Tenon Medical, Inc. — Q1 2024 Form 10-Q Summary
Business Context and Reporting Period
Tenon Medical develops and commercializes the FDA-cleared Catamaran SI Joint Fusion System, a less-invasive titanium implant system for sacroiliac joint disorders. The company focuses on primary SI joint procedures, revisions of failed implants, and SI joint fusion adjuncts to spine procedures in the U.S. The filing covers the three months ended March 31, 2024. Tenon launched the Catamaran System nationally in October 2022.
Tenon Medical is a smaller reporting company and emerging growth company. Its Swiss subsidiary, Tenon Technology AG, was effectively dissolved during the first quarter of 2024.
Financial Performance and Liquidity
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $719 thousand | $433 thousand | +66% |
| Cost of revenue | $249 thousand | $480 thousand | -48% |
| Gross profit/(loss) | $470 thousand | $(47) thousand | Improved by $517 thousand |
| Gross margin | 65% | (11)% | Improved by 76 percentage points |
| Operating expenses | $3.976 million | $4.839 million | -18% |
| Loss from operations | $(3.506) million | $(4.886) million | Improved by $1.380 million |
| Net loss | $(3.576) million | $(4.830) million | Improved by $1.254 million |
| Basic and diluted loss per share | $(1.25) | $(4.30) | Improved |
| Net cash used in operating activities | $(2.338) million | $(3.576) million | Improved by $1.238 million |
Revenue growth was primarily attributed to a 42% increase in surgical procedures using the Catamaran System. Gross margin benefited from higher volume, operating leverage, and greater absorption of production overhead. Operating expenses declined primarily because of lower research and development costs, reduced sales and marketing expenses including the absence of 2023 SpineSource transition fees, and modestly lower general and administrative costs.
- Cash and cash equivalents were $4.388 million at March 31, 2024, compared with $2.428 million at December 31, 2023.
- Total current assets were $5.951 million and current liabilities were $2.262 million.
- Tenon reported no outstanding debt at March 31, 2024 after settling its convertible notes through issuance of Series A preferred stock and warrants.
- Operating cash burn was $2.338 million for the quarter; capital expenditures were $119 thousand.
- Accumulated deficit was $58.649 million.
- Stock-based compensation expense was $1.018 million, or approximately 26% of operating expenses.
Material Changes Versus the Prior Comparable Period
- Revenue increased $286 thousand, while gross profit improved from a $47 thousand loss to $470 thousand.
- Research and development expense decreased 20% to $669 thousand.
- Sales and marketing expense decreased 32% to $1.381 million, primarily due to the absence of 2023 SpineSource transition fees and lower payroll and professional fees; commission expense increased.
- General and administrative expense decreased 3% to $1.926 million.
- Net loss narrowed 26% to $3.576 million, although the company remains substantially loss-making.
- Financing activities provided $4.371 million, including $2.437 million from Series A preferred stock and $1.934 million from common stock issuance.
- On February 20, 2024, Tenon sold 172,239 Series A preferred shares for $2.605 million and issued warrants for 258,374 common shares. It also exchanged its convertible notes and accrued interest for 84,729 preferred shares and warrants for 157,094 common shares.
- Common shares outstanding increased to 3,726,974 at March 31, 2024 from 2,600,311 at December 31, 2023, before giving effect to potential preferred-stock conversions, warrants, options, and restricted stock units.
Guidance, Outlook, Risks, and Unusual Items
Management expects additional operating losses and negative operating cash flow as it continues commercialization, product development, and sales and marketing activities. The filing provides no specific revenue or earnings guidance.
- Going concern: Management states that existing cash will not fund operating expenses and working capital requirements for at least twelve months from the filing date. There is substantial doubt about the company’s ability to continue as a going concern. Management expects to seek additional equity, debt, or collaboration financing.
- Financing and dilution: Additional financing may be unavailable or available only on unfavorable terms. Equity financing could materially dilute existing holders; Series A preferred stock has conversion, liquidation preference, voting, and anti-dilution provisions. Warrants and other equity awards could create additional dilution.
- Nasdaq compliance: On May 7, 2024, Nasdaq notified Tenon that its stock had failed to maintain the $1.00 minimum closing bid price. The company has until November 4, 2024 to regain compliance, with a possible additional 180-day period subject to conditions. Failure to regain compliance could result in delisting, although the notice had no immediate effect on trading.
- Internal controls: Management concluded that disclosure controls and procedures were not effective because limited resources prevented adequate supervision and segregation of accounting duties, constituting a material weakness. No material changes to internal control over financial reporting were reported during the quarter.
- Commercial concentration: Revenue is derived substantially from Catamaran System sales to a limited number of clinicians and may fluctuate with procedure volume, reimbursement, discounts, physician activity, and sales-channel changes.
- Commission obligation: Accrued commissions totaled $2.566 million, including current and noncurrent amounts. The company ultimately expects to expense $3.6 million under its terminated sales representative arrangement, subject to the agreement’s terms.
- Other risks: Key risks include competition, reimbursement and adoption, regulatory developments, manufacturing costs, intellectual-property protection, inventory obsolescence, dependence on financing, and continued operating losses.
Important Facts for Investors to Verify
- Whether Tenon can secure sufficient financing to address the stated twelve-month liquidity shortfall and going-concern uncertainty.
- Quarterly procedure volumes, revenue per procedure, gross-margin sustainability, and customer or clinician concentration.
- Progress toward Nasdaq’s $1.00 minimum bid-price requirement and the potential use and effect of a reverse stock split.
- The fully diluted share count, including 2.587 million common shares underlying Series A preferred stock, 2.388 million outstanding warrants, 93,515 stock options, and 122,095 restricted stock units at March 31, 2024.
- Remediation of the material weakness in segregation of duties and the effectiveness of enhanced finance personnel and reporting controls.
- Remaining accrued commissions, lease obligations, and other contractual cash requirements.