from the EU and uncertainty regarding tariffs affecting U.S. imports and exports may have a negative effect on global economic
conditions, financial markets and our business.
On January 31, 2020, the UK withdrew from the EU. The UK’s withdrawal from the EU is commonly referred to as Brexit. From that date until
December 2020 the UK and the EU negotiated an agreement as to the future customs and trading relationship between the UK and the EU; however, as this
agreement was reached in December 2020, it is unclear whether the provisions set forth in the agreement will work as expected and how well the
relationship between the UK and the EU will continue in practical terms. Brexit has created significant uncertainty concerning the future relationship
between the UK and the EU. In light of the fact that a significant portion of the regulatory framework in the UK is derived from EU laws, the real world
effects of Brexit under the new agreement could materially impact the regulatory regime with respect to the development, manufacture, importation,
approval and commercialization of our product in the UK or the EU. Any changes in our manufacturing or commercialization activities as a result of
Brexit, could increase our costs and otherwise adversely affect our business. In addition, currency exchange rates for the British Pound and the euro with
respect to each other and to the U.S. dollar have already been, and may continue to be, negatively affected by Brexit, which could cause volatility in our
financial results.
We do not know to what extent, or when, the UK’s withdrawal from the EU or any other future changes to membership in the EU will impact our
business. The UK could lose the benefits of global trade agreements negotiated by the EU on behalf of its members, possibly resulting in increased trade
barriers, which could make doing business in the UK more difficult and/or costly. Moreover, in the U.S., tariffs on certain U.S. imports have recently been
imposed, and the EU and other countries have responded with retaliatory tariffs on certain U.S. exports. We cannot predict what effects these and potential
additional tariffs will have on our business, including in the context of escalating global trade and political tensions. However, these tariffs and other trade
restrictions, whether resulting from the UK’s withdrawal from the EU or otherwise, could increase our cost of doing business, reduce our gross margins or
otherwise negatively impact our business and our financial results.
Risks Related to Our Intellectual Property
If we or our licensors fail to adequately protect or enforce our intellectual property rights or secure rights to patents of others, the value of our
intellectual property rights would diminish and our ability to successfully commercialize our products may be impaired.
We rely primarily on patent, copyright, trademark and trade secret laws, as well as confidentiality and non- disclosure agreements and other methods,
to protect our proprietary technologies and know-how. As of December 31, 2020, we owned 40 issued U.S. patents and had 29 pending U.S. patent
applications, and we owned 14 issued foreign patents and had 6 pending foreign patent applications. We have focused the majority of our foreign patent
efforts in China, Europe, and Japan. Our current U.S. patents on iFuse, including the triangular shape, expire in November 2024. Competitors may market
similar triangular shaped devices upon the expiration of the patents in late 2024. Our current U.S. patents on iFuse-3D, including the fenestrated design,
expire in September 2035. Our foreign patents will expire between August 2025 and October 2031.
As of December 31, 2020, we have 13 registered trademarks in the U.S. and have filed for 16 more. We have sought protection for at least 2 of these
trademarks in 60 countries including the 27 European member countries of the Madrid Protocol.
We have applied for patent protection relating to certain existing and proposed products and processes. While we generally apply for patents in those
countries where we intend to make, have made, use, or sell our products, we may not accurately predict all of the countries where patent protection will
ultimately be desirable. If we fail to timely file a patent application in any such country, we may be precluded from doing so at a later date. Furthermore,
we cannot assure investors that any of our patent applications will be approved. The rights granted to us under our patents, including prospective rights
sought in our pending patent applications, may not be meaningful or provide us with any commercial advantage. In addition, those rights could be opposed,
contested, or circumvented by our competitors or be declared invalid or unenforceable in judicial or administrative proceedings. The failure of our patents
to adequately protect our technology might make it easier for our competitors to offer the same or similar products or technologies. Competitors may be
able to design around our patents or develop products that provide outcomes that are comparable to ours without infringing on our intellectual property
rights. Due to differences between foreign and U.S. patent laws, our patented intellectual property rights may not receive the same degree of protection in
foreign countries as they would in the U.S. Even if patents are granted outside the U.S., effective enforcement in those countries may not be available.
Since most of our issued patents are for the U.S. only, we lack a corresponding scope of patent protection in other countries. In countries where we do not
have significant patent protection, we may not be able to stop a competitor from marketing products in such countries that are the same as or similar to our
products.
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We rely on our trademarks, trade names and brand names to distinguish our products from the products of our competitors and have registered or
applied to register many of these trademarks. We cannot assure investors that our trademark applications will be approved. Third parties may also oppose
our trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be
forced to rebrand our products, which could result in loss of brand recognition, and could require us to devote resources to advertising and marketing new
brands. Further, we cannot assure investors that competitors will not infringe upon our trademarks, or that we will have adequate resources to enforce our
trademarks.
We also rely on trade secrets, know-how, and technology, which are not protected by patents, to maintain our competitive position. We try to protect
this information by entering into confidentiality and intellectual property assignment agreements with parties that develop intellectual property for us
and/or have access to it, such as our officers, employees, consultants, and advisors. However, in the event of unauthorized use or disclosure or other
breaches of such agreements, we may not be provided with meaningful protection for our trade secrets or other proprietary information. In addition, our
trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our commercial partners, collaborators,
employees, and consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-
how and inventions. If any of our trade secrets, know-how or other technologies not protected by a patent were to be disclosed to or independently
developed by a competitor, our business, financial condition, and results of operations could be materially adversely affected.
In the future, we may enter into licensing agreements to maintain our competitive position. If we enter into in-bound intellectual property license
agreements, we may not be able to fully protect the licensed intellectual property rights or maintain those licenses. Future licensors could retain the right to
prosecute and defend the intellectual property rights licensed to us, in which case we would depend on the ability of our licensors to obtain, maintain and
enforce intellectual property protection for the licensed intellectual property. These licensors may determine not to pursue litigation against other
companies or may pursue such litigation less aggressively than we would. Further, entering into such license agreements could impose various diligence,
commercialization, royalty, or other obligations on us. Future licensors may allege that we have breached our license agreement with them, and accordingly
seek damages or to terminate our license, which could adversely affect our competitive business position and harm our business prospects.
If a competitor infringes upon one of our patents, trademarks, or other intellectual property rights, enforcing those patents, trademarks, and other
rights may be difficult and time consuming. Even if successful, litigation to defend our patents and trademarks against challenges or to enforce our
intellectual property rights could be expensive and time consuming and could divert management’s attention from managing our business. Moreover, we
may not have sufficient resources to defend our patents or trademarks against challenges or to enforce our intellectual property rights. In addition, if third
parties infringe any intellectual property that is not material to the products that we make, have made, use, or sell, it may be impractical for us to enforce
this intellectual property against those third parties.
We may be subject to damages resulting from claims that we, our employees, or our third-party distributors have wrongfully used or disclosed alleged
trade secrets of our competitors or are in breach of non-competition or non-solicitation agreements with our competitors.
Many of our employees were previously employed at other medical device companies, including our competitors or potential competitors, in some
cases until recently. Some of our third-party distributors sell, or in the past have sold, products of our competitors. We may be subject to claims that we, our
employees, or our third-party distributors have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of these former
employers or competitors. In addition, we have been and may in the future be subject to claims that we caused an employee to breach the terms of his or
her non-competition or non-solicitation agreement. Even if we are successful in defending against these claims, litigation could result in substantial costs,
divert the attention of management from our core business and harm our reputation. If our defense to those claims fails, in addition to paying monetary
damages, we may lose valuable intellectual property rights or personnel. There can be no assurance that this type of litigation will not occur, and any future
litigation or the threat thereof may adversely affect our ability to hire additional direct sales representatives. A loss of key personnel or their work product
could hamper or prevent our ability to commercialize product candidates, which could have an adverse effect on our business, results of operations, and
financial condition.
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The medical device industry is characterized by patent litigation and we could become subject to litigation that could be costly, result in the diversion of
management’s time and efforts, require us to pay damages, and/or prevent us from developing or marketing our existing or future products.
Our commercial success will depend in part on not infringing the patents or violating the other proprietary rights of third parties. Significant litigation
regarding patent rights exists in our industry. Our competitors in both the U.S. and abroad, many of which have substantially greater resources and have
made substantial investments in competing technologies, may have applied for or obtained or may in the future apply for and obtain, patents that will
prevent, limit, or otherwise interfere with our ability to make and sell our products. We have conducted a limited review of patents issued to third parties.
The large number of patents, the rapid rate of new patent issuances, the complexities of the technology involved, and the uncertainty of litigation increase
the risk of management’s attention being diverted to patent litigation. Any litigation or claim against us, even those without merit, may cause us to incur
substantial costs, and could place a significant strain on our financial resources, divert the attention of management from our core business, and harm our
reputation. Further, as the number of participants in the medical device industry grows, the possibility of intellectual property infringement claims against
us increases. If we are found to infringe the intellectual property rights of third parties, we could be required to pay substantial damages, including treble, or
triple, damages if an infringement is found to be willful, and/or royalties and could be prevented from selling our products unless we obtain a license or are
able to redesign our products to avoid infringement. Any such license may not be available on reasonable terms, if at all, and there can be no assurance that
we would be able to redesign our products in a way that would not infringe the intellectual property rights of others. If we fail to obtain any required
licenses or make any necessary changes to our products or technologies, we may have to withdraw existing products from the market or may be unable to
commercialize one or more of our products, all of which could have a material adverse effect on our business, results of operations, and financial condition.
If passed into law, patent reform legislation currently pending in the U.S. Congress could significantly change the risks associated with bringing or
defending a patent infringement lawsuit. For example, fee shifting legislation could require a non-prevailing party to pay the attorney fees of the prevailing
party in some circumstances.
In addition, we generally indemnify our customers and third-party distributors with respect to infringement by our products of the proprietary rights
of third parties. Third parties may assert infringement claims against our customers or third-party distributors. These claims may require us to initiate or
defend protracted and costly litigation on behalf of our customers or third-party distributors, regardless of the merits of these claims. If any of these claims
succeed, we may be forced to pay damages on behalf of our customers or third-party distributors or may be required to obtain licenses to intellectual
property owned by such third parties. If we cannot obtain all necessary licenses on commercially reasonable terms, our customers and third-party
distributors may be forced to stop using or selling our products.
Risks Related to Ownership of Our Common Stock
The price of our common stock may be volatile, and the value of an investment in our common stock could decline.
Medical device stocks have historically experienced volatility, and the trading price of our common stock may fluctuate substantially. These
fluctuations could cause our stockholders to lose all or part of their investment in our common stock. Factors that could cause fluctuations in the trading
price of our common stock include the following:
• the impact that the COVID-19 pandemic has on our business;
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actual or anticipated changes or fluctuations in our results of operations;
• results of our clinical trials and that of our competitors’ products;
• regulatory actions with respect to our products or our competitor’s products;
• announcements of new offerings, products, services or technologies, commercial relationships, acquisitions, or other events by us or our
competitors;
• price and volume fluctuations in the overall stock market from time to time;
• significant volatility in the market price and trading volume of healthcare companies, in general, and of companies in the medical device industry
in particular;
• fluctuations in the trading volume of our shares or the size of our public float;
• negative publicity;
• whether our results of operations meet the expectations of securities analysts or investors or those expectations change;
• litigation involving us, our industry, or both;
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• regulatory developments in the U.S., foreign countries, or both;
• lock-up releases and sales of large blocks of our common stock;
• additions or departures of key employees or scientific personnel; and
• general economic conditions and trends.
In addition, if the market for healthcare stocks or the stock market, in general, experience a further loss of investor confidence, the trading price of
our common stock could decline for reasons unrelated to our business, results of operations, or financial condition. The trading price of our common stock
might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. In the past, following
periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. If our stock
price is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management’s
attention and resources from our business. This could have a material adverse effect on our business, results of operations, and financial condition.
Our sales volumes and our operating results may fluctuate over the course of the year, which could affect the price of our common stock.
We have experienced and continue to experience meaningful variability in our sales and gross profit from quarter to quarter, as well as within each
quarter. Our sales and results of operations will be affected by numerous factors, including, among other things:
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the impact that the COVID-19 pandemic has on our business;
payor coverage and reimbursement;
the number of products sold in the quarter and our ability to drive increased sales of our products;
our ability to establish and maintain an effective and dedicated sales force;
pricing pressure applicable to our products, including adverse third-party coverage and reimbursement outcomes;
results of clinical research and trials on our existing products and products in development;
the mix of our products sold because profit margins differ amongst our products;
timing of new product offerings, acquisitions, licenses or other significant events by us or our competitors;
the ability of our suppliers to timely provide us with an adequate supply of materials and components;
the evolving product offerings of our competitors;
the demand for, and pricing of, our products and the products of our competitors;
factors that may affect the sale of our products, including seasonality and budgets of our customers;
domestic and international regulatory clearances or approvals, or CE Certificates of Conformity, and legislative changes affecting the products
we may offer or those of our competitors;
interruption in the manufacturing or distribution of our products;
the effect of competing technological, industry and market developments;
our ability to expand the geographic reach of our sales and marketing efforts;
the costs of maintaining adequate insurance coverage, including product liability insurance;
the availability and cost of components and materials;
the number of selling days in the quarter;
fluctuation in foreign currency exchange rates; and
impairment and other special charges.
Some of the products we may seek to develop and introduce in the future will require FDA clearance or approval before commercialization in the
U.S., and commercialization of such products outside of the U.S. would likely require additional regulatory
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approvals, or Certificates of Conformity and import licenses. As a result, it will be difficult for us to forecast demand for these products with any degree of
certainty. In addition, we will be increasing our operating expenses as we expand our commercial capabilities. Accordingly, we may experience significant,
unanticipated losses. If our quarterly or annual operating results fall below the expectations of investors or securities analysts, the price of our common
stock could decline substantially. Furthermore, any quarterly or annual fluctuations in our operating results may, in turn, cause the price of our common
stock to fluctuate substantially. Quarterly comparisons of our financial results may not always be meaningful and should not be relied upon as an indication
of our future performance.
We may be unable to utilize our net operating loss carryforwards to reduce our income taxes.
As of December 31, 2020, we had net operating loss (“NOL”) carryforwards of $200.5 million and $165.0 million available to reduce future taxable
income, if any, for U.S. federal income tax and state income tax purposes, respectively. If not utilized, our federal and state NOL carryforwards begin to
expire in 2028 and 2021, respectively, subject to the recent California franchise tax law change affecting California state NOLs mentioned below. Portions
of these NOL carryforwards could expire unused and be unavailable to offset future income tax liabilities. Under legislation enacted in 2017, as modified
by legislation enacted in 2020, unused U.S. federal NOLs generated in tax years beginning after December 31, 2017, will not expire and may be carried
forward indefinitely, but the deductibility of such federal NOLs in taxable years beginning after December 31, 2020, is limited to 80% of taxable income.
At the state level, there may be periods during which the use of NOLs is suspended or otherwise limited. In addition, under Section 382 of the Code, and
corresponding provisions of state law, if a corporation undergoes an “ownership change,” which generally occurs if the percentage of the corporation’s
stock owned by 5% stockholders increases by more than 50% over a three-year period, the corporation’s ability to use its pre-change NOL carryforwards
and other pre-change tax attributes to offset its post-change income may be limited. We updated our Section 382 ownership change analysis through
December 31, 2020. The analysis determined that we have experienced Section 382 ownership changes in 2010 and 2020. A total of $1.4 million of our
NOLs and tax credit carryforwards are subject to limitation as a result of the ownership change.
The California Assembly Bill 85 (AB 85) was signed into law by Governor Gavin Newsom on June 29, 2020. The legislation suspends the California
NOL deductions for 2020, 2021, and 2022 for certain taxpayers and imposes a limitation of certain California Tax Credits for 2020, 2021, and 2022. The
legislation disallows the use of California NOL deductions if the taxpayer recognizes business income and its adjusted gross income is greater than $1.0
million. The carryover periods for NOL deductions disallowed by this provision will be extended. Given that we expect to be at a loss position in the
current year, the new legislation will not impact our current year provision. We will continue to monitor the possible California NOLs and credit limitation
in future periods.
Our charter documents and Delaware law could discourage takeover attempts and lead to management entrenchment.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could delay or prevent a change in
control of our company. These provisions could also make it difficult for stockholders to elect directors that are not nominated by the current members of
our board of directors or take other corporate actions, including effecting changes in our management. These provisions include:
• a classified board of directors with three-year staggered terms, which could delay the ability of stockholders to change the membership of a
majority of our board of directors;
• the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms of those shares, including
preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquiror;
• the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors or the
resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;
• a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our
stockholders;
• the requirement that a special meeting of stockholders may be called only by a majority vote of our entire board of directors, the chairman of our
board of directors, or our chief executive officer, which could delay the ability of our stockholders to force consideration of a proposal or to
take action, including the removal of directors;
• the requirement for the affirmative vote of holders of at least 66 2/3% of the voting power of all of the then-outstanding shares of the voting
stock, voting together as a single class, to amend the provisions of our amended and restated certificate of incorporation relating to the
management of our business or our amended and restated bylaws, which may inhibit the ability of an acquiror to effect such amendments to
facilitate an unsolicited takeover attempt; and
63
• advance notice procedures with which stockholders must comply to nominate candidates to our board of directors or to propose matters to be
acted upon at a stockholders’ meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the
acquiror’s own slate of directors or otherwise attempting to obtain control of us.
In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law. These provisions may prohibit large
stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time.
A Delaware corporation may opt out of this provision by express provision in its original certificate of incorporation or by amendment to its
certificate of incorporation or bylaws approved by its stockholders. However, we have not opted out of, and do not currently intend to opt out of, this
provision.
These and other provisions in our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law could make it
more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by our then-current board
of directors, including delay or impede a merger, tender offer, or proxy contest involving our company. The existence of these provisions could negatively
affect the price of our common stock and limit opportunities for our stockholders to realize value in a corporate transaction.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and the U.S. federal district courts
are the exclusive forums for substantially all disputes between us and our stockholders, which restricts our stockholders’ ability to bring a lawsuit
against us or our directors, officers, or employees in jurisdictions other than Delaware and federal district courts.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for any
derivative action or proceeding brought on our behalf; any action asserting a breach of a fiduciary duty; any action asserting a claim against us arising
pursuant to the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws; or any
action asserting a claim against us that is governed by the internal affairs doctrine. The provision would not apply to suits brought to enforce a duty or
liability created by the Exchange Act. This choice of forum provision may limit a stockholder's ability to bring a claim in a judicial forum that it finds
favorable for these types of disputes with us or our directors, officers, or other employees.
Our amended and restated certificate of incorporation also provides that the U.S. federal district courts are the exclusive forum for resolving any
complaint asserting a cause of action arising under the Securities Act.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our leased headquarters in Santa Clara, California, comprises approximately 21,848 square feet. Our headquarters houses our research, product
development, marketing, finance, education, and administration functions. We believe our facilities are adequate and suitable for our current needs but in
the future we may need additional space. We also lease office spaces in Gallarate, Italy, Mannheim, Germany and Knaresborough, United Kingdom to
accommodate our European sales and marketing team.
Item 3. Legal Proceedings
We may be subject to other legal proceedings and claims in the ordinary course of business. We have received, and may from time to time receive,
letters from third parties alleging patent infringement, violation of employment practices or trademark infringement, and we may in the future participate in
litigation to defend ourselves. We cannot predict the results of any such disputes, and despite the potential outcomes, the existence thereof may have an
adverse material impact on us due to diversion of management time and attention as well as the financial costs related to resolving such disputes.
Item 4. Mine Safety Disclosures
Not Applicable.
64
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
PART II
Market Price of Common Stock
Our common stock is listed on the Nasdaq Global Market under the symbol “SIBN”.
Holders of Record
As of March 5, 2021, we had 173 holders of record of our common stock. The actual number of stockholders is greater than this number of record
holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of
holders of record also does not include stockholders whose shares may be held in trust by other entities.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock, and we do not currently intend to pay any cash dividends on our capital stock
in the foreseeable future.
Recent Sales of Unregistered Securities
There were no sales of unregistered equity securities during the three months ended December 31, 2020.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
There were no repurchases of shares or equity securities during the three months ended December 31, 2020.
Use of Proceeds from our Initial Public Offering of Common Stock
On October 16, 2018, our registration statement on Form S-1 (File No. 333-227445) relating to our initial public offering (“IPO”) of common stock
became effective. The IPO closed on October 16, 2018 at which time we issued 8,280,000 shares of our common stock at an initial offering price of $15.00
per share for gross proceeds of $124.2 million. We received net proceeds from the IPO of approximately $113.4 million, after deducting the underwriting
discount of $8.7 million and other offering-related expenses of $2.1 million. None of the expenses associated with our IPO were paid to directors, officers,
persons owning 10% or more of any class of equity securities, or to their associates, or to our affiliates.
There has been no material change in the planned use of proceeds from the IPO from that described in the prospectus filed with the SEC pursuant to
Rule 424(b)(4) under the Securities Act on October 16, 2018. As of December 31, 2020, approximately $72.7 million of the net proceeds had been used for
general corporate purposes including cash used in operations and capital expenditures.
Item 6. Selected Financial Data.
As a “smaller reporting company”, we are not required to provide the information otherwise required by this Item.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements
and the related notes to those statements included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and
analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes
forward-looking statements that involve risks and uncertainties. As a result of many important factors, including those set forth in the “Risk Factors”
section of this Annual Report on Form 10-K, our actual results could differ materially from the results described in, or implied, by these forward-looking
statements.
Overview
We are a medical device company focused on the development of implantable devices used in the surgical treatment of the sacropelvic anatomy. We
have pioneered a proprietary minimally invasive surgical implant system, which we call iFuse, to fuse the sacroiliac joint to treat sacroiliac joint
dysfunction, which often causes severe lower back pain. Since we introduced iFuse in 2009, as of December 31, 2020, more than 53,000 procedures have
been performed by over 2,300 surgeons, in the U.S. and 35 other countries.
We introduced our second-generation implant, the 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.
In April 2019, we received clearance from the United States Food and Drug Administration, or FDA, to promote the use of our iFuse Implant System
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 our iFuse Implant System 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 the iFuse Implant System to support our trauma program.
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, after deducting underwriting discounts and commissions and offering expenses, from our second follow-on offering
of our common stock.
