UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form
(Mark One)
FOR THE QUARTERLY PERIOD ENDED
or
FOR THE TRANSITION PERIOD FROM _________ to __________
COMMISSION FILE NUMBER
(Exact name of registrant as specified in its charter)
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Securities registered pursuant to Section 12(b) of the Act:
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Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
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Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act) Yes ☐ No
As of August 11, 2023, the registrant had a total of
INDEX
i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends impacting the financial condition of our business. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements.
Forward-looking statements include all statements that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “intend,” “seek,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential,” “might,” “forecast,” “continue,” or the negative of those terms, and similar expressions and comparable terminology intended to reference future periods. Forward-looking statements include, but are not limited to, statements about:
| ● | Our ability to effectively operate our business segments; |
| ● | Our ability to manage our research, development, expansion, growth and operating expenses; |
| ● | Our ability to evaluate and measure our business, prospects and performance metrics; |
| ● | Our ability and our national distributor’s ability to compete, directly and indirectly, and succeed in the highly competitive medical devices industry; |
| ● | Our ability to respond and adapt to changes in technology and customer behavior; |
| ● | Our ability to protect our intellectual property and to develop, maintain and enhance a strong brand; and |
Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.
Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We cannot guarantee future results, levels of activity, performance or achievements. Accordingly, the forward-looking statements in this Quarterly Report on Form 10-Q should not be regarded as representations that the results or conditions described in such statements will occur or that our objectives and plans will be achieved, and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements.
ii
PART I – FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Tenon Medical, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Short-term investments | ||||||||
| Accounts receivable | ||||||||
| Inventory | ||||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Fixed assets, net | ||||||||
| Deposits | ||||||||
| Operating lease right-of-use asset | ||||||||
| Deferred offering costs | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| Liabilities and Stockholders’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Current portion of accrued commissions | ||||||||
| Current portion of operating lease liability | ||||||||
| Warrant liability | — | |||||||
| Total current liabilities | ||||||||
| Accrued commissions, net of current portion | ||||||||
| Operating lease liability, net of current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 8) | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
Tenon Medical, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
(In thousands, except per share data)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ||||||||||||||||
| Gross (Loss) Profit | ( | ) | ( | ) | ||||||||||||
| Operating Expenses | ||||||||||||||||
| Research and development | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Loss from Operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Income (Expense) | ||||||||||||||||
| Gain on investments | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ||||||||||||
| Other income (expense), net | ||||||||||||||||
| Total Other Income (Expense), net | ( | ) | ( | ) | ||||||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net Loss Per Share of Common Stock | ||||||||||||||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| Weighted-Average Shares of Common Stock Outstanding | ||||||||||||||||
| Consolidated Statements of Comprehensive Loss: | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Unrealized gain (loss) on investments | ( | ) | ( | ) | ||||||||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||||||||||
| Total comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Tenon Medical, Inc.
Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(Unaudited)
(In thousands, except share data)
Three Months Ended June 30, 2023 and 2022:
| Series A Convertible Preferred Stock | Series B Convertible Preferred Stock | Common Stock | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Total | |||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | |||||||||||||||||||||||||||||||||||||
| Release of restricted stock units | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock and warrants, net of issuance costs | ||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | |||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock and warrants, net of issuance costs | ||||||||||||||||||||||||||||||||||||||||
| Common stock issued upon conversion of Series A preferred stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Common stock issued upon conversion of Series B preferred stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Common stock issued upon conversion of debt | ||||||||||||||||||||||||||||||||||||||||
| Common stock issued for services | ||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||
Six months ended June 30, 2023 and 2022:
| Series A Convertible Preferred Stock | Series B Convertible Preferred Stock | Common Stock | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Total | |||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | |||||||||||||||||||||||||||||||||||||
| Release of restricted stock units | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock and warrants, net of issuance costs | ||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | |||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock and warrants, net of issuance costs | ||||||||||||||||||||||||||||||||||||||||
| Common stock issued upon conversion of Series A preferred stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Common stock issued upon conversion of Series B preferred stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Common stock issued upon conversion of debt | ||||||||||||||||||||||||||||||||||||||||
| Common stock issued for services | ||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Tenon Medical, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
| Six Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Non-cash interest expense | ||||||||
| Stock-based compensation expense | ||||||||
| Common stock issued for services | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of operating right-of-use asset | ||||||||
| Increase (decrease) in cash resulting from changes in: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaid expenses and other assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ||||||||
| Operating lease liability | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash Flows from Investing Activities | ||||||||
| Sales of short-term investments | ||||||||
| Purchases of short-term investments | ( | ) | ( | ) | ||||
| Purchases of fixed assets | ( | ) | ( | ) | ||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from issuance of common stock and warrants, net of issuance costs | ||||||||
| Deferred offering costs | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Effect of foreign currency translation on cash flow | ( | ) | ||||||
| Net Increase in Cash and Cash Equivalents | ||||||||
| Cash and Cash Equivalents at Beginning of Period | ||||||||
| Cash and Cash Equivalents at End of Period | $ | $ | ||||||
| Supplemental Disclosures of Cash Flow Information | ||||||||
| Non-cash investment and financing activities: | ||||||||
| Common stock issued upon conversion of preferred stock | $ | $ | ||||||
| Common stock issued upon conversion of debt | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Notes to Condensed Consolidated Financial Statements (unaudited)(in thousands, except share and per-share data)
1. Organization and Business
Nature of operations
Tenon Medical, Inc. (the “Company”), was incorporated in the State of Delaware on June 19, 2012 and was headquartered in San Ramon, California until June 2021 when it relocated to Los Gatos, California. The Company is a medical device company that has developed a novel, minimally invasive approach to the sacroiliac joint (the “SI Joint”) using a single, robust, titanium implant for treatment of the most common types of SI Joint disorders that cause lower back pain. The Company received U.S. Food and Drug Administration (“FDA”) clearance in 2018 for its primary product, The Catamaran™ SI Joint Fusion System (“The Catamaran System”) which is designed to transfix and stabilize the SI Joint. The Company is in the early stages of its commercial launch with its only focus being on the US market.
