Conformis, Inc.
Q1 2020 Earnings Call Transcript

Published: 12 May 2020

[Operator:]

Good afternoon. My name is Kevin and I'll be your conference operator today. At this time, I would like to welcome everyone to Conformis First Quarter 2020 Earnings Conference Call. [Operator Instructions]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 the federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.Any statements contained in this call that are not statements of historical facts should be considered forward-looking statements. All forward-looking statements including without limitation statements about Conformis' strategy, future operations, and expectations, the anticipated impact of the novel coronavirus pandemic and the actions Conformis is taking and playing in response.Whether or when restrictions on elective surgeries will be relaxed and demand for procedures will increase. Future financial position and results. Gross margin, product margin, operating trends, financial guidance, market growth, total revenue, mix by product and geography.The anticipated of timing of Conformis product launches, the potential impact and advantages of using personalized implants, business initiatives and transitions in our commercial operations are based upon current estimates and various assumptions.These statements of our material risk and uncertainties that can call actual results or events should materially differ from those anticipated or implied by these forward-looking statements, including those discussed in the risk factor section of Conformis public filings with the U.S. Securities and Exchange Commission.Accordingly you should not place under reliance on these forward-looking statements while Conformance may elect to update these forward-looking statements at some point in the future. Conformis disclaims any obligation expected except as required by law to update revise and these financial projections and forward-looking statements.Whether because of new information and future events or otherwise. This conference call contains time sensitive information and is accurate only as of the live broadcast today, May 11, 2020.I will now turn the call over to Mark Augusti, Conformis' President and Chief Executive Officer. Mark?

[Mark Augusti:]

Thank you, operator. And welcome everyone to Conformis' first quarter 2020 earnings conference call. With me on the call today are CFO Bob Howe. During the call, we will share prepared remarks on a variety of topics including our first quarter financial and operating performance as well as comments related to the COVID-19 pandemics impact on our operations.Following the prepared remarks, we look forward to answering your questions. On March 23rd 2020, we withdrew our full-year growth targets and noticed that it was due to the COVID-19 pandemic and its impact on orthopedics scheduled surgery. This is disappointing because 2020 had gotten off to a solid start.We gave in our release that while these estimates are no longer accurate or reliable as of March 12, 2020. Our best leading estimates had indicated that for Q1 our global product revenue has been approximately 3% lower than revenue in Q1 2019 an improvement from the 10% decline in the prior quarter.Additionally, leading indicators for Q2 2020 had projected returns positive growth with global product revenue growth estimated to increase 8% versus prior year. Only purport these numbers again to place the first quarter actual performance in context of the pandemic impact.Our first quarter revenue declined of around 20% was clearly due to the drop-off in elective surgery in March of this year. Prior to market production and scheduled orthopedic procedures, we had been experiencing uptick in our order rate.This was I believe due to two positive trends, positive feedback and uptick in our new hip franchise, believe in more in view to the positive feedback and interest in our new Identity knee launch. The Identity product team delivered a great product concept and roll-out, the time the investors been unfortunate.This pandemic and the response by national local governments across the globe is unprecedented in our lifetimes and sit proud of the Conformis team and where colleagues have responded. From a leadership perspective, we have sought to protect their employees and their families, protect our production capability, protection for our patients and customers, and communicate.To that end, we have a lot of those employees who are able to do so to work remotely. For our product employees who cannot work remotely, we have among other actions implemented enhanced cleaning, encouraged employees practice social distancing in common areas, elected physical barriers where possible and limited visitors.In addition, we've continued to monitor our supply channel and are not currently aware of any potential concerns. As report to our March 23rd, however work towards to make the difficult position of furlough roughly 1/3rd of our workforce and substantially all of our temporary workforce.Subsequent to this and as a result great efforts by our finance time and outside advisors. On April 17th we're able to secure a Paycheck Protection Program aka PPP loan of approximately $4.7 million. This government released a lot of us to bring back almost all of our furloughed employees.We sure there will be many questions about the ramp-up of those scheduled surgery. While we are pleased to see the beginnings of the resumption of scheduled surgery, we will not be providing any new guidance for 2020 due to the continuing uncertainty in the ramp-up as a result of different policies across multiple states and counties.And of course concerned about possible falls based in COVID-19 infection that would potentially lead through a new surgical interruptions. We can relate that our April revenue decline was approximately 90% to 95% of the prior year. I would like to note that Conformis does not have any revision oncology or trauma orthopedic products but would have been acute or considered essential surgery.As such, among orthopedic companies, we're likely one of the most heavily weighted to its pure primary elective to the joint replacement. Happily, as indicated earlier, I can say that we have certainty the uptick in both orders and surgeries at last week of April and this first week in May.Before I provide further comment and thoughts as I will do later on about the remainder of the year, let me now turn the call over to Bob for more detailed financial review of Q1. Bob?

