SIBN US Equity☆

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes to those statements included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many important factors, including those set forth in the “Risk Factors” section of this Annual Report on Form 10-K, our actual results could differ materially from the results described in, or implied, by these forward-looking statements.

Overview

We are a medical device company focused on the development of implantable devices used in the surgical treatment of the sacropelvic anatomy. We have pioneered a proprietary minimally invasive surgical implant system, which we call iFuse, to fuse the sacroiliac joint to treat sacroiliac joint dysfunction, which often causes severe lower back pain. Since we introduced iFuse in 2009, as of December 31, 2020, more than 53,000 procedures have been performed by over 2,300 surgeons, in the U.S. and 35 other countries.

We introduced our second-generation implant, the iFuse-3D, in 2017. This patented titanium implant combines the triangular cross-section of the iFuse implant with the proprietary 3D-printed porous surface and fenestrated design.

In April 2019, we received clearance from the United States Food and Drug Administration, or FDA, to promote the use of our iFuse Implant System for fusion of the sacroiliac joint in conjunction with multi-level spinal fusion procedures to provide further stabilization and immobilization of the sacroiliac joint. For this indication, surgeons typically use the posterior approach, through the sacrum and into the iliac bones, which we call the Bedrock technique. We received CE marking and began marketing our iFuse Implant System for this indication and surgical technique in Europe in December 2019.

In March 2020, we received FDA 510(k) clearance for an expanded indication for the iFuse Implant System to support our trauma program.

We market our products primarily with a direct sales force as well as a number of distributors in the U.S., and with a combination of a direct sales force and distributors in other countries.

In October 2018, we completed our initial public offering (“IPO”) resulting in net proceeds of $113.4 million after deducting underwriting discounts and commissions and offering expenses. In January and February 2020, we received a total of $63.0 million of net proceeds, after deducting the underwriting discounts, commissions and offering expenses, from our first follow-on public offering of our common stock. In October 2020, we received a total of $71.6 million of net proceeds, after deducting underwriting discounts and commissions and offering expenses, from our second follow-on offering of our common stock.

Impact of COVID-19 Pandemic

The COVID-19 pandemic and the resulting economic downturn are affecting business conditions in our industry. The overall demand for our products decreased at certain points during the year as a result of the pandemic, which impacted our operating results for the year ended December 31, 2020. Many state and local governments in the U.S. and foreign governments issued orders that temporarily precluded elective procedures in order to conserve scarce health system resources in view of the pandemic. The decrease in hospital admission rates and elective surgeries decreased the demand for elective procedures using our iFuse implants. Prior to the COVID-19 pandemic, we experienced case growth trends consistent with those experienced in the fourth quarter of 2019. Beginning at the end of February 2020, we began to see an impact on case volumes in Northern Italy due to the spread of the virus in the Lombardy region, the location of our operation in Gallarate, Italy. Overall, the disruption was not significant through the middle of March 2020, as Italy represents a small portion of our worldwide sales. Beginning in mid-March 2020 through April 2020, we saw a substantial worldwide reduction in global case volumes due to deferral of elective surgeries as a result of the COVID-19 pandemic in the U.S. and across Europe. In May 2020, case volumes began to recover as hospitals and medical centers across the U.S. and Europe resumed performance of elective surgical procedures. In November and December 2020, we again began to see the deferral of elective surgeries by hospitals, surgeons, and patients in the U.S. and across Europe.

We have taken what we believe are all necessary precautions to safeguard our employees, patients, customers, and other stakeholders from the COVID-19 pandemic. We are following the Centers for Disease Control and Prevention’s guidance and state and local restrictions. We modified operations and clinical support starting in March 2020, maintaining streamlined assembly, distribution and related processes in order to continue providing products to our customers. Specific protocols were designed and implemented to minimize contact time among employees working on site. We restricted non-essential travel to protect the health and safety of our employees, patients, and customers. Where healthcare operations were impacted, we supported healthcare providers via telephone and online technologies. We also continued to focus on increasing surgeon activity by utilizing a virtual education series for surgeons and mid-level practitioners to continue our training activities.

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Starting in May 2020, we began to return to more normalized operations and clinical support as local restrictions were reduced, but tightened them again with the resurgence of COVID-19 in November 2020. The majority of our employees who are not related to manufacturing and order fulfillment are currently on a telecommunication work arrangement and have generally been able to successfully work remotely.

Beginning in March 2020, we curtailed certain operating expense due to limited visibility on the extent and duration of the impact from COVID-19. We took preemptive steps to manage spending, including implementing hiring restrictions, eliminating discretionary spending, reducing executive salaries, reducing capital expenditures, reducing non-essential marketing expenses, and delaying clinical research projects. We returned to more normalized spending levels in the fourth quarter with returning revenue growth, refinancing of our debt, and raising of additional equity.

The timing, extent and continuation of any further increase in procedures, and any corresponding increase in sales of our products, and whether there could be a future decrease in the current level of procedures as a result of the COVID-19 pandemic or otherwise, remain uncertain and are subject to a variety of factors, including:

•Further increases in COVID-19 cases in various locations that would result in more hospitalizations and a corresponding decrease in elective procedures in such impacted locations.

•Surgeons and hospitals postponing elective procedures as a result of reduced availability of physicians or space to treat patients, different treatment prioritizations, increased cost pressures and burdens on the overall healthcare infrastructure.

•Patients electing to defer or avoid elective procedures due to concerns about being exposed to COVID-19 in hospital settings, loss of employer-sponsored health insurance related to the high levels of unemployment in the U.S. or other reasons.

•Hospitals reserving more space for potential COVID-19 patients, especially as the number of COVID-19 cases spikes, limiting the space allocated to inpatient and outpatient elective procedures.

•Additional restrictions on access to customers, hospitals, labs and other medical facilities for sales activities, physician training and case support if they have been deemed to be “non-essential” personnel by those facilities or applicable local regulations.

The existence and further duration of the COVID-19 pandemic may also further exacerbate certain risks as described in “Item 1A - Risk Factors”. Recently, the U.S. and many other countries have experienced increasing trends of COVID-19 infections and hospitalizations.

The COVID-19 pandemic is continuing globally, and we are unable to predict how the COVID-19 pandemic will impact procedure volumes or product sales in the future, or the extent, duration or recurrence of the COVID-19 pandemic in any location. We are, therefore, unable to predict the impact of the COVID-19 pandemic, and such could have a material adverse effect on our results of operations, financial condition and capital resources.

Factors Affecting Results of Operations and Key Performance Indicators

We monitor certain key performance indicators that we believe provide us and our investors indications of conditions that may affect results of our operations. Our revenue growth rate and commercial progress is impacted by, among other things, our key performance indicators, including our ability to leverage our sales force, increase surgeon activity and training, engage key opinion leaders, and leverage broad coverage.

Leverage our sales force

We have made significant investments in our sales force since our initial public offering in 2018. We have built a valuable sales team, and we believe they are the key to the recovery that follows the pandemic. As such, we have made it a top priority to support and retain our sales force through this challenging period. We limited new sales force hiring in the second and third quarter of 2020 due to uncertainty from the COVID-19 pandemic and focused on sales force productivity during this period, but resumed hiring of salespeople in the fourth quarter of 2020 based upon our favorable financial position and opportunity for future revenue growth.

As of December 31, 2020, our U.S. sales force consisted of 64 territory sales managers and 58 clinical support specialists directly employed by us and 41 third-party distributors, compared to 56 territory sales managers and 51 clinical support specialists directly employed by us and 37 third-party distributors as of December 31, 2019. As of December 31, 2020, our international sales force consisted of 20 sales representatives directly employed by us and 31 exclusive third-party distributors, compared to 19 sales representatives directly employed by us and 27 exclusive third-party distributors as of December 31, 2019.

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Increase surgeon activity and training

Our medical affairs team works closely with our sales team to increase surgeon activity and training. Surgeon activity includes both the number of surgeons performing iFuse procedures as well as the number of procedures performed per surgeon.

As of December 31, 2020 and 2019, in the U.S., more than 1,600 surgeon and 1,400 surgeons, respectively, have been trained on iFuse and have treated at least one patient. Outside the U.S., as of December 31, 2020, more than 600 surgeons have been trained on iFuse and have treated at least one patient. We grew our active surgeon base to 588 surgeons as of December 31, 2020, compared to 539 active surgeons as of December 31, 2019. We define an active surgeon to be a surgeon who has performed at least one case in the last three months. We will continue to pursue the remainder of the approximately 7,500 target surgeons in the U.S., as well as international surgeons, for training in the future.

The COVID-19 outbreak challenged our traditional method of hands-on cadaveric and dry-lab training. Therefore, in addition to utilizing a virtual education series for surgeons and mid-level practitioners for training activities, we began using the SI-BONE SImulator; a portable, radiation-free, haptics and computer-based simulator for training purposes. Starting in July 2020, we deployed four SImulators in the U.S. and one in Europe. The SImulators were used in approximately 45% of new surgeon training courses in the second half of 2020. We have placed an order for 20 additional SImulators to increase the percentage and number of surgeons trained and retrained using the SImulator in the U.S. and Europe.

Engage key opinion leaders

Our Bedrock technique is used in the treatment of adult spinal deformity. We introduced this technique in June 2019 for use in the fusion of the sacroiliac joints in conjunction with a multi-segment spinal fusion, or long construct, procedure. The Bedrock technique utilizes our proprietary iFuse Implants, with one implant placed across each sacroiliac joint (for a total of two implants per case) using a posterior approach, through the sacrum, across the sacroiliac joint, and into the ilium. The Bedrock technique differs from our traditional iFuse procedure, whereby three iFuse implants are placed across one sacroiliac joint via a lateral transarticular approach through the ilium and into the sacrum. The Bedrock technique is performed to increase stability at the base of a long construct. Biomechanical testing has shown that iFuse Implants placed in this position reduce sacroiliac joint motion by approximately 30% in conjunction with a long construct. We received CE mark clearance for the promotion of the Bedrock technique in Europe and we launched the promotion of this technique in select European markets.

We conduct training courses in several academic centers in the U.S. and engage key opinion leaders to support our development efforts. Interest in the Bedrock technique among deformity surgeons, including many key opinion leaders, has provided our sales representatives with access to important academic medical centers in the U.S. This enables our representatives to train a broader group of spine surgeons, including residents and fellows at these centers, on both the Bedrock technique and minimally invasive sacroiliac fusion. In 2020, we have conducted training courses at over 50 academic centers in the U.S., where more than 200 surgical residents and fellows have been trained.

