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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Form
10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2023

or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM  _________ to __________

COMMISSION FILE NUMBER 001-41364

TENON MEDICAL, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
45-5574718
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
 
 
104 Cooper Court
Los Gatos, CA  95032
 
(408) 649-5760
(Address of principal executive offices) (Zip Code)
 
(Registrant’s telephone number, including area code)
___________________________________
 

Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.001 per share
TNON
The Nasdaq Stock Market LLC

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 filing requirements for the past 90 days.
 
 
Yes  
x
 
 
N
o  
¨
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).   Yes  
    No  
 

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.
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
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  
x
 

As of May 9, 2023, the registrant had a total of 11,251,299 shares of its common stock, par value $0.001 per share, issued and outstanding.

 


INDEX
 
 
Page

 

 
 4
 5
14
19
19
 
20
20
20
20
20
20
21
23




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.



PART I – FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements

Tenon Medical, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
 
 
 
March 31,
 
 
December 31,
 
 
 
2023
 
 
2022
 
 
 
(Unaudited)
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
3,179
 
 
$
2,129
 
Short-term investments
 
 
1,737
 
 
 
6,441
 
Accounts receivable
 
 
316
 
 
 
228
 
Inventory
 
 
416
 
 
 
415
 
Prepaid expenses
 
 
193
 
 
 
134
 
Total current assets
 
 
5,841
 
 
 
9,347
 
Fixed assets, net
 
 
852
 
 
 
793
 
Deposits
 
 
51
 
 
 
51
 
Operating lease right-of-use asset
 
 
818
 
 
 
873
 
Deferred offering costs
 
 
67
 
 
 
25
 
TOTAL ASSETS
 
$
7,629
 
 
$
11,089
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders’ EQUITY
 
Current liabilities:
 
 
 
 
 
 
 
 
Accounts payable
 
$
928
 
 
$
550
 
Accrued expenses
 
 
530
 
 
 
717
 
Current portion of accrued commissions
 
 
1,059
 
 
 
1,035
 
Current portion of operating lease liability
 
 
235
 
 
 
228
 
Total current liabilities
 
 
2,752
 
 
 
2,530
 
Accrued commissions, net of current portion
 
 
1,781
 
 
 
1,624
 
Operating lease liability, net of current portion
 
 
622
 
 
 
683
 
Total liabilities
 
 
5,155
 
 
 
4,837
 
 
 
 
 
 
 
 
 
 
Commitments and contingencies (Note 8)
 
 
 
 
 
 
 
 
Stockholders’ equity (deficit):
 
 
 
 
 
 
 
 
Common stock, $0.001 par value; 130,000,000 shares authorized at March 31, 2023 and December 31, 2022; 11,251,299 and 11,236,801 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively
 
 
11
 
 
 
11
 
Additional paid-in capital
 
 
46,873
 
 
 
45,833
 
Accumulated deficit
 
 
(44,322
)
 
 
(39,492
)
Accumulated other comprehensive loss
 
 
(88
)
 
 
(100
)
Total stockholders’ equity
 
 
2,474
 
 
 
6,252
 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
7,629
 
 
$
11,089
 
 
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
March 31,
 
 
 
2023
 
 
2022
 
Revenue
 
$
433
 
 
$
71
 
Cost of
revenue
 
 
480
 
 
 
275
 
Gross Loss
 
 
(47
)
 
 
(204
)
 
 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
 
Research and development
 
 
834
 
 
 
562
 
Sales and marketing
 
 
2,026
 
 
 
276
 
General and administrative
 
 
1,979
 
 
 
1,037
 
Total Operating Expenses
 
 
4,839
 
 
 
1,875
 
 
 
 
 
 
 
 
 
 
Loss from Operations
 
 
(4,886
)
 
 
(2,079
)
 
 
 
 
 
 
 
 
 
Other Income (Expense)
 
 
 
 
 
 
 
 
Gain on investments
 
 
56
 
 
 
1
 
Interest expense
 
 
—
 
 
 
(274
)
Other income (expense)
 
 
—
 
 
 
(1
)
Total Other Income (Expense), net
 
 
56
 
 
 
(274
)
Net Loss
 
$
(4,830
)
 
$
(2,353
)
Net Loss Per Share of Common Stock
 
 
 
 
 
 
 
 
Basic and diluted
 
$
(0.43
)
 
