Good afternoon, ladies and gentlemen and welcome to the SI-BONE Q4 and Full Year 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host Carrie Mendivil, Investor Relations. Thank you.

Thank you all for participating in today’s call. Joining me today are Jeff Dunn, President and Chief Executive Officer and Laura Francis, Chief Financial Officer and Chief Operating Officer of SI-BONE. Earlier today, SI-BONE released financial results for the quarter and full year ended September 31, 2019. A copy of the press release is available on the company’s website. Before we begin, I would 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 are forward-looking statements. All forward-looking statements including, without limitation, our examination of operating trends and our 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 quarterly report on Form 10-Q filed with the Securities and Exchange Commission on November 12, 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 contains time-sensitive information and is accurate only as of the live broadcast today, March 9, 2020. And with that, I will turn the call over to Jeff.

Thanks, Carrie. Good afternoon and thank you for joining us. I am pleased to welcome you to SI-BONE’s earnings call to review our fourth quarter and full year 2019 results. Our progress in 2019 was marked by strong commercial execution that drove accelerating revenue growth. Revenue for the fourth quarter was $19.8 million, up 27% compared to the fourth quarter of 2018. We ended the year with $67.3 million in sales, up 22% compared to 2018. We have now exceeded over 45,000 procedures performed by more than 2,000 surgeons worldwide. We are well positioned for the future and continue to expect our revenue for full year 2020 to be in the range of $80 million to $82 million, reflecting 19% to 22% growth over 2019. As we enter 2020, we expect a progress in investments we made during 2019 to pay dividends throughout this year. Starting with our sales force, we finished the fourth quarter with 56 reps in our U.S. direct sales organization. Of those 56 reps, 45 are mature reps who have been with the company for over 12 months. During 2019 our direct sales reps had an average run-rate of over $1.3 million and for our mature reps, that figure was over $1.6 million. Our direct reps are further supported by clinical support specialists, or CSSs who assist in case coverage. At the end of the fourth quarter, we had 51 CSSs. Looking ahead to 2020, we are focused on increasing the productivity of our U.S. sales force and incrementally hiring both U.S. direct sales reps and CSSs as needed. We expect to end the year with around 66 sales reps as we add approximately 10 direct sales reps to large and underpenetrated territories over the course of 2020. We also plan to further increase the number…

Thanks, Jeff. For the fourth quarter of 2019, revenue increased 27% to $19.8 million compared to $15.6 million in the fourth quarter of 2018. The increase in revenue during the fourth quarter was primarily driven by higher case volumes. U.S. revenue increased 28% to $18.5 million, while international revenue increased 12% to $1.3 million compared to the corresponding prior year periods. Gross margin for the fourth quarter 2019 was 90% compared to 91% in the fourth quarter 2018. Operating expenses increased 42% to $26.3 million in the fourth quarter 2019 compared to $18.5 million in the fourth quarter of 2018. Our operating loss for the fourth quarter of 2019 was $8.5 million compared to $4.3 million in the fourth quarter 2018. Net loss was $9.1 million or $0.36 per diluted share for the fourth quarter 2019 as compared to $5.3 million or $0.26 per diluted share in the fourth quarter of 2018. For the full year 2019, revenue increased 22% to $67.3 million compared to $55.4 million in 2018. U.S. revenue increased 23% to $61.8 million, while international revenue increased 4% to $5.5 million compared to 2018. The increase in U.S. revenue was primarily driven by higher case volumes. The lower growth rates for international sales, was primarily due to softness in our German subsidiary in the first half of the year. Gross margin for 2019 was 90% compared to 91% in 2018. The change in gross margin was due to an increase in personnel and operations to support the growth of the business. This is in line with our expectations for gross margin to trend towards the mid to high 80% range over the next couple of years. Operating expenses increased 54% to $96.5 million for 2019 compared to $62.5 million in 2018. The increase in operating expense was…

Thank you, Laura. 2019 was a transformational year for SI-BONE. We made significant investments that will add to the continued growth in 2020. Looking ahead in 2020, we are focused on continued commercial execution in the U.S. and overseas ramping up training and educational efforts and furthering our efforts on the reimbursement front. We are well positioned for growth and look forward to what is ahead. I want to thank the SI-BONE team for their enthusiasm and hard work. We look forward to updating you on our progress. With that, we will now open it up to questions. Operator?

