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01:54 Thank you, operator, and welcome, everyone, to our fourth quarter and full-year 2021 earnings call. With me today is our CFO, Bob Howe.

We appreciate you joining us for an update on Conformis. Since our business update on January 6, we’ve continued to execute on our core growth initiatives.

While early we are receiving positive feedback on our platinum services program, we continue to make strides with our Identity Imprint limited market release and we continue to grow our hip business. 02:22 From a strategy perspective, Conformis has never been positioned better.

With our product line-up of new service offerings, we now have expanded revenue opportunities and a clear path to grow our margins materially over the next few years. With that being said, 2021 proved to another challenging year for the medical community we serve.

The ups and downs caused by COVID variants were further impacted by hospital staffing challenges and supply chain pressures. 02:49 [Overall] [ph], Conformis stayed focused all-year and achieved a number of key wins in 2021.

We have a new company record for total revenue generating 99.9 million for the year. This was driven by our exceptional performance and protection and monetizing our IP.

03:06 While we celebrate this achievement we are not satisfied. For those who have been following our progress over the past few years, you know that product revenue is how we measure our business.

Our product revenue in 2021 was roughly what it was in 2020. This was equally rewarding and frustrating.

03:23 Rewarding in the sense, we commenced the limited market release of both our Identity Imprint Knee System and our PSI partnership with Stryker, but frustrating in that we had to do this in the phase of COVID-related headwinds causing instability with elected procedures and staffing shortages at hospitals. 03:23 Omicron cases have declined substantially over the past few weeks, which is a welcome trend.

Although we have not yet seen the substantial change in the headwinds we are facing, we do believe clinic visits will improve throughout the year with the corresponding increase in elected procedures. 03:56 Right now, we do it, not anticipate, nor can we predict any additional variants that would have meaningful impact on our business and we still believe that as elective procedures return to a more normal level, we will see improved recovery.

Although we continue to face headwinds, we are confident in our strategy. 04:14 I like to share some highlights from those aspects, which had the most activity in the past quarter.

The most significant activity was devoted to the final preparation and the actual January 6 launch of our Platinum Services program. This was a tremendous accomplishment by our entire organization.

This program will allow facilities to offer fully personalized knee systems as a [deluxe] [ph] upgrade to their patients. 04:39 At its core, we believe this program increases access and choice to a broader patient population.

Medicare and commercial payers permit patients to pay out of pocket for non-covered [deluxe] [ph] services. Just as patients can pay extra for a private hospital bed or for premium intraocular lens product, Platinum Services brings a first of its kind premium pricing structure to orthopedics where medical facilities can charge patients in the out of pocket fee for their upgrades, which creates a new and incremental revenue stream for the facility.

05:12 While early, the program introduction has gone well, we're onboarding our current hospital and ASC facilities and we’re attracting interest from new customers across the country. The feedback remains consistent with our market research and confirms that patients are looking for a greater say in their care and are willing to pay an out-of-pocket premium to fully personalize their implant.

05:34 We also had solid progress advancing our Imprint Knee. Our Identity Imprint Knee System combines the benefits of our personalized solutions with the convenience and flexibility in the off-the-shelf system.

We believe Imprint represents a significant advancement over standard off-the-shelf knee systems since Imprint included several of the features of our personalized knew system. 05:55 We see this filling the void between the crowd and off-the-shelf category and the fully personalized category where we are the only player.

We recently achieved an important milestones as we successfully completed our 100th Imprint procedure. Interestingly, 45% of surgeon users are competitive, meaning those surgeons are new to Conformis.

06:14 We acknowledge the need to expand our surgeon users and we believe the product benefits of Imprint along with the economic and efficiency benefits of our surgery and the box model provide a significant market share opportunity. Throughout the limited market release, the clinical feedback has been strong.

06:30 During the fourth quarter and early part of the first quarter, surgeons completed a questionnaire and raised a 100% of the Imprint crisis as either four or five star experience based on a number of criteria, including AP and ML femoral and tibial bone coverage. In fact, many knee surgeon users have rated the thermal fit significantly better than the competitive system [AUs] [ph], which is excellent news and confirms our excitement about the superior quality of the product design.

