Q1 2021 Conformis Inc Earnings Call

May 5, 2021

[music].

Good afternoon, and welcome to the fourth quarter 2021, Inc Conference call for performance Inc.

Name of Bally and I'll be the call for the operating today.

All of that have been placed on mute to prevent background noise.

After management's remarks, there will be a question and answer the question.

Before we begin I would like to remind you that the call will include forward looking statements within the meaning of federal Securities Law, which are made pursuant to the taste of double vision of the private Securities Litigation Reform Act of 1995.

Any statements made during the call that are not statements of historical facts should be considered forward looking statements. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward looking statements, including those discussed in the risk factors section of conformance public filings with the SEC.

Securities and Exchange Commission, you should not place undue reliance of the forward looking statements of couple of walnuts the plane and the obligation except as required by law to update or revise any financial projections or forward looking statements, whether because of new information further debt or otherwise. This conference call will include time sensitive information and is accurate as of the <unk>.

<unk> broadcast of the day May 2021.

I will now turn the call over to Mark <unk>, President and Chief Executive Officer of control of it.

Thank you and welcome to our first quarter 2021 earnings Conference call with me on the call today is our CFO Bob Hau. We appreciate you joining us in short the year is off to a good start performances revenue was right, where we expected it to be as we continue to manage through COVID-19 related headwinds my thanks to the entire team which continues.

Use the work relentlessly on our growth strategy the <unk>.

Care industry continues to be impacted by COVID-19, resulting in hospitals operating at or near capacity and thus impacting inpatient electric procedures. In addition, we believe COVID-19 has affected the demand for knee arthroplasty, but in fact any vaccination rates continue to improve we believe we will see patients feeling less anxiety and making office visits.

Undergoing electric procedures like others, we believe we should start to realize the transition back to normal demand levels in the second half of 2021 of course. This assumes that we don't experience anything unforeseen or unexpected our current goals of fourth quarter product revenue match or exceed the product revenue, we realized in the fourth quarter of 2009.

The team.

It has only been a short time since our fourth quarter call. However, I would like to take a moment to update you on our current growth strategy.

The number one grow our core knee business go forward is the best known for its knee implants and this accounts for over 90% of our revenue.

Of our patients have been dealing with knee pain and discomfort per an extended period of time. The surgeries are most likely to review the selected.

That our business has been impacted by the abnormally high levels of deferred elective procedures over the past 12 months of knee replacement patients return. We believe you will see a corresponding improvement in business and more importantly, as we launch our new products from focus on the ASC, we expect to achieve procedure growth, we believe our needs delivered.

The best outcomes for those patients see full or partial knee replacements, and we believe our efficient delivery model will increasingly be preferred as the market seeks efficiency savings.

Number two.

Our hip business during the first quarter, we hit 700000 revenue, which was 49% growth over the first quarter of 2020. This performance was in line with our pandemic adjusted internal expectations, but we don't like the fact that the pandemic has put us off of our original business plan. We are working hard to get back in line with our internal more aggressive expectations.

To grow our hip franchise. The good news is that with the December 2020 commercial launch of the Cordero match fit system, we're driving incremental customer interest and this should work in our favor, especially as we were able to train surgeons at rates more comparable to the pre pandemic model.

We remain excited about the traction we're getting with the hip offering and are committed to investing in our product and commercial activities to maintain growth.

Number three continue to drive R&D efforts launching new and differentiated products. We have several products of the pipeline, including three that we believe will be particularly impactful to our financial performance once they launch.

The first is our anticipated new knee system, which we have named identity imprint. This system is expected to complement our personalized knee offering extremely well and will help us further penetrate the AFC and outpatient segment for total knee arthroplasty or <unk> applications with the FDA for review with the most significant update to report well lets the clearance of <unk>.

Ending we are preparing our marketing and sales teams to ensure that we are ready to attract from trained surgeons on the use of renewable product of later this year.

The second is our estimate was named as the VAT.

Online before timing for the <unk> product was delayed last summer due to resource constraints. Those constraints are now gone due to recent unexpected infusions of capital and we are working hard to get this product back to its original timeline for now we plan of the launch of this product by Q1 of 2022, which is consistent with the view we shared on our last earnings call.

The third is our plan to introduce additional hip stem that will complement our hip portfolio in 2022, having successfully completed the strength of development program. We have restructured our development team to add more resources and bring dedicated leadership to our hedge programs.