$
(2.38
)
 
 
 
 
 
 
 
 
 
Weighted
 
Average Shares of Common Stock Outstanding
 
 
 
 
 
 
 
 
Basic and diluted
 
 
11,242
 
 
 
990
 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Comprehensive Loss:
 
 
 
 
 
 
 
 
Net loss
 
$
(4,830
)
 
$
(2,353
)
Unrealized gain on investments
 
 
13
 
 
 
—
 
Foreign currency translation adjustment
 
 
(1
)
 
 
—
 
Total Comprehensive Loss
 
$
(4,818
)
 
$
(2,353
)
 
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 March 31, 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 January 1, 2023
 
 
—
 
 
$
—
 
 
 
—
 
 
$
—
 
 
 
11,236,801
 
 
$
11
 
 
$
45,833
 
 
$
(39,492
)
 
$
(100
)
 
$
6,252
 
Stock-based compensation expense
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
1,040
 
 
 
—
 
 
 
—
 
 
 
1,040
 
Release of restricted stock units
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
14,498
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
Other comprehensive income
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
12
 
 
 
12
 
Net loss
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
(4,830
)
 
 
—
 
 
 
(4,830
)
Balance at March 31, 2023
 
 
—
 
 
$
—
 
 
 
—
 
 
$
—
 
 
 
11,251,299
 
 
$
11
 
 
$
46,873
 
 
$
(44,322
)
 
$
(88
)
 
$
2,474
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2022
 
 
2,550,763
 
 
$
12,367
 
 
 
491,222
 
 
$
1,272
 
 
 
989,954
 
 
$
1
 
 
$
113
 
 
$
(20,575
)
 
$
(91
)
 
$
(20,552
)
Stock-based compensation expense
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
169
 
 
 
—
 
 
 
—
 
 
 
169
 
Net loss
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
(2,353
)
 
 
—
 
 
 
(2,353
)
Balance at March 31, 2022
 
 
2,550,763
 
 
$
12,367
 
 
 
491,222
 
 
$
1,272
 
 
 
989,954
 
 
$
1
 
 
$
282
 
 
$
(22,928
)
 
$
(91
)
 
$
(22,736
)
 
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)
 
 
 
Three Months Ended March 31,
 
 
 
2023
 
 
2022
 
Cash Flows from Operating Activities
 
 
 
 
 
 
 
 
Net loss
 
$
(4,830
)
 
$
(2,353
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
 
 
 
 
Non-cash interest expense
 
 
—
 
 
 
274
 
Stock-based compensation expense
 
 
1,040
 
 
 
169
 
Depreciation and amortization
 
 
25
 
 
 
10
 
Amortization of operating right-of-use asset
 
 
55
 
 
 
51
 
Increase (decrease) in cash resulting from changes in:
 
 
 
 
 
 
 
 
Accounts receivable
 
 
(88
)
 
 
11
 
Inventory
 
 
(1
)
 
 
(414
)
Prepaid expenses and other assets
 
 
(95
)
 
 
5
 
Accounts payable
 
 
378
 
 
 
(51
)
Accrued expenses
 
 
(6
)
 
 
(118
)
Operating lease liability
 
 
(54
)
 
 
(48
)
Net cash used in operating activities
 
 
(3,576
)
 
 
(2,464
)
 
 
 
 
 
 
 
 
 
Cash Flows from Investing Activities
 
 
 
 
 
 
 
 
Sales of short-term investments
 
 
4,753
 
 
 
4,404
 
Purchases of short-term investments
 
 
—
 
 
 
—
 
Purchases of property and equipment
 
 
(84
)
 
 
(128
)
Net cash provided by investing activities
 
 
4,669
 
 
 
4,276
 
 
 
 
 
 
 
 
 
 
Cash Flows from Financing Activities
 
 
 
 
 
 
 
 
Deferred offering costs
 
 
(42
)
 
 
(54
)
Net cash used in financing activities
 
 
(42
)
 
 
(54
)
 
 
 
 
 
 
 
 
 
Effect of foreign currency translation on cash flow
 
 
(1
)
 
 
2
 
Net Increase in Cash and Cash Equivalents
 
 
1,050
 
 
 
1,760
 
 
 
 
 
 
 
 
 
 
Cash and Cash Equivalents at Beginning of Period
 
 
2,129
 
 
 
2,917
 
Cash and Cash Equivalents at End of Period
 
$
3,179
 
 
$
4,677
 
 
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 three months ended March 31, 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.
 
