Tenon Medical, Inc. (TNON) Earnings Call Transcript & Summary

Greetings, and welcome to the Tenon Medical Third Quarter 2022 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 Steven Van Dick, Chief Financial Officer. Mr. Foster and Mr. Van Dick will present results of operations for the third quarter ended September 30, 2022, and provide a corporate update. A press release detailing the results was released today and is available on the Investor Relations section of our 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 considered 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 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. You should also review our most recent prospectus for a more complete discussion of these factors and other risks, particularly under the heading Risk Factors. At this time, I'll turn the call over to Tenon Medical's Chief Executive Officer, Steve Foster. Please go ahead, sir.

Thank you, Cynthia, and good afternoon to everyone. I'm pleased to welcome you to today's third quarter 2022 financial results and corporate update conference call for Tenon Medical. 2022 continues to be a milestone year for our organization, transitioning to a public company and positioning us for commercialization of our Catamaran SI Joint Fusion System. Previously, in the second quarter, we closed on a $16 million IPO, providing the necessary funds to execute on our commercial plans and support our mission to deliver a refined surgical option for patients with chronic sacroiliac joint pain that fail conservative care. Moving into the third quarter and beyond, we have significantly ramped our commercialization efforts in the building of our sales team. This will continue for the remainder of 2022 and well into 2023. Subsequent to quarter end and most recently, we completed our full national launch of the technology at the North American Spine Society meeting held in Chicago. There, we introduced Catamaran to over 3,500 spinal specialists and other health care professionals in attendance at the meeting. At the event, we had an interactive hands-on technical exhibit, where health care professionals learned more about Catamaran and its novel transfixing approach, hosted multiple hands-on technical workshops for invited physicians and had outcomes from a single center experience with Catamaran presented at the Innovative Technology Session. We continue to target physicians who have been trained on SI procedures or have significant experience with SI surgical technologies. To date, we've hosted 71 physicians in Catamaran workshops. We anticipate acceleration in the quantity of these workshops as Tenon has completed the design of a synthetic trainer model and will deliver an ability to train locally and to do so in a very efficient manner for the physician. Taken together, we are highly focused on showcasing our unique story at conferences and hands-on workshops, where we are receiving highly positive feedback from the clinician community. This ongoing outreach is a critical step in building our commercial momentum for Tenon as we develop commercial infrastructure and our sales management team and transition control of all commercial distribution and sales activity to the company. As recently disclosed, we restructured our national distribution agreement, which will allow accelerated commercial investment to support top line growth. Turning to our Clinical Research time line. We recently announced Institutional Review Board approval from WCG IRB for 2 separate Tenon-sponsored post-market clinical studies of Catamaran. The approval by WCG represents a milestone for us, which allows designated Catamaran study centers to begin recruiting and enrolling patients into the respective studies. The objective of our post-market feasibility study is to report on the clinical outcomes in patients with sacroiliac joint disruptions or degenerative sacroiliitis treated with the Catamaran system. The study is designed to enroll up to 50 patients and up to 10 clinical sites across the United States. Feasibility and CT scan studies will assess patient pain scores, fusion as well as other patient-reported outcomes out to 12 and 24 months. We are currently in the process of identifying and qualifying clinical sites with plans to initiate enrollment in these trials in Q4 of 2022. We continue to be encouraged by the Catamaran System performance in the OR and the increasing number of surgical procedures utilizing the system. Early results show the system delivering on its promises and providing our physician customers with an enhanced option to treat their patients suffering from debilitating SI joint issues. Looking ahead on our commercialization pathway and the addition of our synthetic training model option, we anticipate further acceleration of our outreach at conferences and workshop events. With that, I'll turn it over to Mr. Van Dick, our Chief Financial Officer, to discuss our financials.

Thanks, Steve. I'll give a succinct review of our financial results. A full breakdown is available in our regulatory filings and in the press release that crossed the wire this afternoon. Revenue was $208,000 in the third quarter of 2022, an increase of 197% compared to the $70,000 in the comparable year ago period. Revenue was $414,000 in the 9 months ending September 30, 2022, an increase of $287,000 compared to the $107,000 in the 9 months ended September 30, 2021. The increase in revenue for the 3 and 9 months ended September 30, 2022, was primarily due to increases of 200% and 345%, respectively, of the number of surgical procedures in which the Catamaran System was used, combined with lower revenue per procedure due to a national distribution agreement that was in effect for the sales from the period July 2020 through April 2021. Gross loss for the 3 months ended September 30, 2022, was $94,000 compared to a gross profit of $52,000 in the comparable year ago quarter due to the increases in operations overhead spending and the number of surgical procedures. Gross margin percentage decreased from 74% to a negative 45%, again, driven by higher operations overhead spending and partially offset by higher revenue per procedure, which resulted from an amended and restated national distribution agreement. The operating losses totaled $3.3 million for the third quarter of 2022 compared to a loss of $2.1 million in the third quarter of 2021. The increase in operating expenses was the result of the creation of an infrastructure to support revenue growth, stock-based compensation expense and costs associated with being a public company. Net loss of $3.2 million for the third quarter of 2022 compared to a loss of $2.3 million in the same period of 2021. As of September 30, 2022, cash, cash equivalents and short-term investments totaled $12.5 million. The company believes existing cash, cash equivalents and short-term investments will enable Tenon to fund hiring additional personnel to create a commercial sales organization, sales and marketing activities, including clinician training and clinical study activities and as well as product development. I will now turn the call back to Steve for closing thoughts.