And last one the number four continue to monetize our intellectual property because we successfully achieved the final milestone under the strike. The development agreement, we will receive an $11 million payment from Stryker and can now focus on manufacturing and supply of patient specific instrumentation to stryker.

We have recently granted a non exclusive license to a subset of our patents of the Paragon 28 can use our patient specific instrumentation IP with they're off the shelf implants and their apex <unk> total ankle replacement system performance will receive $1 5 million from Paragon in 2008.

Protecting our intellectual property as a strategic imperative for us and we have a strong team in place to do this through the mutual agreements and litigation when necessary conformance of successfully and strategically licenses technology to number of respected companies. These licenses of generated over $50 million to date and we continue to <unk>.

The protect conformance is positioned as the leader in patient specific instrumentation and implant technology.

In summary, we are pleased with the progress we're making on our growth strategy.

I turn the call over to Bob I'd like to touch on our capital infusion of nearly $80 million of net proceeds of mid February of this cash provides us with the necessary runway to drive our growth strategy and it gives us reasonable cushion as we operate in the face of the COVID-19 headwinds.

The first area, where we are starting to significantly invest this cash in our sales and marketing organization. Specifically, we have added new dedicated sales leader to lead commercial activities targeting the ASC space. In addition, we are adding two to three new marketing resources to support the launch of our new <unk> system, and adding more medical education events from the calendar and order.

The more aggressively train surgeons.

Leave that through these efforts, we will increase the number of surgeons, who use conformance hip and knee products.

The second area of investment is R&D, our goals for incremental investment in R&D are as follows ensure proper resources to meet scheduled timelines greencore and hip improvements in software in implants restarted our new third generation partial knee program and appropriately explore complementary technologies.

Let me now turn the call over to Bob for a more detailed financial review Bob.

Thank you Mark and good afternoon, everyone.

The Mark has already hit the highlights I will start with our recent public offering since it was the most significant financial events of the first quarter.

As a reminder, the offering was for just under 81 million shares at a price of $1 <unk> per share and closed on February 17th the.

The net proceeds were $79 6 million.

We believe this capital infusion positions us well to execute on our growth strategy and provides the runway needed to reach cash flow breakeven.

On the strike of development front, we recently announced the achievement of the last remaining milestone which was contingent on we've seen receiving FDA clearance.

As a result of mean this milestone we now expect an $11 million payment from Stryker, which should be received in the second quarter.

As a reminder to date, we have not yet recognized royalty and licensing revenue in connection with the Stryker agreement.

With the successful completion of the third milestone, we will recognize $25 million of royalty and licensing revenue in the second quarter of 2021.

Of this final milestone is a testament to conformance of significant development expertise and we're excited about the next phase in our relationship with Stryker, which place to another area of our expertise manufacturing high quality patient specific instrumentation.

We now look forward to executing on our long term supply and distribution agreement with Stryker.

Lastly, as a reminder, during the quarter, we worked with our partner Novartis to amend our term loan agreement on March 1st.

As part of that amendment, the revenue covenants waived for the remainder of 2021 and lowered for 2022.

I will now move to the financial highlights that Mark did not cover.

We reported first quarter revenue of $13 8 million, representing the decrease of 16% year over year on a reported basis and 17% on a constant currency basis.

The first quarter product revenue was $13 7 million, representing a decrease of 16% year over year on a reported basis and 17% on a constant currency basis.

Sales of our new products with $13 1 million, representing the decrease of 18% year over year on a reported basis and 19% on a constant currency basis.

Sales of our conformance hip system of approximately 700000, an increase of 49% year over year on both the reported and constant currency basis.

U S product revenue was $11 6 million, representing a decrease of 16% year over year.

U S sales of our new products were $10 9 million, an 18% decline year over year.

The rest of World product revenue was $2 1 million a decrease of 14% year over year on a reported basis and 22% on a constant currency basis.

Our first quarter gross margin was 45% of revenue compared to 44% of revenue for the same quarter. The prior year, an increase of 80 basis points.

This was driven primarily by lower cancel case inventory expense, partially offset by manufacturing variances, resulting from lower production volume.

Total operating expenses for the first quarter were flat year over year, but there were a few variances within the different functions that I would like to call out.

Sales and marketing expenses were down $1 5 million, primarily due to lower marketing event program and advertising expenses as well as lower sales commissions and travel expenses.