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 of $13,765, net of issuance costs. Based on the Company’s current level of revenues and expenditures, the Company believes that its existing cash and cash equivalents and short-term investments as of March 31, 2023 will not provide sufficient funds to enable it to meet its obligations for a period of at least twelve months from the date of the filing of these condensed consolidated financial statements. The Company plans to raise the necessary additional capital through one or a combination of public or private equity offerings, debt financings, and collaborations. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 
5
 

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 100% valuation allowance against net deferred tax assets due to uncertainty of their ultimate realization. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
 
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.
 
The Company had the following dilutive common stock equivalents as of March 31, 2023 and 2022 which were excluded from the calculation because their effect was anti-dilutive:
 
 
March 31,
2023
 
 
March 31,
2022
 
Outstanding restricted stock units
 
 
1,304,032
 
 
 
—
 
Outstanding stock options
 
 
974,344
 
 
 
727,394
 
Outstanding warrants
 
 
96,000
 
 
 
25,000
 
Common shares convertible from notes payable
 
 
—
 
 
 
2,118,591
 
Common shares convertible from preferred stock
 
 
—
 
 
 
1,520,996
 
Total
 
 
2,374,376
 
 
 
4,391,981
 
 
 
6
 

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 estimate
s
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.
 
Recent Accounting Pronouncements Not Yet Adopted
 
There have been no accounting pronouncements or changes in accounting pronouncements in the three months ended March 31, 2023 that are significant
or
potentially significant to the Company.

3.
  
Investments
 
The following table sets forth by level, within the fair value hierarchy, the Company’s investments at fair value as of March 31, 2023 and December 31, 2022:
 
 
 
Level 2
 
 
Corporate debt securities:
 
 
 
 
March 31, 2023
 
$
1,737
 
December 31, 2022
 
$
6,441
 
 
Cost and fair value of available-for-sale investments as of March 31, 2023 and December 31, 2022 are as follows:
 
 
 
Amortized

Cost
 
 
Gross

Unrealized

Gains
 

 
 

 
Gross
Unrealized
Losses
 
 
Fair

Value
 
Corporate debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2023
 
$
1,740
 
 
$
—
 
 
$
(3
)
 
$
1,737
 
December 31, 2022
 
$
6,457
 
 
$
—
 
 
$
(16
)
 
$
6,441
 
 
All of the investments with gross unrealized losses have been in a continuous loss position for less than 12 months.
 
During the three months ended March 31, 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 months ended March 31, 2023 and 2022, there were net gains of approximately $56 and $1, respectively, included in the Company’s net loss. Accrued interest as of March 31, 2023 and December 31, 2022 was approximately $10 and $13, respectively, and is included in prepaid expenses in the Company’s condensed consolidated balance sheet
s
.
 
4.
  
Fixed Assets
, Net
 
Fixed assets, net, consisted of the following:
 
 
 
March 31,
2023
 
 
December 31,
2022
 
Construction in progress
 
$
530
 
 
$
601
 
Catamaran
t
ray
s
ets
 
 
348
 
 
 
193
 
IT
e
quipment
 
 
556
 
 
 
56
 
Lab
e
quipment
 
 
14
 
 
 
14
 
Office
f
urniture
 
 
9
 
 
 
9
 
Fixed assets, gross
 
 
957
 
 
 
873
 
Less: accumulated depreciation
 
 
(105
)
 
 
(80
)
Fixed assets, net
 
$
852
 
 
$
793
 
 
Construction in progress is made up of reusable components that will become Catamaran Tray Sets. Depreciation expense was approximately $25 and $10 for the three months ended March 31, 2023 and 2022, respectively.
 

