CONFORMIS, INC.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to promote an understanding of the
financial condition and results of operations and should be read in conjunction
with our consolidated financial statements and related notes appearing elsewhere
in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the
year ended December 31, 2022 . Some of the information contained in this
discussion and analysis or set forth elsewhere in this Quarterly Report on
Form 10-Q, including information with respect to our plans and strategy for our
business, includes forward-looking statements that involve risks and
uncertainties. As a result of many factors, including those factors set forth in
the ''Risk Factors'' section of our Annual Report on Form 10-K for the fiscal
year ended December 31, 2022 , our actual results could differ materially from
the results described, in or implied, by these forward-looking statements.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that
involve substantial risks and uncertainties. All statements, other than
statements of historical facts, contained in this Quarterly Report on Form 10-Q,
including statements regarding our strategy, future operations, future financial
position, future revenue, projected costs, prospects, our ability to raise
additional funds, plans and objectives of management, effects of pandemics or
other widespread health problems, and expected market growth are forward-looking
statements. These statements involve known and unknown risks, uncertainties and
other important factors that may cause our actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements.
The words "anticipate," "believe," "continue," "could," "estimate," "expect,"
"intend," "may," "might," "plan," "potential," "predict," "project," "should,"
"target," "will," or "would" or the negative of these terms or other similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain these identifying words.
These forward-looking statements include, among other things, statements about:
•whether our capital resources will be adequate to meet the needs of our business and our ability to raise any additional capital;
•our ability to continue as a going concern;
•our estimates regarding the potential market opportunity and timing of estimated commercialization for our current and future products, including our iUni, iDuo, iTotal CR, iTotal PS, iTotal Identity, Identity Imprint, Cordera hip system, Actera Hip System and the planned launch of our new product extensions, including the cementless option of the Identity Imprint knee platform and our Platinum Services? Program; •our expectations regarding the transition of ourU.S. knee implant business to Identity Imprint™ and our new Image-to-Implant® Platinum Services? Program offering, and related operational and regulatory risks we may be exposed to as a result of such transition;
•our expectations regarding our sales, expenses, gross margin and other results of operations;
•our strategies for growth and sources of new sales;
•maintaining and expanding our customer base and our relationships with our independent sales representatives and distributors;
•our current and future products and plans to promote them;
•the anticipated trends and challenges in our business and in the markets in which we operate;
•the implementation of our business model, strategic plans for our business, products, product candidates and technology;
•our ability to successfully develop and commercialize planned products and services;
•the future availability of raw materials used to manufacture, and finished components for, our products from third-party suppliers, including single source suppliers; •product liability claims;
•litigation claims against Aetna;
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--------------------------------------------------------------------------------•patent infringement claims;
•our ability to retain and hire necessary employees and to staff our operations appropriately;
•our ability to compete in our industry and with innovations by our competitors;
•potential reductions in reimbursement levels by third-party payors and cost containment efforts of accountable care organizations;
•our ability to obtain reimbursement or direct payment for our products and services;
•our ability to protect proprietary technology and other intellectual property and potential claims against us for infringement of the intellectual property rights of third parties; •potential challenges relating to changes in and compliance with governmental laws and regulations affecting ourUnited States and international businesses, including regulations of theU.S. Food and Drug Administration (the "FDA") and foreign government regulators, such as more stringent requirements for regulatory clearance of our products; •potential further negative impacts related to the COVID-19 pandemic, including with respect to the magnitude of further resurgent case waves, the effectiveness of vaccines against current and future variant strains and public adoption rates of vaccines (including booster shots), and the actions that we have taken and are planning in response, including our ability to continue production and manufacturing activities at desired levels, the reliability of our supply chain, the pandemic's effect on labor conditions, our ability to meet obligations and covenants under our loan agreements, the duration of decreased demand for our products, and whether or when the demand for elective surgery procedures will increase; and
•our ability to satisfy all applicable NASDAQ continued listing requirements;
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the "Risk Factors" section, that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, collaborations, joint ventures or investments that we may make or enter into. You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q and our other filings with theSEC completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Trademarks Solely for convenience, our trademarks and trade names in this report are referred to without the ® and ™ symbols, but such references should not be construed as any indicator that we will not assert, to the fullest extent under applicable law, our rights thereto. 29 --------------------------------------------------------------------------------
Overview