R&D expenses were up by 600000, primarily due to increased personnel costs as we continue to invest in our product pipeline.

G&A expenses were up by $900000 driven by higher legal fees related to the protection of our intellectual property.

As Mark outlined we are planning for some incremental investments in our sales marketing and R&D organizations to drive our growth strategy.

Additionally, we expect an increase over the next three quarters and our litigation related activity of $3 million to $4 million to further protect our intellectual property.

As a result of these expected increases, we anticipate sales and marketing expense to be between 26% and $27 million for fiscal year 2021.

R&D to be between 16, and $17 million and G&A to be between 28 and $29 million.

Moving to our bottom line performance net loss was $11 5 million or <unk> <unk> per share compared to net loss of $9 4 million or <unk> 14 per share for the same period last year.

Net loss in the first quarter included foreign currency exchange loss of $1 8 million compared to foreign currency exchange loss of <unk> 7 million in the same period last year.

We significantly strengthened our balance sheet during the first quarter, we had cash and cash equivalents of $104 6 million as of March 31, 2021, compared to $28 7 million as of December 31, 2020.

Lastly, I would like to provide some thoughts on our outlook.

Practice of providing full year guidance remains suspended due to the heightened level of unpredictability and volatility caused by COVID-19.

However, we are giving next quarter guidance and some thoughts on the second half of the year.

Based on our performance from April and our forecast for May and June we expect our total product revenue to be between 14% to $14 5 million.

Which is a modest sequential improvement from the first quarter.

As we exited Q1 and through the month of April we have seen sequential improvement in our weekly <unk> scans, which is encouraging however.

However, given the lag time between scan data and the actual surgery day.

We expect Q2 revenue to continue to be negatively impacted by the overall market decline in elective procedures as well as the decline in office visits seen in Q4 and Q1.

We are cautiously optimistic about the positive trend we've seen in our scans as well as the progress that has been made and vaccination of adoption of worldwide.

We continue to believe that office visits and elective procedures will continue to improve through Q2 and into the second half of this year.

Assuming of course that there is no unanticipated complications with vaccinations or new COVID-19 variance.

With the anticipated improvement in the overall elective procedure market, we do expect to sequentially grow our existing base business in both the third and fourth quarters.

In light of where we are today and as Mark stated earlier, our goal is to have fourth quarter product revenue match or exceed revenue realized from the fourth quarter of 2019.

With that I'll turn the call back over to Mark.

Thank you Bob for.

For the first time since the COVID-19 pandemic began I feel like we are starting to regain momentum.

We have seen office visits while still below 2019 levels generally improved we've been able to successfully work remotely progress of our product programs and continue to engage with our key surgeons.

We know of the capital and move forward with confidence we achieved the goals of our Stryker development project and the new imprint need targeting the ASC market remains on track for launch in the second half of this year.

Most importantly, the global vaccine rollout seems to be progressing we're excited about what's in store for the rest of 2021 and for 2022.

One additional point before I close.

Could not be more proud of the entire conformance organization of more appreciate of our Stryker partners, who delivered and continued to deliver out of a very aggressive timeline recall. This we announced the transaction of Stryker in October 2019, and now here. We are in May 2021, when the FDA clearance as of April this is of tremendous.

As a testament to the hard work and the effort of both organizations as well as through conformance is clear competency and expertise in the area of patient specific instrumentation.

In closing I would like to thank conformance employees, our physician customers and their non physician partners, we do business with Phil make People's lives better there's no better feeling the non we help people live without pain with that part of it.

We're happy to take your questions.

Thank you.

I'll ask a question you will need the press Star then one on your telephone to withdraw your question. Please press the pound key again that is star then one if you would like to ask a question.

Sure.

Our first question comes from the line of Josh Jennings with Cowen <unk> Company. Your line is now open.

Hi, This is Eric on for Josh Thanks for taking the question.

Thinking.

Hi, guys how are you doing.

Just thinking now that we're almost halfway through <unk> is there anything you can share on volume trends that you've observed through April and early may and then to the point what sort of backlog do you think is accrued at this point would you be able to quantify that.

Yes, Eric so.

We definitely as we said we've definitely seen an increase in scans for April we're pretty pleased on the trajectory and that's continued through the first few days of May here, It's still early may so.

I think that goes to.