7
 


5. Accrued Expenses
 
Accrued expenses consisted of the following:
 
 
 
March 31,
2023
 
 
December 31,
2022
 
Accrued compensation
 
$
321
 
 
$
452
 
Other accrued expenses
 
 
209
 
 
 
265
 
Total accrued expenses
 
$
530
 
 
$
717
 
 
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 June 2026. The Company includes options that are reasonably certain to be exercised as part of the determination of lease terms. The Company may negotiate termination clauses in anticipation of any changes in market conditions, but generally these termination options are not exercised. Residual value guarantees are generally not included within operating leases. In addition to base rent payments, leases may require the Company to pay directly for taxes and other non-lease components, such as insurance, maintenance, and other operating expenses, which may be dependent on usage or vary month-to-month. Non-lease components were considered and determined not to be material. The Company determined if an arrangement is a lease at inception of the contract and performed the lease classification test as of the lease commencement date. R
ight-of-use
 assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease
r
ight-of-use
assets and liabilities are recognized at the lease’s commencement date based on the present value of lease payments over the lease term. When a lease did not provide an implicit rate, the Company used its estimated incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments.
 
Operating lease costs for the facility lease were $73 and $135 for the three months ended March 31, 2023 and 2022, respectively. Lease costs are included in general and administrative expenses in the
condensed
consolidated statements of operations and comprehensive loss.
 
Supplemental balance sheet information related to leases was as follows:

 
 
March 31,
 
 
December 31,
 
 
 
2023
 
 
2022
 
Operating lease right-of-use assets
 
$
818
 
 
$
873
 
 
 
 
 
 
 
 
 
 
Operating lease liability, current
 
$
(235
)
 
$
(228
)
Operating lease liability, noncurrent
 
 
(622
)
 
 
(683
)
Total operating lease liabilities
 
$
(857
)
 
$
(911
)
 
Future maturities of operating lease liabilities as of March 31, 2023 were as follows:
 
2023
 
$
221
 
2024
 
 
301
 
2025
 
 
310
 
2026
 
 
144
 
Total lease payments
 
 
976
 
Less: imputed interest
 
 
(119
)
Present value of operating lease liabilities
 
$
857
 
 
Other information:
 
Cash paid for operating leases for the three months ended March 31, 2023
 
$
72
 
Cash paid for operating leases for the three months ended March 31, 2022
 
$
70
 
Remaining lease term - operating leases (in years)
 
 
3.25
 
Average discount rate - operating leases
 
 
8.0
%
 
8
 


7. Stockholders’ Equity
 
The Amended and Restated Certificate of Incorporation dated February 18, 2014 authorized the issuance of 3,937,550 shares of common stock and 2,099,525 shares of preferred stock, with a par value of $0.001 per share. In April 2021 the Company increased the number of authorized shares to 7,000,000 shares of common stock and 2,460,802 shares of preferred stock, and increased the number of authorized shares of Series A Preferred Stock to 1,798,905. In October 2021 the Company increased the number of authorized shares to 10,487,904 shares of common stock and 3,297,061 shares of preferred stock. In February 2022, the Company increased the number of authorized shares to 130,000,000 shares of common stock and 20,000,000 shares of preferred stock.
With respect to the preferred stock, 4,500,000 shares are designated Series A Preferred Stock and 491,222 shares are designated Series B Preferred Stock. As of March 31, 2023 and December 31, 2022, there were no shares of Series A Preferred stock or Series B Preferred Stock issued and outstanding.
 
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. Similarly, shares of Series A and Series B Preferred Stock became convertible into common stock at a conversion rate of one-to-0.5, subject to adjustments for stock dividends, splits, combinations, and similar events. No fractional shares were issued in connection with the Reverse Stock Split. All historical and per share amounts reflected throughout this document have been adjusted to reflect the Reverse Stock Split. The authorized number of shares and the par value per share of the Company’s common stock were not affected by the Reverse Stock Split.
 
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 3,200,000 shares of common stock, par value $0.001 per share at a public offering price of $5.00 per share.
Pursuant to the Underwriting Agreement dated April 26, 2022, between the Company, The Benchmark Company, LLC (“Benchmark”) and Valuable Capital Limited (together with Benchmark, the “Underwriters”), the Company granted the Underwriters warrants to purchase a total of 96,000 shares of the Company’s common stock at an exercise price of $5.00 per share. The warrants expire on the fifth anniversary of the commencement of sales under the IPO.
On April 27, 2022, the shares of the Company’s common stock began trading on the Nasdaq Capital Market LLC under the symbol “TNON.”
 
On April 29, 2022, the IPO closed, and the Company received approximately $13.8 million in net proceeds from the IPO after deducting the underwriting discount and commission and other estimated IPO expenses payable by the Company. As a result of the completion of the IPO, the Company converted the entirety of the outstanding principal and accrued interest of the convertible notes payable to 3,955,415 shares of the Company’s common stock.
 