[Operator Instructions] Your first question comes from the line of Dave Turkaly from JMP Securities. Your line is now open.

Great. Thanks and congrats on the quarter and all the progress that you made in ‘19. I know you mentioned Cigna and Anthem on the call. I was wondering, Jeff, if you might just give us an update on some of the other payers and where they stand and when you think you might hear from them?

Yes. So, as I think you know, David, Aetna had posted – and did last year at the same time had a date of January 9 to post an updated policy. Last year, they actually were late and posted on March 15. So our expectation and we have heard this sort of indirectly as well is that sometime mid month this month we should see an Aetna update. As to Anthem, that’s still scheduled for the fall. And as you know, they have started to cover some cases under the new policy, but we don’t expect anything to change in the significant way until potentially the September timeframe. And I think as I mentioned before, there is 112 payers that now cover and there is 12 commercial payers, including the ones we have just talked about that do not cover. So there is spattering of others that are still being worked on around the country.

Got it. And then the 3.3 to 3.7 per active surgeon update is great, I think it’s a little above what we look for, but I guess just your thoughts on – now that you have been at this for a while, should we expect that to continue? Could that improve, I guess, what are your thoughts are sort of, as you look at 2020, do you think that continues to rise? Thank you.

Well, I mean, all the investments we made in ‘19 whether that’s in the sales force or getting more reimbursement or better payment out there that CMS announced, I think brings strength to those kinds of numbers as people are interested in doing the procedure and more focused on the procedure. And I think as they get more educated, they will find more patients, because if they are not looking carefully, they are not finding them. As to what that number might be, David, I am sort of reluctant at this point to throw out a number, but we obviously see strength in the business. We feel very good about 2020 despite the absolute turmoil that all of us are seeing left and right in front of us with the oil situation and the coronavirus situation, we feel very good about the business.

Thank you.

You are welcome.

Your next question is from the line of David Lewis from Morgan Stanley. Your line is open.

Good afternoon. Jeff, just kind of few qualifying questions here, just first on the CPT code increase for physicians as well as Cigna, are you saying you have not seen an impact from those two dynamics, either the two or you are seeing an impact than you expect that impact to build across the quarters of the year?

The latter, David, we are certainly seeing an impact in interest, in buzz from both CPT and Cigna, I was just saying that it’s not – as contracts have to be rewritten, because all the commercial contracts have to get into place that as you know we have a couple of thousand surgeons that have done the procedure, call it, 1,400ish in the United States, all those contracts need to, on the commercial side, the amended. And so I am just not really sure that all those got done in the first week. And so I think the point is that it’s going to take some time to do that, but I think it’s just general momentum that will come with that throughout the year.

Okay, that’s very clear. And then Jeff kind of related to this, I think about your physician targeted training growth trends for 2020. You kind of grew physician training by 20%, 18%, 20% in ‘19 you are forecasting low-teens for ‘20, I guess just on the surface when I think about Cigna and think about a very significant elevation in the CPT code, one would conclude that surgeon training actually would be consistent with the prior not even accelerates? So how to understand how you are thinking about surgeon training. Perhaps you are going to go back and try to reactivate surgeons, and that's a specific effort, but I would expect that number to be closer to 20% to 30% help me understand sort of the commercial strategy for 2020 in light of that number?