[Bob Howe:]

Thank you, Mark. And thank you everyone for joining us. Before I begin the financial review, I want to share change in the level of detail we'll be reporting on our revenue results. Going forward, we will be quoting revenue at the total knee and hip level.While we will conclude, we will continue to provide business updates on new products. We will no longer be providing product level revenue details. As you know, with the launch of our hip product, we are now no longer just the knee company and as such we believe it is appropriate to migrate our reporting to align with these two major product categories.And it will also be consistent with our major competitors report their orthopedic results.I'll now move on to the financial review. We reported first quarter revenue of $16.5 million representing a decrease of 20% or $4.2 million year-over-year on a reported basis. Excluding the negative impact of changes in foreign currency exchange rate of $32,000 revenue decreased 20% on a constant currency basis.Revenue in the first quarter of 2020 and 2019 includes royalty revenue of an $185,000 and a $175,000 respectively related to patent license agreements. First quarter product revenue was $16.3 million representing a decrease of $4.2 million or 20% year-over-year for reported and constant currency basis.Sales on our new products declined $4.1 million to $15.8 million or 21% year-over-year on a reported and constant currency basis. Sales in our Conformis hip system was 441,000 a decrease of 10% year-over-year on both of reported and constant currency basis. U.S. product decreased $3.8 million to $13.8 million or 21% year-over-year.U.S. sales on our knee products declined $3.7 million to $13.4 million or 22% year-over-year. First quarter U.S. product revenue represented 85% of the total product revenue compared to 86% for the same quarter last year. Rest of World product revenue was $2.5 million a decrease of $406,000 or 14% year-over-year on a reported basis and 13% on a constant currency basis.Product sales in new countries as well as growth in the U.K. helped partially offset the negative impact of the COVID-19 global pandemic. With that, I'll now move to review our results across the rest of the P&L.First quarter gross margin was 44% of revenue compared to 48% of revenue for same quarter last year a 380 basis point decrease. The decrease in gross margin was driven primarily by lower volumes and an increase in the inventory reserve for unused product.The increase in reserves factors in at the higher-to-normal delayed surgery as a result of the COVID-19 pandemic. Total operating expenses decreased $1.1 million to $15.3 million or 7% year-over-year. This decrease was driven by a 20% reduction in our sales and marketing expenses primarily as a result of lower variable cost due to decrease in revenue.Net loss was $9.4 million or $0.14 per share compared to net loss of $7.6 million or $0.12 per share for the same period last year. Net loss per share calculations as to weighted average shares outstanding of 67.3 million shares for the first quarter of 2020 compared to 62.8 million shares for the same period last year.Net loss in the first quarter including foreign currency exchange of spend of $714,000 compared to foreign currency expense of $653,000 in the same period last year. We had cash and cash equivalents totaling $21.5 million as of March 31st 2020 compared to $26.4 million as of December 31st 2019.Lastly, I want to close with a brief discussion on liquidity. As a result of the COVID-19 impact on elective procedures we're not expect to satisfy the trailing six months revenue covenant at the end of June 2020 which maybe an event after fall under the 2019 Secured Loan Agreement with Innovatus and East West Bank unless the parties agree to a new financial plan within 60 days after June 30th 2020.We've already begun discussion with Innovatus about the new plan and although we are still early in the stages of discussions, we believe we will be able to work in Innovatus and successfully without any issues that may arise. Under that assumption and with the $4.7 million PPP loan and a combination of Stryker milestone payments and in other nonalluded financing, we believe we can finance the company into Q2 2021.We will of course continually grieve you expenses closely and look for opportunities to reduce discretionary spending. With that let me turn the call back over to Mark to add additional color.

