Tenon Medical, Inc. (NASDAQ:TNON) Q1 2024 Earnings Call Transcript

Tenon Medical, Inc. (NASDAQ:TNON) Q1 2024 Earnings Call Transcript May 15, 2024

Operator: Greetings. Welcome to Tenon Medical First Quarter 2024 Financial Results and Corporate Update Conference Call. As a reminder, this call is being recorded. Your hosts for today are Steve Foster, President and Chief Executive Officer; and Steve Van Dick, Chief Financial Officer. Mr. Foster and Mr. Van Dick will present results of operations for the first quarter ended March 31, 2024, and provide a corporate update. A press release detailing these results was released today and is available on the Investor Relations section of our Company’s website at 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 may be considered forward-looking.

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 is not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. 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 on file with 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.

Steven M. Foster: Thank you, Sherry, and good afternoon to everyone. I’m pleased to welcome you to today’s first quarter 2024 financial results and corporate update conference call for Tenon Medical. We began 2024 following a year of significant operational progress and continued focus on building market share. Across operations, we’ve made considerable commercialization and technical advances and remain on the right path as we begin our second year of commercialization. We aggressively monitor our commercial activities and have restructured our sales organization based on our 2023 learnings. During Q1, we had coverage in two of five geographic regions. With the addition of new personnel assigned to these areas, we are now poised to move forward.

We continue to gain traction in our go-to-market approach with SI-focused physicians and network partners adopting our proprietary Catamaran system, which we believe has broadened the competitive field of surgical options available for patients with chronic sacroiliac joint pain and degenerative sacroiliitis. Our first quarter of 2024 financial results reflected continued strong momentum with a 66% increase in revenue year-over-year driven by a 42% rise in surgical procedures utilizing the Catamaran system. This is our fourth consecutive quarter of positive gross profit with a steady rate of gross margin of 65% as compared to the prior quarter. As we sustain revenue growth, we believe our stable cost structure will continue to maintain gross margin performance at recent levels.

During the quarter, we announced favorable interim results from our ongoing post-market clinical study. The first patients are now reaching their 12-month milestone, which includes a CT scan to assess bone healing. In addition to seeing marked improvements in VAS and ODI scores, we are seeing radiographic proof of bridging bone in these 12-month CT as assessed by an independent radiologist. This is further indication that Catamaran delivers on its clinical promises. For those new to Tenon, this prospective multi-centered single arm post-market study evaluates the clinical outcomes of patients with sacroiliac joint disruptions or degenerative sacroiliitis treated with the Catamaran SI Joint Fusion System. Patients will be evaluated for a period of up to 24 months reviewing various patient reported outcomes, radiographic assessments and adverse events.

As mentioned during our earnings call in March, we are approaching the end of enrollment and anticipate a detailed interim analysis in the fall of 2024. This validation further underscored our confidence that the Catamaran’s transfixing design, less invasive inferior-posterior approach is functioning as intended to optimize patient outcomes through short-term stabilization and long-term fusion of the SI joint. Of note, the interim data from our study combined with the over 500 surgeries performed with the Catamaran system to-date is demonstrating an exceptional safety profile benefiting patients and their physicians alike. We continued expansion of our workshop activities during the first quarter, supported by our valued physician faculty and the robust commercial infrastructure we continue to build.

As a reminder, we take a precise go-to-market approach through our workshop and training programs in order to address physicians and medical professionals with extensive backgrounds and experience in SI surgical technologies. We hosted 12 physicians in Catamaran workshops during the first quarter of 2024. With validation of our system’s effectiveness demonstrated in the preliminary results from our post-market study, we have reached a critical inflection point that will drive further adoption of this important technology. Tenon will be broadening our strategic marketing, promotion and workshop efforts to get the word out that Catamaran delivers. Recently, we welcomed Kristine Jacques to our Board of Directors. Her significant experience in the medical device field focusing on go-to-market strategies of spine related technological innovation will provide valuable insight for our Company.

We further enhanced our growing patent portfolio for the Catamaran SI Joint Implant System with receipt of an issuance of a notice of allowance of patent application from the U.S. Patent and Trademark Office, which further encompasses important claims for our system. Currently, we have eight issued U.S. and international patents and 23 pending U.S. and international patents applications. Additionally, during the first quarter, we strengthened our balance sheet to support our accelerated sales and marketing initiatives. We generated proceeds of $2.6 million from our preferred stock raise during the first quarter as we simultaneously retired $1.25 million in secured debt from the fourth quarter of 2023. With that, I’ll turn it over to Mr. Van Dick, our Chief Financial Officer, to discuss our financials.

Steven Van Dick: Thanks, Steve. I’ll give a succinct review of our financial results. A full breakdown is available in our press release to cross the wire this afternoon. Our revenue was $719,000 in the first quarter of 2024, an increase of 66% compared to the $433,000 in the comparable year ago period. The increase in revenue for the first quarter as compared to the same year ago period was primarily due to an increase of 42% in the number of Catamaran surgical procedures. Gross profit in the first quarter of 2024 was $470,000 or 65% of revenues, compared to a gross loss of $47,000 or a negative 11% of revenues in the comparable year ago quarter. Importantly, we’ve seen gross margins steadily improve due to the revenue growth associated with an increase in the number of surgical procedures, which resulted in sustainable operating leverage due to the lower relative fixed costs and the absorption of more overhead into our standard cost.