Principles of consolidation
The condensed consolidated financial statements of the Company include the accounts of the Company and its wholly-owned subsidiary, Tenon Technology AG (“TTAG”), a Swiss company. All intercompany balances and transactions have been eliminated in consolidation. The financial statements of TTAG are prepared for the same reporting period as the parent, using consistent accounting policies in all material respects.
2. Summary of Significant Accounting Principles
Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). As permitted under these rules and regulations, the Company has condensed or omitted certain financial information and footnote disclosures normally included in its annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The condensed consolidated balance sheet as of December 31, 2022 has been derived from the Company’s audited consolidated financial statements, which are included in its Annual Report on Form 10-K filed with the SEC on March 10, 2023.
These condensed consolidated financial statements have been prepared on the same basis as the Company’s annual consolidated financial statements and, in management’s opinion, reflect all adjustments, consisting only of normal recurring adjustments, that are necessary for a fair presentation of its financial information. The interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year.
These unaudited condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company’s audited consolidated financial statements as of and for the years ended December 31, 2022 and 2021 included in its Annual Report of Form 10-K filed with the SEC on March 10, 2023.
The Company’s significant accounting policies are disclosed in the audited consolidated financial statements as of and for the years ended December 31, 2022 and 2021. There have been no material changes in the Company’s significant accounting policies during the six months ended June 30, 2023.
Going concern uncertainty and liquidity requirements
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. There is substantial doubt about the Company’s ability to continue as a going concern for one year after the date that these financial statements are issued.
5
Since inception, the Company has incurred losses
and negative cash flows from operations. Management expects to incur additional operating losses and negative cash flows from operations
in the foreseeable future as the Company continues its product development programs and the commercialization of The Catamaran System.
On April 29, 2022, the Company closed an initial public offering (the “IPO”) of its common stock for proceeds, net of issuance
costs, of $
Use of estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Significant estimates made by management include, but are not limited to, realization of deferred tax assets, accrued liabilities, accrued commissions, incremental borrowing rate, obsolescence of inventory, stock-based compensation and the fair value of investments, inventory and of the Company’s common stock.
Income Taxes
The Company accounts for income taxes utilizing
ASC 740, “Income Taxes”. ASC 740 requires the measurement of deferred tax assets for deductible temporary differences and
operating loss carry forwards, and of deferred tax liabilities for taxable temporary differences. Measurement of current and deferred
tax liabilities and assets is based on provisions of enacted tax law. The effects of future changes in tax laws or rates are not included
in the measurement. The Company recognizes the amount of taxes payable or refundable for the current year and recognizes deferred tax
liabilities and assets for the expected future tax consequences of events and transactions that have been recognized in the Company’s
financial statements or tax returns. The Company currently has substantial net operating loss carry forwards. The Company has recorded
a
Net loss per share
Basic net loss per share is based upon the weighted average number of common shares outstanding. Diluted net loss per share is based on the assumption that all potential common stock equivalents (convertible preferred stock, stock options, and warrants) are converted or exercised. The calculation of diluted net loss per share excludes potential common stock equivalents if the effect is anti-dilutive. The Company’s weighted average common shares outstanding for basic and diluted are the same because the effect of the potential common stock equivalents is anti-dilutive.
| June 30, 2023 | June 30, 2022 | |||||||
| Outstanding restricted stock units | ||||||||
| Outstanding stock options | ||||||||
| Outstanding warrants | ||||||||
| Total | ||||||||
Recent Accounting Pronouncements Adopted
In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). This standard requires an impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected losses rather than incurred losses. Under the new guidance, each reporting entity estimates an allowance for expected credit losses, which is intended to result in more timely recognition of losses. The new standard applies to trade receivables arising from revenue transactions such as contract assets and accounts receivable. When trade receivables are recorded, they become subject to the CECL model and estimates of expected credit losses on trade receivables over their contractual life will be recorded at inception based on historical information, current conditions, and reasonable and supportable forecasts. The Company adopted ASU 2016-13 as of January 1, 2023. The adoption had no material impact on its results of operations or on its condensed consolidated financial statements.
6
Recent Accounting Pronouncements Not Yet Adopted
There have been no accounting pronouncements or changes in accounting pronouncements in the six months ended June 30, 2023 that are significant or potentially significant to the Company.
3. Investments
| Level 2 | ||||
| Corporate debt securities: | ||||
| June 30, 2023 | $ | |||
| December 31, 2022 | $ | |||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| Corporate debt securities: | ||||||||||||||||
| June 30, 2023 | $ | $ | $ | $ | ||||||||||||
| December 31, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||
All of the investments with gross unrealized losses have been in a continuous loss position for less than 12 months.
During the three and six months ended June 30, 2023 and 2022, the Company did not recognize any significant other-than-temporary impairment losses because the Company does not intend to sell the investments before recovery of their amortized cost bases.
