Tenon Medical, Inc. Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2022; comparative periods are the three and six months ended June 30, 2021. The filing was signed August 12, 2022. Tenon is an early-stage medical-device company commercializing the FDA-cleared Catamaran SI Joint Fusion System, with an initial focus on the U.S. market.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 | ||
|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |
| Revenue | $135 thousand | $22 thousand | $206 thousand | $37 thousand |
| Gross profit/(loss) | $(136) thousand | $13 thousand | $(340) thousand | $17 thousand |
| Gross margin | (101)% | 59% | (165)% | 46% |
| Operating expenses | $5.320 million | $1.626 million | $7.195 million | $1.819 million |
| Loss from operations | $(5.456) million | $(1.613) million | $(7.535) million | $(1.802) million |
| Net loss attributable to Tenon | $(5.488) million | $(1.665) million | $(7.841) million | $(1.865) million |
| Loss per share | $(0.65) | $(2.01) | $(1.66) | $(2.21) |
- Revenue increased 514% in the second quarter and 457% for the first six months, primarily from higher procedure volumes. Management reported procedure increases of 433% and 733%, respectively.
- Cost of sales increased substantially as the Company incurred higher operations overhead and supported more procedures, resulting in negative gross margins.
- Operating expense growth reflected increased hiring, stock-based compensation, sales and marketing activity, public-company costs, professional fees, insurance, and a legal settlement accrual.
- Cash and cash equivalents were $7.875 million at June 30, 2022, compared with $2.917 million at December 31, 2021. Short-term investments were $8.141 million, compared with $4.404 million at year-end, providing combined cash and short-term investments of $16.016 million.
- Net cash used in operating activities was $5.227 million for the six months, compared with $1.191 million in the prior-year period. Net cash used in investing activities was $3.906 million, primarily reflecting purchases of short-term investments and property and equipment.
- Net cash provided by financing activities was $14.139 million, principally from the April 2022 initial public offering.
- The Company reported no outstanding convertible debt at June 30, 2022. Operating lease liabilities totaled $1.016 million, including $234 thousand current, with total future lease payments of $1.192 million.
- Accumulated deficit was $28.416 million at June 30, 2022. Stockholders’ equity was $15.113 million, compared with a deficit of $20.552 million at December 31, 2021.
Material changes and unusual items
- On April 29, 2022, Tenon closed its IPO of 3.2 million shares at $5.00 per share and received approximately $13.8 million in net proceeds after offering costs. The IPO also resulted in warrants to purchase 96,000 shares at $5.00 per share.
- The IPO triggered conversion of all outstanding convertible notes and accrued interest into 3,955,415 common shares, fully satisfying the related debt obligations.
- All Series A and Series B convertible preferred stock converted into 2,693,342 common shares. The Company also issued shares pursuant to anti-dilution provisions, sales representative arrangements, and consulting obligations.
- The Company completed a 1-for-2 reverse stock split on April 6, 2022; historical share and per-share information was retrospectively adjusted.
- Stock-based compensation expense increased to $721 thousand for the first six months, compared with $65 thousand in the prior-year period. Common stock issued for services added $1.561 million to equity and operating costs.
- A former chief executive officer’s arbitration claims were settled on July 21, 2022. Tenon agreed to pay $1.2 million; the full amount was accrued at June 30, 2022, including a $574 thousand second-quarter charge.
Outlook, liquidity, and risks
Management expects additional operating losses and negative operating cash flows as the Company expands product development, sales and marketing, and the commercial launch of the Catamaran System. Based on its current spending level, management believes cash, cash equivalents, and short-term investments will fund obligations for at least twelve months from the filing date. No formal revenue or earnings guidance was provided.
- Liquidity could be consumed faster than expected because of uncertain product revenue, changes in strategy or spending, regulatory developments, research and development requirements, and other operating needs.
- Additional financing may be required. Future equity financing could dilute existing holders, while debt financing could impose restrictive covenants; financing may not be available on acceptable terms.
- The Company depends substantially on a limited number of clinicians, a national distributor or sales representative, product reimbursement, procedure volumes, manufacturing capacity, regulatory clearances, and protection of its intellectual property.
- Gross margins may remain volatile because of manufacturing costs, pricing pressure, product mix, procedure volumes, inventory-related costs, and distributor arrangements.
- Tenon disclosed that its disclosure controls and procedures were not effective as of June 30, 2022 because its size limited segregation of accounting duties, constituting a material weakness in internal controls. Management intends to increase qualified financial personnel and improve procedures.
- The Company stated that it had no material changes to the risk factors previously disclosed in its registration statement. COVID-19 had not materially affected results through the reporting date, but future effects remained uncertain.
Important facts for investors to verify
- Whether procedure growth and the commercial launch translate into sustained revenue and positive gross margins.
- Actual cash burn and whether the $16.016 million of cash and short-term investments remains sufficient under the Company’s evolving operating plan.
- Progress in remediating the material weakness in disclosure controls and segregation of duties.
- Final cash payments and accounting treatment related to the $1.2 million legal settlement.
- Potential dilution from 727,394 outstanding stock options, 1,117,530 restricted stock units, and 121,000 outstanding warrants, in addition to future equity issuances.
- Dependence on the national distribution and sales representative relationship, including commissions, anti-dilution provisions, and termination economics.