Impact of COVID-19 Pandemic
The COVID-19 pandemic and the resulting economic downturn are affecting business conditions in our industry. The overall demand for our products
decreased at certain points during the year as a result of the pandemic, which impacted our operating results for the year ended December 31, 2020. Many
state and local governments in the U.S. and foreign governments issued orders that temporarily precluded elective procedures in order to conserve scarce
health system resources in view of the pandemic. The decrease in hospital admission rates and elective surgeries decreased the demand for elective
procedures using our iFuse implants. Prior to the COVID-19 pandemic, we experienced case growth trends consistent with those experienced in the fourth
quarter of 2019. Beginning at the end of February 2020, we began to see an impact on case volumes in Northern Italy due to the spread of the virus in the
Lombardy region, the location of our operation in Gallarate, Italy. Overall, the disruption was not significant through the middle of March 2020, as Italy
represents a small portion of our worldwide sales. Beginning in mid-March 2020 through April 2020, we saw a substantial worldwide reduction in global
case volumes due to deferral of elective surgeries as a result of the COVID-19 pandemic in the U.S. and across Europe. In May 2020, case volumes began
to recover as hospitals and medical centers across the U.S. and Europe resumed performance of elective surgical procedures. In November and December
2020, we again began to see the deferral of elective surgeries by hospitals, surgeons, and patients in the U.S. and across Europe.
We have taken what we believe are all necessary precautions to safeguard our employees, patients, customers, and other stakeholders from the
COVID-19 pandemic. We are following the Centers for Disease Control and Prevention’s guidance and state and local restrictions. We modified operations
and clinical support starting in March 2020, maintaining streamlined assembly, distribution and related processes in order to continue providing products to
our customers. Specific protocols were designed and implemented to minimize contact time among employees working on site. We restricted non-essential
travel to protect the health and safety of our employees, patients, and customers. Where healthcare operations were impacted, we supported healthcare
providers via telephone and online technologies. We also continued to focus on increasing surgeon activity by utilizing a virtual education series for
surgeons and mid-level practitioners to continue our training activities.
66
Starting in May 2020, we began to return to more normalized operations and clinical support as local restrictions were reduced, but tightened them
again with the resurgence of COVID-19 in November 2020. The majority of our employees who are not related to manufacturing and order fulfillment are
currently on a telecommunication work arrangement and have generally been able to successfully work remotely.
Beginning in March 2020, we curtailed certain operating expense due to limited visibility on the extent and duration of the impact from COVID-19.
We took preemptive steps to manage spending, including implementing hiring restrictions, eliminating discretionary spending, reducing executive salaries,
reducing capital expenditures, reducing non-essential marketing expenses, and delaying clinical research projects. We returned to more normalized
spending levels in the fourth quarter with returning revenue growth, refinancing of our debt, and raising of additional equity.
The timing, extent and continuation of any further increase in procedures, and any corresponding increase in sales of our products, and whether there
could be a future decrease in the current level of procedures as a result of the COVID-19 pandemic or otherwise, remain uncertain and are subject to a
variety of factors, including:
•
•
•
Further increases in COVID-19 cases in various locations that would result in more hospitalizations and a corresponding decrease in elective
procedures in such impacted locations.
Surgeons and hospitals postponing elective procedures as a result of reduced availability of physicians or space to treat patients, different
treatment prioritizations, increased cost pressures and burdens on the overall healthcare infrastructure.
Patients electing to defer or avoid elective procedures due to concerns about being exposed to COVID-19 in hospital settings, loss of employer-
sponsored health insurance related to the high levels of unemployment in the U.S. or other reasons.
• Hospitals reserving more space for potential COVID-19 patients, especially as the number of COVID-19 cases spikes, limiting the space allocated
to inpatient and outpatient elective procedures.
• Additional restrictions on access to customers, hospitals, labs and other medical facilities for sales activities, physician training and case support if
they have been deemed to be “non-essential” personnel by those facilities or applicable local regulations.
The existence and further duration of the COVID-19 pandemic may also further exacerbate certain risks as described in “Item 1A - Risk Factors”.
Recently, the U.S. and many other countries have experienced increasing trends of COVID-19 infections and hospitalizations.
The COVID-19 pandemic is continuing globally, and we are unable to predict how the COVID-19 pandemic will impact procedure volumes or
product sales in the future, or the extent, duration or recurrence of the COVID-19 pandemic in any location. We are, therefore, unable to predict the impact
of the COVID-19 pandemic, and such 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 the recovery that follows the pandemic. As such, we have made it a top priority to support and retain our sales force through this
challenging period. 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 based upon our favorable financial position
and opportunity for future revenue growth.
As of December 31, 2020, our U.S. sales force consisted of 64 territory sales managers and 58 clinical support specialists directly employed by us and
41 third-party distributors, compared to 56 territory sales managers and 51 clinical support specialists directly employed by us and 37 third-party
distributors as of December 31, 2019. As of December 31, 2020, our international sales force consisted of 20 sales representatives directly employed by us
and 31 exclusive third-party distributors, compared to 19 sales representatives directly employed by us and 27 exclusive third-party distributors as of
December 31, 2019.
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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, 2020 and 2019, in the U.S., more than 1,600 surgeon and 1,400 surgeons, respectively, have been trained on iFuse and have
treated at least one patient. Outside the U.S., as of December 31, 2020, more than 600 surgeons have been trained on iFuse and have treated at least one
patient. We grew our active surgeon base to 588 surgeons as of December 31, 2020, compared to 539 active surgeons as of December 31, 2019. We define
an active surgeon to be a surgeon who has performed at least one case in the last three months. 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 outbreak 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 deployed four SImulators in the U.S. and one in Europe. The SImulators
were used in approximately 45% of new surgeon training courses in the second half of 2020. We have placed an order for 20 additional SImulators to
increase the percentage and number of surgeons trained and retrained using the SImulator in the U.S. and Europe.
Engage key opinion leaders
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 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 and we launched the
promotion of this technique in select European markets.
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. In 2020, we have conducted training courses at over 50 academic centers
in the U.S., where more than 200 surgical residents and fellows have been trained.
Leverage broad coverage
We made significant progress in both the number of covered lives and the Medicare physician fee for surgeons performing minimally invasive
sacroiliac fusion in the U.S. As of December 31, 2020, U.S. payors that account for 311.6 million U.S. covered lives reimburse for iFuse, with private
payors accounting for 195.8 million of these covered lives. As of December 31, 2019, U.S. payors covering 282.7 million lives reimbursed for iFuse, of
which 147.9 million were covered by private payors. As of December 31, 2020, 37 U.S. payors have issued positive coverage policies exclusive to iFuse
for sacroiliac joint fusion because of the clinical evidence, compared to 32 exclusive coverage policies as of December 31, 2019. Further, as of December
31, 2020 and 2019, an additional 21 and 20, respectively, private payors cover iFuse and other products for sacroiliac joint fusion. The 2020 covered lives
include Humana, the fifth largest commercial health plan in the U.S. with over 12 million members, which adopted an exclusive coverage policy in
December and Aetna, the third largest commercial health plan in the U.S. with over 22 million members, which adopted a coverage policy in May 2020.
Currently, covered lives counts do not include Anthem, which covers minimally invasive sacroiliac fusion procedures in the event of pelvic girdle trauma
only. We track the number of U.S. covered lives, or individuals whose healthcare is paid for by a private commercial or governmental payor that routinely
reimburses for minimally invasive sacroiliac fusion, as a proxy for availability of the procedure within the U.S. healthcare payment system. 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.
68
Components of Results of Operations
Revenue
We generate most of our revenue from sales of iFuse. Revenue from sales of iFuse 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, and seasonality. 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 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.
The COVID-19 pandemic reduced our expected number of cases. As the pandemic continued in the U.S. and Europe, it had a significant impact on
our case volumes beginning mid-March 2020. The largest impact was felt in April 2020, where revenue declined by 84% from the prior year. Given the
situation, a considerable number of cases were deferred from mid-March through the end of April 2020. Starting in May 2020, case volumes began to
recover as hospitals and medical centers across the U.S. and Europe resumed performance of elective surgery procedures. In the third quarter of 2020, we
saw a more normalized revenue growth resulting in a 26% increase compared to the prior year. In November and December 2020, we again began to see
the deferral of elective surgeries by hospitals, surgeons, and patients in the U.S. and across Europe. We continue to monitor the potential impact of COVID-
19 to our product sales in the U.S. and international markets.
Cost of Goods Sold, Gross Profit, and Gross Margin
We utilize third-party manufacturers for production of iFuse implants and instrument sets. Cost of goods sold consists primarily of costs of the
components of iFuse 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.
Our operations ran at suboptimal capacity as a result of decreased iFuse demand from worldwide restrictions on elective procedures during the
second quarter of 2020. Accordingly, in the second quarter of 2020, certain labor and overhead costs were expensed as incurred which impacted our gross
profit and gross margin. We saw a more normalized operations capacity during the second half of 2020 as case volumes began to recover. We may
experience similar issues in future quarters due to the COVID-19 pandemic.
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 anticipate operating expenses will continue to increase to support our employees. During the second quarter, 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 continue to monitor the rapidly evolving
situation, but as operations returned to more normalized levels, we made additional investments to execute our strategic plans and operational initiatives.
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, to our senior sales management, direct territory sales managers, territory
associate representatives and third-party distributors.
69
Our sales and marketing spending reflected normal business activities into mid-March 2020. Due to the COVID-19 pandemic, we focused on
protecting key investments in our field force while curtailing most other areas of sales and marketing spend during the second and third quarter of 2020.
For example, we guaranteed certain levels of incentive compensation to members of our field sales organization in order to retain these employees and
partially mitigate the impact of the pandemic to their compensation. In contrast, we reduced certain other spending during the COVID-19 pandemic, such
as travel and related expenses, regional surgeon training, trade shows, and discretionary marketing. As revenue growth returned to the levels that we were
experiencing prior to the pandemic, we increased our sales and marketing expense accordingly in the third and fourth quarters of 2020. We plan to increase
investments in our sales force and surgeon training to capture future revenue growth opportunities.
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. Clinical study expenses
declined during mid-March through April due to hospital postponement of trials as a result of the COVID-19 pandemic. However, most hospitals allowed
the resumption of clinical trials starting in May 2020. 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,
compliance, and administrative matters. We took measures during most of the year to control discretionary items classified as general and administrative
expenses due to the COVID-19 pandemic, but expect our general and administrative expenses to return to normal levels as the acuity of the COVID-19
pandemic recedes. General and administrative activities that sustain our business and support our operations as a public company, include but are not
limited to: expenses related to compliance with the rules and regulations of the Securities and Exchange Commission and those of the Nasdaq Global
Market on which our securities are traded; additional insurance expenses; investor relations activities; and other administrative and professional services.
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 a final fee on our Solar Term Loan. Following
the refinancing of our term loan, interest expense also includes the loss on debt extinguishment.
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:
Consolidated Statements of Operations Data:
Revenue
Cost of goods sold
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Total operating expenses
Loss from operations
Interest and other income (expense), net:
Interest income
Interest expense
Other expense, net
Net loss
Year ended December 31, 2020
Amount
%
Year ended December 31, 2019
Amount
%
(in thousands, except for percentages)
$
$
73,387
8,902
64,485
73,790
9,459
19,803
103,052
(38,567)
1,097
(6,101)
(126)
(43,697)
100 % $
12 %
88 %
101 %
13 %
27 %
141 %
(53)%
1 %
(8)%
— %
(60)% $
67,301
6,790
60,511
68,251
7,279
20,984
96,514
(36,003)
2,551
(4,949)
(2)
(38,403)
100 %
10 %
90 %
101 %
11 %
31 %
143 %
(53)%
4 %
(7)%
— %
(56)%
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:
United States
International
Comparison of the years ended December 31, 2020 and 2019
Revenue, Cost of Goods Sold, Gross Profit, and Gross Margin:
Year ended December 31, 2020
Amount
%
Year ended December 31, 2019
Amount
%
$
$
68,118
5,269
73,387
(in thousands except for percentages)
61,843
5,458
67,301
93 % $
7 %
100 % $
92 %
8 %
100 %
Year ended December 31,
2019
2020
$ Change
% Change
Revenue
Cost of goods sold
Gross profit
Gross margin
$
$
73,387
8,902
64,485
(in thousands except for percentages)
6,086
$
2,112
3,974
67,301
6,790
60,511
$
$
$
9 %
31 %
7 %
88 %
90 %
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Revenue. The increase in revenue for the year ended December 31, 2020 compared to the year ended December 31, 2019 comprised a $6.3 million
increase in our U.S. revenue, partly offset by a decrease of $0.2 million in our international revenue. The increase in U.S. revenue was attributable to an
increase in case volumes, partly offset by lower average selling prices resulting from procedures performed at different medical facilities and cases using
fewer implants in certain procedures. The increasing growth trend of our U.S. case count prior to the impact of COVID-19 was partly offset by the decline
in U.S. case volumes specifically during mid-March through April 2020 due to COVID-19. Prior to the impact of COVID-19, we experienced case growth
trends consistent with those experienced in the fourth quarter of 2019. The case growth we experienced prior to the impact of COVID-19 we attribute to
higher sales force productivity, higher numbers of sales personnel, and increased active surgeons due to improving U.S. reimbursement coverage. The
decrease in our international revenue we believe was primarily due to the effects of COVID-19.
Gross Profit and Gross Margin. Gross profit increased $4.0 million for the year ended December 31, 2020 compared to the year ended December 31,
2019 primarily driven by higher revenue, partly offset by higher cost of goods sold. Gross margin decreased to 88% for the year ended December 31, 2020
as compared to 90% the year ended December 31, 2019 primarily due to certain period costs of $0.2 million charged directly to cost of operations and
increases in inventory write-downs of $0.8 million. Certain period costs were expensed as incurred during the second quarter of 2020 because our
operations ran at suboptimal capacity due to lower case volumes as a result of the COVID-19 pandemic. Gross margin was also impacted by higher
employee related costs and inventory management to support the growth of the business.
Operating Expenses:
Sales and marketing
Research and development
General and administrative
Total operating expenses
Year ended December 31,
2019
2020
$ Change
% Change
(in thousands, except for percentages)
$
$
73,790 $
9,459
19,803
103,052 $
68,251 $
7,279
20,984
96,514 $
5,539
2,180
(1,181)
6,538
8 %
30 %
(6)%
Sales and Marketing Expenses. The increase in sales and marketing expenses for the year ended December 31, 2020 as compared to the year ended
December 31, 2019 was primarily due to an increase of $9.7 million in employee related costs and stock-based compensation expense driven by increased
headcount. The increase was partly offset by decreases in travel and other sales and marketing related expenses of $4.2 million due to the COVID-19
pandemic.
Research and Development Expenses. The increase in research and development expenses for the year ended December 31, 2020 as compared to the
year ended December 31, 2019 was primarily due to increases in employee related costs and stock-based compensation expense of $1.7 million driven by
increased headcount, as well as increases in other research and development expenses of $0.5 million primarily due to clinical study and research and
development activities.
General and Administrative Expenses. The decrease in general and administrative expenses for the year ended December 31, 2020 as compared to
the year ended December 31, 2019 was primarily due to $2.5 million of accrued litigation expense recorded in the third quarter of 2019, the reversal of
excess accrued litigation expense of $0.6 million in the second quarter of 2020 following the final settlement of our TCPA class action lawsuit, and
decreases in other general and administrative expenses of $0.6 million as a result of curtailment of discretionary spending in response to the COVID-19
pandemic. These decreases were partly offset by an increase of $2.3 million in employee related costs and stock-based compensation expense driven by
increased headcount and $0.2 million public offering costs that were expensed associated with the follow-on offering in the first quarter of 2020.
Interest and Other Income (Expense), Net:
Interest income
Interest expense
Other expense, net
Total interest and other expense, net
Year ended December 31,
2020
2019
$ Change
% Change
(in thousands, except for percentages)
1,097 $
(6,101)
(126)
(5,130) $
2,551 $
(4,949)
(2)
(2,400) $
(1,454)
(1,152)
(124)
(2,730)
-57 %
23 %
nm
114 %
$
$
72
*not meaningful
Interest Income. The decrease in interest income for the year ended December 31, 2020 as compared to the year ended December 31, 2019 was
mainly due to lower interest earned on our investments in marketable securities. Although the average investments balances were higher for the year ended
December 31, 2020, interest rates earned were lower.
Interest Expense. The increase in interest expense for the year ended December 31, 2020 as compared to the year ended December 31, 2019 was
mainly due to the loss on extinguishment of our Pharmakon Term Loan of $1.5 million, partly offset by lower interest associated with our Solar Term Loan.
See "-Liquidity and Capital Resources-Term Loan."
Other Expense, Net. Other expense, net, increased for the year ended December 31, 2020 as compared to the year ended December 31, 2019 due to
higher foreign currency exchange losses.
Liquidity and Capital Resources
As of December 31, 2020, we had cash and marketable securities of $196.4 million compared to $93.1 million as of December 31, 2019. We have
financed our operations through our public offerings, debt financing arrangements, and the sale of our products. As of December 31, 2020 and 2019 we had
$39.5 million and $39.2 million outstanding debt, respectively.
As of December 31, 2020, we had an accumulated deficit of $239.3 million. During the years ended December 31, 2020 and 2019, we incurred a net
loss of $43.7 million and $38.4 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 through at least the next 12 months. 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, 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, 2020 is related to a term loan pursuant to the Loan and Security Agreement dated May 29, 2020, entered
into by us with Solar Capital Partners (“Solar”). Pursuant to the Loan and Security Agreement, Solar provided an aggregate principal amount of
$40.0 million term loan to us (the “Solar Term Loan”). Prior to Solar Term Loan, our outstanding debt was related to a $40.0 million Term Loan with
Biopharma Credit Investments IV Sub LP (“Pharmakon”) entered in October 2017 (the “Pharmakon Term Loan”). In accordance with the Loan and
Security Agreement with Solar, we paid in full and terminated the Pharmakon Term Loan, which we accounted for as debt extinguishment in accordance
with the accounting standards. As of December 31, 2020 and 2019, there was no amount available that could be borrowed under the credit facilities.
The Pharmakon Term Loan included an interest-only period for 35 months through September 2020 and equal quarterly principal payments plus
interest through December 2022. The Pharmakon Term Loan carried a fixed interest rate of 11.5% and allowed for early prepayment. The prepayment
penalty was equal to the remaining interest due if prepaid within the first 30 months, a 2% penalty for months 31-48, and a 1% penalty for months 49-60.
73
The Solar Term Loan bears interest at a rate per annum equal to 9.40% plus London Interbank Offered Rate (“LIBOR”), payable monthly in arrears.
LIBOR means the greater of (i) 0.33% or (ii) one-month LIBOR (or a comparable replacement rate to be determined by the collateral agent if the LIBOR is
no longer available), which rate shall reset monthly. The Solar Term Loan matures in 60 months on June 1, 2025 (“Maturity Date”), with an interest-only
period of 36 months through June 2023, and then repaid in equal monthly principal payments plus interest through maturity date. Pursuant to the Loan and
Security Agreement, we may voluntarily prepay the Solar Term Loan, in full or in part, in increments of $10.0 million, for a prepayment premium in an
amount equal to 3.00% of the principal if prepaid in year one, 1.25% of the principal if prepaid in year two, and 0.50% of the principal if prepaid in year
three or later. The prepayment premium will be waived if we voluntarily prepay and refinance the outstanding balance with Solar. The Solar Term Loan is
secured by substantially all of our assets. We are also obligated to pay a final fee equal to $1.0 million or 2.5% of the aggregate principal amount of the
Solar Term Loan. This final fee shall be due and payable on the earliest of (i) the maturity date, (ii) the acceleration of the loan balance, or (iii) the full
prepayment, refinancing, substitution or replacement of Solar Term Loan. The final fee was included within the long-term borrowings and is accreted to
interest expense using straight-line method over the life of the term loan.
In July 2017, the head of the United Kingdom Financial Conduct Authority announced the desire to phase out the use of LIBOR by the end of 2021.
In addition, the U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee composed of large U.S.
financial institutions, is considering replacing U.S. dollar LIBOR with the Secured Overnight Financing Rate (“SOFR”), a new index calculated by short-
term repurchase agreements, backed by Treasury securities. Although there have been a few issuances utilizing SOFR or the Sterling Over Night Index
Average, an alternative reference rate that is based on transactions, it is unknown whether these alternative reference rates will attain market acceptance as
replacements for LIBOR. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. As
such, the potential effect of any replacement of the LIBOR could have on our business and financial condition cannot yet be determined.
Subject to other customary covenants set forth in the Loan and Security Agreement, we are required to maintain unrestricted cash and cash
equivalents based on the trailing 12-month net products revenues tested on a monthly basis as follows: (a) $15.0 million if net product revenue is less than
$75.0 million; or (b) $7.5 million if net product revenue is greater than or equal to $75.0 million, but less than $100.0 million (the “minimum liquidity
requirement”). We are not subject to minimum liquidity requirement when trailing twelve-month net product revenues exceed $100.0 million. Upon the
occurrence of an event of default of certain customary covenants, including the minimum liquidity requirement, as specified in the Loan and Security
Agreement, subject to specified cure periods, all amounts owed by us would begin to bear interest at a rate that is 5.0% above the rate effective
immediately before the event of default and may be declared immediately due and payable by Solar. As of December 31, 2020, 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 period.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2020:
Total
Less than 1 year
Principal obligations and final fee on long-term debt (1) $
Interest obligations (2)
Operating leases
Purchase obligations
Total
$
41,000 $
13,644
4,288
273
59,205 $
—
3,946
1,081
273
5,300
Payments Due By Period
1-3 years
(in thousands)
11,667
$
7,602
1,909
—
21,178
$
$
$
4-5 years
More than 5
years
29,333 $
2,096
1,274
—
32,703 $
—
—
24
—
24
(1) Represents the principal obligations and the final fee at maturities of our Solar Term Loan.
(2) Represents the future interest obligations on our Solar Term Loan estimated using the fixed interest rate of 9.40% plus LIBOR held constant as of December 31, 2020.
74
Cash Flows
The following table sets forth the primary sources and uses of cash for each of the periods presented below:
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effects of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash Used in Operating Activities
Year ended December 31,
2019
2020
(in thousands, except for percentages)
$ Change
$
$
(30,662) $
(62,916)
136,401
323
43,146 $
(31,627) $
13,491
3,488
(37)
(14,685) $
965
(76,407)
132,913
360
57,831
Net cash used in operating 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. Net cash used in
operation activities for the year ended December 31, 2019 of $31.6 million resulted from cash outflows due to net loss of $38.4 million, adjusted for $7.3
million of non-cash items and cash outflows from changes in operating assets and liabilities of $0.5 million. The increase in net loss, net of non-cash items
for the year ended December 31, 2020 compared to the year ended December 31, 2019 was mainly due to the higher operating expenses from the growth of
the business, partly offset by higher revenue and decreases of certain expenses primarily due to the timing of accrual for litigation expense, and the result of
actions taken to reduce discretionary spending in response to COVID-19. Cash outflows from changes in operating assets and liabilities for 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 and cash outflows due to increases in operating liabilities due to timing of payments. Cash outflows from
changes in operating assets and liabilities for the year ended December 31, 2019 were primarily due to increases in inventories and accounts receivable as a
result of increased case volumes and growth of the business, partly offset by increased operating liabilities due to the timing of payments and accrual of
litigation expense related to a legal proceeding.