Leverage broad coverage

We made significant progress in both the number of covered lives and the Medicare physician fee for surgeons performing minimally invasive sacroiliac fusion in the U.S. As of December 31, 2020, U.S. payors that account for 311.6 million U.S. covered lives reimburse for iFuse, with private payors accounting for 195.8 million of these covered lives. As of December 31, 2019, U.S. payors covering 282.7 million lives reimbursed for iFuse, of which 147.9 million were covered by private payors. As of December 31, 2020, 37 U.S. payors have issued positive coverage policies exclusive to iFuse for sacroiliac joint fusion because of the clinical evidence, compared to 32 exclusive coverage policies as of December 31, 2019. Further, as of December 31, 2020 and 2019, an additional 21 and 20, respectively, private payors cover iFuse and other products for sacroiliac joint fusion. The 2020 covered lives include Humana, the fifth largest commercial health plan in the U.S. with over 12 million members, which adopted an exclusive coverage policy in December and Aetna, the third largest commercial health plan in the U.S. with over 22 million members, which adopted a coverage policy in May 2020. Currently, covered lives counts do not include Anthem, which covers minimally invasive sacroiliac fusion procedures in the event of pelvic girdle trauma only. We track the number of U.S. covered lives, or individuals whose healthcare is paid for by a private commercial or governmental payor that routinely reimburses for minimally invasive sacroiliac fusion, as a proxy for availability of the procedure within the U.S. healthcare payment system. We believe that the full impact of each coverage decision grows over time as surgeons gain confidence that they will receive reimbursement for the majority of their diagnosed patients.

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Components of Results of Operations

Revenue

We generate most of our revenue from sales of iFuse. Revenue from sales of iFuse fluctuate based on volume of cases (procedures performed), discounts, mix of international and U.S. sales, and the number of implants used for a particular patient. Similar to other orthopedic companies, our case volume can vary from quarter to quarter due to a variety of factors including reimbursement, sales force changes, physician activities, and seasonality. In addition, our revenue is impacted by changes in average selling price as we respond to the competitive landscape and price differences at different medical facilities, such as hospitals and ASCs. Further, revenue results can differ based upon the mix of business between U.S. and international sales and mix of our products either delivered at the point of implantation at the hospital or other medical facilities or delivered through distributors or to hospitals where the products were ordered in advance of the procedure. Our revenue from international sales is impacted by fluctuations in foreign currency exchange rates between the U.S. dollar (our reporting currency) and the local currency.

The COVID-19 pandemic reduced our expected number of cases. As the pandemic continued in the U.S. and Europe, it had a significant impact on our case volumes beginning mid-March 2020. The largest impact was felt in April 2020, where revenue declined by 84% from the prior year. Given the situation, a considerable number of cases were deferred from mid-March through the end of April 2020. Starting in May 2020, case volumes began to recover as hospitals and medical centers across the U.S. and Europe resumed performance of elective surgery procedures. In the third quarter of 2020, we saw a more normalized revenue growth resulting in a 26% increase compared to the prior year. In November and December 2020, we again began to see the deferral of elective surgeries by hospitals, surgeons, and patients in the U.S. and across Europe. We continue to monitor the potential impact of COVID-19 to our product sales in the U.S. and international markets.

Cost of Goods Sold, Gross Profit, and Gross Margin

We utilize third-party manufacturers for production of iFuse implants and instrument sets. Cost of goods sold consists primarily of costs of the components of iFuse implants and instruments, instrument set depreciation, scrap and inventory obsolescence, as well as distribution-related expenses such as logistics and shipping costs. Our cost of goods sold has historically increased as case levels increase.

Our gross profit and gross margin are affected by factors impacting revenue and cost of goods sold. In addition, our gross margins are typically higher on products we sell directly as compared to products we sell through third-party distributors. As a result, changes in the mix of direct versus distributor sales can directly influence our gross margins.

Our operations ran at suboptimal capacity as a result of decreased iFuse demand from worldwide restrictions on elective procedures during the second quarter of 2020. Accordingly, in the second quarter of 2020, certain labor and overhead costs were expensed as incurred which impacted our gross profit and gross margin. We saw a more normalized operations capacity during the second half of 2020 as case volumes began to recover. We may experience similar issues in future quarters due to the COVID-19 pandemic.

Operating Expenses

Our operating expenses consist of sales and marketing, research and development, and general and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, sales commissions and other cash and stock-based compensation related expenses. We anticipate operating expenses will continue to increase to support our employees. During the second quarter, we took steps to reduce variable expenses that were ineffective and slowed down hiring due to the impact to our revenue from COVID-19. We continue to monitor the rapidly evolving situation, but as operations returned to more normalized levels, we made additional investments to execute our strategic plans and operational initiatives.

Sales and Marketing Expenses

Sales and marketing expenses primarily consist of salaries, stock-based compensation expense, and other compensation related costs, for personnel employed in sales, marketing, medical affairs, reimbursement and professional education departments. In addition, our sales and marketing expenses include commissions and bonuses, generally based on a percentage of sales, to our senior sales management, direct territory sales managers, territory associate representatives and third-party distributors.

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Our sales and marketing spending reflected normal business activities into mid-March 2020. Due to the COVID-19 pandemic, we focused on protecting key investments in our field force while curtailing most other areas of sales and marketing spend during the second and third quarter of 2020. For example, we guaranteed certain levels of incentive compensation to members of our field sales organization in order to retain these employees and partially mitigate the impact of the pandemic to their compensation. In contrast, we reduced certain other spending during the COVID-19 pandemic, such as travel and related expenses, regional surgeon training, trade shows, and discretionary marketing. As revenue growth returned to the levels that we were experiencing prior to the pandemic, we increased our sales and marketing expense accordingly in the third and fourth quarters of 2020.We plan to increase investments in our sales force and surgeon training to capture future revenue growth opportunities.

Research and Development Expenses

Our research and development expenses primarily consist of engineering, product development, clinical and regulatory expenses (including clinical study expenses), consulting services, outside prototyping services, outside research activities, materials, depreciation, and other costs associated with development of our products. Research and development expenses also include related personnel compensation and stock-based compensation expense. We expense research and development costs as they are incurred.

Research and development expenses for engineering projects fluctuate with project timing. Based upon our broader set of product development initiatives and the stage of the underlying projects, we expect to continue to make investments in research and development. Clinical study expenses declined during mid-March through April due to hospital postponement of trials as a result of the COVID-19 pandemic. However, most hospitals allowed the resumption of clinical trials starting in May 2020. As such, we anticipate that research and development expenses will continue to increase in the future.

General and Administrative Expenses

General and administrative expenses primarily consist of salaries, stock-based compensation expense, and other costs for finance, accounting, legal, compliance, and administrative matters. We took measures during most of the year to control discretionary items classified as general and administrative expenses due to the COVID-19 pandemic, but expect our general and administrative expenses to return to normal levels as the acuity of the COVID-19 pandemic recedes. General and administrative activities that sustain our business and support our operations as a public company, include but are not limited to: expenses related to compliance with the rules and regulations of the Securities and Exchange Commission and those of the Nasdaq Global Market on which our securities are traded; additional insurance expenses; investor relations activities; and other administrative and professional services.

Interest Income

Interest income is primarily related to our investments of excess cash in money market funds and marketable securities.

Interest Expense

Interest expense is primarily related to borrowings, amortization of debt issuance costs and accretion of a final fee on our Solar Term Loan. Following the refinancing of our term loan, interest expense also includes the loss on debt extinguishment.

Other Income (Expense), Net

Other income (expense), net consists primarily of net foreign exchange gains and losses on foreign transactions.

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Results of Operations

We manage and operate as one reportable segment. The table below summarizes our results of operations for the periods presented (percentages are amounts as a percentage of revenue), which we derived from the accompanying consolidated financial statements:

Amount % Amount %

(in thousands, except for percentages)

Consolidated Statements of Operations Data:

Operating expenses:

Interest and other income (expense), net:

Other expense, net (126) — % (2) — %

We derive the majority of our revenue from sales to customers in the U.S. Revenue by geography is based on billing address of the customer. The table below summarizes our revenue by geography:

Amount % Amount %

(in thousands except for percentages)

Comparison of the years ended December 31, 2020 and 2019

Revenue, Cost of Goods Sold, Gross Profit, and Gross Margin:

Year ended December 31,

(in thousands except for percentages)

Gross margin 88 % 90 %

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Revenue. The increase in revenue for the year ended December 31, 2020 compared to the year ended December 31, 2019 comprised a $6.3 million increase in our U.S. revenue, partly offset by a decrease of $0.2 million in our international revenue. The increase in U.S. revenue was attributable to an increase in case volumes, partly offset by lower average selling prices resulting from procedures performed at different medical facilities and cases using fewer implants in certain procedures. The increasing growth trend of our U.S. case count prior to the impact of COVID-19 was partly offset by the decline in U.S. case volumes specifically during mid-March through April 2020 due to COVID-19. Prior to the impact of COVID-19, we experienced case growth trends consistent with those experienced in the fourth quarter of 2019. The case growth we experienced prior to the impact of COVID-19 we attribute to higher sales force productivity, higher numbers of sales personnel, and increased active surgeons due to improving U.S. reimbursement coverage. The decrease in our international revenue we believe was primarily due to the effects of COVID-19.

Gross Profit and Gross Margin. Gross profit increased $4.0 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 primarily driven by higher revenue, partly offset by higher cost of goods sold. Gross margin decreased to 88% for the year ended December 31, 2020 as compared to 90% the year ended December 31, 2019 primarily due to certain period costs of $0.2 million charged directly to cost of operations and increases in inventory write-downs of $0.8 million. Certain period costs were expensed as incurred during the second quarter of 2020 because our operations ran at suboptimal capacity due to lower case volumes as a result of the COVID-19 pandemic. Gross margin was also impacted by higher employee related costs and inventory management to support the growth of the business.

Operating Expenses:

Year ended December 31,

(in thousands, except for percentages)

Sales and Marketing Expenses. The increase in sales and marketing expenses for the year ended December 31, 2020 as compared to the year ended December 31, 2019 was primarily due to an increase of $9.7 million in employee related costs and stock-based compensation expense driven by increased headcount. The increase was partly offset by decreases in travel and other sales and marketing related expenses of $4.2 million due to the COVID-19 pandemic.

Research and Development Expenses. The increase in research and development expenses for the year ended December 31, 2020 as compared to the year ended December 31, 2019 was primarily due to increases in employee related costs and stock-based compensation expense of $1.7 million driven by increased headcount, as well as increases in other research and development expenses of $0.5 million primarily due to clinical study and research and development activities.

General and Administrative Expenses. The decrease in general and administrative expenses for the year ended December 31, 2020 as compared to the year ended December 31, 2019 was primarily due to $2.5 million of accrued litigation expense recorded in the third quarter of 2019, the reversal of excess accrued litigation expense of $0.6 million in the second quarter of 2020 following the final settlement of our TCPA class action lawsuit, and decreases in other general and administrative expenses of $0.6 million as a result of curtailment of discretionary spending in response to the COVID-19 pandemic. These decreases were partly offset by an increase of $2.3 million in employee related costs and stock-based compensation expense driven by increased headcount and $0.2 million public offering costs that were expensed associated with the follow-on offering in the first quarter of 2020.

Interest and Other Income (Expense), Net:

Year ended December 31, $ Change % Change

(in thousands, except for percentages)

Other expense, net (126) (2) (124) nm

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*not meaningful

Interest Income. The decrease in interest income for the year ended December 31, 2020 as compared to the year ended December 31, 2019 was mainly due to lower interest earned on our investments in marketable securities. Although the average investments balances were higher for the year ended December 31, 2020, interest rates earned were lower.

Interest Expense. The increase in interest expense for the year ended December 31, 2020 as compared to the year ended December 31, 2019 was mainly due to the loss on extinguishment of our Pharmakon Term Loan of $1.5 million, partly offset by lower interest associated with our Solar Term Loan. See "-Liquidity and Capital Resources-Term Loan."

