10-Q 1 sibn930201810-q.htm 10-Q Document

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

Form 10-Q

 

(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018

OR

o 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
 
26-2216351
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)

471 El Camino Real, Suite 101, Santa Clara, California
 
95050
(Address of principal executive offices)
 
(Zip Code)
 
 
 

 Registrant's telephone number, including area code: (408) 207-0700
 

 
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 o No x
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 o
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  o
Accelerated filer  o
Non-accelerated filer  x
Smaller reporting company  x
Emerging growth company x
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o No x
 
The number of shares outstanding of the registrant’s Common Stock, par value $.0001 per share, was 24,335,690 as of November 28, 2018.









TABLE OF CONTENTS

 
 
 
 
 
    
 
Page
 
 
PART I-FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II-OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 

In this Quarterly Report on Form 10-Q, “we,” “our,” “us,” “SI-BONE,” and “the Company” refer to SI-BONE, Inc. 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.









1



SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, contains forward-looking statements. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our future results of operations and financial position, business strategy, prospective products and product candidates, their expected properties, performance and impact on healthcare costs, the expected timeline for achievement of our clinical milestones, the timing of, and potential results from, clinical and other trials, marketing authorization from the U.S. Food and Drug Administration, or FDA, or regulatory authorities in other jurisdictions, coverage and reimbursement for procedures using our product candidates, if approved, research and development costs, timing of regulatory filings and feedback, timing and likelihood of success, plans and objectives of management for future operations and future results of anticipated products, are forward-looking statements.

These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the 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. The forward-looking statements in this Quarterly Report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of risks, uncertainties and assumptions, including those described under the sections in this Quarterly Report entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These forward-looking statements are subject to numerous risks, including, without limitation, the following:

our future capital needs and our need to raise additional funds;

our limited operating history;

our status as a clinical-stage company and our expectation to incur losses in the future;

the lengthy and expensive clinical development process with its uncertain outcome and potential for clinical failure or delay;

the decision by any applicable regulatory authority whether to clear our product candidates for clinical development and, ultimately, whether to approve them for marketing and sale;

our ability to anticipate and prevent adverse events caused by our product candidates;

our ability to identify, in-license, acquire, discover or develop additional product candidates;

our ability to have our product candidates manufactured;

the market acceptance of our product candidates;

our ability to timely and successfully develop and commercialize our existing and future product candidates, if approved;

physician awareness and adoption of our product candidates;

the size of the market for our product candidates;

These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included elsewhere in this Quarterly Report on Form 10-Q and our prior filings with the SEC. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date of this Quarterly Report on Form 10-Q, and we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.


2






PART I-FINANCIAL INFORMATION
Item 1. Financial Statements


SI-BONE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 
 
September 30,
 
December 31,
 
 
 
2018
 
2017
 
 
 
 
 
 
ASSETS
 
 
 
 
 
CURRENT ASSETS
 
 
 
 
 
Cash and cash equivalents
 
$
14,004

 
$
22,408

 
Accounts receivable, net of allowance for doubtful accounts of $264 and $268 at September 30, 2018 and December 31, 2017, respectively
 
7,092

 
7,416

 
Inventory
 
3,028

 
2,553

 
Prepaid expenses and other current assets
 
737

 
1,252

 
Total current assets
 
24,861

 
33,629

 
Property and equipment, net
 
2,048

 
1,896

 
Other non-current assets
 
1,486

 
309

 
TOTAL ASSETS
 
$
28,395

 
$
35,834

 
 
 
 
 
 
 
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
 
Accounts payable
 
$
1,790

 
$
1,814

 
Accrued liabilities and other
 
7,152

 
5,724

 
Total current liabilities
 
8,942

 
7,538

 
Redeemable convertible preferred stock warrants
 
1,103

 
422

 
Long-term borrowings
 
38,899

 
38,704

 
Other long-term liabilities
 
332

 

 
TOTAL LIABILITIES
 
49,276

 
46,664

 
 
 
 
 
 
 
Redeemable convertible preferred stock, $0.0001 par value;
 
 
 
 
 
Authorized: 12,104,749 shares at September 30, 2018 and December 31, 2017; issued and outstanding: 11,871,578 shares at September 30, 2018 and December 31, 2017; (Liquidation preference of $119,194 at September 30, 2018 and December 31, 2017.
 
118,548

 
118,548

 
 
 
 
 
 
 
STOCKHOLDERS’ DEFICIT
 
 
 
 
 
Common stock, $0.0001 par value; Authorized: 19,333,333 shares at September 30, 2018 and December 31, 2017; issued and outstanding: 3,912,907 and 3,603,140 shares, at September 30, 2018 and December 31, 2017, respectively.
 
1

 
1

 
Additional paid-in capital
 
12,003

 
9,943

 
Accumulated other comprehensive income
 
431

 
402

 
Accumulated deficit
 
(151,864
)
 
(139,724
)
 
TOTAL STOCKHOLDERS’ DEFICIT
 
(139,429
)
 
(129,378
)
 
TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
 
$
28,395

 
$
35,834

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

3




SI-BONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share amounts)
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
 
Revenue
$
13,381

 
$
11,683

 
$
39,756

 
$
34,214

Cost of goods sold
1,221

 
1,328

 
3,451

 
3,894

Gross profit
12,160

 
10,355

 
36,305

 
30,320

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
10,605

 
9,857

 
31,890

 
30,987

Research and development
1,373

 
1,466

 
3,875

 
4,234

General and administrative
3,226

 
4,071

 
8,198

 
10,808

Total operating expenses
15,204

 
15,394

 
43,963

 
46,029

 
 
 
 
 
 
 
 
Loss from operations
(3,044
)
 
(5,039
)
 
(7,658
)
 
(15,709
)
Interest and other income (expense), net:
 
 
 
 
 
 
 
Interest income
69

 
44

 
199

 
117

Interest expense
(1,282
)
 
(1,005
)
 
(3,826
)
 
(2,925
)
Other income (expense), net
(535
)
 
317

 
(855
)
 
383

Net loss
(4,792
)
 
(5,683
)
 
(12,140
)
 
(18,134
)
Other comprehensive income:
 
 
 
 
 
 
 
Changes in foreign currency translation
(4
)
 
(25
)
 
29

 
(60
)
Comprehensive loss
$
(4,796
)
 
$
(5,708
)
 
$
(12,111
)
 
$
(18,194
)
 
 
 
 
 
 
 
 
Net loss per share, basic and diluted
$
(1.29
)
 
$
(1.64
)
 
$
(3.34
)
 
$
(5.26
)
 
 
 
 
 
 
 
 
Weighted-average number of common shares used to compute basic and diluted net loss per share
3,712,876

 
3,475,628

 
3,638,905

 
3,450,252

The accompanying notes are an integral part of these condensed consolidated financial statements.


4




 
SI-BONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
 
 
Cash flows from operating activities
 
 
 
 
Net loss
 
$
(12,140
)
 
$
(18,134
)
Adjustments to reconcile net loss to net cash used in operating activities
 
 
 
 
Depreciation and amortization
 
536

 
817

Change in allowance for doubtful accounts
 
(3
)
 
8

Stock-based compensation
 
1,081

 
1,038

Change in fair value of redeemable convertible preferred stock warrants
 
681

 
(235
)
Loss on write-off of property and equipment
 
95

 
172

Amortization of debt discount
 
194

 
235

Write-off of public offering costs
 

 
1,292

Forgiveness of notes receivable
 

 
437

Changes in operating assets and liabilities
 
 
 
 
Accounts receivable
 
357

 
(405
)
Inventory
 
(458
)
 
(1,146
)
Prepaid expenses and other assets
 
495

 
(43
)
Accounts payable
 
(884
)
 
1,447

Accrued liabilities and other
 
1,844

 
1,023

Net cash used in operating activities
 
(8,202
)
 
(13,494
)
Cash flows from investing activities
 
 
 
 
Purchase of property and equipment
 
(777
)
 
(370
)
Net cash used in investing activities
 
(777
)
 
(370
)
Cash flows from financing activities
 
 
 
 
Proceeds from the exercise of common stock options, net
 
915

 
176

Proceeds from the issuance of redeemable convertible preferred stock, net
 

 
5,426

Payments of public offering costs
 
(288
)
 
(1,292
)
Net cash provided by financing activities
 
627

 
4,310

Effect of exchange rate changes on cash and cash equivalents
 
(52
)
 
154

Net decrease in cash and cash equivalents
 
$
(8,404
)
 
$
(9,400
)
Cash and cash equivalents at
 
 
 
 
Beginning of period
 
22,408

 
27,900

End of period
 
$
14,004

 
$
18,500

Supplemental disclosure of cash flow information
 
 
 
 
Cash paid for interest
 
$
3,147

 
$
2,473

Supplemental disclosure of noncash information
 
 
 
 
Vesting of early exercised stock options
 
$
64

 
$
91

Purchases of property and equipment included in accounts payable and accrued liabilities
 
$
35

 
$
10

Public offering costs included in accounts payable and accrued liabilities
 
$
865

 
$

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


SI-BONE, INC.
NOTES TO UNAUDITED CONDENSED 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 iFuse Implant System, or iFuse, in 2009 in the United States, in 2010 in certain countries in the European Union, and in 2015 in certain countries in the rest of the world.
Reverse Stock Split
In October 2018, the Company's board of directors and stockholders approved a 1-for-18 reverse stock split of the Company's common stock and redeemable convertible preferred stock, which was effected on October 4, 2018. The par value of the common stock and redeemable convertible preferred stock was not adjusted as a result of the reverse split. All issued and outstanding share and per share amounts of common stock, redeemable convertible preferred stock, stock options, and warrants included in the accompanying consolidated financial statements have been adjusted to reflect this reverse stock split for all periods presented.
Initial Public Offering
On October 16, 2018, the Company’s Registration Statement on Form S-1 (File No. 333-227445) relating to the initial public offering (IPO) of its common stock was declared effective by the Securities and Exchange Commission (SEC). Pursuant to such Registration Statement, the Company sold 8,280,000 shares at an initial public offering price of $15.00 per share for net proceeds of $113.7 million to the Company, net of underwriting discounts and commissions and offering costs.
In connection with the IPO, the Company's outstanding shares of redeemable convertible preferred stock were automatically converted into an aggregate of 12,066,654 shares of common stock and the Company's outstanding warrants to purchase 156,550 shares of redeemable convertible preferred stock were automatically converted into warrants to purchase an aggregate of 284,983 shares of common stock, resulting in reclassification of the related redeemable convertible preferred stock warrant liability of $1.1 million in additional paid-in-capital.
 