[Mark Augusti:]

Thanks, Bob. Always global pandemic has been a challenge for people all over the world. I want to acknowledge and thank the incredible employees of Conformis. Through their efforts we've continued to move the company forward and ready to support the resumption of schedule hip and knee replacement.Some of the specific actions we have undertaken are as follows. During the selling process, we proactively offered numerous virtual medical education sections for surgeons both domestically and international. We held a number of professional education events for our sales agents.In addition, as noted in our March 23rd release, you maintained our development activity and as a result of continued to progress our new product development programs. This included the activities going to the Stryker partnership. While on the subject of our work with Stryker, let me pause to provide a little more color on this partnership.As it is now and there's a significant shift in turning asset class into lower class space and care facilities such as hospital outpatient centers and ambulatory care centers. Of the 800,000 or so primary knees performed annually in the United States, some of what's indicate that more than 50% might be performed on outpatient basis in the next three to five years.We think the COVID-19 pandemic will accelerate the shift to ASC. In order to capitalize on this trend, Conformis and Stryker ended into a strategic collaboration over our Conformis business is designing of the point PSI, got it that create knee-in-a-box solution for the market leading Triathlon Total Knee System.We expect the Triathlon Knee-in-a-Box to be available in mid-2021 but of course actual commercial availability will up to Stryker. Continuing on other actions we have undertaken include our operations team has continued to produce implants for substantially all of the orders we had in-house before the pause in elective surgery.Today approximately 43% of those have already been implanted or scheduled to be implanted. We currently expect to see almost all of the remaining cases 90% or more to be rescheduled. Perhaps, most importantly we continue to receive Identity instrument parts and were able to build over 60 new sets during this pause.Now more than 100 Identity sets to deploy to the field immediately and we anticipate to achieve our goal of 500 new identity sets being available before year-end. While we cannot predict exactly how revenue will ramp during the resumption of orthopedic procedures.We are prepared to serve our customers and patients as we have in the past. We have seen our leading indicators clients since the week ending on April 11 which appears to have been our well clients. As we model various ramp scenarios, here is a list of some of the current working assumptions we have.The major Q2 and most of Q3 will be difficult to predict or with the bump even clear upward trend in resumption of joint replacement procedures. Elective surgeries will normalize in Q4 at 90% or more across the United States. Assuming there is no second pause in elective surgeries due to an uptick in COVID-19 infection rates.Elective surgeries will come back quicker in the U.S. than in Europe. We think as I've said the trend towards or ASC surgery will accelerate which is a good sign for Conformis given our end in efficient inventory model. We also think that reps will still be required for procedure support, give a credential and testing and personal protection equipment requirement will become more rigorous.As Bob indicated, we will continue to manage our business closely through this difficult time and adjust accordingly as circumstances dictate. Importantly in all scenarios we are looking at we believe we'll be ready to support our customers across all geographies as they resume their surgical schedules.Once again I would like to acknowledge and thank all the Conformis employees, consultant's advisors and customers that continue to shoulder on with us through this challenging time. All of your efforts and good will are greatly appreciated. Thank you.With that, I'll turn the call back to the operator and Bob and I are happy to take questions.

[Operator:]

[Operator Instructions] The first question comes from Joshua Jennings with Cowen.

[Joshua Jennings:]

Hi, good afternoon. Thanks for taking the questions. Mark, I was hoping to just touch on the new product launches primarily the Identity knee and the hip. How would you have us think about those launches in the setting of this COVID crisis?I mean, as you see recovery or will you be marketing those two platforms as aggressively as you would have been pre-COVID and how should we think about the ramp of two products.