David, this is Laura. You are asking a good question here if you look at what happened in 2019 we have an interesting situation where there were two factors that were driving the growth of our business so number one was the hiring of all of the sales reps and there was a heavy emphasis on the hiring of the clinical support specialists and what the hiring allowed those clinical support specialists allowed our senior sales reps to do actually deeper penetrate their accounts and so what we saw was a momentum with the best surgeons who were regularly diagnosing and treating patient’s which cause the increase from the 3.3 to the 3.7 and we do attribute that to the additional valid clinical support specialists that allowed our sales reps to go deeper within their own accounts the second factor is obviously the training of additional surgeons and we have put a pretty equal emphasis on both of those and very heavy focus on training surgeons as well as ramping up the sales force and so I think what we are trying to do is be conservative with that surgeon number representing that we may see more of an increase in the number of procedures that are being done in order to make up that 19% to 22% growth or we may see also that increase in the number of surgeons.

Let me just add David as an example this past weekend we had three different SI-BONE surgeon training/meetings across the country one here in San Francisco on Friday and Saturday and then two in other locations so the demand even though some of the travel restrictions that are running around us there is do three trainings in one weekend is a lot of strength and I think now that the CPT payment is more interesting let just say we are continuing to see really good strength.

Okay. Sounds like maybe the physician training number is a little conservative but the focus for 2020 is sort of depth over breadth?

I think it’s both. But certainly we think that there is opportunity, I guess that we think there is opportunity in both for sure.

We are over the – with those numbers that you mentioned, they are going deeper into the accounts.

Okay. And then just last one and I will jump back in queue. Just can you give us an update, I know it’s early, but just Bedrock enrollment trends, where you are in terms of enrollment number or percent of trial enrolled? Thanks so much.

We have opened up a – I don’t have the exact number in front of me, David, but something like, I think at least half a dozen sites across the country, enrollment is still very early, because those contracts take time to negotiate, but we have very firm targets as to how many people will we enroll this year and the team is comped base on those enrollments to make sure that they get done. So I think we have shared with you and the rest of the community that we have had 40 academic center trainings. And so the Bedrock cases being on all over the place in the clinical interest of 20 sites is certainly in sight, let’s just say, there is greater strength than 20 sites to go into the clinical trial.

Great. Thanks so much.

You are welcome.

Thank you. Your next question is from the line of Kyle Rose from Canaccord. Your line is open.

Great. Thank you for taking the questions and congrats on a strong 2019. So I am wondering if you could just talk a little bit about the sales force, I appreciate the commentary regarding under – overall productivity and an underlying productivity of the mature reps, but maybe just help us talk about some of the momentum from the latter cohorts. I mean, you made some big hiring momentum in 2019 you are talking about adding another 10 reps in 2020? How have you seen the productivity curve trend with these latest cohorts? And then any expectation when you think about guidance this year for disruption in promoting some of your better sales reps to management and splitting territories and things of that sort? Could you just help us understand what’s contemplated from a productivity standpoint?

Yes. I will let Laura comment on some of that, but I would start with, I don’t expect there to be any disruption whatsoever from these promotions. These people are very much working managers in the sense that there is a dozen of them across the country. I think we have a tremendous system in place in the field with planned reviews and we have created a ratio with increasing it to 12, so that the managers don’t have too many reps. We are very much on track on the hiring piece. So I don’t expect any disruption there, Kyle and I will let Laura comment sort of on some of the productivity numbers, the 1.3 or the 1.6, but we feel pretty good about the thing actually playing out how we had planned it with the CSSs and the productivity, but let me turn it over to Laura for a bit.

But believe it we were looking at this from the beginning. We did say that we considered a mature rep to be somebody that had 12 months of experience with us and with our model of strength to add in clinical support specialists and various other things, training that we were doing with our sales force. What we are trying to do is really accelerate that, but what we really found is that it is taking around 12 months to really start to ramp up those completely new territories and senior sales reps. And so when we place a new senior sales rep we estimate that we can get $100,000 to $200,000 out of them within that first year. But then, we see significant growth thereafter the second year is more in the $700,000 range, the third year more in a $1.4 million range is where our models are showing us where we are at and what historical data is actually telling us so we do have to make the initial investments in order to make that happen but the good news is we made a substantial investment in 2019 and we think that it puts us into a terrific position for 2020 to significantly increase our sales and get the productivity out of those people and then to continue to do that with 10 new territories in 2020.