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP have been condensed or omitted, and accordingly the balance sheet as of December 31, 2017 has been derived from the audited consolidated financial statements at that date but does not include all of the information required by GAAP for complete financial statements. These unaudited interim condensed consolidated financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair statement of the Company’s consolidated financial information. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or for any other interim period or for any other future year.
The accompanying condensed consolidated financial statements should be read in conjunction with the audited financial statements and related notes thereto for the year ended December 31, 2017 contained in the Company’s prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the SEC on October 18, 2018.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 include: fair value of assets and liabilities; analysis of the allowance for doubtful accounts; inventory valuation; valuation of deferred tax assets, including related valuation allowances; fair value of common stock and redeemable convertible preferred stock warrants; stock-based compensation; and useful lives of long lived assets. 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.

6


SI-BONE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JOBS Act Accounting Election
As an emerging growth company under the Jumpstart Our Business Startups Act of 2012, or 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 until such time as those standards apply to private companies.
Segments
The chief operating decision makers for the Company are the Chief Executive Officer and Chief Financial Officer. The Chief Executive Officer and the Chief Financial Officer 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 United States. Revenue by geography is based on billing address of the customer. No single country outside the United States accounts for more than 10% of the total revenue during the periods presented. Long-lived assets held outside the United States are immaterial.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Domestic
$
12,216

 
$
10,530

 
$
35,672

 
$
30,915

International
1,165

 
1,153

 
4,084

 
3,299

 
$
13,381

 
$
11,683

 
$
39,756

 
$
34,214

Foreign Currency
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 resulting from the translation of the Company’s consolidated balance sheets are recorded as a component of accumulated other comprehensive income. 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 cash equivalents. The Company’s cash and cash equivalents are deposited with financial institutions in the United States and in Europe; the majority of the Company’s cash and cash equivalents are deposited with a single financial institution in the United States. Deposits in this institution exceed the amount of insurance provided on such deposits. The Company has not experienced any losses on its deposits of cash and cash equivalents.
The Company’s revenue and accounts receivable are spread across a large number of customers, primarily in the United States, and no one customer accounts for more than 10% of total revenue or gross accounts receivable in any period presented.
Other Risks and Uncertainties
The Company is subject to risks common to early-stage 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, uncertainty of market acceptance of products, and the need to obtain additional financing.
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.

7


SI-BONE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Liquidity
As of and for the nine months ended September 30, 2018, the Company had an accumulated deficit of $151.9 million and used $8.2 million of cash in operations. The Company has not achieved positive cash flow from operations to date. The Company held cash and cash equivalents of $14.0 million and $22.4 million as of September 30, 2018 and December 31, 2017, respectively.
The Company’s primary cash needs are for the ongoing commercialization of its iFuse products. The Company also has certain debt covenants associated with its current debt agreement. These covenants include a $5.0 million minimum cash balance and revenue targets, which if not met would result in the debt becoming immediately due. The revenue target is assessed quarterly based on the rolling twelve months of revenue, and increases by approximately 2%-4% each quarter. Beginning with the three months ended March 31, 2019, the Company is required to meet either revenue or earnings targets. The Company has met the minimum liquidity and revenue targets as of September 30, 2018; however there can be no assurances that the Company will continue to meet these targets in the future.
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 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 carrying amount of the redeemable convertible preferred stock warrants has been marked to fair value such that the carrying amount represents its estimated fair value.
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.
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.
The Company’s cash equivalents consist of money market funds as of September 30, 2018 and December 31, 2017. The money market funds are classified as Level 1 of the fair value hierarchy. The Company’s redeemable convertible preferred stock warrants are classified within Level 3 of the fair value hierarchy. The redeemable convertible preferred stock warrants have been valued using a Black-Scholes valuation model and are subsequently marked to fair value each reporting period. The related input assumptions are discussed in Note 8.
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.
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 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.

8


SI-BONE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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. As of September 30, 2018 and December 31, 2017, inventory consisted entirely of finished goods.
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
3 – 5 years
Machinery and equipment
3 – 5 years
Furniture and fixtures
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.
Intangible assets
Intangible assets consist of intellectual property related to the sacroiliac-joint developed technologies acquired by the Company in March 2008. Intangible assets are amortized over the period of estimated benefit using the straight-line method and estimated useful lives of approximately 15 years. No residual value is estimated for intangible assets.
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 an asset might not be recoverable. When such an event occurs, management determines whether there has been an impairment by comparing the anticipated undiscounted future net cash flows to the related asset’s carrying value. If an asset is considered impaired, the asset is written down to fair value, which is determined based either on discounted cash flows or appraised value, depending on the nature of the asset. Through September 30, 2018 and December 31, 2017, the Company has not experienced impairment losses on its long-lived assets.
Public Offering Costs
Specific incremental costs (i.e. consisting of legal, accounting and other fees and costs) directly attributable to a proposed or actual offering of securities may properly be deferred and charged against the gross proceeds of the offering. In the event a planned IPO does not occur or is significantly delayed, all of the costs will be expensed. There were $1.2 million and $0 of offering costs capitalized as of September 30, 2018 and December 31, 2017, respectively, in other non-current assets on the consolidated balance sheets. Such costs were transferred to additional paid-in capital upon completion of the IPO on October 16, 2018. Offering costs of $1.3 million were also incurred and expensed in the three and nine months ended September 30, 2017, as a result of delays in the IPO process during the periods.
Common Stock 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’ deficit 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.
Redeemable Convertible Preferred Stock Warrants
Warrants and other similar instruments related to shares that are contingently redeemable are classified as liabilities on the consolidated balance sheet at their estimated fair value because the shares underlying the warrants may obligate the Company to transfer assets to the holders at a future date under certain circumstances such as a deemed liquidation event. The warrants are exercisable into the Company’s redeemable convertible preferred stock and are classified as liabilities on the consolidated balance sheet. The warrants, measured at fair value, are subject to re-measurement at each balance sheet date and the change in fair value, if any, is recognized as

9


SI-BONE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

other income (expense), net. The Company will continue to adjust the liability for changes in fair value until the earlier of (i) exercise of the warrants, (ii) conversion into equity classified warrants to purchase common stock, or (iii) expiration of the warrants. The remaining value of the redeemable convertible preferred stock warrants will be reclassified to common stock with no further remeasurement required upon exercise of the warrants or conversion into equity classified warrants to purchase common stock.
The Company estimates the fair value of these liabilities using option pricing models and assumptions that are based on the individual characteristics of the warrants on the valuation date, as well as assumptions for future financings, expected volatility, expected life, yield, and risk-free interest rate.
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 United States and Europe.
In accordance with ASC Topic 605, Revenue Recognition (“ASC 605”), the Company recognizes revenue when persuasive evidence of an arrangement exists, title and risk of loss has transferred to the customer, the sales price is fixed or determinable, and collectability is reasonably assured. For the majority of product sales where the Company’s sales representative delivers the product at the point of implantation at hospitals or other medical facilities, the Company recognizes revenue related to product sales upon completion of the procedure and authorization by the customer. Revenue is recognized upon receipt of a purchase agreement or agreement on pricing terms with the customer and when all other revenue recognition criteria are met. For the remaining sales, which include distributor and hospital sales where the product is ordered in advance of a procedure and a valid purchase order has been received, the Company recognizes revenue based upon shipping or delivery terms, which represents the point in time when the customer has taken ownership and assumed risk of loss and the required revenue recognition criteria are met. Such customers are obligated to pay within specified terms regardless of when or if they ever sell or use the products, and the Company has no post-delivery obligations.
Warranty Program
In January 2017, the Company implemented a warranty program which 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. These one-time credits are accounted for as sales reserves. Sales and warranty reserves from the warranty program were $0.1 million as of September 30, 2018 and December 31, 2017.
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 United States. The medical device excise tax is included in cost of goods sold in the consolidated statements of operations and comprehensive loss for all the periods presented. Effective December 2015, the Act was amended to include a provision to suspend the tax on medical devices through 2017. In January 2018, the suspension on the tax on medical devices was further extended through 2019.
Shipping and Handling Costs
Shipping and handling costs are expensed as incurred and are included in cost of goods sold.
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 include (1) employee-related expenses, including salaries, benefits, travel and non-cash stock-based compensation expense (2) external research and development expenses (3) other expenses, which include direct and allocated expenses for facilities and other costs.
Advertising Expenditures
The cost of advertising is expensed as incurred. Advertising costs totaled $0.2 million for each of the three months ended September 30, 2018 and 2017, and $0.5 million and $0.6 million for the nine months ended September 30, 2018 and 2017, respectively.
Stock-Based Compensation
The Company measures its stock-based awards made to employees based on the estimated fair values of the awards as of the grant date using the Black-Scholes option-pricing model. The model requires management to make a number of assumptions including expected

10


SI-BONE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

volatility, expected life, risk-free interest rate and expected dividends. 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.
Equity instruments issued to nonemployees 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 nonemployees 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 adopted the accounting guidance for uncertainties in income taxes, which prescribes a recognition threshold and measurement process for recording uncertain tax positions taken, or expected to be taken, in a tax return in the financial statements. The guidance also prescribes treatment for derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The Company accrues for the estimated amount of taxes for uncertain tax positions if it is more likely than not that the Company would be required to pay such additional taxes. An uncertain tax position will not be recognized if it has a less than 50% likelihood of being sustained.
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 series of redeemable convertible preferred stock and 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 redeemable convertible preferred stock and early exercised stock options as the holders of redeemable convertible preferred stock and early exercised stock options 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, redeemable convertible preferred stock and common stock options and warrants are considered to be potentially dilutive securities. Because the Company has reported a net loss in all periods presented, redeemable convertible preferred stock and 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.
Comprehensive Loss
Comprehensive loss represents all changes in the stockholders’ deficit except those resulting from distributions to stockholders. The Company’s unrealized foreign currency translation income (losses) represents the only component of other comprehensive income that is 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.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which required an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The
new standard is effective for fiscal years beginning after December 15, 2017 for public companies, and for fiscal years beginning after December 15, 2018, and interim periods beginning after December 15, 2019, for private companies. Early application is permitted. The standard permits the use of either the retrospective or cumulative effect transition method. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),

