Earnings Transcript for MOTS - Q1 Fiscal Year 2021

Operator: Greetings. And welcome to the Motus GI Holdings First Quarter 2021 Update Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I’d like to turn the call over to your host today, Garth Russell of LifeSci Advisors. Please proceed.

Garth Russell: Thank you, Operator, and thank you everyone for joining us for the Motus GI First Quarter 2021 Update Call. Representing the company are Tim Moran, Chief Executive Officer; and Andy Taylor, Chief Financial Officer; and Mark Pomeranz, President and Chief Operating Officer of Motus GI. Before I turn the call over to management for their opening remarks, I would like to take a minute to remind you that this conference call and webcast will contain forward-looking statements about the company. These statements are subject to risks and uncertainties that could cause actual results to differ. Please note that these forward-looking statements reflect our opinions only as of the date of this call. We will not undertake any obligation, revise or publicly release the results of any revisions to these forward-looking statements in light of new information, or future events. Factors that could cause actual results or outcomes to differ materially from those expressed or implied by such forward looking statements are discussed in greater detail in our most recent filing on Form 10-K and our other Periodic Report on Form 10-Q and 8-K filed with the SEC. I'd now like to turn the call over to Tim Moran, CEO of Motus GI. Sir, the floor is yours.

Tim Moran: Thanks, Garth, thank you everyone for joining us today for Modus GI's first quarter 2021 earnings call. I'll start by providing an update on our commercial progress in the first quarter, followed by an update on each of the four value creation drivers that I first outlined during our fourth quarter call, which include product innovation, and more specifically, our recently FDA cleared Upper GI Pure-Vu system, reimbursement, clinical data and strategic partnerships. I'll then ask Andrew to provide an overview of our financial performance for the quarter. At the end of our prepared remarks, we will open the call to take your questions. As it relates to Q1 commercial progress, I'm pleased to report that market conditions are steadily improving in US hospitals. And as a result, our team continues to focus on building important customer relationships as we execute our strategy to cultivate awareness, market acceptance and utilization of our proprietary Pure-Vu system for colonoscopy. To date, we've conducted evaluations at more than two dozen target hospitals, most of which are prominent academic medical centers that are part of larger multi hospital health systems. These product evaluations have progressed at varying speeds, particularly due to site specific impacts of COVID-19. As a result, the initial phase of our commercialization has taken longer than planned. However, I am pleased that interest in Pure-Vu is growing. Importantly, feedback from existing users and prospective customers regarding our technology has been highly positive. We're receiving more inbound requests by physicians and hospitals interested in evaluating the Pure-Vu system, which we believe positions us very well for future commercial success. Our initial strategy has been primarily focused on key opinion leading GIs at prominent US hospital systems. During the last year, we've supported this effort through investments in digital marketing, including the creation of our Pure-Vu podcast series, which are one on one interviews with GI physicians, as well as our growing compendium of clinical case studies, also available online through our website and other social media platforms. In terms of our pipeline, our sales team is expanding its outreach to regional community hospitals, and IBM. For example, in Q1, we restarted and completed evaluations at both Houston Methodist Hospital in Texas, as well as Sinai Hospital, one of the largest community hospitals in Maryland. In terms of key performance indicators in the first quarter of 2021, we delivered a 40% increase in revenue compared to last quarter. Notably, this represented our third consecutive quarter of incremental revenue growth. While revenue numbers are still quite modest relative to the very large adjustable market opportunity for Pure-Vu in the US, we are encouraged to see us steady increase of Pure-Vu procedures conducted this quarter, both paid and as part of product evaluations in comparison to the second half of 2020. We attribute this progress to the rebound in GI procedures at US hospitals, as well as the additional training we are conducting with targeted physicians as we regained on site access at most accounts. We now have four major hospitals signed to volume agreements, which require minimum quarterly purchases of Pure-Vu single-use sleeves in return for use of our Pure-Vu workstation. We are currently negotiating additional such agreements, as well as capital purchases with key sites that we expect to close in the second quarter. Let me expand a bit further on these committed volume agreements specifically. First, these early adopter customer agreements provide us with reasonably predictable recurring sleeve revenues each quarter. Second, these agreements provide for strong gross margins, as we typically command list pricing on the sleeves in return for use of the workstation. Finally, through the balance of 2021, we expect to continue to train additional physicians within each of these committed sites, with the aim to grow quarterly procedural volumes at levels that exceed the minimum purchase requirements. Our commercial focus remains on establishing a strong base of Pure-Vu users who are advocates for our technology. As awareness for our solution grows, so does the opportunity to expand our reach both within hospitals that have started to use Pure-Vu, as well to sister hospitals within the same health system. To support our growth, we do anticipate thoughtfully adding sales resources in 2021 as needed in select areas. I want to shift gears