[Mark Augusti:]

Yes, absolutely Josh. Like I said we had good headway going into this, going certainly into March on both those franchises. We continue to build hip inventory. So, we're going to be able to go after that new franchise as aggressively as we anticipated.We actually did a number of virtual teachings with new surgeons we've got new surgeons interested in the hip. So, the work side about that and the Identity was doing well as I mentioned. And the fact that we're able to continue to build sets I think is a big deal because now we had pent-up demand anyway and now we're going to be able to satisfy that demand with new sets.And we're seeing that as I indicated, we're seeing an uptick an early indicators in orders for Identity and for Hip.Getting some feedback Josh, I don’t know if that's your phone or something on the call. Operator, can you maybe --.

[Operator:]

Josh, I would say if you could just queue back up for your question further finish your questions out?

[Mark Augusti:]

Thanks. Thanks, operator.

[Joshua Jennings:]

[Indiscernible]

[Operator:]

Our next question comes from Steven Lichtman with Oppenheimer.

[Steven Lichtman:]

Hey.

[Mark Augusti:]

Yes, Steven.

[Steven Lichtman:]

Mark, you mentioned the number 90% a couple of times. I just want to clarify. So, I think you are saying sort of your going assumptions right now is that 4Q would be a sort of 90% or in other words like 10% down from last year. Is that right. And then, you also mentioned 90% of differed procedures will come back. So, could you talk a bit about where you're getting those sort of dead ladder assumption as well as there from your talks with Box in the field or anything else would be helpful.

[Mark Augusti:]

While not to confuse, you're right I mentioned 90 twice. One negatively and one positively; so they're confusing. And just to be clear, on the negative one it was really only for the month of April which we provided color on. And as I said we're already seeing upticks here in the early part of May.As far as Q4, we're obviously we're modelling a lot of different scenarios and at the end of the day you kind of have to take a view. But based on the surgeons I've talked to based on our field checks, also you have to remember we're a little more sort of north east and Mid-Atlantic heavy if you will on our businesses, a smaller market share player, Steve.But I kind of feel like our best modelling suggests we're going to be sort of 90% to a 100% of normal rate as the base case in Q4. I think there is a scenario that says it could be higher, given pent-up demand, there is obviously scenarios that say with maybe some of the restrictions and capacity.It could be challenging to do that but I think that Q4 will be sort of base case in that 90% to 100% of normalized demand.

[Steven Lichtman:]

And then what about these the procedures that are being differed today, is that also sort of you think that almost 90% or so of those could ultimately get done?

[Mark Augusti:]

Yes. We think they're going to get done. And so, we believe that they're going to pepper in over the coming month. I've seen this is probably the biggest debate right, people modelling Steve about certain patients are going to go away. They're not going to actually want to get their hip and knee done, whatever.I believe OA is a disease that progresses, I believe eventually they'll get done. So, what we're seeing from a Conformis perspective it is a lot of interest in scheduling those patients, a lot of interest in getting him back on the surgical calendar and getting them up and ready to go quickly. And so, as we indicated, of the cases we filled 43% already have been completed at surgery date.So, we expect another 47% to 50% to get into. We'll of the stuff we built, we expect we'll do it at least 90% of those, so of the inventory we built. So yes, there is the 90% number again but it's really it's we don’t expect, I see numbers of like 20% dropout and I wanted to put our stake in the ground, I don’t think we're going to.Again, I could be wrong but I don’t think we're going to see that. I think in the Conformis world where going to see most the 10% dropout.

[Steven Lichtman:]

Okay. And then just lastly, Mark. On your ASC comments, yes obviously there's been a lot of talk about potential acceleration in that shift and their ability to get up and running quicker.Are you seeing that yet or is it too early, I mean your business model does lend itself there more. Are you seeing that I know it can't be the theory but you're seeing that in actuality at any signs of that?