Other Expense, Net. Other expense, net, increased for the year ended December 31, 2020 as compared to the year ended December 31, 2019 due to higher foreign currency exchange losses.

Liquidity and Capital Resources

As of December 31, 2020, we had cash and marketable securities of $196.4 million compared to $93.1 million as of December 31, 2019. We have financed our operations through our public offerings, debt financing arrangements, and the sale of our products. As of December 31, 2020 and 2019 we had $39.5 million and $39.2 million outstanding debt, respectively.

As of December 31, 2020, we had an accumulated deficit of $239.3 million. During the years ended December 31, 2020 and 2019, we incurred a net loss of $43.7 million and $38.4 million, respectively, and expect to incur additional losses in the future. We have not achieved positive cash flow from operations to date.

Based upon our current operating plan, we believe that our existing cash and marketable securities will enable us to fund our operating expenses and capital expenditure requirements through at least the next 12 months. However, the economic impact of the duration and severity of the COVID-19 pandemic, and our responses thereto (including such actions we have taken or may take in the future as disclosed elsewhere in this Report) pose risks and uncertainties in our future available capital resources. Further, we may face challenges and uncertainties and, as a result, our available capital resources may be consumed more rapidly than currently expected due to, but not limited to, the following as a result of the COVID-19 pandemic or otherwise: (a) decreases in sales of our products and the uncertainty of future revenues from new products; (b) changes we may make to the business that affect ongoing operating expenses; (c) changes we may make in our business strategy; (d) regulatory developments affecting our existing products; (e) changes we may make in our research and development spending plans; and (f) other items affecting our forecasted level of expenditures and use of cash resources.

Term Loan

The outstanding debt as of December 31, 2020 is related to a term loan pursuant to the Loan and Security Agreement dated May 29, 2020, entered into by us with Solar Capital Partners (“Solar”). Pursuant to the Loan and Security Agreement, Solar provided an aggregate principal amount of $40.0 million term loan to us (the “Solar Term Loan”). Prior to Solar Term Loan, our outstanding debt was related to a $40.0 million Term Loan with Biopharma Credit Investments IV Sub LP (“Pharmakon”) entered in October 2017 (the “Pharmakon Term Loan”). In accordance with the Loan and Security Agreement with Solar, we paid in full and terminated the Pharmakon Term Loan, which we accounted for as debt extinguishment in accordance with the accounting standards. As of December 31, 2020 and 2019, there was no amount available that could be borrowed under the credit facilities.

The Pharmakon Term Loan included an interest-only period for 35 months through September 2020 and equal quarterly principal payments plus interest through December 2022. The Pharmakon Term Loan carried a fixed interest rate of 11.5% and allowed for early prepayment. The prepayment penalty was equal to the remaining interest due if prepaid within the first 30 months, a 2% penalty for months 31-48, and a 1% penalty for months 49-60.

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The Solar Term Loan bears interest at a rate per annum equal to 9.40% plus London Interbank Offered Rate (“LIBOR”), payable monthly in arrears. LIBOR means the greater of (i) 0.33% or (ii) one-month LIBOR (or a comparable replacement rate to be determined by the collateral agent if the LIBOR is no longer available), which rate shall reset monthly. The Solar Term Loan matures in 60 months on June 1, 2025 (“Maturity Date”), with an interest-only period of 36 months through June 2023, and then repaid in equal monthly principal payments plus interest through maturity date. Pursuant to the Loan and Security Agreement, we may voluntarily prepay the Solar Term Loan, in full or in part, in increments of $10.0 million, for a prepayment premium in an amount equal to 3.00% of the principal if prepaid in year one, 1.25% of the principal if prepaid in year two, and 0.50% of the principal if prepaid in year three or later. The prepayment premium will be waived if we voluntarily prepay and refinance the outstanding balance with Solar. The Solar Term Loan is secured by substantially all of our assets. We are also obligated to pay a final fee equal to $1.0 million or 2.5% of the aggregate principal amount of the Solar Term Loan. This final fee shall be due and payable on the earliest of (i) the maturity date, (ii) the acceleration of the loan balance, or (iii) the full prepayment, refinancing, substitution or replacement of Solar Term Loan. The final fee was included within the long-term borrowings and is accreted to interest expense using straight-line method over the life of the term loan.

In July 2017, the head of the United Kingdom Financial Conduct Authority announced the desire to phase out the use of LIBOR by the end of 2021. In addition, the U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee composed of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with the Secured Overnight Financing Rate (“SOFR”), a new index calculated by short-term repurchase agreements, backed by Treasury securities. Although there have been a few issuances utilizing SOFR or the Sterling Over Night Index Average, an alternative reference rate that is based on transactions, it is unknown whether these alternative reference rates will attain market acceptance as replacements for LIBOR. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. As such, the potential effect of any replacement of the LIBOR could have on our business and financial condition cannot yet be determined.

Subject to other customary covenants set forth in the Loan and Security Agreement, we are required to maintain unrestricted cash and cash equivalents based on the trailing 12-month net products revenues tested on a monthly basis as follows: (a) $15.0 million if net product revenue is less than $75.0 million; or (b) $7.5 million if net product revenue is greater than or equal to $75.0 million, but less than $100.0 million (the “minimum liquidity requirement”). We are not subject to minimum liquidity requirement when trailing twelve-month net product revenues exceed $100.0 million. Upon the occurrence of an event of default of certain customary covenants, including the minimum liquidity requirement, as specified in the Loan and Security Agreement, subject to specified cure periods, all amounts owed by us would begin to bear interest at a rate that is 5.0% above the rate effective immediately before the event of default and may be declared immediately due and payable by Solar. As of December 31, 2020, we were in compliance with all debt covenants. Though there are uncertainties surrounding the impact of the COVID-19 pandemic that may impact our future revenue, we believe that we have sufficient cash and cash equivalents to meet the minimum liquidity requirements in the foreseeable succeeding period.

Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2020:

Payments Due By Period

Total Less than 1 year 1-3 years 4-5 years More than 5 years

(in thousands)

Purchase obligations 273 273 — — —

(1)Represents the principal obligations and the final fee at maturities of our Solar Term Loan.

(2)Represents the future interest obligations on our Solar Term Loan estimated using the fixed interest rate of 9.40% plus LIBOR held constant as of December 31, 2020.

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Cash Flows

The following table sets forth the primary sources and uses of cash for each of the periods presented below:

Year ended December 31,

(in thousands, except for percentages)

Net cash provided by (used in):

Effects of exchange rate changes on cash and cash equivalents 323 (37) 360

Cash Used in Operating Activities

Net cash used in operating activities for the year ended December 31, 2020 of $30.7 million resulted from cash outflows due to net loss of $43.7 million, adjusted for $15.6 million of non-cash items and cash outflows from changes in operating assets and liabilities of $2.5 million. Net cash used in operation activities for the year ended December 31, 2019 of $31.6 million resulted from cash outflows due to net loss of $38.4 million, adjusted for $7.3 million of non-cash items and cash outflows from changes in operating assets and liabilities of $0.5 million. The increase in net loss, net of non-cash items for the year ended December 31, 2020 compared to the year ended December 31, 2019 was mainly due to the higher operating expenses from the growth of the business, partly offset by higher revenue and decreases of certain expenses primarily due to the timing of accrual for litigation expense, and the result of actions taken to reduce discretionary spending in response to COVID-19. Cash outflows from changes in operating assets and liabilities for year ended December 31, 2020 were primarily due to timing of prepayments of certain expenses, higher accounts receivable due to the timing of collections, higher inventory due to the timing of inventory build-up and cash outflows due to increases in operating liabilities due to timing of payments. Cash outflows from changes in operating assets and liabilities for the year ended December 31, 2019 were primarily due to increases in inventories and accounts receivable as a result of increased case volumes and growth of the business, partly offset by increased operating liabilities due to the timing of payments and accrual of litigation expense related to a legal proceeding.

Cash Provided by (Used In) Investing Activities

Net cash used in investing activities in the year ended December 31, 2020 was $62.9 million compared to net cash provided by investing activities of $13.5 million in the year ended December 31, 2019. Net cash used in investing activities for the year ended December 31, 2020 consisted of purchases of our marketable securities, net of maturities and sales, of $60.4 million, and by purchases of purchases of property and equipment of $2.6 million. Net cash provided by investing activities for the year ended December 31, 2019 consisted of maturities of our marketable securities, net of purchases of $15.9 million, partially offset by purchases of property and equipment of $2.4 million.

Cash Provided by Financing Activities

Cash provided by financing activities in the year ended December 31, 2020 was $136.4 million compared to $3.5 million in the year ended December 31, 2019. The difference was primarily due to the receipt of the proceeds, net of underwriting discounts, commissions and offering costs of $134.6 million from our follow-on public offerings in January and October 2020. Cash provided by financing activities for the year ended December 31, 2020 also include proceeds from the issuance of common stock under our stock-based incentive compensation plans of $3.4 million, partly offset by debt payments associated with refinancing of our debt of $1.6 million. This compares to the cash provided by financing activities for the year ended December 31, 2019 which consisted of issuance of shares of common stock under our employee stock purchase plan of $3.7 million, partially offset by payments of additional IPO related costs of $0.2 million.

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Critical Accounting Policies, Significant Judgments, and Use of Estimates

This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenue generated, and expenses incurred during the reporting periods. We base our estimates on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. For more comprehensive discussion of our significant accounting policies, refer to “Note 2 - Summary of Significant Account Policies” in the accompanying Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.

Revenue Recognition

We adopted the new revenue standard in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”) effective January 1, 2019. The adoption of ASC 606 did not have a material effect on our revenue recognition. We derive our revenue from the sale of our products to medical groups and hospitals through our direct sales force and distributors throughout the U.S. and Europe. In accordance with ASC 606, we recognize revenue when control is transferred to the customer, in an amount that reflects the consideration we expect to be entitled to in exchange for the goods or services. To recognize revenue, we apply the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.

As it relates to majority of our revenue consisting of product sales where our sales representative delivers the product at the point of implantation at hospital or medical facilities, we recognize the revenue upon completion of the procedure and authorization by the customer, net of rebates and price discounts. We also generate a small portion of our revenue from sale of products through distributors and hospital or medical facilities where the product is ordered in advance of a procedure. The performance obligation is the delivery of the product and therefore, we recognize revenue upon shipment to the customers, net of rebates and price discounts. We account for rebates and price discounts as reduction to revenue, calculated based on the terms agreed to with the customer. Historically, there had been no significant price discounts. Sales prices are specified in either customer contract, agreed price list, or purchase order, which is executed prior to the transfer of control to the customer. For certain hospitals and medical facilities, we have agreements in place consists of either a master services agreement or an approved price list, which defines the terms and conditions of the arrangement, including the pricing information, payment terms and pertinent aspects of the relationship between the parties. We also have agreements in place with its distributors, which include standard terms that do not allow for payment contingent on resale of the product, obtaining financing, or other terms that could impact the distributor’s payment obligation. Our standard payment terms are generally net 30 to 90 days. We consider sales commissions and related expenses as incremental and recoverable costs of acquiring customer contracts. Our sales commissions paid to our sales representatives commensurate for each surgery performed. The period of benefit is concurrent when we recognize our revenue, as such, we also recognize sales commission as expense when incurred.