Operating losses totaled $3.5 million for the first quarter of 2024 compared to a loss of $4.9 million in the first quarter of 2023. Decreases in the operating expenses were primarily a result of decreases in research and development expenses and third-party sales and marketing expenses due to Tenon’s implementation of an internal commercial infrastructure. Net loss was $3.6 million for the first quarter of 2024 compared to a loss of $4.8 million in the same period of 2023. The Company does expect to incur additional losses in the future. As of March 31, 2024, cash and cash equivalents totaled $4.4 million as compared to $2.4 million as of December 31, 2023. As of March 31, 2024, the Company has no outstanding debt. With that, I’ll turn it back to Steve, for closing thoughts.

Steven M. Foster: Thank you, Steve. As we continue to drive momentum in the market represented by year-over-year increases in our Catamaran procedures, we are prioritizing the scale of our commercialization strategy of our proprietary FDA cleared surgical implant system. We ended the first quarter with attractive year-over-year revenue growth and a fourth consecutive quarter of positive gross margin. We believe we will continue this growth trajectory supported by our expanding commercial infrastructure and seasoned sales management team. We are particularly encouraged by the interim clinical results from our post-market clinical trial as well as safety profile emerging from our clinical experience to-date. Our organization believes deeply in the First Do No Harm component of Hippocratic Oath and is committed to delivering technologies our physician customers can count on.

Our investment in IRB controlled post-market data gathering is further reinforcing that the Catamaran system delivers on its promises. We will continue to refine and innovate to drive our growth objectives to further improve the quality of life for patients suffering from SI joint pain, while pursuing long-term value for our shareholders. I thank all of you for attending. And now, I’d like to hand the call over to our operator, to begin the question-and-answer session with our covering analysts. Sherry?

Operator: Thank you. [Operator Instructions] Our first question is from Bruce Jackson with The Benchmark Company. Please proceed.

Bruce Jackson: Good afternoon. Thank you for taking my questions. First, question about the workshops and the composition of the doctors. What’s the mix between interventional pain physicians and the spine surgeons?

Q&A Session

Steven M. Foster: Thank you, Bruce. I appreciate your question. Yes. We have a mix of orthopedic and neuro spine surgeon and interventional and pain surgeon customers. Our mix in training is, believe it or not, right in that 50-50 range. There’s a lot of debate about in this space between the specialties, etcetera. We are agnostic to that issue. We focus a great deal on making sure that the physicians we target and invite into a workshop environment have the experience necessary to deal with this type of procedure that understand the SI joint, what have you. But, yes, to answer your question specifically, we’re right about at the 50-50 mark, interventional and pain, versus, spine surgeon.

Bruce Jackson: Okay. Great. And then, a question on the post-market study. So, you released some data back in March that looked great. And, I think you mentioned in the script that you’re going to be releasing some more data later this year. Can you tell us how many patients were in the first group of data that was released? And then, what can we look forward to with the next data release?

Steven M. Foster: Sure. Indeed. Really what you can look forward to is increasing numbers. So, in the first, the press release, I believe, you’re referring to that was about a month, a month and a half ago, we were reporting on the first few patients that have hit their 12-month milestone and gone to get that critical post-op CT. Yes, we’re constantly monitoring how they’re responding, their satisfaction, their pain scores, things of that nature. When we get to that 12-month mark, we want to do a radiographic assessment of the healing that’s taking place around. If the pain scores are improving and we see a good radiographic proof of bridging bone fusion, we’re drawing the conclusion very quickly that what we set out to do has been achieved.

And so, that’s a critical landmark, that 12-month landmark. We had the first few patients, I believe it was six, but it hit that milestone. That’s what was involved in the first press release that came out. What you’ll see, Bruce, in the fall is just increasing numbers instead of six, so we’ll be up to 10, 11, 12, into the teams and things of that nature. And at that point, we’ll be able to compile an interim analysis. So, it won’t be a final document on the study, but it will be an interim analysis on our progress as we start to draw conclusions about what we’re seeing in this data.

Bruce Jackson: Okay, great. And then, last question for me. So, I believe the study is going to be enrolling upwards of 50 patients eventually. Is that right? And then, at what point do you think physicians will look at the data and say this is, can give me the comfort to give this a try? Will the 12-month data be sufficient or will some of them wait for the 24 month data? And that’s it for me. Thank you.

Steven M. Foster: Yes. And, thanks for that. So, a couple of things. One, the study is set for a maximum of 50 patients. So, we’re somewhere north of 40 and near 50 we’ll shut down enrollment and go into, data gathering and assessment process. Where do physicians get moved? Look. This is a wild card question because some really want to wait for the whole study to play out and see everything together. Others will be moved at that interim analysis time window. The bottom line is if the pain has gone away to a significant level, the patients are highly satisfied, and they see actual pictures of a bridging bone fusion of the SI joint, they start drawing conclusions. Something that’s missing with all the different SI technologies out there is clear and definitive radiographic proof of an arthrodesis or a fusion.

