Q3 2020 Conformis Inc Earnings Call

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Speakers remarks, there will be a question and answer session before we begin I would like to remind you that Conformis management will make statements. During this call that include forward looking statements within the meaning of federal Securities Law, which are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 99.

Five any statements contained in this call that are not statements of historical facts should be considered to be forward looking statements. All forward looking statements, including without limitation statements about conformis tragedy future expectations plans and prospects for future operations future financial.

Position and results gross margin product margin operating trends financial guidance market growth total revenue and revenue mix by product and travel fee the anticipated timing of product launches, including the new knee replacement offering targeted at hospital outpatient and ambulatory surgery Center of excellence.

Patients about the impact of the noble Corona virus epidemic.

Wonder restrictions on elective surgeries will be relaxed and demand for procedures will increase the potential impact and advantages of using personal lives implants business initiatives and transitions in our commercial operations are based upon current estimates and various assumptions. This statements involve material.

Risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward looking statements, including those discussed under risk factors section of one form it's public filings with the Securities and Exchange Commission corn.

Accordingly, you should not place undue reliance of this forward looking statements while conformis may elect to update these forward looking statements at some point in the future Conformis disclaims any obligation except as required by law to update or revise any financial projections and forward looking statements whether because of new.

New information future events or otherwise this conference call contains time sensitive information and is accurate only as of the lie broadcast today November four 2020.

I will turn the call over to Mark a gossipy Conformis, President and Chief Executive Officer Mark.

Thank you operator, and welcome everyone to Conformis is third quarter 2020 earnings conference call with me on the call today is our CFO Bob.

During the call we will share prepared remarks on a variety of topics, including our third quarter financial and operating performance as well as comments related to the COVID-19, Endemics impact on our operations. Following their prepared remarks, we look forward to answering your questions.

On March 23rd 2020, Redrew or full year growth targets and noted that it was due to the pandemic and its impact on our computing schedule surgeries.

October six 2020, we pre released our third quarter revenue results and those numbers are consistent with what we are reporting today.

As expected our third quarter performance was impacted by the pandemic well we've continued to be pleased by the resumption of scheduled orthopedic procedures in the quarter were still not seeing primary arthroplasty surgical volumes at prior year levels.

Please recall that Conformis does not have any revision oncology or trauma products. Therefore, we are heavily weighted towards pure elective total joint replacement. Nevertheless, we do expect Q4 revenue to be sequentially above Q4, although with a year over year growth rate in the fourth quarter slightly lower than Q3, we do anticipate men 2020.

One we will return to full year growth over 2019, and we'll provide more color on the 2021 quarterly phasing during our Q4 earnings call.

Moving on I would like to point out some other notable items from the past quarter or hip sales in the quarter grew 122%. Our team continues to make progress in this area in spite of the challenges related to new product introductions during the pandemic.

This quarter, we were able to hold our first medical education events since the condemning started which included both in person and virtual attendees were very pleased with the quality of education, we were able to deliver for our virtual attendees and expect this to become a routine part of her surgeon training going forward.

We're also pleased to see good operational rigor in the quarter. We saw our gross margin increased to 48%, which was of course, an increase over the prior quarter, but importantly, an increase over prior year as well, perhaps most significantly in September conformis agreed to sell a combination of stock and warrants to healthcare focused institutional investor resulting in.

Gross proceeds of approximately $17.25 million. This additional capital will be used to support continued execution of our strategic plans.

Before I provide further comment on the quarter, let me turn the call over to Bob for more detailed financial review.

Thank you Mark and thank you everyone for joining us.

We reported third quarter revenue of 16.1 million, representing a decrease of 1.2 million or 7% year over year on a reported and constant currency basis.

Revenue in the third quarter of 2020, and 2019 includes royalty revenue of 146000, and 191000, respectively related to patent license agreements.

Third quarter product revenue was 16.0 million, representing a decrease of 1.1 million or 7% year over year on a reported and constant currency basis.

Sales of our new products decreased 1.6 million to 15.1 million or 10% year over year on a reported and constant currency basis.

Sales of our Conformis hip system with 0.9 million, an increase of 122% year over year on both a reported and constant currency basis.

US product revenue decreased 1.0 million to 14.1 million or 7% year over year.

You Es sales of our new products decreased 1.5 million to 13.3 million or 10% year over year.

Third quarter U.S. product revenue represented 89% of total product revenue same as our third quarter last year.