now to our four value creation drivers. Let's start with new product innovation. I'm pleased to report that two weeks ago, the FDA granted us 510-k clearance for our Pure-Vu disposable sleeve designed to fit on gastroscope for use during upper GI endoscopy. This is an exciting new market opportunity that further enhances the overall utility of Pure-Vu in the GI lab. The new sleeve uses the same Pure-Vu capital equipment as our existing lower GI solution. And the procedures are performed at the same target hospitals by the same target physicians. Therefore, the commercial activity and customer base we've been developing will soon be able to consider using our new Pure-Vu Upper GI sleeves for another clinical application. From a critical need perspective in Upper GI endoscopy, blood and adherent blood clots frequently obstruct the field of view for the physician as they are attempting to identify and treat the bleed source. We expect by leveraging our pulsed vortex irrigation and smart sense suction technology, that Pure-Vu can play a key role in assisting with removing these obstructions to improve visibility. Upper GI bleeds occur in the US at a rate of approximately 400,000 cases per year, which expands our total addressable inpatient market in the US by approximately 25%. In terms of next steps, our first priority is to leverage our FDA approval to initiate Upper GI clinical case evaluations that will allow us to demonstrate clinical utility and gain learnings in collaboration with existing Pure-Vu users. We expect to commence our pilot cases in June at key centers of excellence, who will perform an initial series of approximately 30 real world procedures. During this pilot phase, we will gain important procedural feedback and experience across a variety of different UPPER GI patient cases. We expect these learnings to help inform our plans for a full Upper GI commercial launch. Now let's discuss reimbursement. In the fourth quarter, we submitted two reimbursement applications to CMS; one for a new technology add-on payment, which if awarded would provide reimbursement for Pure-Vu in the inpatient setting and potentially serve as an accelerator to our current commercial execution. The second application is for a transitional pass through payment, which if awarded would be the first direct coverage of Pure-Vu in the outpatient colorectal cancer screening market. Securing pass through coverage for Pure-Vu for outpatient procedures could be an important catalyst for our business, as it may provide an incentive for physicians and outpatient centers to adopt our innovative technology due to potential favorable additional payments. Financial and health economic drivers, of course, serve only to complement the superior patient outcomes that we believe the Pure-Vu system delivers today. We expect feedback on both CMS applications by the end of 2021. We're also in the initial stages of executing our strategy to gain coverage for the Pure-Vu system by private payers. The first step in this process is aligning with an external partner to assist us in our efforts. I am pleased to report that we just signed a partnership agreement with one of the nation's top reimbursement firms, who has been engaged to help us develop and implement a payer outreach program, as well as to manage a patient access and provider services platform to support reimbursement for the peer review system. Please keep in mind that there are a variety of different avenues to obtain product reimbursement. And we've only outlined on this call our initial submissions to date. While we cannot guarantee reimbursement or favorable payment terms, this is a key priority for the company. And I'm pleased with the early progress we're making to move our plans forward. Moving to our third value creation driver, the generation of new clinical data. Last week, the journal Cost Effectiveness and Resource Allocation published a sponsored analysis of the Pure-Vu system on the outcomes of cost, quality of life and aversion of colorectal cancers as compared to the current standard of care for outpatient colonoscopy. There are important and compelling findings outlined in this article that show the use of the Pure-Vu system has the potential to generate lifetime savings of up to $992 per patient compared to the current standard of care for outpatient colorectal cancer screening. We believe this new data could be helpful in our efforts to seek outpatient reimbursement coverage. In terms of active clinical studies, as we reported during our last call, our investigator initiated study at the Cleveland Clinic is currently enrolling. This study is evaluating the clinical and economic benefits of using the Pure-Vu system in patients with emergent lower GI bleeding. The study is designed to enroll at least 20 patients who will undergo minimal bowel prep to provide patients a much faster time to diagnosis as compared to the current 24 to 36 hours typically required to complete full bowel prep. The outcomes we received from this study could begin to challenge the current standard of care for critical lower GI bleed patients. We anticipate having this study completed by the end of 2021. Finally, let me reiterate our thinking as it relates to strategic partnerships. We continue to advance our dialogue with several potential strategic partners. Our focus is finding pathways to accelerate and expand our commercial efforts in the US and in targeted regions outside of the US, enhance our technology development and unlock value for our shareholders. As we continue to drive greater awareness and utilization of Pure-Vu in the market, we believe strategic options that fit our criteria, and their actionable will become available for consideration. In summary, we're making important commercial progress. And if deployed a highly disciplined and focused approach to capitalize on four value creation drivers that have the potential to enhance the trajectory of our business in 2021 and beyond. I will now turn the call over to Andrew, who will review our financial results for the first quarter. Andrew?

