Titan Medical Inc.

Good morning and welcome to the Titan Medical Q3 Earnings Results Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded I'd now like to turn the conference over to Kristen Galfetti.

Please go ahead.

Thank you, Operator. Good morning, everyone, and thank you for joining us for Titan Medical's third quarter 2021 earnings conference call. During our call, we will review Titan's third quarter 2021 financial results and share business highlights, which are summarized in our earnings press release issued earlier this morning. A copy of the release can be found in the investor relations section of our website, at www.titanmedicalinc.com. As a reminder, certain statements made during this conference call constitute forward-looking statements that reflect management's current expectations of the company's future growth, results of operations, performance, and business prospects and opportunities. Forward-looking statements involve significant risks, uncertainties, and assumptions. Many factors could cause the company's actual results, performance, or achievements to be materially different from any future results, performance, or achievements that may be expressed or implied by such forward-looking statements, including, without limitation, those listed in the Caution Regarding Forward-Looking Statements and Risk Factor sections of the company's Annual Information Form and Form 40F for the fiscal year ended December 31, 2020, as well as assumptions discussed under the section titled Development Plan in the company's recent MD&A, each of which may be viewed at cedar.com and at sec.gov. Please read all forward-looking statement and risk cautions in these sections and in today's news release announcing our financial and operating results and be guided by their contents in making investment decisions or recommendations. The release is available at www.titanmedicalinc.com. With that, I'll turn the call over to David McNally, President and Chief Executive Officer of Titan Medical. David?

