TNON

Business Context and Reporting Period

Tenon Medical, Inc. (TNON) is a medical device company focused on the commercialization of The Catamaran™ SI Joint Fusion System, a surgical implant for treating sacroiliac joint dysfunction. This Form 10-Q covers the quarterly period ended June 30, 2024. The company is classified as a non-accelerated filer, a smaller reporting company, and an emerging growth company. As of June 30, 2024, the company had 3,951,767 shares of common stock issued and outstanding.

Key Financial Metrics

Note: The company had no outstanding debt as of June 30, 2024, following the conversion of convertible notes into Series A Preferred Stock in February 2024.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 21% year-over-year for the three months ended June 30, 2024, and 38% for the six-month period, driven by a 7% and 19% increase, respectively, in the number of surgical procedures performed.
• Margin Expansion: Gross margin improved significantly to 52% (Q2 2024) and 58% (YTD 2024) compared to 26% and 13% in the prior year periods, attributed to operating leverage and better absorption of production overhead.
• Expense Reduction: Total operating expenses decreased 4% in Q2 and 11% YTD compared to 2023. This was primarily due to the absence of one-time transition fees paid to a former sales representative in 2023 and reduced professional fees.
• Debt Elimination: The company fully prepaid its convertible notes in February 2024 by issuing Series A Preferred Stock, resulting in zero interest expense for the current period compared to prior periods.

Outlook, Risks, and Management Commentary

• Liquidity and Going Concern: Management has expressed substantial doubt about the company's ability to continue as a going concern for twelve months from the filing date. Cash on hand ($1.97 million) is insufficient to fund operations for the next year without additional capital.
• Capital Raising: The company plans to raise additional capital through public or private equity offerings, debt financings, or collaborations. In Q2 2024, the company raised approximately $4.4 million through the issuance of Series A Preferred Stock and common stock.
• Nasdaq Compliance: The company received a notice from Nasdaq regarding failure to maintain the $1.00 minimum bid price. It has an initial 180-day compliance period ending November 4, 2024, to regain compliance, potentially via a reverse stock split.
• Internal Controls: The company disclosed a material weakness in internal controls over financial reporting due to a lack of segregation of duties, a common issue for smaller entities. Disclosure controls and procedures were deemed not effective.
• Stockholder Actions: On July 23, 2024, stockholders approved terms for Series B Preferred Stock and amendments to the Series A Preferred Stock conversion price to comply with Nasdaq listing rules.

Investor Verification Checklist

• Cash Runway: Verify the timeline and terms of any new financing efforts, as current cash reserves are projected to be insufficient for 12 months.
• Nasdaq Status: Monitor the company's progress in regaining compliance with the $1.00 minimum bid price rule by the November 4, 2024 deadline to avoid delisting.
• Dilution Risk: Review the terms of the Series A and Series B Preferred Stock, including conversion prices and anti-dilution provisions, which may significantly impact common shareholder value.
• Revenue Sustainability: Assess whether the 38% year-over-year revenue growth is sustainable given the company's reliance on a limited number of clinicians and the competitive medical device landscape.
• Internal Controls: Evaluate the company's plan to remediate the material weakness in internal controls, particularly regarding the segregation of duties.