We remain on track for a 2Q transition through a full market release. 07:02 Lastly, our hit business had 8% revenue growth in the quarter and 19% growth for the year, which is particularly pleasing since we still have a limited product portfolio and like knee replacements, hip procedures are very susceptible to deferral as an elective procedure.

In addition, COVID has resulted in less new product trialing, which is an important requisite for growth since we are still relatively new in the hip space. 07:24 With continued focus on the training and education of the growing group of surgeons who use our hip implants.

Like our knees, our hip [indiscernible] leverages unique delivery model to provide customers an efficient and economic benefits solution. 07:39 In addition, we made progress on our [indiscernible].

This will be our second stem and we remain on track for a mid-2022 launch. [Indiscernible] will be a shorter style model conducive to the popular direct anterior approach.

We believe having a broader hip portfolio is important for us to attract new surgeons to Conformis. 07:59 Now, I'd like to shift gears and highlight two recent achievements reinforcing the compelling and clinical success of our personalized knee implants.

First, the Orthopaedic Data Evaluation Panel in the United Kingdom and independent commonly referred to as [ODA] [ph]. [Indiscernible] is a Conformis size totaled CR Knee Replacement System, replacement system a 7A rating, which reflects 7 years of performance data as reported in the UK's.

National Joint Registry or the NJR. 08:24 The NJR is one of the most respected registries in orthopedics.

So, this clinical performance as reported is a fantastic independent validation of the quality of the Conformis personalized knee design. 08:36 The other clinical win and perhaps even more significant was the recent publication in JVJ [indiscernible] really general for the public news of the journal of bone and joint surgery.

This study looked at patients that have fully personalized Conformis implant in one knee and not the shelf implant in the other knee. 08:54 The authors reported a 72% of patients for further Conformis need.

Only 6% of patients prefer their off-the-shelf made and 22% were neutral on preference. As the authors noted, patients in this study with bilateral knee joint replacement showed an overall preference for customized total knee replacement.

09:12 We believe both these studies will be a particular interest to patients concerning upgrade through our platinum services program. As you know, the overall environment has been everything but predictable.

We continue to believe hospitals and ASCs will return to normalized elective procedures both in the U.S. and internationally at some point in 2022.

09:32 However, our claim rules, assume they operate in a similar environment that we've seen in the past 6 to 8 quarters until we see a sustained improvement in our scan activity and procedure bookings. 09:43 Let me now turn the call over to Bob for a more detailed financial review of the quarter.

09:48 Thank you, Mark, and good afternoon everyone. I'll start with the walk through of our financial highlights and then close with a few thoughts on our outlook.

We reported total revenue of 15.4 million in the fourth quarter, which is down 8% from the fourth quarter of 2020 on both a reported and constant currency basis. 10:06 For the year, as Mark mentioned, we hit an all-time record with $99.9 million.

Product revenue was 15.3 million for the fourth quarter, which was also down 8% from the fourth quarter of 2020 on the both the reported and constant currency basis. For the year, our product revenue was 58.3 million, which is roughly flat to 2020.

10:28 Within product revenue sales of our Conformis system were approximately 700,000, up 8%, compared to last year's fourth quarter. For the year, our hip business grew 19% in 2021 to $3 million.

We expect our hip growth rates to accelerate in the second half of the year as we expand our product portfolio and [trialing] [ph] by surgeons resumes in earnest, since it was slowed considerably during COVID. 10:52 Our royalty revenue for the fourth quarter was 146,000 and a record 41.5 million for the year, which included several non-recurring, but significant dollar value items relating to protecting and monetizing our IP.

Our recurring licensing revenue is expected to be approximately 125,000 per quarter. 11:12 Our product gross margin was 38.0% in the fourth quarter, and was adversely affected by primarily two items.

The first was an increase in our cancelled case inventory reserve. We have seen an increasing in the ageing of cases that have been postponed, but not yet rescheduled, as well as a lower than estimated conversion rate of these cases into revenue.

11:32 The cancelled case inventory reserve is associated with fully manufactured Implant Kits for surgeries that were postponed at this point a future surgery date is yet to be scheduled. These unscheduled surgeries can still occur and we continue to work with the healthcare facilities to get these back on the calendar.