Cash Provided by (Used In) Investing Activities
Net cash used in investing activities in the year ended December 31, 2020 was $62.9 million compared to net cash provided by investing activities of
$13.5 million in the year ended December 31, 2019. Net cash used in investing activities for the year ended December 31, 2020 consisted of purchases of
our marketable securities, net of maturities and sales, of $60.4 million, and by purchases of purchases of property and equipment of $2.6 million. Net cash
provided by investing activities for the year ended December 31, 2019 consisted of maturities of our marketable securities, net of purchases of $15.9
million, partially offset by purchases of property and equipment of $2.4 million.
Cash Provided by Financing Activities
Cash provided by financing activities in the year ended December 31, 2020 was $136.4 million compared to $3.5 million in the year ended December
31, 2019. The difference was primarily due to the receipt of the proceeds, net of underwriting discounts, commissions and offering costs of $134.6 million
from our follow-on public offerings in January and October 2020. Cash provided by financing activities for the year ended December 31, 2020 also include
proceeds from the issuance of common stock under our stock-based incentive compensation plans of $3.4 million, partly offset by debt payments
associated with refinancing of our debt of $1.6 million. This compares to the cash provided by financing activities for the year ended December 31, 2019
which consisted of issuance of shares of common stock under our employee stock purchase plan of $3.7 million, partially offset by payments of additional
IPO related costs of $0.2 million.
75
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 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 policies discussed below are critical to understanding our
historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. 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 the new revenue standard in accordance with 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
consists 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 estimate the grant date fair value of stock options and ESPP using the Black-Scholes option valuation model. The model requires us to make a
number of assumptions including expected volatility, expected term, risk-free interest rate and expected dividends. A number of these assumptions are
subjective, and their determination generally require judgment.
•
•
•
Expected Term - The expected term represents the period that we expect the share-based awards to be outstanding. We use the simplified method
to determine the expected term as permitted by the guidance since we have no sufficient historical exercise patterns to estimate the expected life.
The simplified method is calculated as the average of the time to vesting and the contractual life of the options.
Expected Volatility - Since we became public in October 2018 and have no sufficient trading history, we use stock price volatility using the
average historical volatilities of publicly traded companies within our industry that we consider comparable to our business over a period
approximately equal to the expected term of our stock options.
Risk-Free Interest Rate - We base the risk-free interest rate on the U.S. Treasury zero coupon issued in effect at the time of grant for periods
corresponding with the expected term of the option.
76
• Dividend Yield - We have not paid any dividends and we have no current plans to pay dividends on our common stock. As such, we use expected
dividend yield of zero.
We recognize stock-based compensation expense over the requisite service period using the straight-line method, which is based on the value of the
portion of stock-based payment awards that is ultimately expected to vest. As such, we reduce our stock-based compensation for the estimated forfeitures at
the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-
vesting forfeitures and record stock-based compensation expense only for those awards that we expect to vest. To the extent actual forfeitures differ from
the estimates, we record the difference as a cumulative adjustment in the period that the estimates are revised.
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.
JOBS Act Accounting Election
In April 2012, the JOBS Act was enacted. Section 107(b) of the JOBS Act provides that an “emerging growth company” can take advantage of the
extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging
growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected
to avail ourselves of this exemption and, therefore, are not be subject to the same new or revised accounting standards as other public companies that are
not emerging growth companies.
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.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
As a “smaller reporting company”, we are not required to provide the information otherwise required by this Item.
77
Item 8. Financial Statements and Supplementary Data
SI-BONE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Supplementary Data
78
79
80
81
82
83
84
107
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of SI-BONE, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of SI-BONE, Inc. and its subsidiaries (the “Company”) as of December 31, 2020 and
2019, and the related consolidated statements of operations and comprehensive loss, of changes in stockholders' equity and of cash flows for the years then
ended, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its
cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As
part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on
the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/PricewaterhouseCoopers LLP
San Jose, California
March 10, 2021
We have served as the Company's auditor since 2013.
79
SI-BONE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowance for doubtful accounts of $263 and $238, respectively
Inventory
Prepaid expenses and other current assets
Total current assets
Long-term investments
Property and equipment, net
Other non-current assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable
Accrued liabilities and other
Current portion of long-term borrowings
Total current liabilities
Long-term borrowings
Other long-term liabilities
TOTAL LIABILITIES
Commitments and contingencies (Note 6)
STOCKHOLDERS’ EQUITY
Preferred stock, $0.0001 par value; 5,000,000 shares authorized; no shares issued and outstanding
Common stock, $0.0001 par value; 100,000,000 shares authorized; 32,583,220 and 25,163,803 shares
issued and outstanding, respectively
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
TOTAL STOCKHOLDERS’ EQUITY
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
December 31,
2020
December 31,
2019
$
$
$
$
53,581 $
142,851
13,611
5,633
2,565
218,241
—
4,527
374
223,142 $
3,271 $
10,199
—
13,470
39,455
854
53,779
10,435
81,345
11,720
5,452
2,510
111,462
1,278
3,954
315
117,009
2,811
11,605
4,358
18,774
34,865
362
54,001
—
—
3
408,113
524
(239,277)
169,363
223,142 $
3
258,121
464
(195,580)
63,008
117,009
The accompanying notes are an integral part of these consolidated financial statements.
80
SI-BONE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share amounts)
Revenue
Cost of goods sold
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Total operating expenses
Loss from operations
Interest and other income (expense), net:
Interest income
Interest expense
Other expense, net
Net loss
Other comprehensive income (loss):
Unrealized gain (loss) of marketable securities
Changes in foreign currency translation
Comprehensive loss
Net loss per share, basic and diluted
Year ended December 31,
2019
2020
73,387 $
8,902
64,485
73,790
9,459
19,803
103,052
(38,567)
1,097
(6,101)
(126)
(43,697)
(59)
119
(43,637) $
67,301
6,790
60,511
68,251
7,279
20,984
96,514
(36,003)
2,551
(4,949)
(2)
(38,403)
44
(19)
(38,378)
(1.50) $
(1.55)
$
$
$
Weighted-average number of common shares used to compute basic and diluted net loss per share
29,059,171
24,705,980
The accompanying notes are an integral part of these consolidated financial statements.
81
SI-BONE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
Common Stock
Shares
Amount
24,450,757 $
3 $
Additional
Paid-in
Capital
246,927 $
Accumulated
Other
Comprehensive
Income
Accumulated
Deficit
Total
Stockholders’
Equity
439 $ (157,177) $
90,192
Balances as of December 31, 2018
Issuance of common stock upon exercise of stock options, net of
shares withheld
Issuance of common stock related to employee stock purchase
plan
Issuance of common stock upon vesting of restricted stock units
Repurchase of unvested early exercised stock options
Stock-based compensation
Vesting of early exercised stock options
Additional accrual of IPO related costs
Foreign currency translation
Net unrealized gain on marketable securities
Net loss
Balances as of December 31, 2019
Issuance of common stock from public offerings, net of
underwriting discounts, commissions and offering costs
Issuance of common stock upon exercise of stock options, net of
shares withheld
Issuance of common stock related to employee stock purchase
plan
Issuance of common stock upon vesting of restricted stock units
Stock-based compensation
Vesting of early exercised stock options
Foreign currency translation
Net unrealized loss on marketable securities
Net loss
444,788
168,457
108,631
(8,830)
—
—
—
—
—
—
25,163,803
6,613,560
323,701
137,377
344,779
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3
—
—
—
—
—
—
—
—
—
Balances as of December 31, 2020
32,583,220 $
3 $
1,490
2,203
—
—
7,464
197
(160)
—
—
—
258,121
134,616
1,463
1,915
—
11,927
71
—
—
—
408,113 $
—
1,490
—
—
—
—
—
—
—
(19)
44
—
464
—
—
—
—
—
—
—
—
—
—
(38,403)
(195,580)
—
—
—
—
—
—
119
(59)
—
524 $ (239,277) $
—
—
—
—
—
—
(43,697)
2,203
—
—
7,464
197
(160)
(19)
44
(38,403)
63,008
134,616
1,463
1,915
—
11,927
71
119
(59)
(43,697)
169,363
The accompanying notes are an integral part of these consolidated financial statements.
82
SI-BONE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities
Stock-based compensation
Depreciation and amortization
Bad debt expense
Accretion of discount on marketable securities
Realized gain on marketable securities
Amortization of debt issuance costs
Loss on extinguishment of debt
Loss on sale and disposal of property and equipment
Changes in operating assets and liabilities
Accounts receivable
Inventory
Prepaid expenses and other assets
Accounts payable
Accrued liabilities and other
Net cash used in operating activities
Cash flows from investing activities
Maturities of marketable securities
Sales of marketable securities
Purchases of marketable securities
Purchases of property and equipment
Net cash (used in) provided by investing activities
Cash flows from financing activities
Proceeds from follow-on public offering, net of underwriting discounts, commissions and offering costs
Proceeds from debt financing
Principal repayments of debt financing
Payments of debt issuance costs
Payments of prepayment penalty and lender fees
Proceeds from the exercise of common stock options
Proceeds from issuance of common stock under employee stock purchase plan
Repurchase of unvested early exercised stock options
Payments of initial public offering costs
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at
Beginning of year
End of year
Supplemental disclosure of cash flow information
Cash paid for interest
Supplemental disclosure of non-cash information
Vesting of early exercised stock options
Unpaid purchases of property and equipment
Year ended December 31,
2019
2020
$
(43,697) $
(38,403)
11,927
1,130
234
115
(46)
292
1,534
376
(2,186)
(274)
(136)
835
(766)
(30,662)
104,716
14,095
(179,166)
(2,561)
(62,916)
134,616
45,297
(45,297)
(750)
(843)
1,463
1,915
—
—
136,401
323
43,146
10,435
53,581 $
7,464
774
—
(1,413)
—
259
—
171
(3,236)
(2,105)
(515)
383
4,994
(31,627)
159,800
—
(143,864)
(2,445)
13,491
—
—
—
—
—
1,490
2,203
(38)
(167)
3,488
(37)
(14,685)
25,120
10,435
4,276 $
4,949
71
26
197
375
$
$
The accompanying notes are an integral part of these consolidated financial statements.
83
SI-BONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company and Nature of Business
SI-BONE, Inc. (the “Company”) was incorporated in the state of Delaware on March 18, 2008 and is headquartered in Santa Clara, California. The
Company is a medical device company that has pioneered a proprietary minimally invasive surgical implant system to fuse the sacroiliac joint for treatment
of the most common types of sacroiliac joint disorders that cause lower back pain. The Company introduced its primary product, the iFuse Implant System,
or iFuse, in 2009 in the U.S., in 2010 in certain countries in the European Union, and in 2015 in certain countries in the rest of the world.
Public Offerings of Common Stock
In October 2018, the Company completed its initial public offering (“IPO”) by issuing 8,280,000 shares of common stock, at an offering price of
$15.00 per share for net proceeds of $113.4 million to the Company, net of underwriting discounts and commissions and offering costs.
In January 2020, the Company received $50.0 million net proceeds, after deducting the underwriting discounts and commissions, from its public
offering of 4,300,000 shares of the Company's common stock at a public offering price of $21.50 per share, of which 2,490,053 shares were offered and
sold by the Company. Further, in February 2020, the underwriters fully exercised its option to purchase 645,000 shares of the Company's common stock at
a public offering price of $21.50 per share for an additional net proceeds of $13.0 million to the Company, after deducting the underwriting discounts and
commissions. The total public offering costs incurred in connection with the follow-on offering were allocated based on the gross proceeds received by the
Company and the other selling shareholders on a pro-rated basis. Public offering cost of $0.4 million allocated to selling of shares by the Company was
charged against the gross proceeds received from the follow-on offering. Public offering costs of $0.2 million allocated to selling of shares by the selling
shareholders was recognized as transaction costs within general and administrative expenses on the consolidated statements of operations in the year ended
December 31, 2020.
In October 2020, the Company received $71.6 million of net proceeds from its second follow-on public offering of 3,000,000 shares of the
Company's common stock, and the exercise of underwriter's option to purchase from the Company an additional 478,507 shares of the Company's common
stock, at a public offering price of $22.00 per share. In addition to the shares sold by the Company in the second follow-on offering, in October 2020, the
selling stockholder sold 190,053 shares of the Company's common stock previously held by the selling stockholder at a price to the public of $22.00 per
share. The Company did not receive any proceeds from the sale by the selling stockholder.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United
States of America (“U.S. GAAP”). The consolidated financial statements include the Company's accounts, as well as those of the Company's wholly-
owned international subsidiaries. All inter-company accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Significant accounting estimates and management judgments reflected in the consolidated
financial statements primarily includes the fair value of stock options. Estimates are based on historical experience, where applicable and other assumptions
believed to be reasonable by the management. Actual results could differ from those estimates.
84
SI-BONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JOBS Act Accounting Election
As an emerging growth company under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), the Company is eligible to take
advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth
companies. The Company has elected to take advantage of the extended transition period for adopting new or revised accounting standards that have
different effective dates for public and private companies. Those standards apply to companies until the earlier of the date that it is (i) no longer an
emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, these
consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public
company effective dates. The Company continues to be an emerging growth company until December 31, 2023, unless one of the following occurs: (i) if
the Company's total annual gross revenues are $1.07 billion or more; or (ii) the Company has issued more than $1.0 billion in non-convertible debt in the
past three years; or (iii) the Company becomes a “large accelerated filer,” as defined in Rule 12b-2 of the Exchange Act.
Segments
Operating segments are based on components of the Company that engage in business activities that earn revenue and incur expenses and (a) whose
operating results are regularly reviewed by the Company’s chief operating decision maker (“CODM”), to make decisions about resource allocation and
performance and (b) for which discrete financial information is available. The CODM for the Company are the Chief Executive Officer (“CEO”) and Chief
Operating Officer & Chief Financial Officer (“COO/CFO”). The CEO and the COO/CFO review financial information presented on a consolidated basis,
accompanied by information about revenue by geographic region, for purposes of evaluating financial performance. The Company has one business
activity and there are no segment managers who are held accountable for operations, operating results or plans for levels or components below the
consolidated unit level. Accordingly, the Company has determined that it has a single reportable and operating segment structure.
The Company derives substantially all of its revenue from sales to customers in the U.S. Revenue by geography is based on billing address of the
customer. International revenue accounted for less than 10% of the total revenue during the periods presented. Long-lived assets held outside the U.S. are
immaterial. Following table summarizes the Company's revenue by geography:
United States
International
Foreign Currency
Year ended December 31,
2019
2020
(in thousands)
$
$
68,118 $
5,269
73,387 $
61,843
5,458
67,301
The Company’s foreign subsidiaries use local currency as their functional currency. Assets and liabilities are translated at exchange rates prevailing at
the balance sheet dates. Revenue, costs and expenses are translated into U.S. dollars using average exchange rates for the period. Gains and losses from
foreign currency translation are recorded as a component of accumulated other comprehensive income (loss). Gains and losses from foreign currency
transactions are recognized as a component of other income (expense), net.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and marketable securities. The Company’s
cash and marketable securities are deposited with financial institutions in the U.S. and in Europe. The majority of the Company’s cash and marketable
securities are deposited with a single financial institution in the U.S. Deposits in this institution exceed the amount of insurance provided on such deposits.
The Company has not experienced any net losses on its deposits of cash and marketable securities.
The Company’s revenue and accounts receivable are spread across a large number of customers, primarily in the U.S., and no customer accounts for
more than 10% of total revenue or gross accounts receivable in any period presented.
85
SI-BONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Risks and Uncertainties
The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on
the Company's business is highly uncertain and difficult to predict, as the response to the pandemic and the information surrounding the pandemic is
rapidly evolving. The severity of the impact of the COVID-19 pandemic on the Company's business will depend on a number of factors, including, but not
limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company's customers, all of which are uncertain and
cannot be predicted. The Company's future results of operations and liquidity could be adversely impacted by delays in payments of outstanding receivable
amounts beyond normal payment terms, supply chain disruptions and uncertain demand, excess and obsolete inventory, and the impact of any initiatives
and programs that the Company may undertake to address financial and operations challenges faced by its customers.
The Company is also subject to risks common to medical device companies including, but not limited to, new technological innovations, dependence
on key personnel, protection of proprietary technology, compliance with government regulations, product liability, the ability to obtain adequate coverage
and reimbursement from third-party payors and uncertainty of market acceptance of products. The Company is dependent on third-party manufacturers and
suppliers, in some cases single source suppliers. The Company currently has limited long term contracts with its key suppliers and is subject to risks such
as manufacturing failures, non-compliance with regulatory requirements, price fluctuations, inability to properly meet demand and third-party supplier
discontinuation of operations.
Liquidity
As of December 31, 2020, the Company had cash and marketable securities of $196.4 million compared to $93.1 million as of December 31, 2019.
The Company has financed its operations through our public offerings, debt financing arrangements, and the sale of its products. As of December 31, 2020
and 2019 the Company had $39.5 million and $39.2 million outstanding debt, respectively. As of December 31, 2020, the Company's accumulated deficit
was $239.3 million. During the years ended December 31, 2020 and 2019, the Company incurred a net loss of $43.7 million and $38.4 million,
respectively. The Company has not achieved positive cash flow from operations to date.
Based upon the Company's current operating plan, the Company believes that its existing cash and marketable securities will enable the Company to
fund its operating expenses and capital expenditure requirements through at least the next 12 months. However, the economic impact of the duration and
severity of the COVID-19 pandemic, and the Company's responses thereto (including such actions that the Company had taken or may take in the future as
disclosed elsewhere in this Report) poses risk and uncertainties in its future available capital resources. Further, the Company may face challenges and
uncertainties and, as a result, its 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 its products and the uncertainty of future revenues from new products;
(b) changes that the Company may make to the business that affect ongoing operating expenses; (c) changes that the Company may make in its business
strategy; (d) regulatory developments affecting its existing products; (e) changes the Company may make in its research and development spending plans;
and (f) other items affecting the Company's forecasted level of expenditures and use of cash resources.
Fair Value of Financial Instruments
Carrying amounts of certain of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable, and accrued
liabilities, approximate fair value due to their relatively short maturities and market interest rates, if applicable. The Company's marketable securities are
classified as Level 1 or Level 2 of the fair value hierarchy as defined below. The carrying value of the Company’s long-term debt also approximates fair
value based on management’s estimation that a current interest rate would not differ materially from the stated rate.
The Company discloses and recognizes the fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques
used to measure fair value. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that
market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier value hierarchy has been established,
which prioritizes the inputs used in measuring fair value as follows:
Level 1: Quoted prices (unadjusted) in active market that are accessible at measurement date for assets or liabilities. The fair value hierarchy gives
the highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
86
SI-BONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value
measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to
make judgments and considers factors specific to the asset or liability.
Cash and Cash Equivalents
The Company considers all highly liquid investments with remaining maturities at the date of purchase of three months or less to be cash equivalents.
Marketable Securities
The Company's marketable securities primarily consist of investments in money market funds, U.S. treasury securities, corporate bonds and
commercial paper. All of the Company's marketable securities are available-for-sale and are classified based on their maturities. Marketable securities with
remaining maturities at the date of purchase of three months or less are classified as cash equivalents. Short term investments are securities that original or
remaining maturity is greater than three months and not more than twelve months. Long-term investments are securities that original or remaining maturity
is more than twelve months. All marketable securities are recorded at their estimated fair value. Unrealized gains and losses on available-for-sale securities
are recorded in accumulated other comprehensive income (loss) (“OCI”) on the consolidated balance sheets. The Company evaluates its investments to
assess whether those in unrealized loss positions are other-than-temporarily impaired. The Company considers impairments to be other-than-temporary if
they are related to deterioration in credit risk or if it is likely the Company will sell the securities before the recovery of their cost basis. Realized gains and
losses and declines in value judged to be other-than-temporary are determined based on the specific identification method and are reported in other income
(expense), net in the consolidated statements of operations.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company generally does not require collateral or other
security in support of accounts receivable. Allowances are provided for individual accounts receivable when the Company becomes aware of a customer’s
inability to meet its financial obligations, such as in the case of bankruptcy, deterioration in the customer’s operating results or change in financial position.
If circumstances related to such customers change, estimates of the recoverability of receivables would be further adjusted. The Company also considers
broad factors in evaluating the sufficiency of its allowance for doubtful accounts, including the length of time receivables are past due, significant one-time
events, creditworthiness of customers and historical experience. Account balances are charged off against the allowance after all means of collection have
been exhausted and the potential for recovery is considered remote.
Inventory
Inventory is stated at lower of cost or net realizable value. The Company establishes the inventory basis by determining the cost based on standard
costs approximating the purchase costs on a first-in, first-out basis. The excess and obsolete inventory is estimated based on future demand and market
conditions. Inventory write-downs are charged to cost of goods sold.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. All property and equipment is depreciated on a straight-
line basis over the estimated useful lives of the assets, which are as follows:
Computer and office equipment
Machinery and equipment
Furniture and fixtures
3 – 5 years
3 – 5 years
7 years
Leasehold improvements are amortized over the lesser of their useful lives or the life of the lease. Upon sale or retirement of the assets, the cost and
related accumulated depreciation are removed from the consolidated balance sheet and the resulting gain or loss is recognized in the consolidated statement
of operations. Maintenance and repairs are charged to operations as incurred.
87
SI-BONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets
(or asset group) may not be fully recoverable. Whenever events or changes in circumstances suggest that the carrying amount of long-lived assets may not
be recoverable, the Company estimates the future cash flows expected to be generated by the assets (or asset group) from its use or eventual disposition. If
the sum of the expected future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess
of the carrying amount over the fair value of the assets. Significant management judgment is required in the grouping of long-lived assets and forecasts of
future operating results that are used in the discounted cash flow method of valuation. Through December 31, 2020 and 2019, the Company has not
experienced impairment losses on its long-lived assets.