Stock-Based Compensation

We estimate the grant date fair value of stock options and ESPP using the Black-Scholes option valuation model. The model requires us to make a number of assumptions including expected volatility, expected term, risk-free interest rate and expected dividends. A number of these assumptions are subjective, and their determination generally require judgment.

•Expected Term - The expected term represents the period that we expect the share-based awards to be outstanding. We use the simplified method to determine the expected term as permitted by the guidance since we have no sufficient historical exercise patterns to estimate the expected life. The simplified method is calculated as the average of the time to vesting and the contractual life of the options.

•Expected Volatility - Since we became public in October 2018 and have no sufficient trading history, we use stock price volatility using the average historical volatilities of publicly traded companies within our industry that we consider comparable to our business over a period approximately equal to the expected term of our stock options.

•Risk-Free Interest Rate - We base the risk-free interest rate on the U.S. Treasury zero coupon issued in effect at the time of grant for periods corresponding with the expected term of the option.

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•Dividend Yield - We have not paid any dividends and we have no current plans to pay dividends on our common stock. As such, we use expected dividend yield of zero.

We recognize stock-based compensation expense over the requisite service period using the straight-line method, which is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. As such, we reduce our stock-based compensation for the estimated forfeitures at the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting forfeitures and record stock-based compensation expense only for those awards that we expect to vest. To the extent actual forfeitures differ from the estimates, we record the difference as a cumulative adjustment in the period that the estimates are revised.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Seasonality

Our business is affected by seasonal variations. For instance, we have historically experienced lower sales in the summer months and higher sales in the last quarter of the fiscal year. However, taken as a whole, seasonality does not have a material impact on our financial results.

JOBS Act Accounting Election

In April 2012, the JOBS Act was enacted. Section 107(b) of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption and, therefore, are not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

Recent Accounting Pronouncements

See Note 2 of Notes to Consolidated Financial Statements for related discussions on recently adopted accounting standards and updates on recently issued accounting standards not yet effective, which information is incorporated by reference here.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

As a “smaller reporting company”, we are not required to provide the information otherwise required by this Item.

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Item 8. Financial Statements and Supplementary Data

SI-BONE, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm 79

Consolidated Balance Sheets 80

Consolidated Statements of Operations and Comprehensive Loss 81

Consolidated Statements of Changes in Stockholders' Equity 82

Consolidated Statements of Cash Flows 83

Notes to Consolidated Financial Statements 84

Supplementary Data 107

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of SI-BONE, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of SI-BONE, Inc. and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations and comprehensive loss, of changes in stockholders' equity and of cash flows for the years then ended, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/PricewaterhouseCoopers LLP

San Jose, California

March 10, 2021

We have served as the Company's auditor since 2013.

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SI-BONE, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

ASSETS

CURRENT ASSETS

Prepaid expenses and other current assets 2,565 2,510

Long-term investments — 1,278

Other non-current assets 374 315

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES

Current portion of long-term borrowings — 4,358

Other long-term liabilities 854 362

Commitments and contingencies (Note 6)

STOCKHOLDERS’ EQUITY

Accumulated other comprehensive income 524 464

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 223,142 $ 117,009

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

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SI-BONE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

Year ended December 31,

Operating expenses:

Interest and other income (expense), net:

Other expense, net (126) (2)

Other comprehensive income (loss):

Unrealized gain (loss) of marketable securities (59) 44

Changes in foreign currency translation 119 (19)

Net loss per share, basic and diluted $ (1.50) $ (1.55)

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

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SI-BONE, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(In thousands, except share amounts)

Shares Amount

Repurchase of unvested early exercised stock options (8,830) — — — — —

Stock-based compensation — — 7,464 — — 7,464

Vesting of early exercised stock options — — 197 — — 197

Additional accrual of IPO related costs — — (160) — — (160)

Foreign currency translation — — — (19) — (19)

Net unrealized gain on marketable securities — — — 44 — 44

Vesting of early exercised stock options — — 71 — — 71

Foreign currency translation — — — 119 — 119

Net unrealized loss on marketable securities — — — (59) — (59)

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

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SI-BONE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Year ended December 31,

Cash flows from operating activities

Adjustments to reconcile net loss to net cash used in operating activities

Depreciation and amortization 1,130 774

Bad debt expense 234 —

Accretion of discount on marketable securities 115 (1,413)

Realized gain on marketable securities (46) —

Amortization of debt issuance costs 292 259

Loss on extinguishment of debt 1,534 —

Loss on sale and disposal of property and equipment 376 171

Changes in operating assets and liabilities

Prepaid expenses and other assets (136) (515)

Accrued liabilities and other (766) 4,994

Net cash used in operating activities (30,662) (31,627)

Cash flows from investing activities

Sales of marketable securities 14,095 —

Purchases of property and equipment (2,561) (2,445)

Net cash (used in) provided by investing activities (62,916) 13,491

Cash flows from financing activities

Proceeds from debt financing 45,297 —

Principal repayments of debt financing (45,297) —

Payments of debt issuance costs (750) —

Payments of prepayment penalty and lender fees (843) —

Proceeds from the exercise of common stock options 1,463 1,490

Repurchase of unvested early exercised stock options — (38)

Payments of initial public offering costs — (167)

Net cash provided by financing activities 136,401 3,488

Effect of exchange rate changes on cash and cash equivalents 323 (37)

Net increase (decrease) in cash and cash equivalents 43,146 (14,685)

Cash and cash equivalents at

Supplemental disclosure of cash flow information

Supplemental disclosure of non-cash information

Vesting of early exercised stock options 71 197

Unpaid purchases of property and equipment 26 375

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

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SI-BONE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. The Company and Nature of Business

SI-BONE, Inc. (the “Company”) was incorporated in the state of Delaware on March 18, 2008 and is headquartered in Santa Clara, California. The Company is a medical device company that has pioneered a proprietary minimally invasive surgical implant system to fuse the sacroiliac joint for treatment of the most common types of sacroiliac joint disorders that cause lower back pain. The Company introduced its primary product, the iFuse Implant System, or iFuse, in 2009 in the U.S., in 2010 in certain countries in the European Union, and in 2015 in certain countries in the rest of the world.

Public Offerings of Common Stock

In October 2018, the Company completed its initial public offering (“IPO”) by issuing 8,280,000 shares of common stock, at an offering price of $15.00 per share for net proceeds of $113.4 million to the Company, net of underwriting discounts and commissions and offering costs.

In January 2020, the Company received $50.0 million net proceeds, after deducting the underwriting discounts and commissions, from its public offering of 4,300,000 shares of the Company's common stock at a public offering price of $21.50 per share, of which 2,490,053 shares were offered and sold by the Company. Further, in February 2020, the underwriters fully exercised its option to purchase 645,000 shares of the Company's common stock at a public offering price of $21.50 per share for an additional net proceeds of $13.0 million to the Company, after deducting the underwriting discounts and commissions. The total public offering costs incurred in connection with the follow-on offering were allocated based on the gross proceeds received by the Company and the other selling shareholders on a pro-rated basis. Public offering cost of $0.4 million allocated to selling of shares by the Company was charged against the gross proceeds received from the follow-on offering. Public offering costs of $0.2 million allocated to selling of shares by the selling shareholders was recognized as transaction costs within general and administrative expenses on the consolidated statements of operations in the year ended December 31, 2020.

In October 2020, the Company received $71.6 million of net proceeds from its second follow-on public offering of 3,000,000 shares of the Company's common stock, and the exercise of underwriter's option to purchase from the Company an additional 478,507 shares of the Company's common stock, at a public offering price of $22.00 per share. In addition to the shares sold by the Company in the second follow-on offering, in October 2020, the selling stockholder sold 190,053 shares of the Company's common stock previously held by the selling stockholder at a price to the public of $22.00 per share. The Company did not receive any proceeds from the sale by the selling stockholder.

2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”).The consolidated financial statements include the Company's accounts, as well as those of the Company's wholly-owned international subsidiaries. All inter-company accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant accounting estimates and management judgments reflected in the consolidated financial statements primarily includes the fair value of stock options. Estimates are based on historical experience, where applicable and other assumptions believed to be reasonable by the management. Actual results could differ from those estimates.

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SI-BONE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JOBS Act Accounting Election

As an emerging growth company under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), the Company is eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. The Company has elected to take advantage of the extended transition period for adopting new or revised accounting standards that have different effective dates for public and private companies. Those standards apply to companies until the earlier of the date that it is (i) no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, these consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. The Company continues to be an emerging growth company until December 31, 2023, unless one of the following occurs: (i) if the Company's total annual gross revenues are $1.07 billion or more; or (ii) the Company has issued more than $1.0 billion in non-convertible debt in the past three years; or (iii) the Company becomes a “large accelerated filer,” as defined in Rule 12b-2 of the Exchange Act.

Segments

Operating segments are based on components of the Company that engage in business activities that earn revenue and incur expenses and (a) whose operating results are regularly reviewed by the Company’s chief operating decision maker (“CODM”), to make decisions about resource allocation and performance and (b) for which discrete financial information is available. The CODM for the Company are the Chief Executive Officer (“CEO”) and Chief Operating Officer & Chief Financial Officer (“COO/CFO”). The CEO and the COO/CFO review financial information presented on a consolidated basis, accompanied by information about revenue by geographic region, for purposes of evaluating financial performance. The Company has one business activity and there are no segment managers who are held accountable for operations, operating results or plans for levels or components below the consolidated unit level. Accordingly, the Company has determined that it has a single reportable and operating segment structure.

The Company derives substantially all of its revenue from sales to customers in the U.S. Revenue by geography is based on billing address of the customer. International revenue accounted for less than 10% of the total revenue during the periods presented. Long-lived assets held outside the U.S. are immaterial. Following table summarizes the Company's revenue by geography:

Year ended December 31,

(in thousands)

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 from foreign currency translation are recorded as a component of accumulated other comprehensive income (loss). Gains and losses from foreign currency transactions are recognized as a component of other income (expense), net.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and marketable securities. The Company’s cash and marketable securities are deposited with financial institutions in the U.S. and in Europe. The majority of the Company’s cash and marketable securities are deposited with a single financial institution in the U.S. Deposits in this institution exceed the amount of insurance provided on such deposits. The Company has not experienced any net losses on its deposits of cash and marketable securities.

The Company’s revenue and accounts receivable are spread across a large number of customers, primarily in the U.S., and no customer accounts for more than 10% of total revenue or gross accounts receivable in any period presented.

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SI-BONE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Risks and Uncertainties

The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on the Company's business is highly uncertain and difficult to predict, as the response to the pandemic and the information surrounding the pandemic is rapidly evolving. The severity of the impact of the COVID-19 pandemic on the Company's business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company's customers, all of which are uncertain and cannot be predicted. The Company's future results of operations and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain disruptions and uncertain demand, excess and obsolete inventory, and the impact of any initiatives and programs that the Company may undertake to address financial and operations challenges faced by its customers.

The Company is also subject to risks common to medical device companies including, but not limited to, new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations, product liability, the ability to obtain adequate coverage and reimbursement from third-party payors and uncertainty of market acceptance of products. The Company is dependent on third-party manufacturers and suppliers, in some cases single source suppliers. The Company currently has limited long term contracts with its key suppliers and is subject to risks such as manufacturing failures, non-compliance with regulatory requirements, price fluctuations, inability to properly meet demand and third-party supplier discontinuation of operations.