Rest of World product revenue was 1.8 million a decrease of approximately 130000 or 7% year over year on a reported basis and 10% on a constant currency basis.

With that I'll now move on to our results across the rest of the piano.

Third quarter gross margin was 48% of revenue compared to 44% of revenue for the same quarter last year, an increase of 360 basis points incur.

The increase in gross margin was driven primarily by lower cancel case inventory reserves improvements in yield and other manufacturing improvements.

Total operating expenses increased 4.3 million to 14.8 million or 2% year over year increase in expenses, primarily due to increases in general legal and litigation expenses.

Net loss was 6.2 million or nine cents per share compared to net loss of $8.7 million or 13 cents per share for the same period last year.

Net loss per share calculations assumed weighted average shares outstanding.

71.2 million shares for the third quarter 2020, compared to 64.8 million shares for the same period last year.

Net loss for the third quarter included foreign currency exchange income of 1.5 million compared to foreign currency exchange loss of $1.3 million in the same period last year.

We had cash and cash equivalents totaling 32.9 million as of September Thirtyth 2020, compared to 26.4 million as of December 30, Onest 2019.

Lastly, I want to close with a few comments on liquidity as Mark mentioned, we are pleased to have raised approximately 17 million of gross proceeds from the registered direct offering in the third quarter.

The funds from this offering provide a significant amount of additional capital that will allow the company to continue to execute its strategic plan.

We continue to make good progress on our strike a development efforts during the third quarter, we achieved the second milestone C. The associated 3 million dollar payment.

We are still on track to achieve the last remaining milestone, which we expect to be completed prior to the middle of next year, and which will result in conformance, receiving additional payments of $11 million.

With the recent equity raise completed any anticipated milestone payment. We believe we've made substantial progress in funding the company toward the goal of cash flow breakeven.

With that let me turn the call back over to Mark to add additional color sure. Thanks, Bob.

Okay, well the effects of the pandemic continued to be challenging as mentioned in prior releases in commentary conformance has maintained its key development activities.

There's always continue to progress our most important new product development programs.

Includes activities related to our Stryker partnership as well as work on a plan New me offering we announced last quarter, but it also includes other important projects such as our WPS me and our confirmed mismatch hip system, both of which received FDA clearance in the quarter.

Identity P. S is the poster stabilize version of our identity total knee system, which was launched in the cruciate retaining or CR version last year in limited release.

Customer feedback on our identity meat products has been very favorable we're pleased to be able to expand our addressable market with our PS offerings.

Our Conformis match hip system applies our leading patient specific instruments station or PSR capabilities to hip arthroplasty, when utilizing our cordero standard had been cup implants.

Combined with our proprietary I view, claiming system, we expect conformis mass to allow surgeons to apply our innovative solutions to clinical situations, where a personalized tipton plant is not indicated.

We believe Conformis match will help expand and accelerate adoption of our hip arthroplasty technology, we anticipate launching conformis match prior to year end.

A few additional comments on the pipeline as previously reported we received our second of three milestone payments contemplated in the Stryker collaboration.

As an indication that we remain on track towards successful completion of the program in mid 2021 rig.

Regarding our new knee system targeted hospital outpatient assay sites of care, we have made significant progress in the quarter and continue to believe we can meet an aggressive timeline for launch.

We continue to anticipate launching this innovative knee arthroplasty system in the second half of 2021.

Lastly, I would like to comment on the capital raise we executed in the quarter goes there remains uncertainty around COVID-19 related demand disruptions as Bob previously mentioned, we resist raise will allow us to focus on operational execution and on the commercial priorities of our business, such as attracting and retaining great surgeon customers and launching.

New and innovative products.

Once again I would like to acknowledge and thank all the Conformis employees consultants advisors and customers that continue to sell derived through through the challenging time.

All the efforts of goodwill and greatly appreciative, we're pleased with the performance we had in the quarter. Thank you with that I'll turn the call back over to the operator, and we'll take questions.

Thank you, Sir ladies and gentlemen, if you have a question at this time. Please press. The Star then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.

Your first question is from Kyle Rose of Canaccord. Your line is open.

Hi, This is Ian.

This is actually an entre count.

I was hoping you could talk a bit about the benefit of having both see hip and the knee products together on any potential cross selling going on into accounts is.

Is it helping you potentially attract sales talent.

Or is it still a bit early there given given the cobot impact last quarter. Thank you.

