Conformis, Inc.

Good morning and welcome to the third quarter 2022 earnings conference call for Conformis, Inc. My name is Shannon and I will be your conference operator today. All lines have been placed on listen-only mode to prevent any background noise. After management's remarks, there will be a question and answer session. I would like to remind you that this call will 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 1995. Any statements made during this call that are not statements of historical facts should be considered forward looking. 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 sections of conformance public filings with the US Securities and Exchange Commission. You should not place undue reliance on these forward-looking statements. Conformance 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, November 2nd, 2022. I will now turn the call over to Mark Agusti, President and Chief Executive Officer of Conformis.

Thank you, operator. With me today is our CFO, Bob Howell. We appreciate you taking the time to hear our business update. I will start by reiterating that we remain confident in our long-term growth strategy. We're gaining traction with Imprint and Platinum Services, which I'll elaborate on in a moment. However, translating our growing surgeon and patient interest in the top line revenue is taking longer than we initially expected. Based on that, we are taking proactive measures with our cost structure to improve our overall cash management. This will result in deliberate expense control efforts that do not impact our long-term opportunity, but do help us in the short term as we execute on our strategy. Bob will share more details on this shortly. We had a good quarter of awareness of our platinum services program for personalized needs. On top of this, we had several positives in the third quarter. One, we initiated the full commercial launch of our imprinting. Two, we formally transitioned to our new platinum services model on September 1st. Three, we received five 10K clearance of the Acterra HIP system and are positioned to launch the limited market release shortly. And four, our international sales grew 5% in constant currency, primarily through our continued progress in Australia. As we execute on our strategic pivot, our near-term performance is driven by two initiatives. Our imprinting system continues to receive great reviews from surgeons that use it. Imprint combines several of the best features of our fully personalized solution with aspects of a traditional off-the-shelf system. So it is truly in a category by itself. Adoption continues to ramp and we now have imprint on contract with approximately 90% of our current customers. We continue to focus on field training and on a focus to the ASCs to increase our overall penetration there. Interest with our new platinum services program continues to gain traction as evidenced by the fact that we added to the number of facilities under contract. We increased the number of healthcare facilities enrolled to 49 at the end of the third quarter, up from 21 through the end of second quarter. We formally transitioned to the new business model on September 1st. So going forward, our fully personalized needs are only available through the Platinum Services program. We've been pleased with the interest we received from surgeons needing conformance for those who have not ordered from us longer than a year. For example, Platinum Services orders were up 4X in September over what they were in the five months leading up to the transition. In terms of our entire product portfolio, we have not seen much change in the overall macro environment. We're still experiencing higher than normal cases that are being rescheduled or canceled due to labor and supply chain challenges. This continues to lead to tight product deliveries and, at times, the need to reschedule surgical cases. In addition, we continue to focus on penetrating the ASC segment as reflected by the growth in revenue for this site of care over Q3 2021. Moving on to an update on our pipeline, We held our own in the quarter. For Actair, we continue to build inventory to support our limited market release and expect the first procedure to be done shortly. We're excited about the product design and feel it will position us well to address the growing position interest in interior hip procedures. The other major project is our porous coated knee. On a positive note, we have submitted our regulatory package to the FDA. However, supply chain challenges remain a headwind. We're exploring options to expedite the timeline, but for now, we continue to expect a limited market release in early Q2 of next year. Lastly, as you saw, on October 26th, our shareholders approved additional ratios on a reverse stock split to help us regain compliance with NASDAQ listing requirements. The company's board of directors has determined to proceed with implementing the reverse stock split using the one for 25 ratio. The company is working with its transfer agent NASDAQ, and other applicable parties to implement the reverse stock split with an expected completion date in November of 2022. We will continue to provide updates via press release and a form A-K as this matter is finalized. I will now turn the call over to Bob for some more details about our financial performance for the quarter and our outlook.

Thank you, Mark, and good afternoon, everyone. Product revenue was in line with our expectations at $13.6 million. which was down 3% on a reported basis and 2% on a constant currency basis, versus the third quarter of last year. Within product revenue, our worldwide need business was down 1% on a constant currency basis, and our HIP business was down 19%. As Mark mentioned, our international need business was up 5% on a constant currency basis due to strong growth in Australia. Product gross margin for the third quarter was 34.6%. slight sequential decline of 50 basis points as compared to the second quarter. While we continue to face headwinds from increased material and labor costs, and we work through some initial transition inefficiencies related to our new business model, we are focused on making the necessary changes to improve our operations. For the fourth quarter, we expect product gross margin to sequentially improve to the upper 30s. As we head into 2023, this metric should continue to improve as imprint and platinum services becomes a larger portion of our product mix and we make efficiency improvements in our business model transformation. I will now move to OpEx where we continue to manage our costs. Our total operating expenses for the third quarter were $16.8 million, which was $1.4 million lower than the second quarter and down 3% versus the third quarter of last year. As Mark mentioned, we recently implemented a cost reduction plan related to our OpEx structure. This plan is anticipated to stay in place until we regain top line momentum. We're currently targeting to reduce annual variable and employee related expenses by 10 to 12 million, the majority of which will impact 2023. Several initiatives have already been put in place with others to be implemented this quarter and into early 2023. These expense reductions will not impact our porous knee and acterra hip new product development, nor will we significantly reduce our investments in sales and marketing programs focused on driving greater imprint and platinum services adoption. We believe these cash-shaving actions will have limited to no impact on our long-term opportunity, but they will help us maximize our cash near-term. For the full year of 2022, we now expect our OPEX to be between $73 to $75 million, which is lower than the guidance range we provided back in August, where we indicated we would be at the low end of our previous range of 75 to 81 million. Moving to our balance sheet, we have cash and cash equivalents of 59.6 million at the end of the third quarter. Our level of cash use will continue to fluctuate quarter to quarter near term, and as highlighted last quarter, we expect to increase inventory over the next few quarters to support our product launch cadence, which includes the full commercial launch of imprint, and the limited market release of our actuarial hip and porous-coated knee. We expect additional inventory investment to be between $2 million to $4 million over the next few quarters. In terms of outlook, we expect our fourth quarter product revenue to be between $13 million to $14 million. This puts us at the low end of the $57 million to $61 million range for the year we established back in August. We believe our revenue performance has been impacted by transitioning our existing customers to our new product offerings, and by continuing supply chain and operational challenges. At this point, we expect one to two quarters of top line pressure as we complete the transition to our new business model. While this is disappointing, we believe the impact will be relatively short term, and then after we work through these challenges, we'll return to growth. With that, Mark and I are happy to take your questions.