Revenue Recognition
The Company’s revenue is derived from the sale of its products to medical groups and hospitals through its direct sales force and distributors
throughout the U.S. and Europe.
The Company adopted the new revenue standard in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”)
effective for the fiscal year ended December 31, 2019. Revenue is recognized when control is transferred to the customer, in an amount that reflects the
consideration the Company expects to be entitled to in exchange for the goods or services. Under the new revenue recognition standard, the Company
applies 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 product sales where the Company's sales representative delivers the product at the point of implantation at the
hospital or medical facilities, the Company continues to recognize the revenue upon completion of the procedure and authorization by the customer, net of
rebates and price discounts. This represents the majority of the Company's consolidated revenue. The Company also generates a small portion of revenue
from the sale of products through distributors and to certain hospital or medical facilities where the products are ordered in advance of a procedure. The
performance obligation is the delivery of the products and therefore, revenue is recognized upon shipment to the customers, net of rebates and price
discounts. The Company accounts for rebates and price discounts as a 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 the 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, the Company has agreements in place consists
of either a master services agreement or an agreed 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. The Company also has 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. The Company's standard payment terms are generally net 30 to 90 days.
Shipping and Handling Costs
Shipping and handling costs are treated as fulfillment costs, which are expensed as incurred and are included in cost of goods sold.
Costs to Obtain Customer Contracts
Sales commissions and related expenses are considered incremental and recoverable costs of acquiring customer contracts. The Company’s sales
commissions paid to its sales representatives are generally based on the surgeries performed. The Company applied the practical expedient that permits an
entity to expense the cost to obtain a contract as incurred when the expected amortization is one year or less. The period of benefit is concurrent with when
the Company recognizes its revenue and as such, the Company recognizes sales commission as expense when incurred.
88
SI-BONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warranty
The Company has a warranty program that provides a purchaser a one-time replacement of any iFuse implant at no additional cost for a revision
procedure within a one-year period following the original procedure and is accounted for as a warranty accrual. The Company also provides a purchaser
with a one-time credit equal to the purchase price paid for use on future purchases for any revision procedure within the one-year period following an
original procedure where an implant is not required. The warranty is not priced or sold separately and is intended to safeguard the customer against defects
and it does not provide incremental service to the customer. As such, it is considered an assurance type warranty and is not accounted as a service type
warranty, which could represent a separate performance obligation. The Company accounts for these one-time credits as sales reserves and is included in
accrued liabilities and other in the consolidated balance sheets. Sales and warranty reserves from the warranty program were immaterial as of December 31,
2020 and 2019.
Medical Device Excise Tax
In accordance with the Patient Protection and Affordable Care Act, effective January 1, 2013, the Company began to incur an excise tax on sales of
medical devices in the U.S. The Company recorded the medical device excise tax within the cost of goods sold in the consolidated statements of operations
and comprehensive loss when incurred. Effective January 1, 2016, the Consolidated Appropriations Act of 2016, which was signed into law in December
2015, included a two-year suspension on the medical device excise tax. In January 2018, the suspension on the tax on medical devices was further extended
through January 1, 2020. In December 2019, the U.S. Senate passed a bipartisan legislation to permanently repeal the medical device excise tax.
Research and Development
Research and development costs are charged to operations as incurred and consist of costs incurred by the Company for the development of the
Company’s product which primarily include: (1) employee-related expenses, including salaries, benefits, travel and non-cash stock-based compensation
expense; (2) external research and development expenses; and (3) other expenses, which include direct and allocated expenses for facilities and other costs.
Advertising Expenditures
The cost of advertising is expensed as incurred and is included under sales and marketing expense in the consolidated statements of operations.
Advertising expenses were $0.3 million and $0.4 million for the year ended December 31, 2020 and 2019, respectively.
Loss Contingency
The Company is subject to various potential loss contingencies arising in the ordinary course of business. From time to time, the Company may be
involved in certain proceedings, legal actions and claims. Such matters are subject to many uncertainties, and the outcomes of these matters are not within
the Company's control and may not be known for prolonged periods of time. In some actions, the claimants may seek damages, as well as other relief,
including injunctions which may prohibit the Company to engage in certain activities, which, if granted, could require significant expenditures and/or result
in lost revenues. The Company records a liability in the consolidated financial statements when a loss is known or considered probable and the amount can
be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any
other, the minimum amount of the range is accrued. If a loss is reasonably possible but not known or probable, and can be reasonably estimated, the
estimated loss or range of loss is disclosed. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded.
Stock-Based Compensation
The Company applies the fair value recognition provisions of stock-based compensation. Stock-based compensation expense is recognized over the
requisite service period using the straight-line method and is based on the value of the portion of stock-based payment awards that is ultimately expected to
vest. As such, the Company’s stock-based compensation is reduced for the estimated forfeitures at the date of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting forfeitures and record stock-based
compensation expense only for those awards that are expected to vest. To the extent actual forfeitures differ from the estimates, the difference will be
recorded as a cumulative adjustment in the period that the estimates are revised.
The Company estimates the grant date fair value of stock options using the Black-Scholes option valuation model. The model requires management to
make a number of assumptions including expected volatility, expected term, risk-free interest rate and expected dividends. A number of these assumptions
are subjective, and their determination generally require judgment.
89
SI-BONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
•
•
•
Expected Term - The expected term represents the period that the share-based awards are expected to be outstanding. The Company uses the
simplified method to determine the expected term as permitted by the guidance since the Company has no sufficient historical exercise patterns to
estimate the expected life. The simplified method is calculated as the average of the time to vesting and the contractual life of the options.
Expected Volatility - Since the Company became public in October 2018 and has no sufficient trading history, the Company uses stock price volatility
using the average historical volatilities of publicly traded companies within its industry that the Company considers to be comparable to its business
over a period approximately equal to the expected term for its stock options.
Risk-Free Interest Rate - The risk-free interest rate is based on the U.S. Treasury zero coupon issued in effect at the time of grant for periods
corresponding with the expected term of the option.
• Dividend Yield - The Company has not paid any dividends and has no current plans to pay dividends on its common stock. As such, the Company
uses expected dividend yield of zero.
The fair value of the restricted stock unit (“RSU”) grant is based on the market price of the Company’s common stock on the date of grant.
Prior to IPO, the fair value of the shares of the Company's common stock has historically been determined by its Board of Directors since there were
no public market information available for the Company's common stock. The estimated fair value of the Company's common stock was determined at
each valuation date in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of
Privately-Held-Company Equity Securities Issued as Compensation. Subsequent to its IPO, the Company uses the market closing price for its common
stock as reported on the Nasdaq Global Market on the date of grant.
Equity instruments issued to non-employees are recorded at their fair value on the measurement date and are subject to periodic adjustments as the
underlying equity instruments vest. The Company believes that the estimated fair value of the stock options is more readily measurable than the fair value
of the services received. Stock-based compensation related to stock options granted to non-employees is recognized as the stock options are earned.
In the event the underlying terms of stock options are modified on which stock-based compensation was granted, additional expense is recognized for
any modification that increases the total fair value of the share-based payment arrangement at the modification date.
Income Taxes
The Company accounts for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and liabilities using the enacted tax rates in effect for the year in which the differences are
expected to affect taxable income. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be
realized.
The Company recognizes uncertain tax positions when it meets a more-likely-than-not threshold. The Company recognizes potential accrued interest
and penalties related to unrecognized tax benefits as income tax expense.
Net Loss per Share of Common Stock
The Company calculates basic and diluted net loss per common share attributable to shareholders in conformity with the two-class method required
for companies with participating securities. The Company considers all early exercised stock options to be participating securities as the holders are entitled
to receive dividends on a pari passu basis in the event that a dividend is paid on common stock. Under the two-class method, the net loss attributable to
common stock is not allocated to the early exercised stock options as the holders do not have a contractual obligation to share in losses.
Basic net loss per common share is calculated by dividing the net loss by the weighted-average number of common shares outstanding during the
period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss by the weighted-average
number of common shares and potentially dilutive securities outstanding for the period. For purposes of the diluted net loss per share calculation, common
stock options and warrants are considered to be potentially dilutive securities. Because the Company has reported a net loss in all periods presented,
common stock options and warrants are anti-dilutive and therefore diluted net loss per common share is the same as basic net loss per common share for
those periods.
90
SI-BONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Comprehensive Loss
Comprehensive loss represents all changes in the stockholders’ equity except those resulting from distributions to stockholders. The Company’s
unrealized foreign currency translation income (losses) and unrealized gains (losses) on marketable securities represent the two components of other
comprehensive income that are excluded from the reported net loss for each of the reporting periods and has been presented in the consolidated statements
of operations and comprehensive loss.
Warrants
The Company accounts for warrants for shares of common stock as equity in accordance with the accounting guidance for derivatives. The
accounting guidance provides a scope exception from classifying and measuring as a financial liability a contract that would otherwise meet the definition
of a derivative if the contract is both (i) indexed to the entity’s own stock and (ii) classified in the stockholders’ equity section of the consolidated balance
sheet. The Company determined that the warrants for shares of common stock issued in connection with its prior debt arrangements are required to be
classified in equity. Warrants classified as equity are recorded as additional paid-in capital on the consolidated balance sheet and no further adjustments to
their valuation are made. In connection with the IPO, all of the Company's redeemable convertible preferred stock warrants were automatically converted
into common stock warrants.
Adoption of New Revenue Recognition Standard
The Company adopted the new revenue recognition standards (“ASC 606”) using the modified retrospective method effective for the year ended
December 31, 2019. This approach was applied to all contracts that were not completed as of January 1, 2019. As an emerging growth company that
elected to take advantage of the JOBS Act accounting election, the Company was not required to adopt the new revenue standard in the interim reporting
periods on the year of adoption and is not required, and intends not, to revise its 2019 interim periods which were reported under previous revenue
recognition standards (“ASC 605”). The adoption of ASC 606 did not result in a material impact on the Company’s consolidated financial statements and
no adjustment was made to the opening balance of accumulated deficit at January 1, 2019. ASC 606's core principle is that a reporting entity will recognize
revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. As it relates to product sales where the Company's sales representative delivers the product at the point of
implantation at hospital or medical facilities, which represents majority of the Company's revenue, the Company continues to recognize the revenue upon
completion of the procedure and authorization by the customer, net of rebates and price discounts. As it relates to sale of products through distributors and
hospitals where product is ordered in advance of the procedure, the Company continues to recognize the revenue upon shipments to the customers, net of
rebates and price discounts. Additionally, ASC 606 requires the capitalization of costs to obtain a contract, primarily sales commissions, and amortization
of these costs over the contract period or estimated customer life. The Company’s sales commissions paid to its sales representatives is generally based on
the surgeries performed. The Company applied the practical expedient that permits an entity to expense the cost to obtain a contract as incurred when the
expected amortization is one year or less. As such, the Company recognize sales commission as expense when incurred.
The Company disaggregates revenues from contracts with customers into geographical regions. The Company determined that disaggregating
revenue into these categories depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by regional economic factors.
For information revenue by geography, refer to Segments in “Note 2 - Summary of Significant Accounting Policies” in the accompanying Notes to
Consolidated Financial Statements.
Other Recently Adopted Accounting Standards
In June 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2018-07, Improvements to Non-
employee Share-Based Payment Accounting. ASU 2018-07 expands the scope of Topic 718, Compensation-Stock Compensation, to include share-based
payments issued to non-employees for goods or services. Consequently, the accounting for share-based payments to non-employees and employees will be
substantially aligned. ASU 2018-07 supersedes Subtopic 505-50, Equity-Based Payments to Non-Employees. The Company adopted this standard effective
for the year ended December 31, 2020, and the adoption did not have any material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurements, which eliminates, adds or modifies certain disclosure requirements for fair
value measurements. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value
hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value
measurements. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year, with early
adoption permitted to adopt either the entire standard or only the provisions that eliminate or modify the requirements. The Company has adopted this
standard effective for the year ended December 31, 2020, and the adoption did not have any material impact on the Company’s consolidated financial
statements.
91
SI-BONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recently Issued Accounting Standards Not Yet Effective
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires that lessee's recognize a right-of-use asset and a lease liability
for all leases with lease terms greater than twelve months in the balance sheet. A lease liability is a lessee's obligation to make lease payments arising from
a lease, measured on a discounted basis; and a right-of-use asset is an asset that represents the lessee’s right to use, or control use of, a specified asset for
the lease term for all leases (with the exception of short-term leases) at the adoption date. In July 2018, the FASB issued ASU 2018-10 and ASU 2018-11,
which provides clarification on the narrow aspects of the guidance and provide an additional transition method to adopt the new leases standard. The new
transition method allows an entity to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In
March 2019, the FASB issued ASU 2019-01, which provides clarification on implementation issues associated with adopting ASU 2016-02. The new leases
standard must be adopted using a modified retrospective transition method and allows for the application of the new guidance at the beginning of the
earliest comparative period presented or at the adoption date. In November 2019, the FASB issued ASU 2019-10, which revised the mandatory effective
dates of the new leases standard. Further, due to the impact of the COVID-19, in June 2020, the FASB issued ASU 2020-05 to further defer the effective
date for one year for entities in the “all other” categories. For public companies, the new guidance became effective for fiscal years, and for interim periods
within those fiscal years, beginning after December 15, 2018. For all other entities, the new guidance is now effective for fiscal years beginning after
December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. Early adoption is still permitted for any interim or annual
financial statements not yet issued.
As an emerging growth company, the new leases standard is now effective for the Company for the fiscal year ending December 31, 2022 and interim
periods within fiscal year ending December 31, 2023. The Company is currently evaluating the impact of this standard on its consolidated financial
statements including the timing of its adoption. The Company anticipates electing several practical expedients that permit the Company not to reassess (1)
whether a contract is or contains a lease, (2) the classification of existing leases, and (3) whether previously capitalized initial direct costs would qualify for
capitalization under ASC 842. The Company expects that the adoption of this new standard will have a material impact on its balance sheet. The most
significant impact would be the recognition of operating lease right-of-use assets and liability. The standard is not expected to have a material impact on the
Company's consolidated statements of income and cash flows.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments. FASB issued ASU 2019-05 in May 2019 and ASU 2019-08 in November 2019 for codification improvements of Topic 326. The new standard
revises the accounting requirements related to the measurement of credit losses and will require organizations to measure all expected credit losses for
financial assets based on historical experience, current conditions and reasonable and supportable forecasts about collectability. Assets must be presented in
the financial statements at the net amount expected to be collected. In November 2019, the FASB issued ASU 2019-10, which defers the effective date
of ASU 2016-13 for public companies that are eligible to be smaller reporting companies and all other companies, to fiscal years beginning after December
15, 2022, including interim periods within those fiscal years. In February 2020, the FASB issued ASU 2020-02, which provides guidance regarding
methodologies, documentation, and internal controls related to expected credit losses. The Company is currently evaluating the impact of this standard on
its consolidated financial statements but does not expect the adoption of the standard will have a material impact on the Company's consolidated financial
statements.
92
SI-BONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Marketable Securities
The table below summarizes the marketable securities:
Money market funds
Commercial paper
Cash equivalents
U.S. treasury securities
Corporate bonds
Commercial paper
Short-term investments
Total marketable securities
Money market funds
Commercial paper
Cash equivalents
U.S. treasury securities
Corporate bonds
Commercial paper
Short-term investments
Corporate bonds
Long-term investments
Total marketable securities
Amortized Cost
Unrealized Gains
Unrealized
Losses
Aggregate Fair
Value
December 31, 2020
$
$
45,948
1,400
47,348
74,779
8,940
59,137
142,856
190,204
$
$
(in thousands)
—
—
—
4
4
—
8
8
$
$
— $
—
—
(7)
(6)
—
(13)
(13) $
45,948
1,400
47,348
74,776
8,938
59,137
142,851
190,199
Amortized Cost
Unrealized Gains
Unrealized
Losses
Aggregate Fair
Value
December 31, 2019
(in thousands)
$
$
3,068
2,495
5,563
67,051
9,075
5,165
81,291
1,278
1,278
88,132
$
$
—
—
—
34
24
—
58
—
—
58
$
$
—
—
—
(2)
(2)
—
(4)
—
—
(4)
$
$
3,068
2,495
5,563
67,083
9,097
5,165
81,345
1,278
1,278
88,186
The long-term investments outstanding as of December 31, 2019 matured in April 2020. The Company did not identify any of its marketable
securities as other-than-temporarily impaired as of December 31, 2020 and 2019.
93
SI-BONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Fair Value Measurement
Carrying amounts of certain of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued
liabilities, approximate fair value due to their relatively short maturities and market interest rates, if applicable. The carrying value of the Company’s long-
term debt also approximates fair value based on management’s estimation that a current interest rate would not differ materially from the stated rate. There
were no other financial assets and liabilities that requires fair value hierarchy measurements and disclosures for the periods presented.
The table below summarizes the fair value of the Company’s marketable securities measured at fair value on a recurring basis based on the three-tier
fair value hierarchy:
Marketable securities
Money market funds
U.S. treasury securities
Corporate bonds
Commercial paper
Total marketable securities
Marketable securities
Money market funds
U.S. treasury securities
Corporate bonds
Commercial paper
Total marketable securities
5. Balance Sheet Components
Inventory
Level 1
Level 2
Level 3
Total
December 31, 2020
(in thousands)
45,948 $
74,776
—
—
120,724 $
— $
—
8,938
60,537
69,475 $
— $
—
—
—
— $
45,948
74,776
8,938
60,537
190,199
Level 1
Level 2
Level 3
Total
December 31, 2019
(in thousands)
3,068 $
67,083
—
—
70,151 $
— $
—
10,375
7,660
18,035 $
— $
—
—
—
— $
3,068
67,083
10,375
7,660
88,186
$
$
$
$
As of December 31, 2020 and 2019, inventory consisted entirely of finished goods.
Property and Equipment, net:
Machinery and equipment
Construction in progress
Computer and office equipment
Leasehold improvements
Furniture and fixtures
Less: Accumulated depreciation and amortization
94
December 31,
2020
December 31,
2019
$
$
(in thousands)
6,342 $
1,692
714
503
233
9,484
(4,957)
4,527 $
4,613
1,854
598
497
187
7,749
(3,795)
3,954
SI-BONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Construction in progress pertains to cost of individual components of a custom instrument set used for surgical placement of iFuse implants that have
not yet been placed into service. Depreciation expense was $1.1 million and $0.8 million for the years ended December 31, 2020 and 2019, respectively.
Accrued Liabilities and Other:
Accrued compensation and related expenses
Accrued litigation expense
Accrued professional services
Others
6. Commitments and Contingencies
Operating Leases
December 31,
2020
December 31,
2019
$
$
(in thousands)
9,175 $
—
511
513
10,199 $
7,274
3,200
392
739
11,605
The Company has a non-cancelable operating lease for an office building space, located in Santa Clara, California which expires in May 2025. The
Company also has non-cancelable operating leases for its office building spaces in Gallarate, Italy and Mannheim, Germany which both expire in
November 2024, and in Knaresborough, United Kingdom, which expires in December 2025. Further, the Company also leases vehicles under operating
lease arrangements for certain of its sales personnel in Europe which expire various times in 2021 to 2023.
Rent expense is recorded over the lease terms on a straight-line basis. Rent expense charged to operations under operating leases totaled
approximately $1.2 million and $1.2 million for the years ended December 31, 2020 and 2019, respectively.
The aggregate future minimum lease payments under all leases as of December 31, 2020 are as follows:
Year Ending December 31,
2021
2022
2023
2024
2025
Thereafter
Purchase Commitments and Obligations
(in thousands)
1,081
1,001
908
893
381
24
4,288
$
$
The Company has certain purchase commitments related to its inventory management with certain manufacturing suppliers wherein the Company is
required to purchase the amounts forecasted in a blanket purchase order. The contractual obligations represent future cash commitments and liabilities
under agreements with third parties and exclude orders for goods and services entered into in the normal course of business that are not enforceable or
legally binding. These outstanding commitments amounted to $0.3 million and $0.4 million as of December 31, 2020 and 2019, respectively.
95
SI-BONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Legal Proceedings
On February 6, 2019, a putative class action captioned Eric B. Fromer Chiropractic, Inc. (“Plaintiff”) v. SI-BONE, Inc. (Civil Action No. 5:19-cv-
633-SVK), was filed in the U.S. District Court, Northern District of California (the “California Action”). The complaint alleges violations of the Telephone
Consumer Protection Act (the “TCPA”) on behalf of an individual and a putative class of persons alleged to be similarly situated. The complaint alleges
that the Company sent invitations to an educational dinner event to health care providers by way of facsimile transmission. The TCPA prohibits using a fax
machine to send unsolicited advertisements not including proper opt-out instructions or to send unsolicited advertisements to persons with whom the sender
did not have an established business relationship. The plaintiff sought various forms of relief, including statutory damages of $500 for each violation of the
TCPA or, in the alternative, treble damages of up to $1,500 for each knowing and willful violation of the TCPA and a permanent injunction prohibiting the
Company from sending or having sent advertisements by way of facsimile transmission. Subsequently on December 20, 2019, Plaintiff the filed a putative
class action captioned Eric B. Fromer Chiropractic, Inc. v. SI-BONE, Inc. (Case No. 1922-CC12323), in the Circuit Court of the City of St. Louis, State of
Missouri (the “Missouri Action”). The Missouri Action alleges the same TCPA violations as the California Action. On December 23, 2019 the parties filed
a joint stipulation of dismissal of the California Action and on January 14, 2020, the parties executed a definitive settlement agreement (the “Settlement
Agreement”) pursuant to which, the Company agreed to settle all disputes regarding the advertising faxes to the settlement class.
The Company accrued litigation expense of $3.2 million during the year ended December 31, 2019 within general and administrative expenses in the
consolidated financial statements, which was the Company's estimated cost to resolve the matter pursuant to the Settlement Agreement and based on the
estimated class members' claim submission rate. Following the notice and claims submission process, on June 22, 2020, the Circuit Court of the City of St.
Louis, State of Missouri, approved a final order to pay the approved claims submitted by class members, fees, expenses and incentive awards totaling
$2.6 million as final settlement. Accordingly, the Company recorded a reversal of accrued litigation expense of $0.6 million in year ended December 31,
2020 within general and administrative expenses in the consolidated financial statements. The Company made the final settlement payment on July 1,
2020.
Indemnification
The Company enters into standard indemnification arrangements in the ordinary course of business. Pursuant to these arrangements, the Company
indemnifies, holds harmless, and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified party, in connection with
any trade secret, copyright, patent or other intellectual property infringement claim by any third-party with respect to the Company’s technology. The term
of these indemnification agreements is generally perpetual. The maximum potential amount of future payments the Company could be required to make
under these agreements is not determinable because it involves claims that may be made against the Company in the future, but have not yet been made.