Liquidity

As of December 31, 2020, the Company had cash and marketable securities of $196.4 million compared to $93.1 million as of December 31, 2019. The Company has financed its operations through our public offerings, debt financing arrangements, and the sale of its products. As of December 31, 2020 and 2019 the Company had $39.5 million and $39.2 million outstanding debt, respectively. As of December 31, 2020, the Company's accumulated deficit was $239.3 million. During the years ended December 31, 2020 and 2019, the Company incurred a net loss of $43.7 million and $38.4 million, respectively. The Company has not achieved positive cash flow from operations to date.

Based upon the Company's current operating plan, the Company believes that its existing cash and marketable securities will enable the Company to fund its operating expenses and capital expenditure requirements through at least the next 12 months. However, the economic impact of the duration and severity of the COVID-19 pandemic, and the Company's responses thereto (including such actions that the Company had taken or may take in the future as disclosed elsewhere in this Report) poses risk and uncertainties in its future available capital resources. Further, the Company may face challenges and uncertainties and, as a result, its available capital resources may be consumed more rapidly than currently expected due to, but not limited to, the following as a result of the COVID-19 pandemic or otherwise: (a) decreases in sales of its products and the uncertainty of future revenues from new products; (b) changes that the Company may make to the business that affect ongoing operating expenses; (c) changes that the Company may make in its business strategy; (d) regulatory developments affecting its existing products; (e) changes the Company may make in its research and development spending plans; and (f) other items affecting the Company's forecasted level of expenditures and use of cash resources.

Fair Value of Financial Instruments

Carrying amounts of certain of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable, and accrued liabilities, approximate fair value due to their relatively short maturities and market interest rates, if applicable. The Company's marketable securities are classified as Level 1 or Level 2 of the fair value hierarchy as defined below. The carrying value of the Company’s long-term debt also approximates fair value based on management’s estimation that a current interest rate would not differ materially from the stated rate.

The Company discloses and recognizes the fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Quoted prices (unadjusted) in active market that are accessible at measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

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SI-BONE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and considers factors specific to the asset or liability.

Cash and Cash Equivalents

The Company considers all highly liquid investments with remaining maturities at the date of purchase of three months or less to be cash equivalents.

Marketable Securities

The Company's marketable securities primarily consist of investments in money market funds, U.S. treasury securities, corporate bonds and commercial paper. All of the Company's marketable securities are available-for-sale and are classified based on their maturities. Marketable securities with remaining maturities at the date of purchase of three months or less are classified as cash equivalents. Short term investments are securities that original or remaining maturity is greater than three months and not more than twelve months. Long-term investments are securities that original or remaining maturity is more than twelve months. All marketable securities are recorded at their estimated fair value. Unrealized gains and losses on available-for-sale securities are recorded in accumulated other comprehensive income (loss) (“OCI”) on the consolidated balance sheets. The Company evaluates its investments to assess whether those in unrealized loss positions are other-than-temporarily impaired. The Company considers impairments to be other-than-temporary if they are related to deterioration in credit risk or if it is likely the Company will sell the securities before the recovery of their cost basis. Realized gains and losses and declines in value judged to be other-than-temporary are determined based on the specific identification method and are reported in other income (expense), net in the consolidated statements of operations.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company generally does not require collateral or other security in support of accounts receivable. Allowances are provided for individual accounts receivable when the Company becomes aware of a customer’s inability to meet its financial obligations, such as in the case of bankruptcy, deterioration in the customer’s operating results or change in financial position. If circumstances related to such customers change, estimates of the recoverability of receivables would be further adjusted. The Company also considers broad factors in evaluating the sufficiency of its allowance for doubtful accounts, including the length of time receivables are past due, significant one-time events, creditworthiness of customers and historical experience. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

Inventory

Inventory is stated at lower of cost or net realizable value. The Company establishes the inventory basis by determining the cost based on standard costs approximating the purchase costs on a first-in, first-out basis. The excess and obsolete inventory is estimated based on future demand and market conditions. Inventory write-downs are charged to cost of goods sold.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. All property and equipment is depreciated on a straight-line basis over the estimated useful lives of the assets, which are as follows:

Computer and office equipment 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.

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SI-BONE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Impairment of Long-Lived Assets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets (or asset group) may not be fully recoverable. Whenever events or changes in circumstances suggest that the carrying amount of long-lived assets may not be recoverable, the Company estimates the future cash flows expected to be generated by the assets (or asset group) from its use or eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets. Significant management judgment is required in the grouping of long-lived assets and forecasts of future operating results that are used in the discounted cash flow method of valuation. Through December 31, 2020 and 2019, the Company has not experienced impairment losses on its long-lived assets.

Revenue Recognition

The Company’s revenue is derived from the sale of its products to medical groups and hospitals through its direct sales force and distributors throughout the U.S. and Europe.

The Company adopted the new revenue standard in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”) effective for the fiscal year ended December 31, 2019. Revenue is recognized when control is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for the goods or services. Under the new revenue recognition standard, the Company applies the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied. As it relates to product sales where the Company's sales representative delivers the product at the point of implantation at the hospital or medical facilities, the Company continues to recognize the revenue upon completion of the procedure and authorization by the customer, net of rebates and price discounts. This represents the majority of the Company's consolidated revenue. The Company also generates a small portion of revenue from the sale of products through distributors and to certain hospital or medical facilities where the products are ordered in advance of a procedure. The performance obligation is the delivery of the products and therefore, revenue is recognized upon shipment to the customers, net of rebates and price discounts. The Company accounts for rebates and price discounts as a reduction to revenue, calculated based on the terms agreed to with the customer. Historically, there had been no significant price discounts. Sales prices are specified in either the customer contract, agreed price list, or purchase order, which is executed prior to the transfer of control to the customer. For certain hospitals and medical facilities, the Company has agreements in place consists of either a master services agreement or an agreed price list, which defines the terms and conditions of the arrangement, including the pricing information, payment terms and pertinent aspects of the relationship between the parties. The Company also has agreements in place with its distributors, which include standard terms that do not allow for payment contingent on resale of the product, obtaining financing, or other terms that could impact the distributor’s payment obligation. The Company's standard payment terms are generally net 30 to 90 days.

Shipping and Handling Costs

Shipping and handling costs are treated as fulfillment costs, which are expensed as incurred and are included in cost of goods sold.

Costs to Obtain Customer Contracts

Sales commissions and related expenses are considered incremental and recoverable costs of acquiring customer contracts. The Company’s sales commissions paid to its sales representatives are generally based on the surgeries performed. The Company applied the practical expedient that permits an entity to expense the cost to obtain a contract as incurred when the expected amortization is one year or less. The period of benefit is concurrent with when the Company recognizes its revenue and as such, the Company recognizes sales commission as expense when incurred.

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SI-BONE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Warranty

The Company has a warranty program that provides a purchaser a one-time replacement of any iFuse implant at no additional cost for a revision procedure within a one-year period following the original procedure and is accounted for as a warranty accrual. The Company also provides a purchaser with a one-time credit equal to the purchase price paid for use on future purchases for any revision procedure within the one-year period following an original procedure where an implant is not required. The warranty is not priced or sold separately and is intended to safeguard the customer against defects and it does not provide incremental service to the customer. As such, it is considered an assurance type warranty and is not accounted as a service type warranty, which could represent a separate performance obligation. The Company accounts for these one-time credits as sales reserves and is included in accrued liabilities and other in the consolidated balance sheets. Sales and warranty reserves from the warranty program were immaterial as of December 31, 2020 and 2019.

Medical Device Excise Tax

In accordance with the Patient Protection and Affordable Care Act, effective January 1, 2013, the Company began to incur an excise tax on sales of medical devices in the U.S. The Company recorded the medical device excise tax within the cost of goods sold in the consolidated statements of operations and comprehensive loss when incurred. Effective January 1, 2016, the Consolidated Appropriations Act of 2016, which was signed into law in December 2015, included a two-year suspension on the medical device excise tax. In January 2018, the suspension on the tax on medical devices was further extended through January 1, 2020. In December 2019, the U.S. Senate passed a bipartisan legislation to permanently repeal the medical device excise tax.

Research and Development

Research and development costs are charged to operations as incurred and consist of costs incurred by the Company for the development of the Company’s product which primarily include: (1) employee-related expenses, including salaries, benefits, travel and non-cash stock-based compensation expense; (2) external research and development expenses; and (3) other expenses, which include direct and allocated expenses for facilities and other costs.

Advertising Expenditures

The cost of advertising is expensed as incurred and is included under sales and marketing expense in the consolidated statements of operations. Advertising expenses were $0.3 million and $0.4 million for the year ended December 31, 2020 and 2019, respectively.

Loss Contingency

The Company is subject to various potential loss contingencies arising in the ordinary course of business. From time to time, the Company may be involved in certain proceedings, legal actions and claims. Such matters are subject to many uncertainties, and the outcomes of these matters are not within the Company's control and may not be known for prolonged periods of time. In some actions, the claimants may seek damages, as well as other relief, including injunctions which may prohibit the Company to engage in certain activities, which, if granted, could require significant expenditures and/or result in lost revenues. The Company records a liability in the consolidated financial statements when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is reasonably possible but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded.

Stock-Based Compensation

The Company applies the fair value recognition provisions of stock-based compensation. Stock-based compensation expense is recognized over the requisite service period using the straight-line method and is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. As such, the Company’s stock-based compensation is reduced for the estimated forfeitures at the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting forfeitures and record stock-based compensation expense only for those awards that are expected to vest. To the extent actual forfeitures differ from the estimates, the difference will be recorded as a cumulative adjustment in the period that the estimates are revised.

The Company estimates the grant date fair value of stock options using the Black-Scholes option valuation model. The model requires management to make a number of assumptions including expected volatility, expected term, risk-free interest rate and expected dividends. A number of these assumptions are subjective, and their determination generally require judgment.

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SI-BONE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

•Expected Term - The expected term represents the period that the share-based awards are expected to be outstanding. The Company uses the simplified method to determine the expected term as permitted by the guidance since the Company has no sufficient historical exercise patterns to estimate the expected life. The simplified method is calculated as the average of the time to vesting and the contractual life of the options.

•Expected Volatility - Since the Company became public in October 2018 and has no sufficient trading history, the Company uses stock price volatility using the average historical volatilities of publicly traded companies within its industry that the Company considers to be comparable to its business over a period approximately equal to the expected term for its stock options.

•Risk-Free Interest Rate - The risk-free interest rate is based on the U.S. Treasury zero coupon issued in effect at the time of grant for periods corresponding with the expected term of the option.

•Dividend Yield - The Company has not paid any dividends and has no current plans to pay dividends on its common stock. As such, the Company uses expected dividend yield of zero.

The fair value of the restricted stock unit (“RSU”) grant is based on the market price of the Company’s common stock on the date of grant.

Prior to IPO, the fair value of the shares of the Company's common stock has historically been determined by its Board of Directors since there were no public market information available for the Company's common stock. The estimated fair value of the Company's common stock was determined at each valuation date in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Subsequent to its IPO, the Company uses the market closing price for its common stock as reported on the Nasdaq Global Market on the date of grant.