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 2,693,342 shares of the Company’s common stock at the conversion rate detailed below and issued the common stock to the preferred stockholders.
 
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 3.0% of the fully diluted equity of the Company through the date of an initial public offering and was issued 312,351 shares of the Company’s common stock to the Representative, fully satisfying the Company’s obligations. Also, as a result of the completion of the IPO, the Company issued 85,739 shares of its common stock to a consultant. The value of these shares issued at the IPO price of $5.00 per share was charged to operating expenses in the Company’s
consolidated 
financial statements.
 
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 one vote per share of common stock held. The holders of Series A and Series B Preferred Stock were entitled to vote together with the common stock as a single class on any matter submitted to a vote of the stockholders. Holders of Series A and Series B Preferred Stock were entitled to the number of votes equal to the number of common stock issuable upon conversion of their respective Series A and Series B Preferred Stock at the time such shares are voted. The holders of a majority of the preferred stock had additional voting rights as specified in the Company’s Amended and Restated Certificate of Incorporation, as amended.

 
9
 

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 two to four years and have a 10-year expiration date. In April 2021, the Board increased the number of shares of common stock reserved for issuance under the 2012 Plan to 662,516. In July 2021, the Board increased the number of shares of common stock reserved for issuance under the 2012 Plan to 737,516. In August 2021, the Board increased the number of shares of common stock reserved for issuance under the 2012 Plan from 737,516 shares to 799,266 shares and approved the form of a 2022 Equity Incentive Plan.


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 1,600,000. Automatic annual increases in number of shares available for issuance under the 2022 Plan is equal to the least of (a) 1,100,000 shares, (b) 4% of the total number of shares of all classes of common stock outstanding on the last day of the immediately preceding fiscal year, or (c) such number determined by the 2022 Plan administrator no later than the last day of the immediately preceding fiscal year. Annual increases will continue until the tenth anniversary of the earlier of the Board or stockholder approval of the 2022 Plan, which is January 10, 2032. Upon the effective date of the 2022 Plan, the Board terminated the 2012 Plan such that no new equity awards will be issued
by the 2012 Plan.

Compensation expense for the three months ended March 31, 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.

A summary of the Company’s
stock
 option and restricted stock unit activity under its plans is as follows:
 
 
 
Number of
Shares Subject
to Outstanding
Stock Options
 
 
 
 
 
 
 
 
Weighted

Average

Exercise

Price
p
er

Share
 



 
 



 
Number of
Outstanding
Restricted Stock
Units
 
 
 
 
 
 
 
 
Weighted
A
verage Grant
Date Fair
Value
per
Share
 
 
 
 
Outstanding at December 31, 2022
 
 
898,844
 
 
$
4.74
 
 
 
1,318,530
 
 
$
7.93
 
Granted
 
 
75,500
 
 
$
2.32
 
 
 
—
 
 
 
—
 
Released
 
 
—
 
 
 
—
 
 
 
(14,498
)
 
$
2.75
 
Forfeited
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
Outstanding at March 31, 2023
 
 
974,344
 
 
$
4.55
 
 
 
1,304,032
 
 
$
7.99
 


10


The following table sets forth stock-based compensation expense recognized for the three months ended March 31, 2023 and 2022:
 
 
 
Three months ended March 31,
 
 
 
2023
 
 
2022
 
Research and development
 
$
372
 
 
$
29
 
Sales and marketing
 
 
58
 
 
 
12
 
General, and administrative
 
 
610
 
 
 
128
 
Total stock-based compensation expense
 
$
1,040
 
 
$
169
 
 
At March 31, 2023, there were
483,992
shares available for issuance under the 2022 Plan.
 
Warrants
 
In April 2022, as noted above, the Company granted the Underwriters warrants to purchase a total of 96,000 shares of the Company’s common stock. The warrants are immediately exercisable at an exercise price of $5.00 per share and expire on the fifth anniversary of the commencement of sales under the IPO. The fair value of the warrants on the grant date was $2.75 per warrant, which was calculated based on the following weighted
 
average assumptions, using a Black-Scholes option valuation model: expected term of 5.00 years; expected volatility of 62.55%; dividend yield of 0%, and risk-free interest rate of 2.92%. The Company recorded the fair value of these warrants of approximately $264 as an issuance cost to additional paid-in capital in 2022. As the IPO issuance costs were also recorded to additional paid-in capital, the net impact was $0.