We are a medical technology company and innovator in the orthopedic industry since our founding in 2004. In particular, we believe that we are a leader in the development, manufacturing, and sales of patient-specific products and instrumentation that are individually sized and shaped to fit each patient's unique knee and hip anatomy. The worldwide market for total knee and hip replacement products is approximately$17 billion annually. In theU.S. elective total joint procedures are shifting from the hospital to outpatient facilities and ambulatory surgery centers ("ASCs"). We believe that approximately 50% of all primary hip and knee procedures will be performed in ASCs within the next five years. A key driver in the outpatient shift of orthopedic procedures is the ongoing changes by theCenters for Medicare & Medicaid Services ("CMS"). In recent years, CMS removed key musculoskeletal services from the inpatient-only list, including total knee arthroplasty in 2018 and total hip arthroplasty in 2020. CMS also continues to expand the ASCs covered procedure list, including total knee arthroplasty in 2020 and total hip arthroplasty in 2021. As healthcare costs rise, governments and government agencies, including CMS, are looking to reduce their healthcare expenditures markedly through reimbursement reductions and cost-shifting to patients. OnJanuary 6, 2022 , we announced the launch of our new Image-to-Implant® Platinum Services? Program, a premium service offering for the U.S. market. New to orthopedics, this program addresses the rapidly evolving demands of the healthcare marketplace where generic products are being commoditized and patients are increasingly willing to pay a premium for deluxe services. As ofSeptember 1, 2022 ,U.S. medical facility customers are only able to obtain our fully personalized iTotal Identity knee system through participation in our Image-to-Implant Platinum Services? Program. Both Medicare and most commercial payors permit patients to pay out-of-pocket for non-covered, deluxe services. Through the Image-to-Implant® Platinum Services? Program,Conformis is bringing this approach to orthopedics by enabling participating medical facilities to establish and offer patients an out-of-pocket services upgrade to obtain the Company's fully personalized iTotal Identity™ knee system. Combined with our new Made-to-Measure Identity Imprint™ knee system, we believe that we now address multiple market segments within knee arthroplasty: •the Identity Imprint™ knee system provides a data-informed high-quality knee implant system that provides a level of personalization through its patient-specific instruments ("PSI") and proprietary algorithms for pre-surgical planning, but is only available in pre-designed standard sizes, all at a price comparable to standard off-the-shelf options; and •the Image-to-Implant® Platinum Services? Program gives patients inthe United States the opportunity to upgrade to a fully-personalized iTotal Identity™ knee implant system by paying an incremental deluxe services fee. As ofDecember 31, 2022 , we had sold a total of more than 149,000 knee implants, including more than 123,000 total knee implants and 26,000 partial knee implants. In multiple clinical studies, iTotal CR, our cruciate-retaining total knee replacement implant, demonstrated superior clinical outcomes, including with respect to function, kinematics and objective functional measures, and greater patient satisfaction compared to those of standard, or off-the-shelf, implants that it was tested against. OnAugust 16, 2021 , the first procedure was performed using the Imprint knee replacement system. Imprint, available in both cruciate retaining ("CR") and posterior stabilized ("PS") implants, utilizes a proprietary algorithm to select the appropriate implant size from 12 standard sizes that most closely meet the geometric and anatomic requirements of the patient's knee based on the individual's CT scan. As with our personalized iTotal knee product line, Imprint uses our sterile Surgery-in-a-Box delivery system, which we believe provides ASCs and hospitals with greater procedural efficiency and improved sterilization cost savings over comparable systems. With the interest in our Imprint system from ASC customers, we have prioritized applying our porous-coated technology to the Imprint system which will be our first cementless TKA product offering. We are targeting a limited commercial launch of the porous-coated technology in the second half of 2023, however the launch may be delayed to the first half of 2024 due to regulatory or technical challenges. OnNovember 11, 2019 , we entered full commercial launch of theConformis personalized hip system, now branded as Cordera Rx. Since the launch of the personalized hip system, we have introduced multiple product line extensions including Cordera Standard,Cordera Pro and Cordera Match. InNovember 2022 , we completed the first procedure using our Actera™ Hip System, a second hip stem within our hip portfolio. The system, designed for hip reconstruction, uses the cutting-edge tri-taper stem design, and features a range of sizes and angles derived from our data analytics. This cementless hip stem component features a proximally coated titanium spray with a 30 -------------------------------------------------------------------------------- hydroxyapatite layer to encourage initial and long-term fixation. We believe that the system's tri-taper stem design will enable surgeons to treat a broader range of patient anatomies and the shorter length options offer easier access to the femur while maintaining the fixation and integrity required for long term success of the implant. For the initial limited launch, the Actera™ Hip System will feature a range of standard sizes in both stem and cup components. We plan to launch future Actera™ line extensions that will offer additional personalization options for surgeons to choose what best fits their patients, even for complex anatomies. The new system is currently rolling out to select sites across theU.S. , and we currently anticipate the commercial launch to occur in mid-2023. All of our currently marketed knee and hip replacement products and related design software have been cleared by theU.S. Food and Drug Administration (the "FDA") under the premarket notification process of Section 510(k) of the federal Food, Drug, and Cosmetic Act (the "FDCA"). We have received CE Certificates of Conformity allowing us to affix the CE Mark. We market our products and services to orthopedic surgeons, hospitals, and other medical facilities, and patients. We use direct sales representatives, independent sales representatives and distributors to market and sell our products inthe United States ,Germany , theUnited Kingdom ,Austria ,Ireland ,Switzerland ,Spain ,Portugal ,the Netherlands ,Belgium , the Dutch Antilles,Brazil , Suriname,Australia , theUnited Arab Emirates , the Sultanate ofOman ,Italy ,Poland and other markets.