During the three and six months ended June 30,
2023, there were net gains of approximately $
4. Fixed Assets, Net
| June 30, 2023 | December 31, 2022 | |||||||
| Construction in progress | $ | $ | ||||||
| Catamaran tray sets | ||||||||
| IT equipment | ||||||||
| Lab equipment | ||||||||
| Office furniture | | |||||||
| Fixed assets, gross | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Fixed assets, net | $ | $ | ||||||
Construction in progress is made up of reusable
components that will become Catamaran Tray Sets. Depreciation expense was approximately $
7
5. Accrued Expenses
| June 30, 2023 |
December 31, 2022 |
|||||||
| Accrued compensation | $ | $ | ||||||
| Other accrued expenses | |
|||||||
| Total accrued expenses | $ | $ | ||||||
6. Leases
In June 2021, the Company entered into a facility
lease agreement for its company headquarters in Los Gatos, California. This non-cancellable operating lease expires in
Operating lease costs for the facility lease were
$
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Operating lease right-of-use assets | $ | $ | ||||||
| Operating lease liability, current | $ | ( | ) | $ | ( | ) | ||
| Operating lease liability, noncurrent | ( | ) | ( | ) | ||||
| Total operating lease liabilities | $ | ( | ) | $ | ( | ) | ||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Total lease payments | ||||
| Less: imputed interest | ( | ) | ||
| Present value of operating lease liabilities | $ |
Other information:
| Cash paid for operating leases for the six months ended June 30, 2023 | $ | |||
| Cash paid for operating leases for the six months ended June 30, 2022 | $ | |||
| Remaining lease term - operating leases (in years) | ||||
| Average discount rate - operating leases | % |
8
7. Stockholders’ Equity
The Amended and Restated Certificate of Incorporation
dated February 18, 2014 authorized the issuance of
Reverse Stock Split
On April 6, 2022, the Company effected a 1:2 reverse
stock split (the “Reverse Stock Split”) by filing an amendment to the Company’s Amended and Restated Certificate of
Incorporation, as amended, with the Delaware Secretary of State. The Reverse Stock Split combined every two shares of our common stock
issued and outstanding immediately prior to effecting the Reverse Stock Split into one share of common stock.
Initial Public Offering
On April 26, 2022, the Company’s Registration
Statement relating to the IPO was declared effective by the SEC. The IPO consisted of
On April 29, 2022, the IPO closed, and the Company
received approximately $
On April 29, 2022, as result of the completion
of the IPO, the Company converted all shares of Series A and Series B Preferred Stock to
Concurrent with the completion of the IPO and
in accordance with the Amended and Restated Exclusive Sales Representative Agreement executed in May 2021, the counterparty to the agreement
received anti-dilution protections to maintain ownership of
9
Registered Offering
On June 16, 2023, the Company closed the Registered
Offering of a total of
Voting rights
The holders of vested shares of common stock are
entitled to vote on any matter submitted to a vote of the stockholders and each such holder is entitled to
Equity awards
In 2012, the Board of Directors of the Company
(the “Board”) approved the Tenon Medical, Inc. 2012 Equity Incentive Plan (the “2012 Plan”). The 2012 Plan provides
for the issuance of common stock options, appreciation rights, and other awards to employees, directors, and consultants. Options issued
under the 2012 Plan generally vest over a period of
On January 10, 2022 and February 2, 2022, the
Board and stockholders, respectively, of the Company approved the Tenon Medical, Inc. 2022 Equity Incentive Plan (the “2022 Plan”),
which was effective on April 25, 2022. The number of shares of common stock that may be subject to awards and sold under the 2022 Plan
is equal to
Compensation expense for the three and six months ended June 30, 2023 and 2022 includes the portion of awards vested in the periods for all equity-based awards granted, based on the grant date fair value estimated using a Black-Scholes option valuation model.
| Stock Options | Restricted Stock Units | |||||||||||||||
| Number of Shares Subject to Outstanding Stock Options |
Weighted Average Exercise Price per Share |
Number of Outstanding Restricted Stock Units |
Weighted Average Grant Date Fair Value per Share |
|||||||||||||
| Outstanding at December 31, 2022 | $ | $ | ||||||||||||||
| Granted | $ | |||||||||||||||
| Released | ( |
) | $ | |||||||||||||
| Canceled/Forfeited | ( |
) | $ | |||||||||||||
| Outstanding at June 30, 2023 | $ | $ | ||||||||||||||
10
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Research and development | $ | $ | $ | $ | ||||||||||||
| Sales and marketing | ||||||||||||||||
| General, and administrative | ||||||||||||||||
| Total stock-based compensation expense | $ | $ | $ | $ | ||||||||||||
At June 30, 2023, there were
Warrants
In April 2022, as noted above, the Company granted
the Underwriters warrants to purchase a total of
In June 2023, as noted above, in connection
with the Registered Offering, the Company issued Offering Warrants to purchase a total of
8. Commitments and Contingencies
Sales Representative Agreement
In April 2020, the Company entered into an Exclusive
Sales Representative Agreement, under which the counterparty to the agreement (the “Representative”) received exclusive rights
to market, promote, and distribute The Catamaran System in the United States and Puerto Rico. The agreement is for an initial period of
The Restated Sales Agreement restructured the
calculation of the bonus paid to the Representative upon an acquisition, removed the bonus payable upon an IPO, and allows the Company
to terminate the Restated Sales Agreement as long as the bonus paid to the Representative is at least $
11
On October 6, 2022, the Company entered into the
Terminating Amended and Restated Exclusive Sales Representative Agreement (the “Termination Agreement”) with the Representative,
which terminated the Restated Sales Agreement. In accordance with the Termination Agreement, (i) the Company paid the Representative $
| 2023 | ||||
| Balance at December 31, 2022 | $ | |||
| Amounts paid during 2023 | ( | ) | ||
| Accretion | ||||
| Balance at June 30, 2023 | $ | |||
Per the terms of the Termination Agreement, the
Company ultimately expects to expense $
Simultaneously with the execution of the Termination Agreement, the Company entered into a Consulting Agreement dated October 6, 2022, with the Representative (the “Consulting Agreement”). Under the terms and conditions of the Consulting Agreement, the Representative is tasked with organizing, recruiting, training, and coordinating the Company’s Clinical Specialist program, Physician Education program and Sales Education program as more specifically described in the Consulting Agreement.
