Tenon Medical, Inc. annual report, FY2022

Tenon Medical, Inc. 2022 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2022. The filing is an annual report, not a standalone fourth-quarter filing; clear fourth-quarter operating results are generally not provided.

Business context

Tenon is an early-stage medical device company focused on sacroiliac-joint disorders. Its primary product is the FDA-cleared CATAMARAN SI-Joint Fusion System, a single titanium implant designed for a minimally invasive inferior-posterior approach. Tenon conducted its full U.S. commercial launch in October 2022 and sells primarily through independent distributors and sales representatives.

The company operates in one business segment and remains dependent on adoption of a single product. Management estimates a large, underserved U.S. SI-joint fixation market, but acknowledges that these market estimates are based largely on internal analysis and public information.

Financial performance and key metrics

Metric	2022	2021	Change
Revenue	$0.691 million	$0.160 million	Up 332%
Cost of goods sold	$1.332 million	$0.055 million	Up $1.277 million
Gross profit/(loss)	$(0.641) million	$0.105 million	Declined $0.746 million
Gross margin	(93%)	66%	Down 159 percentage points
Research and development	$2.828 million	$1.718 million	Up 65%
Sales and marketing	$7.833 million	$2.141 million	Up 266%
General and administrative	$7.423 million	$2.707 million	Up 174%
Loss from operations	$(18.725) million	$(6.461) million	Loss increased
Net loss attributable to Tenon	$(18.917) million	$(7.048) million	Loss increased
Operating cash flow	$(12.025) million	$(4.292) million	Cash use increased $7.733 million

Revenue growth reflected a reported 361% increase in procedures using the CATAMARAN System, partially offset by lower revenue per procedure associated with distribution arrangements. The gross loss resulted primarily from increased manufacturing and operating overhead as Tenon prepared for commercialization.

Stock-based compensation was $2.897 million in 2022, compared with $0.377 million in 2021. Non-cash stock-based compensation and common stock issued for services were significant adjustments to operating cash flow.

Liquidity, capital structure, and cash flow

Cash and cash equivalents were $2.129 million at December 31, 2022, and short-term investments were $6.441 million, for combined cash and short-term investments of approximately $8.6 million.
Tenon had no outstanding debt at year-end. Convertible notes and accrued interest were converted into approximately 3.96 million common shares upon completion of the April 2022 IPO.
The April 2022 IPO generated approximately $13.8 million of net proceeds. Financing activities provided $14.114 million in cash during 2022.
Investing activities used $2.884 million, including net purchases of short-term investments and $0.847 million of property and equipment.
Accumulated deficit was $39.492 million at December 31, 2022, and stockholders’ equity was $6.252 million.
Operating lease obligations totaled $0.911 million at year-end, with total remaining contractual payments of approximately $1.048 million.
Management stated that existing resources were not sufficient to fund operations and capital requirements for at least the next 12 months from issuance of the financial statements. The auditor included a going-concern emphasis paragraph.

Material changes versus 2021

Tenon transitioned from limited pre-commercial sales to a national commercial launch in October 2022.
Revenue increased substantially, but product costs increased faster, producing a gross loss instead of the prior-year gross profit.
Sales and marketing spending increased sharply to support commercialization, training, clinical activities, and sales infrastructure.
General and administrative expense increased due to public-company costs, personnel and infrastructure buildout, insurance, legal costs, stock compensation, and a legal settlement accrual.
The IPO materially changed the capital structure: preferred stock and convertible notes were converted into common stock, and debt was eliminated.
A 1-for-2 reverse stock split was completed on April 6, 2022; historical share and per-share information was adjusted accordingly.

Guidance, outlook, risks, contingencies, and unusual items

The filing does not provide quantitative revenue, earnings, margin, or procedure-volume guidance. Management expects operating expenses and losses to continue as it expands commercialization, develops additional products, and conducts clinical activities. Additional capital may be sought through equity, debt, collaborations, or licensing arrangements, with potential dilution or restrictive financing terms.

Commercial adoption: Success depends on convincing physicians and facilities to adopt a single-product technology in a competitive market with larger, better-funded competitors.
Reimbursement: Private-payor coverage may be inconsistent, and reimbursement pressure or a shift toward lower-priced ambulatory surgery centers could reduce procedure volumes and selling prices.
Clinical evidence: Existing evidence includes an initial 18-case series and biomechanical testing. Tenon plans post-market studies, including a 50-patient, 10-center trial and a prospective CT study; results may not support adoption or reimbursement.
Regulation: The CATAMARAN System has FDA 510(k) clearance, but ongoing compliance, inspections, quality requirements, reporting, recalls, and future product clearances remain material risks. The filing states that Tenon and its contract manufacturer had not yet been inspected by the FDA.
Manufacturing: All products are manufactured by five contract manufacturers, with some single-source or single-location dependencies and no long-term manufacturing agreements.
Unusual sales agreement item: In October 2022, Tenon terminated its exclusive sales representative agreement. It paid $1.0 million in cash and recorded a $2.611 million sales and marketing charge for the estimated fair value of future payments. The remaining liability was $2.560 million at year-end, and total payments under specified clauses are expected to reach $3.6 million.
Legal settlement: Tenon settled claims brought by a former CEO and related parties for $1.2 million, fully paid by December 31, 2022.
Internal controls: Management identified a material weakness in disclosure controls and internal control over financial reporting due to inadequate segregation of duties. Remediation efforts were underway, but the weakness had not been fully remediated at year-end.
Subsequent banking risk: As of March 10, 2023, Tenon disclosed approximately $585,000 deposited with Silicon Valley Bank, including approximately $335,000 above the FDIC insurance limit. The filing stated that loss of the uninsured amount was not expected to impair operational payments, but could cause temporary disruption.

Investor verification checklist

Verify the pace and economics of commercial adoption, including procedures performed, revenue per procedure, gross margin, and customer concentration.
Assess whether the company can raise capital before its available cash and investments are depleted, and estimate the potential dilution or debt burden.
Review the going-concern disclosure and reconcile reported liquidity with projected operating cash burn.
Track the remaining payments and accounting treatment under the terminated sales representative agreement.
Evaluate results from the planned post-market clinical studies and their effect on physician adoption and payor coverage.
Monitor FDA inspections, quality-system compliance, adverse events, recalls, and any required additional clearances.
Assess remediation of the material weakness in segregation of duties and the company’s ability to maintain timely, reliable SEC reporting.
Review outstanding options, RSUs, warrants, and other potential dilution; as of December 31, 2022, outstanding options and RSUs totaled approximately 2.22 million shares and warrants totaled 96,000 shares.