Thanks Ian.

Certainly go that's not helping him and everything's new [laughter]. These days, but there's no doubt the strategic reason for launching the had been and the innovation around it remains.

We do have great opportunities for cross selling.

We're actually very detailed tracking that and looking that that's obviously the low hanging fruit for us is to present, the new product innovations.

Innovations to customers, we already have a relationship with.

Having said that I'm pleased with the ability to attract new surgeons, which we've done that haven't before when using arnie.

As well as our.

Our ability to important pieces in his or her as I've mentioned this when we talk about the hip launch before is our ability to get on contracts. So you know that the ability to cross sell and leverage the knee relationship isn't just for surgeons US also with you know the financial buyers and the people we contract with so we've been very pleased with our ability to.

To do that with our hip so theres still lot of work to do it's never easy it's a highly competitive market, but we think we've got a very differentiated solution. You know we're launching first with just a cry type spend but as we've talked about previously we have other stems plan.

I think that will be a big source of growth for us in the coming quarters. Okay.

Perfect. Thank you.

And then just one follow up if I could.

You talked a lot about the new knee system for assay in the outpatient arena are you is there is this the same kind of opportunity for hips and outpatient Nancy or is that.

A little less of an impact there in that segment.

So I fundamentally believe the the opportunities there I think that the.

Ecosystem that we're in and the physician community has done let's say a better job on you know the right clinical indications and the right clinical procedures to do outpatient total knee arthroplasty.

And that's because also it was easier a little easier and awesome Medicare CMS.

Remove that from the inpatient only list earlier they have now as you know done it for the hip and I think the work being done in Hep.

So that demand will follow I think it will lag the need a little bit.

It's like anything else there are some physicians that are already aggressively doing outpatient AOCI hit.

Hip arthroplasty, it's just not at the same level that these will be but we believe that opportunity is strong and will.

Eventually follow just as strong as the name.

Great. Thank you okay.

Okay. Thanks.

Your next question is from Josh Jennings of Cowen Your line is open.

Hi, guys. This is actually Eric on for Josh Thanks for taking my question.

In past quarters, you guys have provided the monthly progression of volume recovery for the quarter. I was just wondering if it'd be possible for you to do the same here for Threeq.

Yes, we didnt do that just because it had flattened out a little bit I don't know that I don't want to put Bob on the spot or another we're prepared to do that so probably going to decline at this this is going to be thoughtful about it but you know.

It was it was something that we did just because I think it was more uncertain, but I you know I do believe we've seen.

You know as I indicated I alluded to we've seen a resumption were not Craig Craig where we were from office visits and.

Surgical levels of prior year, but sequentially us back.

Okay understood. Thanks, Louise Thanks for sharing that.

Yeah, and then moving elsewhere in the 2024 financial targets you guys have outlined previously expansion into international markets like China, and Japan was highlighted as a key initiative I was just wondering when we could possibly expect to see conformis is entrance into those markets and then how the strategy might differ from other.

International markets you guys right.

Right. So that's a that's a good question and they are as you I'm sure likely no longer term regulatory challenges, but we do have them in the out year plans and we are still planning on those and doing the work that we need to do for those regulatory.

Approvals and all the stuff associated with that.

I don't think I'm prepared to say exactly when you'll start to see a census, those markets, but it certainly would be prior to that prior to 2024, but it certainly won't be next year for instance, because we know those are.

In general those approvals take longer.

Excellent. Thank you.

Your next question is from Robbie Marcus from Jpmorgan. Your line is open.

Hi, this is actually a saar in on for Robby.

Just a question on the EPS see me upcoming 2021 have you seen anything in the quarter.

Regarding the shifts to assay that might have accelerated as results depend I make.

The thing on that opportunity that might have kind of changed throughout the quarter.

Yes, and I I think I think the opportunities only become more compelling IPH I am.

And we remain hard pressed to full out to pull out data sources that I I think or you know.

Specific so to speak but my conversations with.

Physicians and people in the industry and.

People that are at the fees is and just.

Really our doctors are probably the key source to me is is they're seeing they're seeing a and more demand they're seeing their patients seem to be more comfortable.

Given the current environment to proceed with their search.

Surgery in an outpatient manner versus inpatient manager I think there is some residual.

Right, if you will around hospitals, whether that's warranted or not but it's real so on the margin, it's accelerate that shift and I think it's maybe opportunity more compelling I mean, I think if you look overall at total knee arthroplasty, you know the robotics trend the cementless trend and the trend to ASV.

