Conformis, Inc.

Good afternoon. My name is Josh, and I will be your conference operator today. At this time, I would like to welcome everyone to the conformist fourth quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. Before we begin, I would like to remind you that this call will include forward-looking statements within the meaning of the Federal Securities Law, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements made during this call that are not statements of historical facts should be considered forward-looking statements. These statements involve material risk and uncertainty 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 conformist public filings with the U.S. Securities and Exchange Commission. Accordingly, you should not place undue reliance on these forward-looking statements. Conformist disclaims any obligation except as required by law to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. This conference call will include time-sensitive information and is accurate only as of the live broadcast. today, March 3rd, 2021. I will now turn the call over to Mark Agusti, President and Chief Executive Officer of Conformis.

Thank you, and welcome everyone to our fourth quarter and full year 2020 earnings conference call. With me on the call today is our CFO, Bob Howe. Like many other medical device companies, Conformis was materially impacted by the effects of COVID-19 in 2020. We were hardest hit from last March through the second quarter, tipping to our lowest quarterly revenue number as a public company in the second quarter of 2020. We saw reason for optimism through the third quarter as elective procedures resumed fairly rapidly, and this carried into the start of fourth quarter. However, midway through November, we experienced a resurgent of the negative impacts of COVID across our business. Although hospitals were better prepared to handle the volumes of sick patients, elective procedures slowed again as hospitals redlined at near capacities with COVID patients and patients requiring emergency care. The number of CT scans slowed as did the number of book procedures. Though this pronounced impact was not as severe as it was in the second quarter of 2020, we again saw knee and hip procedures slow down for us dramatically. And this has continued into Q1. Although COVID infection rates have begun to subside, hospitals are still dealing with limited bed capacity and procedure volumes have not returned to 2019 levels. We believe that another COVID-related headwind has been orthopedic surgeons looking for shorter lead times between appointment booking and surgery because they have less overall demand for procedures right now. The result is that the lead time for personalized needs has worked against us as surgeons have been more likely to use another solution to fill up openings in their near-term schedules. In addition, it has been increasingly challenging to gain new surgeons because we believe that many have been deferring testing new technologies and products during these times. This has particularly made training new surgeons on our conformance hip harder than usual. Notwithstanding the effects of COVID, one thing that we believe has been reinforced over the past year is that we have the right strategy for growth. I would like to take a moment and update you on each of the elements of our current growth strategy. First, our grow our core cemented personalized knee business. We believe our knees are the best solutions for patients who need knee replacements and want to stay active. Our customer satisfaction scores remain high, Our published clinical results are strong and continue to be strong, and we continue to build and strengthen relationships with surgeons. COVID has slowed our progress of growing this business recently, but we feel there is a natural backlog of procedures building and patients will get more comfortable as vaccines become more widely available. We believe as elective procedure levels improve, this will directly improve our personalized core knee business. Number two is to grow our hip business. We're still in the very early stages of growth of our HIP business. While overall business was down in the fourth quarter in the year, our HIP business was up approximately 5% for the quarter and 26% for the year. In addition, in December 2020, we initiated our commercial launch of the Kadera Match HIP system. We expect our HIP franchise to continue to become a significant component of our revenue base over time, especially as surgeons further adopt new technologies, attend in-person training courses, and we launch our next STEM option in 2022. Number three, continue our R&D efforts and launch new and differentiated products. We are currently developing two products which we anticipate will move the needle for us. The most significant, of course, is our anticipated new standard knee offering, which is being designed to provide a lower-cost alternative to hospitals, outpatient surgery centers, and ASCs, while still taking full advantage of years of patient data collected through our unique business model. We are confident that the new knee will launch in the second half of 2021 and believe it will be a material game changer for us. We recently filed our 510K application with the FDA. The other noteworthy product is our cementless knee. Progress is being made there too. In late January, as you saw, we are partnering with Scythe Medical to use its technology to further strengthen this offering. We plan on the launch of this product in Q1 2022. Despite the negative impacts of COVID on our business, we made a strategic decision to continue investing in our R&D pipeline during the year, and we're excited about the portfolio of new products we plan to launch in the next few years. Indeed, we are in this position because we remain committed to new product development. Number four, continue to monetize our intellectual property and find strategic licensing arrangements. This includes our striker relationships. which we believe validates the quality of our patient-specific instrumentation and of our delivery model. In addition, this partnership provides us with an accretive long-term supply agreement. We're near the end of the development process, and the submission is currently being reviewed by the FDA. This is the last significant step in the development process, and once regulatory clearance is received, we expect to be in a position to begin supplying Stryker. Of course, the timing of when we will begin initial shipments will be determined by Stryker. Taken all together, we believe we're on the right path, which leads me to one final update. Subsequent to year end, on February 17th, we closed on $85 million underwritten public offering. We were thrilled at the demand for the offering and are pleased with the new investors who are now connected to conformance, as well as those who increased their positions. We believe the quality of the investors that participated demonstrate the attractiveness of and the confidence in our strategy. This cash infusion is significant for us. We believe that it provides ample liquidity for us to execute our growth strategy. There are several significant areas where we intend to use this capital, and we believe putting the cash to use to grow business will build shareholder value that will more than offset the near-term dilutive effects. You can expect us to invest in R&D and new product development. In mid-2020, for example, we had to decide to keep either our new standard knee offering or cementless knee project on plan, despite both being essential to our long-term growth. We chose to focus on the standard need because, as I mentioned earlier, we expect it to be a game changer for us. This capital infusion should allow us over the next few years not to have to choose between too high quality and strategically important products for development. In addition to new product development, we expect to also make strategic investments to strengthen our sales and marketing efforts targeting the ASC space and to reinforce our efforts to aggressively protect our intellectual property portfolio. We also intend to get started with some long-term and game-changer projects. For instance, robotics is gaining interest across orthopedics. We have questions about the ultimate value of robotics and are not aware that any significant clinical results have been published which justify the incremental cost. While we currently believe that nothing is better than a personalized implant, this recent capital infusion will allow us to proactively evaluate how robotics might complement our personalized approach to arthroplasty. We feel we have a great vision for growth backed by a great team and a healthy balance sheet to make it all happen. Let me now turn the call over to Bob for a more detailed financial review of the quarter and the year. Bob?

