Good afternoon, and welcome to SI-BONE's First Quarter 2019 Earnings Conference Call. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Carrie Mendivil from the Gilmartin Group for a few introductory comments.

Thank you all for participating in today's call. Joining me today is Jeff Dunn, President and Chief Executive Officer; and Laura Francis, Chief Financial Officer of SI-BONE. Earlier today, SI-BONE released financial results for the quarter ended March 31st, 2019. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance or related are forward-looking statements. All trends in our forward-looking – future financial expectations, which includes expectations for hiring active surgeons, reimbursement decisions and guidance for revenue, are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our most recent annual report on Form 10-K filed with the Securities and Exchange Commission on March 14th, 2019. SI-BONE disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. This conference call has time-sensitive information and is accurate only as of the live broadcast today, May 8th, 2019. And with that, I'll turn the call over to Jeff.

Thanks, Carrie. Good afternoon, and thank you for joining us. I'm pleased to welcome you to SI-BONE's first-quarter 2019 earnings call. During the quarter, we delivered a solid operational performance driven by our growing educational efforts, ongoing investment in innovation, expanding field organization and increasing payer coverage. Total revenue for the first-quarter 2019 was approximately $15 million, up 18% compared to the first-quarter 2018 and 5 percentage points higher than the growth of 13% in the fourth quarter of 2018. U.S. revenue for the first quarter was $13.5 million, representing 19% growth over the same period of the prior year. International revenue was $1.5 million. Turning to our business, we are continuing to expand our commercial footprint and simultaneously educate surgeons on SI joint dysfunction. Until a few years ago, Sacroiliac joint dysfunction was largely overlooked when treating lower-back pain. At SI-BONE, we were almost solely responsible for educating the broader marketplace. We are continuing to make meaningful investments in surgeon education, which we believe is critical to further penetrate this market. In addition to our efforts, societies are increasingly taking up the mantle in surgeon education. This was recently highlighted at the American Academy of Orthopaedic Surgeons annual meeting in Las Vegas in mid-March. At their request, we met with the executive team of AAOS, a 39,000-physician society, to discuss their interest in working with SI-BONE to better educate their members on SI joint issues. We're also continuing to innovate and provide differentiated surgical solutions in the sacropelvic space. At AAOS, we highlighted our iFuse Bedrock technique, which we believe is an important advancement in how we treat adult deformity patients. In November 2018, this technique was cleared by the FDA for use in adult deformity surgeries in accordance with our existing indication for use. In April, we received…

Thanks, Jeff. For the first quarter of 2019, revenue increased 18% to $15 million, compared to $12.7 million for the first quarter of 2018. U.S. revenue for the first quarter was $13.5 million, representing 19% growth over the same period of the prior year. International revenue for the first quarter was $1.5 million, representing 9% growth over the same period in the prior year. The increase in revenue primarily was driven by increases in domestic and international case volumes. Gross margin for the first quarter of 2019 was 90% as compared to 92% in the corresponding prior-year period. The decrease in gross margin was due to an increase in personnel in operations to support the growth of our business, in line with our expectations. Looking ahead, we expect gross margins to trend toward the mid- to high 80% level in the next two to three years driven by mix and scale. Operating expenses increased 53% to $22.3 million for the first quarter of 2019 as compared to $14.6 million in the corresponding prior-year period. The increase primarily was driven by higher surgeon education spending, a step-up in sales hiring and additional advertising and marketing. We increased our sales and marketing spend to capture the opportunity from the recent positive and exclusive reimbursement decisions made by U.S. commercial payers. In addition, we incurred higher general and administrative expenses due to higher stock-compensation expenses and the ongoing costs associated with being a public company. The operating loss was $8.8 million in the first quarter of 2019 as compared to $2.9 million in the corresponding prior-year period. Our net loss was $9.3 million or a loss of $0.38 per diluted share for the first quarter of 2019 as compared to $4.2 million or a loss of $1.17 per diluted share in the corresponding prior-year period. We ended the first quarter with $115.3 million of cash, cash equivalents and short-term investments. Turning to our outlook for 2019, we continue to expect revenue to be in the range of $65 million to $66.5 million, representing growth of 17% to 20% over full-year 2018. We expect Q2 international revenue to be similar to Q1 with further acceleration in the second half of the year. On the whole, we anticipate that our U.S. and international businesses will grow at similar rates for the year. I'll now turn the call back over to Jeff for closing comments.