 
11
 

 
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 five years, and automatically renews for an additional five years unless written notice is given by either party prior to April 27, 2023. The agreement provides for a bonus to be paid to the Representative upon an acquisition or IPO. In May 2021
,
the Company entered into an Amended and Restated Exclusive Sales Representative Agreement (the “Restated Sales Agreement”). In connection with the amended agreement, the Company paid $500 cash and issued 53,757 shares of common stock to the Representative, for which the Company recorded a combined total of approximately $880 as sales and marketing expense. In addition, the Representative received anti-dilution protections to maintain ownership of 3.0% of the fully diluted equity of the Company through the date of an initial public offering. In October, 2021, the Company issued 44,447 shares
of common stock 
with a fair value of approximately $333 to the Representative in accordance with the anti-dilution provision. In April 2022, the Company issued 312,351 shares
of common stock 
to the Representative in accordance with the anti-dilution provision, fully satisfying the Company’s obligations.
 
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 $6,000.
 
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 $1,000 in cash; and (ii) the Company 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 the Company, (b) 20% of net sales of the
p
roduct 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 of the Company, the Company will pay the Representative $3,600 less previous amounts paid pursuant to clause (b) and clause (c) above. The Company recorded a charge of $1,000 for the payment to the Representative in the fourth quarter of 2022 and is expensing the $85 per charges as incurred over the six month period. For payments under clause (b) and clause (c) above, the Company estimated the fair value of the liability using level 3 hierarchy inputs based on a Monte Carlo simulation of future revenues
with a 25% quarterly estimated standard deviation of growth rates and a 10% probability of dissolution,
discounted at an estimated discount rate of 15.4%. Based on the Company’s fair value analysis, a
total
of $2,611
 
was charged to sales and marketing expense in the consolidated statements of operations and comprehensive loss and recorded as accrued commissions in the consolidated balance sheets
. A reconciliation of the liability under clause (b) and clause (c) for the three months ended March 31, 2023
is as follows:
 
 
 
2023
 
Balance at
December 3
1, 2022
 
$
2,560
 
Amounts paid during 2023
 
 
(77
)
Accretion
 
 
204
 
Balance at March 31, 2023
 
$
2,687
 
 
Per the terms of the Termination Agreement, the Company ultimately expects to expense $3,600 under clause (b) and clause (c).
 
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 October 6, 2022, until October 05, 2023, unless extended by mutual agreement of the parties in writing for additional one-year terms, or terminated in accordance with the terms of the Consulting Agreement. In consideration for the services to be provided, the Company shall pay the Representative a base consulting fee of $700 per year, payable in monthly instal
l
ments, along with additional compensation of up to $62.5 per quarter, if certain sales targets are met, for four quarters; along with any travel and related out-of-pocket expenses incurred by the Representative in connection with the performance of the services.

 
12

 
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.
 
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 March 31, 2023 and December 31, 2022, approximately $22 and $8, respectively, of the Company’s net monetary assets were denominated in Swiss francs. The Company has not entered into any hedging transactions to reduce the exposure to currency risk.


 
13
 

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 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 March 31, 2023, we had an accumulated deficit of approximately $44.3 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 period ended March 31, 2022 reflect the impact of the Reverse Stock Split.
 
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.
 

14

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 IT 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 Capital Market LLC on which our securities will be 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.

15

Results of Operations
 
The following table sets forth our results of operations for the periods presented (in thousands):
 
 
 
Three Months Ended
March 31,
 
Consolidated Statements of Operations Data:
 
2023
 
 
2022
 
Revenue
 
$
433
 
 
$
71
 
Cost of goods sold
 
 
480
 
 
 
275
 
Gross (loss) profit
 
 
(47
)
 
 
(204
)
Operating expenses:
 
 
 
 
 
 
 
 
Research and development
 
 
834
 
 
 
562
 
Sales and marketing
 
 
2,026
 
 
 
276
 
General and administrative
 
 
1,979
 
 
 
1,037
 
Total operating expenses
 
 
4,839
 
 
 
1,875
 
Loss from operations
 
 
(4,886
)
 
 
(2,079
)
Interest and other income (expense), net:
 
 
 
 
 
 
 
 
Gain on investments
 
 
56
 
 
 