Thank you, Kristen. Good morning and welcome to Titan Medical's third quarter 2021 earnings call. I want to thank our shareholders for their support as we continue to develop the ENOS robotic single access surgical system to improve patient outcomes and meet the demand by surgeons to perform procedures through a single incision. As we look to year end 2021, we acknowledge the strong progress that Titan has made this year in all aspects of the business. Building upon accomplishments that we discussed on prior quarterly calls, we are pleased to share with you today details of our progress and updates on what lies ahead for Titan. Also joining me on the call today is Steven Lemieux, our Chief Financial Officer. The third quarter of 2021 was highly productive for Titan and marked by several notable achievements, including the addition of industry leaders in single access and robotic assisted surgery to our surgeon advisory board, the completion of our preclinical GLP studies and the expansion of our Chapel Hill facility to establish in-house manufacturing capabilities for our proprietary instruments and cameras. Additionally, Productive communications with the FDA provided more clarity on supplementary information that will be required to complete our investigational device exemption application. In view of these meetings with the FDA, along with discussions with an OEM manufacturer for our surgeon workstation and patient cart, and in conjunction with an internal design review performed after the completion of the GLP studies, we have reviewed and updated our timeline to market, as I will explain in more detail. In addition to communications with the FDA through the Q submission program, we were fortunate to have a conference call in September that provided more details on requirements for our anticipated IDE submission and clinical study. Through a review with the OEM manufacturer and our internal design review team, We also determined that additional time will be needed to accommodate design transfer to manufacturing, the establishment of supply chain management, planning for product assembly and testing, and the implementation of software updates related to safety controls. Although we identified and ordered long lead time components when we initially became aware of supply chain disruptions, We remain vigilant with suppliers in procuring required parts as supply chain disruptions can affect even non-custom parts. In parallel, we will be developing assembly and test procedures and related documentation. Robotic-assisted surgical systems are complex and require numerous risk mitigations to prevent misuse and patient harm. The safe operation of our ENO system is paramount. And although an impact to our timeline, the implementation of software that detects hardware or electronic system failures is important. While the system software that controls core functionality has been demonstrated in numerous preclinical studies, the implementation of safety system software and testing will continue into 2022. Accordingly, we have adjusted our overall timelines. Our new target for commercializing the ENOS system is in early 2025 based on the sequence of completing development and transfer to manufacturing, filing and receiving approval of an IDE application with the FDA, completing a multicenter human clinical study, and filing and receiving approval of a de novo application with the FDA. While we are disappointed to extend our timelines, the additional clarity that we have recently gained should help us to prepare IDE and de novo filings that we believe will facilitate more efficient review by the FDA. When we look at the long-term outlook for the company, we remain confident that the ENOS system is differentiated from currently available systems. In addition, our intellectual property position in robotic assisted surgery positions us as a leading innovator in single access surgery. Notwithstanding the adjustment in our timelines, we will continue to execute a thorough review and make any adjustments necessary to activities related to our IDE application to place the ENO system in the best position possible ahead of commercialization. Importantly, Knowing the robotic-assisted surgery market is less than 5% penetrated worldwide leaves runway for penetration to increase with a differentiated system that is designed to better meet patient and surgeon needs. As I mentioned earlier, we recently announced the expansion of our Surgeon Advisory Board that includes industry leaders and luminaries in single access and robotic-assisted surgery from multiple health systems and practices across the U.S. New additions include Dr. Ricardo Astape, affiliated with Baptist Hospital of Miami and Kendall Regional Medical Center, Dr. J. Scott Magnuson of Advent Health Nicholson Center, Dr. Arlene Song of Duke University, and Dr. Kevin Stepp of Atrium Health. New members will join Dr. Arnold Edvincula of the New York Presbyterian Hospital, Columbia University Medical Center. We look to their insight and guidance as we prepare for human clinical studies. In addition to supporting our clinical studies, they're excited to help us to develop best clinical practices and effective training programs so that upon clearance to market, Many surgeons can realize our shared vision to improve patient outcomes through robotic-assisted single-access surgery. During the quarter, we completed our GLP preclinical studies in porcine subjects on schedule, with procedures having been completed in accordance with FDA's good laboratory practice. We expect pathology results from post-surgical tests in the first quarter of 2022. We continued the build out of our Chapel Hill facilities to support in-house manufacturing and life cycle testing of proprietary cameras and instruments. Build out is expected to conclude by year end 2021. Also during the quarter, we successfully completed an ISO 1345 quality audit and our certification has been maintained. Bright preparation for our clinical studies is ongoing as we interact with the institutional review board committees of hospitals expected to participate in our clinical studies. Additionally, our comprehensive robotic assisted surgery intellectual property portfolio has expanded to over 190 patents and applications. Representing a significant increase from our patent portfolio just five years ago, which was less than 50 patents and applications. We anticipate further expanding our patent portfolio by filing additional patent applications as we develop our robotic surgical technologies and potentially by licensing suitable technologies. We are proud to have compiled such a robust collection of assets supporting our position as an innovation leader in robotic assisted single access surgery and believe this deep know-how and scope of intellectual property will put Titan in a unique position among new entrants to robotic assisted surgery. Our collaboration with Medtronic under the development and license agreement continues to be productive as we approach completion of the final milestone. Following completion and acceptance of the deliverables by year end 2021, Titan expects to receive a final license payment of approximately $11 million, partially offset by full repayment of the loan previously provided by Medtronic. Under the development agreement, Titan is developing certain robotic-assisted surgery technology and know-how that provides Medtronic access to a portion of our intellectual property portfolio in exchange for milestone payments. Importantly, Titan maintains perpetual, royalty-free, worldwide rights to commercialize the licensed technologies for use with the Enos system. Furthermore, we have our own independent and unlicensed patent portfolio that continues to grow as we continue to innovate in robotic-assisted surgery. Stephen and I participated in investor conferences in September and met with institutional investors as part of our increased communications activities. In addition, we are strengthening our relationships with health technology journalists in order to develop a narrative of the ENO system and how it can benefit patients. I was recently interviewed by Dr. Moira Gunn, host of National Public Radio's Tech Nation. The interview was aired across the U.S. through the network's affiliates and on podcast channels in early November. As a former NASA scientist, engineer, and software programmer, she was intrigued with the ENO system development and purpose. The podcast episode is available on our website and NPR Tech Nation's website, so we encourage you to listen in. As we have discussed on prior calls, the single-access robotic surgery environment is rapidly evolving with greater promise for market expansion than ever before. We believe the market is under-penetrated and there is high demand for a versatile, single-access robotic platform, presenting an exciting opportunity for our system to make a difference in patients' lives. Hospitals and surgeons are increasingly interested in improving patient outcomes with a focus on greater cost effectiveness and efficiency and improved functionality. Titan's innovative technology is being designed to be both effective and easy to use, enabling medical professionals to perform their best to improve patient outcomes. Additionally, enhancing robotic-assisted surgery using innovative technology through a single access point may result in lower operating room costs and greater patient throughput for surgical centers. The ENOS system's initial clinical focus will include benign gynecologic surgery for the US market. With prospects of reducing trauma, hastening healing, and minimizing scarring, we believe this patient population is particularly motivated to embrace our single access surgical solution. Additionally, based on our successful preclinical studies, we anticipate that the versatility of the ENOS system could be very attractive for broad use in multiple subspecialties. We plan to work closely with our Surgeon Advisory Board and other leading surgeons to obtain feedback and insights regarding opportunities for us to satisfy unmet needs across numerous procedures. As I shared earlier, we will continue our dialogue with the FDA as we finalize details for the clinical study with the goal of obtaining regulatory marketing authorization for the ENOS system. Communications with the FDA have indicated that the regulatory pathway for our ENOS single access surgical system is expected via the de novo process reserved for novel medical devices. We anticipate, given information currently available to us, that our IDE study will include total laparoscopic hysterectomies performed on 30 to 40 patients at three to four clinical sites. Looking forward, and while certain factors are outside of our control, we're focused on continued IRB site preparation, completion of product development and design transfer to manufacturing anticipated for mid-2022, testing for safety and verification of manufactured units, anticipated by year-end 2022 or early 2023, submitting an IDE application in early 2023, and subsequent FDA review likely anticipated to occur in the first half of 2023, completing an IDE study and follow-up by early 2024, Submitting a de novo application in 2024 with an FDA review anticipated for completion in late 2024 or early 2025. And ultimately, with the requisite marketing authorization from the FDA, a commercial launch of the ENO system in early 2025. We remain committed to providing an innovative single access robotic system that meets the needs of patients, surgeons, and hospitals and will continue to work diligently to accomplish our goal. I will now turn the call to Stephen Lemieux, our Chief Financial Officer, to review our financial results.