11


SI-BONE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

which clarifies the implementation guidance on principal versus agent considerations in ASU 2014-09. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies certain aspects of identifying performance obligations and licensing implementation guidance. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which relates to disclosures of remaining performance obligations, as well as other amendments to guidance on collectability, non-cash consideration and the presentation of sales and other similar taxes collected from customers. These standards have the same effective date and transition date as ASU 2014-09. Management is undergoing its assessment of the new standard, which includes the review of contracts and revenue channels, and will adopt the standard for the fiscal year ending December 31, 2019.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. ASU 2015-11 simplifies the guidance on the subsequent measurement of inventory, excluding inventory measured using last-in, first out or the retail inventory method. Under the new standard, in scope inventory should be measured at the lower of cost and net realizable value. The new standard will become effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2016, for public companies. For all other entities, the new standard is effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017, with early adoption permitted. The Company has adopted this standard for the fiscal year ended December 31, 2017, which did not have a material impact on the Company’s consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. ASU 2015-17 specifies that deferred tax assets and liabilities shall be classified as noncurrent, or long-term, in a classified statement of financial position. The new standard is effective for public entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For private entities, the new standard is effective for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. Earlier application is permitted for all entities as of the beginning of an interim or an annual reporting period. The Company has early adopted this standard for the fiscal year ended December 31, 2017, which did not have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued its new lease accounting guidance. Under the new guidance, ASU 2016-02, Leases (Topic 842), lessor accounting is largely unchanged. The new lease guidance simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Under the new guidance, lessees will be required to recognize a lease liability, which is a lessor’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which 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. The new guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018 for public companies and beginning after December 15, 2019 for private companies. Early adoption is permitted for any interim or annual financial statements net yet issued. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing and operating leases) must apply a modified retrospective approach for all leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the impact of this standard on its consolidated financial statements, and anticipates adopting the standard for the fiscal year ending December 31, 2020.
In March 2016, the FASB issued ASU 2016-09, which simplified several aspects of accounting for stock-based compensation transactions. The areas for simplification in this update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new guidance is effective for public entities for fiscal years beginning after December 15, 2016 and interim periods within those years. Other entities must apply the new guidance in fiscal years beginning after December 15, 2017 and in interim periods within fiscal years beginning after December 15, 2018, with early adoption permitted. The Company early adopted this standard in the first quarter of 2017 by recording the cumulative impact of applying this guidance to retained earnings, which was not material. The Company elected to continue to estimate the number of awards that are expected to vest.
In August 2016, the FASB issued ASU 2016-15 “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments”. ASU 2016-15 provides guidance on the following eight specific cash flow classification issues: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. Current GAAP does not include specific guidance on these eight cash flow classification issues. The amendments of this ASU are effective for reporting periods beginning after December 15, 2017 for public companies, and fiscal years beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019 for private companies, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2016-15 on its consolidated financial statements, and anticipates adopting the standard for the fiscal year ending December 31, 2019.

12


SI-BONE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The standard is effective for all entities for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The Company has adopted this standard for the fiscal year ending December 31, 2018, which did not have a material impact on the Company’s consolidated financial statements.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815) I. Accounting for Certain Financial Instruments with Down Round Features II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Part I applies to entities that issue financial instruments such as warrants, convertible debt or convertible preferred stock that contain down-round features. Part II replaces the indefinite deferral for certain mandatorily redeemable noncontrolling interests and mandatorily redeemable financial instruments of nonpublic entities contained within ASC Topic 480 with a scope exception and does not impact the accounting for these mandatorily redeemable instruments. For public business entities, the amendments in Part I of this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim period. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements, and anticipates adopting the standard for the fiscal year ending December 31, 2020.
In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220). This update provides companies with the option to reclassify stranded tax effects caused by the 2017 Tax Cuts and Jobs Act (the 2017 Tax Act) from accumulated other comprehensive income to retained earnings. This standard is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements, and anticipates adopting the standard for the fiscal year ending December 31, 2019.
In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 expands the scope of Topic 718, Compensation—Stock Compensation, to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. ASU 2018-07 supersedes Subtopic 505-50, Equity—Equity-Based Payments to Non-Employees. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than a company’s adoption date of ASC 606. The Company is evaluating the impact that the adoption of this standard will have on the consolidated financial statements, and anticipates adopting the standard for the fiscal year ending December 31, 2020.

13


SI-BONE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


3. Fair Value Measurement
The following table sets forth the fair value of the Company’s financial assets and liabilities measured at fair value on a recurring basis based on the three-tier fair value hierarchy (in thousands):
 
September 30, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Money market funds[1]
$
13,668

 
$

 
$

 
$
13,668

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Redeemable convertible preferred stock warrants
$

 
$

 
$
1,103

 
$
1,103

 
 
 
 
 
 
 
 
 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Money market funds[1]
$
22,115

 
$

 
$

 
$
22,115

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Redeemable convertible preferred stock warrants
$

 
$

 
$
422

 
$
422

 
[1]
Included in cash and cash equivalents on the consolidated balance sheet

The following table sets forth a summary of the changes in the fair value of the redeemable convertible preferred stock warrants, the Company’s Level 3 financial liability, which is measured on a recurring basis (in thousands):
 
 
Balances at December 31, 2017
$
422

Change in fair value recorded in other (income) expense, net
681

Balances at September 30, 2018
$
1,103

4. Balance Sheet Components
Property and Equipment, net (in thousands):
 
September 30,
 
December 31,
 
2018
 
2017
 
 
 
 
Machinery and equipment
$
3,670

 
$
3,428

Construction in progress
660

 
879

Computer and office equipment
325

 
310

Leasehold improvements
443

 
272

Furniture and fixtures
146

 
29

 
5,244

 
4,918

Less: Accumulated depreciation and amortization
(3,196
)
 
(3,022
)
 
$
2,048

 
$
1,896

Depreciation expense were $0.2 million and $0.5 million for the three and nine months ended September 30, 2018, respectively, and $0.3 million and $0.8 million for the three and nine months ended September 30, 2017, respectively.

14





Accrued Liabilities and Other (in thousands):
 
September 30,
 
December 31,
 
2018
 
2017
 
 
 
 
Accrued compensation, travel and related expenses
$
3,968

 
$
3,732

Accrued interest
1,176

 
831

Accrued professional services
858

 
341

Sales tax payable
461

 
466

Liability for early exercise of unvested stock options
359

 
65

Sales and warranty reserves
52

 
149

Others
278

 
140

 
$
7,152

 
$
5,724


5. Commitments and Contingencies
Operating Leases
In August 2012, the Company entered into a new four-year non-cancelable operating lease for its existing office building space in San Jose, California which commenced in January 2013. In February 2014, the Company expanded the existing lease space and extended the lease terms through June 2017. In May 2016, the Company entered into another extension of the lease with its lessor for additional 12 months beginning in July 2017. Effective May 2018, the Company entered into an early termination agreement on an operating lease for its San Jose office. No early termination fees were incurred and all previously agreed-to rent payments were released, with no further obligations. In February 2018, the Company entered into a new seven-year non-cancelable operating lease for an office building space in Santa Clara, California which commenced in April 2018.
In March 2011, the Company entered into a six-year non-cancelable operating lease for its office building space in Milan, Italy. In February 2017, the terms of the lease were extended for another six years under the same agreement. In September 2015, the Company entered into a six-year non-cancelable operating lease for additional floor space in its office building in Milan, Italy.
In November 2014, the Company entered into a five-year non-cancelable operating lease for its office building space in Mannheim, Germany.
In December 2015, the Company entered into a three-year non-cancelable operating lease for its office building space in Knaresborough, United Kingdom.
The Company also leases vehicles under operating lease arrangement for the Company’s sales personnel in Europe. Operating leases under such arrangements expire during various times in 2021.
Rent expense is recorded over the lease terms on a straight-line basis. Rent expense charged to operations under operating leases totaled approximately $0.3 million for both the three-month periods ended September 30, 2018 and 2017, and $0.9 million and $0.7 million for the nine-month periods ended September 30, 2018 and 2017, respectively.
 
 
The aggregate future minimum lease payments under all leases as of September 30, 2018 are as follows (in thousands):
Year Ending December 31,
 
2018 (with three months remaining)
$
234

2019
1,007

2020
951

2021
828

2022
781

Thereafter
1,921

 
$
5,722


15


SI-BONE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Contingencies
From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of business activities. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.
Purchase Commitments and Obligations
The Company has certain purchase commitments related to inventory used in normal course of business. These commitments totaled at $0.3 million and $0.1 million at September 30, 2018 and December 31, 2017, respectively. The amounts paid under these arrangements may be less in the event that the arrangement is renegotiated or canceled.
Legal Proceedings
The Company is subject to claims and assessments from time to time in the ordinary course of business but does not believe that any such matters known to the Company as of September 30, 2018, individually or in the aggregate, will have a material adverse effect on the Company’s financial position, results of operations or cash flows.
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.
6. Borrowings
The Company had $38.9 million and $38.7 million of outstanding debt, net of debt discounts, as of September 30, 2018 and December 31, 2017, respectively.
 
