Tenon Medical, Inc.

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. Van Dyck will present results of operations for the third quarter 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 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 replace 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 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.

Thank you, Devin, and good afternoon to everyone. I'm pleased to welcome you to today's third quarter 2023 financial results and corporate update conference call for Tenon Medical. During the third quarter, we expanded the adoption of our fully commercialized Catamaran system and experienced 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 third quarter, procedures supported strong revenue growth with an increase of 354% year-over-year and 27% sequentially from the second quarter. In the previous quarter, we marked an important milestone with gross profit and gross profit margin turning positive. Now in the third quarter, Gross profit was up 176% sequentially from the second quarter of 2023 to $535,000. And gross profit margin improved to 57% in third quarter from 26% in the second quarter of 2023. The third quarter marked an important milestone for Tenon as we launched the surgical use of our jib instrument kit for the catamaran SI joint fusion system for initial patient treatment by two 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 multi-level fusion, and SI procedures utilizing navigation software in imaging. Continued strong growth and increasing surgical procedures in the third quarter was fueled by our valued physician customers with support from our commercial infrastructure we built. Our mission to deliver refined surgical options for patients with chronic sacroiliac joint pain or degenerative sacrolitis that fail conservative care is continuing to gain traction with targeted physicians. 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 cadaveric 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 third quarter, our surgical procedures increased 329% compared to the year-ago quarter, confirming a solid return on investment for our strategic approach. 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 posture 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 third quarter, 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 dick our chief financial officer to discuss our financials 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 third quarter of 2023 an increase of 354 percent compared to the 208 000 in the comparable year ago period. Revenue for the nine months ended September 30th, 2023 was 2.1 million, an increase of 412% compared to the 414,000 in the comparable year ago period. The increase in revenue for the three and nine months ended September 30th, 2023 as compared to the same periods in 2022 was primarily due to increases of 329% and 404% respectively and the number of surgical procedures in which the catamaran system is used. Gross profit in the third quarter of 2023 was $535,000 or 57% of revenues compared to the gross loss of $94,000 or a negative 45% of revenues in the comparable year ago quarter. For the nine months ended September 30th, 2023, gross profit was $682,000 or 32% of revenues compared to a gross loss of $434,000 or a negative 105% 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 $3.4 million for the third quarter of 2023, compared to a loss of $3.3 million in the third quarter of 2022. For the nine months ended September 30th, 2023, operating losses totaled 12.6 million compared to a loss of 10.8 million in the comparable prior year period. The increase in operating expenses was largely due to higher sales and marketing expenses as the company further developed its sales function, increases the frequency of marketing initiatives, and continues to enhance infrastructure to support future growth. Net loss was $3.3 million for the third quarter of 2023 compared to a loss of $3.2 million in the same period of 2022. For the nine months ended September 30th, 2023, net loss was $12.4 million compared to a net loss of $11 million in the comparable previous year period. We continue to expect to incur additional losses in the future. As of September 30th, 2023, cash and cash equivalents and short-term investments totaled $3.4 million as compared to $6.3 million as of June 30th, 2023. As of September 30th, 2023, the company has no outstanding debt. I will now turn the call back to Steve for his closing thoughts.

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 third quarter with strong revenue gains and a positive growth margin and believe we can continue this growth trajectory with our expanding commercial infrastructure and seasoned sales management team. We continue to reinforce our commitment to 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 to multi-level fusion, and SI procedures utilizing navigation software and 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 of patients suffering from SI joint pain and bring long-term value to our shareholders. I thank all of you for attending, and now I'd like to hand the call over to our operator to begin our question and answer session with our covering analyst. Devin?

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. 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.

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 availability, and are there any regulatory considerations?

Yeah. Hello, Bruce. This is Steve, and thanks for your question. So our JID kit is an enhancement of our instrumentation system. We're well past... the prototype phase, we've now built these technologies and put them in the hands of select physicians to make sure that we haven't missed anything, that it's satisfactory to them, and that it's delivering on its promises. 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.

Okay, super exciting. And then in 2023, you had a fairly favorable reimbursement climate. Are there any changes for 2024 anticipated?

Yes, indeed. As always, a very dynamic space in the SI world. The AMA 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 that there will be a new CAC 1 code introduced into the SI world coming in 2024. That new CAC 1 code will be focused on facilitating reimbursement and professional fees for intra-articular devices, which there are many on this market. That'll establish reimbursement rates, et cetera, in the 7.8 RVU range. 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 will continue to have access to the use of 27279 and 27280 per the physician's preference in the various situations that they see with patients. We draw that conclusion because 90 plus percent of our implant, once it's implanted, 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 27279 and 27280 as the option. So it's a very dynamic spot. We don't know everything yet, but we think we have a pretty good feel for where all this is going to shake out for the coming year.

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.

Yes, it's moving along very nicely. As a matter of fact, we had two patients enrolled today. at a site that we're bringing online and quite excited about. I anticipate, Bruce, this is targeted, this post-market trial is targeted for 50 patients. It could be anywhere between 40 and 50, 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. 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.

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

Thank you, Bruce.

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

Thank you. Steve, yes, just to follow up on the post-market study, 40 to 50 patients and expect to conclude, you said, by end of 1Q24. Two signed up today. What's the total number you have signed up so far?

Yeah, 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 and December months coming up. So we really do anticipate that we'll get into that 40 to 50 range by the end of Q1 in 2024.

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

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

Seven active sites, okay. And then I know you're doing physician training, and obviously you have some great numbers here in procedures, up 329% in the third 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 yeah 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 workshop with the technology as efficient and convenient frankly for the physicians as possible We've got a lot of work on a synthetic model that allows us 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 efficient. 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. 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.

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? You know, how do you vet the orthopedic surgeons to make sure that they're the right ones to train and work with?

Yeah, certainly what you say, 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 to image. If the physician has experience imaging the pelvis and placing implants there, etc., 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, et cetera, tells us the story about how things would go for us in a training session. And so we do. We target folks who have been down through that pathway, were 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 as 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.

Great. And then maybe just one financial question. So gross margin came in significantly better than than I was expecting at 56.7%. Anything that you would attribute to that strong gross margin for this quarter? And is that sustainable or it'll fluctuate a little bit here in the near term?

Thanks. Anthony, this is Steve. Yeah, 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. 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.

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

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.

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 and Z Group. We'd be more than happy to assist. With that, I wish everybody a good evening.

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