Thank you, Mark, and good afternoon, everyone. There are a few financial topics I'd like to hit on, and I'll start with the recent updates to our capital structure and cash management. We finished the year with $28.7 million of cash and cash equivalents, which was up from the $26.4 million at the end of last year. As Mark mentioned, we are pleased with our $85 million of gross proceeds from our public offering in February. The offering was for just under 81 million shares at a price of $1.05 per share. We believe that this infusion eliminates any financing overhang that had been present. This is especially important due to the continuing unpredictable nature of the pandemic and how long it will continue to negatively affect our business. We continue to make good progress on our striker development projects. and we are still on track to achieve the last remaining milestone, which is contingent on receiving FDA clearance. Our application was received by the FDA in late January, and as a reminder, the last milestone payment is $11 million. In April 2020, we took out a $4.7 million loan as part of the Paycheck Protection Program. We believe we used the entire loan for eligible purposes as outlined by the U.S. Treasury Department, as all the proceeds were used to fund qualifying payroll expenses. Accordingly, we recently filed an application for forgiveness of this loan and continue to believe the entire amount will be forgiven. Lastly, and with respect to our term loan with Innovatus, we executed a new amendment to the agreement on March 1st that waives the revenue covenants for the remainder of 2021 and lowers the revenue amounts that must be achieved in 2022. We continue to enjoy a strong partnership with Innovatus and this new agreement acknowledges the uncertainty that COVID-19 has inserted into our industry. Moving to our financial highlights, I would like to review the key results that Mark did not cover. We reported fourth quarter revenue of $16.7 million, representing a decrease of 16% year-over-year on a reported basis and 17% on a constant currency basis. Fourth quarter product revenue was $16.5 million, representing a decrease of 16% year-over-year on a reported basis and 17% on a constant currency basis. Sales of our knee products were $15.9 million, representing a decrease of 17% year-over-year on a reported basis and 18% on a constant currency basis. Sales of our conformist hip systems were $0.6 million, an increase of 5% year-over-year on both a reported and constant currency basis. U.S. product revenue was $14.4 million, representing a decrease of 16% year-over-year. U.S. sales of our knee products were $13.8 million, a 17% decline year-over-year. Rest of world product revenue was $2.1 million, a decrease of 16% year-over-year on a reported basis, and 22% on a constant currency basis. For the full year of 2020, we reported revenue of $68.8 million, representing a decrease of 11% year-over-year, on both a reported and constant currency basis. 2020 revenue includes $9.6 million of royalty and licensing revenue from the settlement and license agreement with Zimmer Biomet, which was recognized in the second quarter. Both revenue for the fourth quarter and for the total year were down from the prior year and below the expectations we had not only at the beginning of the year, but also at the start of the fourth quarter. Our revenue was challenged from COVID most of the year due to the volatility and reductions experienced in elective procedures. We were pleased to see a strong correlation to improvement in our business as elective procedures rebounded, particularly in the third quarter. We're working hard to ensure we are well positioned for when this happens in 2021. Our fourth quarter gross margin was 47% of revenue compared to 49% of revenue for the same quarter the prior year. The decrease in gross margin year over year was driven primarily by lower volume and canceled case inventory expense. For the year, gross margin was 49 percent of revenue compared to 47 percent of revenue in 2019, a 160 basis point increase, which is driven by the 9.6 million licensing revenue recognized as a result of the settlement and license agreement with Zimmer Biomed. Full year 2020 product gross margin was 43 percent of revenue compared to 47 percent in 2019, a 400 basis point decline. The decrease in gross margin year over year was again primarily due to lower manufacturing volumes and canceled case inventory expense. Operating expenses for the fourth quarter were flat year-over-year, and for the full year of 2020 were down 5%. We continued to maintain our investment in our R&D pipeline throughout the year, despite the headwinds on our top line, and we made selective reductions in marketing expenses, travel and entertainment, and other discretionary spending to minimize the impact on our cash burn. Last year, we began to build a presence in India to support our CAD manufacturing design activities, as well as for several other current or planned corporate functions, including regulatory, clinical, and software design development. This was done to attract top talent and to benefit from identified cost savings opportunities. We expect to continue to ramp our number of employees in India to support both our striker launch as well as the anticipated growth in our knee and hip product lines. The India investment will support our efforts to improve gross margin and is part of our long-range strategy to reduce the cost of our products. Lastly, I would like to provide some thoughts on our outlook. Last March, we suspended our practice of providing full-year guidance due to the heightened level of unpredictability and volatility caused by COVID. Although the environment has not stabilized enough for us to resume providing full-year guidance, we are in a position to provide insight into what we expect for revenue in the first half of the year. Historically, we see a drop in the first quarter compared to the preceding fourth quarter, as many health plans reset on January 1st. Add to that the continued pressure we experienced from elective procedures so far this quarter, we expect our first quarter product revenue to be in the range of $13 to $14 million. We believe this pressure will continue through the second quarter, but that we may see elective procedure volumes improve in Q3 as vaccines become more widely available. With that, let me turn the call back over to Mark.