The term of the Consulting Agreement is from
Litigation
In the normal course of business, the Company may possibly be named as a defendant in various lawsuits.
9. Concentrations of Risk
Credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents.
The Company maintains cash balances at financial institutions located in California and Switzerland. Accounts at the U.S. financial institutions are secured by the Federal Deposit Insurance Corporation. At times, balances may exceed federally insured limits. The Company has not experienced any losses in such accounts. Management believes that the Company is not exposed to any significant credit risk with respect to its cash and cash equivalents.
The Company grants unsecured credit to its customers based on an evaluation of the customer’s financial condition and a cash deposit is generally not required. Management believes its credit policies do not result in significant adverse risk and historically has not experienced significant credit-related losses.
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Currency risk
The Company’s subsidiary, Tenon Technology
AG, realizes a portion of its expenses in Swiss francs. Consequently, certain assets and liabilities are exposed to foreign currency fluctuations.
At June 30, 2023 and December 31, 2022, approximately $
10. Subsequent Events
Offering Warrant Reset
As noted in Note 7 above, in June 2023, in connection
with the Registered Offering, the Company issued Offering Warrants to purchase a total of
Notice from Nasdaq
On July 20, 2023, the Company received a letter from the Nasdaq Listing
Qualifications Staff of Nasdaq therein stating that for the 30 consecutive business day period between June 6, 2023 through July 19, 2023,
the common stock of the Company had not maintained a minimum closing bid price of $
To regain compliance, the closing bid price of
the Company’s common stock must meet or exceed $
If the Company does not regain compliance with the Bid Price Rule by January 16, 2024, the Company may be eligible for an additional 180-day period to regain compliance. To qualify, the Company would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the Bid Price Rule, and would need to provide written notice of its intention to cure the bid price deficiency during the second compliance period, by effecting a reverse stock split, if necessary.
If the Company cannot regain compliance during the Compliance Period or any subsequently granted compliance period, the common stock of the Company will be subject to delisting. At that time, the Company may appeal the delisting determination to a Nasdaq hearings panel.
The notice from Nasdaq has no immediate effect on the listing of the Company’s common stock and its common stock will continue to be listed on The Nasdaq Capital Market under the symbol “TNON.” The Company is currently evaluating its options for regaining compliance. There can be no assurance that the Company will regain compliance with the Bid Price Rule or maintain compliance with any of the other Nasdaq continued listing requirements.
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Equity Line of Credit
On July 24, 2023, the Company entered into a purchase
agreement (“Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”), under which, subject to
specified terms and conditions, the Company may sell to Lincoln Park up to $
The Company cannot sell any shares to Lincoln Park until the date that a registration statement covering the resale of shares of common stock that have been and may in the future be issued to Lincoln Park under the Purchase Agreement, which the Company agreed to file with the SEC pursuant to the Registration Rights Agreement, is declared effective by the SEC and a final prospectus in connection therewith is filed and all of the other conditions set forth in the Purchase Agreement are satisfied (such date, the “Commencement Date”).
Beginning on the Commencement Date and for a period
of 24 months thereafter, under the terms and subject to the conditions of the Purchase Agreement, from time to time, at the Company’s
discretion, the Company has the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park is obligated to purchase, up
to $
If the Company directs Lincoln Park to purchase the maximum number of shares of common stock that the Company may sell in a Regular Purchase, then in addition to such Regular Purchase, and subject to certain conditions and limitations in the Purchase Agreement, the Company may direct Lincoln Park to purchase additional shares of common stock in an “accelerated purchase” (each, an “Accelerated Purchase”) and an “additional accelerated purchase” (each, an “Additional Accelerated Purchase”) (including multiple Additional Accelerated Purchases on the same trading day) as provided in the Purchase Agreement. The purchase price per share for each Accelerated Purchase and Additional Accelerated Purchase will be based on market prices of the common stock on the applicable purchase date for such Accelerated Purchases and such Additional Accelerated Purchases. Lincoln Park has no right to require the Company to sell any common stock to Lincoln Park, but Lincoln Park is obligated to make purchases as the Company directs, subject to conditions and limitations set forth in the Purchase Agreement.
The Purchase Agreement also prohibits the Company
from directing Lincoln Park to purchase any shares of common stock if those shares, when aggregated with all other shares of common stock
then beneficially owned by Lincoln Park and its affiliates, would result in Lincoln Park and its affiliates having beneficial ownership,
at any single point in time, of more than
The Company’s net proceeds under the Purchase
Agreement will depend on the frequency of sales and the number of shares sold to Lincoln Park and the prices at which the Company sells
shares to Lincoln Park. The Company expects that any net proceeds it receives from such sales to Lincoln Park will be used for general
corporate purposes, including working capital. As consideration for Lincoln Park’s commitment to purchase up to $
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and the other information set forth in the Registration Statement. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the SEC.
Overview
Tenon Medical, Inc., a medical device company formed in 2012, has developed a proprietary, U.S. Food and Drug Administration (“FDA”) approved surgical implant-system, which we call The Catamaran™ SI Joint Fusion System (“The Catamaran System”). The Catamaran System offers a novel, less invasive inferior-posterior approach to the sacroiliac joint (“SI Joint”) using a single, robust titanium implant to treat SI Joint dysfunction that often causes severe lower back pain. The system features the Catamaran™ Fixation Device which passes through both the axial and sagittal planes of the ilium and sacrum, transfixing the SI Joint along its longitudinal axis. Published clinical studies have shown that 15% to 30% of all chronic lower back pain is associated with the SI Joint.