 
 
 
 
Term Loan
In August 2016, the Company entered into a Term Loan facility and a revolving line of credit with Silicon Valley Bank, or SVB and Oxford Finance LLC, or Oxford for $35.2 million. The Term Loan had interest only periods for six months up to October 1, 2017 and was then to be repaid over 27 months of equal principal payments plus interest. The maturity date of the term loan was December 1, 2019, and it carried an interest rate equal to the greater of 11% or the WSJ Prime rate plus 7.75%. The Term Loan borrowings were senior unsecured obligations of the Company, ranking equally and ratably among themselves and with the Company’s existing and future unsecured and unsubordinated debt.
In conjunction with the above Term Loan agreement, the Company issued redeemable convertible preferred stock warrants (refer to Note 8 for details).
In October 2017, the Company extinguished the Term Loan with SVB and Oxford. Concurrently, the Company entered into a New Term Loan with Pharmakon Advisors, or Pharmakon. As a result of the extinguished debt, the Company paid $29.1 million in principal payments to SVB and Oxford. The Company also paid $1.5 million in early termination fees and recorded $0.7 million of unamortized debt discounts. This loss on extinguishment of $2.2 million is reflected as interest expense in the consolidated statement of operations.
The Company entered into the New Term Loan with Pharmakon for $40.0 million in October 2017. Debt issuance costs of $1.3 million were recorded as a direct deduction from the carrying amount of the New Term Loan on the consolidated balance sheet, and are being amortized over the period of the New Term Loan using the effective interest method to interest expense in the consolidated statement of operations. The New Term Loan includes an interest-only period for 35 months through September 2020 and is then repaid in equal quarterly principal payments plus interest through December 2022, and is classified as long-term borrowings on the consolidated balance

16


SI-BONE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

sheet. The New Term Loan carries a fixed interest rate of 11.5% and a closing fee of 1.5% of the funded amount, or $0.6 million. The New Term Loan includes a pre-payment fee equal to the interest due for the first 30 months of the agreement if it is prepaid within the first 30 months, a 2% prepayment penalty for months 31-48, and a 1% penalty for months 49-60. The New Term Loan requires the Company to maintain a minimum cash balance of $5.0 million and to achieve certain revenue targets. Beginning with the three months ended March 31, 2019, the Company is required to meet either revenue or earnings targets. Under the New Term Loan, the Company also has a second tranche of $10.0 million available through January 2019, contingent upon the achievement of certain revenue milestones. The New Term Loan is a senior obligation secured with a blanket first lien on the assets of the Company. As of September 30, 2018 and December 31, 2017, the total loan balance, net of debt discount, was $38.9 million and $38.7 million, respectively, with an effective interest rate of 12.3% and 12.0%, respectively, and the Company was in compliance with all debt covenants.
Approximate annual future minimum principal payments under the loan agreements as of September 30, 2018 are as follows (in thousands):
Year Ending at, December 31,
 
2018 (with three months remaining)
$

2019

2020
4,444

2021
17,778

2022
17,778

Total future minimum payments
40,000

Less:
 
Amount representing debt discount
(1,101
)
Total minimum payments
$
38,899

Line of Credit
In October 2015, the Company entered into an agreement with its existing lender SVB and Oxford. The amount of the revolving line of credit was $4.0 million (or 80% of the amount of certain customer accounts receivable). It carried an interest rate equal to the WSJ Prime rate plus 3% with a maturity of December 1, 2019. In October 2017, this line of credit was cancelled in conjunction with the SVB and Oxford debt extinguishment discussed above. No draws were made on this facility at September 30, 2018 and December 31, 2017.
7. Redeemable Convertible Preferred Stock
 
 
 
 
 
 
 
 
Preferred stock at September 30, 2018 and December 31, 2017 consisted of the following:
 
Shares
 
 
 
 
Series
Authorized
 
Issued and
Outstanding
 
Carrying Value
 
Liquidation Value
 
 
 
 
 
(in thousands)
Series 1
245,096

 
245,096

 
$
154

 
$
154

Series 2
709,617

 
709,608

 
1,489

 
1,520

Series 3
498,958

 
498,938

 
2,862

 
2,874

Series 4
2,509,047

 
2,509,032

 
15,656

 
15,807

Series 5
2,086,138

 
2,009,226

 
18,127

 
18,275

Series 6
3,389,227

 
3,319,274

 
54,508

 
54,674

Series 7
2,666,666

 
2,580,404

 
25,752

 
25,890

Total
12,104,749

 
11,871,578

 
$
118,548

 
$
119,194


17


SI-BONE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The holders of preferred stock have various rights and preferences as follows:
Voting Rights
The holders of Series 1, Series 2, Series 3, Series 4, Series 5, Series 6, and Series 7 preferred stock shares are entitled to vote on all matters on which the common stockholders are entitled to vote. The holders of Series 1, Series 2, Series 3 shall have the right to 0.352941 votes for each share of Series 2 common stock into which such preferred stock would convert and the holders of Series 4, Series 5, Series 6 and Series 7 shall have the right to one vote for each share of Series 2 common stock into which such preferred stock would convert. As long as there are any shares of Series 4, Series 5, Series 6, or Series 7 shares are outstanding, the holders of such Series 4, Series 5, Series 6 or Series 7 shall, at each respective series, be entitled to elect one member of the Board of Directors each; the holders of Series 2 common stock shall be entitled to elect two members of the Board of Directors; and the holders of the preferred stock and Series 2 common stock, voting together as a single class shall be entitled to elect the remaining members of the Board of Directors, as determined at each annual meeting of the Board of Directors.
As long as at least 277,778 preferred stock shares remain outstanding, the Company must obtain approval from a majority of the holders of a majority of the then outstanding shares of preferred stock and a majority of the voting power of all outstanding shares of Series 5 preferred stock in order to (i) consummate or agree to consummate a Liquidation Event (as defined in the Company’s certificate of incorporation); (ii) amend, alter, restate or repeal any provision of the Company’s certificate of incorporation or bylaws so as to adversely alter, affect or change the powers, preferences, rights or privileges of the shares of preferred stock; (iii) increase or decrease (other than by redemption or conversion) the total number of authorized shares of common stock or preferred stock or designated shares of any series of preferred stock; (iv) authorize or issue, or obligate itself to issue, any equity security (including any other security convertible into or exercisable for any such equity security) having a preference over, or being on a parity with, any series of preferred stock with respect to dividends, liquidation or redemption, other than the issuance of any authorized but unissued shares of Series 6 preferred stock designated in the Company’s certificate of incorporation (including any security convertible into or exercisable for such shares of preferred stock); (v) redeem, purchase or otherwise acquire (or pay into or set aside for a sinking fund for such purpose) any share or shares of preferred stock or common stock; provided, however, that this restriction shall not apply to the repurchase of shares of common stock from employees, officers, directors, consultants or other persons performing services for the Company or any subsidiary pursuant to agreements under which the Company has the option to repurchase such shares upon the occurrence of certain events, such as the termination of employment or service, or pursuant to an agreement providing for a right of first refusal in favor of the Company, in each case, provided that such agreement has been approved by the Company’s board of directors; or (vi) pay or declare any dividend on any shares of capital stock of the Company.
Dividends
The holders of preferred stock are entitled to receive noncumulative dividends, when and if declared by the Board of Directors, out of any assets legally available, prior to and in preference to any declaration or payment of dividends on the common stock of the Company. Dividend rates, on a per annum basis, for Series 1, Series 2, Series 3, Series 4, Series 5, Series 6, and Series 7 preferred stock are $0.050112, $0.171360, $0.4608, $0.504, $0.72774, $1.317744, and $0.802656, respectively, (adjusted to reflect subsequent stock dividends, stock splits or recapitalization).
After payment of such dividends, any additional dividends shall be distributed to the holders of all preferred stock and common stock on a pro rata basis in proportion to the number of common stock held by each shareholder as if the preferred stock had been converted at the effective conversion rate. No dividends on preferred stock or common stock have been declared as of September 30, 2018 and December 31, 2017.
Liquidation
In the event of (A) the closing of the sale, lease, transfer, exclusive license or other disposition of all or substantially all of the Company’s assets, in a single transaction or series of related transactions, by the Company or any subsidiary or subsidiaries of the Company, of all or substantially all the assets of the Company and its subsidiaries taken as a whole (or, if substantially all of the assets of the Company and its subsidiaries taken as a whole are held by one or more subsidiaries, the sale or disposition (whether by consolidation, merger, conversion or otherwise) of such subsidiaries of the Company or all or substantially all of the assets of such subsidiaries), except where such sale, lease, transfer, exclusive license or other disposition is made the Company or one or more wholly owned subsidiaries of the Company, (B) the consummation of a merger, consolidation or acquisition in which (x) the Company is a constituent party or (y) a subsidiary of the Company is a constituent party and the Company issues shares of its capital stock pursuant to such merger, consolidation or acquisition (except a merger, consolidation or acquisition involving the Company or a subsidiary in which the capital stock of the Company outstanding immediately prior to such merger, consolidation or acquisition continue to represent or are converted or exchanged for shares of capital stock which represent, immediately following such merger, consolidation or acquisition at least a majority of the voting power of the capital stock of (1) the surviving or resulting corporation or (2) if the surviving or resulting corporation is a wholly owned subsidiary of another corporation immediately following such merger, consolidation or acquisition, the parent corporation of such