We were incorporated in
COVID-19 Pandemic Update
InDecember 2019 , a human infection originating inChina was traced to a novel strain of coronavirus. The virus subsequently spread to other parts of the world, includingthe United States andEurope , and caused unprecedented disruptions in the global economy as efforts to contain the spread of the virus intensified. InMarch 2020 , theWorld Health Organization declared this coronavirus outbreak (COVID-19) to be a pandemic. We experienced significantly decreased demand for our products during the pandemic as healthcare providers and individuals de-prioritized and deferred medical procedures deemed to be elective, such as joint replacement procedures, which had a significant negative effect on our revenue. In the third and fourth quarters of 2021, the Company experienced higher levels of deferred and rescheduled knee and hip procedures as a result of the surge in COVID-19 cases associated with the Delta and Omicron variants. During the first quarter of 2022,United States case counts peaked in January and then trended downward for the remainder of the year. The future progression of the pandemic remains uncertain.
Components of our results of operations
The following is a description of factors that may influence our results of operations, including significant trends and challenges that we believe are important to an understanding of our business and results of operations.
Revenue
Our product revenue is generated from sales to hospitals and other medical facilities that are served through a direct sales force, independent sales representatives and distributors inthe United States ,Germany , theUnited Kingdom ,Switzerland ,Australia , and other markets. In order for surgeons to use our products, the medical facilities where these surgeons treat patients typically require us to enter into pricing agreements. The process of negotiating a pricing agreement can be lengthy and time-consuming, requiring extensive management time and may not be successful. Revenue from sales of our products fluctuates principally based on the selling price of the joint replacement product, as the sales price of our products varies among hospitals and other medical facilities. In addition, our product revenue may fluctuate based on the product sales mix and mix of sales by geography. Our product revenue from international sales can be significantly impacted by fluctuations in foreign currency exchange rates, as our sales are denominated in the local currency in the countries in which we sell our products. We expect our product revenue to fluctuate from quarter-to-quarter due to a variety of factors, including seasonality, as we have historically experienced lower sales in the summer months and higher sales around year-end, the timing of the introduction of our new products, if any, and the impact of the buying patterns and implant volumes of medical facilities. 31 -------------------------------------------------------------------------------- Royalty and licensing revenue for the three months endedMarch 31, 2022 includes revenue of$0.5 million generated from our license agreement (the "License Agreement") with Paragon 28. Ongoing royalty revenue is generated from our license agreement (the "MicroPort License Agreement") withMicroPort Orthopedics Inc. , a wholly owned subsidiary of MicroPort Scientific Corporation, or collectively,MicroPort . The MicroPort License Agreement will expire upon the expiration of the last to expire of our patents and patent applications licensed toMicroPort , which currently is expected to occur in 2031. We provide certain information regarding our financial results or projected financial results on a non-GAAP "constant currency basis." This information estimates the impact of changes in foreign currency rates on the translation of our current or projected future period financial results as compared to the applicable comparable period. This impact is derived by taking the adjusted current or projected local currency results and translating them intoU.S. dollars based upon the foreign currency exchange rates for the applicable comparable period. It does not include any other effect of changes in foreign currency rates on our results or business. Non-GAAP information is not a substitute for, and is not superior to, information presented on a GAAP basis. This non-GAAP financial measure may be different from non-GAAP financial measures used by other companies, limiting its usefulness for comparison purposes. Moreover, presentation of revenue on a constant currency basis is provided for year-over-year comparison purposes, and investors should be cautioned that the effect of changing foreign currency exchange rates has an actual effect on our operating results. We consider the use of a period over period revenue comparison on a constant currency basis to be helpful to investors, as it provides a revenue growth measure free of positive or negative volatility due to currency fluctuations.
Cost of revenue
We produce our computer aided designs, or CAD, in-house and inIndia and use them to direct most of our product manufacturing efforts. We manufacture all of our patient-specific instruments, or iJigs, tibial trays used in our total knee implants, and polyethylene tibia tray inserts for our iTotal CR and our iTotal PS product, in our facility inWilmington, Massachusetts . We polish our femoral implants used in our total and partial knee products in our facility inWallingford, Connecticut . Starting in 2019, we began to manufacture the lateral partial tibial tray components in our facility inWilmington, Massachusetts . We outsource the production of the remainder of the partial knee tibial components, femoral castings, and other knee and hip components to third-party suppliers. Our suppliers make our personalized implant components using the CAD designs we supply. Cost of revenue consists primarily of costs of raw materials, manufacturing personnel, outsourced CAD labor, manufacturing supplies, inbound freight, manufacturing overhead, and depreciation expense. We calculate gross margin as revenue less cost of revenue divided by revenue. Our gross margin has been and will continue to be affected by a variety of factors, including primarily volume of units produced, mix of product components manufactured by us versus sourced from third parties, our average selling price, foreign exchange rates, the geographic mix of sales, product sales mix, manufacturing efficiencies, raw material costs, the number of cancelled sales orders resulting in wasted implants, and royalty revenue. We expect our gross margin from the sale of our products, which excludes royalty and licensing revenue, to expand over time to the extent we are successful in reducing our manufacturing costs per unit, increasing our manufacturing efficiency, and increasing sales volume through the launch of Identity Imprint™ and our Image-to-Implant® Platinum Services? Program. We believe that areas of opportunity to expand our gross margin in the future, if and as the volume of our product sales increases, include the following: •absorbing overhead costs across a larger volume of product sales; •increased sales mix of our higher margin Identity ImprintTM product and an increased selling price as a result of our Image-to-Implant® Platinum Services? Program; •obtaining more favorable pricing for the materials used in the manufacture of our products; •obtaining more favorable pricing of certain components of our products manufactured for us by third parties; •increasing the proportion of our CAD design activities that is performed in-house at ourIndia facility; •developing new versions of our software used in the design of our joint replacement implants, which we believe will reduce costs associated with the design process; and •improving the efficiency of our internal manufacturing processes. 32 --------------------------------------------------------------------------------
We also continue to explore other opportunities to reduce our manufacturing costs. However, these and the above opportunities may not be realized. In addition, our gross margin may fluctuate from period to period.
