Tenon Medical, Inc. Form 10-Q Summary
Business Context and Reporting Period
Tenon Medical is an early-stage medical device company commercializing the FDA-cleared Catamaran SI Joint Fusion System in the United States. The system uses a minimally invasive titanium implant to treat sacroiliac joint disorders. The company launched nationally in October 2022 and is building its sales, marketing, clinical, and operational infrastructure.
This unaudited Form 10-Q covers the three months ended March 31, 2023, with comparisons to the three months ended March 31, 2022. The company is a smaller reporting company and an emerging growth company.
Financial Results and Key Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $433 thousand | $71 thousand | Up 510% |
| Cost of revenue | $480 thousand | $275 thousand | Up 75% |
| Gross loss | $47 thousand | $204 thousand | Improved by $157 thousand |
| Gross margin | (12%) | (287%) | Improved |
| Operating expenses | $4.839 million | $1.875 million | Up 158% |
| Loss from operations | $4.886 million | $2.079 million | Increased by $2.807 million |
| Net loss | $4.830 million | $2.353 million | Increased by $2.477 million |
| Basic and diluted loss per share | $0.43 | $2.38 | Improved per share due primarily to increased share count |
Revenue growth primarily reflected a reported 489% increase in surgical procedures using the Catamaran System. Cost of revenue exceeded revenue, resulting in a negative gross margin. Operating expenses were 1,118% of revenue, and the net loss was 1,115% of revenue.
- Research and development expense was $834 thousand, up 48%, mainly due to higher stock-based compensation.
- Sales and marketing expense was $2.026 million, up 634%, driven by increased payroll, SpineSource transition expenses, sales commissions, consulting and professional fees, and clinical and marketing collateral costs.
- General and administrative expense was $1.979 million, up 91%, primarily due to stock-based compensation, insurance, payroll, professional fees, public-company compliance, and infrastructure costs.
- Stock-based compensation expense was $1.040 million, compared with $169 thousand in the prior-year period.
- Other income was $56 thousand, including gains on investments. There was no interest expense in Q1 2023 versus $274 thousand of interest expense in Q1 2022.
Cash Flow, Balance Sheet, Debt, and Liquidity
- Cash and cash equivalents were $3.179 million at March 31, 2023, compared with $2.129 million at December 31, 2022.
- Short-term investments were $1.737 million, down from $6.441 million at year-end 2022. Cash and short-term investments totaled approximately $4.9 million.
- Net cash used in operating activities was $3.576 million, compared with $2.464 million in Q1 2022.
- Net cash provided by investing activities was $4.669 million, primarily from $4.753 million of short-term investment sales, partially offset by $84 thousand of property and equipment purchases.
- Net cash increased by $1.050 million during the quarter, ending at $3.179 million.
- The company reported no outstanding debt at March 31, 2023.
- Total liabilities were $5.155 million, including $2.687 million of accrued commissions related to the terminated sales representative agreement and $857 thousand of operating lease liabilities.
- Stockholders’ equity declined to $2.474 million from $6.252 million at December 31, 2022, primarily reflecting the quarterly net loss.
- The company had an accumulated deficit of $44.322 million and has not generated positive operating cash flow.
Management stated that substantial doubt exists regarding the company’s ability to continue as a going concern for one year after issuance of the financial statements. Based on current revenue and expenditures, existing cash and short-term investments are not expected to fund obligations for at least twelve months from the filing date. Management expects to seek additional capital through equity offerings, debt financing, collaborations, or a combination of these sources.
Material Changes, Outlook, Risks, and Unusual Items
- The commercial launch increased procedure volume and revenue, but the company remains materially unprofitable and continues to operate with negative gross margins and negative operating cash flow.
- Management expects additional operating losses and negative operating cash flow as it continues commercialization, product development, research and development, clinical activities, and sales-force expansion.
- The company’s terminated sales representative agreement requires payments equal to 20% of U.S. and Puerto Rico net sales through December 31, 2023, followed by 10% of net sales until specified aggregate payments reach $3.6 million, subject to acquisition-related provisions. The accrued liability was $2.687 million at March 31, 2023.
- Operating lease payments total $976 thousand, with $221 thousand due within one year and the remainder due through 2026.
- Additional financing may dilute existing stockholders or impose debt covenants. If financing is unavailable, the company may need to delay, reduce, or suspend sales and marketing, research and development, or other operations.
- Revenue depends on a limited number of clinicians and is subject to procedure volume, reimbursement, pricing, discounts, implant utilization, physician activity, and sales-channel changes.
- The company faces competition, regulatory and product-development risks, intellectual-property risks, manufacturing and inventory risks, and uncertainty regarding clinician adoption of the Catamaran System.
- Disclosure controls and procedures were deemed ineffective because the company lacks sufficient resources for adequate supervision and segregation of accounting duties, which management identified as a material weakness in internal control.
- No material changes to previously disclosed risk factors were reported, and no material litigation was disclosed.
Important Facts for Investors to Verify
- Whether procedure growth and revenue can continue at a level sufficient to produce positive gross margins and reduce cash burn.
- The timing, terms, and dilution associated with the company’s expected financing needs.
- Whether cash and short-term investments remain adequate given operating cash use of $3.576 million in Q1 2023.
- The ultimate cash impact of accrued commissions and other obligations under the terminated sales representative agreement.
- Progress in remediating the material weakness in disclosure controls and segregation of accounting duties.
- Commercial adoption, reimbursement, competitive positioning, regulatory status, and clinical outcomes of the Catamaran System.