18


SI-BONE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

surviving or resulting corporation); (C) any transaction or series of related transactions to which the Company is a party in which in excess of fifty percent (50%) of the Company’s voting power is transferred; provided that it shall not include any transaction or series of related transactions principally for bona fide equity financing purposes in which cash is received by the Company or any successor or indebtedness of the Company is cancelled or converted or a combination thereof occurs, or (D) a liquidation, dissolution or winding up of the Company, the holders of the preferred stock are entitled to receive prior to and in preference to any distribution to holders of the common stock, an amount equal to their respective original issuance price per share (original issuance price per share for Series 1, Series 2, Series 3, Series 4, Series 5, Series 6, and Series 7 preferred stock are $0.6264, $2.142, $5.76, $6.30, $9.0954, $16.4718, and $10.0332, respectively), plus any declared but unpaid dividends on such shares. Should the Company’s legally available assets be insufficient to satisfy the full liquidation preference, the funds will be distributed ratably among the holders of the preferred stock in proportion to the preferential amount each holder is otherwise entitled to receive.
Upon the closing of the distribution as above, the remaining proceeds shall be distributed among the holders of Series 4, Series 5, Series 6, Series 7 preferred stock and common stock pro rata based on the number of shares of common stock held by each until the holders of the preferred stock have received the “participation cap.” Thereafter, if proceeds remain, the holders of Series 7 preferred stock and common stock shall receive all of the remaining proceeds pro rata based on the number of shares of common stock held by each (assuming full conversion of all such Series 7 preferred stock). The Company has a per share “Participation Cap” of $32.9436 for the Series 6 preferred stock, $18.1908 for the Series 5 preferred stock, and $12.60 for the Series 4 preferred stock (each as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations or the like with respect to such series of preferred stock).
Conversion
Each share of Series 1, Series 2, Series 3, Series 4, Series 5, Series 6, and Series 7 preferred stock is convertible at the option of the holder, into the number of shares of Series 2 common stock into which such shares are at the then effective conversion ratio or one to one ratio. The conversion price per share for Series 1, Series 2, Series 3 and Series 4, Series 5, Series 6, and Series 7 preferred stock shall be the respective issuance price per share, respectively. The initial conversion price is subject to adjustment from time to time. In March 2017, due to the issuance of additional shares of Series 7 preferred stock, the conversion price per share for the Series 6 preferred stock was amended from $15.714 per share to $15.5574 per share which resulted in the conversion ratio increasing from 1.05 to 1.06 per share.
Each share of preferred stock shall be converted into common stock shares upon the earlier of (i) immediately before the closing of a firm commitment underwritten public offering in which the aggregate gross proceeds of not less than $50.0 million and a per share public offering of not less than $30.0996, or (ii) the Company’s receipt of a written request for such conversion from the holders of at least the voting majority of all outstanding preferred stock (voting as a single class and on an as-converted basis).
Other Matters
The Company has classified the preferred stock as temporary equity on the consolidated balance sheets as the shares can be redeemed upon the occurrence of certain change in control events that are outside the Company’s control, including deemed liquidation, sale or transfer of the Company. The Company did not adjust the carrying values of the preferred stock to the liquidation preferences of such shares because it was uncertain whether or when an event would occur that would obligate the Company to pay the liquidation preferences to holders of shares of preferred stock.


19


SI-BONE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

8. Warrants
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Warrants issued and outstanding at both September 30, 2018 and December 31, 2017 are as follows (in thousands, except share and per share data):
 
 
Series
 
Date
 
Number of
Shares
Underlying
Warrants
 
Price per
Share
 
Fair Value
at the Date
of Issuance
Warrants to purchase
 
 
Issuance
 
Expiration
 
 
Common stock
 
 
 
7/19/2013
 
7/22/2023
[a]
101,010
 
$
3.96

 
$
244

Common stock
 
 
 
11/26/2014
 
11/26/2024
[a]
21,928
 
$
3.42

 
$
47

Common stock
 
 
 
3/1/2017
 
3/1/2027
[a]
1,388
 
$
5.94

 
$
5

Total common stock warrants
 
 
 
 
 
 
 
124,326
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Redeemable convertible preferred stock
 
Series 5
 
7/1/2012
 
7/25/2019
[b]
54,917
 
$
9.10

 
$
255

Redeemable convertible preferred stock
 
Series 5
 
7/19/2013
 
7/22/2023
[c]
21,989
 
$
9.10

 
$
122

Redeemable convertible preferred stock
 
Series 6
 
11/26/2014
 
11/26/2024
[c]
6,310
 
$
16.47

 
$
49

Redeemable convertible preferred stock
 
Series 6
 
10/20/2015
 
10/20/2025
[c]
39,339
 
$
16.47

 
$
396

Redeemable convertible preferred stock
 
Series 6
 
11/9/2015
 
11/9/2025
[c]
24,283
 
$
16.47

 
$
244

Redeemable convertible preferred stock
 
Series 7
 
12/22/2016
 
12/22/2026
[c]
9,712
 
$
10.03

 
$
45

Total redeemable convertible preferred stock warrants
 
 
 
 
 
 
 
156,550
 
 
 
 
Total outstanding common and redeemable convertible preferred stock warrants
 
 
 
 
 
 
 
280,876
 
 
 
 
 
[a]
Common stock warrants will remain outstanding until exercised by the holder.
[b]
These warrants will be net exercised immediately upon the closing of the Company’s IPO, or upon a corporate transaction as defined in the Note and Warrant Purchase Agreement dated July 25, 2012.
[c]
Convertible preferred stock warrants will remain outstanding until exercised by the holder and will convert to common stock warrants upon an IPO. The warrants will be exercisable for 10 years from the date of issuance.
In connection with previously issued debt, the Company issued 101,010 warrants to purchase common shares of the Company at an exercise price of $3.96 per share in July 2013. Additionally, the Company issued warrants to purchase an additional 21,928 shares of common stock at an exercise price of $3.42 per share in November 2014. The Company determined that its warrants to purchase shares of common stock meet the requirements for equity classification.
In conjunction with debt issued in July 2012, the Company issued warrants which became exercisable for an aggregate of 54,917 shares of Series 5 preferred stock of the Company at an exercise price of $9.10 per share.
In conjunction with debt issued in 2013 and 2014, the Company issued 21,989 warrants to purchase Series 5 redeemable convertible preferred stock of the Company at an exercise price of $9.10 per share. Subsequently, the Company issued additional warrants to purchase 6,310 shares of Series 6 redeemable convertible preferred stock at an exercise price of $16.47 per share.
In conjunction with the debt agreement with SVB and Oxford, or Term Loan agreement (refer to Note 6), the Company issued warrants to purchase 39,339 shares of Series 6 redeemable convertible preferred stock at an exercise price of $16.47 per share in October 2015 and additional 24,283 shares of Series 6 redeemable convertible preferred stock at an exercise price of $16.47 per share in November 2015.
In conjunction with the Term Loan agreement and its modification (refer to Note 6), the Company issued additional warrants for the purchase of 9,712 shares of Series 7 redeemable convertible preferred stock at an exercise price of $10.03 per share in December 2016.

The fair value of warrants to purchase preferred stock were recorded at the date of issuance as a discount to debt and amortized to interest expense over the term of the note. The changes in the fair value of the redeemable convertible preferred stock warrants are recorded in other income and expense.

20


SI-BONE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In March 2017, the Company issued a warrant to purchase 1,388 shares of common stock at an exercise price of $5.94 to a consultant. The Company determined that such warrant meets the requirements for equity classification.
In October 2017, the Company extinguished its debt with SVB and Oxford. All related debt discounts were written off upon repayment of the loan.
Weighted-average assumptions used in computation of the fair value of the redeemable convertible preferred stock warrants are summarized in the table below:
 
 
September 30,
 
December 31,
 
 
2018
 
2017
 
 
 
 
 
Remaining contractual term (in years)
 
4.7

 
5.3

Expected volatility
 
52.66
%
 
59.06
%
Risk-free interest rate
 
2.67
%
 
2.16
%
Dividend yield
 
%
 
%

9. Common Stock
In March 2017, the Board of Directors approved an increase of 555,555 Series 2 common stock. As a result, the Company’s restated certificate of incorporation, as amended, authorizes the Company to issue 19,333,333 shares of $0.0001 par value common stock, of which 6,000,000 has been designated as Series 1 common stock and 13,333,333 has been designated as Series 2 common stock. The holders of Series 1 common stock shall have no voting rights; the holders of Series 2 common stock shall have the right to one vote for each such share. The holders of common stock are also 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.
The Company has reserved shares of common stock, on an issued and as-converted basis, for future issuance as follows:
 
September 30, 2018
 
December 31, 2017
 
Issued and
Outstanding
Shares
 
Common Stock
Equivalent Shares
 
Issued and
Outstanding
Shares
 
Common Stock
Equivalent Shares
 
 
 
 
 
 
Series 1 common stock
3,422,722

 
3,422,722

 
3,112,955

 
3,112,955

Series 2 common stock
490,185

 
490,185

 
490,185

 
490,185

Redeemable convertible preferred stock
11,871,578

 
12,066,654

 
11,871,578

 
12,066,654

Stock options outstanding
2,711,667

 
2,711,667

 
3,001,929

 
3,001,929

Stock options available for grant
10,149

 
10,149

 
29,654

 
29,654

Common stock warrants
124,326

 
124,326

 
124,326

 
124,326

Redeemable convertible preferred stock warrants
156,550

 
160,657

 
156,550

 
160,657

Total
18,787,177

 
18,986,360

 
18,787,177

 
18,986,360

10. Stock Option Plan
In April 2008, the Company adopted the 2008 Stock Option Plan (the “Plan”), as amended, under which the Board of Directors may issue incentive and nonqualified stock options to employees, directors and consultants. 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 nonqualified stock option shall not be less than 100% and 85%, respectively, of the fair market value on the date of grant. As of December 31, 2017, a total of 5,350,080 shares of common stock have been reserved for issuance under the Plan. 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 shares issued under the Plan are exercisable immediately, but subject to a right of repurchase by the Company of any unvested shares.


21


SI-BONE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes activity under the Plan for the nine months ended September 30, 2018:
 
 
Options Outstanding
 
 
 
 
 
 
Shares
Available
for
Grant
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value
 
 
 
 
 
 
 
 
(in years)
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2017
 
29,654

 
3,001,929

 
$
4.15

 
 
 
$
3,585

Options granted
 
(73,783
)
 
73,783

 
5.51

 
 
 
 
Options exercised
 

 
(309,767
)
 
4.11

 
 
 
960

Options cancelled
 
54,278

 
(54,278
)
 
4.77

 
 
 
 
Balances at September 30, 2018
 
10,149

 
2,711,667

 
$
4.12

 
6.8
 
$
23,957

 
 
 
 
 
 
 
 
 
 
 
Options vested and exercisable - September 30, 2018
 
 
 
1,639,606

 
$
3.65

 
6.0
 
$
15,271

 
 
 
 
 
 
 
 
 
 
 
Options vested and expected to vest - September 30, 2018
 
 
 
2,489,664

 
$
4.01

 
6.7
 
$
22,285

The aggregate intrinsic values of options outstanding, options exercisable, options vested and exercisable, and options vested and expected to vest were calculated as the difference between the exercise price of the options and the estimated fair value of the Company’s common stock, as determined by the board of directors, as of September 30, 2018 and December 31, 2017.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Early Exercise of Unvested Stock Options
Early exercises of stock options 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’ deficit as the options vest. At September 30, 2018 and December 31, 2017, the Company had a total of 78,757 and 16,117 shares of common stock, respectively, subject to repurchase under the Plan and $0.4 million and $0.1 million, respectively, of associated liabilities for the repurchase.