Operating expenses
Our operating expenses consist of sales and marketing, research and development and general and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, stock-based compensation, and sales commissions. Sales and marketing. Sales and marketing expense consists primarily of personnel costs, including salary, employee benefits and stock-based compensation for personnel employed in sales, marketing, customer service, medical education and training, as well as investments in surgeon training programs, industry events and other promotional activities. In addition, our sales and marketing expense includes sales commissions and bonuses, generally based on a percentage of sales, to our sales managers, direct sales representatives and independent sales representatives. Recruiting, training and retaining productive sales representatives and educating surgeons about the benefits of our products are required to generate and grow revenue. We expect sales and marketing expense to decrease in 2023 as part of our cost reduction plans. Our sales and marketing expense may fluctuate from period to period due to the seasonality of our revenue and the timing and extent of our expenses. Research and development. Research and development expense consists primarily of personnel costs, including salary, employee benefits and stock-based compensation for personnel employed in research and development, regulatory and clinical areas. Research and development expense also includes costs associated with product design, product refinement and improvement efforts before and after receipt of regulatory clearance, development of prototypes, testing, clinical study programs and regulatory activities, contractors and consultants, and equipment and software to support our development. As our revenue increases, we will also incur additional expense for revenue share payments to our past and present scientific advisory board members, including one of our past directors. We expect research and development expense to decrease in 2023 as part of our cost reduction plans. General and administrative. General and administrative expense consists primarily of personnel costs, including salary, employee benefits and stock-based compensation for our administrative personnel that support our general operations, including executive management, general legal and intellectual property, finance and accounting, information technology and human resources personnel. General and administrative expense also includes outside legal costs associated with intellectual property and general legal matters, financial audit fees, insurance, fees for other consulting services, depreciation expense, long-lived asset impairment charges, freight, facilities expense, allocation of manufacturing training costs, and severance expense. We expect our general and administrative expense to decrease in 2023 primarily due to lower litigation and other expenses associated with our cost reduction plans. Our general and administrative expense may fluctuate from period to period due to the timing and extent of the expenses.
Total other (expenses) income, net
Total other income (expenses), net consists primarily of interest expense and amortization of debt discount associated with our term loans outstanding during the year, gain on forgiveness of PPP loan, income related to the development agreement with Stryker, and gains (losses) from foreign currency transactions. The effect of exchange rates on our foreign currency-denominated asset and liability balances are recorded as foreign currency translation adjustments in the consolidated statements of comprehensive loss.
Income tax provision
Income tax provision consists primarily of a provision for income taxes in
foreign jurisdictions in which we conduct business. We maintain a full valuation
allowance for deferred tax assets including net operating loss carryforwards and
research and development credits and other tax credits.
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--------------------------------------------------------------------------------Consolidated results of operations
Comparison of the three months ended
The following table sets forth our results of operations expressed as dollar
amounts, percentage of total revenue and year-over-year change (in thousands):
2023 2022 2023 vs 2022
As a% of As a% of
Total Total $ %
Three Months Ended March 31, Amount Revenue Amount Revenue Change Change
Revenue
Product revenue $ 12,691 99 % $ 14,884 96 % $ (2,193) (15) %
Royalty and licensing 146 1 667 4 (521) (78)
Total revenue 12,837 100 15,551 100 (2,714) (17)
Cost of revenue 7,734 60 9,810 63 (2,076) (21)
Gross profit 5,103 40 5,741 37 (638) (11)
Operating expenses:
Sales and marketing $ 5,051 39 % $ 6,665 43 % $ (1,614) (24) %
Research and development 2,458 19 4,479 29 (2,021) (45)
General and administrative 7,023 55 9,333 60 (2,310) (25)
Total operating expenses 14,532 113 20,477 132 (5,945) (29)
Loss from operations (9,429) (73) (14,736) (95) 5,307 36
Total other (expenses) income, net (160) (1) (1,261) (8) 1,101 87
Loss before income taxes (9,589) (75) (15,997) (103) 6,408 40
Income tax provision (18) - 34 - (52) (153)
Net loss $ (9,571) (75) % $ (16,031) (103) % $ 6,460 40 %
Product revenue. Product revenue was $12.7 million for the three months ended
March 31, 2023 compared to $14.9 million for the three months ended March 31,
2022 , a decrease of $2.2 million or 15%. The decrease in product revenue was
primarily due to declines in U.S. knee orders following our business model
transition and manufacturing/supply chain challenges.