Stephen? Thank you, David. In the following discussion of results, please note that all numbers are in U.S. dollars. As of September 30, 2021, we had cash of $44.7 million, a decrease from $55 million at June 30, 2021, but an increase from $25.5 million at December 31, 2020. In 2021, the company received $44.2 million in cash from the equity offerings completed in January and February, from the sale of common shares to Aspire Capital under the terms of a common share purchase agreement, and from the exercise of warrants. We also earned $10 million in the second quarter from the completion of the Medtronic milestone. We also have the ability to issue another 2.7 million common shares under the terms of the agreement with Aspire to raise additional capital. The company continues to carry a loan from an affiliate of Medtronic in the amount of $2.1 million, including accrued interest evidenced by an 8% senior secured promissory note on our books. Research and development expense totaled $10.6 million for the three months ended September 30, 2021, compared to $2.3 million for the three months ended September 30, 2020. R&D expenses are related to the development of the ENO system and the development work required to achieve the milestones under the development agreement with Medtronic. In the comparative period following the execution of the Medtronic agreements in June 2020, the company made the strategic decision to move a significant portion of its R&D in-house at its new R&D center in Chapel Hill, North Carolina, to advance both the development of the ENO system and complete the development work required to achieve the Medtronic milestones. General and administrative expenses were $3.4 million for the three months ended September 30, 2021, compared to $2.2 million for the three months ended September 30, 2020. The increase in G&A expenses in the quarter is primarily related to an increase in stock-based compensation of $1 million. The company uses adjusted G&A as a non-IFRS measure to adjust for non-cash items and one-time charges to provide a more transparent view of the normal G&A cash burn. Adjusted G&A was $2.1 million for the three months ended September 30, 2021, compared to $1.9 million for the three months ended September 30, 2020. Titan's growth over the past year has been remarkable. We have established our development center in Chapel Hill, North Carolina, and are currently expanding it to build in-house manufacturing capabilities. We have tripled our workforce to support the development of the ENO system, and we are delivering on milestones in our development and license agreement with Medtronic. These are all significant accomplishments for Titan. We anticipate that our cash balance of $44.7 million at September 30th and the anticipated milestone payment from Medtronic, net of the debt repayment, will be sufficient to continue to fund the development of the ENO system and operational expenses through 2022, including any costs pursuant to the development program with Medtronic. With that, I will turn the call back over to David.