Equity instruments issued to non-employees are recorded at their fair value on the measurement date and are subject to periodic adjustments as the underlying equity instruments vest. The Company believes that the estimated fair value of the stock options is more readily measurable than the fair value of the services received. Stock-based compensation related to stock options granted to non-employees is recognized as the stock options are earned.

In the event the underlying terms of stock options are modified on which stock-based compensation was granted, additional expense is recognized for any modification that increases the total fair value of the share-based payment arrangement at the modification date.

Income Taxes

The Company accounts for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to affect taxable income. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized.

The Company recognizes uncertain tax positions when it meets a more-likely-than-not threshold. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits as income tax expense.

Net Loss per Share of Common Stock

The Company calculates basic and diluted net loss per common share attributable to shareholders in conformity with the two-class method required for companies with participating securities. The Company considers all early exercised stock options to be participating securities as the holders are entitled to receive dividends on a pari passu basis in the event that a dividend is paid on common stock. Under the two-class method, the net loss attributable to common stock is not allocated to the early exercised stock options as the holders do not have a contractual obligation to share in losses.

Basic net loss per common share is calculated by dividing the net loss by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common shares and potentially dilutive securities outstanding for the period. For purposes of the diluted net loss per share calculation, common stock options and warrants are considered to be potentially dilutive securities. Because the Company has reported a net loss in all periods presented, common stock options and warrants are anti-dilutive and therefore diluted net loss per common share is the same as basic net loss per common share for those periods.

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SI-BONE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Comprehensive Loss

Comprehensive loss represents all changes in the stockholders’ equity except those resulting from distributions to stockholders. The Company’s unrealized foreign currency translation income (losses) and unrealized gains (losses) on marketable securities represent the two components of other comprehensive income that are excluded from the reported net loss for each of the reporting periods and has been presented in the consolidated statements of operations and comprehensive loss.

Warrants

The Company accounts for warrants for shares of common stock as equity in accordance with the accounting guidance for derivatives. The accounting guidance provides a scope exception from classifying and measuring as a financial liability a contract that would otherwise meet the definition of a derivative if the contract is both (i) indexed to the entity’s own stock and (ii) classified in the stockholders’ equity section of the consolidated balance sheet. The Company determined that the warrants for shares of common stock issued in connection with its prior debt arrangements are required to be classified in equity. Warrants classified as equity are recorded as additional paid-in capital on the consolidated balance sheet and no further adjustments to their valuation are made. In connection with the IPO, all of the Company's redeemable convertible preferred stock warrants were automatically converted into common stock warrants.

Adoption of New Revenue Recognition Standard

The Company adopted the new revenue recognition standards (“ASC 606”) using the modified retrospective method effective for the year ended December 31, 2019. This approach was applied to all contracts that were not completed as of January 1, 2019. As an emerging growth company that elected to take advantage of the JOBS Act accounting election, the Company was not required to adopt the new revenue standard in the interim reporting periods on the year of adoption and is not required, and intends not, to revise its 2019 interim periods which were reported under previous revenue recognition standards (“ASC 605”). The adoption of ASC 606 did not result in a material impact on the Company’s consolidated financial statements and no adjustment was made to the opening balance of accumulated deficit at January 1, 2019. ASC 606's core principle is that a reporting entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. As it relates to product sales where the Company's sales representative delivers the product at the point of implantation at hospital or medical facilities, which represents majority of the Company's revenue, the Company continues to recognize the revenue upon completion of the procedure and authorization by the customer, net of rebates and price discounts. As it relates to sale of products through distributors and hospitals where product is ordered in advance of the procedure, the Company continues to recognize the revenue upon shipments to the customers, net of rebates and price discounts. Additionally, ASC 606 requires the capitalization of costs to obtain a contract, primarily sales commissions, and amortization of these costs over the contract period or estimated customer life. The Company’s sales commissions paid to its sales representatives is generally based on the surgeries performed. The Company applied the practical expedient that permits an entity to expense the cost to obtain a contract as incurred when the expected amortization is one year or less. As such, the Company recognize sales commission as expense when incurred.

The Company disaggregates revenues from contracts with customers into geographical regions. The Company determined that disaggregating revenue into these categories depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by regional economic factors. For information revenue by geography, refer to Segments in “Note 2 - Summary of Significant Accounting Policies” in the accompanying Notes to Consolidated Financial Statements.

Other Recently Adopted Accounting Standards

In June 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2018-07, Improvements to Non-employee Share-Based Payment Accounting. ASU 2018-07 expands the scope of Topic 718, Compensation-Stock Compensation, to include share-based payments issued to non-employees for goods or services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. ASU 2018-07 supersedes Subtopic 505-50, Equity-Based Payments to Non-Employees. The Company adopted this standard effective for the year ended December 31, 2020, and the adoption did not have any material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurements, which eliminates, adds or modifies certain disclosure requirements for fair value measurements. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year, with early adoption permitted to adopt either the entire standard or only the provisions that eliminate or modify the requirements. The Company has adopted this standard effective for the year ended December 31, 2020, and the adoption did not have any material impact on the Company’s consolidated financial statements.

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SI-BONE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Recently Issued Accounting Standards Not Yet Effective

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires that lessee's recognize a right-of-use asset and a lease liability for all leases with lease terms greater than twelve months in the balance sheet. A lease liability is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset is an asset that represents the lessee’s right to use, or control use of, a specified asset for the lease term for all leases (with the exception of short-term leases) at the adoption date. In July 2018, the FASB issued ASU 2018-10 and ASU 2018-11, which provides clarification on the narrow aspects of the guidance and provide an additional transition method to adopt the new leases standard. The new transition method allows an entity to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In March 2019, the FASB issued ASU 2019-01, which provides clarification on implementation issues associated with adopting ASU 2016-02. The new leases standard must be adopted using a modified retrospective transition method and allows for the application of the new guidance at the beginning of the earliest comparative period presented or at the adoption date. In November 2019, the FASB issued ASU 2019-10, which revised the mandatory effective dates of the new leases standard. Further, due to the impact of the COVID-19, in June 2020, the FASB issued ASU 2020-05 to further defer the effective date for one year for entities in the “all other” categories. For public companies, the new guidance became effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the new guidance is now effective for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. Early adoption is still permitted for any interim or annual financial statements not yet issued.

As an emerging growth company, the new leases standard is now effective for the Company for the fiscal year ending December 31, 2022 and interim periods within fiscal year ending December 31, 2023. The Company is currently evaluating the impact of this standard on its consolidated financial statements including the timing of its adoption. The Company anticipates electing several practical expedients that permit the Company not to reassess (1) whether a contract is or contains a lease, (2) the classification of existing leases, and (3) whether previously capitalized initial direct costs would qualify for capitalization under ASC 842. The Company expects that the adoption of this new standard will have a material impact on its balance sheet. The most significant impact would be the recognition of operating lease right-of-use assets and liability. The standard is not expected to have a material impact on the Company's consolidated statements of income and cash flows.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. FASB issued ASU 2019-05 in May 2019 and ASU 2019-08 in November 2019 for codification improvements of Topic 326. The new standard revises the accounting requirements related to the measurement of credit losses and will require organizations to measure all expected credit losses for financial assets based on historical experience, current conditions and reasonable and supportable forecasts about collectability. Assets must be presented in the financial statements at the net amount expected to be collected. In November 2019, the FASB issued ASU 2019-10, which defers the effective date of ASU 2016-13 for public companies that are eligible to be smaller reporting companies and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. In February 2020, the FASB issued ASU 2020-02, which provides guidance regarding methodologies, documentation, and internal controls related to expected credit losses. The Company is currently evaluating the impact of this standard on its consolidated financial statements but does not expect the adoption of the standard will have a material impact on the Company's consolidated financial statements.

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SI-BONE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Marketable Securities

The table below summarizes the marketable securities:

Amortized Cost Unrealized Gains Unrealized Losses Aggregate Fair Value

(in thousands)

Amortized Cost Unrealized Gains Unrealized Losses Aggregate Fair Value

(in thousands)

Money market funds $ 3,068 $ — $ — $ 3,068

The long-term investments outstanding as of December 31, 2019 matured in April 2020. The Company did not identify any of its marketable securities as other-than-temporarily impaired as of December 31, 2020 and 2019.

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SI-BONE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Fair Value Measurement

Carrying amounts of certain of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities and market interest rates, if applicable. The carrying value of the Company’s long-term debt also approximates fair value based on management’s estimation that a current interest rate would not differ materially from the stated rate. There were no other financial assets and liabilities that requires fair value hierarchy measurements and disclosures for the periods presented.

The table below summarizes the fair value of the Company’s marketable securities measured at fair value on a recurring basis based on the three-tier fair value hierarchy:

Level 1 Level 2 Level 3 Total

(in thousands)

Marketable securities

Level 1 Level 2 Level 3 Total

(in thousands)

Marketable securities

Money market funds $ 3,068 $ — $ — $ 3,068

5. Balance Sheet Components

Inventory

As of December 31, 2020 and 2019, inventory consisted entirely of finished goods.

Property and Equipment, net:

(in thousands)

Computer and office equipment 714 598

Less: Accumulated depreciation and amortization (4,957) (3,795)

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SI-BONE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Construction in progress pertains to cost of individual components of a custom instrument set used for surgical placement of iFuse implants that have not yet been placed into service. Depreciation expense was $1.1 million and $0.8 million for the years ended December 31, 2020 and 2019, respectively.

Accrued Liabilities and Other:

(in thousands)

Accrued compensation and related expenses $ 9,175 $ 7,274

Accrued litigation expense — 3,200

Accrued professional services 511 392

6. Commitments and Contingencies

Operating Leases

The Company has a non-cancelable operating lease for an office building space, located in Santa Clara, California which expires in May 2025. The Company also has non-cancelable operating leases for its office building spaces in Gallarate, Italy and Mannheim, Germany which both expire in November 2024, and in Knaresborough, United Kingdom, which expires in December 2025. Further, the Company also leases vehicles under operating lease arrangements for certain of its sales personnel in Europe which expire various times in 2021 to 2023.

Rent expense is recorded over the lease terms on a straight-line basis. Rent expense charged to operations under operating leases totaled approximately $1.2 million and $1.2 million for the years ended December 31, 2020 and 2019, respectively.

The aggregate future minimum lease payments under all leases as of December 31, 2020 are as follows:

Year Ending December 31, (in thousands)

Thereafter 24

Purchase Commitments and Obligations

The Company has certain purchase commitments related to its inventory management with certain manufacturing suppliers wherein the Company is required to purchase the amounts forecasted in a blanket purchase order. The contractual obligations represent future cash commitments and liabilities under agreements with third parties and exclude orders for goods and services entered into in the normal course of business that are not enforceable or legally binding. These outstanding commitments amounted to $0.3 million and $0.4 million as of December 31, 2020 and 2019, respectively.