The patient demand for knee arthroplasty coming back.

I think that goes to the vaccines progressing, especially in the arthroplasty patient population the age population.

And again as Bob alluded in his section.

We need those office business to come back we need people to come in and be willing to the.

Of the assessed for surgery, and then go to <unk> scan. So that's that's.

That's sort of the early thing that we're seeing.

As far as the.

Talking about quantifying of backlog I don't know the we're going to comment.

Comment on quantifying it but I think we can say that.

All of all along we've seen backlog gets scheduled of patients return because as you recall, we will of built some some cases and then.

The surgeries were delayed and they came back and were continuing to see those trickle in and we have seen a slight uptick in that category of business, but the real positive momentum is just an uptick in <unk>.

Basically scan volumes and Thats, what we need to drive our business and so thats, making us positive around the Q2.

Understood that's fair.

Then you've previously said LLP targets with the few milestones for 2024 around revenue and margin.

Wondering if do you still expect to meet those or should we be anticipating a refresh of the <unk> at some point and just as one of my question is that.

What are your expectations for the Stryker partnership of years down. The road was that included in that initial <unk> range.

I think you previously said that the supply portion of the agreement could be 10% to 20% of the company's total revenue is that still an inappropriate weighted that we should be thinking about thanks for the questions.

Yes, that's right Eric 10 to 20 is what we had signaled that.

That hasnt changed and to your comment on the ranges were still sticking with those ranges.

We still believe Thats achievable and Thats our goal to meet it still on track.

It's fair to say look when we publish those we had insight into the first part of the COVID-19 not of Crystal ball in the second but we gave some ranges on purpose. So we.

We certainly as part of our responsibility as stewards of the ship so to speak we will always look at our <unk> and if we move off of that stuff. We have an obligation to signal that but we still believe that we're incredibly in that range.

So.

But I guess my point is obviously.

We had to take some hits in the fact of the slow start here in 2021, because that was the contemplated when you put that together, but we're still we're still in those ranges.

We still see opportunity to drive business with these new product programs and I think importantly, the other thing is and that's why we will do a refresh.

And neither of signal where that comes but we're committed to those ranges, but we just talked about in my comments, adding for instance, the partial knee with the funding and commitment and support from our shareholders we have to be appropriately.

The best that money and one of the exciting things allows US do now is continue to progress of new product programs. So we'll signal more of that later, but we are as I said on this call we've.

Signals, we're going to be doing a partial knee program, which will happen within the 2024 timeline as well okay.

Thank you thanks for the question.

Thank you.

Our next question comes from the line of Robbie Marcus with Jpmorgan. Your line is now open.

Thank you Scott sorry, not from a Ravi here.

So I saw your comments on <unk>.

<unk>.

Reaching of coming in line with what you saw in <unk> 19, So I'm trying to get a sense of what that implies for the <unk> does that mean that it's going to come in lower the 19, and so what needs to happen here in <unk> in terms of scans.

Make sure Youre getting kind of close to that number of <unk> and I understand youre not quantifying it but how much did these new scans in office does it need to improve over the next.

Month, and a half or so to kind of ensure that <unk>.

In line with the trajectory.

Yes.

Yes, I think I could maybe Bob can add some color, but I think.

I think we're thinking if things continue to progress the way they are and we hope they will and expect they will at this point because we don't have anything to the contrary that we might actually be able to do Q3 levels of <unk> 19 in Q3 here of 2021.

Just as an expectation to see how thats going so that sort of thing.

The answer your question, that's sort of the trajectory that we could see coming out of the Q2 that sets us up for actually makes the Q3 and I think again in our comments. We said, we expect to see sequential improvement in both Q3 and Q4, alright. So yes, I mean, we still need to see improvement we've seen improvements through April as we mentioned in early may.

We're on our way to get to those levels in the in.

In Q3 still some work to do but we're heading the right direction.

Okay great.

And with the upcoming.

ASC knee launch.

What's being assumed right now in this guidance or what are your expectations for the contribution here in the back half of the year.

Both both of the top line as well as the P&L.

How does this affect you.

The margins here.

So we're not breaking out that specifically and part of the challenge is we don't know exactly when approval will happen.

Have a limited release and we're going to launch it but it's tough to predict the uptake.

I think we've.

We've appropriately baked it in and.

We have opportunity for upside.