The Company has entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors
and officers against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct
of the individual.
The Company has not incurred costs to defend lawsuits or settle claims related to these indemnification agreements. No liability associated with such
indemnifications has been recorded to date.
7. Borrowings
Term Loan
The following table summarizes the outstanding borrowings from the term loan as of the periods presented:
96
SI-BONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Principal outstanding and final fee
Less: Unamortized debt issuance costs
Unaccreted value of final fee
Outstanding debt, net of debt issuance costs and unaccreted value of final fee
Classified as:
Current portion of long-term borrowings
Long-term borrowings
December 31,
2020
December 31,
2019
(in thousands)
$
$
$
$
41,000 $
(661)
(884)
39,455 $
— $
39,455 $
40,000
(777)
—
39,223
4,358
34,865
The outstanding debt as of December 31, 2019 related to a term loan entered by the Company with Biopharma Credit Investments IV Sub LP
(“Pharmakon”) in October 2017 for total loan proceeds of $40.0 million (the “Pharmakon Term Loan”). The Pharmakon Term Loan included an interest-
only period for 35 months through September 2020 and then equal quarterly principal payments plus interest through December 2022. The Pharmakon
Term Loan carried a fixed interest rate of 11.5% and allowed for early prepayment. The prepayment penalty fee was equal to the remaining interest due if
prepaid within the first 30 months, a 2% penalty for months 31-48, and a 1% penalty for months 49-60.
On May 29, 2020, the Company entered into a Loan and Security Agreement with Solar Capital Partners (“Solar”) providing for a term loan of an
aggregate principal amount of $40.0 million to the Company (the “Solar Term Loan”). In accordance with the Loan and Security Agreement, the Company
paid in full and terminated the Pharmakon Term Loan, which was accounted for as debt extinguishment in accordance with the accounting standards. The
Company recognized the unamortized debt issuance costs of $0.7 million and the prepayment penalty and lender fees of $0.8 million related to Pharmakon
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, 2020. The total debt issuance costs of $0.8 million associated with the Solar 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 Solar Term Loan bears interest at a rate per annum equal to 9.40% plus the greater London Interbank Offered Rate (“LIBOR”), payable monthly
in arrears. LIBOR means the greater of (i) 0.33% or (ii) one-month LIBOR (or a comparable replacement rate to be determined by the collateral agent if the
LIBOR is no longer available), which rate shall reset monthly. The Solar Term Loan matures in 60 months on June 1, 2025 (“Maturity Date”), with an
interest-only period of 36 months through June 2023, and then repaid in equal monthly principal payments plus interest through maturity date. Pursuant to
the Loan and Security Agreement, the Company may voluntarily prepay the Solar Term Loan, in full or in part, but only in increments of $10.0 million, for
a prepayment premium in an amount equal to 3.00% of the principal if prepaid in year one, 1.25% of the principal if prepaid in year two, and 0.50% of the
principal if prepaid in year three or later. The prepayment premium will be waived if the Company voluntarily prepays and refinances the outstanding
balance with Solar. The Solar Term Loan is secured by substantially all of the Company’s assets.
The Company is also obligated to pay a final fee equal to $1.0 million or 2.5% of the aggregate principal amount of the Solar Term Loan, which was
fully earned by Solar on the effective date of the Loan and Security Agreement. With respect to the Solar Term Loan, this final fee shall be due and payable
on the earliest of (i) the maturity date, (ii) the acceleration of the loan balance or (iii) its full prepayment, refinancing, substitution or replacement. The final
fee 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 effective interest rate related to the Pharmakon Term Loan was 12.4% and 12.3% for the term loan's outstanding periods for the years ended
December 31, 2020 and 2019, respectively. The effective interest rate related to the Solar Term Loan was 10.6% for the term loan's outstanding period for
year ended December 31, 2020.
97
SI-BONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below summarizes the future principal and final fee payments under the Solar Term Loan as of December 31, 2020:
Year ending December 31,
2021
2022
2023
2024
2025
Total principal and final fee payments
(in thousands)
—
—
11,667
20,000
9,333
41,000
$
$
Subject to other customary covenants set forth in the Loan and Security Agreement with Solar, the Company is required to maintain unrestricted cash
and cash equivalents based on the trailing 12-month net products revenues tested on a monthly basis as follows: (a) $15.0 million if net product revenue is
less than $75.0 million; or (b) $7.5 million if net product revenue is greater than or equal to $75.0 million, but less than $100.0 million (the “minimum
liquidity requirement”). The Company is not subject to minimum liquidity requirement when trailing twelve-month net product revenues exceeds
$100.0 million. Upon the occurrence of an event of default of certain customary covenants, including the minimum liquidity requirements, as specified in
the Loan and Security Agreement, subject to specified cure periods, all amounts owed by the Company would begin to bear interest at a rate that is 5.00%
above the rate effective immediately before the event of default and may be declared immediately due and payable by Solar. As of December 31, 2020, the
Company was in compliance with all debt covenants. Though there are uncertainties surrounding the impact of the COVID-19 pandemic that may impact
our future revenue, the Company believes that it has sufficient cash and cash equivalents to meet the minimum liquidity requirements in the foreseeable
succeeding periods.
CARES Act
On March 27, 2020, the U.S. federal government enacted the “Coronavirus Aid, Relief and Economic Security (CARES) Act,” and among other
things, established the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), whereby certain small
businesses were eligible for a loan to fund payroll expenses, rent, and related costs. The loan may be forgiven if the funds are used for payroll and other
qualified expenses. The Company met the requirements to apply for the PPP loan given that the Company has less than 500 employees and the business
was negatively impacted by COVID-19. The Company submitted its application and was approved for the SBA program and received the proceeds from
the PPP loan amounting to $5.3 million on April 21, 2020, pursuant to a Promissory Note with Silicon Valley Bank (“SVB”). In light of the subsequent
clarifications from the U.S. government on the eligibility criteria, the Company determined it was appropriate to repay the entire amount of the PPP loan.
Accordingly, on April 29, 2020, the Company repaid in full the PPP loan and correspondingly terminated the Promissory Note.
The CARES Act allows employers to defer the deposit and payment of an employer's share of social security taxes through December 31, 2020. The
Company recorded a total liability of $1.0 million related to the deferral of the social security taxes of which $0.5 million is included in each accrued
liabilities and other and other long-term liabilities in the consolidated balance sheets as of December 31, 2020.
98
SI-BONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Warrants
The table below summarizes common stock warrants issued and outstanding at both December 31, 2020 and 2019:
Date
Issuance
3/1/2017
7/22/2013
11/26/2014
10/20/2015
11/9/2015
12/22/2016
Expiration
3/1/2027
7/22/2023
11/26/2024
10/20/2025
11/9/2025
12/22/2026
[a]
[a]
[a]
[a]
[a]
[a]
Number of
Shares
Underlying
Warrants
1,388
32,983
6,680
41,650
25,709
9,712
118,122
Price per
Share
$5.94
$9.10
$16.47
$16.47
$16.47
$10.03
$
$
Fair Value
(in thousands)
5 [b]
122 [b]
49 [b]
396 [c]
244 [c]
45 [c]
861
[a] Common stock warrants will remain outstanding until the earlier of the expiration date or the date exercised by the holder.
[b] Fair value at the date of issuance.
[c] Fair value at the date of conversion from redeemable convertible preferred stock to common stock warrants in conjunction with the IPO on October 16, 2018.
9. Common and Preferred Stock
The Company's certificate of incorporate as amended and restated in October 2018, authorizes the Company to issue 100,000,000 shares of common
stock and 5,000,000 shares of preferred stock, each having a par value of $0.0001. Common stock issued and outstanding as of December 31, 2020 and
2019 were 32,583,220 shares and 25,163,803 shares, respectively. As of December 31, 2020 and 2019, there was no preferred stock issued and outstanding.
The holders of common stock are entitled to receive dividends whenever funds are legally available, as, when, and if declared by the Board of
Directors. There have been no dividends declared to date.
10. Stock-Based Compensation
2008 Stock Option Plan and 2018 Equity Incentive Plan
In April 2008, the Company adopted the 2008 Stock Option Plan (the “2008 SOP”), as amended, under which the Board of Directors may issue
incentive and non-qualified stock options to employees, directors and consultants. In October 2018, the Company adopted the 2018 Equity Incentive Plan
(the “2018 EIP”), which serves as the successor to the 2008 SOP, under which the Board of Directors may issue incentive and non-qualified stock options
and RSUs to employees, directors and consultants. No new options have been granted under the 2008 SOP since August 2018. Outstanding options under
the 2008 SOP continue to be subject to the terms and conditions of that plan.
The number of shares of common stock reserved for issuance under the 2018 EIP will automatically increase on January 1 of each year, beginning
January 1, 2019, and continuing through and including January 1, 2028, by 5% of the total number of shares of the Company's capital stock outstanding on
December 31 of the preceding calendar year, or a lesser number of shares determined by the Company's Board of Directors. On January 1, 2019 and 2020,
the total number of shares of common stock reserved for issuance increased by 1,222,538 and 1,258,190 shares respectively. As of December 31, 2020, a
total of 2,843,814 shares of common stock are available for future grants under the 2018 EIP. On January 1, 2021, the total number of shares of common
stock reserved for issuance under the 2018 EIP automatically increased by 1,629,161 shares.
The Board of Directors has the authority to determine to whom options will be granted, the number of shares, the term and the exercise price. If an
individual owns stock representing more than 10% of the outstanding shares, the price of each share shall be at least 110% of the fair market value, as
determined by the Board of Directors. The exercise price of an incentive stock option and a non-qualified stock option shall not be less than 100% and
85%, respectively, of the fair market value on the date of grant.
Options granted have a term of 10 years, except, options granted to individuals holding more than 10% of the outstanding shares have a term of five
years. Options generally vest over a four-year period. Certain stock options are exercisable immediately, but are subject to a right of repurchase by the
Company for any unvested shares. RSUs granted under the 2018 EIP generally vest over two to four years based upon continued services and are settled at
vesting in shares of the Company's common stock.
99
SI-BONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Options
The following table summarizes stock option activity for the years ended December 31, 2020 and 2019:
Options Outstanding
Outstanding as of December 31, 2018
Granted
Exercised
Canceled and forfeited
Outstanding as of December 31, 2019
Granted
Exercised
Canceled and forfeited
Outstanding as of December 31, 2020
Options vested and exercisable as of December 31, 2020
Options vested and expected to vest as of December 31, 2020
Number of
Shares
2,641,198
638,983
(444,924)
(116,286)
2,718,971
26,236
(323,701)
(15,549)
2,405,957
2,069,020
2,390,755
Weighted-
Average Exercise
Price
$4.27
$20.89
$3.36
$11.30
$8.02
$17.31
$4.52
$17.07
$8.54
$6.85
$8.36
Weighted-
Average
Contractual
Remaining Life
(Years)
Aggregate
Intrinsic Value
(in thousands)
5.80
5.40
6.00
$
$
$
51,402
47,689
51,493
The aggregate intrinsic value of options exercised during the years ended December 31, 2020 and 2019 amounted to $5.6 million and $6.8 million,
respectively, representing the difference between the fair value of the Company's common stock at the date of exercise and the exercise price paid. The
aggregate intrinsic values of options outstanding, options vested and exercisable, and options vested and expected to vest as of December 31, 2020
represents the difference between the weighted average exercise price and the closing price of the Company’s common stock on the last trading day of the
year.
Outstanding options and exercisable options information by range of exercise prices as of December 31, 2020 was as follows:
Exercise Price
-
-
-
-
-
$3.69
$4.41
$5.31
$20.51
$22.00
$0.84
$3.70
$4.42
$5.32
$20.52
Number of Shares
465,071
689,903
458,812
356,271
435,900
2,405,957
Options Outstanding
Options Vested and Exercisable
Average
Remaining
Contractual
Life (Years)
3.40
4.80
6.40
7.50
8.00
5.80
Weighted-
Average
Exercise Price
$3.31
$4.29
$4.67
$12.08
$22.00
$8.54
Number of Shares
465,071
689,903
422,974
282,203
208,869
2,069,020
Weighted-
Average
Exercise Price
$3.31
$4.29
$4.67
$11.00
$22.00
$6.85
The table below summarizes the weighted average grant date fair value per share and the assumptions used to estimate the grant date fair value using
the Black-Scholes option-pricing model of the stock options granted during the periods presented:
Weighted average grant date fair value per share
Expected term (years)
Expected volatility
Risk-free interest rate
Dividend yield
100
Year ended December 31,
5.5
2020
$8.16
to
46.7% to
1.6% to
—%
7.0
47.2%
1.6%
2019
$9.78
to
41.7% to
1.3% to
5.0
—%
7.0
47.3%
2.6%
SI-BONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2020, there was $3.2 million of unrecognized compensation cost related to stock options granted. These costs are expected to be
recognized over a period of approximately 1.9 years.
Early Exercise of Unvested Stock Options
Early exercises of stock options under the Company's 2008 SOP are subject to a right of repurchase by the Company of any unvested shares. The
repurchase rights lapse over the original vesting period of the options. The Company accounts for the cash received in consideration for the early exercised
options as a liability included in accrued liabilities, which is then reclassified to stockholders’ equity as the options vest. As of December 31, 2020 and
2019, the Company had a total of 5,836 and 21,404 shares of common stock, respectively, subject to repurchase under the 2008 SOP.
Restricted Stock Units
The following table summarizes restricted stock units activity for the years ended December 31, 2020 and 2019:
Outstanding as of December 31, 2018
Granted
Vested
Canceled and forfeited
Outstanding as of December 31, 2019
Granted
Vested
Canceled and forfeited
Outstanding as of December 31, 2020
Number of
Shares
53,436
639,726
(108,631)
(41,490)
543,041
1,016,432
(344,779)
(49,399)
1,165,295
Weighted-
Average
Grant Date Fair
Value
$11.69
$20.14
$19.10
$18.48
$19.72
$20.17
$19.87
$19.73
$20.07
As of December 31, 2020, there was a total unrecognized compensation cost of $19.3 million. These costs are expected to be recognized over a period
of approximately 2.9 years.
Employee Stock Purchase Plan
The Company's 2018 Employee Stock Purchase Plan (the “ESPP”) allows eligible employees to purchase shares of the Company's common stock
through payroll deductions at the price equal to 85% of the lesser of the fair market value of the stock as of the first date or the ending date of each six
month offering period. The offering period generally commences in May and November. On March 26, 2020, the Company's Compensation Committee
approved the amendment of the terms of future offerings under the ESPP which, among other things, increased the maximum number of shares that may be
purchased on any single purchase date, provided for automatic enrollment in a new offering, and provided that the offering which commenced in May 2020
be twelve months in duration and consist of two purchase periods. There were 515,307 shares of common stock originally reserved for issuance under the
ESPP. Under the ESPP, the number of shares reserved for issuance under the ESPP automatically increases on January 1st of each year, starting on
January 1, 2019, and continuing through January 1, 2029, by an amount equal to (i) the lesser of 1% of the total number of shares of the Registrant’s
common stock outstanding on December 31st of the preceding calendar year, and (ii) 555,555 shares of common stock. As of December 31, 2020, a total of
705,618 shares of common stock are available for future grants under the 2018 EIP. On January 1, 2021, the total number of shares of common stock
reserved for issuance under the ESPP Plan increased by 325,832 shares.
The fair value of the ESPP shares is estimated using the Black-Scholes option pricing model, which is being amortized over the requisite service
period. The Company issued 137,377 shares and 168,457 shares under the ESPP during the years ended December 31, 2020 and 2019, respectively,
representing approximately $1.9 million and $2.2 million in employee contributions. As of December 31, 2020 and 2019, total accumulated ESPP related
employee payroll deductions amounted to $0.4 million and $0.2 million, respectively, which were included within accrued compensation and related
expenses in the consolidated balance sheets. For the years ended December 31, 2020 and 2019, the Company recognized $1.2 million and $0.8 million,
respectively, of stock-based compensation expense related to ESPP. As of December 31, 2020, the unrecognized compensation cost for the ESPP was $0.2
million.
101
SI-BONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company estimated the fair value of ESPP purchase rights during the offering period using a Black-Scholes option pricing model with the
following assumptions:
Expected term (years)
Expected volatility
Risk-free interest rate
Dividend yield
Stock-Based Compensation
Year ended December 31,
0.5
2020
to
38.3% to
to
0.1%
—%
1.0
79.4%
1.6%
38.3%
1.6%
2019
0.5
to
to
—%
58.4%
2.4%
The following table sets forth stock-based compensation expense recognized for the periods presented:
Cost of goods sold
Sales and marketing
Research and development
General and administrative
11. Employee Benefit Plan
Year ended December 31,
2019
2020
(in thousands)
$
$
331 $
5,527
1,139
4,930
11,927 $
185
3,335
516
3,428
7,464
The Company sponsors a 401(k) plan covering all employees. Contributions made by the Company are discretionary and are determined annually by
the Board of Directors. Effective January 1, 2019, the Company made a discretionary matching contribution equal to dollar for dollar employee
contribution, up to 3% eligible compensation of the employee, with a maximum annual contribution from the Company of one thousand dollars per
employee. Further, in order for an employee to receive the matching contribution, the employee must be at least 21 years old, work at least 1,000 hours per
year, and must be employed by the Company at the beginning through the end of the year. For the years ended December 31, 2020 and 2019, the Company
made $0.2 million and $0.1 million, respectively, contributions to the 401(k) plan.
12. Net Loss Per Share of Common Stock
The following table summarizes the computation of basic and diluted net loss per share:
Net loss
Weighted-average shares used to compute basic and diluted net loss per share
Net loss per share, basic and diluted
102
Year ended December 31,
2019
2020
(in thousands, except share and per
share data)
$
$
(43,697) $
(38,403)
29,059,171
24,705,980
(1.50) $
(1.55)
SI-BONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Because the Company has reported a net loss in all periods presented, outstanding stock options, restricted stock units, shares subject to repurchase,
ESPP purchase rights and common stock warrants are anti-dilutive and therefore diluted net loss per common share is the same as basic net loss per
common share for the periods presented. The following anti-dilutive common stock equivalents were excluded from the computation of diluted net loss per
share for the periods presented:
Stock options
Restricted stock units
Shares subject to repurchase
ESPP purchase rights
Common stock warrants
13. Income Taxes
The components of the Company’s loss before income taxes are as follows:
Domestic
Foreign
Loss before income taxes
Year ended December 31,
2019
2020
2,718,971
2,405,957
543,041
1,165,295
21,404
5,836
65,442
83,040
118,122
118,122
3,466,980
3,778,250
Year ended December 31,
2020
2019
(in thousands)
$
$
(41,708) $
(1,989)
(43,697) $
(37,709)
(694)
(38,403)
There was no provision for income taxes recorded for the years ended December 31, 2020 and 2019. The Company continues to maintain a full
valuation allowance against its net deferred tax assets due to the uncertainty surrounding realization of such assets. The Company periodically evaluates the
realizability of its net deferred tax assets based on the expected realization and is dependent on the Company's ability to generate sufficient future taxable
income during periods prior to the expiration of tax attributes to fully utilize these assets.
103
SI-BONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of deferred income taxes are as follows:
Federal
State
Foreign
Total deferred income taxes
Change in deferred tax valuation allowance
Net deferred income tax
Year ended December 31,
2019
2020
(in thousands)
9,855 $
2,711
583
13,149
(13,149)
— $
8,523
1,569
(200)
9,892
(9,892)
—
$
$
Income tax expense differs from the amount computed by applying the statutory federal income tax rate due to the following:
Tax at statutory federal rate
State tax, net of federal benefit
Tax credits
Change in deferred tax valuation allowance
Stock compensation
Foreign rate differences
Other
Total income tax expense
Year ended December 31,
2019
2020
(21.0)%
(6.2)%
(0.7)%
30.1 %
(1.2)%
(1.3)%
0.3 %
— %
(21.0)%
(4.1)%
(0.7)%
25.8 %
(1.5)%
0.5 %
1.0 %
— %
The tax effects of temporary differences and carryforwards that give rise to significant portions of the deferred tax assets are presented below:
Net operating loss carryforwards
Research and development credits
Accruals and reserves
Stock compensation
Depreciation and amortization
Total deferred tax assets
Less: Valuation allowance
Total deferred tax asset, net of valuation allowance
Year ended December 31,
2020
2019
(in thousands)
52,331 $
3,160
5,450
2,395
117
63,453
(63,453)
— $
$
$
42,032
2,428
4,222
1,512
110
50,304
(50,304)
—
The following table summarizes changes in the valuation allowance for the years ended December 31, 2020 and 2019:
Beginning balance
Additions during the period
Ending balance
104
Year ended December 31,
2019
2020
(in thousands)
$
$
50,304
13,149
63,453
$
$
40,412
9,892
50,304
SI-BONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2020, the Company had net operating loss (“NOL”) carryforwards of approximately $200.5 million and $165.0 million
available to reduce future taxable income, if any, for federal and state income tax purposes, respectively. If not utilized, the Company’s federal NOL
carryforward begins to expire in 2028, and the state NOL carryforward begins to expire in 2021.
As of December 31, 2020, the Company had credit carryforwards of approximately $2.5 million and $2.5 million available to reduce future taxable
income, if any, for both federal and state income tax purposes, respectively. The federal credits begin to expire in 2029, and the state credits have no
expiration date.
The Company updated its Section 382 ownership change analysis through December 31, 2020 and determined that the last ownership change was in
February 2020 due to the follow-offering. The analysis concluded that no additional NOL carryforwards will expire due to the Section 382 limitation from
the ownership change for both federal and state tax purposes. The Company maintains the reduction of $1.4 million of its NOL carryforwards from the
previous ownership change. The Company will continually assess the need to update its Section 382 ownership change analysis, as the Company may
experience ownership changes in the future that could materially limit its ability to use its NOL carryforwards.
The CARES Act includes provisions relating to refundable payroll tax credits, deferment of employer's social security payments, net operating loss
carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax
depreciation methods for qualified improvement property. The Company deferred the payment of an employer's share of social security taxes through
December 31, 2020 of $1.0 million.