Stock-Based Compensation
The following table sets forth stock-based compensation expense related to options granted for the periods presented (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
Cost of goods sold
 
$
5

 
$
5

 
$
17

 
$
18

Research and development
 
30

 
33

 
101

 
98

Sales and marketing
 
110

 
107

 
350

 
313

General and administrative
 
183

 
198

 
613

 
609

 
 
$
328

 
$
343

 
$
1,081

 
$
1,038

Amounts above do not include $0.4 million of stock-based compensation expense related to forgiveness of notes receivable for the nine months ended September 30, 2017. No amounts of stock-based compensation expense related to forgiveness of notes receivable were recognized for the three months ended September 30, 2018. Refer to Note 12 for details.
Employee Stock-Based Compensation
During the three months ended September 30, 2018, the Company granted stock options to employees to purchase 19,998 shares of common stock with a weighted-average exercise price of $9.88 per share. During the nine months ended September 30, 2018, the

22


SI-BONE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Company granted stock options to employees to purchase 73,783 shares of common stock with a weighted-average exercise price of $5.51 per share. As of September 30, 2018, there was a total unrecognized compensation cost of $1.9 million. These costs are expected to be recognized over a period of approximately 2.1 years. The Company estimates the fair value of stock options using the Black-Scholes option valuation model. The fair value of employee stock options is being amortized on a straight-line basis over the requisite service period of the awards. The fair value of employee stock options was estimated using the assumptions below. Each of these inputs is subjective and its determination generally requires significant judgment.
Performance Stock Options
In March 2017, the Company granted 564,098 performance stock options at a grant price of $5.94, of which 408,544 performance options will vest monthly over four years and 155,554 performance options will vest monthly over three years. The vesting period will begin on the date of the closing of an IPO, the performance condition, subject to the optionee’s continuous service. Stock-based compensation expense for performance stock options is based on the probability of achieving certain performance criteria, as defined in the individual option grant agreement. Periodically, the Company estimates the number of performance options ultimately expected to vest and recognizes stock-based compensation expense for those options when it becomes probable that the performance criteria will be met. As of September 30, 2018 an IPO was not deemed probable and thus no expense was recognized.
Fair Value of Common Stock
The fair value of the shares of the Company’s common stock underlying the stock options has historically been determined by the Company’s Board of Directors. Because there has been no public market for the Company’s common stock, its Board of Directors has determined the fair value of the Company’s common stock at the time of grant of the option by considering a number of objective and subjective factors, including independent third-party valuations, the Company’s stage of development, sales of the Company’s redeemable convertible preferred stock, the Company’s operating and financial performance, equity market conditions affecting comparable public companies, the lack of liquidity of the Company’s capital stock, and the general and industry-specific economic outlooks.
Expected Term
The expected term represents the period that the share-based awards are expected to be outstanding. The Company used the simplified method to determine the expected term, which is calculated as the average of the time to vesting and the contractual life of the options.
Expected Volatility
As the Company’s common stock has never been publicly traded, the expected volatility is derived from 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 issues in effect at the time of grant for periods corresponding with the expected term of the option.
Dividend Yield
The Company has never paid dividends on its common stock and has no plans to pay dividends on its common stock. Therefore, the Company used an expected dividend yield of zero.
Expected Forfeiture Rate
The Company is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option 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.

23


SI-BONE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The grant date fair value of the stock option awards granted to employees was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions:
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
Expected term
6.04
 
6.03
 
5.98
 
5.05
Expected volatility
41%-44%
 
42%-46%
 
41%-46%
 
41%-55%
Risk-free interest rate
2.74%-2.80%
 
1.73%-2.15%
 
2.35%-2.93%
 
1.73%-2.75%
Dividend yield
—%
 
—%
 
—%
 
—%
Restricted Stock Units
In August 2018, the Company granted 37,036 restricted stock units with a grant-date fair value of $7.74 per share. Fifty percent of these awards will vest on the first day of the first open trading window that occurs after the one-year anniversary of the closing of an IPO, and fifty percent will vest on the first day of the first open trading window that occurs after the two-year anniversary of the closing of an IPO, subject to continued service through each relevant vesting date.
11. Employee Benefit Plan
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. The Company has made no contributions to the 401(k) plan since its inception.
12. Related Party Transactions
In March 2013, the Company granted a loan to its then current Chief Financial Officer to assist with the exercise of his stock option grants in the form of a full recourse promissory note with an aggregate principal amount of $0.2 million. The note is collateralized by the common stock issued upon the exercise of the stock options, as well as personal assets of the borrower. Interest under this note will accrue at the rate of 1.09% per annum. In November 2016, the loan amount was partially repaid in the amount of $0.1 million (including principal and interest). The remainder of the principal balance of this note, together with all accrued and unpaid interest to date, was fully paid in December 2017.
In February 2014, the Company granted a loan to its Chief Executive Officer to assist with the exercise of his stock option grants in the form of a full recourse promissory note with an aggregate principal amount of $0.4 million. The note is collateralized by the common stock issued upon the exercise of the stock options, as well as personal assets of the borrower. At the time of issuance, the Company accounted for the note as a full recourse promissory note based on historical pattern of collecting payment on notes in full and no other notes had been forgiven, nor had any recourse notes been substantively converted to nonrecourse. Interest under this note will accrue at the rate of 1.97% per annum. The principal balance of this note, together with all accrued and unpaid interest to date, was due in February 2019. In March 2017, the Company forgave $0.2 million of principal and interest due on this promissory note from its Chief Executive Officer. In addition, the Board of Directors approved the forgiveness of the remaining 50% of the principal balance of the note in January 2018. At the time of the forgiveness, all of the related stock options were fully vested. As a result, the Company expensed the principal note balance of $0.4 million to stock-based compensation expense and accrued interest of $0.1 million to general and administrative expenses in the consolidated statement of operations.


24


SI-BONE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

13. Net Loss Per Share of Common Stock
Basic and Diluted Net Loss per Share
The following table summarizes the computation of basic and diluted net loss per share (in thousands, except share and per share data):
 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
Net loss
$
(4,792
)
 
$
(5,683
)
 
$
(12,140
)
 
$
(18,134
)
 
 
 
 
 
 
 
 
Weighted-average shares used to compute basic and diluted net loss per share*
3,712,876

 
3,475,628

 
3,638,905

 
3,450,252

Net loss per share, basic and diluted*
$
(1.29
)
 
$
(1.64
)
 
$
(3.34
)
 
$
(5.26
)
_________________________________________
* Calculated based on the 1-for-18 reverse stock split effected October 4, 2018.
Unvested shares for the years ended September 30, 2018 and December 31, 2017 were excluded from the weighted-average shares used to compute basic and diluted net loss per share.
The following common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented because including them would have been antidilutive:
 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
Stock options
2,711,667
 
3,015,021
 
2,711,667
 
3,015,021
Shares subject to repurchase
78,757
 
25,150
 
78,757
 
25,150
Redeemable convertible preferred stock
12,066,654
 
12,066,654
 
12,066,654
 
12,066,654
Redeemable convertible preferred stock warrants
160,657
 
160,657
 
160,657
 
160,657
Common stock warrants
124,326
 
124,326
 
124,326
 
124,326


Item 2. 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 Quarterly Report on Form 10-Q, and with the consolidated financial statements and management’s discussion and analysis of our financial condition and results of operations in our prospectus filed with the SEC on October 18, 2018. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q, 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 that has 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. Since we introduced iFuse in 2009, more than 35,000 procedures had been performed by over 1,700 surgeons in the United States and 33 other countries as of September 30, 2018. Published clinical studies have shown that 15% to 30% of all chronic lower back pain is associated with the sacroiliac joint. We believe iFuse is currently used in the majority of minimally invasive surgical fusions of the sacroiliac joint in the United States.