This is something we’ve been committed to delivering since day one, and are very much looking forward to it. So, why we were so excited and put that release out a month and a half ago to see those early images of clearly healed SI joint. So, I think that’s what you’ll see, Bruce, is just the numbers continuing to grow as we move through the assessment of this data and the follow-up periods and the milestones.

Bruce Jackson: Excellent. Thank you.

Operator: Our next question is from Anthony Vendetti with The Maxim Group. Please proceed.

Anthony Vendetti: Thanks. Yes, so just following up on the study, so 40 to 50 patients, 50 is max. Where are you right now in terms of the number of patients? And then, how many sites do you anticipate when full enrollment is complete? How many sites are you looking?

Steven M. Foster: Yes. Sure, Anthony. Thanks for the question. We’re just about done, is what I’ll tell you. We’re in the high-30s, nearing 40 and just about wrapped up with enrollment. I really do anticipate that’ll be happening here very shortly, and we’ll go ahead and shut that down. We have eight active sites with the study right now. Don’t see that expanding radically because we’re down to maybe, I don’t know, eight to ten more cases to enroll in the trial. So, it’ll probably be in that eight range when all is said and done.

Anthony Vendetti: Okay. And then, in terms of physician training, how do you see that playing out, assuming the results come in and it’s compelling? How do you anticipate that rollout?

Steven M. Foster: Well, a couple of things. I mentioned some of the restructuring we did to our sales organization. So frankly, our training number was a little lower than normal in Q1 because of that transition. So, I expect, number one, now that we’re bringing people on board and what have you, I expect that number to expand and grow. I think the other component to it, Anthony, that’s really important is with clinical data like that, that goes out and gets in front of the physicians either via, podium presentations or posters or publications or what have you, we anticipate more inquiries. Right now, we’re chasing, trying to tell our story, get people interested, etcetera. With data, we hope that data will be compelling, and it will compel physicians to inquire about, hey, can I check this stuff out?

Can I get into a workshop setting, etcetera? So, all arrows are pointing up on the training volume. We believe we’ve got our synthetic model and our training program down nice and tight now, etcetera. So, we’re ready to go and excited about it.

Anthony Vendetti: Okay. And then just in terms of the sales force, as you go through this transition, what’s the number that you think makes sense by the end of this year?

Steven M. Foster: Number in the sales organization?

Anthony Vendetti: Yes.

Steven M. Foster: Yes. So, we set five geographical regions around the country to put direct personnel into combination of sales management personnel as well as clinical support personnel to help with training and first surgeries, early surgeries, in services, things of that nature. We anticipate those five regions to be really what we build-off of here in the early stages. And, as our sales grow, it may make sense to go to seven to ten to etcetera as volumes go up and it gets too much for these guys to handle to have a bigger geography. And, as we talked about before, their job is to interface with independent distributors, people who are entrenched, with the physicians out there, etcetera, to get to build local support, case coverage things of that nature. So, that’s the way our model works and we’ll be at five throughout the calendar year 2024.

Anthony Vendetti: Okay, great. And then, maybe just lastly in terms of and I know it’s early stage, there’s a lot of fixed costs, but at let’s say normal volume, what’s the margin on one of these systems approximately if you’re not building them, kind of, at a single sort of pace but you ramped up. What should be the gross margin on one of these systems?

Steven M. Foster: Yes, it’s a fair question. I’ll let Steve Van Dick jump in as well. But, I will say that here in the early stages when we’re not at the volume that you’re talking about at full boat volume, we’re pushing this 65% in gross margin. We see that as baseline. We can grow from there as volumes go up and we can leverage. So, we’re encouraged. We think we can be a mid-70s margin organization going forward with our model without putting undue stress on the organization. Steve, do you want to comment on that real quickly?

Steven Van Dick: Yes. I would just add that, really for us right now, it’s not so much the material cost of the implant, because that’s relatively small in comparison to the total cost of goods sold, which includes the overhead component related to the our operations team located in Los Gatos. So, like Steve indicated that as volumes go up, we have a relatively high percentage of our costs that are fixed or semi-fixed. And so, we think that during the year maintaining mid-60s kind of margins depending on the actual sales volume and our mix between ASCs and hospitals, our margin should begin with a 6%. And, as revenue grows, as Steve indicated, we think that as the revenue ramps, getting margins into the 70s is very doable.

Anthony Vendetti: Okay, great. That’s very helpful color. I appreciate it. I’ll hop back in the queue. Thank you.

Steven M. Foster: Thanks, Anthony.

Operator: Thank you. I would now like to turn the call back over to Mr. Foster, for closing remarks.

Steven M. Foster: Well, thank you, Sherry. 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 for some reason we were unable to answer any of your questions, please reach out to our IR firm, MZ Group, who will be more than happy to assist. And with that, I wish everyone a good day.

Operator: Thank you. This will conclude today’s conference. You may disconnect your lines at this time, and thank you for your participation.