With an entry similar to the SI Joint injection, the surgical approach is direct to the joint. The angle and trajectory of the inferior-posterior approach is designed to point away from critical neural and vascular structures and into the strongest cortical bone. Joined by a patented osteotome bridge, the implant design consists of two hollow fenestrated pontoons with an open framework to facilitate bony in-growth through the SI Joint. One pontoon fixates into the ilium and the other into the sacrum. The osteotome is designed to disrupt the articular portion of the joint to help facilitate a fusion response.
Our initial clinical results indicate that The Catamaran System implant is promoting fusion across the joint as evidenced by computerized tomography (CT) scans which is the gold standard widely accepted by the clinical community. We had our national launch of The Catamaran System in October 2022 and are building a sales and marketing infrastructure to market our product and address the greatly underserved market opportunity that exists.
We believe that the implant design and procedure we have developed, along with the 2D and 3D protocols for proper implantation will be received well by the clinician community who have been looking for a next generation device.
We have incurred net losses since our inception in 2012. As of June 30, 2023, we had an accumulated deficit of approximately $48.6 million. To date, we have financed our operations primarily through an initial public offering, private placements of equity securities, certain debt-related financing arrangements, and sales of our product. We have devoted substantially all of our resources to research and development, regulatory matters and sales and marketing of our product.
Reverse Stock Split
On April 6, 2022, we effected the Reverse Stock Split. Any fractional shares that would have resulted from the Reverse Stock Split were rounded up to the nearest whole share. Our authorized common stock was not impacted by the Reverse Stock Split. Immediately after the Reverse Stock Split there were 989,954 shares of our common stock outstanding. Profit per share and share amounts for the condensed consolidated financial statements as of and for the periods ended June 30, 2022 reflect the impact of the Reverse Stock Split.
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Components of Results of Operations
Revenue
We derive substantially all our revenue from sales of The Catamaran System to a limited number of clinicians. Revenue from sales of The Catamaran System fluctuates based on volume of cases (procedures performed), discounts, and the number of implants used for a particular patient. Similar to other orthopedic companies, our revenue can also fluctuate from quarter to quarter due to a variety of factors, including reimbursement, changes in independent sales representatives and physician activities.
Cost of Goods Sold, Gross Profit, and Gross Margin
We utilize contract manufacturers for production of The Catamaran System implants and Catamaran Tray Sets. Cost of goods sold consists primarily of costs of the components of The Catamaran System implants and instruments, quality inspection, packaging, scrap and inventory obsolescence, as well as distribution-related expenses such as logistics and shipping costs. We anticipate that our cost of goods sold will increase in absolute dollars as case levels increase.
Our gross margins have been and will continue to be affected by a variety of factors, including the cost to have our product manufactured for us, pricing pressure from increasing competition, and the factors described above impacting our revenue.
Operating Expenses
Our operating expenses consist of sales and marketing, research and development, and general and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of consulting expenses, salaries, sales commissions and other cash and stock-based compensation related expenses. We expect operating expenses to increase in absolute dollars as we continue to invest and grow our business.
Sales and Marketing Expenses
Sales and marketing expenses primarily consist of independent sales representative training and commissions in addition to salaries and stock-based compensation expense. Starting in May 2021, commissions to our national distributor have been based on a percentage of sales and we anticipate that these commissions will make up a significant portion of our sales and marketing expenses. We expect our sales and marketing expenses to increase in absolute dollars with the commercial launch of The Catamaran System resulting in higher commissions and salaries, increased clinician and sales representative training, and the start of clinical studies to gain wider clinician adoption of The Catamaran System. Our sales and marketing expenses may fluctuate from period to period due to timing of sales and marketing activities related to the commercial launch of our product.
Research and Development Expenses
Our research and development expenses primarily consist of engineering, product development, regulatory expenses, and consulting services, outside prototyping services, outside research activities, materials, and other costs associated with development of our product. Research and development expenses also include related personnel and consultants’ compensation and stock-based compensation expense. We expense research and development costs as they are incurred. We expect research and development expense to increase in absolute dollars as we improve The Catamaran System, develop new products, add research and development personnel, and undergo clinical activities that may be required for regulatory clearances of future products.
General and Administrative Expenses
General and administrative expenses primarily consist of salaries, consultants’ compensation, stock-based compensation expense, and other costs for finance, accounting, legal, compliance, and administrative matters. We expect our general and administrative expenses to increase in absolute dollars as we add personnel and information technology infrastructure to support the growth of our business. We also expect to incur additional general and administrative expenses as a result of operating as a public company, including but not limited to: expenses related to compliance with the rules and regulations of the SEC and those of The Nasdaq Stock Market LLC on which our securities are traded; additional insurance expenses; investor relations activities; and other administrative and professional services. While we expect the general and administrative expenses to increase in absolute dollars, we anticipate that it will decrease as a percentage of revenue over time.
Gain (Loss) on Investments, Interest Expense and Other Income (Expense), Net
Gain (loss) on investments consists of interest income and realized gains and losses from the sale of our investments in money market and corporate debt securities. Interest expense is related to borrowings and includes deemed interest derived from the beneficial conversion prices of notes payable. Other income and expenses have not been significant to date.