Early days, it's not going to have huge margin improvements because it's sort of the beginning of the production cycle, but as we said longer term, it's going to have significant margin improvement in the longer term will be sort of like after we get four of five quarters under our belt and driving value of the increases as well as production efficiencies.

No.

We don't see it being a huge.

Gross margin mover beyond what we've talked about in the past fair and I think we've sort of indicated that.

The comments right Bob Yes, it's more of a 'twenty two impacts.

The 21.

Thanks for the time guys. Thanks.

Thank you. Thank you.

Thank you as a reminder to asking the question you would need the press Star then one of your telephone.

Our next question comes from the line of Steven Lichtman with Oppenheimer. Your line is now open.

Hi, guys. This is sameer on for Steve.

The name here.

Hi, So I just wanted to quickly ask another question on the standard knee.

Are there any metrics you can provide on how many <unk> do you guys are hoping the target initially and as a follow up will you be looking to create like a separate sales force for the ASC.

Yes, I appreciate it welcome so.

So let me answer reverse order, we're not looking to create a separate sales force. However.

As I indicated in the comments we have hired.

The person dedicated to ASC sales and marketing to support our existing sales force and agents.

In the rollout of the product training of the project more importantly lead identification of execution and we actually see that as a model, where we'll probably add one or two more people around there as we get closer to launch time and.

And so.

It's a little bit of of different twist, it's not a separate sales force will still use our local agents and the good relationships, we have with them, but we're going to support them with the economic sell as well as some other things on.

Around how we go to market on the.

And focusing on the ASC.

As far as metrics that's of Great question.

I think if you could just.

Defer that to later, let's get the product launch and then we've had some conversations ourselves about what metrics, we may share about product adoption and youll hear more from us after we get closer to launch about what kind of insight we will give you around that.

And I'll leave it at that okay.

Great great. Thank you. Thanks for that Mark and then just last question from my side last last quarter, you mentioned <unk>.

<unk> and launching new products of the hip during COVID-19.

Any updates or progress on the training side, okay. Thanks.

Yeah, a little bit there.

And I think look I think as you can see even if the rest of industry reported I think in my comments and even in subsequent talks I talked the fact that we had to understand that we're primarily the knee arthroplasty company in the the knee arthroplasty of U S market would be down in Q1, and I think as we're seeing.

The reports come from our fellow competitors of the market was down it's improving but it was down and we're seeing monthly improvement and I want to reiterate that.

March was better than January and February April must bear the March end.

We're hoping that may is going to be better than April. So we're seeing good movement here, but.

So thats. Good. So then and then as far as training it was hard to train in the first quarter because there is still a resistance of travel but the good news is is most surgeons are vaccinated now because they got vaccinated early on as health care providers.

They seem more willing to train into traveled to train.

And so for example, we just had a big course out west and we had sort of the most participation. We've had in six quarters. So we're very excited and we were able to what's really interesting we were able to do.

Thinking out loud about two thirds, the three quarters of the people that trade where life.

Hands on cadaver work didactic sessions, both hit the knee and then we were also then able to do about another 25% to 30% were available through virtual training. So we actually had a session that was going on at the same time so the.

The virtual people could drop in on the day that succession, and then we had a cadaver session set up with the right Cameron it equipment.

So we could actually do of remote could average surgery by one of our proctors and that worked out well I mean, that's that's gone well. So I think that could be of model going forward for people that can travel, but the good news is we were able to actually get a really nice amount of participation and so thats one of the reasons why I feel comfortable as I indicated my comments to add.

More of Med Ed events here.

<unk>.

In the second half of the year late Q2, but more importantly, early second half to help drive training towards our new product launches and specifically the ASC knee, but as long as the hit we had good performance, we wanted to do better, but we're continuing to see interest center hip.

Yes, it's a great question meta it's going to be a critical component of that through the remainder of the year.

Okay.

Thank you.

Sure.

Thank you there are no further questions.

Ladies and gentlemen. This concludes today's conference call. We thank you for your participation you may now disconnect. Thank you Valerie take care.

Okay.

All of them.

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Sure.

Yes.

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Yes.

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Okay.

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Okay.

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Yes.

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Okay.

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The year.

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Net.

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The team.

<unk>.

[music].

Good afternoon, welcome to the fourth quarter, 2021, or any kind of the crop of quality.

My name is Valerie and I'll be the profit.

The operating today.