These are probably three of the biggest things going on right now and so we're very pleased that we think we have the best delivery model for the assay sections Uh huh.

I see.

Site of care and as you know we've talked about Cementless from our standpoint, we've got to get that product launch and so that remains a big big impetus for us.

Great. Thank you and just one quick follow up I know you gave some color on kind of the longer term international opportunity, especially on the last call, but I did you see anything in the quarter I know the international Oxys small.

A smaller portion of the business, but the.

The recovery by O.U.S. first U.S.

Well.

That's a good question then of course as monitoring what other people have said so.

I try not to.

Yes, I, just kind of come where I'm coming from it's a challenge but.

You know, we just saw the UK go a month lock down.

We've seen some regional locked down to different parts of Europe. So that's why in my prepared comments I talked to this and I. Appreciate you give the EPS you talked about I mean, we you know we're not out of this I'm not.

I want to be clear I'm not you know.

Being negative I think that you know, we're not going to see the broad base level of demand disruption. We saw in Q2, having said that there is still uncertainty around that so we all have to be.

Yes, a little thoughtful about that the good news is.

I think our customers.

Our industry has done a great job in figuring out how to manage patients through us.

Through whether it's the hospital outpatient environment to protect them against cobot, how to reassure them I think you know tele health and different applications like that are allowing contactors to interact with their patients.

But you can't get away from the fact that if you look round, we're seeing some.

Various spikes in different geographies, and we just can't predict how the government.

Agencies will respond to that and to answer your question specifically, yes, we've seen.

Some shutdowns in some of our customer centers in Europe, they're not again, they are not they tend to be a little more thoughtful in the sense that they're not just we're shutting down and there's no message about when or what were starting back it's more targeted and it's.

Broad based across so so to speak countries were targeted around.

Senators and geographies and with a time limit so so more to come on that and that's a that's a more color will provide later in the fourth quarter.

Okay.

Great. Thank you.

Your next question is from Steve Blackman from Oppenheimer. Your line is open.

Hi, This is David on for Steve Thanks for taking the question.

Maybe one for you Mark I was just wondering if you could provide.

How about an update on the status of the of your sales organization and do you anticipate any changes over the near term.

Well I'm really pleased with the.

The sales.

Sales organization and the focus they've been able to maintain coming through.

You know coming through this this covance situation.

I'm, particularly pleased with we said at the beginning of the year, we wanted to add a new.

New agents and we've done that we've seen 7% growth in our agents since since.

Since December 31, 2019, which I think is a good performance were targeting 10 for the full year. So we're well on the way and we continue to do that.

And so that's a you know.

Acquiring entertaining surgeon customers is important but a big part of that is good distribution and.

I think part of the success, we're having this year is again going back to one of the first questions by having the hip product.

Houses to be more attractive to agents that have both.

In the relationship.

Relationships and skill sets so having.

Having only the knee in prior quarters was a challenge for us and recruitment, but now that we've got I think an innovative hip system with also a plan to add and fill out that portfolio portfolio has made conformance and more attractive place for experienced orthopedic agent. So we're we're pleased with the performance. We made we can always do better.

I want to do better.

But but like the direction it's going.

Okay, Great. That's helpful. And then just one follow up I was wondering if you could maybe talk about any updates on the reimbursement coverage status from that now.

How is that progressing there. Thank you.

Yes, no no new news on that I think were settled in for the long winter here a typical litigation, it's going to be you know, while furthers news there I think that.

Well I don't think I mean, we track now we're able to track through some automation I think I reported this last quarter. So we can start to see exactly what our payer mix looks like and we still get.

Some.

Requests and we have a process now for doing prior authorizations 40, surgeons and we actually still get some approvals on appeal on that but we don't see we don't see a lot of it and request because I think our customers are sort of train now to know, but every now and then we still got him and I'm pleased to see that.

Still get some approvals, but the most important thing is we don't anticipate having reasonably well be any other changes to coverage at this point.

Most of the commercial payers have been through this and that and.

We are pretty pleased outside of the situation with the broad coverage that we have.

Okay got it thank you.

Okay Nick.

Go ahead, operator, there are no questions over the phone for Sandra.

Okay, all right well with that we'll end it I appreciate everybody, who dialed in and listen and thank.

Thank you.

Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.

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