Andy Taylor: Thank you, Tim. And thank you everyone for joining us today. We reported revenue for the first quarter 2021 of approximately $51,000 primarily from the sales of Pure-Vu single-use sleeves. As Tim mentioned, this represents an increase in reported revenues of approximately 40% compared to the fourth quarter of 2020. For the three months ended March 31 2021, we reported a net loss of approximately $4.6 million or $0.11 per basic and diluted share compared to a net loss of $6.5 million or $0.23 per basic and diluted share for the same period last year. The net loss attributable to common shareholders in the first quarter of 2021 was $10.8 million or $0.25 per basic and diluted share, which included non cash, deemed dividends from warrant issuance, totaling $6.1 million associated with the previously announced issuance of warrants under the warrant exchange agreement, executed in January 2021 with an existing institutional investor. During the first quarter, net cash used in operating activities and for the purchase of fixed assets was $4.7 million as compared to $7.2 million for the same period 2020, a reduction of approximately 35% year-over-year. As is the case each year, first quarter cash expenditures includes certain one time annual outflows associated with compliance and corporate matters, this year totaling approximately $1.6 million, which will not recur in future quarters in 2021. At March 31 2021, we reported $27.7 million in cash and cash equivalents. This balance included approximately $11 million raised this quarter through the warrant exchange agreement, as well as $8 million from our 2019 term loan agreement with Silicon Valley Bank. With our current cash balance, we are poised to execute on our 2021 value creation drivers, ensure compliance with our bank liquidity covenant, and meet our overall anticipated cash needs into 2022. And with that, I'll turn the call back over to Tim.

Tim Moran: Thanks, Andrew. In closing, we remain committed to continuing to build a strong foundation of loyal Pure-Vu supporters and capitalize on our first mover advantage in this large addressable market. We intend to work with our customers to ensure access to our technology and expect to continue to ramp procedure volumes in the back half of 2021. From a near term catalyst perspective, we believe we have never been in a stronger position as a company. We will continue to drive forward each of our four major catalysts including new product innovation, reimbursement, clinical data generation, and strategic partnership opportunities. Our commercial progress coupled with these key catalysts provides opportunities for us to unlock significant value for our customers, their patients and our shareholders. I will now ask the operator to open the call for your questions.

Operator: [Operator Instructions] Our first question comes from Matt O'Brien with Piper Jaffray.

DrewStafford: Hi, guys, good afternoon. This is actually Drew on for Matt. And thank you for taking the questions. I want to start off on the minimum sleeve purchase disagreement. Obviously, you signed a couple last quarters, a couple more this quarter. Just any update on how those accounts you signed last quarter are tracking relative to those agreements. I understand you have some COVID impact in there as well. And then any feedback from those institutions as they started to ramp up their volumes.

TimMoran: Yes, Drew, thanks for the question. This is Tim. Yes, so we're pleased that we were able to sign more committed accounts this quarter. And as I referenced in the prepared remarks, we expect to sign additional accounts here in Q2 and beyond. But I'm pleased to say that each of these accounts so far is hitting their minimum objectives on a quarterly basis, which is what we want to see. But we've also been spending time in these accounts now that we're gaining access training additional physician. So we fully expect that these truly will be minimums, and these accounts will grow well beyond that as we get further into the year. But so far the design of the program is allowing us to get into these accounts quickly and not have capital funding be a roadblock and having it on site just fosters further usage coupled that with our ability to now get in those accounts and influence that process and we expect that to ramp up in the back half of the year but so far so good.

DrewStafford: Okay, that's great to hear. And turning to Upper GI, congrats on the approval well ahead of schedule, maybe you kind of help us think about the roll out there. I think you mentioned some pilot cases are going to kick off, what point do you think it proceed the full launch? Is that '21? Or is that more like a '22 type event? And then, how should we be thinking about how you're going to market institutions? Does it change the way you're able to approach, the VAT committees or anything like that?