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Results of Operations
The following table sets forth our results of operations for the periods presented (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| Consolidated Statements of Operations Data: | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Revenue | $ | 743 | $ | 135 | $ | 1,176 | $ | 206 | ||||||||
| Cost of goods sold | 549 | 271 | 1,029 | 546 | ||||||||||||
| Gross (loss) profit | 194 | (136 | ) | 147 | (340 | ) | ||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | 901 | 657 | 1,735 | 1,219 | ||||||||||||
| Sales and marketing | 1,883 | 1,943 | 3,909 | 2,219 | ||||||||||||
| General and administrative | 1,732 | 2,720 | 3,711 | 3,757 | ||||||||||||
| Total operating expenses | 4,516 | 5,320 | 9,355 | 7,195 | ||||||||||||
| Loss from operations | (4,322 | ) | (5,456 | ) | (9,208 | ) | (7,535 | ) | ||||||||
| Interest and other income (expense), net: | ||||||||||||||||
| Gain on investments | 37 | 35 | 93 | 36 | ||||||||||||
| Interest expense | — | (88 | ) | — | (362 | ) | ||||||||||
| Other income (expense) | — | 21 | — | 20 | ) | |||||||||||
| Net loss | $ | (4,285 | ) | $ | (5,488 | ) | $ | (9,115 | ) | $ | (7,841 | ) | ||||
The following table sets forth our results of operations as a percentage of revenue:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| Consolidated Statements of Operations Data: | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Revenue | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
| Cost of goods sold | 74 | 201 | 88 | 265 | ||||||||||||
| Gross profit | 26 | (101 | ) | 12 | (165 | ) | ||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | 121 | 487 | 148 | 592 | ||||||||||||
| Sales and marketing | 253 | 1,439 | 332 | 1,077 | ||||||||||||
| General and administrative | 233 | 2,015 | 316 | 1,824 | ||||||||||||
| Total operating expenses | 608 | 3,941 | 795 | 3,493 | ||||||||||||
| Loss from operations | (582 | ) | (4,041 | ) | (783 | ) | (3,658 | |||||||||
| Interest and other income (expense), net: | ||||||||||||||||
| Gain on investments | 5 | 26 | 8 | 17 | ||||||||||||
| Interest expense | — | (65 | ) | — | (176 | ) | ||||||||||
| Other expense | — | 16 | — | 10 | ||||||||||||
| Net loss | (577 | )% | (4,065 | )% | (775 | )% | (3,806 | )% | ||||||||
Comparison of the Three and Six Months Ended June 30, 2023 and 2022 (in thousands, except percentages)
Revenue, Cost of Goods Sold, Gross Profit, and Gross Margin
| Three Months Ended June 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Revenue | $ | 743 | $ | 135 | $ | 608 | 450 | % | ||||||||
| Cost of goods sold | 549 | 271 | 278 | 103 | % | |||||||||||
| Gross (loss) profit | $ | 194 | $ | (136 | ) | $ | 330 | (243 | )% | |||||||
| Gross (loss) profit percentage | 26 | % | (101 | )% | ||||||||||||
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| Six Months Ended June 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Revenue | $ | 1,176 | $ | 206 | $ | 970 | 471 | % | ||||||||
| Cost of goods sold | 1,029 | 546 | 483 | 88 | % | |||||||||||
| Gross (loss) profit | $ | 147 | $ | (340 | ) | $ | 487 | (143 | )% | |||||||
| Gross (loss) profit percentage | 12 | % | (165 | )% | ||||||||||||
Revenue. The increase in revenue for the three and six months ended June 30, 2023 as compared to the same periods in 2022 was primarily due to increases of 463% and 433%, respectively, in the number of surgical procedures in which The Catamaran System was used.
Cost of Goods Sold, Gross Profit, and Gross Margin. The increase in cost of goods sold for the three and six months ended June 30, 2023 as compared to the same periods in 2022 was due to increases of 463% and 433%, respectively, in the number of surgical procedures performed. Gross loss and gross margin percentage improved due to higher revenue associated with the increase in the number of surgical procedures.
Operating Expenses
| Three Months Ended June 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Research and development | $ | 901 | $ | 657 | $ | 244 | 37 | % | ||||||||
| Sales and marketing | 1,883 | 1,943 | (60 | ) | (3 | )% | ||||||||||
| General and administrative | 1,732 | 2,720 | (988 | ) | (36 | )% | ||||||||||
| Total operating expenses | $ | 4,516 | $ | 5,320 | $ | (804 | ) | (15 | )% | |||||||
| Six Months Ended June 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Research and development | $ | 1,735 | $ | 1,219 | $ | 516 | 42 | % | ||||||||
| Sales and marketing | 3,909 | 2,219 | 1,690 | 76 | % | |||||||||||
| General and administrative | 3,711 | 3,757 | (46 | ) | (1 | )% | ||||||||||
| Total operating expenses | $ | 9,355 | $ | 7,195 | $ | 2,160 | 30 | % | ||||||||
Research and Development Expenses. Research and development expenses for the three months ended June 30, 2023 increased as compared to the same period in 2022 primarily due to increased stock-based compensation ($200) and payroll expenses ($100), partially offset by decreased professional fees ($37).
Research and development expenses for the six months ended June 30, 2023 increased as compared to the same period in 2022 primarily due to increased stock-based compensation ($543) and payroll expenses ($116), partially offset by decreased professional fees ($45).
Sales and Marketing Expenses. Sales and marketing expenses for the three months ended June 30, 2023 decreased as compared to the same period in 2022 primarily due to decreased consulting and professional fees ($1,340), partially offset by increased payroll expenses ($670), SpineSource transition expenses ($260), sales commissions ($278), and stock-based compensation ($46) The increase in payroll and payroll related expenses is primarily due to the increased number of sales and marketing employees as we build out our sales function.
Sales and marketing expenses for the six months ended June 30, 2023 increased as compared to the same period in 2022 primarily due to increased payroll expenses ($1,330), SpineSource transition expenses ($690), sales commissions ($610) and stock-based compensation ($92), partially offset by decreased consulting and professional fees ($1,129). The increase in payroll and payroll related expenses is primarily due to the increased number of sales and marketing employees as we build out our sales function.
General and Administrative Expenses. General and administrative expenses for the three months ended June 30, 2023 decreased as compared to the same period in 2022 primarily due to a legal settlement accrual in 2022 ($574) and decreased professional service fees ($517) partially offset by increased stock-based compensation ($256), and payroll expenses ($62).