The following table sets forth, for the periods indicated, our product revenue
by geography expressed as U.S. dollar amounts, percentage of product revenue and
year-over-year change (in thousands):
2023 2022 2023 vs 2022
As a % of As a % of
Product Product $ %
Three Months Ended March 31, Amount Revenue Amount Revenue Change Change
United States $ 10,567 83 % $ 12,715 85 % $ (2,148) (17) %
Germany 826 7 1,177 8 (351) (30)
Rest of world 1,298 10 992 7 306 31
Product revenue $ 12,691 100 % $ 14,884 100 % $ (2,193) (15) %
Product revenue in the United States was generated through our direct sales
force and independent sales representatives. The percentage of product revenue
generated in the United States was 83% for the three months ended March 31, 2023
compared to 85% for the three months ended March 31, 2022 .
The United States product revenue decreased $2.1 million to $10.6 million or 17%
year over year. The decrease in product revenue was primarily due to declines in
U.S. knee orders following our business model transition and
manufacturing/supply chain challenges. Following the September 1, 2022
transition to the new business model, we have seen a reduction in our orders as
existing customers migrate to the new product and service offering.
Additionally, some of our existing customers have chosen not to offer our fully
personalized iTotal Identity product given it will require an out-of-pocket
patient pay upgrade and some have chosen not to order Identity Imprint given it
is not a fully personalized knee system. Germany product revenue decreased $0.4
million to $0.8 million , or 30% year over year on a reported basis and 26% on a
constant currency basis. We believe the decline was primarily due to continued
reimbursement headwinds from Medizinischer Dienst der Krankenversicherung
("MDK"), operational disruptions, and foreign currency exchange rates. Rest of
World product
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revenue increased $0.3 million to $1.3 million , or 31% year-over-year on a
reported basis and 39% on a constant currency basis. The increase is primarily
due to an increase in elective surgeries in the UK which were lower in the prior
period as a result of the COVID-19 pandemic, and growth in Australia .
Royalty and licensing revenue. Royalty and licensing revenue was $0.1 million
for the three months ended March 31, 2023 compared to $0.7 million for the three
months ended March 31, 2022 , a decrease of $0.5 million or 78%. The decrease in
royalty and licensing revenue was driven by $0.5 million in revenue recognized
under the License Agreement with Paragon 28 in the prior period.
Cost of revenue, gross profit and gross margin. Cost of revenue was $7.7
million for the three months ended March 31, 2023 compared to $9.8 million for
the three months ended March 31, 2022 , a decrease of $2.1 million , or 21%. Gross
profit was $5.1 million for the three months ended March 31, 2023 compared to
$5.7 million for the three months ended March 31, 2022 , a decrease of $0.6
million or 11%. Gross margin increased 290 basis points to 40% for the three
months ended March 31, 2023 from 37% for the three months ended March 31, 2022 .
The increase in gross margin was driven primarily by higher selling prices on
our fully personalized knees due to our Platinum Services? Program, volume
transition to our lower cost Imprint™ knee system, and decreased cancelled case
inventory expense partially offset by increased labor and material costs and
lower manufacturing volumes.
Sales and marketing. Sales and marketing expense was $5.1 million for the three
months ended March 31, 2023 compared to $6.7 million for the three months ended
March 31, 2022 , a decrease of $1.6 million or 24%. The decrease was due
primarily to lower tradeshow expenses of $0.5 million , commission expense of
$0.6 million , personnel costs of $0.4 million , and other expense of $0.1
million . Sales and marketing expense decreased as a percentage of total revenue
to 39% for the three months ended March 31, 2023 compared to 43% for the three
months ended March 31, 2022 .
Research and development. Research and development expense was $2.5 million for
the three months ended March 31, 2023 compared to $4.5 million for the three
months ended March 31, 2022 , a decrease of $2.0 million , or 45%. The decrease
was due primarily to a reduction in project related expenses of $0.7 million ,
personnel costs of $1.0 million , and revenue share expense of $0.3 million .
Research and development expense decreased as a percentage of total revenue to
19% for the three months ended March 31, 2023 compared to 29% for the three
months ended March 31, 2022 .
General and administrative. General and administrative expense was $7.0 million
for the three months ended March 31, 2023 compared to $9.3 million for the three
months ended March 31, 2022 , a decrease of $2.3 million , or 25%. The decrease
was primarily due to a decrease in litigation expense of $1.1 million ,
professional and outside services of $0.5 million , shipping costs of $0.3
million , personnel costs of $0.2 million , and other costs of $0.2 million .