11:50 The second item is that over the past few quarters, we've experienced an increased impact from a tough labor market, combined with COVID-related absenteeism. This has negatively affected our manufacturing capacity and efficiency and resulted in higher scrap, shipment delays, and a temporary increase in our delivery lead times.

12:09 While there are many advantages to our just in time manufacturing model, it can work against us when a manufacturing facility is not operating at the right capacity and efficiency levels. 12:19 To address these challenges, we've invested in recruiting new team members, focused on retaining our talented operators and increased our focus on training to get new hires up to speed faster.

12:30 For the full-year, our product gross margin was 41.4%. Like many other companies, we continue to face margin headwinds from high material, labor, and other manufacturing costs.

In addition, we have felt the impact of higher cancelled case inventory expense, lower sales volume, and a reduction in selling price. 12:48 Until the medical facility environment normalizes, we are operating closer to our target capacity and efficiency levels.

We expect our gross margin rates to remain in a high-30s to low-40s. However, as the environment improves, we should be able to ramp our gross margins back to the mid-40s.

13:05 Longer term, we expect our gross margin to increase meaningfully driven by growth of our Imprint products, which is targeted to have gross margins in the low 70s at scale, and our Platinum Services, which is targeted in the low-60s at scale. 13:20 Total operating expenses for the fourth quarter were 19.3 million, which reflects the investment we are making in sales and marketing in R&D.

It also reflects the planned higher G&A related to investment and professional fees to protect our IP. G&A was also impacted by higher freight expense as we relied more heavily on expedited shipping methods as a result of our manufacturing capacity challenges.

13:45 In 2021, we finished the year with 68.7 million of total operating expenses. This includes the planned investments we made in the second half of the year and was in-line with our previous guidance.

We continue to closely manage our expense structure and have focused the majority of our investments towards supporting our growth plan. 14:04 For 2022, we expect operating expenses to be between $75 million and $81 million, which reflects continuation of our planned investment to drive our growth, as well as associated variable expense, increases as a result of this growth.

I'll walk through how 2022 compares to 2021 and highlight a few key areas driving the year-over-year increases. 14:26 From a high level, like almost all companies, we are facing a tough labor market.

Turnover is higher than normal and finding qualified talent is taking much longer and is more expensive. We have addressed this by adjusting compensation for our workforce to align with current market trends.

This impacts all operating expense categories to an extent. 14:45 For sales and marketing, we had 24.9 million in 2021.

We anticipate sales and marketing expenses to be between 29 million and 32 million in fiscal year 2022. At the high end of this range, about half the increase is related to variable costs associated with the revenue growth and half is related to the continuation of planned investments that we started in the second half of 2021 to support Imprint and other product introductions and the launch of Platinum Services Program.

15:14 For R&D, we had 14.8 million in 2021. For 2022, we expect R&D to be between 16 million and 17 million.

This increase is to continue to drive our priority products in our development pipeline at AI Technology to enhance our CAD process and support our regulatory efforts to transition to European Union medical device regulations. 15:37 Finally, for G&A, we had 29.0 million in 2021.

For 2022, we expect G&A to be between 30 million and 32 million. The increase is primarily driven by higher compensation expense, increased freight costs, and additional investment support IT initiatives.

15:55 Moving to our bottom line performance, we generated net loss of 16.0 million in the quarter or $0.09 per share. This included foreign currency exchange loss of 865,000, compared to foreign currency exchange income of 1.7 million in the same period last year.

16:12 Interest expense was 1.7 million, compared to 0.6 million in the same period last year. This increase was due to 1.1 million of expense related to the extinguishment of debt, recognized as a result of our debt refinancing.

16:27 Our balance sheet remains strong as we had cash and cash equivalents of 100.6 million at the end of the fourth quarter. This included the 15.5 million of license and royalty payments I mentioned last quarter, that we received in October.

16:43 One balance sheet item to note is inventory. We expect to continue to build our inventory of Imprint Knees, as well as our [Cordera] hip over the coming quarters to support our product launch cadence.

16:55 As noted earlier, we refinanced our credit facility in November. This new $21 million facility extends the term until 2026 as a 3-year interest only period, a reduced interest rate, and includes more favorable covenants.