Thank you, Stephen. We believe that the ENOS surgical system will address an under-penetrated but high-demand segment of the robotic-assisted surgical device market with the potential to provide less patient trauma and faster recovery times and savings on capital equipment, service, and procedure costs for hospitals. Although the delay in timing is unexpected, we recognize the importance of strengthening the body of preclinical evidence, benchtop tests, safety data, and manufacturing capabilities needed to support an IDE submission for the ENOS system. We believe the ENOS system will offer a differentiated option from currently available systems that will better meet patient and surgeon needs. We believe entering a global market that is less than 5% penetrated provides us a runway to expand the use of robotic-assisted surgery and make a difference in this industry. We look forward to keeping you apprised on Titan's progress toward the exciting milestones ahead, including advancing our ENOS single access robotic surgical system toward commencing human clinical studies and meeting the final milestone under the Medtronic development program. We will now open the line for questions. Operator?

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster.

First question today comes from Suraj Kalia with Oppenheimer & Co. Please go ahead.

Good morning, David, Stephen. Hope everyone is safe and healthy.

Good morning, Siraj.

Hey, so David, thanks for providing the updates. I was wondering if I could just drill down a little bit more on the details, specifically on ENOS. When do you believe that we will have a complete design freeze?

Based on our schedule, Siraj, we will be completing design of elements of the system in, I'll call it a sequence of packages. The surgeon workstation, we expect to have that completed in terms of design transfer by year end. The patient cart into the first quarter, really it's rather mature and it's the central unit that interfaces with disposables that will transfer over i'll say roughly in q1 of next year and then we have the consumables and the sterile interfaces and the like all in we would expect that the design would be complete from an electromechanical perspective about mid-year next year but we see a sequence of manufacturing rolling forward so that it doesn't all happen on a particular day We're sequencing it to be able to compress the time schedule as best we can.

Forgive me, David. Maybe I should rephrase. I was referring more to Titan R&D specifically, not the manufacturing transfer. Are we at a design-free stage already, or how much more time till the internal Titan team?

Yes, the two are closely related, Suraj. design transfer is not complete until we've frozen the design and the drawings are in a state where they are the final version. And so when I referred to the design transfer phases of this and in the sense that you're speaking to design freeze, it follows that same sequence. So I would say as we look at the entire system buttoned up, without further changes of substance going forward. And by the way, there are always modifications that happen as we are transferring to manufacturing and developing test procedures and the like. But to give you a more simple answer, I would expect that by mid-year next year, 2022, we would have frozen the design of all of the components of the system that you're speaking to.

Fair enough. David, the safety systems testing that you mentioned are additionally needed in calendar 2022. I'm curious, is this a reflection on ENOS-specific issues, or do you think this reflects more broadly the FDA's safety concerns about existing systems in the market? And partly, my question also includes, J&J also announced they are Ottawa system is going to be delayed. I'm just curious if there is something more behind the scenes that is shaping up the FDA's thought processes with the existing systems on the market.