1
 
Interest expense
 
 
—
 
 
 
(274
)
Other income (expense)
 
 
—
 
 
 
(1
)
Net loss
 
$
(4,830
)
 
$
(2,353
)
 

The following table sets forth our results of operations as a percentage of revenue:
 
 
 
Three Months Ended
March 31,
 

Consolidated Statements of Operations Data:
 
2023
 
 
2022
 
Revenue
 
 
100
%
 
 
100
%
Cost of goods sold
 
 
111
 
  
  
387
 
Gross profit
 
 
(11
)
 
 
287
 
Operating expenses:
 
 
 
 
  
  
 
 
Research and development
 
 
193
 
  
  
792
 
Sales and marketing
 
 
468
 
  
  
389
 
General and administrative
 
 
457
 
  
  
1,461
 
Total operating expenses
 
 
1,118
 
  
  
2,641
 
Loss from operations
 
 
(1,128
)
 
 
(2,928
)
Interest and other income (expense), net:
 
 
 
 
  
  
 
 
Gain on investments
 
 
13
 
  
  
1
 
Interest expense
 
 
—
 
 
 
(386
)
Other expense
 
 
—
 
 
 
(1
)
Net loss
 
 
(1,115
)%
 
 
(3,314
)%
 

Comparison of the Three Months Ended March 31, 2023 and 2022 (in thousands, except percentages)
 
Revenue, Cost of Goods Sold, Gross Profit, and Gross Margin
 
 
 
Three Months Ended March 31,
 
 
 
 
 
 
 
 
 
2023
 
 
2022
 
 
$ Change
 
 
% Change
 
Revenue
 
$
433
 
 
$
71
 
 
$
362
 
 
 
510
%
Cost of goods sold
 
 
480
 
 
 
275
 
 
 
205
 
 
 
75
%
Gross (loss) profit
 
$
(
47
)
 
$
(204
)
 
$
157
 
 
 
(
77
)%
Gross (loss) profit percentage
 
 
(12
)%
 
 
(287
)%
 
 
 
 
 
 
 
Revenue. 
The increase in revenue for the three months ended March 31, 2023 as compared to the same period in 2022 was primarily due to increases of 489% in the number of surgical procedures in which The Catamaran System was used.
 

16
 

Cost of Goods Sold, Gross Profit, and Gross Margin.
 The increase in cost of goods sold for the three months ended March 31, 2023 as compared to the same period in 2022 was due to a 489% increase 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 March 31,
 
 
 
 
 
 
 
 
 
2023
 
 
2022
 
 
$ Change
 
 
% Change
 
Research and development
 
$
834
 
 
$
562
 
 
$
272
 
 
 
48
%
Sales and marketing
 
 
2,026
 
 
 
276
 
 
 
1,750
 
 
 
634
%
General and administrative
 
 
1,979
 
 
 
1,037
 
 
 
942
 
 
 
91
%
Total operating expenses
 
$
4,839
 
 
$
1,875
 
 
$
2,964
 
 
 
158
%
 

Research and Development Expenses
. Research and development expenses for the three months ended March 31, 2023 increased as compared to the same period in 2022 primarily due to increased stock-based compensation ($343), partially offset by decreased professional fees ($72).
 
Sales and Marketing Expenses. 
Sales and marketing expenses for the three months ended March 31, 2023 increased as compared to the same period in 2022 primarily due to increased payroll expenses ($664), SpineSource transition expenses ($430), sales commissions ($331), consulting and professional fees ($236), and clinical and marketing collateral expenses ($72) 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 March 31, 2023 increased as compared to the same period in 2022 primarily due to increased stock-based compensation ($482), insurance expense ($184), payroll expenses ($154) and professional service fees ($50). The significant increase in general and administrative expenses in 2023 was primarily due to the Company’s ongoing transition to an operating company with an audit of our 2022 consolidated financial statements and reviews of our quarterly results by our outside accounting firm and by legal representatives, and the creation of an infrastructure to support future growth through the hiring of employees and establishment of a facility lease.
 
Gain (Loss) on Investments, Interest Expense and Other Income (Expense), Net
 
Gain on investments for the three months ended March 31, 2023 increased approximately $55 as compared to the three months ended March 31, 2022 due to interest on our investments in money market and corporate debt securities. We did not have significant investments in corporate debt securities during the first three months of 2022. We had no interest expense for the three months ended March 31, 2023 and interest expense for the three months ended March 31, 2022 of $386 related to our convertible debt.
 
