Tenon Medical, Inc. — Q2 2023 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 company launched nationally in October 2022 and remains focused on expanding sales, clinician adoption, research and development, and commercial infrastructure. This report covers the three and six months ended June 30, 2023; financial statements are unaudited and presented in thousands unless otherwise noted.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $743 | $1,176 |
| Cost of sales | $549 | $1,029 |
| Gross profit (loss) | $194 | $147 |
| Gross margin | 26% | 12% |
| Operating expenses | $4,516 | $9,355 |
| Loss from operations | $(4,322) | $(9,208) |
| Net loss | $(4,285) | $(9,115) |
| Basic and diluted loss per share | $(0.33) | $(0.75) |
| Net cash used in operating activities | Not separately reported | $(6,752) |
- Cash and cash equivalents were $5.852 million at June 30, 2023, and short-term investments were $493,000, for total cash and investments of approximately $6.345 million.
- Total liabilities were $8.952 million, including a $3.164 million warrant liability and $1.526 million of accrued commissions excluding the current portion.
- The company reported no outstanding debt at June 30, 2023. Operating lease liabilities totaled $802,000, with $905,000 of remaining undiscounted lease payments.
- Accumulated deficit was $48.607 million, and stockholders’ equity was $903,000 before the subsequent warrant reclassification.
- Operating cash burn increased from $5.227 million to $6.752 million for the first six months. Investing cash flow was positive $5.798 million, primarily because of sales of short-term investments, while financing provided $4.665 million.
Material changes versus the prior comparable period
- Second-quarter revenue increased 450% to $743,000 from $135,000, primarily reflecting a 463% increase in procedures using the Catamaran System. Six-month revenue increased 471% to $1.176 million, with procedures increasing 433%.
- Gross margin improved to 26% in the second quarter from negative 101% and to 12% for the six-month period from negative 165%, although the company remained unprofitable.
- Second-quarter operating expenses declined 15% to $4.516 million, primarily because of lower consulting and professional fees and the absence of a prior-year legal settlement accrual. Six-month operating expenses increased 30% to $9.355 million, driven by higher research and development, sales and marketing, payroll, commissions, transition costs, and stock-based compensation.
- Six-month stock-based compensation increased to $2.094 million from $721,000.
- The company completed a registered offering on June 16, 2023, issuing 10 million units consisting of common shares and 20 million warrants. The financial statements report net proceeds of $4.808 million.
- The offering warrants were initially classified as a $3.164 million liability. Their exercise price reset on July 16, 2023 to $0.3146 per share, after which the warrants were reclassified to additional paid-in capital.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects additional operating losses and negative operating cash flow as commercialization and product development continue. It states that existing cash and investments will not fund obligations and planned operations for at least twelve months from issuance of the financial statements.
- The company disclosed substantial doubt about its ability to continue as a going concern and expects to seek additional equity, debt financing, or collaborations. Failure to obtain financing could require delaying, reducing, or suspending sales, marketing, research, development, or other activities.
- On July 24, 2023, the company entered into an equity line with Lincoln Park Capital Fund allowing potential sales of up to $10 million of common stock over 24 months, subject to conditions and limitations. It also issued 989,087 commitment shares. The company cannot draw under the facility until the applicable resale registration statement becomes effective and other conditions are satisfied.
- Nasdaq notified the company that its stock had failed to maintain the $1.00 minimum bid price. The initial compliance period ends January 16, 2024, with a possible additional 180-day period subject to Nasdaq requirements. Failure to regain compliance could result in delisting.
- The company had also received a Nasdaq notice concerning stockholders’ equity below the $2.5 million minimum. Management believes the warrant reclassification and public offering restored compliance, but Nasdaq will continue monitoring the requirement.
- Disclosure controls and procedures were deemed ineffective because limited resources prevent adequate segregation of accounting duties, constituting a material weakness in internal control.
- The terminated sales representative agreement requires payments based on product sales, including 20% of U.S. and Puerto Rico net sales through December 31, 2023 and 10% thereafter until aggregate payments reach $3.6 million, subject to the agreement’s terms. Accrued commissions were $2.648 million at June 30, 2023.
- Key operating risks include limited commercial history, dependence on a single primary product, uncertain reimbursement and clinician adoption, competition, regulatory requirements, manufacturing and inventory risks, additional financing needs, dilution, and potential Nasdaq delisting.
Most important facts for investors to verify
- Whether the company can raise sufficient capital to address the disclosed going-concern uncertainty and sustain operations beyond the next twelve months.
- The pace, economics, and repeatability of Catamaran procedures, including whether improving gross margins persist as volume grows.
- The terms, availability, dilution impact, and actual utilization of the Lincoln Park equity line.
- Nasdaq compliance with both the minimum bid price and minimum stockholders’ equity requirements.
- The potential dilution from 20 million offering warrants, approximately 1.9 million outstanding options and restricted stock units, and other equity awards.
- The filing reports registered-offering net proceeds of $4.808 million in the financial statements but cites $4.866 million in a later Nasdaq disclosure; investors should reconcile this discrepancy.
- Management’s remediation of the material weakness in disclosure controls and the adequacy of accounting personnel and segregation of duties.