TimMoran: Yes, so we were pleased, very pleased with that FDA approval. And as you said, it came in, very short order. The team, I want to compliment our team. Internally, our R&D and engineering team did a terrific job. And then, of course, the regulatory folks with a great submission to make it very clear and focused. So based on that, yes, the first key priority here for Upper GI is to initiate this initial grouping of pilot accounts to do upwards of call it 30 procedures. And the reason that's so important is we want to get the key learnings, the physician feedback, things that will really inform us in terms of procedural development, all the things that you want to do to ensure a robust, eventual full commercial launch. So that's going to take, call it a couple months to do those initial cases. And then based on that, Drew, we're going to, that'll inform us in terms of the speed that we then continue on into the market. But we're very excited right now, with this opportunity. Upper GI as I've talked about before, it really is synergistic to everything that we're doing, right; it's in the same accounts, the same position call point. So we can leverage and add more productivity to the very lean sales force that we have. But then now they've got another indication to sell. And on top of that, it works off of the existing capital. So for accounts that already have capital on site, this is a very simple upgrade to Pure-Vu system and the overall utility. And I think that's going to play a big role as it relates to the VAC committees on a go forward basis, because now, obviously, this one capital investment is going to allow them to treat two different indications. And we've talked about this, but Upper GI is something that when blood or blood clots are obstructing the field of view for the physician, this can be a very critical and acute situation. So we truly believe that our product is going to act as a nice combination to the existing gastroscope to allow the physician to have that clear visibility, while still being able to use the working channels of the gastroscope. So they're not now tying up the gastroscope using it for suction, they're using our device to get that suction irrigation, which is allowing them to put their tools down the working channel, which is truly what it's intended for. So, we're very bullish, but we have to take this in a very strategic approach, so the first portion of this will be the pilot series, and then, I anticipate on the next earning call providing a further update.

DrewStafford: Very helpful. And just last one for me, just stepping back and looking at the total business in general, I just want to make sure I fully understand the strategy laid out and kind of what to expect from a revenue perspective over the next, 12 to 18 months here, you obviously have a number of things going on, you sign some high profile institutions on the Pure-Vu, am I right to sort of interpret that you kind of expect to continue this process at a similar pace, work with those institutions to build out efficacy and cost debt, and then, maybe start pushing a little bit more aggressively in the early part of 2022. And that's when you start to see the revenue acceleration, is that the correct interpretation?

TimMoran: So I think generally speaking, Drew, that's relatively accurate. But I think the way we're thinking about this is, if you think about the initial kind of call it 20- 25 sites that we've talked about from the beginning of the launch, obviously, there was a setback with COVID that it's taken a couple extra quarters to really get through that first phase. And the reason we said that was so important is because it gives you the learnings, it gives you the feedback in terms of the procedure themselves, what the physician is saying, how to best utilize the product and the procedure. And you really need those learnings to then make a significant investment into selling resources. So I think we're moving much further along in that now that things have opened up and we're able to get our reps back into these accounts. So you heard me say earlier, we will start to add sales resources this year. So we have more opportunities than the size of our sales team. So you'll see us add resources start to ramp up into the end of the year, which coincides nicely with kind of closing out the expectation of getting these accounts fully converted, committed to capital and reordering the process, the products on a consistent basis. And then I think we have the ability to continue to invest heavily into sales resources as we're seeing that happening, but we're also evaluating, as I mentioned in the prepared remarks, the potential for strategic partnership, which could be a viable option to really scale the business more, from a commercial perspective. So, but that's the thinking in terms of, how do we take what we have here and really get into this large, large addressable market that, quite frankly, we're the only product available, right, we've got that first mover advantage. So exciting future ahead.

Operator: Our next question comes from Steven Lichtman with Oppenheimer.

DavidKuang: Hey, guys, this is actually David on for Steve, thanks for taking our questions. Just starting off with for me, wondering if you could, because that's I'm getting the extended indication into the Upper GI. I was wondering if you could talk about what the reimbursement environment would look like upon launch with that.

