Tenon Medical, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Tenon Medical is an early-stage medical device company developing and commercializing the FDA-cleared CATAMARAN SI-Joint Fusion System for sacroiliac joint disorders. The company is preparing a broader U.S. commercial launch through a national distributor. This filing covers the three months ended March 31, 2022, with comparative results for the three months ended March 31, 2021.
Financial Results and Liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $71 thousand | $15 thousand |
| Cost of sales | $275 thousand | $11 thousand |
| Gross profit (loss) | $(204) thousand | $4 thousand |
| Total operating expenses | $1.875 million | $193 thousand |
| Loss from operations | $(2.079) million | $(189) thousand |
| Net loss attributable to Tenon | $(2.353) million | $(200) thousand |
| Basic and diluted loss per share | $(2.38) | $(0.24) |
| Net cash used in operating activities | $(2.464) million | $(162) thousand |
- Revenue increased $56 thousand, or 373%, primarily from an approximately 80% increase in surgical procedures using the CATAMARAN System.
- Gross margin deteriorated from 27% to a negative margin; the filing reports approximately negative 283% in its percentage table and negative 287% in the comparative discussion. Higher operating overhead and procedure volumes drove the gross loss.
- Research and development expense increased to $562 thousand, sales and marketing to $276 thousand, and general and administrative expense to $1.037 million.
- Interest expense increased to $274 thousand, mainly due to the approximately $12.2 million convertible note offering completed in May through July 2021.
- Cash and cash equivalents were $4.677 million at March 31, 2022, compared with $2.917 million at December 31, 2021. The increase primarily reflected $4.404 million of proceeds from selling short-term investments, partly offset by operating cash use and capital expenditures.
- Outstanding debt and accrued interest totaled approximately $13.8 million, net of debt discounts. Total liabilities were $16.241 million, while stockholders’ deficit was $22.736 million.
Material Changes Versus the Prior Comparable Period
- The company moved from minimal early-stage activity toward commercial launch, with substantially higher personnel, quality and regulatory consulting, sales training, commissions, legal, audit and facility costs.
- Cost of sales increased 2,400% year over year, outpacing the 373% revenue increase and resulting in a gross loss.
- Operating expenses increased $1.682 million, or approximately 871%, driven by research and development, sales infrastructure, public-company preparation and expanded administrative resources.
- Net cash used in operations increased $2.302 million, while the company funded liquidity partly by selling its investments.
- At March 31, 2022, 4.392 million potential common shares from convertible notes, preferred stock, options and warrants were excluded from diluted loss per share because they were anti-dilutive.
Outlook, Risks, Contingencies and Unusual Items
- Management expects additional operating losses and negative operating cash flow as the company continues product development and the commercial launch.
- Management stated that March 31 cash would not have funded obligations through June 2022. The going-concern uncertainty was addressed by the subsequent IPO; management expects IPO proceeds, together with existing cash, to fund operations and capital expenditures for at least 12 months from the financial statement release date.
- On April 29, 2022, the company closed an IPO of 3.2 million shares at $5.00 per share and received approximately $14.617 million in net proceeds. The stock began trading on Nasdaq under TNON on April 27, 2022.
- The IPO triggered conversion of all convertible notes and accrued interest into 3,955,415 common shares and conversion of preferred stock into 2,693,342 common shares. The company also issued 312,351 shares to its sales representative under anti-dilution provisions and 85,739 shares to a consultant.
- A 1-for-2 reverse stock split became effective April 6, 2022. Historical share and per-share amounts in the filing reflect the split.
- The company faces an arbitration claim by a former chief executive seeking damages in excess of $3 million, plus fees and costs. The company believes its potential exposure is limited to $600 thousand, has recorded approximately $600 thousand in accrued expenses, and cannot estimate any additional potential loss. The hearing was scheduled for November 2022.
- Disclosure controls and procedures were concluded to be ineffective because limited resources prevented adequate segregation of accounting duties, creating a material weakness in internal controls.
- Key risks include uncertain product adoption and reimbursement, dependence on a limited number of clinicians and a national distributor, competition, regulatory requirements, future financing needs, potential dilution, inventory and manufacturing risks, and the ability to scale operations.
Investor Verification Checklist
- Verify post-IPO capitalization, including conversions of debt and preferred stock, anti-dilution issuances, underwriter warrants and the 2022 Equity Incentive Plan.
- Assess whether revenue and procedure growth can overcome the company’s unusually negative gross margin and expanding operating expenses.
- Reconcile cash runway and expected use of the approximately $14.617 million IPO net proceeds against forecast operating losses and capital needs.
- Review the terms, dilution effects and settlement status of the convertible notes converted after the IPO.
- Monitor the former executive’s arbitration, including any potential damages beyond the $600 thousand accrued amount.
- Track remediation of the material weakness in disclosure controls and the company’s ability to add qualified finance personnel and improve segregation of duties.