17:11 Lastly, I would like to provide some thoughts on our outlook. Based on our performance in February and our forecast for March, we expect Q1 product revenue to be between 13.5 million to 14.5 million, This compares to the first quarter of 2021, which was 13.7 million.

17:30 Our Q1 guidance reflects a forecasted impact from continued disruption of electric procedures caused by Omicron variant, staffing shortage in the medical facilities, and our own manufacturing capacity challenges. 17:42 With that, Mark and I are happy to take your questions.

18:10 Great. Thank you for taking the questions.

Just wondered if we could kind of walk through your expectations maybe beyond the Q1 just with respect to all the moving pieces you have on the revenue line this year? When we think about Stryker and that relationship rolling out, as well as the combination of the full launch from the Platinum Services, as well as Imprint, can you kind of help us understand the puts and takes to avoid – or thinking for the full-year number?

18:37 Hey, Kyle it’s Mark. I'll let Bob have a chance to comment, but I think what we're looking at is sequential quarter-to-quarter improvement of the top-line.

And that'll be through continued launch of our Imprint and our Platinum Services Program. I think in the back half is benefited a little more from the launch of the hip stem, so hip will sort of contribute to that growth a little more in the back half.

19:08 And Stryker is in there, again as I’ve said before, we're not really going to comment too meaningfully on that, our respect for relationship, but it's showing, just lower than maybe, I pursue you would like that continued growth, so lower actual sales, but continued sales, each month. 19:28 I mean, like us with our launches and stuff, the industry, which Stryker is a apart of is impacted by the Omicron and the stuff in January and it kind of be closed.

So, for instance, I know in person, we couldn’t have a sales meeting. I thin other companies got affected by that, the ability to train sales force, launch new products have been impacted.

19:53 So, a lot of those plans for 2022, the companies like the launch in Q1 have sort of been pushed out later in the year. So, I think we'll continue to see some continued growth from that, but the thematically, what we're looking for is sequential quarter growth improvement throughout 2022.

Okay.

20:15 Yeah. The only thing I would add, I think is obviously there's an assumption.

We had signaled a range of 60 to 70 on our January 6th call. The 60 represents if the market doesn't really improve as kind of the [indiscernible] case scenario 70 obviously, assumes, it improves, so obviously sequential improvement would be benefited by improvement in the overall electric procedure market.

20:37 Yes. Absolutely.

Okay.

20:40 Yeah. And then just one more on my end.

Could you just talk about, maybe breakdown the gross margin headwinds that you saw in the Q4? I mean, how much of that is royalty reserve versus much of that is coming from just input costs in capacity constraints, just really trying to understand those two pieces and with respect to how gross margins are going to shake out for the full0year?

21:02 Yeah. Yeah.

And again, I'll let Bob capture more detail, but there's no doubt as, he said in the prepared remarks, there was some one-off [indiscernible] stuff and the canceled cases as you might have been managing this environment higher than we've typically run. So, we've decided to go ahead and make for that provision in Q4.

21:22 We're going to keep looking at that. Obviously throughout 2022.

There's no doubt that labor input as Bob [indiscernible] has gotten higher and with turnover, it's a challenge on that. So that's impacted us some small things from raw materials.

I don't think it's been crazy, but we're seeing some of that continue to come through and that's challenged for all medical med-tech companies, and so we're bearing some of that as well. 21:52 I could tell you first quarter 2022, right, we're not, I don't think I'll let Bob talk about it, but there’s no doubt that January was a tough month.

So, we're seeing some sequential improvement through February. We're hoping that March holds up, January was a tough month, and it was a tough month all around not only on the revenue line, but as you might imagine that that impacted efficiencies.

Because we had ton of absenteeism, late December and all through January, due to our manufacturing Salesforce – workforces up here in [The New England] [ph] area, primarily and we got really, really hit hard with Omicron. 22:29 So, the good news is, people got through it healthy.

They will be able to come back, you know I'm pleased to say on that, but when you see the kind of absenteeism we experience, it's target to run an efficient plan. So that was a challenge for us, but we should see some sequential improvement in gross margin as well.