General and administrative expenses for the six months ended June 30, 2023 decreased as compared to the same period in 2022 primarily due to a legal settlement accrual in 2022 ($574) and decreased professional service fees ($489), partially offset by increased stock-based compensation ($738) and payroll expenses ($245). The increase in general and administrative expenses in 2023 exclusive of the legal settlement accrual was primarily due to the Company’s ongoing transition to an operating company and the creation of an infrastructure to support future growth through the hiring of employees.
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Gain (Loss) on Investments, Interest Expense and Other Income (Expense), Net
Gain on investments for the three and six months ended June 30, 2023 increased approximately $2 and $57, respectively, as compared to the three and six months ended June 30, 2022 due to interest on our investments in money market and corporate debt securities. We had no interest expense for the three and six months ended June 30, 2023 and interest expense for the three and six months ended June 30, 2022 of $88 and $362 related to our convertible debt.
Liquidity and Capital Resources; Going Concern
As of June 30, 2023, we had cash and cash equivalents and short-term investments of approximately $6.3 million. Since inception, we have financed our operations through private placements of preferred stock, debt financing arrangements, our initial public offering and the sale of our products. As of June 30, 2023, we had no outstanding debt.
As of June 30, 2023, we had an accumulated deficit of approximately $48.6 million and expect to incur additional losses in the future. We have not achieved positive cash flow from operations to date. On April 29, 2022, we closed an initial public offering of our common stock. On June 16, 2023, we closed a registered public offering. Based upon our current operating plan, we believe that our existing cash and cash equivalents will not be sufficient to fund our operating expenses and capital expenditure requirements through at least the next 12 months from the date these consolidated financial statements were available to be released. We plan to raise the necessary additional capital through one or a combination of public or private equity offerings, debt financings, and collaborations. We continue to face challenges and uncertainties and, as a result, our available capital resources may be consumed more rapidly than currently expected due to (a) the uncertainty of future revenues from The Catamaran System; (b) changes we may make to the business that affect ongoing operating expenses; (c) changes we may make in our business strategy; (d) regulatory developments affecting our existing products; (e) changes we may make in our research and development spending plans; and (f) other items affecting our forecasted level of expenditures and use of cash resources.
As we attempt to raise additional capital to fund our operations, funding may not be available to us on acceptable terms, or at all. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of or suspend one or more of our sales and marketing efforts, research and development activities, or other operations. We may seek to raise any necessary additional capital through a combination of public or private equity offerings, debt financings, and collaborations. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends. If we are unable to raise capital, we will need to delay, reduce, or terminate planned activities to reduce costs. Doing so will likely harm our ability to execute our business plans. Due to the uncertainty in our ability to raise capital, management believes that there is substantial doubt in our ability to continue as a going concern for the next twelve months from the issuance of these consolidated financial statements.
We plan to use our cash within the twelve months from June 30, 2023 and beyond for working capital and research and development.
Contractual Obligations
The following table summarizes our contractual obligations as of June 30, 2023:
| Payments Due By Period (In thousands) |
||||||||||||||||||||
| Less than | More than |
|||||||||||||||||||
| Total | 1 year | 1-3 years | 4-5 years | 5 years | ||||||||||||||||
| Operating leases | $ | 905 | $ | 150 | $ | 611 | $ | 144 | $ | — | ||||||||||
| Purchase obligations | — | — | — | — | — | |||||||||||||||
| Total | $ | 905 | $ | 150 | $ | 611 | $ | 144 | $ | — | ||||||||||
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Obligations under Terminated Sales Representative Agreement: On October 6, 2022, we entered into the Terminating Amended and Restated Exclusive Sales Representative Agreement (the “Termination Agreement”). In accordance with the Termination Agreement, (i) we paid the Representative $1,000 in cash; and (ii) we agreed to pay the Representative (a) $85 per month during the six months after the date of the Termination Agreement in return for efforts by the Representative to transition operations to us, (b) 20% of net sales of the Product sold in the United States and Puerto Rico until December 31, 2023 and (c) after December 31, 2023, 10% of net sales until such time as the aggregate amount paid to the Representative under this clause (c) and clause (b) above equal $3,600. In the event of an acquisition, we will pay the Representative $3,600 less previous amounts paid pursuant to clause (b) and clause (c) above. The timing of the payments under clause (b) and (c) is variable depending on the timing of our sales.
Cash Flows (in thousands, except percentages)
The following table sets forth the primary sources and uses of cash for each of the periods presented below:
| Six Months Ended June 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Net cash (used in) provided by: | ||||||||||||||||
| Operating activities | $ | (6,752 | ) | $ | (5,227 | ) | $ | (1,525 | ) | 29 | % | |||||
| Investing activities | 5,798 | (3,906 | ) | 9,704 | (248 | )% | ||||||||||
| Financing activities | 4,665 | 14,139 | (9,474 | ) | (67 | )% | ||||||||||
| Effect of foreign currency translation on cash flow | 12 | (48 | ) | 60 | (125 | )% | ||||||||||
| Net increase in cash and cash equivalents | $ | 3,723 | $ | 4,958 | $ | (1,235 | ) | (25 | )% | |||||||
The decrease in net cash used in operating activities for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022 was primarily attributable to our increased net loss of $1.3 million, adjusted for increases in non-cash stock-based compensation expenses ($1,373) and a decrease in common stock issued for services (1,561), in addition to increases in inventory ($285) and accounts payable ($495).
Cash provided by investing activities for the six months ended June 30, 2023 consisted primarily of the net sales of short-term investments of approximately $6.0 million to use to fund our operations, partially offset by purchases of property and equipment of $0.2 million. Cash used in investing activities for the six months ended June 30, 2022 consisted primarily of the net purchases of short-term investments of $3.7 million and purchases of property and equipment of $0.2 million.