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The two sacroiliac joints are the largest joints in the body and connect the sacrum, near the base of the spine, to the iliac bones, the two major bones of the pelvis. The iFuse system includes a series of patented triangular implants, the instruments we have developed to enable the procedure, as well as the diagnostic and surgical techniques we have developed to enable physicians to perform the procedure. We introduced our second generation implant, the iFuse-3D, in 2017. We market our products with a direct sales force and a number of distributors in the United States, and with a combination of a direct sales force and distributors in other countries.
We have incurred net losses since our inception in 2008. We had net losses of $12.1 million for the nine months ended September 30, 2018 and $23.0 million and $20.6 million for the years ended December 31, 2017 and 2016, respectively. As of September 30, 2018, we had an accumulated deficit of $151.9 million. To date, we have financed our operations primarily through private placements of equity securities, certain debt-related financing arrangements, and sales of our products. We have devoted substantially all of our resources to research and development of our products, reimbursement-related initiatives, sales and marketing activities, and clinical, quality assurance, and regulatory matters for our products.
In October 2018, we completed our IPO by issuing 8.28 million shares of common stock, at an offering price of $15.00 per share, for net proceeds of $113.7 million after deducting underwriting discounts and commissions and offering expenses payable by us.
Factors Affecting Results of Operations
Coverage and Reimbursement
Prior to our launch of iFuse in 2009, Medicare and most private insurance companies reimbursed surgeons routinely for sacroiliac joint fusions, which were primarily invasive. However, effective July 1, 2013, the AMA’s Editorial Panel effectively restricted reimbursement for minimally invasive sacroiliac joint fusion because they considered the published clinical evidence at the time to be inadequate.
Subsequently, as a result of the growing number of published clinical studies demonstrating the effectiveness and safety of iFuse, along with the support of several professional medical specialty societies and leading academic surgeons, the AMA Editorial Panel established a new reimbursement code for minimally invasive sacroiliac joint fusion surgery, effective 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.
Coverage decisions for this code are made independently by each private insurance company and each of the seven regional Medicare Administrative Contractors that help manage Medicare. As of September 30, 2016, because of the iFuse clinical evidence, all Medicare Administrative Contractors were covering the procedure. At the time, very few private payors were covering. By September 30, 2017, U.S. payors covering approximately 211 million lives regularly reimbursed for the iFuse procedure, and as of September 30, 2018, U.S. payors covering 254 million lives reimburse for iFuse, 119 million of which are covered by private payors. Forty-one of the largest 65 private payors were covering regularly, or had announced coverage for, the iFuse procedure, while the remaining private payors were reevaluating their coverage policies. Of these 41 private payors, 24 of them have issued positive coverage policies exclusive to iFuse for sacroiliac joint fusion because of the clinical evidence. Eighteen of these exclusive coverage policies have published since January 1, 2018, which we believe has contributed to our accelerating sales growth in our fiscal year 2018.
There are a number of large and small private payors, including Aetna, Cigna, Humana, and Anthem that are not yet reimbursing 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.
Our Sales Force
We market and sell iFuse primarily through a direct sales force and a number of third-party distributors. Our target customer base includes approximately 7,500 U.S. 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 is comprised of seven sales regions. Each region is comprised of a number of territory sales managers who 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. As of September 30, 2018, our territory sales managers were led by seven regional sales managers who reported to our Vice President of U.S. Sales. The Vice President of U.S. Sales reports to our Chief Commercial Officer. As of September 30, 2018, our U.S. sales force consisted of 46 sales representatives directly employed by us and 32 third-party distributors.

26



In addition to general sales and marketing training, we provide our sales organization with comprehensive, hands-on cadaveric and dry-lab training sessions focusing on the clinical benefits of our products and how to use them. We believe our robust training and professional development programs have been an important component of our success to date and will help support our anticipated future growth. We expect to continue to increase the size of our sales organization in order to increase sales and market penetration and to provide the significant, ongoing level of customer support required by our sales and marketing strategy.
As of September 30, 2018, we had 29 employees working in our European operations, and have established operations in Italy (2010), Germany (2014), and the United Kingdom (2015). As of September 30, 2018, our international sales force consisted of 15 sales representatives directly employed by us and 21 exclusive third-party distributors, which together had sales in 33 countries through September 30, 2018. We anticipate continuing to build our operations in the major European countries while establishing distributor arrangements in smaller ones. We intend to follow a similar model in Europe to the one established in the United States, working with internationally recognized healthcare professional experts as we expand our training and reimbursement activities. As of September 30, 2018, beyond Europe and the United States, surgeons had performed the first iFuse procedures in Australia, Cayman Islands, Hong Kong, Israel, Japan, Kuwait, New Zealand, Taiwan, Turkey, and Saudi Arabia.
 
We have in the past and expect in the future to enter into different compensation arrangements with our sales professionals, which may include minimum guaranteed commissions. This has impacted our compensation expenses in the past and we expect it will in the future.
Components of Results of Operations
Revenue
We derive substantially all 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 revenue can also fluctuate from quarter to quarter due to a variety of factors, including reimbursement, sales force changes, physician activities, and seasonality. Our revenue from international sales may also be significantly impacted by fluctuations in foreign currency exchange rates between the U.S. dollar (our reporting currency) and the local currency.
Cost of Goods Sold, Gross Profit, and Gross Margin
We utilize third-party manufacturers for production of the iFuse implants and instrument sets. Cost of goods sold consists primarily of costs of the components of iFuse implants and instruments, scrap and inventory obsolescence, as well as distribution-related expenses such as logistics and shipping costs. We anticipate that our cost of goods sold will increase in absolute dollars as case levels increase.
In accordance with the Patient Protection and Affordable Care Act, effective January 1, 2013, we began to incur an excise tax on sales of medical devices in the United States. Effective December 2015, the Act was amended to include a provision to suspend the tax on medical devices through 2017. In January 2018, the suspension on the tax on medical devices was further extended through 2019. In July 2018, the U.S. House of Representatives voted to repeal this tax. It is unclear when the U.S. Senate will vote on this matter. Our gross margins have been and will continue to be affected by a variety of factors, including the cost to have our products manufactured for us, pricing pressure from increasing competition, and the factors described above impacting our revenue. 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.
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 expect operating expenses to increase in absolute dollars, as we continue to invest and grow our business, but decrease as a percentage of revenue. In September 2017, we implemented cost-saving measures, which reduced our operational expenses though headcount reductions, reduced project spending, and more targeted marketing and surgeon training activities.
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, and professional education departments. In addition, our sales and marketing expenses include commissions and bonuses, generally based on a percentage of sales, to our sales managers and directors, direct sales representatives and third-party distributors. We expect our sales and marketing expenses to increase in absolute dollars with

27



the continued commercialization of our current and future products and continued investment in our global sales organization, including broadening our relationships with third-party distributors, expanding exclusivity
commitments among them and increasing the number of our direct sales representatives, especially with increased reimbursement and adoption in the United States. Our sales and marketing expenses may fluctuate from period to period due to the seasonality of our business and as we continue to add direct sales representatives in new territories.
Research and Development Expenses
Our research and development expenses primarily consist of engineering, product development, clinical and regulatory expenses (including clinical study expenses), and 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 and consultants’ compensation and stock-based compensation expense. We expense research and development costs as they are incurred. We expect research and development expense to increase in absolute dollars as we develop new products, add research and development personnel, and undergo clinical activities, including more clinical studies to gain additional regulatory clearances and wider surgeon adoption.
General and Administrative Expenses
General and administrative expenses primarily consist of compensation, stock-based compensation expense, and other costs for finance, accounting, legal, compliance, reimbursement, and administrative matters. We expect our general and administrative expenses to increase in absolute dollars to support the growth of our business. We also expect to incur additional general and administrative expenses as a result of operating as a public company, including but 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. While we expect the general and administrative expenses to increase in absolute dollars, we anticipate that it will decrease as a percentage of revenue over time.
Interest Expense
Interest expense is related to borrowings and includes the amortization of debt discounts derived from the issuance of warrants.
Other Income (Expense), Net
Other income (expense), net consists primarily of the changes in fair value of our preferred stock warrant liability and net gain (loss) on foreign currency transactions. In connection with our initial public offering, or IPO, our preferred stock warrant liability was settled.


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Results of Operations
The following table sets forth our results of operations for the period presented:
 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
Revenue
$
13,381

 
$
11,683

 
$
39,756

 
$
34,214

Cost of goods sold
1,221

 
1,328

 
3,451

 
3,894

Gross profit
12,160

 
10,355

 
36,305

 
30,320

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
10,605

 
9,857

 
31,890

 
30,987

Research and development
1,373

 
1,466

 
3,875

 
4,234

General and administrative
3,226

 
4,071

 
8,198

 
10,808

Total operating expenses
15,204

 
15,394

 
43,963

 
46,029

Loss from operations
(3,044
)
 
(5,039
)
 
(7,658
)
 
(15,709
)
Interest and other income (expense), net:
 
 
 
 
 
 
 
Interest income
69

 
44

 
199

 
117

Interest expense
(1,282
)
 
(1,005
)
 
(3,826
)
 
(2,925
)
Other income (expense), net
(535
)
 
317

 
(855
)
 
383

Net loss
$
(4,792
)
 
$
(5,683
)
 
$
(12,140
)
 
$
(18,134
)


The following table sets forth our results of operations as a percentage of revenue:
 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
Revenue
100
 %
 
100
 %
 
100
 %
 
100
 %
Cost of goods sold
9
 %
 
11
 %
 
9
 %
 
11
 %
Gross profit
91
 %
 
89
 %
 
91
 %
 
89
 %
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
79
 %
 
84
 %
 
80
 %
 
91
 %
Research and development
10
 %
 
13
 %
 
10
 %
 
12
 %
General and administrative
24
 %
 
35
 %
 
21
 %
 
32
 %
Total operating expenses
113
 %
 
132
 %
 
111
 %
 
135
 %
 
 
 
 
 
 
 
 
Loss from operations
(23
)%
 
(43
)%
 
(20
)%
 
(46
)%
Interest and other income (expense), net:
 
 
 
 
 
 
 
Interest income
1
 %
 
 %
 
1
 %
 
 %
Interest expense
(10
)%
 
(9
)%
 
(10
)%
 
(9
)%
Other income (expense), net
(4
)%
 
3
 %
 
(2
)%
 
1
 %
 
 
 
 
 
 
 
 
Net loss
(36
)%
 
(49
)%
 
(31
)%
 
(54
)%
 

29



The following table sets forth our United States and international revenue:
 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
United States
12,216

 
10,530

 
35,672

 
30,915

International
1,165

 
1,153

 
4,084

 
3,299

 
$
13,381

 
$
11,683

 
$
39,756

 
$
34,214

The following table sets forth our United States and international revenue as a percentage of our total revenue:
 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
United States
91
%
 
90
%
 
90
%
 
90
%
International
9
%
 
10
%
 
10
%
 
10
%
 
100
%
 
100
%
 
100
%
 
100
%
Comparison of the Three Months Ended September 30, 2018 and 2017
Revenue, Cost of Goods Sold, Gross Profit, and Gross Margin
 
Three Months Ended
September 30,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
 
(in thousands, except for percentages)
Revenue
$
13,381

 
$
11,683

 
$
1,698

 
15
 %
Cost of goods sold
1,221

 
1,328

 
(107
)
 
(8
)%
Gross profit
$
12,160

 
$
10,355

 
$
1,805

 
17
 %
Gross margin
91
%
 
89
%
 
 
 
 

Revenue. Revenue increased $1.7 million or 15%, for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017. The increase is attributable to $1.7 million in growth from U.S. sales as a result of higher sales force productivity and improved U.S. reimbursement coverage.