Alright. That’s very helpful. Thank you. And you talked about some new products and new indications I think Jeff mentioned iFuse Bone but are there any new products we should be thinking about from a launch standpoint in 2020?

We are working on two major product efforts they are very much late this year early next year we have been we are very far along in the development I should say of both of those products and think they will help our efforts not just in the SI joint space but in the adult deformity and the trauma space. So there is some cross products that we think are potentially best in breed and as I think about it Kyle when we entered the SI joint space that really was 50 years of no invention in my mind. In the lower part of the adult deformity space and I think that there was pretty modest invention solving that pelvic side of the things in the last 50 years and I think in the trauma space as well over the last 50 years there has been but just say modest invention and we think we will advance all three of those areas by early next year.

Okay. And then just the last question I will hop back in just when you think about gross margin the gross margin profile the company in your average selling prices and have you noticed any difference as you are going to broader account base you have got 539 active users now going to go to 625 in 2020 how should we be thinking about the pricing assumptions on the go forward basis?

We are premium priced products. At the present time our product is on average around 10% to 15% higher than other company’s and so and rightly so given the amount of work that we have done in this space the amount of education that we have put in the clinical data that we have and so on but with that said, we do look at our ASPs, and given our strong gross margin profile, we want to make sure to continue to penetrate the market and grow with it and so on the average our ASP’s have been declining by a couple of percent a year we expect for that to continue to occur over time and that’s what we have built into some of our assumptions in why we give that additional color around gross margin.

Thank you. Your next question is from the line of Craig Bijou from Cantor Fitzgerald. Your line is open.

Thanks guys. Good afternoon. Thanks for taking the question. Wanted to just start with the guidance in 2020 and recognizing that it is still early and there are preferable market perspective that are couple of factors but you sequentially grew throughout 2019 you have a number of pretty good growth drivers coming in 2020 in our view and the guidance suggests growth that’s down slightly obviously it is not a big step down but just wanted to get your thoughts there is there anything else that that we should be considering when thinking about how you are guidance is lined up for 2020?

Yes, Craig, I mean you and the investors on the call know that during 2019 that we were except for this last quarter the fourth quarter we were pretty much on the number or through the year. We obviously were, in the fourth quarter, ahead of the consensus number. We, I think, are very confident in the – or I shouldn’t say we think we are very confident in the business, but we certainly want to be ahead of the number going forward. There is nothing that we see significant headwinds other than this general coronavirus issue. And so we, as you don’t exactly know, how that’s going to play out, hopefully that will all be over in 60 days or at least dissipated in the next 60 days. Just a matter of color on that, we have lost some cases in Italy, it’s a small portion of our – a very small portion of our business. I just talked to a surgeon and in some places they are asking the surgeons not to travel to conferences like at Stanford and NYU and a few other places. That may or the first thought I had was well, is that a negative or is that a positive that they are going to behold more, because they are not going to Brazil to the Global Spine Conference or those kinds of things. So I think that I would just finish with I think both Laura and I and the rest of the executive team feel very good about the business, all the growth drivers, all the execution, we feel in a great place on the balance sheet – from a balance sheet standpoint and an execution standpoint. We are really not seeing to-date any effect from the coronavirus in the U.S. Of course that could change, but I think the guidance is prudent and at the same time we feel very strong about the business.

Great. That’s helpful. And maybe Laura on obviously 2019 was a significant investment year for you guys, added a lot of sales people and clinical support specialists. At least on the clinical support specialist side, I don’t think you are probably going to add as many, but just want to understand how we should be thinking about operating leverage and the spend for 2020?