Thank you, Laura. In closing, we remain confident that our fundamentals are intact, and business outlook remains strong. During the first quarter, we made headway on the reimbursement and clinical fronts, further validating our position as the market leader for providing differentiated surgical devices in the sacropelvic space. Going forward in 2019, we are focused on expanding our commercial team in the U.S. and overseas, continuing to ramp up training and educational efforts and continuing our efforts on the reimbursement front. We look forward to providing updates on our progress, and we will see some of you next week at the Bank of America healthcare conference in Las Vegas. With that, we will now open it up to questions. Operator?

[Operator instructions] Our first question comes from David Lewis of Morgan Stanley. Your line is open.

Good afternoon. Just a couple of questions for me for – maybe for Jeff. Jeff, just obviously the big change this quarter is the operating expense dynamics. Obviously you expanded the commercial infrastructure pretty dramatically. I was just wondering if you could just flesh that out a little bit more for us. Where is that investment going in terms of clinical support, infrastructure relative to sales, sales leadership or sales support infrastructure? And what impact are you seeing here on either sales rep productivity here, near term, or new account penetration? And I have a quick follow-up.

Yes, David. We have increased the investment there. We put in two area vice presidents. We now have 10 regional directors, and we have been hiring, and without a lot of trouble, terrific people that want to come to work for the company. So we are in very good shape in our hiring plan, as well in our surgeon training. I know we don't give – we both know we don't give numbers of exact surgeons trained, but we are, I should say, a bit ahead of plan on our own plan on training the number of surgeons that are coming to training, interested in Bedrock, interested in the product and some of the stuff that we've talked around the trickle-down effect of Bedrock and people coming to training for that and for SI joint fusion. And obviously, that is a result of sort of five-or-so things, better reimbursement in places like Alabama and others, where we're seeing people come to training; more sales reps in the field; more products, including this decorticator. So we do have one competitor that has a decorticator, and we're seeing an interesting group of surgeons who used to use their product coming our way. So it's sort of all of the above that we're spending money on, and we're starting to see the results of that investment in the growth rate. I feel very good about where we're investing money. We're being aggressive but very thoughtful, and I think it's going to result in a very good year for us.

OK. And just two quick follow-ups for me, and I'll give them both now. The first is just in terms of your hiring plan expectations for the year. Jeff, where are you on those hiring plans? Meaning, how much of the hiring activity has actually occurred here in the first five months of the year. And then second follow-up was just on Bedrock. I just wondered if you could share sort of, you know, the clinical response to the Bedrock system kind of post the academy meeting. Thanks so much.

Sure, I can say. David, we're highly confident that we are going to meet the hiring plans and highly confident that we're going to meet the surgeon training goals that we have internally, which obviously equates into active surgeons. So we are a bit ahead of plan on each of those things. I'm not going to get into specific numbers, but we are in – we think that will bear really good fruit over the next three quarters, including this quarter. As to the Bedrock response, as I mentioned, we had all these academic institutions in Chicago this past Friday and Saturday and last Sunday. I can tell you that the energy around the idea of Bedrock and the surgical technique and the biomechanics is resonating exactly as we had hoped, and I had quotes from big-shot surgeons, big KOLs that said this is a great advancement to long-construct surgery. This is really going to shine a light on the SI joint, as we've talked about, and there will be trickle-down effects. And there were were people like Chris Shaffrey there and Polly, Frank Phillips, Paul Park who was quite excited, and we had a surgeon from Stanford. And so all in all, the reception, I think, has just begun, and it is really terrific.

Our next question comes from Dave Turkaly of JMP Securities. Your line is open.

Thanks. I was wondering if I could maybe just follow up on the active surgeon one, and you may not want to give the exact number. But I know the first quarter historically has been a little bit slow. And I was just curious if given the momentum you saw sort of in the fourth quarter of last year, did some of that carry over in the first quarter, specifically on the active surgeon front?

Dave, we gave a number, moving from 450 to 550 in a 12-month period. We are, as I said, we're certainly ahead of plan on the training, and we really look at that as a sort of a bellwether on active surgeons as well. So I think we're going to be in very good shape throughout the year.

And you mentioned that the large majority of the increase coming from case from volumes, I guess. Would it be safe to assume that? Or I guess any color on ASPs, flattish year over year, up or down either direction?