On June 29, 2020, Governor Gavin Newsom signed California Assembly Bill 85 (AB 85) into law. The legislation suspends the California net
operating loss deductions for 2020, 2021, and 2022 for certain taxpayers and imposes a limitation of certain California Tax Credits for 2020, 2021, and
2022. The legislation disallows the use of California net operating loss deductions if the taxpayer recognizes business income and its adjusted gross income
is greater than $1.0 million. The carryover periods for net operating loss deductions disallowed by this provision will be extended. Additionally, any
business credit will only offset a maximum of $5.0 million of California tax. Given the Company’s loss position for the year ended December 31, 2020, the
new legislation did not impact the current year provision. The Company will continue to monitor the possible California net operating loss and credit
limitations in future periods.
The Company accounts for the uncertainty in income taxes by utilizing a comprehensive model for the recognition, measurement, presentation and
disclosure in financial statements of any uncertain tax positions that have been taken or are expected to be taken on an income tax return. The changes in
the Company’s uncertain income tax positions for the years ended December 31, 2020 and 2019 consisted of the following:
Year ended December 31,
2019
2020
Balance at beginning of the year
Increases related to current year's tax positions
Balance at end of the year
$
$
$
(in thousands)
1,287
226
1,513
$
1,084
203
1,287
The Company has elected to recognize interest and penalties related to uncertain tax positions as a component of income tax expense. The Company
has no accrued interest related to unrecognized tax benefits as of December 31, 2020 and 2019. None of the Company’s unrecognized tax benefits that, if
recognized, would affect its effective tax rates for the years ended December 31, 2020 and 2019. The Company does not anticipate the total amounts of
unrecognized tax benefits will significantly increase or decrease in the next 12 months.
The Company currently has no federal, state or foreign tax examinations in progress nor has it had any federal or state examinations since inception.
As a result of the Company’s net operating loss carry forwards, all of its tax years are subject to federal and state tax examinations.
105
SI-BONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Related Party Transactions
On February 24, 2020, the Company entered into a joint development agreement (the “Development Agreement”) with SeaSpine Orthopedics
Corporation (“SeaSpine”) to develop a next generation device for sacropelvic fixation. Mr. Keith Valentine, who serves as the President, Chief Executive
Officer and a member of the board of directors of SeaSpine, also serves as a member of the Company's Board of Directors since August 2015.
Pursuant to the development plan, SeaSpine shall use reasonable efforts to assist in the development of the potential product offering, including
licensing certain existing intellectual property to be incorporated into such product. Under the terms of the Development Agreement, the Company agreed
to make monthly payments to SeaSpine to reimburse for full time resources employed by SeaSpine responsible to conduct the development activities. For
the year ended December 31, 2020, the Company expensed $118,000 of the reimbursement charges from SeaSpine, which was recorded within research
and development expense in the consolidated statement of operations. There was no outstanding liabilities to SeaSpine as of December 31, 2020.
Certain intellectual property developed pursuant to the project plan will be owned by the Company, certain intellectual property developed pursuant
to the project plan will be owned by SeaSpine, and other intellectual property developed pursuant to the project plan will be jointly owned by SeaSpine and
the Company. The Company also agreed to provide SeaSpine a royalty-free, worldwide, perpetual, non-exclusive license of certain of the Company's
intellectual property incorporated into the product to be developed. The Company also agreed to pay SeaSpine a product royalty, in an amount specified in
the Development Agreement, for each resulting product sold for a period of 10 years beginning on the initial market launch. The term of the Development
Agreement shall continue until the expiration of all royalty terms, unless earlier terminated by either party, as provided for by the Development Agreement.
106
Supplementary Data
Selected Quarterly Consolidated Financial Data (Unaudited)
As a “smaller reporting company”, we are not required to provide the information required by this Item.
Schedule II - Valuation and Qualifying Accounts
All schedules are omitted because they are not applicable, or the required information is shown in the financial statements or notes thereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or
submit under the Securities and Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s
rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to
allow timely decisions regarding required disclosure.
The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of
judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely.
Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide
reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to
continue to monitor and upgrade our internal controls as necessary or appropriate for our business but cannot assure you that such improvements will be
sufficient to provide us with effective internal control over financial reporting.
As of December 31, 2020, our management, with the participation of our Chief Executive Officer (“CEO”) and our Chief Operating Officer & Chief
Financial Officer (“COO/CFO”), have evaluated our disclosure controls and procedures (as defined in Rules 13a‑15(e) and 15d‑15(e) under the Securities
Exchange Act of 1934, as amended). Based on that evaluation, our CEO and our COO/CFO have concluded that, as of December 31, 2020, our disclosure
controls and procedures were effective at the reasonable assurance level.
Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Our management
assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making this assessment, our management used the
criteria set forth in the Internal Control -Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on management's assessment, management has concluded that, as of December 31, 2020, our internal control over financial reporting was
effective.
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm because as an “emerging
growth company” we are exempt from Section 404(b) of the Sarbanes-Oxley Act of 2002.
Changes in Internal Control Over Financial Reporting.
There were no changes in our internal control over financial reporting during the fourth quarter of the year ended December 31, 2020, that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. In response to the COVID-19 pandemic,
certain of our employees still continued to work remotely during the quarter. Management took measures to ensure that our internal control over financial
reporting remained unchanged during this period.
107
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
Information required by this item will be contained in our definitive proxy statement to be filed with the Securities and Exchange Commission on
Schedule 14A in connection with our 2021 Annual Meeting of Stockholders, or the 2021 Proxy Statement, which will be filed not later than 120 days after
the end of our fiscal year ended December 31, 2020, under the headings “Management,” “Proposal 1 - Election of Directors,” “Information Regarding the
Board of Directors and Corporate Governance”, and, if applicable, “Delinquent Section 16(a) Reports”, and is incorporated herein by reference.
We have adopted a Code of Business Conduct and Ethics that applies to our officers, directors and employees which is available on our website at
www.si-bone.com. The Code of Business Conduct and Ethics is intended to qualify as a “code of ethics” within the meaning of Section 406 of the
Sarbanes-Oxley Act of 2002 and Item 406 of Regulation S-K. In addition, we intend to promptly disclose on our website in the future (1) the nature of any
substantive amendment to our Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer, principal
accounting officer or controller or persons performing similar functions and (2) the nature of any waiver, including an implicit waiver, from a provision of
our code of ethics that is granted to one of these specified officers, the name of such person who is granted the waiver and the date of the waiver.
Item 11. Executive Compensation.
The information required by this item regarding executive compensation will be incorporated by reference to the information set forth in the sections
titled “Executive Compensation” and “Compensation of Non-Employee Board Members” in our 2021 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item regarding security ownership of certain beneficial owners and management will be incorporated by reference to
the information set forth in the sections titled “Security Ownership of Certain Beneficial Owners and Management” and “Securities Authorized for
Issuance Under Equity Compensation Plans” in our 2021 Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item regarding certain relationships and related transactions and director independence will be incorporated by
reference to the information set forth in the sections titled “Certain Relationships and Related Party Transactions” and “Information Regarding the Board of
Directors and Corporate Governance”, respectively, in our 2021 Proxy Statement.
Item 14. Principal Accounting Fees and Services.
The information required by this item regarding principal accountant fees and services will be incorporated by reference to the information set forth in
the section titled “Principal Accountant Fees and Services” in our 2021 Proxy Statement.
108
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) The following documents are filed as part of this report:
1. Financial Statements
Information in response to this Item is included in Part II, Item 8 of this Annual Report on Form 10‑K.
2. Financial Statement Schedules
All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
3. Exhibits
The following exhibits, as required by Item 601 of Regulation S-K are attached or incorporated by reference as stated below.
EXHIBIT INDEX
Incorporation By Reference
Exhibit
Number
3.1
3.2
4.1
4.2
4.3
10.1+
10.2+
10.3+
10.4+
10.5+
10.6+
10.7#
10.8+
10.9+
10.10+
10.11+
10.12+
Description
Amended and Restated Certificate of Incorporation.
Amended and Restated Bylaws.
Form of Common Stock Certificate of the Company.
Reference is made to Exhibits 3.1 and 3.2.
Description of SI-BONE, Inc. Common Stock
Form of Indemnity Agreement between the Registrant and each of its
directors and executive officers.
2008 Stock Plan and forms of agreements thereunder.
2018 Equity Incentive Plan.
Forms of Stock Option Grant Notice, Option Agreement and Notice of
Exercise under the 2018 Equity Incentive Plan.
Forms of Restricted Stock Unit Grant Notice and Restricted Stock Unit
Award Agreement under the 2018 Equity Incentive Plan.
2018 Employee Stock Purchase Plan.
Manufacturing, Quality and Supply Agreement, dated January 31,
2017, between the Registrant and rms Company and Addendum No. 1
dated July 7, 2017.
Offer Letter Agreement, dated December 15, 2009, between the
Registrant and Jeffrey W. Dunn.
Offer Letter Agreement, dated February 19, 2015, between the
Registrant and Michael A. Pisetsky
Letter Regarding Change to Employment Terms, dated June 20, 2016,
between the Registrant and Michael A. Pisetsky.
Offer Letter Agreement, dated April 27, 2015, between the Registrant
and Laura Francis.
Severance and Change in Control Agreement dated March 15, 2016,
between the Registrant and Laura Francis.
Form
8-K
S-1/A
S-1/A
10-Q
S-1
S-1/A
S-1/A
S-1/A
SEC File No.
001-38701
333-227445
333-227445
001-38701
333-227445
333-227445
333-227445
333-227445
S-1/A
333-227445
S-1/A
S-1
333-227445
333-227445
S-1
S-1
S-1
S-1
S-1
333-227445
333-227445
333-227445
333-227445
333-227445
Exhibit
3.1
3.4
4.1
4.3
10.1
10.2
10.3
10.4
10.5
10.6
10.6
10.7
10.8
10.9
10.10
10.11
Filing Date
10/19/2018
10/5/2018
10/5/2018
5/5/2020
9/20/2018
10/5/2018
10/5/2018
10/5/2018
10/5/2018
10/5/2018
9/20/2018
9/20/2018
9/20/2018
9/20/2018
9/20/2018
9/20/2018
109
S-1
S-1
333-227445
333-227445
S-1/A
333-227445
10.12
10.18
10.21
9/20/2018
9/20/2018
10/5/2018
S-1
333-227445
10.21
9/20/2018
S-1
10-Q
8-K
8-K
333-227445
001-38701
10.30
10.2
9/20/2018
11/12/2019
001-38701
Item 5.02
1/3/2020
001-38701
10-Q
001-38701
10.1
10.1
1/7/2021
8/4/2020
10.13+
10.14+
10.15
10.16*
10.17
10.18+
10.19+
10.20+
10.21+
10.22*
10.23
10.24*
21.1*
23.1*
24.1*
31.1*
31.2*
32.1**
101.INS*
101.SCH*
101.CAL*
101.DEF*
101.LAB*
101.PRE*
104
Amended and Restated Letter Agreement, dated March 1, 2017,
between the Registrant and Laura Francis.
Offer Letter Agreement, dated June 19, 2016, between the Registrant
and Anthony J. Recupero.
Amended and Restated Investors’ Rights Agreement, dated June 2,
2016, by and among the Registrant and the parties thereto, as amended
on October 4, 2018.
Addendum No. 2 to Manufacturing, Quality and Supply Agreement,
dated July 1, 2020, between the Registrant and rsm Company.
Office Lease Agreement, dated February 2, 2018, between the
Registrant and Bixby SPE Finance 11, LLC, as amended on April 16,
2018.
Form of Restricted Stock Unit Grant Notice and Award Agreement.
Amendment to Restricted Stock Units of Chief Operating Officer &
Chief Financial Officer
Changes to Chief Executive Officer, Chief Operating Officer & Chief
Financial Officer, and Chief Commercial Officer Compensation
Amendment to Offer Letter with Jeffrey Dunn
2020 Non-Employee Directors' Compensation Policy
Loan and Security Agreement, dated May 29, 2020, between SI-
BONE, Inc. and Solar Capital Ltd., as collateral agent, and the lenders
from time to time party thereto.
SI-BONE, Inc. Severance Benefit Plan and Form of Participation
Agreement
List of Subsidiaries of Registrant
Consent of PricewaterhouseCoopers, Independent Registered Public
Accounting Firm
Power of Attorney (contained in the signature page of this report)
Certification of Principal Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
Certification of Principal Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
Certification of Principal Executive Officer and Principal Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Inline XBRL Instance Document - the instance document does not
appear in the Interactive Data File because its XBRL tags are
embedded within the Inline XBRL document
Inline XBRL Taxonomy Extension Schema Document
Inline XBRL Taxonomy Extension Calculation Linkbase Document
Inline XBRL Taxonomy Extension Definition Linkbase Document
Inline XBRL Taxonomy Extension Label Linkbase Document
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Cover Page Interactive Data File (formatted as Inline XBRL and
contained in Exhibit 101)
* Filed herewith.
110
** Furnished herewith. Exhibit 32.1 is being furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, nor shall such exhibit be deemed to be incorporated by
reference in any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as otherwise
specifically stated in such filing.
+ Indicates a management contract or compensatory plan.
# Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities
and Exchange Commission.
(b) We have filed, or incorporated into this Annual Report on Form 10‑K by reference, the exhibits listed on the Exhibit Index immediately above.
(c) See Item 15(a)2 above.
Item 16. Form 10-K Summary.
Not provided.
111
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized, in Santa Clara, California, on March 10, 2021.
SIGNATURES
SI-BONE, Inc.
By:
/s/ Jeffrey W. Dunn
Jeffrey W. Dunn
President and Chief Executive Officer
(Duly Authorized Officer and Principal Executive Officer)
SI-BONE, Inc.
By:
/s/ Laura A. Francis
Laura A. Francis
Chief Operating Officer & Chief Financial Officer
(Principal Financial and Accounting Officer)
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Laura A. Francis, and
Michael A. Pisetsky, and each of them, as his or her true and lawful attorneys-in-fact and agents, each with the full power of substitution, for him or her and
in his or her name, place or stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10‑K, and to file the same, with
all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on
behalf of the Registrant in the capacities and on the dates indicated.
Signature
Title
/s/ Jeffrey W. Dunn
Jeffrey W. Dunn
President and Chief Executive Officer
(Principal Executive Officer) and Director
/s/ Laura A. Francis
Laura A. Francis
Chief Operating Officer & Chief Financial Officer
(Principal Financial and Accounting Officer)
Date
March 10, 2021
March 10, 2021
/s/ Timothy E. Davis, Jr.
Timothy E. Davis, Jr.
/s/ Mark J. Foley
Mark J. Foley
/s/John G. Freund, M.D.
John G. Freund, M.D.
/s/ Jeryl L. Hilleman
Jeryl L. Hilleman
/s/ Gregory K. Hinckley
Gregory K. Hinckley
/s/ Karen A. Licitra
Karen A. Licitra
/s/ Keith C. Valentine
Keith C. Valentine
/s/ Mika Nishimura
Mika Nishimura
Lead Independent Director, Director
March 10, 2021
Director
Director
Director
Director
Director
Director
Director
March 10, 2021
March 10, 2021
March 10, 2021
March 10, 2021
March 10, 2021
March 10, 2021
March 10, 2021
CONFIDENTIAL & PROPRIETARY Exhibit 10.16
ADDENDUM NO. 2 TO MANUFACTURING, QUALITY AND SUPPLY AGREEMENT
THIS ADDENDUM NO. 2 TO MANUFACTURING, QUALITY AND SUPPLY AGREEMENT (“Addendum No. 2”), effective as of July 1,
2020 (“Addendum Effective Date”) is by and between SI-BONE, Inc., a Delaware corporation having a principal place of business at 471 El
Camino Real, Suite 101, Santa Clara, California 95050 (“SI-BONE”) and rms Company (“Customer”), a Minnesota corporation having a
principal place of business at 8600 Evergreen Blvd., Coon Rapids, MN 55433, and amends that certain Manufacturing, Quality and Supply
Agreement between the parties with an effective date of January 31, 2017 as amended by that certain addendum dated July 7, 2017 (the
“Existing Agreement” and together with this Addendum No. 1, the “Agreement”). Capitalized terms used and not defined herein shall have
the meaning given them in the Existing Agreement.
The parties agree as follows:
1.
2.
Schedule A to Addendum No. 1. The parties hereby agree that Schedule A to Addendum No. 1 is amended and restated in its entirety
with the Schedule A to Addendum No. 2 attached hereto.
Pricing Addendum. The parties hereby agree that the Exhibit A (Pricing Addendum) of the Agreement is amended and restated in its
entirety with the Exhibit A (Pricing Addendum) attached hereto.
3. Miscellaneous.
a. Ratification. The parties take this opportunity to ratify the Existing Agreement and confirm all of their respective obligations set forth
therein, including the representations and warranties made to one another.
b. Severability. If any provision of the Agreement will be declared invalid, illegal or unenforceable, such provision will be severed and
all remaining provisions will continue in full force and effect.
c. Entire Agreement. The Agreement, including this Addendum No. 2, is the full, complete, and exclusive agreement between the
parties and supersedes and cancels any and all previous or contemporaneous agreements of whatever nature, whether written or
oral, between Customer and SI-BONE and SI-BONE’s subsidiaries and affiliates with respect to its subject matter. The Agreement
may only be modified or amended in a writing signed by both parties. Subject headings are for convenience of reference only and
will in no way affect interpretation of the Agreement.
d. Counterparts. This Addendum No. 2 may be executed in separate counterparts, and by facsimile, each of which will be deemed an
original, and when executed separately or together, will constitute a single original instrument, effective in the same manner as if
the parties had executed one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Addendum No. 2 as of the date set forth beneath such person’s name.
SI-BONE, Inc.
By: /s/ Michael Blanchard
Name: Michael Blanchard
Title: VP, Operations
Date Signed: 7/7/2020
rms Company
By: /s/ Richard S. Riddle
Name: Richard S. Riddle
Title: Director of Sales
Date Signed: 6-July-2020
SI-BONE, INC.
Exhibit 10.22
2020 NON-EMPLOYEE DIRECTORS’ COMPENSATION POLICY APPROVED BY THE BOARD OF
DIRECTORS
December 3, 2020
Each member of the Board of Directors (the “Board”) who is not also serving as an employee of SI-BONE, Inc. (the “Company”)
or any of its subsidiaries (each such member, an “Eligible Director”) will receive the compensation described in this Non-Employee
Directors’ Compensation Policy (the “Director Compensation Policy”) for his or her Board service. The Director Compensation Policy
may be amended at any time in the sole discretion of the Board or the Compensation Committee of the Board.
Annual Cash Compensation
Each Eligible Director shall receive the cash compensation described below. The annual cash compensation amount set forth
below is payable in equal quarterly installments, payable in arrears on the last day of each fiscal quarter in which the service occurred. If
an Eligible Director joins the Board or a committee of the Board (“Committee”) at a time other than effective as of the first day of a fiscal
quarter, each annual retainer set forth below will be pro-rated based on days served in the applicable fiscal year, with the pro-rated amount
paid for the first fiscal quarter in which the Eligible Director provides the service, and regular full quarterly payments thereafter. All
annual cash retainer fees are vested upon payment.
1.
2.
3.
Annual Board Service Retainer: payable in restricted stock units as further described under Equity Compensation below (“Annual
Retainer RSU Grant”)
Annual Committee Member / Chair Service Retainer:
a.
b.
c.
Member / Chairperson of the Audit Committee: $9,000 / $20,000
Member / Chairperson of the Compensation Committee: $6,000 / $15,000
Member / Chairperson of the N&CG Committee: $5,000 / $10,000
Annual Lead Independent Director Service Retainer:
Lead Independent Director: $27,500
a.
Equity Compensation
The equity compensation set forth below will be granted under the SI-BONE, Inc. 2018 Equity Incentive Plan (the “Plan”), and
will be documented on the applicable form of equity award agreement most recently approved for use by the Board (or a duly authorized
committee thereof) for Eligible Directors. Any stock options granted under the Director Compensation Policy will be nonstatutory stock
options, with an exercise price per share equal to 100% of the Fair Market Value (as defined in the Plan) of the underlying Common Stock
on the date of grant, and a term of ten years from the date of grant (subject to earlier termination in connection with a termination of
service as provided in the Plan). Any RSU grant provided for by this Director Compensation Policy that vests quarterly shall have
quarterly vesting dates of March 15, June 15, September 15 and December 15 (the “Quarterly Vesting Dates”), and any RSU Grant that
vests annually shall vest on the earlier to occur of the one-year anniversary of the date of grant or the Company’s next Annual General
Meeting of its stockholders.
Initial Share Grant: Upon first election to the Board, each Eligible Director will be granted, upon approval by the Board or
1.
Compensation Committee of the Board, restricted stock units having a value of
$200,000 based on the share price then used by the Company for determination of the number of shares granted in RSU grants (the “Initial
RSU Grant”). The Initial RSU Grant will vest quarterly over three
years beginning on the Quarterly Vesting Date that follows the date of grant, such that the Initial RSU Grant will be fully vested on the
next Quarterly Vesting Date that follows the third anniversary of the Eligible Director’s first election to the Board, subject to the Eligible
Director’s Continuous Service on each applicable vesting date. In addition, in the event of a Change in Control or a Corporate Transaction,
any unvested portion of the Initial RSU Grant will fully vest and become exercisable as of immediately prior to the effective time of such
Change in Control or Corporate Transaction, subject to the Eligible Director’s Continuous Service on the effective date of such
transaction.
2. Annual Retainer RSU Grant: Each Eligible Director shall receive an annual RSU grant having an approximate value of $40,000 based
on the most recent closing price of the Company’s shares, which will vest approximately one year from the grant date (the “Annual
Retainer Grant”), subject to the Eligible Director’s Continuous Service on each applicable vesting date. In addition, in the event of a
Change in Control or a Corporate Transaction, any unvested portion of the Annual Retainer Grant will fully vest and become exercisable as
of immediately prior to the effective time of such Change in Control or Corporate Transaction, subject to the Eligible Director’s Continuous
Service on the effective date of such transaction.
3. Additional RSU Grants: The Compensation Committee may review and approve additional equity grants to Eligible Directors on the
date of each subsequent annual meeting. Each Eligible Director shall receive an annual RSU grant having an approximate value of
$120,000 based on the share price then used by the Company for determination of the number of shares granted in RSU grants, which will
vest approximately one year from the grant date (the “Additional Annual RSU Grant”), subject to the Eligible Director’s Continuous
Service on each applicable vesting date. In addition, in the event of a Change in Control or a Corporate Transaction, any unvested portion of
the Additional Annual RSU Grant will fully vest and become exercisable as of immediately prior to the effective time of such Change in
Control or Corporate Transaction, subject to the Eligible Director’s Continuous Service on the effective date of such transaction.
