Tenon Medical, Inc. — Q3 2022 Form 10-Q Summary
Business context and reporting period
Tenon Medical is an early-stage medical device company developing and commercializing the FDA-cleared Catamaran SI Joint Fusion System, a titanium implant for sacroiliac joint disorders. The company was in the early stages of its U.S. commercial launch and announced a national launch in October 2022. This filing covers the quarter and nine months ended September 30, 2022; financial statements are unaudited.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $208 thousand, versus $70 thousand | $414 thousand, versus $107 thousand |
| Gross profit (loss) | $(94) thousand, versus $52 thousand | $(434) thousand, versus $69 thousand |
| Gross margin | (45%), versus 74% | (105%), versus 64% |
| Operating expenses | $3.168 million, versus $2.149 million | $10.363 million, versus $3.968 million |
| Loss from operations | $(3.262) million, versus $(2.097) million | $(10.797) million, versus $(3.899) million |
| Net loss attributable to Tenon | $(3.171) million, versus $(2.341) million | $(11.012) million, versus $(4.206) million |
| Net loss per share | $(0.28), versus $(2.55) | $(1.59), versus $(4.85) |
- Revenue increased 197% in the quarter and 287% year to date, primarily from higher procedure volume. Management reported procedure increases of approximately 200% and 345%, respectively.
- Cost of sales increased substantially as the company expanded operations and prepared for commercial launch, resulting in negative gross margins.
- Research and development, sales and marketing, and general and administrative expenses increased year to date by 118%, 94%, and 249%, respectively. Stock-based compensation was $1.755 million year to date, compared with $208 thousand in the prior period.
- Net cash used in operating activities was $8.640 million, compared with $2.602 million in the prior-year period. Cash used in investing activities was $5.223 million, primarily reflecting net purchases of short-term investments and $246 thousand of capital expenditures.
- Financing activities provided $14.139 million, primarily from the April 2022 IPO. The IPO generated approximately $13.8 million of net proceeds.
- At September 30, 2022, cash and cash equivalents were $3.153 million, short-term investments were $9.381 million, and total current assets were $13.665 million.
- The company reported no outstanding debt at September 30, 2022. Convertible notes and accrued interest were converted into 3,955,415 common shares upon the IPO.
- Total liabilities were $1.990 million, including $965 thousand of operating lease liabilities. Stockholders’ equity was $12.947 million, compared with a deficit of $20.552 million at December 31, 2021, primarily reflecting the IPO and debt and preferred-stock conversions.
- Accumulated deficit was $31.587 million, and 11,236,801 common shares were outstanding as of November 10, 2022.
Material changes versus the prior comparable period
- Revenue grew materially, but cost of sales grew faster, reversing the prior-year gross profit to a gross loss.
- Operating expenses increased by $6.395 million year to date, reflecting commercialization investments, increased staffing, stock compensation, public-company costs, insurance, professional fees, and a $574 thousand legal settlement accrual.
- Interest expense declined in the third quarter and was eliminated after the IPO-related conversion of the company’s convertible notes.
- The IPO, preferred-stock conversions, and debt conversions substantially changed the capital structure, increased common shares outstanding, eliminated preferred stock and debt, and produced positive stockholders’ equity.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects additional operating losses and negative operating cash flow as it expands commercialization, research and development, clinical activities, and infrastructure.
- The filing states that existing cash, cash equivalents, and short-term investments were not expected to fund obligations for at least twelve months from issuance of the financial statements. Management identified substantial doubt about the company’s ability to continue as a going concern and expects to seek additional equity, debt, collaboration, or licensing financing.
- Additional financing may be unavailable or dilutive. Failure to obtain financing could require the company to delay, reduce, or suspend sales, marketing, research and development, or other activities.
- On October 6, 2022, the company terminated its amended exclusive sales representative agreement. It paid $1.0 million in cash and agreed to transition payments, commissions of 20% of U.S. and Puerto Rico net sales through 2023 and 10% thereafter until specified payment limits are reached. The company expects to record a $4.6 million sales and marketing charge in the fourth quarter of 2022.
- The company entered into a separate consulting agreement with the former representative for a base fee of $700 thousand per year, plus potential performance compensation and expenses.
- A former director and CEO’s arbitration claim was settled in July 2022 for $1.2 million, which was fully paid by September 30, 2022.
- Disclosure controls and procedures were deemed ineffective because the company lacked sufficient accounting personnel, supervision, and segregation of duties; management identified a material weakness in internal controls.
- Key operating risks include uncertain product adoption and reimbursement, limited commercial history, dependence on a limited number of clinicians and distribution relationships, competition, regulatory requirements, manufacturing and inventory risks, and the need for additional capital.
Most important facts for investors to verify
- Actual procedure volume, revenue per procedure, customer concentration, reimbursement trends, and the sustainability of the October 2022 commercial launch.
- The company’s cash burn and available liquidity following the expected $4.6 million fourth-quarter sales and marketing charge and ongoing operating losses.
- Timing, terms, and dilution associated with any required future equity or debt financing.
- Progress in remediating the material weakness in disclosure controls and financial reporting.
- Financial impact of terminating the sales representative agreement, including commissions, transition payments, and acquisition-related obligations.
- Product adoption, clinical evidence, regulatory status, manufacturing capacity, inventory utilization, and gross-margin improvement.