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SI-BONE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Legal Proceedings

On February 6, 2019, a putative class action captioned Eric B. Fromer Chiropractic, Inc. (“Plaintiff”) v. SI-BONE, Inc. (Civil Action No. 5:19-cv-633-SVK), was filed in the U.S. District Court, Northern District of California (the “California Action”). The complaint alleges violations of the Telephone Consumer Protection Act (the “TCPA”) on behalf of an individual and a putative class of persons alleged to be similarly situated. The complaint alleges that the Company sent invitations to an educational dinner event to health care providers by way of facsimile transmission. The TCPA prohibits using a fax machine to send unsolicited advertisements not including proper opt-out instructions or to send unsolicited advertisements to persons with whom the sender did not have an established business relationship. The plaintiff sought various forms of relief, including statutory damages of $500 for each violation of the TCPA or, in the alternative, treble damages of up to $1,500 for each knowing and willful violation of the TCPA and a permanent injunction prohibiting the Company from sending or having sent advertisements by way of facsimile transmission. Subsequently on December 20, 2019, Plaintiff the filed a putative class action captioned Eric B. Fromer Chiropractic, Inc. v. SI-BONE, Inc. (Case No. 1922-CC12323), in the Circuit Court of the City of St. Louis, State of Missouri (the “Missouri Action”). The Missouri Action alleges the same TCPA violations as the California Action. On December 23, 2019 the parties filed a joint stipulation of dismissal of the California Action and on January 14, 2020, the parties executed a definitive settlement agreement (the “Settlement Agreement”) pursuant to which, the Company agreed to settle all disputes regarding the advertising faxes to the settlement class.

The Company accrued litigation expense of $3.2 million during the year ended December 31, 2019 within general and administrative expenses in the consolidated financial statements, which was the Company's estimated cost to resolve the matter pursuant to the Settlement Agreement and based on the estimated class members' claim submission rate. Following the notice and claims submission process, on June 22, 2020, the Circuit Court of the City of St. Louis, State of Missouri, approved a final order to pay the approved claims submitted by class members, fees, expenses and incentive awards totaling $2.6 million as final settlement. Accordingly, the Company recorded a reversal of accrued litigation expense of $0.6 million in year ended December 31, 2020 within general and administrative expenses in the consolidated financial statements. The Company made the final settlement payment on July 1, 2020.

Indemnification

The Company enters into standard indemnification arrangements in the ordinary course of business. Pursuant to these arrangements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified party, in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third-party with respect to the Company’s technology. The term of these indemnification agreements is generally perpetual. The maximum potential amount of future payments the Company could be required to make under these agreements is not determinable because it involves claims that may be made against the Company in the future, but have not yet been made.

The Company has entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct of the individual.

The Company has not incurred costs to defend lawsuits or settle claims related to these indemnification agreements. No liability associated with such indemnifications has been recorded to date.

7. Borrowings

Term Loan

The following table summarizes the outstanding borrowings from the term loan as of the periods presented:

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SI-BONE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands)

Principal outstanding and final fee $ 41,000 $ 40,000

Less: Unamortized debt issuance costs (661) (777)

Unaccreted value of final fee (884) —

Classified as:

Current portion of long-term borrowings $ — $ 4,358

The outstanding debt as of December 31, 2019 related to a term loan entered by the Company with Biopharma Credit Investments IV Sub LP (“Pharmakon”) in October 2017 for total loan proceeds of $40.0 million (the “Pharmakon Term Loan”). The Pharmakon Term Loan included an interest-only period for 35 months through September 2020 and then equal quarterly principal payments plus interest through December 2022. The Pharmakon Term Loan carried a fixed interest rate of 11.5% and allowed for early prepayment. The prepayment penalty fee was equal to the remaining interest due if prepaid within the first 30 months, a 2% penalty for months 31-48, and a 1% penalty for months 49-60.

On May 29, 2020, the Company entered into a Loan and Security Agreement with Solar Capital Partners (“Solar”) providing for a term loan of an aggregate principal amount of $40.0 million to the Company (the “Solar Term Loan”). In accordance with the Loan and Security Agreement, the Company paid in full and terminated the Pharmakon Term Loan, which was accounted for as debt extinguishment in accordance with the accounting standards. The Company recognized the unamortized debt issuance costs of $0.7 million and the prepayment penalty and lender fees of $0.8 million related to Pharmakon Term Loan as a loss on debt extinguishment. The costs and fees are reflected as interest expense in the consolidated statement of operations for the year ended December 31, 2020. The total debt issuance costs of $0.8 million associated with the Solar Term Loan were recorded in the consolidated balance sheet as a direct deduction from the carrying amount of the loan, and are amortized as a component of interest expense using straight-line method over the life of the term loan.

The Solar Term Loan bears interest at a rate per annum equal to 9.40% plus the greater London Interbank Offered Rate (“LIBOR”), payable monthly in arrears. LIBOR means the greater of (i) 0.33% or (ii) one-month LIBOR (or a comparable replacement rate to be determined by the collateral agent if the LIBOR is no longer available), which rate shall reset monthly. The Solar Term Loan matures in 60 months on June 1, 2025 (“Maturity Date”), with an interest-only period of 36 months through June 2023, and then repaid in equal monthly principal payments plus interest through maturity date. Pursuant to the Loan and Security Agreement, the Company may voluntarily prepay the Solar Term Loan, in full or in part, but only in increments of $10.0 million, for a prepayment premium in an amount equal to 3.00% of the principal if prepaid in year one, 1.25% of the principal if prepaid in year two, and 0.50% of the principal if prepaid in year three or later. The prepayment premium will be waived if the Company voluntarily prepays and refinances the outstanding balance with Solar. The Solar Term Loan is secured by substantially all of the Company’s assets.

The Company is also obligated to pay a final fee equal to $1.0 million or 2.5% of the aggregate principal amount of the Solar Term Loan, which was fully earned by Solar on the effective date of the Loan and Security Agreement. With respect to the Solar Term Loan, this final fee shall be due and payable on the earliest of (i) the maturity date, (ii) the acceleration of the loan balance or (iii) its full prepayment, refinancing, substitution or replacement. The final fee was included within the long-term borrowings and is accreted to interest expense using straight-line method over the life of the term loan.

The effective interest rate related to the Pharmakon Term Loan was 12.4% and 12.3% for the term loan's outstanding periods for the years ended December 31, 2020 and 2019, respectively. The effective interest rate related to the Solar Term Loan was 10.6% for the term loan's outstanding period for year ended December 31, 2020.

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SI-BONE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The table below summarizes the future principal and final fee payments under the Solar Term Loan as of December 31, 2020:

Year ending December 31, (in thousands)

Total principal and final fee payments $ 41,000

Subject to other customary covenants set forth in the Loan and Security Agreement with Solar, the Company is required to maintain unrestricted cash and cash equivalents based on the trailing 12-month net products revenues tested on a monthly basis as follows: (a) $15.0 million if net product revenue is less than $75.0 million; or (b) $7.5 million if net product revenue is greater than or equal to $75.0 million, but less than $100.0 million (the “minimum liquidity requirement”). The Company is not subject to minimum liquidity requirement when trailing twelve-month net product revenues exceeds $100.0 million. Upon the occurrence of an event of default of certain customary covenants, including the minimum liquidity requirements, as specified in the Loan and Security Agreement, subject to specified cure periods, all amounts owed by the Company would begin to bear interest at a rate that is 5.00% above the rate effective immediately before the event of default and may be declared immediately due and payable by Solar. As of December 31, 2020, the Company was in compliance with all debt covenants. Though there are uncertainties surrounding the impact of the COVID-19 pandemic that may impact our future revenue, the Company believes that it has sufficient cash and cash equivalents to meet the minimum liquidity requirements in the foreseeable succeeding periods.

CARES Act

On March 27, 2020, the U.S. federal government enacted the “Coronavirus Aid, Relief and Economic Security (CARES) Act,” and among other things, established the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), whereby certain small businesses were eligible for a loan to fund payroll expenses, rent, and related costs. The loan may be forgiven if the funds are used for payroll and other qualified expenses. The Company met the requirements to apply for the PPP loan given that the Company has less than 500 employees and the business was negatively impacted by COVID-19. The Company submitted its application and was approved for the SBA program and received the proceeds from the PPP loan amounting to $5.3 million on April 21, 2020, pursuant to a Promissory Note with Silicon Valley Bank (“SVB”). In light of the subsequent clarifications from the U.S. government on the eligibility criteria, the Company determined it was appropriate to repay the entire amount of the PPP loan. Accordingly, on April 29, 2020, the Company repaid in full the PPP loan and correspondingly terminated the Promissory Note.

The CARES Act allows employers to defer the deposit and payment of an employer's share of social security taxes through December 31, 2020. The Company recorded a total liability of $1.0 million related to the deferral of the social security taxes of which $0.5 million is included in each accrued liabilities and other and other long-term liabilities in the consolidated balance sheets as of December 31, 2020.

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SI-BONE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. Warrants

The table below summarizes common stock warrants issued and outstanding at both December 31, 2020 and 2019:

Issuance Expiration

[a] Common stock warrants will remain outstanding until the earlier of the expiration date or the date exercised by the holder.

[b]Fair value at the date of issuance.

[c] Fair value at the date of conversion from redeemable convertible preferred stock to common stock warrants in conjunction with the IPO on October 16, 2018.

9. Common and Preferred Stock

The Company's certificate of incorporate as amended and restated in October 2018, authorizes the Company to issue 100,000,000 shares of common stock and 5,000,000 shares of preferred stock, each having a par value of $0.0001. Common stock issued and outstanding as of December 31, 2020 and 2019 were 32,583,220 shares and 25,163,803 shares, respectively. As of December 31, 2020 and 2019, there was no preferred stock issued and outstanding.

The holders of common stock are entitled to receive dividends whenever funds are legally available, as, when, and if declared by the Board of Directors. There have been no dividends declared to date.

10. Stock-Based Compensation

2008 Stock Option Plan and 2018 Equity Incentive Plan

In April 2008, the Company adopted the 2008 Stock Option Plan (the “2008 SOP”), as amended, under which the Board of Directors may issue incentive and non-qualified stock options to employees, directors and consultants. In October 2018, the Company adopted the 2018 Equity Incentive Plan (the “2018 EIP”), which serves as the successor to the 2008 SOP, under which the Board of Directors may issue incentive and non-qualified stock options and RSUs to employees, directors and consultants. No new options have been granted under the 2008 SOP since August 2018. Outstanding options under the 2008 SOP continue to be subject to the terms and conditions of that plan.

The number of shares of common stock reserved for issuance under the 2018 EIP will automatically increase on January 1 of each year, beginning January 1, 2019, and continuing through and including January 1, 2028, by 5% of the total number of shares of the Company's capital stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by the Company's Board of Directors. On January 1, 2019 and 2020, the total number of shares of common stock reserved for issuance increased by 1,222,538 and 1,258,190 shares respectively. As of December 31, 2020, a total of 2,843,814 shares of common stock are available for future grants under the 2018 EIP. On January 1, 2021, the total number of shares of common stock reserved for issuance under the 2018 EIP automatically increased by 1,629,161 shares.

The Board of Directors has the authority to determine to whom options will be granted, the number of shares, the term and the exercise price. If an individual owns stock representing more than 10% of the outstanding shares, the price of each share shall be at least 110% of the fair market value, as determined by the Board of Directors. The exercise price of an incentive stock option and a non-qualified stock option shall not be less than 100% and 85%, respectively, of the fair market value on the date of grant.

Options granted have a term of 10 years, except, options granted to individuals holding more than 10% of the outstanding shares have a term of five years. Options generally vest over a four-year period. Certain stock options are exercisable immediately, but are subject to a right of repurchase by the Company for any unvested shares. RSUs granted under the 2018 EIP generally vest over two to four years based upon continued services and are settled at vesting in shares of the Company's common stock.