TimMoran: Sure, so what I can say is this, similar to our lower GI, there are programs that we believe that this product would fit into, we just talked about, what we're doing with lower GI submissions with CMS that these initial kind of more fast track programs that they offer for new technologies. So, obviously, an Upper GI product like this that is unique to the market would have those same opportunities, and we're evaluating those now, David. So we don't have an update to give you in terms of timing, but that's certainly something that we're evaluating, and we'll take advantage of any and all opportunities that would support the commercialization. What I will say is this is a hospital based procedure, for the most part in terms of Upper GI endoscopy for bleeding cases. And similar to our lower GI, the value prop with Pure-Vu in terms of our ability to avoid delays for lower GI or shorten length of stay, we think will also be applicable for Upper GI if we can shorten the time it takes to get diagnosis on these procedures, which at times in difficult cases can be hours, that's going to have significant benefit both to the patient and the institution. So we think reimbursement is probably not a headwind. But just to be an accelerator if we were to get reimbursement on Upper GI in the future.

DavidKuang: Okay, great. That's helpful. And then just secondly from me I was wondering if you could talk about what the current hospital CapEx environment looks like, given the broader vaccine rollout. Do you anticipate placing any outright purchases of the system in '21 ahead?

TimMoran: Yes, so we're the vaccine rollout as we talked about last quarter, we anticipated it would start to improve things. And we're certainly seeing that in the first quarter, and in getting even better in the second quarter. So that's all positive. And the downstream impact, as we've discussed is significant because it gives us onsite access, the physician mindshare to focus on new technologies has certainly begun to open up all very, very positive, specifically for we're trying to accomplish as a company and as a business, as we build this market. From a capital perspective, I don't know that our view has changed yet compared to what we've said in the past. I mean we're being very flexible with our customers in terms of options to get the capital into their facility. We've talked about these volume agreements, which, seem to be popular. Currently, we do offer a leasing program, which is a very simple program that the hospital can lease over the course of 24 or 36 months. And then of course, an outright purchase. I'm not sure I'm ready to predict the capital environment improving between now and the end of the calendar year. But we'll certainly update you as we see more.

DavidKuang: Got it. And just lastly for me. Are there any updates on any types of data presentations that we should be looking out this year, either from reduce or expedite study?

TimMoran: Yes, sure, we certainly have a focus on both getting existing trials that are done, Pure-Vu as well as some of the new clinical studies that we have underway, but I'll ask Mark, who's on the line to just comment on kind of how we're thinking about, upcoming publications.

MarkPomeranz: Hi, everyone thanks for joining the call. So, yes, we are really looking at high likelihood of reduced steady coming out in full Pure-Vu journal. And of course it will be -- of the coming months. So we believe we're on track for that to happen and also looking at I think as we've talked about in the past, unfortunately for the expedite trial, our key investigator had switched institutions in the early parts of that trial. So we didn't get a full data set with that study. But regardless of that, we do anticipate that we will be able to get that data out and publicly disclosed in the coming months as well.

Operator: Our next question comes from Yi Chen with H.C. Wainwright.

BoobalanPachaiyappan: Hi, this is Boobalan dialing in for Yi Chen. So, first question, do you anticipate hiring new sales reps as the economy is beginning to normalize?

TimMoran: Yes. Hi, Boobalan. Thanks for the question. This is Tim. Yes, we do. We do intend to add sales resources strategically throughout this year. And really, it'll be based on needs and opportunities in specific metro areas. But we're actively looking at that as we speak. So I would expect you will see that we're not ready to give a specific number because as I said, we're going to, it will be kind of commensurate with opportunity. But we do intend to add to our sales team.

BoobalanPachaiyappan: Alright, next one, are you planning to submit new 510-k applications during the coming quarter?

TimMoran: So from a 510-k application perspective, the most recent is the one that we obviously just submitted a month ago and got approved for Upper GI, so we're not ready to comment on any additional submissions here in the next call it quarter or so. But we will definitely update folks, as we continue to develop our platform and other opportunities from a product perspective. We absolutely have a robust R&D pipeline, but nothing that we would be -- it would be appropriate to comment on today in terms of 510-k submission.

Operator: There are no further questions in queue. At this time, I would like to turn the call back over to management for closing comments.

Tim Moran: Great, thanks Tanya, I appreciate that. And I just want to thank everyone for joining the call today. As I said we are enthusiastic and excited that we're now back out in the market with access to most and if not, eventually here all of our accounts. As you heard today, we're seeing traction from a commercial perspective. And the four value creation drivers we believe can have a nice impact on our business here the near term, but certainly proved to be very important long term for the growth of Motus GI. So thank you everyone and we look forward to talking to you during next quarterly call.

Operator: Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation. Have a great day.