Tenon Medical Q3 2023 Earnings Call Transcript

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November 14, 2023

There are 6 speakers on the call.

Operator

Greetings, and welcome to the Tenon Medical Third Quarter 2023 Financial Results and Corporate Update Conference Call. As a reminder, this call is being recorded. Your hosts today are Steve Foster, Chief Executive Officer and President and Steve Van Dyck, Chief Financial Officer. Mr. Foster and Mr.

Operator

Van Dijk will present results of operations for the Q3 ended September 30, 2023 and provide a corporate update. A press release detailing these results was released today and is available on the Investor Relations section of the company's website, www.tenonmed.com. Before we begin the formal presentation, I would like to remind everyone that statements made on the call and webcast may include predictions, estimates and other information that might be are forward looking. While these forward looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to replace undue reliance on these forward looking statements, which reflect our opinions only as of the date of this presentation.

Operator

Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward looking statements in light of new information or future events. Throughout today's discussion, we will attempt to present some important factors relating to our business that may affect our predictions. For a more complete discussion of these factors and other risks, you should review our prospectus dated April 26, 2022, particularly under the heading Risk Factors, which is on file with the Securities and Exchange Commission at www.sec.gov. At this time, I'll turn the call over to Tenon Medical's Chief Executive Officer, Steve Foster. Please go ahead, sir.

Speaker 1

Thank you, Devin, and good afternoon to everyone. I'm pleased to welcome you to today's Q3 2023 Financial Results Update Conference Call for Tennon Medical. During the Q3, we expanded the adoption of our fully commercialized catamaran system and an increase in the number of surgical procedures in which the system was used, driven largely by our multifaceted marketing strategy, including ongoing educational programs, informational materials and interactive workshops. During the Q3, procedures supported strong revenue growth with an increase of 3 54% year over year and 27% sequentially from the 2nd quarter. In the previous quarter, we marked an important milestone with gross profit and gross profit margin turning positive.

Speaker 1

Now in the Q3, gross profit was up 176% sequentially from the Q2 of 2023 to $535,000 and gross profit margin improved to 57% in 3rd quarter from 26% in the Q2 of 2023. The 3rd quarter marked an important milestone for Tenon As we launch the surgical use of our Jib instrument kit for the catamaran SI Joint Fusion System for initial patient treatment by 2 leading physicians in the ortho and neuro spine fields. We are encouraged by the overall positive feedback we've received from our physician customers Utilizing the system as well as the encouraging early post op results, we've developed enhanced tools with a promise to deliver upgraded graft handling, smaller access profile and enhanced access stabilization. These upgrades will assist our expansion of application into SI Revision Surgery, adjunct to multilevel fusion fueled by our valued physician customers with support from our commercial infrastructure we built. Our mission to deliver refined surgical options Patients with chronic sacroiliac joint pain or degenerative sacroiliitis, the VAIO conservative care is continuing to gain traction with targeted physicians.

Speaker 1

As a reminder, we leverage our relationships with national and local sales managers, clinical managers and independent distributors, And we conduct frequent local workshop training programs to reach physicians who have been trained on SI procedures or have significant experience with SI Surgical Technologies. We continue to focus on a combination of our local synthetic model and catabaric lab workshops to introduce the catamaran system, creating a timely and efficient process for our physician customers. We supplement these efforts with intensive clinical support and service. Combined, these critical advantages And activities are designed to drive acceleration in the number of procedures completed with the catamaran system. During the Q3, our surgical procedures increased 3 29% compared to the year ago quarter, Confirming a solid return on investment, our strategic approach.

Speaker 1

Our programs hosted 28 physicians in catamaran workshops To learn more about how the implant transfixes and stabilizes the SI joint, as well as why the inferior posterior approach is the optimized approach to the anatomy. During the workshops, we highlight how this distinct implant system addresses a significant unmet market opportunity and designed to produce broad and demonstrable advantages over market competitors. Building on the momentum of the Q3, We expect the number of surgical procedures to continue to grow as our sales team broadens our strategic marketing, promotion and workshops featuring the catamaran system. With that, I'll turn it over to Mr. Van Dijk, our Chief Financial Officer, to discuss our financials.

Speaker 2

Thank you, Steve. I'll give us a sync review of our financial results. A full breakdown is available in our press release that crossed the wire this afternoon. Our revenue was $944,000 in the Q3 of 2023, an increase of 3 54% compared to the 208,000 in the comparable year ago period. Revenue for the 9 months ended September 30, 2023 was $2,100,000 an increase of 412% compared to the $414,000 in the comparable year ago period.