Thank you, Steve. In summary, we continue to believe we are well positioned to create long-term value for our shareholders. With the national launch of Catamaran and ongoing positive feedback, we are very optimistic for the commercialization of our proprietary FDA-cleared surgical implant system, which is designed to optimize SI joint fixation infusion surgery and corresponding outcomes. As we close 2022 and look into the new year, we are focused on the following: one, the build-out of our commercial infrastructure and our sales management team in order to ramp our commercial outreach; two, introducing and educating physicians to our optimized surgical approach for SI Joint Fusion; and three, delivering clinical research that reinforces the promise of this distinct technology. I look forward to providing our shareholders with further updates in subsequent quarters as we scale commercialization and develop our clinical study data. I thank you all for attending, and I would like to hand the call back over to the operator so we can get into a question-and-answer session. Cynthia?

[Operator Instructions] We will take our first question from Bruce Jackson with The Benchmark Company.

So you had a fairly significant presence at NASS this year. I was wondering if you could just recap for us the -- some of the activities that took place, some of the presentations that were made by some of your KOLs and then what the response to that was by the physicians.

Thanks for the question, Bruce. I'd be happy to do so. Listen, North American Spine Society meeting has been a sort of a bellwether and a critical meeting for spine companies over the years. They, like all the others, are emerging from post-pandemic slowdowns and things of that nature. The meeting was very robust. We had a booth presence on the floor, a lot of activity, people visiting after the various didactic sessions, et cetera. We also brought equipment in to have evening workshops, full-boat evening workshops with C-arm fluoroscopy and our synthetic models that I mentioned earlier, where surgeons were able to spend time in a quiet setting going through the sequence of instrumentation, how this all works. Really an excellent opportunity, maybe before the dinner hour to review the technology, ask questions of experienced physicians and faculty, really a good engagement. And then finally, Dr. Michael Chaparro from West Palm Beach, Florida presented his alpha series of cases with Catamarans, an 18-patient series in a single site. So early data from our experiences but showed really impressive pain scores as well as post-op imaging that reinforces the promise of this important technology. It is clear that the Catamaran can get the job done when it comes to fixating and setting the join up for an appropriate fusion. And we really look forward to initiating the feasibility trial I mentioned earlier to bring a multicenter experience and report on those results going forward.

Okay. Great. And then the other thing that coincided with NASS was the announcement of a new agreement with SpineSource. So maybe you could tell us about the transition and how -- what's going to work in terms of the sales force, what the new responsibilities are for SpineSource? And then do you still plan on taking a special charge in the fourth quarter?

We'll do. So SpineSource, a national distributor partner, a legacy agreement that we had, we chose mutually to restructure the agreement as a public company. Of course, we want to be extremely aggressive with our investments and expansion of our sales presence with distributors and sales managers and clinical specialists out in the field. It was mutually agreed that it was better for us to restructure the way this thing was put together. We did so in an amicable manner, and we'll continue to work with SpineSource personnel to move forward and to build on the momentum that we've created here to date. And so their role will be across our commercialization activities, everything from training curriculum to building out sales teams. Of course, right now, we're transitioning distribution contracts from SpineSource agreements to Tenon agreements, things of that nature, just to make sure everything is done in an efficient and effective manner. There'll be a big part of our efforts going forward, Bruce. As we expand, as you can imagine, we'll move from a relatively small number of independent distributors to a much larger group as we build out the remainder of 2022 and into 2023. And SpineSource resources will be a very big part of that and an important part of that.

Bruce, just with the...

All right. That's great. Go ahead.

Yes, Bruce, in terms of the fourth quarter charge, yes, our -- still our read on the accounting for the transaction, we feel that the $1 million upfront payment that we made to SpineSource to renegotiate this agreement will definitely be charged as well as the future commissions that we've agreed to pay. The general accepted accounting principle is going to require that we accrue those upfront and reduce the liability as the commissions or as the commissions are earned. So we do plan on taking a $4.6 million charge in the fourth quarter to recognize this restructuring of the agreement as well as then there'll be the charges for transition services in some of the consulting services that Steve outlined. We'll be taking charges on those, but those will be expensed as the services are rendered.

And some of those are noncash charges, right?

These will all be cash charges. Yes. I mean the original $3.6 million will be a noncash hit because the commission doesn't get paid out until revenue is earned.

Congratulations on all the progress during the quarter.

Thank you, Bruce.

Thanks, Bruce.

And that will conclude today's question-and-answer session. Mr. Foster, at this time, I'll turn the conference back to you for any additional or closing remarks.

I just want to express appreciation for everyone who joined the call. This is a very exciting time for us at Tenon, as you can imagine, after restructuring our commercial format, et cetera, launching our product. We're really excited about the clinical research that's kicking off here in the short term, and we'll be excited to bring results to everyone in future quarters. With that, I think we'll wrap it up, Cynthia.

Thank you, sir. This concludes today's call. Thank you for your participation, and you may now disconnect.