General and administrative expense decreased as a percentage of total revenue to
55% for the three months ended March 31, 2023 from 60% for the three months
ended March 31, 2022 .
Total other (expenses) income, net. Other (expenses) income, net was $0.2
million of other expenses for the three months ended March 31, 2023 compared to
$1.3 million of other expenses for the three months ended March 31, 2022 , a
change of $1.1 million , or 87%. The change was primarily due to an increase in
foreign currency exchange transaction income of $1.3 million , partially offset
by higher interest expense of $0.2 million .
Income taxes. Income tax provision was
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Liquidity, capital resources and plan of operations
Reverse Stock Split
OnOctober 26, 2022 , our Board of Directors approved a 1-for-25 reverse stock split of our Common Stock ("Reverse Stock Split"), which was implemented inNovember 2022 . As a result of the Reverse Stock Split, each of the holders of our Common Stock received one (1) new share of Common Stock for every twenty-five (25) shares such shareholder held immediately prior. Fractional shares as a result of the Reverse Stock Split were paid in cash. The Reverse Stock Split also affected the Company's outstanding stock options and warrants and resulted in the shares underlying such instruments being reduced and the exercise price being increased proportionately to the Reverse Stock Split ratio. All share and per share information has been retroactively adjusted to give effect to the Reverse Stock Split for all periods presented, unless otherwise indicated. The total number of our authorized shares of preferred stock was not affected by the foregoing. However, the total number of our authorized common stock was decreased to 20,000,000 after giving effect to the Reverse Stock Split. In connection with the Reverse Stock Split, there was no change in the par value per share of$0.00001 .
Sources of liquidity and funding requirements
From our inception inJune 2004 through the three months endedMarch 31, 2023 , we have financed our operations primarily through private placements of preferred stock, our initial public offering in 2015, other equity financings, debt and convertible debt financings, equipment purchase loans, patent licensing, and product revenue beginning in 2007. We have not yet attained profitability and continue to incur operating losses and negative operating cash flows. As ofMarch 31, 2023 , we had an accumulated deficit of$590.9 million .
We expect to incur substantial expenditures in the foreseeable future in connection with the following:
•expansion of our sales and marketing efforts, including the expanded advertising of our Platinum Services? Program; •expansion of our manufacturing capacity; •funding research and development activities related to new and existing products, including our porous-coated technology for the Imprint system and Actera™ line extensions; •pursuing and maintaining appropriate regulatory clearances and approvals for our existing products and any new products that we may develop; and •enforcing our intellectual property rights and pursuing our claims against Aetna. We anticipate that our principal sources of funds in the future will be revenue generated from the sales of our products, potential future capital raises through the issuance of equity or other securities, available sales of shares under the Sales Agreement, or potential debt financings, and revenues that we may generate in connection with licensing our intellectual property. Additionally, in order for us to meet our long-term operating plan, revenue growth, gross margin improvements and leveraging operating expenses will be necessary to reduce cash used in operations. We will need to generate significant additional revenue to achieve and maintain profitability, and even if we achieve profitability, we cannot be sure that we will remain profitable for any substantial period of time. It is also possible that we may allocate significant amounts of capital toward products or technologies for which market demand is lower than anticipated and, as a result, abandon such efforts. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, or if we expend capital on projects that are not successful, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, and we may even have to scale back our operations. Our failure to become and remain profitable could impair our ability to raise capital, expand our business, maintain our research and development efforts or continue to fund our operations. OnMarch 23, 2020 , we filed a shelf registration statement on Form S-3 (the "Shelf Registration Statement"), which was declared effective by theSEC onAugust 5, 2020 . Under the Shelf Registration Statement, we are permitted to sell from time to time up to$200 million of common stock, preferred stock, debt securities, warrants, or units comprised of any combination of these securities, for our own account in one or more offerings. The Shelf Registration Statement is intended to provide us flexibility to conduct sales of our registered securities, subject to market conditions and our future capital needs. 36 -------------------------------------------------------------------------------- OnAugust 5, 2020 , we filed with theSEC a prospectus supplement, for the sale and issuance of up to$25 million of our common stock and entered into an ATM issuance sales agreement (the "Sales Agreement"), withCowen and Company, LLC ("Cowen"), pursuant to which we may offer and sell shares of the our common stock to or through Cowen, acting as agent and/or principal, from time to time in an "at-the-market" offering as defined in Rule 415 promulgated under the Securities Act of 1933, as amended, including without limitation sales made by means of ordinary brokers' transactions on the Nasdaq Capital Market or otherwise at market prices prevailing at the time of sale, in block transactions, or as otherwise directed by us. Under the Sales Agreement, Cowen will use commercially reasonable efforts to sell the Common Stock from time to time, based upon instructions from us (including any price, time or size limits or other customary parameters or conditions we may impose). We will pay Cowen a commission of up to 3.0% of the gross sales proceeds of any Common Stock sold through Cowen under the Sales Agreement, and we have provided Cowen with customary indemnification rights. Any shares of