Philosophy
The Director Compensation Policy is designed to attract and retain experienced, talented individuals to serve on the Board. The
Board anticipates that the Board, or a duly authorized committee thereof, will generally review Eligible Director compensation on an
annual basis on or about the date of the Company’s Annual General Meeting of its stockholders. The Director Compensation Policy, as
amended from time to time, may take into account the time commitment expected of Eligible Directors, best practices and market rates in
director compensation, the economic position of the Company, broader economic conditions, historical compensation structure, the advice
of the compensation consultant that the Compensation Committee or the Board may retain from time to time, and the potential dilutive
effect of equity awards on our stockholders.
Under the Director Compensation Policy, Eligible Directors receive cash compensation in the form of retainers to recognize their
level of responsibility as well as the necessary time commitment involved in serving in a leadership role and/or on Committees. Eligible
Directors also receive equity compensation because we believe that stock ownership provides an incentive to act in ways that maximize
long-term stockholder value. Further, we believe that stock-based awards are essential to attracting and retaining talented Board members.
When stock options are granted, these stock options will have an exercise price at least equal to the Fair Market Value of Common Stock
on the date of grant, so that stock options provide a return only if the Fair Market Value appreciates over the period in which the stock
option vests and remains exercisable. We believe that the vesting acceleration provided in the case of a
Change in Control or other Corporate Transaction is consistent with market practices and is critical to attracting and retaining high quality
directors.
SI-BONE, Inc.
Severance Benefit Plan
Exhibit 10.24
Section 1. INTRODUCTION.
The SI-BONE, Inc. Severance Benefit Plan (the “Plan”) is hereby established by the Compensation Committee of the Board of Directors
of SI-BONE, Inc. (the “Company”) effective July 16, 2020. The purpose of the Plan is to provide for the payment of severance benefits to eligible
employees of the Company in the event that such employees become subject to involuntary or constructive employment terminations. This Plan document
also is the Summary Plan Description for the Plan.
For purposes of the Plan, the following terms are defined as follows:
(a)
“Affiliate” means any corporation, limited liability company or other business entity (other than the Company) in an “unbroken
chain” beginning with the Company, if each of the business entities other than the last such business entity in the unbroken chain owns stock or other equity
interests possessing 50% or more of the total combined voting power of all classes of stock or other equity interests in one of the other business entities in
such chain.
variable compensation) as in effect prior to any reduction that would give rise to an employee’s right to a resignation for Good Reason (if applicable).
(b)
“Base Salary” means base pay (excluding incentive pay, premium pay, commissions, overtime, bonuses and other forms of
(c)
“Cause” means, with respect to a particular employee, the meaning ascribed to such term in any written employment agreement,
offer letter or similar agreement between such employee and the Company defining such term, and, in the absence of such agreement, means with respect
to such employee, the term “Cause” as defined in the Equity Plan. The determination whether a termination is for Cause shall be made by the Plan
Administrator in its sole and exclusive judgment and discretion.
(d)
(e)
“Change in Control” has the meaning ascribed to such term in the Equity Plan.
“Change in Control Period” means the period commencing three months prior to the Closing of a Change in Control and
ending 12 months following the Closing of a Change in Control.
(f)
“Closing” means the initial closing of the Change in Control as defined in the definitive agreement executed in connection with
the Change in Control. In the case of a series of transactions constituting a Change in Control, “Closing” means the first closing that satisfies the threshold
of the definition for a Change in Control.
(g)
(h)
(i)
(j)
“Code” means the Internal Revenue Code of 1986, as amended, including any applicable regulations and guidance thereunder.
“Committee” means the Board of Directors or the Compensation Committee of the Board of Directors of the Company.
“Company” means SI-BONE, Inc. or, following a Change in Control, the surviving entity resulting from such event.
“Confidentiality Agreement” means the Company’s standard form of Employee Proprietary Information and Inventions
Agreement or any similar or successor document.
(k)
“Covered Termination” means, with respect to an employee, a termination of employment that is due to (1) a termination by the
Company without Cause (and other than as a result of the employee’s death or Disability) or (2) the employee’s resignation for Good Reason, and in either
case of (1) or (2), results in such employee’s Separation from Service.
(l)
“Disability” means any physical or mental condition which renders an employee incapable of performing the work for which he
or she was employed by the Company or similar work offered by the Company. The Disability of an employee shall be established if (i) the employee
satisfies the requirements for benefits under the Company’s
1
long-term disability plan or (ii) in the absence of a Company-sponsored long-term disability plan, the employee satisfies the requirements for Social
Security disability benefits.
(m)
set forth in Section 2.
(n)
(o)
“Eligible Employee” means an employee of the Company that meets the requirements to be eligible to receive Plan benefits as
“Equity Plan” means the SI-BONE, Inc. 2018 Equity Incentive Plan, as amended from time to time.
“Good Reason” for an employee’s resignation means the occurrence of any one or more of the following are undertaken by the
Company (or successor to the Company, if applicable) without the employee’s express written consent:
a material reduction in such employee’s annual base salary or total target cash compensation (i.e. the sum of such
Covered Employee’s annual base salary and annual target bonus) representing, in either case, a reduction of an amount equal to more than ten percent
(10%) of such employee’s then current base salary;
(1)
(2)
a material reduction or material adverse change in such employee’s job duties, responsibilities or authority; provided,
however, that any such reduction or change after a Change in Control (or similar corporate transaction that does not constitute a Change in Control) shall
not constitute Good Reason by virtue of the fact that such employee is performing similar duties and responsibilities in a larger organization (e.g., the
Chief Executive Officer continues to be the Chief Executive Officer of the successor or parent corporation);
a material diminution in the authority, duties or responsibility of the supervisor to whom such employee is required to
report including a requirement that such employee report to a corporate officer or employee instead of reporting directly to the board of directors of the
Company;
(3)
a relocation of such employee’s principal place of employment with the Company (or successor to the Company, if
applicable) to a place by more than 30 miles as compared to such employee’s then-current principal place of employment immediately prior to such
relocation, except for required travel by the employee on the Company’s business to an extent substantially consistent with employee’s business travel
obligations prior to the effective date of the Change in Control (or similar transaction); or
(4)
employee and the Company concerning the terms and conditions of such employee’s employment or service with the Company,
(5)
a material breach by the Company of any provision of this Plan or any other material agreement between such
(6) provided, however, that in any case of (1), (2), (3) or (4) above, in order for the employee’s resignation to be deemed to have
been for Good Reason, (i) the employee must first give the Company written notice of such employee’s intent to resign for Good Reason within
90 days after the date on which the Company gives written notice to such employee of the Company’s affirmative decision to take an action set
forth in clause (1), (2), (3), or (4) above (or such action or condition otherwise occurs), which notice shall describe such condition(s) employee
believes constitute Good Reason; (ii) the Company must fail to remedy such condition(s) within 30 days after receipt of such written notice (the
“Cure Period”), and (iii) the employee must resign from employment effective not later than 90 days after the expiration of such Cure Period.
A attached hereto, and which may include such other terms as the Committee deems necessary or advisable in the administration of the Plan.
(p)
“Participation Agreement” means an agreement between an employee and the Company in substantially the form of Appendix
(q)
“Plan Administrator” means the Committee prior to the Closing and the Representative upon and following the Closing, as
applicable.
(r)
“Representative” means one or more members of the Committee or other persons or entities designated by the Committee prior
to or in connection with a Change in Control that will have authority to administer and interpret the Plan upon and following the Closing as provided in
Section 8(a).
of similar effect.
(s)
“Section 409A” means Section 409A of the Code and the treasury regulations and other guidance thereunder and any state law
2
(t)
“Separation from Service” means a “separation from service” within the meaning of Treasury Regulations Section 1.409A-1(h),
without regard to any alternative definition thereunder.
Section 2: ELIGIBILITY FOR BENEFITS.
(a)
Eligible Employee. An employee of the Company is eligible to participate in the Plan if (i) the Plan Administrator has
designated such employee as eligible to participate in the Plan by providing such employee a Participation Agreement; (ii) such employee has signed and
returned such Participation Agreement to the Company within the time period required therein; and (iii) such employee meets the other Plan eligibility
requirements set forth in this Section 2. The determination of whether an employee is an Eligible Employee shall be made by the Plan Administrator, in its
sole discretion, and such determination shall be binding and conclusive on all persons.
(b)
Release Requirement. Except as otherwise provided in an individual Participation Agreement, in order to be eligible to receive
benefits under the Plan, the employee also must execute a general waiver and release, in such a form as provided by the Company (the “Release”), within
the applicable time period set forth therein, and such Release must become effective in accordance with its terms, which must occur in no event more than
60 days following the date of the applicable Covered Termination.
(c)
Plan Benefits Provided In Lieu of Any Previous Benefits. This Plan shall supersede any change in control or severance
benefit plan, policy or practice previously maintained by the Company with respect to an Eligible Employee and any change in control or severance
benefits in any individually negotiated employment contract, employment offer letter, or other agreement between the Company and an Eligible Employee.
Notwithstanding the foregoing, the Eligible Employee’s outstanding equity awards shall remain subject to the terms the Equity Plan or other applicable
equity plan under which such awards were granted (including the award documentation governing such awards) that may apply upon a Change in Control
and/or termination of such employee’s service and no provision of this Plan shall be construed as to limit the actions that may be taken, or to violate the
terms, thereunder.
(d)
Exceptions to Severance Benefit Entitlement. An employee who otherwise is an Eligible Employee will not receive benefits
under the Plan in the following circumstances, as determined by the Plan Administrator in its sole discretion:
The employee’s employment is terminated by the Company for any reason (including due to the employee’s death or
Disability) or the employee voluntarily terminates employment with the Company in any manner, and in either case, such termination is not a Covered
Termination. Voluntary terminations include, but are not limited to, resignation, retirement or failure to return from a leave of absence on the scheduled
date.
(1)
that is wholly or partly owned (directly or indirectly) by the Company or an Affiliate.
(2)
The employee voluntarily terminates employment with the Company in order to accept employment with another entity
The employee is offered an identical or substantially equivalent or comparable position with the Company or an
Affiliate. For purposes of the foregoing, a “substantially equivalent or comparable position” is one that provides the employee substantially the same level
of responsibility and compensation and would not give rise to the employee’s right to a resignation for Good Reason.
(3)
(4)
The employee is offered immediate reemployment by a successor to the Company or an Affiliate or by a purchaser of
the Company’s assets, as the case may be, following a Change in Control and the terms of such reemployment would not give rise to the employee’s right
to a resignation for Good Reason. For purposes of the foregoing, “immediate reemployment” means that the employee’s employment with the successor to
the Company or an Affiliate or the purchaser of its assets, as the case may be, results in uninterrupted employment such that the employee does not incur a
lapse in pay or benefits as a result of the change in ownership of the Company or the sale of its assets. For the avoidance of doubt, an employee who
becomes immediately reemployed as described in this Section 2(d)(4) by a successor to the Company or an Affiliate or by a purchaser of the Company’s
assets, as the case may be, following a Change in Control shall continue to be an Eligible Employee following the date of such reemployment.
benefits under the Plan are scheduled to commence.
(5)
The employee is rehired by the Company or an Affiliate and recommences employment prior to the date severance
(e)
Termination of Severance Benefits. An Eligible Employee’s right to receive severance benefits under this Plan shall terminate
immediately if, at any time prior to or during the period for which the Eligible Employee is receiving severance benefits under the Plan, the Eligible
Employee:
3
willfully breaches any material statutory, common law, or contractual obligation to the Company or an Affiliate
(including, without limitation, the contractual obligations set forth in the Confidentiality Agreement and any other confidentiality, non-disclosure and
developments agreement, non-competition, non-solicitation, or similar type agreement between the Eligible Employee and the Company, as applicable);
or
(1)
(2)
fails to enter into the terms of any Confidentiality Agreement reasonably requested by the Company.
Section 3. AMOUNT OF BENEFITS.
(a)
Benefits in Participation Agreement. Benefits under the Plan shall be provided to an Eligible Employee as set forth in the
Participation Agreement.
(b)
Additional Benefits. Notwithstanding the foregoing, the Committee may, in its sole discretion, provide benefits to individuals
who are not Eligible Employees (“Non-Eligible Employees”) chosen by the Plan Administrator, in its sole discretion, and the provision of any such
benefits to a Non-Eligible Employee shall in no way obligate the Company to provide such benefits to any other individual, even if similarly situated. If
benefits under the Plan are provided to a Non-Eligible Employee, references in the Plan to “Eligible Employee” (and similar references) shall be deemed to
refer to such Non-Eligible Employee.
(c)
Certain Reductions. In addition to Section 2(e) above, the Company, in its sole discretion, shall have the authority to reduce an
Eligible Employee’s severance benefits, in whole or in part, by any other severance benefits, pay and benefits provided during a period following written
notice of a business closing or mass layoff, pay and benefits in lieu of such notice, or other similar benefits payable to the Eligible Employee by the
Company or an Affiliate that become payable in connection with the Eligible Employee’s termination of employment pursuant to (i) any applicable legal
requirement, including, without limitation, the Worker Adjustment and Retraining Notification Act or any other similar state law or (ii) any Company
policy or practice providing for the Eligible Employee to remain on the payroll for a limited period of time after being given notice of the termination of the
Eligible Employee’s employment, and the Plan Administrator shall so construe and implement the terms of the Plan. Any such reductions that the
Company determines to make pursuant to this Section 3(c) shall be made such that any severance benefit under the Plan shall be reduced solely by any
similar type of benefit under such legal requirement, agreement, policy or practice (i.e., any cash severance benefits under the Plan shall be reduced solely
by any cash payments or severance benefits under such legal requirement, agreement, policy or practice). The Company’s decision to apply such reductions
to the severance benefits of one Eligible Employee and the amount of such reductions shall in no way obligate the Company to apply the same reductions
in the same amounts to the severance benefits of any other Eligible Employee. In the Company’s sole discretion, such reductions may be applied on a
retroactive basis, with severance benefits previously paid being re-characterized as payments pursuant to the Company’s statutory obligation.
(d)
Parachute Payments. If any payment or benefit an Eligible Employee will or may receive from the Company or otherwise (a
“Payment”) would (i) constitute a “parachute payment” within the meaning of Section 280G of the Code, and (ii) but for this sentence, be subject to the
excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then any such Payment shall be equal to the Reduced Amount. The “Reduced
Amount” shall be either (x) the largest portion of the Payment that would result in no portion of the Payment (after reduction) being subject to the Excise
Tax or (y) the largest portion, up to and including the total, of the Payment, whichever amount (i.e., the amount determined by clause (x) or by clause (y)),
after taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest applicable
marginal rate), results in the Eligible Employee’s receipt, on an after-tax basis, of the greater economic benefit notwithstanding that all or some portion of
the Payment may be subject to the Excise Tax. If a reduction in a Payment is required pursuant to the preceding sentence and the Reduced Amount is
determined pursuant to clause (x) of the preceding sentence, the reduction shall occur in the manner (the “Reduction Method”) that results in the greatest
economic benefit for the Eligible Employee. If more than one method of reduction will result in the same economic benefit, the items so reduced will be
reduced pro rata (the “Pro Rata Reduction Method”).
Notwithstanding any provisions in this Section above to the contrary, if the Reduction Method or the Pro Rata Reduction Method would
result in any portion of the Payment being subject to taxes pursuant to Section 409A that would not otherwise be subject to taxes pursuant to Section 409A,
then the Reduction Method and/or the Pro Rata Reduction Method, as the case may be, shall be modified so as to avoid the imposition of taxes pursuant to
Section 409A as follows: (A) as a first priority, the modification shall preserve to the greatest extent possible, the greatest economic benefit for the Eligible
Employee as determined on an after-tax basis; (B) as a second priority, Payments that are contingent on future events (e.g., being terminated without
Cause), shall be reduced (or eliminated) before Payments that are not contingent on future events; and (C) as a third priority, Payments that are “deferred
compensation” within the meaning of Section 409A shall be reduced (or eliminated) before Payments that are not deferred compensation within the
meaning of Section 409A.
4
The Company shall appoint a nationally recognized accounting or law firm to make the determinations required by this Section. The
Company shall bear all expenses with respect to the determinations by such accounting or law firm required to be made hereunder. If the Eligible Employee
receives a Payment for which the Reduced Amount was determined pursuant to clause (x) above and the Internal Revenue Service determines thereafter
that some portion of the Payment is subject to the Excise Tax, Eligible Employee agrees to promptly return to the Company a sufficient amount of the
Payment (after reduction pursuant to clause (x) above) so that no portion of the remaining Payment is subject to the Excise Tax. For the avoidance of doubt,
if the Reduced Amount was determined pursuant to clause (y) above, the Eligible Employee shall have no obligation to return any portion of the Payment
pursuant to the preceding sentence.
Section 4. RETURN OF COMPANY PROPERTY.
An Eligible Employee will not be entitled to any severance benefit under the Plan unless and until the Eligible Employee returns all
Company Property. For this purpose, “Company Property” means all paper and electronic Company documents and other Company property which the
Eligible Employee had in his or her possession or control at any time, including, but not limited to, Company files, notes, drawings, records, plans,
forecasts, reports, studies, analyses, proposals, agreements, financial information, research and development information, sales and marketing information,
operational and personnel information, specifications, code, software, databases, computer-recorded information, tangible property and equipment
(including, but not limited to, computers, facsimile machines, mobile telephones, servers), credit cards, entry cards, identification badges and keys; and any
materials of any kind which contain or embody any proprietary or confidential information of the Company (and all reproductions thereof in whole or in
part). As a condition to receiving benefits under the Plan, an Eligible Employee must not make or retain copies, reproductions or summaries of any such
Company documents, materials or property. However, an Eligible Employee is not required to return his or her personal copies of documents evidencing
the Eligible Employee’s hire, termination, compensation, benefits and stock options and any other documentation received as a stockholder of the
Company.
Section 5. TIME OF PAYMENT AND FORM OF BENEFITS.
The Company reserves the right in the Participation Agreement to specify whether payments under the Plan will be paid in a single sum,
in installments, or in any other form and to determine the timing of such payments. All such payments under the Plan will be subject to applicable
withholding for federal, state, foreign, provincial and local taxes. All benefits provided under the Plan are intended to satisfy the requirements for an
exemption from application of Section 409A to the maximum extent that an exemption is available and any ambiguities herein shall be interpreted
accordingly; provided, however, that to the extent such an exemption is not available, the benefits provided under the Plan are intended to comply with the
requirements of Section 409A to the extent necessary to avoid adverse personal tax consequences and any ambiguities herein shall be interpreted
accordingly.
It is intended that (i) each installment of any benefits payable under the Plan to an Eligible Employee be regarded as a separate
“payment” for purposes of Treasury Regulations Section 1.409A-2(b)(2)(i), (ii) all payments of any such benefits under the Plan satisfy, to the greatest
extent possible, the exemptions from the application of Section 409A provided under Treasury Regulations Sections 1.409A-1(b)(4), 1.409A-1(b)(5) and
1.409A-1(b)(9)(iii), and (iii) any such benefits consisting of COBRA premiums also satisfy, to the greatest extent possible, the exemption from the
application of Section 409A provided under Treasury Regulations Section 1.409A-1(b)(9)(v). However, if the Company determines that any severance
benefits payable under the Plan constitute “deferred compensation” under Section 409A and the Eligible Employee is a “specified employee” of the
Company, as such term is defined in Section 409A(a)(2)(B)(i), then, solely to the extent necessary to avoid the imposition of the adverse personal tax
consequences under Section 409A, (A) the timing of such severance benefit payments shall be delayed until the earlier of (1) the date that is six months and
one day after the Eligible Employee’s Separation from Service and (2) the date of the Eligible Employee’s death (such applicable date, the “Delayed Initial
Payment Date”), and (B) the Company shall (1) pay the Eligible Employee a lump sum amount equal to the sum of the severance benefit payments that the
Eligible Employee would otherwise have received through the Delayed Initial Payment Date if the commencement of the payment of the severance benefits
had not been delayed pursuant to this paragraph and (2) commence paying the balance, if any, of the severance benefits in accordance with the applicable
payment schedule.
5
In no event shall payment of any severance benefits under the Plan be made prior to an Eligible Employee’s Separation from Service or
prior to the effective date of the Release. If the Company determines that any severance payments or benefits provided under the Plan constitute “deferred
compensation” under Section 409A, and the Eligible Employee’s Separation from Service occurs at a time during the calendar year when the Release could
become effective in the calendar year following the calendar year in which the Eligible Employee’s Separation from Service occurs, then regardless of
when the Release is returned to the Company and becomes effective, the Release will not be deemed effective, solely for purposes of the timing of payment
of severance benefits under this Plan, any earlier than the latest permitted effective date (the “Release Deadline”). If the Company determines that any
severance payments or benefits provided under the Plan constitute “deferred compensation” under Section 409A, then except to the extent that severance
payments may be delayed until the Delayed Initial Payment Date pursuant to the preceding paragraph, on the first regular payroll date following the
effective date of an Eligible Employee’s Release, the Company shall (1) pay the Eligible Employee a lump sum amount equal to the sum of the severance
benefit payments that the Eligible Employee would otherwise have received through such payroll date but for the delay in payment related to the
effectiveness of the Release and (2) commence paying the balance, if any, of the severance benefits in accordance with the applicable payment schedule.
Section 6. TRANSFER AND ASSIGNMENT.
The rights and obligations of an Eligible Employee under this Plan may not be transferred or assigned without the prior written consent of
the Company. This Plan shall be binding upon any entity or person who is a successor by merger, acquisition, consolidation or otherwise to the business
formerly carried on by the Company without regard to whether or not such entity or person actively assumes the obligations hereunder and without regard
to whether or not a Change in Control occurs.
Section 7. MITIGATION.
Except as otherwise specifically provided in the Plan, an Eligible Employee will not be required to mitigate damages or the amount of
any payment provided under the Plan by seeking other employment or otherwise, nor will the amount of any payment provided for under the Plan be
reduced by any compensation earned by an Eligible Employee as a result of employment by another employer or any retirement benefits received by such
Eligible Employee after the date of the Eligible Employee’s termination of employment with the Company.
Section 8. CLAWBACK; RECOVERY.
All payments and severance benefits provided under the Plan will be subject to recoupment in accordance with any clawback policy that
the Company is required to adopt pursuant to the listing standards of any national securities exchange or association on which the Company’s securities are
listed or as is otherwise required by the Dodd-Frank Wall Street Reform and Consumer Protection Act or other applicable law. No recovery of
compensation under such a clawback policy will be an event giving rise to a right to resign for Good Reason, constructive termination, or any similar term
under any plan of or agreement with the Company.
Section 9. RIGHT TO INTERPRET AND ADMINISTER PLAN; AMENDMENT AND TERMINATION.