That's an excellent question, Suraj. And while the circumstances of each company are different, All in this business acknowledge the technical complexity of robotic-assisted surgical systems and the highly regulated environment in which we operate. And notably, we new entrants face a new standard for regulatory clearance to market that earlier robotic-assisted surgery entrants did not face. And so when we look at the comprehensive package we need to supply in an IDE application, the Safety data, including electromechanical interference, I should say electrical interference, electromagnetic interference data, human factors evaluation, has to be performed on manufactured units with the, as we view it, with all of the software safety precautions built into the system. And this is something that this standard requires at a level that originally we did not anticipate when we were looking at going the 510 pathway, which is more related to proving substantial equivalence to a previously approved device. So that standard is now higher. It's become crystal clear as we've communicated with the FDA what those requirements look like. And in performing our review of where we stand over the past month, we determined that, first of all, this market is highly under-penetrated, so there's time to do it right. And we're much better off to put the extra time in now to develop a robust filing for the IDE with all of the safety data and software implementation performed on manufactured units and get that package right rather than submitting a package that might be incomplete or have missing parts, that exposes us to much greater delays down the road. So there's time to do it right. It's painful, but we're committed to doing it right and getting this package in a comprehensive form. That was rather long-winded, but I hope I answered your question, Suraj.

Fair enough. And David, last question. I'll hop back in the queue and let others pick the baton. So, David, you mentioned the training schedule. I'd be curious to understand what is the key differentiation in the e-nose training schedule vis-a-vis, because one of the things in the field, as you and I have talked in the past, has always been there is insufficient training, inadequate training on existing systems on the market, right? So I'd be curious to understand how you all are thinking through e-nose training programs. And also you mentioned something about licensing. And maybe I misheard that. And what was licensing specifically related to? Would greatly appreciate any color. Thank you for taking my question.

Yes. Very good, Suraj. And I'll handle that as two questions. With respect to training, we're already working with our surgeon advisors to develop training curriculum for that begins with operation of the system in a dry lab environment, as well as operation of the simulation software that we've integrated into the workstation. And there presently exists 14 training modules implemented on the system where surgeons can train in virtual reality. And this is very important as surgeons can hone their skills before operating even in a preclinical environment on human cadaver or porcine subjects. Of course, that would be the next step, however, having worked through dry lab training as well as training in the simulation software where surgeons can assess their skills, then moving to an animal and cadaver lab environment, and then ultimately to proctored procedures for early procedures And as I say, we're working with our Surgeon Advisory Board, led by Dr. Arnold Advincula of Columbia University Medical Center, who is our medical advisor, to develop the right sequence of curriculum, one, to train for performing the IDE studies, our clinical studies, and then ultimately a program that can be rolled out upon marketing clearance to train an expanding group of surgeons. So that's first question. Second, with respect to license technologies, we will continually seek opportunities to license our IP and know-how where it makes sense, as we did with the Medtronic Development and License Agreements, where we've retained rights to all of that technology to implement in the ENO system. There may be other opportunities for us to out-license as well as licensing technology from other companies that would be complementary to what we have in terms of the ENO system. So we'll remain opportunistic in that regard. We're one of the few companies in this industry that's been able to monetize its IP, and with a growing portfolio, we'll continue to look for those opportunities.

And thank you for participating today, Suraj. Again, if you'd like to ask a question today, just star then one, star then one to ask your question.

There being no further questions at this time, this will conclude our question and answer session. I'd like to turn the conference back over to David McNally for any closing remarks.

Actually, Grant, we do have a couple of questions from the webcast we'd like to share.

Oh, apologies. Please go ahead.

Okay. I've tried to group them as best I can. So the first one would be, what changed in the past quarter that has resulted in the timeline to market delay?

I'll be happy to take that one, Kristen. This is David. During the prior quarter and recent weeks following, discussions with the FDA provided clarity on information required to complete a comprehensive IDE application. And additionally, as we prepare for transfer to manufacturing, communications with an OEM manufacturer regarding transfer to manufacturing and supply chain management of the surgeon workstation and patient cart, as well as product and software testing, resulted in a determination that We need additional time to address these areas before filing a comprehensive IDE submission. Again, reiterating my response to the question from Suraj Kalia, there's time to do this right with an underpenetrated global market, and we're much better off to take the time now, even though it delays our timeline. We believe that ultimately that affects the long-term timeline less, than not having a complete, wholesome application for the IDE. But it's really the convergence of inputs from FDA, manufacturing, and our own internal design review.

Thank you, David. There are a couple questions regarding will this delay in e-mail's timeline affect achieving the final Medtronic milestone or affect the Medtronic relationship in any way?