Not only through top-line improvement, but also through efficiency improvement, but with that I’ll…

22:52 Yes, I mean, just specifically on the question on Q4 in [bridging it] [ph]. I mean, I would say that cancelled case adjustment was probably about a third of the head, and without that, we probably would have been in the low-40s, which is roughly where we were thinking.

Outside of that, you know you probably have a third that's due to efficiencies, and we'll try to get the exact number on that as you can imagine. 23:18 And then, there's probably another of 20%, 30% that's inputs whether it's labor or whether it's raw materials, that's probably directionally, Kyle in the [indiscernible].

And there’s a little bit of price, but that's not the biggest driver.

23:36 Thank you.

23:38 Thanks, Kyle.

23:50 Thank you. Hi, guys.

Wanted to start off with Imprint, [indiscernible] on the competitive surgeon conversion at 45%, I was wondering also what you're seeing in terms of the location of these procedures? Are most of them now ASC, and what is your thought in terms of where the mix of ASC versus hospital will be for Imprint as you look at over the next couple of years?

24:24 Okay. Steve, I will tell you, I don't want to put a number on it, because I don't want be wrong and we are looking at that and we're looking at potentially providing more color on that for you guys as we go through the year.

I mean, it's a little early, but I will say it's primarily ASC. So, a lot of ASC.

I'm not going to say there's not any in the hospital because there's some, but that's giving the exact number, it's a lot of ASC. 24:52 And it's a great question you want to get to, but that's one of the reasons why we're in a challenging time and there's a lot of things bothering us, but we're really excited about our strategy.

Because we're having a lot of productive conversations with Imprint for ASC utilization, which is what we targeted. So, we're really pleased about how that is sinking in.

25:20 Great. On Platinum Services, based on what you're seeing so far, do you anticipate the whole custom program to be converted to Platinum by September, I think that's when you had targeted before?

25:37 Yeah, that's still our plan. I'm not sure it will be the whole custom program, but I think what you mean, which is right, is the only way to access to fully personalized knee will be through the Platinum Services Program starting in September.

Now, to be clear that between now and then it's really only our existing users that we're transitioning. Starting as we speak, new customers, which we're getting with Imprint, new customers only can get to the fully custom product through Platinum Services.

But yes, by September, that be the only way to get a fully custom Implant from Conformis.

26:19 Great. Last question and that's where is what I had meant.

Thanks Mark and then on the new primary hip stem in mid-2022, so I assume that that would be a limited launch in the back half and that does sort of full benefit of the portfolio on hip. We should really be targeting for 2023 or will that be more of a full launch in the back half?

26:42 Yes. Yes, that's pretty much our cadence.

Knock on wood, hopefully, the limited lease will go well and will only be in limited release for couple quarters, and then we will get close to full-year benefit, that would be the plan in 2023. So, yes, that's the way to think about it.

26:58 But as you know, our numbers are smaller with our hip franchises. So, even in limited release if again, you don't know until you're there, but it should be able to incrementally drive growth for us because we've got a small base we're working off of even limited release.

27:15 Okay. Got it.

Thanks Mark.

27:28 Hi. Good afternoon.

Thanks for taking the questions. I was hoping to just make sure I was clear on the full-year guidance and just you are formally reiterating that 60 million to 70 million today.

Sorry, I just didn't see in the press release or in the formal remarks, but I think you answered in one of the questions that that is still in play?

27:47 Yes. I mean, that's, yeah.

I think the way I would say, is, the answer is yes. And if we saw a need to say something different, we would tell you.

So, it is our expectations for the full-year, haven't changed.

28:04 Great. I just want to make sure I was – we're clear on that.

And then second, just thinking about the hikes in labor costs, is that pertinent to the salesforce? And if, is this an opportunity where you can spend a little bit more to [pluck off] [ph] some talent or on the other hand, are you seeing any pressure for reps leaving for greener pastures if you will?

And is there just an overall kind of sales rep, hope scotch going on in 1Q across the industry?

28:36 Well, that's a really interesting question, Josh. I haven't sort got it about way.

So, when we referred to this and what we're experiencing is, is really our employee workforce, our W2 workforce. As you know, most not all, but most of our sales reps are commissioned agents.

And we're not seeing losses there through that or anything around that. As a matter of fact, I will tell you and it's one of the statistics we'll look at, but we, led by our commercial team, we are making changes in our agent structure, we’re in our leadership team, they're doing a great job.