(a)
Interpretation and Administration. Prior to the Closing, the Committee shall be the Plan Administrator and shall have the
exclusive discretion and authority to establish rules, forms, and procedures for the administration of the Plan and to construe and interpret the Plan and to
decide any and all questions of fact, interpretation, definition, computation or administration arising in connection with the operation of the Plan, including,
but not limited to, the eligibility to participate in the Plan and amount of benefits paid under the Plan. The rules, interpretations, computations and other
actions of the Committee shall be binding and conclusive on all persons. Upon and after the Closing, the Plan will be interpreted and administered in good
faith by the Representative who shall be the Plan Administrator during such period. All actions taken by the Representative in interpreting the terms of the
Plan and administering the Plan upon and after the Closing will be final and binding on all Eligible Employees. Any references in this Plan to the
“Committee” or “Plan Administrator” with respect to periods following the Closing shall mean the Representative.
(b)
Amendment. The Plan Administrator reserves the right to amend this Plan at any time; provided, however, that any amendment
of the Plan will not be effective as to a particular employee who is or may be adversely impacted by such amendment or termination and has an effective
Participation Agreement without the written consent of such employee.
(c)
Termination. Unless otherwise extended by the Committee, the Plan will automatically terminate following satisfaction of all
the Company’s obligations under the Plan.
6
Section 10. NO IMPLIED EMPLOYMENT CONTRACT.
The Plan shall not be deemed (i) to give any employee or other person any right to be retained in the employ of the Company or (ii) to
interfere with the right of the Company to discharge any employee or other person at any time, with or without cause, which right is hereby reserved. This
Plan does not modify the at-will employment status of any Eligible Employee.
Section 11. LEGAL CONSTRUCTION.
This Plan is intended to be governed by and shall be construed in accordance with the Employee Retirement Income Security Act of 1974
(“ERISA”) and, to the extent not preempted by ERISA, the laws of the State of California.
Section 12. CLAIMS, INQUIRIES AND APPEALS.
(a)
Applications for Benefits and Inquiries. Any application for benefits, inquiries about the Plan or inquiries about present or
future rights under the Plan must be submitted to the Plan Administrator in writing by an applicant (or his or her authorized representative). The Plan
Administrator is:
SI-BONE, Inc.
Compensation Committee of the Board of Directors or Representative
Attention to: Corporate Secretary
471 El Camino Real, Suite 101
Santa Clara, California, USA 95050
(b)
Denial of Claims. In the event that any application for benefits is denied in whole or in part, the Plan Administrator must
provide the applicant with written or electronic notice of the denial of the application, and of the applicant’s right to review the denial. Any electronic
notice will comply with the regulations of the U.S. Department of Labor. The notice of denial will be set forth in a manner designed to be understood by the
applicant and will include the following:
(1)
(2)
(3)
the specific reason or reasons for the denial;
references to the specific Plan provisions upon which the denial is based;
a description of any additional information or material that the Plan Administrator needs to complete the review and an
explanation of why such information or material is necessary; and
an explanation of the Plan’s review procedures and the time limits applicable to such procedures, including a statement
of the applicant’s right to bring a civil action under Section 502(a) of ERISA following a denial on review of the claim, as described in Section 10(d)
below.
(4)
This notice of denial will be given to the applicant within 90 days after the Plan Administrator receives the application, unless special
circumstances require an extension of time, in which case, the Plan Administrator has up to an additional 90 days for processing the application. If an
extension of time for processing is required, written notice of the extension will be furnished to the applicant before the end of the initial 90 day period.
Administrator is to render its decision on the application.
This notice of extension will describe the special circumstances necessitating the additional time and the date by which the Plan
(c)
Request for a Review. Any person (or that person’s authorized representative) for whom an application for benefits is denied, in
whole or in part, may appeal the denial by submitting a request for a review to the Plan Administrator within 60 days after the application is denied. A
request for a review shall be in writing and shall be addressed to:
SI-BONE, Inc.
Compensation Committee of the Board of Directors or Representative
Attention to: Corporate Secretary
471 El Camino Real, Suite 101
Santa Clara, California, USA 95050
7
A request for review must set forth all of the grounds on which it is based, all facts in support of the request and any other matters that the
applicant feels are pertinent. The applicant (or his or her representative) shall have the opportunity to submit (or the Plan Administrator may require the
applicant to submit) written comments, documents, records, and other information relating to his or her claim. The applicant (or his or her representative)
shall be provided, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to his or her
claim. The review shall take into account all comments, documents, records and other information submitted by the applicant (or his or her representative)
relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.
(d)
Decision on Review. The Plan Administrator will act on each request for review within 60 days after receipt of the request,
unless special circumstances require an extension of time (not to exceed an additional 60 days), for processing the request for a review. If an extension for
review is required, written notice of the extension will be furnished to the applicant within the initial 60 day period. This notice of extension will describe
the special circumstances necessitating the additional time and the date by which the Plan Administrator is to render its decision on the review. The Plan
Administrator will give prompt, written or electronic notice of its decision to the applicant. Any electronic notice will comply with the regulations of the
U.S. Department of Labor. In the event that the Plan Administrator confirms the denial of the application for benefits in whole or in part, the notice will set
forth, in a manner calculated to be understood by the applicant, the following:
(1)
(2)
(3)
the specific reason or reasons for the denial;
references to the specific Plan provisions upon which the denial is based;
a statement that the applicant is entitled to receive, upon request and free of charge, reasonable access to, and copies of,
all documents, records and other information relevant to his or her claim; and
(4)
a statement of the applicant’s right to bring a civil action under Section 502(a) of ERISA.
(e)
Rules and Procedures. The Plan Administrator will establish rules and procedures, consistent with the Plan and with ERISA, as
necessary and appropriate in carrying out its responsibilities in reviewing benefit claims. The Plan Administrator may require an applicant who wishes to
submit additional information in connection with an appeal from the denial of benefits to do so at the applicant’s own expense.
(f)
Exhaustion of Remedies. No legal action for benefits under the Plan may be brought until the applicant (i) has submitted a
written application for benefits in accordance with the procedures described by Section 10(a) above, (ii) has been notified by the Plan Administrator that
the application is denied, (iii) has filed a written request for a review of the application in accordance with the appeal procedure described in Section 10(c)
above, and (iv) has been notified that the Plan Administrator has denied the appeal. Notwithstanding the foregoing, if the Plan Administrator does not
respond to an Eligible Employee’s claim or appeal within the relevant time limits specified in this Section 10, the Eligible Employee may bring legal action
for benefits under the Plan pursuant to Section 502(a) of ERISA.
Section 13. BASIS OF PAYMENTS TO AND FROM PLAN.
The Plan shall be unfunded, and all cash payments under the Plan shall be paid only from the general assets of the Company.
Section 14. OTHER PLAN INFORMATION.
(a)
Employer and Plan Identification Numbers. The Employer Identification Number assigned to the Company (which is the
“Plan Sponsor” as that term is used in ERISA) by the Internal Revenue Service is 26-2216351. The Plan Number assigned to the Plan by the Plan Sponsor
pursuant to the instructions of the Internal Revenue Service is 502.
December 31.
(b)
Ending Date for Plan’s Fiscal Year. The date of the end of the fiscal year for the purpose of maintaining the Plan’s records is
8
(c)
Agent for the Service of Legal Process. The agent for the service of legal process with respect to the Plan is:
SI-BONE, Inc.
Attention to: Corporate Secretary
471 El Camino Real, Suite 101
Santa Clara, California, USA 95050
In addition, service of legal process may be made upon the Plan Administrator.
(d)
Plan Sponsor. The “Plan Sponsor” is:
SI-BONE, Inc.
471 El Camino Real, Suite 101
Santa Clara, California, USA 95050
+1 (408) 207-0700
(e)
Plan Administrator. The Plan Administrator is the Committee prior to the Closing and the Representative upon and following
the Closing. The Plan Administrator’s contact information is:
SI-BONE, Inc.
Compensation Committee of the Board of Directors or Representative
471 El Camino Real, Suite 101
Santa Clara, California, USA 95050
The Plan Administrator is the named fiduciary charged with the responsibility for administering the Plan.
Section 15. STATEMENT OF ERISA RIGHTS.
Participants in this Plan (which is a welfare benefit plan sponsored by SI-BONE, Inc.) are entitled to certain rights and protections under
ERISA. If you are an Eligible Employee, you are considered a participant in the Plan and, under ERISA, you are entitled to:
(a)
Receive Information About Your Plan and Benefits
Examine, without charge, at the Plan Administrator’s office and at other specified locations, such as worksites, all
documents governing the Plan and a copy of the latest annual report (Form 5500 Series), if applicable, filed by the Plan with the U.S. Department of
Labor and available at the Public Disclosure Room of the Employee Benefits Security Administration;
(1)
Obtain, upon written request to the Plan Administrator, copies of documents governing the operation of the Plan and
copies of the latest annual report (Form 5500 Series), if applicable, and an updated (as necessary) Summary Plan Description. The Administrator may
make a reasonable charge for the copies; and
(2)
furnish each Eligible Employee with a copy of this summary annual report.
(3)
Receive a summary of the Plan’s annual financial report, if applicable. The Plan Administrator is required by law to
(b)
Prudent Actions by Plan Fiduciaries. In addition to creating rights for Eligible Employees, ERISA imposes duties upon the
people who are responsible for the operation of the employee benefit plan. The people who operate the Plan, called “fiduciaries” of the Plan, have a duty to
do so prudently and in the interest of you and other Eligible Employees and beneficiaries. No one, including your employer, your union or any other
person, may fire you or otherwise discriminate against you in any way to prevent you from obtaining a Plan benefit or exercising your rights under ERISA.
(c)
Enforce Your Rights. If your claim for a Plan benefit is denied or ignored, in whole or in part, you have a right to know why
this was done, to obtain copies of documents relating to the decision without charge, and to appeal any denial, all within certain time schedules.
Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request a copy of Plan documents or
the latest annual report from the Plan, if applicable, and do not receive them within 30 days, you may file suit in a Federal court. In such a case, the court
may require the Plan Administrator to provide the materials and pay
9
you up to $110 a day until you receive the materials, unless the materials were not sent because of reasons beyond the control of the Plan Administrator.
situated in Santa Clara County, California.
If you have a claim for benefits which is denied or ignored, in whole or in part, you may only file suit in a state or Federal court
If you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor, or you
may file suit in a Federal court. The court will decide who should pay court costs and legal fees. If you are successful, the court may order the person you
have sued to pay these costs and fees. If you lose, the court may order you to pay these costs and fees, for example, if it finds your claim is frivolous.
(d)
Assistance with Your Questions. If you have any questions about the Plan, you should contact the Plan Administrator. If you
have any questions about this statement or about your rights under ERISA, or if you need assistance in obtaining documents from the Plan Administrator,
you should contact the nearest office of the Employee Benefits Security Administration, U.S. Department of Labor, listed in your telephone directory or the
Division of Technical Assistance and Inquiries, Employee Benefits Security Administration, U.S. Department of Labor, 200 Constitution Avenue N.W.,
Washington, D.C. 20210. You may also obtain certain publications about your rights and responsibilities under ERISA by calling the publications hotline of
the Employee Benefits Security Administration.
10
Appendix A
Participation Agreement
Name: ___________________
Section 1. ELIGIBILITY.
You have been designated as eligible to participate in the SI-BONE, Inc. Severance Benefit Plan (the “Plan”), a copy of which is attached
to this Participation Agreement (the “Participation Agreement”). Capitalized terms not explicitly defined in this Participation Agreement but defined in the
Plan shall have the same definitions as in the Plan. You will receive the benefits set forth below if you meet all the eligibility requirements set forth in the
Plan, including, without limitation, timely executing a Release for benefit of the Company and allowing such Release to become effective in accordance
with its terms. Notwithstanding the schedule for provision of benefits set forth below, the schedule and timing of payment of any benefits under this
Participant Agreement is subject to any delay in payment that may be required under Section 5 of the Plan.
Section 2. CHANGE IN CONTROL SEVERANCE BENEFITS.
[You will receive the severance benefits set forth in this Section 2 in the event of either: (i) a Covered Termination occurring during the
Change in Control Period, or (ii) the Closing of a Change in Control, provided that you agree to provide transition services for a period of up to six months
(if the Company or its successor offers such transition services at a level of compensation no lower than the annual base salary you received prior to such
Change in Control (pro-rated for any reduction in time commitment or work effort, based on a 40 hour work week, allowed by such transition consulting
arrangement), without taking into account any prior reduction in compensation that would, itself, give rise to a Good Reason termination)]. [If you are
2
terminated in a Covered Termination that occurs during the Change in Control Period, you will receive the severance benefits set forth in this Section 2.]
All severance benefits described herein are subject to standard deductions and withholdings.
1
(a)
Base Salary. You shall receive a cash payment in an amount equal to [______] months (the “Severance Period”) of payment of
your Base Salary. The Base Salary payment will be paid to you in a lump sum cash payment no later than the second regular payroll date following the later
of (i) the effective date of the Release or (ii) the Closing, but in any event not later than March 15 of the year following the year in which your Separation
from Service occurs.
3
4
(b)
Bonus Payment. You will be entitled to [one and one-half (1.5) times] the annual target cash bonus established for you, if any,
pursuant to the annual performance bonus or annual variable compensation plan established by the Board of Directors or Committee (or any authorized
committee or designee thereof) for the year in which your Covered Termination occurs. If at the time of the Covered Termination you are eligible for the
annual target cash bonus for the year in which the Covered Termination occurs, but the target percentage (or target dollar amount, if specified as such in the
applicable bonus plan) for such bonus has not yet been established for such year, the target percentage shall be the target percentage established for you for
the preceding year (but adjusted, if necessary for your position for the year in which the Covered Termination occurs). For the avoidance of doubt, the
amount of the annual target bonus to which you are entitled under this Section 2(b) will be calculated (1) assuming all articulated performance goals for
such bonus (including, but not limited to, corporate and individual performance, if applicable), for the year of the Covered Termination were achieved at
target levels; (2) as if you had provided services for the entire year for which the bonus relates; and (3) ignoring any reduction in your Base Salary that
would give rise to your right to resignation for Good Reason (such bonus to which you are entitled under this Section 2(b), the “Annual Target Bonus
Severance Payment”). The Annual Target Bonus Severance Payment shall be paid in a lump sum cash payment no later than the second regular payroll
date following the later of (i) the effective date of the Release or (ii) the Closing, but in any event not later than March 15 of the year following the year in
which your Separation from Service occurs.
1
Option 1 for chief executive officer only.
2
Option 2 for all other executive officers.
3
Insert 24 months for chief executive officer only, and 12 months for other executive officers.
4
1.5x target bonus is for the chief executive officer only.
1
(c)
Payment of Continued Group Health Plan Benefits. If you timely elect continued group health plan coverage under the
Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) following your Covered Termination date, the Company shall pay directly to the
carrier the full amount of your COBRA premiums on behalf of you for your continued coverage under the Company’s group health plans, including
coverage for your eligible dependents, until the earliest of (i) the end of the Severance Period following the date of your Covered Termination, (ii) the
expiration of your eligibility for the continuation coverage under COBRA, or (iii) the date when you become eligible for substantially equivalent health
insurance coverage in connection with new employment (such period from your termination date through the earliest of (i) through (iii), the “COBRA
Payment Period”). Upon the conclusion of such period of insurance premium payments made by the Company, you will be responsible for the entire
payment of premiums (or payment for the cost of coverage) required under COBRA for the duration of your eligible COBRA coverage period, if any. For
purposes of this Section, (1) references to COBRA shall be deemed to refer also to analogous provisions of state law and (2) any applicable insurance
premiums that are paid by the Company shall not include any amounts payable by you under an Internal Revenue Code Section 125 health care
reimbursement plan, which amounts, if any, are your sole responsibility. You agree to promptly notify the Company as soon as you become eligible for
health insurance coverage in connection with new employment or self-employment.
Notwithstanding the foregoing, if at any time the Company determines, in its sole discretion, that it cannot provide the COBRA premium
benefits without potentially incurring financial costs or penalties under applicable law (including, without limitation, Section 2716 of the Public Health
Service Act), then in lieu of paying COBRA premiums directly to the carrier on your behalf, the Company will instead pay you on the last day of each
remaining month of the COBRA Payment Period a fully taxable cash payment equal to the value of your monthly COBRA premium for the first month of
COBRA coverage, subject to applicable tax withholding (such amount, the “Special Severance Payment”), such Special Severance Payment to be made
without regard to your election of COBRA coverage or payment of COBRA premiums and without regard to your continued eligibility for COBRA
coverage during the COBRA Payment Period. Such Special Severance Payment shall end upon expiration of the COBRA Payment Period.
(d)
Equity Acceleration. The vesting and exercisability of each outstanding unvested stock option and other stock award, as
applicable, that you hold covering Company common stock (each, an “Equity Award”) shall be accelerated in full and any reacquisition or repurchase
rights held by the Company in respect of common stock issued pursuant to any Equity Award granted to you shall lapse in full. For purposes of determining
the number of shares that will vest pursuant to the foregoing provision with respect to any performance based vesting Equity Award for which the
performance period has not ended and that has multiple vesting levels depending upon the level of performance, vesting acceleration with respect to any
ongoing performance period(s) shall occur with respect to the number of shares subject to the award as if the applicable performance criteria had been
attained at a 100% level or, if greater, based on actual performance as of the termination of your Continuous Service to the Company. Notwithstanding
anything to the contrary set forth herein, your Equity Awards shall remain subject to the terms of the Equity Plan (or other applicable Company plan) and
award documents under which such Equity Award was granted, including any provision for earlier termination of such Equity Awards.
(e)
Extension of Post-Termination Exercise Period. All outstanding Equity Awards which carry a right to exercise that you hold
as of the date of your Covered Termination will expire on the earlier of (A) the original term of such outstanding Equity Awards as set forth in the
applicable award agreement or the equity incentive plan, subject to earlier termination in the event of a Change in Control as set forth in the terms of the
applicable equity incentive plan and definitive agreement for such Change in Control transaction, and (B) the date which occurs on the second anniversary
of termination of your Continuous Service to the Company.
Section 3. NON-CHANGE IN CONTROL SEVERANCE BENEFITS. If your employment is terminated by the Company without Cause that occurs
at a time that is not during the Change in Control Period, you will receive:
(a)
the base salary cash payment described in Section 2(a) above, but the Severance Period for purposes of calculating such benefits
shall be twelve (12) months; and
(b)
twelve (12) months.
the COBRA benefits described in Section 2(c) above, but the Severance Period for purposes of calculating such benefits shall be
You shall not be eligible to receive any other benefits under the Plan except as described in Section 3(a) and Section 3(b) above.
For the avoidance of doubt, in no event shall you be entitled to benefits under both Section 2 and this Section 3. If you are eligible for severance benefits
under both Section 2 and this Section 3, you shall receive the benefits set forth in Section 2 and such benefits shall be reduced by any benefits previously
provided to you under Section 3.
2
Section 4. ACKNOWLEDGEMENTS.
As a condition to participation in the Plan, you hereby acknowledge each of the following:
(a)
The benefits that may be provided to you under this Participation Agreement are subject to certain reductions and termination
under Section 2 and Section 3 of the Plan.
(b)
Your eligibility for and receipt of any severance benefits to which you may become entitled as described in Section 2 or Section
3 above is expressly contingent upon your execution of and compliance with the terms and conditions of the Plan, the Release and the Confidentiality
Agreement. Severance benefits under this Participation Agreement shall immediately cease in the event of your violation of the provisions of
Confidentiality Agreement or any other written agreement with the Company.
(c)
As further described in Section 2(c) of the Plan, this Participation Agreement and the Plan supersede and replace any change in
control or severance benefits previously provided to you and by executing below you expressly agree to such treatment.
To accept the terms of this Participation Agreement and participate in the Plan, please sign and date this Agreement in the space provided below and return
it to Timothy E. Davis no later than July ____, 2020.
SI-BONE, Inc.
By:
Timothy E. Davis,
Lead Independent Director and
Compensation Committee Chairman
Eligible Employee
[Insert Name]
Date:
3
Schedule
Executive Officer
Base Pay
Bonus
COBRA Coverage Equity Awards
Jeffrey Dunn
24 months base salary
1.5 times annual target cash
bonus
24 months
Full acceleration of vesting of
all equity awards
Laura Francis
12 months base salary
Anthony Recupero
12 months base salary
Michael Pisetsky
12 months base salary
Then current annual target
cash bonus
Then current annual target
cash bonus
Then current annual target
cash bonus
12 months
12 months
12 months
Full acceleration of vesting of
all equity awards
Full acceleration of vesting of
all equity awards
Full acceleration of vesting of
all equity awards
4
List of subsidiaries of the Registrant
Subsidiary
SI-BONE S.R.L.
SI-BONE Deutschland GmbH
SI-BONE UK LTD
Jurisdiction
Italy
Germany
United Kingdom
Exhibit 21.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-235714) and Form S-8 (Nos. 333-227907, 333-
230473 and 333-237091) of SI-BONE, Inc. of our report dated March 10, 2021 relating to the financial statements, which appears in this Form 10-K.
Exhibit 23.1
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 10, 2021
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Jeffrey W. Dunn, certify that:
1.
I have reviewed this Form 10-K of SI-BONE, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date:
March 10, 2021
/s/ Jeffrey W. Dunn
Jeffrey W. Dunn
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Laura A. Francis, certify that:
1.
I have reviewed this Form 10-K of SI-BONE, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: March 10, 2021
/s/ Laura A. Francis
Laura A. Francis
Chief Operating Officer & Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, Jeffrey W. Dunn, President and Chief Executive Officer of SI-Bone,
Inc. (the “Company”), and Laura A. Francis, Chief Operating Officer & Chief Financial Officer of the Company, each hereby certify that, to the best of his
or her knowledge:
1. The Company’s Annual Report on Form 10-K for the period ended December 31, 2020, to which this Certification is attached as Exhibit 32.1 (the
“Periodic Report”), fully complies with the requirements Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the
Exhibit 32.1
Company.
Date: March 10, 2021
Date: March 10, 2021
/s/ Jeffrey W. Dunn
Jeffrey W. Dunn
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Laura A. Francis
Laura A. Francis
Chief Operating Officer & Chief Financial Officer
(Principal Financial Officer)
This certification is being furnished to the Securities and Exchange Commission as an exhibit to the Annual Report and shall not be deemed filed by the
Company for purposes of § 18 of the Securities Exchange Act of 1934, as amended.; and is not to be incorporated by reference into any filing of the
Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.