I'll take that one as well. The two programs are independent. We've been very mindful to remain focused on our ENOS system, while other development is with separate resources under the development license agreements with Medtronic. So the two are unrelated. Now, we do share the challenges of the global supply chain issues, but we're navigating in each of those programs. Notably, of course, the Medtronic program deliverable moved into the fourth quarter based on supply chain. So both programs suffer those challenges, but at the same time, we're navigating and managing each independently.

Thank you. Considering the announced delay to the market, will your current cash balance be able to fund the company through to commercialization?

Hey, Kristen, it's Steven.

I'll take that one. So, as we communicate in the past, we do have sufficient capital to get through the development program for 2022. But we do not have sufficient cash to get to commercialization. And as I mentioned earlier calls, our plan is to raise capital to fund the business through commercialization.

Thank you. It seems that today's announcement follows the pattern, not only of Titan's medical history, but RIS companies in general. continuing moving out milestones and time to market. What seems to be the underlying problem?

This is David. I'll take that one. And again, as I responded to Suraj, the circumstances for each company are different. So I'll really focus on Titan's situation. You know, the technology development and commercialization of these devices requires substantial capital and human resources. I think it's important to note that during COVID, contrary to much of the rest of the industry, Titan actually staffed a facility. We went in June of 2020 to one employee to now over 40 employees in Chapel Hill. So we have been able to, in spite of COVID, staff a facility and move forward. That being said, these systems are highly regulated. They're complex. And It is challenging to predict with great accuracy, as we have seen with others in the industry as well, precisely where these milestones will fall. But most importantly, the ability of a company to navigate through this is based on the quality of the team and its tenacity. We have an excellent team that is committed and tenacious to succeed in realizing the vision for single access robotic surgery. And we expect to be able to not only endure, but to succeed ultimately in bringing the product to market. With that being said, again, it's a very challenging business. And we are facing a new standard for regulatory clearance to market that has just emerged with clarity over the past year. So we've got a higher hurdle than companies that have gone before. And certainly the early entrance into the space, we take that very seriously and we have to do it right.

Excellent.

Even with all the progress that Titan has made and clearly today's announcement, the share price has continued to slide downward. Is there anything that the company can do to raise it?

Well, Kristin, I welcome you to take a hand in that one in terms of what we're doing. I'll take the first part, Kristin, which is there's nothing more important than execution. Execution in making progress toward commercialization of our system, and that requires completion of development, including software implementation, transfer to manufacturing, And then, of course, testing, including safety and verification testing, and a robust application for our IDE, and then de novo application. So those are the big pieces of execution that we have to continue to march forward on and demonstrate progress. Now I'll turn it over to you to share some of the things that we're doing to spread the word.

Sure. So I think, you know, today's news is obviously all about having clarity on the path forward and what we need to do. In parallel, you know, with this updated time frame, we will continue to increase our investor outreach and make sure that our story is known to institutions that traditionally provide added stability in the stock. Additionally, you've probably noticed we have increased our outreach to public relations and journalists, and we're seeing a lot of uptake in those audiences. So it's really about getting the story out there in front of the right investors who believe us and who are on the same timeframe as we are. We have a final question. What does the future look like for Titan and the Medtronic post-accomplishing the milestone, the fourth milestone, the fourth and last milestone?

I'll say that we are focused presently on the final milestone and achieving that in this present quarter by year end. I can say that we have an excellent working relationship, and we share an inspiration to improve patient outcomes through robotic technologies. But with that, I can't speak to the future.

It would be inappropriate at this point, and I'll leave it at that. I think that concludes the groups of questions that we received on the webcast. Any final comments, David? Yes. Thank you, Kristin.

In closing, I want to thank everyone for joining us on the call this morning. We remain focused on bringing our robotic single access surgical system to the market for the benefit of patients and surgeons. We remain very excited about the opportunity that lies ahead for Titan, and we look forward to keeping you informed of our progress.

Thank you all again for joining us today. The conference has now concluded. Thank you.