Cash provided by financing activities for the six months ended June 30, 2023 consisted primarily of the $4.8 million, net of relevant expenses, received from our registered offering in June 2023. Cash provided by financing activities for the six months ended June 30, 2022 consisted of the $14.1 million cash received from our initial public offering in April 2022, net of relevant expenses.
Critical Accounting Policies, Significant Judgments, and Use of Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported results of operations during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from three other sources. Actual results could differ from these estimates under different assumptions or conditions. For the six months ended June 30, 2023, there were no significant changes to our existing critical accounting policies from those disclosed on our Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
As of June 30, 2023, and December 31, 2022, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Not required under Regulation S-K for “smaller reporting companies.”
ITEM 4. Controls and Procedures. Disclosure Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms promulgated by the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Because of the inherent limitations to the effectiveness of any system of disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that all control issues and instances of fraud, if any, with a company have been prevented or detected on a timely basis. Even disclosure controls and procedures determined to be effective can only provide reasonable assurance that their objectives are achieved.
As of June 30, 2023, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) pursuant to Rule 13a-15 of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are not effective at the reasonable assurance level.
Our size has prevented us from being able to employ sufficient resources to enable us to have an adequate level of supervision and segregation of duties. Therefore, it is difficult to effectively segregate accounting duties which comprises a material weakness in internal controls. This lack of segregation of duties leads management to conclude that the Company’s disclosure controls and procedures are not effective to give reasonable assurance that the information required to be disclosed in reports that the Company files under the Exchange Act is recorded, processed, summarized and reported as and when required.
To the extent reasonably possible given our limited resources, we intend to take measures to cure the aforementioned weaknesses, including, but not limited to, increasing the capacity of our qualified financial personnel to ensure that accounting policies and procedures are consistent across the organization and that we have adequate control over our Exchange Act reporting disclosures.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control procedures over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the six months ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEDINGS
ITEM 1A. RISK FACTORS
As a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and in item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this item. In any event, there have been no material changes in our risk factors as previously disclosed in our Annual Report on Form 10-K filed with the U.S. Securities and Securities Exchange Commission (“SEC”) on March 10, 2023.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(A) Unregistered Sales of Equity Securities
None.
(B) Use of Proceeds
Not applicable.
(C) Issuer Purchases of Equity Securities
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
As previously reported by the Company on a Current Report on Form 8-K filed with the Securities and Exchange Commission on July 21, 2023, on July 20, 2023, the Company received written notice from The Nasdaq Stock Market LLC (“Nasdaq”) stating that the Company failed to maintain a minimum bid price of at least $1.00 per share for the prior 30 consecutive trading day period from June 6, 2023 to July 19, 2023, based upon the closing bid price for its common stock as required by Nasdaq Listing Rule 5550(a)(2).
Pursuant to Nasdaq Listing Rule 5810(c)(3)(A), the Company has 180 calendar days, or until January 16, 2024, to regain compliance with the minimum bid requirement under Nasdaq Listing Rule 5550(a)(2). During the compliance period, the Company’s common stock will continue to be listed and traded on The Nasdaq Capital Market. To regain compliance, the closing bid price of the Company’s common stock must meet or exceed $1.00 per share for a minimum of 10 consecutive trading days, unless extended by Nasdaq under Nasdaq Rule 5810(c)(3)(H), prior to January 16, 2024.
In the event the Company does not regain compliance during the compliance period, the Company may be eligible for additional 180 calendar days to comply with Nasdaq Listing Rule 5550(a)(2), subject to the Company satisfying the continued listing requirement for the market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market with the exception of the bid price requirement, subject to Nasdaq’s approval.
As previously reported by the Company on a Current Report on Form 8-K filed with the Securities and Exchange Commission on May 19, 2023, the Company received a written notice from Nasdaq dated May 17, 2023, notifying the Company that it is no longer in compliance with Nasdaq Rule 5550(b)(1), the minimum stockholders’ equity requirement of $2,500,000 for continued listing on The Nasdaq Capital Market (the “Minimum Equity Requirement”).
On June 16, 2023, the Company consummated a public offering (the “Public Offering”) of 10,000,000 units, each unit consisting of one share of the Company’s common stock and two warrants, each to purchase one share of the Company’s common stock in which it received net proceeds of $4,866,000. As of July 10, 2023, the Company believes it is in compliance with the Minimum Equity Requirement as a result of the Public Offering.
Nasdaq will continue to monitor the Company’s ongoing compliance with the Minimum Equity Requirement and, if at the time of its next periodic report the Company does not evidence compliance, it may be subject to delisting.
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ITEM 6. EXHIBITS
EXHIBIT INDEX
| # | Incorporated by reference to the same exhibit number in the Company’s Registration Statement No. 333-272488, filed with the Securities and Exchange Commission on June 7, 2023. |
| ## | Incorporated by reference to the same exhibit number in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 20, 2023, as amended by the Form 8-K/A filed with the Securities and Exchange Commission on July 18, 2023. |
| ### | Incorporated by reference to the same exhibit number in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 28, 2023. |
| * | Exhibits 32.1 and 32.2 are being furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall such exhibits be deemed to be incorporated by reference in any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as otherwise specifically stated in such filing. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| TENON MEDICAL, INC. | |
| Dated: August 11, 2023 | /s/ Steven M. Foster |
| Steven M. Foster | |
| Chief Executive Officer and President, Director (Principal Executive Officer) | |
| Dated: August 11, 2023 | /s/ Steven Van Dick |
| Steven Van Dick | |
| Chief Financial Officer (Principal Financial and Accounting Officer) |
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