Speaker 2

The increase in revenue for the 3 9 months ended September 30, 2023, as compared to the same periods in 2022, was primarily due to Gross profit in the Q3 of 2023 was $535,000 or 57 percent of revenues compared to the gross loss of $94,000 or a negative 45 percent of revenues in the comparable year ago quarter. For the 9 months ended September 30, 2023, gross profit was $682,000 or 32 percent of revenues compared to a gross loss of $434,000 or a negative 105 percent of revenue in the comparable year ago period. Gross margin continued to improve due to higher revenues as a result of increase in the number of surgical procedures during the quarter. Operating losses totaled $3,400,000 for the Q3 of 2023 compared to a loss of $3,300,000 in the Q3 of 2020 2. For the 9 months ended September 30, 2023, operating losses totaled $12,600,000 compared to a loss of $10,800,000 in the comparable prior year period.

Speaker 2

The increase in operating expenses was largely due to higher sales and marketing for future growth. Net loss was $3,300,000 for the Q3 of 2023 compared to a loss of $3,200,000 in the same period of 2022. For the 9 months ended September 30, 2023, net loss was $12,400,000 compared to a net loss of $11,000,000 in the comparable previous year period. We continue to expect to incur additional As of September 30, 20.3 cash and cash equivalents and short term investments totaled $3,400,000 as compared to $6,300,000 as of June 30, 2023. As of September 30,

Speaker 1

Thank you, Steve. With the accelerating pace of the catamaran procedures and continued expansion of our sales and marketing efforts, We are very optimistic for continued growth in the commercialization of our proprietary FDA cleared surgical implant system. We mark the Q3 with strong revenue gains and a positive growth margin and believe we can continue this growth trajectory with our We continue to reinforce our commitment validating and differentiating patient outcomes and radiographic assessment with ongoing post market clinical studies and expect to expand the application of our distinct product offering to address SI revision surgery, adjunct multilevel fusion SI procedures utilizing navigation software in imaging. We look forward to additional updates in the months to come As we continue to expand our sales infrastructure and execute on our growth objectives to improve the quality of life for patients suffering from SI joint pain and bring long term value to our shareholders. I thank all of you for attending.

Speaker 1

And now I'd like to hand the call over to our operator to begin our question and answer session with our covering analysts.

Speaker 3

One moment please while we poll for questions. Our first question comes from the line of Bruce Jackson with The Benchmark Company. Please proceed with your question.

Speaker 4

Hi, good afternoon and congratulations on all of the progress. A couple of questions about the JID Instrument kit, is this something that's being prototyped right now? And what are your plans in terms of getting it into a full commercial And are there any regulatory considerations?

Speaker 1

Yes. Hello, Bruce. This is Steve, and thanks for your questions. So Our Jig Kit is an enhancement of our instrumentation system. We're well past the prototype We've now built these technologies and put them in the hands of select physicians to make sure that we Missed anything that it's satisfactory to them and that it's delivering on its promises.

Speaker 1

The technology has been through all regulatory review and is clear to go And we are now expanding the use of Jib into virtually all of our procedures from day to day. We spent the month of October really making sure we like what we saw. We've done over 30 procedures with the technology. Very, very encouraged about the feedback and what we're seeing there. So we're off and running now with this JIB technology.

Speaker 4

Okay. Super. And then in 2023, you had a fairly Favorable reimbursement climate, are there any changes for 2024 anticipated?

Speaker 1

Yes, indeed. As always, a very dynamic space in the SI world. BAMA has completed their processes throughout 2023. And of course, we wait anxiously to see the final AMA CPT book usually comes out In the early December timeframe, what we understand from their recommendations and from prior meetings' recommendations is There will be a new CAT 1 code introduced into the SI world coming in 2024. That new CAT 1 code will be focused on facilitating reimbursement and professional fees for intra articular devices, which there are many on this market that will establish reimbursement rates, etcetera, in the 7.8 RVU range.

Speaker 1

That's a process they've been going through to establish the code and to establish values for that code. We anticipate very little change for catamaran and that we'll continue to have access to the use of Situations that they see with patients. We draw that conclusion because 90 plus percent Of our implant, once it's implanted, Bruce, 90 plus percent of the implant is anchored in the ilium and then again in the sacrum. So we decidedly by every definition are not an intra articular device. So that pretty much leaves 27, $279,000 $27,000 $280,000,000 as the option.

Speaker 1

So it's a very dynamic spot. We don't know everything yet, but we think we have Pretty good feel for where all this is going to shake out for the coming year.

Speaker 4

Okay, great. And then last question for me. We had a post approval study underway. Just wanted to know if there's any update on that?

Speaker 1

Yes, it's moving along very nicely. As a matter of fact, we had 2 patients enrolled today at a site that we're bringing online I'm quite excited about. I anticipate, Bruce, this is targeted this post market trial is targeted for 50 patients. It could be anywhere between $40,000,000 $50,000,000 somewhere in that range when all is said and done. And we anticipate that enrollment for that trial will end here Probably by the end of Q1, that would be my target at this point.