Hey, David. It's Laura. We – as you know, we do normally see a little bit of erosion in our ASPs, so our volumes are actually higher. In the U.S., we showed 19% growth in revenue, but it was a couple of percentage points higher than that in volume but then slightly offset by a little bit of a decline in ASP and – listen, we have gross margins of 90%. We don't want to lose cases due to price issues, and so we're going to be competitive. We're also seeing the procedure moving more into ambulatory surgical centers where there is more price sensitivity, and so we are trying to be competitive there as well.

Got it. And just one last one if I could. You mentioned the BC BS Alabama, 3 million. I thought – and I could have had this wrong last quarter. But I thought you might have had 62 million exclusive coverage lives last quarter, but I think that's the number you quoted today. So I was just wondering if you know – I know that Alabama was an exclusive to Vermont and Highmark were, but did they not increase the number that you guys have – number of lives covered exclusively?

Vermont is fairly small and I believe Highmark we actually included Highmark in our numbers from the first quarter because of the fact that we were aware of it at the time.

In March, I think they came on I believe – I can't remember exactly, David, but…

I think it technically…

Alabama is not exclusive, but the others are. And I think the good part about this is, we are not only getting exclusive wins, but even the ones that we're just putting in positive policies, but are flipping their policies from non-exclusive to exclusive like these, and you know a lot of people said, oh, that's never going to happen, Jeff and we're seeing that with some of these and we certainly expect more progress on the reimbursement front this year as well. There aren't a lot of Blue Cross plans left, there is a handful and then of course we have a few of the big payers that we're working quite interactively and we have published as you know, the four-year prospective clinical study, which includes the USRCT and the five year is coming and we should have the last patient back in the next 60 days or so and publish that later this summer. So some people think two years is the magical one, five years is magical for some. So we're hoping that helps us increase our competitiveness as a company once we have that five-year perspective.

Great, thanks a lot.

[Operator instructions] Our next question comes from Kyle Rose of Canaccord. Your line is open.

Great, thank you very much. Just two questions for me, more from a big picture perspective. Just wanted to talk a little bit about productivity. Obviously you've launched some new products here, you talked about the Bedrock technique that's very early, but you're also launched the decorticator. I think historically, you've talked about somewhere in the $1 million or $1.5 million kind of long-term productivity on a per-rep basis. So just do those two new products change that at all? Are they included historically. And then the second question is just more on building the channel in the patient diagnosis pathway. I mean obviously you're adding reps clinical support specialists. How do we think about as you turn on reimbursement, the time it takes to fill that patient funnel and then kind of when we should start to see the productivity from some of those new reps coming onboard? And with that I'll hop off. Thank you.

Yes, so Kyle, we are starting to seeing productivity continue to move up and to the right. So we're encouraged by that and some of that is just more cases per surgeon as reimbursement comes through in places like Alabama where they used to only be able to do Medicare. So it is moving in the right direction for sure and also because they have clinical specialists underneath them and someone else can run the trays and help out in the territory. As to – what was the…

The next one was just as you're adding those reps, I mean how will you think about – with the new data and everything that's out, how does productivity ramp now relative to where it was historically. Seems like you guys are in a better position now, but just want to make sure my assumptions are correct.

No, I think your assumption is correct and we've added – we expect to get to somewhere around 110 total people in the field and half of those approximately are CSSs which are productivity boosters by the end of the year. So without question, that is the expectation that we are taking it from just slightly over $1 million sort of at the beginning of the year where we think we can get it up much closer to a $1.3 million, $1.4 million, $1.5 million and then eventually a quite a bit higher than that as some of the big payers come on. And also in some of these territories that have Bedrock cases, that's going to add to their productivity because instead of doing X amount of surgeries, they will put some Bedrock cases on and some of those range from, as I said in my remarks earlier, sometimes there are two implants there, but sometimes there are five or six implants or six implants there. So when you put in six implants, you can do the math. The ASP on some of those can be good too and that helps out with the sales reps productivity.

Great, thank you.

You’re welcome.

There are no further questions. I'd like to turn the call back over to Jeff Dunn for any further remarks.

Just in summary, I would say we're quite pleased with the results going from 13% to 18%. We feel like all the pieces are coming together from an investment standpoint on product, on hiring, on reimbursement and more exclusives on surgeon training and those things combined I think are all starting to really work together and we'll see some, some other catalysts hopefully improve things and so, we're quite excited about how things are coming together in all of those areas. So with that, thank you very much for joining the call and have a good rest of the day.

Ladies and gentlemen, thank you for participating in today’s conference. You may now disconnect. Everyone have a great day.