2019 was very clearly an investment year for the company and there were two reasons for the investment. One was just the amount of momentum that we had from reimbursement and then also the capital in order to really capture the opportunity. And so what we are doing is we had been very careful about spend in 2018. We have an interesting business, where in 2018 we got to the point of where we were almost breakeven from an operating income perspective just by very closely managing spend with 90% plus gross margin, but the desire to accelerate the growth rate required the sort of investment that we made in 2019 combined with the capital in order to do that. So, we really put our foot on the gas in 2019 and you can see how our growth rates have accelerated from then. 2020 is a little bit of a different year. I would say it’s the year where we are going to digest a lot of the investments that we actually made. So, if you think about, for example, those investments that we made in sales reps and clinical support specialists, let’s assume then average one of those people team on to our staff in the middle of the year. So, you will have 6 months of expense on average from those hires, you now need to absorb the full expense in the year 2020. So, that’s a lot of where you are going to see the increase in spend and then much more modest investments in other areas of the business. So, general and administrative expenses shouldn’t be growing significantly. R&D, we are going to continue to incrementally invest based on the new products that Jeff mentioned as well as the SILVIA Bedrock study that was mentioned previously. Those are going to go into R&D and then sales and marketing as we said around 10 sales reps hired, plus 10 CSSs hired. So, more incremental adding 20 people this year versus 40 last year into the field.

Got it. That’s very helpful. Thank you for taking the questions.

Thanks, Craig.

You are welcome.

Thank you. Your next question is coming from the line of Kaila Krum from SunTrust. Your line is open.

Hey, guys. Thanks for taking our questions. So you mentioned 2020 is kind of a year to digest some of the investments of 2019 so guys how do you think about sort of 2021 and growth going forward I mean is it fair assume that the growth could accelerate of this 2020 guidance you have provided added any additional thoughts there would be helpful?

Well I will let Laura also share her thoughts but Kyle as we think we penetrated the market along with competitors out there less than 10% of the market so in the base business we think there's an awful lot of running room for an awful lot of years and with the things that we now have in place we think 21 and 22 in that area will continue with great growth great growth, particularly of an Anthem and an Aetna, come through prior to 21 and then I think the second part of that is as we pour some more products into the mix in early 21 or late 20 we will see how those uptakes are and those products but we feel quite confident that we have come up with some things that I think will help us in 21 and 22 as a company on top of the very underpenetrated still base business so of course adding more sales reps and training and more surgeons are part of that equation but those other fundamental additions around reimbursement and products I think give us great confidence in the outer years.

I think the only other thing I would add to that Kyle is that if you look at the average run rate for our direct sales reps right now were at around 1.3 million productivity per year and with 56 territories and 51 of them that have clinical support specialists within we feel that a target for an average territory is $2 million with the senior sales reps plus the clinical support specialists so there is this combination of continuing to hire on the sales side both the sales reps and the clinical support specialists but it is also growing that productivity of the sales reps as well and so it is that approach in the reason why is to continue to accelerate the growth rate that we have been experiencing number one but then number two over time having that vision to profitable growth.

Great. That makes it to understand. And then you guys mentioned that launched iFuse Bone in the U.S. in December can you just talk about how you view that opportunity how meaningful that could be this year and how that sort of increases your average procedure value any additional color would be helpful?