All of that type of placed on mute to prevent background noise at the narratives remarks, there'll be a question and answer the question.

Before we begin I would like to remind you that the call off with forward looking statements within the meaning of federal Securities law.

Which are made pursuant to the pay TV out of the private Securities Litigation Reform Act of 1995.

Any statements made during the call that are not statements of historical cash should be.

Consider forward looking statements.

The statements of all material with the uncertainty that could cause actual with block one of the deck to materially differ from those anticipated or implied by the U K, including.

Including both the depth and the risk factors section of completing the public filings with the state you'll have the charity themselves.

You should not place undue reliance upon one of the big thing a couple of the play and the obligation.

As required by law, so that they own the box any financial projections of forward looking guidance, whether because of the new emulation further that sort of idle at this conference call will include time sensitive information and is accurate as of the last back half of the day make the 2021.

I will now turn the call over to Mark about the President Chief Executive after a couple of wallet.

Thank you and welcome to our first quarter 2021 earnings Conference call with me on the call today is our CFO Bob Hau. We appreciate you joining us.

The short the ear is off to a good start performances revenue was right, where we expected it to the as we continue to manage through COVID-19 related headwinds my thanks to the entire team, which continues to work relentlessly on our growth strategy. The healthcare industry continues to be impacted by COVID-19, resulting in hospitals operating at or near capacity and that's the impact.

Of the inpatient all up the procedures. In addition, we believe COVID-19 has affected the demand for knee arthroplasty, but in vaccinate vaccination rates continue to improve we believe we will see patients feeling less anxiety and making office visits undergoing electric procedures.

Like others, we believe we should start to realize the transition back to normal demand levels in the second half of 2021 of course. This assumes that we don't experience anything unforeseen or unexpected. Our current goal is to have fourth quarter product revenue matrix. The the product revenue, we realized in the fourth quarter of 2019.

It has only been a short time since our fourth quarter call. However, I would like to take the moment to update you on our current growth strategy.

Number one grow our core knee business.

The first is best known for its knee implants, and this accounts for over 90% of our revenue since most of our patients have been dealing with knee pain and discomfort per an extended period of time. The surgeries are most likely to review. The selected this means that our business has been impacted by the abnormally high levels of deferred elective procedures over the past 12 months.

And they replacement patients return, we believe you will see a corresponding improvement in business and more importantly, as we launch our new products from focus on the ASC, we expect to achieve procedure growth. We believe are needed to deliver the best outcomes for those patients needing full or partial knee replacements and we believe our efficient delivery model will increasingly deep.

Preferred as the market seeks efficiency savings.

Number two.

Grow our hips business during the first quarter, we had 700000 revenue, which was 49% growth over the first quarter of 2020. This performance was in line with our pandemic adjusted internal expectations.

We don't like the fact that the pandemic has put us off of our original business plan. We are working hard to get back in line with our internal more aggressive expectations to grow our hip franchise. The good news is that with the December 2020 commercial launch of the Cordero match fit system, we're driving incremental customer interest and this should work in our favor, especially as we're able.

Of the train surgeons at rates more comparable to the pre pandemic model.

We remain excited about the traction we're getting with the hip offering and are committed to investing in our product and commercial activities to maintain growth.

The first is our anticipated new knee system, which we have named identity imprint. This system is expected to complement our personalized knee offering extremely well and will help us further penetrate the ASC and outpatient segment for total knee arthroplasty or plastic applications with the FTE per review with the most significant update to report well, let's be clear interest.

Ending we are preparing our marketing and sales teams to ensure that we are ready to attract and train surgeons on the use of our new product of later this year.

The second is our cement less knee as of now.

Online before our timing for the <unk> product was the lag last summer due to resource constraints. Those constraints are now gone through the recent unexpected infusions of capital and we are working hard to get this product back to its original timeline for now we plan of the launch of this product by Q1 of 2022, which is consistent with the view we shared on our last earnings call.

The third is our plan to introduce additional hip stem that will complement our hedged portfolio in 2022, having successfully completed the strength of development program. We have restructured our development team to add more resources and bring dedicated leadership to our hedge programs.

And lastly, the number four continue to monetize our intellectual property because we successfully achieved the final milestone under the strike. The development agreement, we will receive an $11 million payment from Stryker and can now focus on manufacturing and supply of patient specific instrumentation to stryker.