29:14 We're seeing a lot of interest from new agents coming to Conformis because the Imprint in Platinum Services story is attracting them. So, I think we're going to plan to be adding significantly to our salesforce and I’ll probably talk to some of those metrics as we have something to report in Q1 at our Q1 earnings call, but that's our goal.

29:39 I can say publicly like it's always been our goal, but it's been hard, it's been hard during COVID for – to do that. 2020 was basically a last year, and 2020 was a little challenging and we hadn't really gotten into the launch of Imprint, but now that it's out there, people are seeing that it's real, we're delivering on it.

They're seeing the story, they understand the ASC strategy, and that's getting traction. 30:02 That's the best word I can say.

It’s getting traction and good agents in orthopedics, if nothing else, they're good at sniffing out an opportunity to make money. And that gets through, you know a good story to sell, and a good product to represent and that's what we have with Imprint and Platinum Services.

30:21 Great. And just one last follow-up, just in terms of your expectations for recovering the U.S.

versus Europe, any difference there in terms of the pacing and the cadence or what you're seeing so far in Q1? Thanks a lot.

30:35 Yeah, I'll let Bob talk about that. I think he's a little closer, but in general, Europe is still a challenge for us as a company because number 1, we're even more limited in our critical mass and support.

The challenge we have is still, if you think about our, so we had already planned the [indiscernible] hip at this point internationally. 31:00 Our knee portfolio is challenged as always through reimbursement challenges and pricing and other stuff and the NDR regulation has continued to be a big headwind that we have to get through and represent the risk and where we want to go is, we'd like to get to Imprint as the main product over there.

31:19 We don't see separate limited opportunities in certain markets. We will see the same opportunity that we have in the U.S.

with Platinum Services. So, while we're thinking about adding distribution in Japan and then with – Australia has gone, these are still risk for us, as we think about that in the recovery, frankly, is – I don't believe it's going to be as pronounced as much because our biggest revenue source is still Germany and Germany still is just a reimbursement drag from us on that.

Because all we have is the fully personalized revenue and that's what they're banging on. 32:01 So, it's a challenge for us.

Having said that, it’s become almost to the point Josh, where still meaningful, but it's fairly more than 10% of our revenue at this point where it was high right, probably, well actually, we're right about that. So, give or take a few points.

So, it continues to be challenging for us, but we continue to push at some of the new countries that we want a lot.

32:31 Yes, I mean, Mark hit all the points. I mean, we don't have the growth drivers overseas that we do in the U.S.

but we do have some arrangements like Australia, for instance, which we are hopeful and we want to see it, but we're starting to seeing it, but we're, I would say for next year, take a little more conservative. Hopefully procedures will benefit like they have in the U.S.

with recovery and elective procedure market, but clearly, they don't have the growth drivers that we have.

32:57 And I think, I mean we don't report out. I don't believe country my country, but the issue is, the issue is, even though we get certain growth in some of smaller companies and that's helpful, Germany has been such a big portion of the international revenue line, the U.S.

revenue line that is Germany struggled to just – as you know, Josh, because you filed the company. I mean, I've been very transparent about it to continue challenge for us and struggling for COVID you can hurt more.

33:28 Understood. Thanks, gentlemen.

33:30 Thank you, Josh. Appreciate it.

Operator, any more questions?

33:43 Thank you, operator. And once again, thank you everyone for participating today.

We have a solid strategy and we're focused on executing it. We continue to believe our move to Platinum Services Program and the Imprint System focused on the ASCs is the right thing to do and it really reinforces our unique and differentiated portfolio.

34:03 And most importantly, it's allowing us to implement a disruptive placing model to arthroplasty. That's like a key insight that I focused on, and we're excited about.

So, on behalf of our leadership team, I want to thank our entire employee base for doing their part to help our surgeons do business easier and help our patients continue to gain pain free lives. I mean, it has been tough at the close of the year and in January, but all of our employees are making a difference, making a difference with our surgeon patients and patients.

34:37 We're going to be participating in several healthcare events and conference over the coming months. So, we look forward to seeing our committee there and talk to you more about the company.

Thank you for your interest and have a great evening.