Common Stock offered pursuant to the Sales Agreement will be offered and sold pursuant to the Shelf Registration Statement. We are not obligated to make any sales of Common Stock under the Sales Agreement. The offering of shares of Common Stock pursuant to the Sales Agreement will terminate upon the earlier of (i) the sale of all Common Stock subject to the Sales Agreement or (ii) termination of the Sales Agreement in accordance with its terms. As of the date thereof, we have not sold any shares under the Sales Agreement. OnSeptember 23, 2020 , we and a healthcare-focused institutional investor entered into a subscription agreement the "Subscription Agreement," pursuant to which we sold (i) 340,483 shares of its common stock and accompanying warrants to purchase up to 340,483 shares of common stock and (ii) pre-funded warrants to purchase up to 379,718 shares of common stock and accompanying warrants to purchase up to 379,718 shares of common stock in a registered direct offering (adjusted for the 1-for-25 reverse stock split) for gross proceeds of approximately$17.3 million . The common stock (or one pre-funded warrants in lieu thereof) and accompanying warrants were sold as units, each consisting of one share (or one pre-funded warrant to purchase one share of common stock in lieu thereof) and one warrant to purchase one share of common stock, at an offering price of$23.95 per unit. The net proceeds to us from the offering, after deducting the placement agent's fees and other estimated offering expenses payable by us, was approximately$15.9 million . The pre-funded warrants became exercisable immediately upon issuance, have an exercise price of$0.0025 per share and were exercisable until all of the pre-funded warrants were exercised in full. As ofMarch 31, 2021 , all pre-funded warrants were exercised. The warrants became exercisable immediately upon issuance, have an exercise price of$21.87 per share (adjusted for the 1-for-25 reverse stock split), and will expire five years from the date of issuance. As ofDecember 31, 2022 , approximately 240,000 of these warrants have been exercised. The pre-funded warrants and the warrants each prohibit the holder from exercising any portion thereof to the extent that the holder would own more than 9.99% of the number of shares of common stock outstanding immediately after exercise. The number of shares issuable upon exercise of the warrants and pre-funded warrants and the exercise price of the warrants and pre-funded warrants is adjustable in the event of stock splits, stock dividends, combinations of shares and similar recapitalization transactions. OnNovember 22, 2021 , we entered into a Credit and Security Agreement (the "New Credit Agreement") withMidCap Financial Services, LLC ("MidCap Financial Services "), as servicer forMidCap Financial Trust to refinance the Company's existing senior secured indebtedness. The New Credit Agreement provides for a five-year,$21 million secured term loan facility (the "Term Facility"), and replaces our existing credit facility under the 2019 Secured Loan Agreement, withInnovatus , as collateral agent and lender,East West Bank and other lenders party thereto (collectively, the "Lenders"). We used the proceeds from the debt financings to pay off our existing credit facility under the 2019 Secured Loan Agreement with the Lenders. The New Credit Agreement contains customary affirmative and negative covenants, including limitations on our ability to incur additional debt, grant or permit additional liens, make investments and acquisitions, merge or consolidate with others, dispose of assets, pay dividends and distributions, pay subordinated indebtedness and enter into affiliate transactions. In addition, the New Credit Agreement contains a minimum liquidity covenant requiring the us to maintain unrestricted cash and cash equivalents in excess of$4.0 million . The New Credit Agreement also includes events of default customary for facilities of this type and upon the occurrence of such events of default, subject to customary cure rights, all outstanding loans under the Term Facility may be accelerated. As ofMarch 31, 2023 , we were not in breach of covenants under the New Credit Agreement. For further information regarding the New Credit Agreement see "Note I-Debt and Notes Payable" in the financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. 37 -------------------------------------------------------------------------------- OnNovember 8, 2022 we entered into a Settlement and License Agreement with Medacta, pursuant to which the parties agreed to terms for resolving the then-existing patent disputes. In consideration of the licenses, releases, covenants and other immunities granted by us to Medacta, Medacta was required to pay us a fee promptly after execution of the Settlement and License Agreement, which was received in full onDecember 12, 2022 . The agreement provides for the grant of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon receipt of the payment from Medacta. OnFebruary 17, 2021 , we closed an offering of our common stock under the Shelf Registration Statement and issued and sold 3,238,095 shares of our common stock at a public offering price of$26.25 per share (adjusted for the 1-for-25 reverse stock split), for aggregate net proceeds of approximately$79.6 million . We intend to use the net proceeds of the offering of the shares for general corporate purposes, which may include research and development costs, sales and marketing costs, clinical studies, manufacturing development, the acquisition or licensing of other businesses or technologies, repayment and refinancing of debt, including our secured term loan facility, working capital and capital expenditures. OnApril 8, 2021 , we entered into a License Agreement with Paragon 28, granting Paragon 28 a non-exclusive license under a subset of ourU.S. patents for the use of patient-specific instruments with off-the-shelf implants. In connection with this License Agreement, we recognized revenue of$1.0 million during the quarter endedJune 30, 2021 and$0.5 million during the quarter endedMarch 31, 2022 . see "Note B-Summary of Significant Accounting Policies" in the financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. We may need to engage in additional equity or debt financings to secure additional funds. We may not be able to obtain additional financing on terms favorable to us, or at all. To the extent that we raise additional