Liquidity and Capital Resources
 
As of March 31, 2023, we had cash and cash equivalents and short-term investments of $4.9 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 March 31, 2023, we had no outstanding debt.
 
As of March 31, 2023, we had an accumulated deficit of $44.3 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, the Company closed an initial public offering of its common stock. 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.

17
 

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.
 
Contractual Obligations
 
The following table summarizes our contractual obligations as of March 31, 2023:
 
Payments Due By Period
(In thousands)
 
 
 
 
 
 
 
Less than
 
 
 
 
 
 
 
 
More

than
 

 
 
Total
 
 
1 year
 
 
1-3 years
 
 
4-5 years
 
 
5 years
 
Operating leases
 
$
976
 
 
$
221
 
 
$
611
 
 
$
144
 
 
$
—
 
Purchase obligations
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
Total
 
$
976
 
 
$
221
 
 
$
611
 
 
$
144
 
 
$
—
 
 
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:
 
 
 
Three Months Ended March 31,
 
 
 
 
 
 
 
 
 
2023
 
 
2022
 
 
 
 
$ Change
 
 
% Change
 
Net cash (used in) provided by:
 
 
 
 
 
 
 
 
 
 
 
 
Operating activities
 
$
(3,
576
)
 
$
(2,464
)
 
$
(1,
112
)
 
 
45
%
Investing activities
 
 
4,669
 
 
 
4,276
 
 
 
393
 
 
 
9
%
Financing activities
 
 
(42
)
 
 
(54
)
 
 
12
 
 
 
22
%
Effect of foreign currency translation on cash flow
 
 
(1
) 
 
 
2
 
 
 
(3
)
 
 
(150
)%
Net (decrease) increase in cash and cash equivalents
 
$
1,
050
 
 
$
1,760
 
 
$
(
710
)
 
 
(40
)%
 
The increase in net cash used in operating activities for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was primarily attributable to our increased net loss of $2.6 million, adjusted for increases in non-cash stock-based compensation expenses ($871), in addition to increases in inventory ($413) and accounts payable ($429).
 
Cash provided by investing activities for the three months ended March 31, 2023 consisted primarily of the net sales of short-term investments of approximately $4.8 million to use to fund our operations, partially offset by purchases of property and equipment of $0.1 million. Cash used in investing activities for the three months ended March 31, 2022 consisted primarily of the net sales of short-term investments of $4.4 million, partially offset by purchases of property and equipment of $0.2 million.
 
 
Cash provided used in financing activities for the three months ended March 31, 2023 and 2022 consisted primarily of spending for deferred offering costs.
 
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 three months ended March 31, 2023, there were no significant changes to our existing critical accounting policies from those disclosed on our Annual Report on Form 10-K
.
 

18

Off-Balance Sheet Arrangements
 
As of March 31, 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.
 
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 March 31, 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 our fiscal quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

19

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
 

None.
 

20

ITEM 6.  EXHIBITS
 

EXHIBIT INDEX
 

Exhibit
Number
 
Description
 
 
 

 
 
 

 
 
 

 
 
 

 
 
 

 
 
 

 
 
 

 
 
 

 
 
 

 

 

 

 

 

 

 

 
101.INS***
 
Inline XBRL Instance Document
 
 
 
101.SCH***
 
Inline XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL***
 
Inline XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF***
 
Inline XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB***
 
Inline XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE***
 
Inline XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
104
 
Cover Page Interactive Data File (embedded within the Inline XBRL document)
 
#
Incorporated by reference to the same exhibit number in the Company’s Registration Statement No. 333-260931, filed with the Securities and Exchange Commission on April 20, 2022.
 
##
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 October 11, 2022.
 

21
 

†
Portions of this exhibit have been omitted.
 
*
Filed herewith
 
**
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.
 
***
Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and otherwise are not subject to liability under those sections.
22
 

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: May 9, 2023
/s/ Steven M. Foster
 
Steven M. Foster
 
Chief Executive Officer and President, Director
(Principal Executive Officer)
 
 
Dated: May 9, 2023
/s/ Steven Van Dick
 
Steven Van Dick
 
Chief Financial Officer
(Principal Financial and Accounting Officer)

23
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