Yes I would make a couple of comments Kyle it is not a huge introduction you did not see us make some big press release over it you certainly will see press releases on these other products that I have alluded to late this year early next year but what is behind that is really our strategy around enabling technologies as opposed to a base product and no different than decorticator, where we've penetrated competitors' businesses with that enabling technology bone is the same kind of thing it allows us to go those surgeons who say I want to put in bone in conjunction with your product I love the product but I really have been talking medical schools that putting in bone is a good thing the positive side of that is it is incremental business the other positive side of uses the exact same instruments so we didn’t have to spend money on new instruments it uses the 4 millimeter implants which was and it is the same triangular shape there is certainly business we're garnering. And I guess the final item is we expected more of those cases to potentially be two implants and one bone and we are seeing some surgeons actually putting three implants in a bone. So it’s early on the play there and it’s not a huge part of our business. So I don’t think you should factor that in, in some important way, but it is an incremental strength as we, I think have by far the best suite of enabling technologies on top of the best product in the market competitively, I think, without question. So…

And I think only addition that I would have is we were talking about the ASP earlier in the discussion. When we talk about the technologies, it’s partly to ensure that we have all the enabling technologies that our surgeons are looking for to make sure they choose SI-BONE over any other solution that’s out there, but it also is a way of helping to maintain the ASP as well.

Makes a lot of sense. Thanks, guys.

You are welcome.

Thank you. Your next question comes from the line of David Saxon from Needham. Your line is open.

Yes. Hi, Jeff and Laura. Thanks for taking the questions. In your prepared remarks, you talked a little bit about going out and reactivating inactive surgeons, so I was just wondering how quickly do you think you can do that and how big of an opportunity is that?

Well, the surgeon pie has about 7,500 north of neurosurgeons in the United States. Laura, do you remember that…

So 1,400 surgeons in the U.S. have been trained and treated at least 1 patient and 539 surgeons actually performed procedure in the fourth quarter. So you have around 900 surgeons who weren’t active in that last quarter of the year. So David, it’s a good question and the opportunity is pretty significant. It is difficult to sometimes flip a switch and get them reactivated right away. It depends upon what – where they are at currently. There are some surgeons that are doing multiple procedures a month. There are other surgeons that are doing procedures once a year. If you take the surgeons who are once a year and you get them doing them 4 times a year, for example, you can relatively quickly increase sales from those surgeons that are sporadically active. If you are taking a surgeon that’s been inactive for an extended period of time, those are a little bit more challenging. So for example, there maybe a surgeon who has significant Cigna coverage and was not performing procedures that decided to start after the Cigna decision in the fourth quarter. What we would probably need to do is bring that surgeon back, train the surgeon and then that surgeon would have to start diagnosing patients and performing procedures which the period of time to do that is usually a good 6 to 9 months. So that’s the way that we think about in active surgeons. And it’s definitely a focal point and could be a very significant growth opportunity for the company. The other comment I was going to make is there were surgeons that with the previous surgeon payments, were not necessarily interested in performing procedures, but with that increase of 27%, we are hearing from surgeons that they are interested in coming back and performing a procedure as well. So that’s another opportunity to get some of those surgeons that have been in active as well as surgeons who have never been trained or performed a procedure.

Great. That’s helpful. And then on Bedrock, what kind of revenue assumptions are baked into guidance and then can you give some color on what percentage of Bedrock accounts go on to do standalone iFuse procedures? Thanks so much.

Yes. We have not put a huge amount of Bedrock into the forecast. You are just going along, David, exactly how we had hoped from a exposure standpoint into the academic centers. If someone had asked me, would we get into 40 academic centers with Bedrock, I would have said, well, that’s probably a stretch? And so we are quite pleased with the penetration. We haven’t as you know and all of you know broken out those particular numbers and don’t intend to any time soon. So I don’t know if you want to add anything to that, Laura, but…

No, Bedrock is doing exactly what we had hoped it would do and that is there is a focus on the SI joint as the pain generator coming from key opinion leaders and is helping to drive our core business.

Great. Thanks so much.

You’re welcome.

Thank you. I am showing no further questions at this time. I would now like to turn the conference back to Mr. Jeff Dunn, President and CEO.

Great. Well, just a thank you very much. I know it’s been a challenging day for everyone across the world and I appreciate you joining the call and thank you very much for your support. Have a great evening.

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation and have a wonderful day. You may all disconnect.