Cost of Goods Sold, Gross Profit, and Gross Margin. Total cost of goods sold decreased $0.1 million, or 8%, for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017. The decrease in cost of goods sold is primarily due to a decrease in depreciation expense of $0.1 million related to instrument sets becoming fully depreciated. Gross profit increased $1.8 million, or 17%, to $12.2 million due to higher revenue and lower cost of goods sold.
 
Operating Expenses
 
Three Months Ended
September 30,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
 
(in thousands, except for percentages)
Sales and marketing
$
10,605

 
$
9,857

 
$
748

 
8
 %
Research and development
1,373

 
1,466

 
(93
)
 
(6
)%
General and administrative
3,226

 
4,071

 
(845
)
 
(21
)%
Total operating expenses
$
15,204

 
$
15,394

 
(190
)
 
 
Sales and Marketing Expenses. Sales and marketing expenses increased $0.7 million, or 8%, for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017. The increase was primarily due to $0.3 million in increased employee incentive expenses and an increase of $0.1 million in distributor commissions related to improved company

30



performance during the period, an increase of $0.1 million in website enhancement costs, and an increase of $0.1 million in consultants related to increased surgeon training events.
Research and Development Expenses. Research and development expenses decreased $0.1 million, or 6%, for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017. The decrease was primarily due to lower spend in clinical research as our trials continue to mature.
General and Administrative Expenses. General and administrative expenses decreased $0.8 million, or 21%, for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017. The decrease was primarily due to a decrease of $1.3 million in offering costs written off in the three months ended September 30, 2017 as a result of delays in the public offering process in 2017. This decrease was offset by an increase in employee incentive expenses of $0.3 million related to improved company performance during the period, and an increase in general corporate legal and other fees of $0.2 million.
Interest and Other Income (Expense), Net
 
Three Months Ended
September 30,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
 
(in thousands except for percentages)
Interest income
$
69

 
$
44

 
$
25

 
57
 %
Interest expense
(1,282
)
 
(1,005
)
 
(277
)
 
28
 %
Other income (expense), net
(535
)
 
317

 
(852
)
 
(269
)%
Interest Income. Interest income remained relatively consistent for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017, and is related to investments of excess cash in money market funds.
Interest Expense. Interest expense increased $0.3 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017, due to a $10.0 million increase in the level of borrowings associated with closing a new debt arrangement in October 2017.
Other Income (Expense), Net. Other income (expense), net, decreased $0.9 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017, primarily due to losses from the change in the fair value of our preferred stock warrants outstanding, which are accounted for as a liability and revalued at each reporting period, and foreign currency exchange losses.
 
Comparison of the Nine Months Ended September 30, 2018 and 2017
Revenue, Cost of Goods Sold, Gross Profit, and Gross Margin
 
Nine Months Ended September 30,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
 
(in thousands except for percentages)
Revenue
$
39,756

 
$
34,214

 
$
5,542

 
16
 %
Cost of goods sold
3,451

 
3,894

 
(443
)
 
(11
)%
Gross profit
$
36,305

 
$
30,320

 
$
5,985

 
20
 %
Gross margin
91
%
 
89
%
 
 
 
 
Revenue. Revenue increased $5.5 million, or 16%, for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, primarily due to an increase of $4.8 million from growth of domestic revenue from additional hiring of sales personnel and improved U.S. reimbursement coverage. In addition, we had $0.8 million from growth of international revenue from our branch in the United Kingdom, increased sales force productivity in Germany, and new business in Australia and Taiwan.
Cost of Goods Sold, Gross Profit, and Gross Margin. Total cost of goods sold decreased $0.4 million, or 11%, for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. This is primarily due to a decrease of $0.3 million in depreciation expense related to instrument sets that have become fully depreciated, and a decrease in employee related costs of $0.2 million related to decreases in headcount, and a decrease of $0.1 million in consulting and other professional fees. These decreases were

31



partially offset by the increase in direct product costs from higher case volumes. Gross profit increased $6.0 million, or 20%, to $36.3 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 due to higher revenue and lower cost of goods sold.
Operating Expenses
 
Nine Months Ended September 30,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
 
(in thousands except for percentages)
Sales and marketing
$
31,890

 
$
30,987

 
$
903

 
3
 %
Research and development
3,875

 
4,234

 
(359
)
 
(8
)%
General and administrative
8,198

 
10,808

 
(2,610
)
 
(24
)%
Total operating expenses
$
43,963

 
$
46,029

 
$
(2,066
)
 
 
Sales and Marketing Expenses. Sales and marketing expenses increased $0.9 million, or 3%, for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The increase was primarily due to $1.2 million in increased salaries and other employee incentive expense and related costs as a result of improved company performance during the period, $0.2 million in increased commissions, net of lower minimum guaranteed commissions, and $0.2 million in distributor commissions due to higher revenues. These increases were partially offset by a decrease of $0.3 million in general marketing expenses, and $0.4 million in surgeon training programs including training facilities and consulting surgeon costs due to continued focus on maximizing class sizes to more fully leverage training events.
Research and Development Expenses. Research and development expenses decreased $0.4 million, or 8%, for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The decrease was primarily due to a $0.4 million reduction in salaries and related expenditures from lower headcount.
General and Administrative Expenses. General and administrative expenses decreased $2.6 million, or 24%, for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The decrease was primarily due to $1.3 million of offering costs written off in September 2017 as a result of delays in the public offering process, a decrease of $0.5 million due to the forgiveness of a loan to the Chief Executive Officer in the 2017 period, a decrease in consulting spend of $0.5 million related to cost control measures put in place at the end of the third quarter 2017, and a settlement charge of $0.2 million incurred during the nine months ended September 2017.
Interest and Other Income (Expense), Net
 
Nine Months Ended September 30,
 
$ Change
 
% Change
 
2018
 
2017
 
 
(in thousands except for percentages)
Interest income
$
199

 
$
117

 
$
82

 
70
 %
Interest expense
(3,826
)
 
(2,925
)
 
(901
)
 
31
 %
Other income (expense), net
(855
)
 
383

 
(1,238
)
 
(323
)%
Interest Income. Interest income increased $0.1 million, or 70%, for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, due to investment of excess cash in money market funds.
Interest Expense. Interest expense increased $0.9 million, or 31%, for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, due to a $10.0 million increase in the level of borrowings associated with closing a new debt arrangement in October 2017.
Other Income (Expense), Net. Other income (expense), net, decreased $1.2 million or 323%, for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, as a result of losses from the change in the fair value of outstanding preferred stock warrants, which are accounted for as a liability and revalued at each reporting period.

32




Liquidity and Capital Resources
As of September 30, 2018, we had cash and cash equivalents of $14.0 million. Since inception, we have financed our operations through private placements of preferred stock, debt financing arrangements, and the sale of our products. As of September 30, 2018, we had $38.9 million principal amount of outstanding debt, net of debt discounts.
As of September 30, 2018, we had an accumulated deficit of $151.9 million. During the nine months ended September 30, 2018, we incurred a net loss of $12.1 million. During the years ended December 31, 2017 and 2016, we incurred net losses of $23.0 million and $20.6 million, respectively, and expect to incur additional losses in the future. We have not achieved positive cash flow from operations to date. The debt covenants associated with our current debt agreement require us to maintain a minimum cash balance of $5.0 million and revenue targets. Beginning with the three months ended March 31, 2019, we are required to meet either revenue or earnings targets. If we do not comply with these covenants, the debt will immediately become due.
Based upon our current operating plan, we believe that the net proceeds from our IPO, together with our existing cash and cash equivalents, will enable us to fund our operating expenses and capital expenditure requirements through at least the next 12 months. We continue to face challenges and uncertainties and, as a result, our available capital resources may be consumed more rapidly than currently expected due to (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.
 
If we need to raise additional capital to fund our operations, funding may not be available to us on acceptable terms, or at all. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of or suspend one or more of our sales and marketing efforts, research and development activities, or other operations. We may seek to raise any necessary additional capital through a combination of public or private equity offerings, debt financings, and collaborations or licensing arrangements. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends. If we are unable to raise capital, we will need to delay, reduce, or terminate planned activities to reduce costs. Doing so will likely harm our ability to execute our business plans.
Borrowings
In October 2017, we extinguished a term loan and revolving line of credit facility with Silicon Valley Bank and Oxford Finance, LLC and concurrently, entered into the New Term Loan with Pharmakon Advisors for $40.0 million. The New Term Loan includes an interest-only period for 35 months through September 2020 and is then repaid for 25 months of equal principal payments plus interest through December 2022. The New Term Loan carries a fixed interest rate of 11.5% and a closing fee of 1.5% of the funded amount, or $0.6 million. The New Term Loan includes a pre-payment fee of the remaining interest payable for the first 30 months of the agreement if it is prepaid within the first 30 months, a 2% prepayment penalty for months 31-48, and a 1% penalty for months 49-60. The New Term Loan requires us to maintain a minimum cash balance of $5.0 million and revenue targets. Beginning with the three months ended March 31, 2019, we are required to meet either revenue or earnings targets. Under the New Term Loan, we also have a second tranche of $10.0 million available through January 2019, contingent upon the achievement of certain revenue milestones. The New Term Loan is collateralized by all of our assets, including intellectual property.
As of December 31, 2017 and September 30, 2018, we were in compliance with all of our debt obligations and covenants.
 
Contractual Obligations

During the nine months ended September 30, 2018, there have been no material changes to our contractual obligations and commitments outside the ordinary course of business from December 31, 2017, other than in February 2018, we entered into a new seven-year lease for our Santa Clara, California facility. The total commitment is $5.1 million.

33



Cash Flows
The following table sets forth the primary sources and uses of cash for each of the periods presented below:
 
Nine Months Ended
September 30,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
 
(in thousands, except for percentages)
Net cash (used in) provided by:
 
 
 
 
 
 
 
Operating activities
$
(8,202
)
 
$
(13,494
)
 
$
5,292

 
(39
)%
Investing activities
(777
)
 
(370
)
 
(407
)
 
110
 %
Financing activities
627

 
4,310

 
(3,683
)
 
(85
)%