[Mark Augusti:]

So, I would say we're seeing the discussion and yes I can certainly point off to one or two customers that have absolutely indicated they're starting in the ASC first and we've seen some of those scheduled cases moved to the ASC or to the outpatient. And I've seen physicians talk about they want to do the healthier younger patients first as well younger relatively for away patients.And see if they want to in some cases move them to the ASC or to the outpatient center. I will tell you that our discussions have drastically picked up our contracts are discussing with customers around that. We are seeing market increase in those discussions in that ability.And that's the part of what is making the modelling challenging. I think could use talk to the historic players. They think there is you know there's not enough bandwidth there's not enough capacity you know in the ASC. Something like I think that's true if you're expecting the old mindset but Conformis customers know they can do more capacity with the Conformis model.And I think that's why we're seeing more interesting discussion. So, the question for us is one of our discussions translated to actual cases for us in the ramp-up for that. That's certainly again one of the models that we looked at and that's certainly would be in our upside scenario.

[Steven Lichtman:]

Got it, thanks Mark.

[Mark Augusti:]

Thanks, Steve.

[Operator:]

Our next question comes from Robert Marcus from JP Morgan.

[Unidentified Analyst:]

Hi, this is actually Lilly on for Robbie. Thanks for taking the question. Given the current economic environment, how are you thinking about the impact of your economic downturn on the business and to what extent is this contemplated in your expectation for getting back to 90% in the fourth quarter.I think that's a great question. As we look at a bunch of demand drivers and then we look at things that would be sort of demand breaks if you will and it's this part about unemployment and the concerned around that is come up a lot recently about what people have insurance coverage or not and what the demand be there.They want to take half work. And I think that's a fair point. I think it's a fair point but I look at it and say at least past demand is Medicare so I think that's going to be okay. And then you look at the employment and commercial, then you look at will they have insurance coverage or not insurance or will that be like and will they get it done.And so, it's really a tough one but I sort of believe that there is enough other positive things driving it that it won't be that much of a drag. I would say I'm actually probably a little more worried about people just feeling they want to get back to their houses and be safe. But I really starting to see a lot of the communications from households.I mean people are adjusting, I've seen a lot of prerecorded video messages and calls of surgeons about how they're reassuring their patients about their journey to have the procedure and the testing and COVID-free environment. Again, I think this is another reason why we will point to a doubt patient.And I can see because they can control things better there. So well, it's a concern that's one of the reasons why I'm I kind of say the 90% to 100%. I think there's a scenario work to be more than a 100% if unemployment is better than anticipated in the fourth quarter.

[Unidentified Analyst:]

Great, thank you. And one quick follow-up. And you augmented fairly aggressive cost cutting initiatives. How do you think these steps could impact your ability to ramp-up and be competitive in the second half of the year and in 2021? Thanks.

[Mark Augusti:]

Well, I'd like to say that due to the loan that we received and I know we were fortunate to be able to get that as a smaller company.It's actually not as bad as we probably would have to get to because we're able to bring employees back and then work down work on not only our backlog but also continue to -- we'll skip a little detail but as we've seen our March 23rd and now we continued on the manufacturing developments from a R&D standpoint.But many of our programs now are moving to what we call manufacturing validations about and we needed operational employee support to do those. So, being able to bring some of those people back to work on a couple of our programs like for instance our cementless and what not.Where it's a nice juncture. So, that allowed us to keep those schedules moving forward. So, I feel good about that, I think there will be some cost cutting around travel and I think there's going to be less than person met at and so those are I think they're going to be well tolerated and understood because of the nature of the environment actually.But will as we said we're going to look at all things as we see the different scenarios to play out and we'll adjust and our expenses and support activities around the scenarios as they happen. Okay?

[Operator:]

Thank you. [Operator Instructions] And I'm not showing any further questions at this time. I'd like to turn the call back to our host.

[Mark Augusti:]

Okay, alright. Well thank you, I appreciate it operator. And thank you everybody.

[Operator:]

Ladies and gentlemen, that concludes today's presentation. You may now disconnect and have a wonderful day.