We have recently granted a non exclusive license to a subset of our patents. So the Paragon 28 can use our patient specific instrumentation IP with they're off the shelf implants in the apex <unk> total ankle replacement system performance of all received $1 5 million from Paragon 2008.

Protecting our intellectual property as a strategic imperative for us and we have a strong team in place to do this through the mutual agreement of some litigation of unnecessary conformance of successfully in the strategically license the technology to number of respected companies. These licenses of generated over $50 million to date and we continue to the jealous.

The protect conformance is positioned as the leader in patient specific instrumentation it didn't plant technology.

In summary, we are pleased with the progress, we're making all of our growth strategy.

Before I turn the call over to Bob I'd like to touch on our capital infusion of nearly $80 million of net proceeds of mid February of this cash provide us with the necessary runway to drive our growth strategy and it gives us reasonable cushion as we operate in the face of the COVID-19 headwinds.

The first area, where we are starting to significantly invest this cash in our sales and marketing organizations. Specifically, we've added new dedicated sales leader to lead commercial activities targeting the ASC space. In addition, we are adding two to three new marketing resources to support the launch of our new <unk> system, and adding more medical education events through the calendar.

And the more aggressively trade uncertainties.

Believe that through these efforts and the will increase the number of surgeons, who use conformance flip in the products the.

The second area of investment is R&D, our goals for incremental investment in R&D are as follows ensure proper resourcing to meet scheduled timelines bring forward hit the improvements in software net plant restart of our new third generation partial knee program and appropriately explore complementary technologies.

So let me now turn the call over to Bob for a more detailed financial review of Bob.

Yes.

Thank you Mark and good afternoon, everyone of them.

Mark has already hit the highlights I will start with our recent public offering since it was the most significant financial events of the first quarter.

As a reminder, the operating loss of just under 81 million shares at a price of $1 <unk> per share and closed on February 17th.

The net proceeds were $79 6 million.

We believe this capital infusion positions us well to execute on our growth strategy and provide the runway needed to reach cash flow breakeven.

On the strike of development front, we recently announced the achievement of the last remaining milestone, which was contingent on receiving receiving FDA clearance.

As a result of meeting this milestone we now expect in the $11 million payment from Stryker, which should be received in the second quarter.

As a reminder to date, we have not yet recognized royalty and licensing revenue in connection with the Stryker agreement.

With the successful completion of the third milestone, we will recognize $25 million of royalty and licensing revenue in the second quarter of 2021.

The final milestone is a testament to conformance of significant development expertise and we're excited about the next phase in our relationship with Stryker.

Which placed are another area of our expertise manufacturing high quality patient specific instrumentation.

We now look forward to executing on our long term supply and distribution agreement with Stryker.

Lastly, as a reminder, during the quarter, we work with our partner Novartis to amend our term loan agreement on March one.

As part of that amendment, the revenue covenants waived for the remainder of 2021 and lowered for 2022.

I will now move to the financial highlights that Mark did not cover.

We reported first quarter revenue of $13 8 million, representing the decrease of 16% year over year on a reported basis and 17% on a constant currency basis.

The first quarter product revenue was $13 7 million, representing a decrease of 16% year over year on a reported basis and 17% on a constant currency basis.

Sales of our new products with $13 1 million, representing the decrease of 18% year over year on a reported basis and 19% on a constant currency basis.

<unk> of our conformance hip system of approximately 700000, an increase of 49% year over year on both the reported and constant currency basis.

U S product revenue was $11 6 million, representing a decrease of 16% year over year.

U S sales of our new products were $10 9 million, an 18% decline year over year.

Rest of World product revenue was $2 1 million a decrease of 14% year over year on a reported basis and 22% on a constant currency basis.

Our first quarter gross margin was 45% of revenue compared to 44% of revenue for the same quarter. The prior year, an increase of 80 basis points.

This was driven primarily by lower cancel case inventory expense, partially offset by manufacturing variances, resulting from lower production volume.

Total operating expenses for the first quarter were flat year over year, but there were a few variances within the different functions that I would like to call out.

Sales and marketing expenses were down $1 5 million, primarily due to lower marketing event program and advertising expenses as the.

Well as lower sales commissions and travel expenses.

R&D expenses were up by 600000, primarily due to increased personnel costs as we continue to invest in our product pipeline.

G&A expenses were up by 900000, driven by higher legal fees related to the protection of our intellectual property.