capital through the future sale of equity or debt, the ownership interest of our stockholders will be diluted. The terms of these future equity or debt securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders or involve negative covenants that restrict our ability to take specific actions, such as incurring additional debt or making capital expenditures. AtMarch 31, 2023 , we had cash and cash equivalents of$37.8 million and$0.5 million in restricted cash allocated to lease deposits. Based on our current operating plan, we expect to fund our operations, capital expenditure requirements and debt service over the next twelve months with existing cash and cash equivalents as ofMarch 31, 2023 , anticipated revenue from operations, revenue that may be generated in connection with licensing intellectual property, available sales of shares under the Sales Agreement, funds from additional equity or debt financing. We have based this expectation on assumptions that may prove to be wrong, such as the revenue that we expect to generate from the sale of our products, the gross profit we expect to generate from those revenues, and the fact that we could use our capital resources sooner than we expect. Cash flows
The following table sets forth a summary of our cash flows for the periods indicated, as well as the year-over-year change (in thousands):
Three Months Ended March 31,
2023 2022 $ Change % Change
Net cash (used in) provided by:
Operating activities $ (9,847) $ (17,102) $ 7,255 42 %
Investing activities (907) (692) (215) (31)
Financing activities - - - 100
Effect of exchange rate on cash (127) (45) (82) (182)
Total $ (10,881) $ (17,839) $ 6,958 39 %
Net cash used in operating activities. Net cash used in operating activities
was $9.8 million for the three months ended March 31, 2023 compared to $17.1
million used in operating activities for the three months ended March 31, 2022 ,
a decrease in use of $7.3 million . The $7.3 million decrease in net cash used in
operating activities was primarily affected by a decrease in net loss of $6.5
million , a decrease in accounts receivable of $2.3 million , a decrease in
prepaid expense and other assets of $0.2 million , a decrease in royalty and
licensing receivable of $0.4 million , an increase in inventory of $0.1 million ,
and a decrease in accounts payable, accrued expenses and other
38
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liabilities of
Net cash used in investing activities. Net cash used in investing activities was$0.9 million for the three months endedMarch 31, 2023 , and for the three months endedMarch 31, 2022 net cash used in investing activities was$0.7 million , an increase of$0.1 million . The increase is due to an increase in costs related to the acquisition of property, plant, and equipment.
Net cash provided by financing activities. Net cash provided by financing
activities was
Contractual obligations and commitments
There have not been any material changes to our contractual obligations and commitments disclosed in the Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report filed on Form 10-K for the year endedDecember 31, 2022 other than changes in our debt facilities as disclosed in "Note I-Debt and Notes Payable" in the financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.
Revenue share agreements
We are party to revenue share agreements with certain past and present members of our scientific advisory board under which these advisors agreed to participate on our scientific advisory board and to assist with the development of our personalized implant products and related intellectual property. These agreements provide that we will pay the advisor a specified percentage of our net revenue, ranging from 0.1% to 1.33%, with respect to our products on which the advisor made a technical contribution or, in some cases, which we covered by a claim of one of or patents on which the advisor is a named inventor. The specific percentage is determined by reference to product classifications set forth in the agreement and is tiered based on the level of net revenue collected by us on such product sales. Our payment obligations under these agreements typically expire a fixed number of years after expiration or termination of the agreement, but in some cases expire on a product-by-product basis or expiration of the last to expire of our patents where the advisor is a named inventor that claims the applicable product. The aggregate revenue share percentage of net revenue from our currently marketed knee replacement products, including percentages under revenue share agreements with all of our scientific advisory board members, ranges, depending on the particular product, from 0.1% to 0.6%. We incurred aggregate revenue share expense including all amounts payable under our scientific advisory board revenue share agreements of$0.3 million during the three months endedMarch 31, 2023 , representing 2.3% of product revenue, and$0.6 million during the three months endedMarch 31, 2022 , representing 4.0% of product revenue. Revenue share expense is included in research and development. For further information, see "Note H-Commitments and Contingencies" to the consolidated financial statements appearing in this Quarterly Report on Form 10-Q.
Segment information
We have one primary business activity and operate as one reportable segment.
Off-balance sheet arrangements
ThroughMarch 31, 2023 , we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical accounting policies and estimates
We have prepared our consolidated financial statements in conformity with accounting principles generally accepted inthe United States . Our preparation of these financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. We believe the critical accounting policies and estimates that require the use 39 -------------------------------------------------------------------------------- of significant estimates and judgments in the preparation of our consolidated financial statements include revenue recognition, inventory valuations, impairment assessments, and income tax reserves and related allowances. We evaluate our estimates and judgments on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates are more fully described under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical accounting policies and estimates" in our Annual Report on Form 10-K for the year endedDecember 31, 2022 . 40
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