Speaker 1

And at that point, we'll be seeing some immediate Reporting on how the patients did both pre op in the OR and immediately post op And then we look forward, of course, to ongoing reports as they come in for their follow-up for pain scores and ultimately a set of Scans to prove radiographically that they've appropriately healed and fused. So really looking forward to that data as it rolls.

Speaker 4

Okay, super. Thank you very much for taking my questions.

Speaker 1

Thank you, Bruce.

Speaker 3

Thank you. Our next question comes from the line of Anthony Vendetti with Maxim Group. Please proceed with your question.

Speaker 5

Thank you. Steve, yes, so just to follow-up on the post market study, 40 to 50 patients and expect to conclude by End of 1Q 'twenty four. 2 signed up today, what's the total number you have signed up so far?

Speaker 1

Yes. We're in the low 20s right now, Anthony, and hello, by the way. Thanks for joining us. We're in the low 20s in enrollment. We've got several patients now that are teed up for the November December months coming up.

Speaker 1

So we really do anticipate that we'll get into that 40 to 50 range by the end of Q1 in 20

Speaker 5

Okay, great. And how many sites is that at? Just remind me again.

Speaker 1

We now have 7 active sites around the country that are actively recruiting and enrolling patients.

Speaker 5

7.5%, okay. And then I know you're doing physician training and obviously you have some great numbers here in procedures up 3 29 percent in the 3rd quarter. Are you ramping up the physician training? How is that going? And what are you doing to get more physicians enrolled and aware of the catamaran system?

Speaker 1

Yes, this is a great question. So of course, we're like any other company, we're trying to fill the funnel with opportunities, Right. The only way we know how to do that is to tell our story and compel and then make the ability to take a look at the technology and do a To bring the technology to them locally, so they don't have to wait and travel on a Saturday or something like that to a lab In a city where they have to fly and things of that nature. So we're accelerating by making it convenient And of course, it's the engine that sort of fills our funnel and gets us moving towards adoption and eventual use of the technology. We're encouraged by what we see.

Speaker 1

Look, I'll stress, We target very, very carefully. And so our objective isn't to see how many people we can train. Our objective is to target really well So that when we train someone, it's worth their time and it's worth our time and investment. And that's how we choose to go about our business every day.

Speaker 5

That's great. Just in terms of vetting them and figuring out which orthopedic surgeons You work with maybe just a little more color on how that process goes. Is it referrals from KOLs? How do you vet the orthopedic surgeons to make sure that they're the right ones to train and work with?

Speaker 1

Yes. Certainly, what you say are our key opinion leaders have a lot to do with sort of vetting, if you will, who we invite into training sessions. What we look at, Anthony, is the experience they have with SI Technologies. The pelvis is an interesting environment If the physician has experience imaging the pelvis and placing implants there, etcetera, they're way ahead of the game as it relates to Being comfortable in their learning curve and what have you to adopt a technology like this. So their experience with SI Technologies in the past, Training sessions they've been involved in, etcetera, tells us the story about how things would go for us in Training session.

Speaker 1

And so we do, we target folks who have been down through that pathway, we're comfortable with the imaging, who have these experiences in their background and frankly have developed the referral networks and what have you to have SI is part of their practice. When we establish those things, this becomes a target that's meaningful for us and gives us energy on that specific target.

Speaker 5

Great. And then maybe just one financial question. So gross margin came in significantly better than I was expecting, a 56.7 Anything that you would attribute to that strong gross margin for this quarter? And is that sustainable

Speaker 2

Anthony, this is Steve. Yes, I think We do believe that the gross margin is sustainable. I mean, it's tied to our growth in revenue. I think like we mentioned earlier, or haven't mentioned earlier, but what I normally refer people to is A good portion of our cost of goods sold is either fixed or semi fixed. And so the incremental increase in revenue, we have good leverage to increase that margin percent as revenue grows, because the amount of incremental Costs associated with another extra procedure or additional procedures is right now a small piece of our cost of goods sold versus the overhead and the facility costs that we currently have.

Speaker 2

So I think we're really happy with where the margins came in and we do expect that they will be able to continue to grow as revenue grows.

Speaker 5

Okay, great. Excellent. Thanks guys. I appreciate it. I'll hop back in the queue.

Speaker 3

Thank you. There are no further questions at this time. I'd like to turn the floor back over to Mr. Foster for closing comments.

Speaker 1

Well, thank you, Devin. I'd like to thank each of you for joining our earnings conference call today and look forward to continuing to update you on our ongoing progress And growth, if we were unable to answer any of your questions, please reach out to our IR firm, MZ Group, who would be more than happy to assist. With that, I wish everybody a good evening.

Speaker 3

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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Tenon Medical Q3 2023
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