99

SI-BONE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock Options

The following table summarizes stock option activity for the years ended December 31, 2020 and 2019:

Options Outstanding

The aggregate intrinsic value of options exercised during the years ended December 31, 2020 and 2019 amounted to $5.6 million and $6.8 million, respectively, representing the difference between the fair value of the Company's common stock at the date of exercise and the exercise price paid. The aggregate intrinsic values of options outstanding, options vested and exercisable, and options vested and expected to vest as of December 31, 2020 represents the difference between the weighted average exercise price and the closing price of the Company’s common stock on the last trading day of the year.

Outstanding options and exercisable options information by range of exercise prices as of December 31, 2020 was as follows:

Exercise Price Options Outstanding Options Vested and Exercisable

The table below summarizes the weighted average grant date fair value per share and the assumptions used to estimate the grant date fair value using the Black-Scholes option-pricing model of the stock options granted during the periods presented:

Year ended December 31,

Weighted average grant date fair value per share $8.16 $9.78

Expected term (years) 5.5 to 7.0 5.0 to 7.0

Risk-free interest rate 1.6% to 1.6% 1.3% to 2.6%

Dividend yield —% —%

100

SI-BONE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2020, there was $3.2 million of unrecognized compensation cost related to stock options granted. These costs are expected to be recognized over a period of approximately 1.9 years.

Early Exercise of Unvested Stock Options

Early exercises of stock options under the Company's 2008 SOP are subject to a right of repurchase by the Company of any unvested shares. The repurchase rights lapse over the original vesting period of the options. The Company accounts for the cash received in consideration for the early exercised options as a liability included in accrued liabilities, which is then reclassified to stockholders’ equity as the options vest. As of December 31, 2020 and 2019, the Company had a total of 5,836 and 21,404 shares of common stock, respectively, subject to repurchase under the 2008 SOP.

Restricted Stock Units

The following table summarizes restricted stock units activity for the years ended December 31, 2020 and 2019:

Number of Shares Weighted- Average Grant Date Fair Value

As of December 31, 2020, there was a total unrecognized compensation cost of $19.3 million. These costs are expected to be recognized over a period of approximately 2.9 years.

Employee Stock Purchase Plan

The Company's 2018 Employee Stock Purchase Plan (the “ESPP”) allows eligible employees to purchase shares of the Company's common stock through payroll deductions at the price equal to 85% of the lesser of the fair market value of the stock as of the first date or the ending date of each six month offering period. The offering period generally commences in May and November. On March 26, 2020, the Company's Compensation Committee approved the amendment of the terms of future offerings under the ESPP which, among other things, increased the maximum number of shares that may be purchased on any single purchase date, provided for automatic enrollment in a new offering, and provided that the offering which commenced in May 2020 be twelve months in duration and consist of two purchase periods. There were 515,307 shares of common stock originally reserved for issuance under the ESPP. Under the ESPP, the number of shares reserved for issuance under the ESPP automatically increases on January 1st of each year, starting on January 1, 2019, and continuing through January 1, 2029, by an amount equal to (i) the lesser of 1% of the total number of shares of the Registrant’s common stock outstanding on December 31st of the preceding calendar year, and (ii) 555,555 shares of common stock. As of December 31, 2020, a total of 705,618 shares of common stock are available for future grants under the 2018 EIP. On January 1, 2021, the total number of shares of common stock reserved for issuance under the ESPP Plan increased by 325,832 shares.

The fair value of the ESPP shares is estimated using the Black-Scholes option pricing model, which is being amortized over the requisite service period. The Company issued 137,377 shares and 168,457 shares under the ESPP during the years ended December 31, 2020 and 2019, respectively, representing approximately $1.9 million and $2.2 million in employee contributions. As of December 31, 2020 and 2019, total accumulated ESPP related employee payroll deductions amounted to $0.4 million and $0.2 million, respectively, which were included within accrued compensation and related expenses in the consolidated balance sheets. For the years ended December 31, 2020 and 2019, the Company recognized $1.2 million and $0.8 million, respectively, of stock-based compensation expense related to ESPP. As of December 31, 2020, the unrecognized compensation cost for the ESPP was $0.2 million.

101

SI-BONE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company estimated the fair value of ESPP purchase rights during the offering period using a Black-Scholes option pricing model with the following assumptions:

Year ended December 31,

Expected term (years) 0.5 to 1.0 0.5

Risk-free interest rate 0.1% to 1.6% 1.6% to 2.4%

Dividend yield —% —%

Stock-Based Compensation

The following table sets forth stock-based compensation expense recognized for the periods presented:

Year ended December 31,

(in thousands)

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. Effective January 1, 2019, the Company made a discretionary matching contribution equal to dollar for dollar employee contribution, up to 3% eligible compensation of the employee, with a maximum annual contribution from the Company of one thousand dollars per employee. Further, in order for an employee to receive the matching contribution, the employee must be at least 21 years old, work at least 1,000 hours per year, and must be employed by the Company at the beginning through the end of the year. For the years ended December 31, 2020 and 2019, the Company made $0.2 million and $0.1 million, respectively, contributions to the 401(k) plan.

12. Net Loss Per Share of Common Stock

The following table summarizes the computation of basic and diluted net loss per share:

Year ended December 31,

(in thousands, except share and per share data)

Net loss per share, basic and diluted $ (1.50) $ (1.55)

102

SI-BONE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Because the Company has reported a net loss in all periods presented, outstanding stock options, restricted stock units, shares subject to repurchase, ESPP purchase rights and common stock warrants are anti-dilutive and therefore diluted net loss per common share is the same as basic net loss per common share for the periods presented. The following anti-dilutive common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented:

Year ended December 31,

13. Income Taxes

The components of the Company’s loss before income taxes are as follows:

Year ended December 31,

(in thousands)

There was no provision for income taxes recorded for the years ended December 31, 2020 and 2019. The Company continues to maintain a full valuation allowance against its net deferred tax assets due to the uncertainty surrounding realization of such assets. The Company periodically evaluates the realizability of its net deferred tax assets based on the expected realization and is dependent on the Company's ability to generate sufficient future taxable income during periods prior to the expiration of tax attributes to fully utilize these assets.

103

SI-BONE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The components of deferred income taxes are as follows:

Year ended December 31,

(in thousands)

Change in deferred tax valuation allowance (13,149) (9,892)

Net deferred income tax $ — $ —

Income tax expense differs from the amount computed by applying the statutory federal income tax rate due to the following:

Year ended December 31,

Tax at statutory federal rate (21.0) % (21.0) %

State tax, net of federal benefit (6.2) % (4.1) %

Tax credits (0.7) % (0.7) %

Change in deferred tax valuation allowance 30.1 % 25.8 %

Stock compensation (1.2) % (1.5) %

Foreign rate differences (1.3) % 0.5 %

Total income tax expense — % — %

The tax effects of temporary differences and carryforwards that give rise to significant portions of the deferred tax assets are presented below:

Year ended December 31,

(in thousands)

Research and development credits 3,160 2,428

Depreciation and amortization 117 110

Total deferred tax asset, net of valuation allowance $ — $ —

The following table summarizes changes in the valuation allowance for the years ended December 31, 2020 and 2019:

Year ended December 31,

(in thousands)

104

SI-BONE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2020, the Company had net operating loss (“NOL”) carryforwards of approximately $200.5 million and $165.0 million available to reduce future taxable income, if any, for federal and state income tax purposes, respectively. If not utilized, the Company’s federal NOL carryforward begins to expire in 2028, and the state NOL carryforward begins to expire in 2021.

As of December 31, 2020, the Company had credit carryforwards of approximately $2.5 million and $2.5 million available to reduce future taxable income, if any, for both federal and state income tax purposes, respectively. The federal credits begin to expire in 2029, and the state credits have no expiration date.

The Company updated its Section 382 ownership change analysis through December 31, 2020 and determined that the last ownership change was in February 2020 due to the follow-offering. The analysis concluded that no additional NOL carryforwards will expire due to the Section 382 limitation from the ownership change for both federal and state tax purposes. The Company maintains the reduction of $1.4 million of its NOL carryforwards from the previous ownership change. The Company will continually assess the need to update its Section 382 ownership change analysis, as the Company may experience ownership changes in the future that could materially limit its ability to use its NOL carryforwards.

The CARES Act includes provisions relating to refundable payroll tax credits, deferment of employer's social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company deferred the payment of an employer's share of social security taxes through December 31, 2020 of $1.0 million.

On June 29, 2020, Governor Gavin Newsom signed California Assembly Bill 85 (AB 85) into law. The legislation suspends the California net operating loss deductions for 2020, 2021, and 2022 for certain taxpayers and imposes a limitation of certain California Tax Credits for 2020, 2021, and 2022. The legislation disallows the use of California net operating loss deductions if the taxpayer recognizes business income and its adjusted gross income is greater than $1.0 million. The carryover periods for net operating loss deductions disallowed by this provision will be extended. Additionally, any business credit will only offset a maximum of $5.0 million of California tax. Given the Company’s loss position for the year ended December 31, 2020, the new legislation did not impact the current year provision. The Company will continue to monitor the possible California net operating loss and credit limitations in future periods.

The Company accounts for the uncertainty in income taxes by utilizing a comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of any uncertain tax positions that have been taken or are expected to be taken on an income tax return. The changes in the Company’s uncertain income tax positions for the years ended December 31, 2020 and 2019 consisted of the following:

Year ended December 31,

(in thousands)

Balance at beginning of the year $ 1,287 $ 1,084

Increases related to current year's tax positions 226 203

Balance at end of the year $ 1,513 $ 1,287

The Company has elected to recognize interest and penalties related to uncertain tax positions as a component of income tax expense. The Company has no accrued interest related to unrecognized tax benefits as of December 31, 2020 and 2019. None of the Company’s unrecognized tax benefits that, if recognized, would affect its effective tax rates for the years ended December 31, 2020 and 2019. The Company does not anticipate the total amounts of unrecognized tax benefits will significantly increase or decrease in the next 12 months.

The Company currently has no federal, state or foreign tax examinations in progress nor has it had any federal or state examinations since inception. As a result of the Company’s net operating loss carry forwards, all of its tax years are subject to federal and state tax examinations.

105

SI-BONE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14. Related Party Transactions

On February 24, 2020, the Company entered into a joint development agreement (the “Development Agreement”) with SeaSpine Orthopedics Corporation (“SeaSpine”) to develop a next generation device for sacropelvic fixation. Mr. Keith Valentine, who serves as the President, Chief Executive Officer and a member of the board of directors of SeaSpine, also serves as a member of the Company's Board of Directors since August 2015.

Pursuant to the development plan, SeaSpine shall use reasonable efforts to assist in the development of the potential product offering, including licensing certain existing intellectual property to be incorporated into such product. Under the terms of the Development Agreement, the Company agreed to make monthly payments to SeaSpine to reimburse for full time resources employed by SeaSpine responsible to conduct the development activities. For the year ended December 31, 2020, the Company expensed $118,000 of the reimbursement charges from SeaSpine, which was recorded within research and development expense in the consolidated statement of operations. There was no outstanding liabilities to SeaSpine as of December 31, 2020.