TENON MEDICAL, INC. 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 theSEC .
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 TM SIJ Fusion System ("The CATAMARAN System"), designed to fuse one or both sacroiliac joints ("SI-Joint") to treat SI-Joint dysfunction that often causes severe lower back pain. Published clinical studies have shown that 15% to 30% of all chronic lower back pain is associated with the SI-Joint. 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. 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 are preparing for a national launch of The CATAMARAN System through a national distributor to address the greatly underserved market opportunity that exists. We have incurred net losses since our inception in 2012. During the first three months of 2022 and 2021, we had net losses of approximately$2,353,000 , and$201,000 , respectively. As ofMarch 31, 2022 , we had an accumulated deficit of approximately$23.0 million . To date, we have financed our operations primarily through 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
OnApril 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 endedMarch 31, 2022 and 2021 reflect the impact of the Reverse Stock Split. Further, we have retrospectively adjusted the 2021 and 2020 financial statements for profit per share and share amounts as a result 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.
Cost of Goods Sold, Gross Profit, and Gross Margin
We utilize contract manufacturers for production of The CATAMARAN System implants and instrument 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. 16 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 stock-based compensation expense and independent sales representative training and commissions. Starting inMay 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, increased The CATAMARAN System 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 theSEC and those ofThe 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.
17
Results of Operations
The following table sets forth our results of operations for the period
presented:
Three Months Ended
March 31,
(In thousands)
Consolidated Statements of Operations Data: 2022 2021
Revenue $ 71 $ 15
Cost of goods sold 275 11
Gross (loss) profit (204) 4
Operating expenses:
Research and development 562 87
Sales and marketing 276 4
General and administrative 1,037 102
Total operating expenses 1,875 193
Loss from operations (2,079 ) (189 )
Interest and other income (expense), net:
Gain on investments 1 -
Interest expense (274 ) (11 )
Other expense (1 ) (1 )
Net loss (2,353 ) (201 )
Loss attributable to non-controlling interest - (1 )
Net loss attributable to
The following table sets forth our results of operations as a percentage of revenue:
Three Months Ended
March 31,
Consolidated Statements of Operations Data: 2022 2021
Revenue 100 % 100 %
Cost of goods sold 383 73
Gross profit (283) 27
Operating expenses:
Research and development 784 555
Sales and marketing 385 30
General and administrative 1,446 648
Total operating expenses 2,615 1,232
Loss from operations (2,898 ) (1,205 )
Interest and other income (expense), net:
Gain on investments 1 -
Interest expense (382 ) (72 )
Other expense (1 ) (4 )
Net loss (3,280 ) (1,281 )
Loss attributable to non-controlling interest - (5 )
Net loss attributable to Tenon Medical, Inc. (3,280 )% (1,276 )%18
Comparison of the Three Months Ended
Revenue, Cost of Goods Sold, Gross Profit, and Gross Margin
Three Months Ended March 31,
2022 2021 $ Change % Change
Revenue $ 71 $ 15 $ 56 373 %
Cost of goods sold 275 11 264 2,400 %
Gross (loss) profit $ (204) $ 4 $ (208) (5,200) %
Gross margin (287) % 27 %
Revenue.
Revenue increased approximately $56 or 373%, for the three months ended
March 31, 2022 as compared to the three months ended March 31, 2021 . The
increase was primarily due to an 80% increase in the number of surgical
procedures in which The CATAMARAN System was used, combined with lower revenue
per procedure due to a national distribution agreement in effect for sales from
July 2020 through April of 2021 that decreased the amount of revenue that the
Company was able to recognize per surgical procedure.
Cost of Goods Sold, Gross Profit, and Gross Margin.
Total cost of goods sold increased approximately$264 or 2,400%, for the three months endedMarch 31, 2022 as compared to the three months endedMarch 31, 2021 . The increase in cost of goods sold is due to a 7,844% year-over-year increase in operations overhead spending as the Company progressed toward commercial launch of The CATAMARAN system, combined with an 80% year-over-year increase in the number of surgical procedures. Gross (loss) profit decreased approximately$208 or 5,200%, to a gross loss of approximately$204 due to the increases in overhead spending and the number of surgical procedures. Gross margin percentage decreased from 27% to negative 283%, driven by higher operations overhead spending, and partially offset by higher revenue per procedure from resulting from an amended and restated national distribution
agreement.
Operating Expenses
Three Months Ended March 31,
2022 2021 $ Change % ChangeResearch and development $ 562 $ 87$ 475 546 % Sales and marketing 276 4 272 6,800 % General and administrative 1,037 102 935 917 % Total operating expenses $ 1,875$ 193 $ 1,682 Research and Development Expenses. Research and development expenses increased approximately$475 , or 546%, for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 . The increase was primarily due to increased payroll expenses, and professional fees of approximately$403 and$129 , respectively. The increase in consulting expenses relates to a quality/regulatory consulting group hired inMay 2021 to upgrade our quality system. The increase in payroll expenses reflects the fact that we did not have any employees during the first three months of 2021. Sales and Marketing Expenses. Sales and marketing expenses increased approximately$272 , or 6,800%, for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 . The increase was primarily due to increased sales training expenses ($72 ), payroll expenses ($65 ), sales commissions ($43 ), consulting fees ($32 ), and marketing collateral expenses ($25 ). General and Administrative Expenses . General and administrative expenses increased approximately$935 , or 917%, for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 . The increase was primarily due to increased payroll expenses ($293 ), consulting and legal fees ($279 and$143 , respectively), stock-based compensation ($128 ), and rent expense ($73 ). The significant increase in general and administrative expenses was a result of the Company's ongoing transition to an operating company with formalization and amendment of consulting and sales representative agreements, an audit of the Company's 2021 audited consolidated financial statements, and the creation of an infrastructure to support future growth through the hiring of employees and establishment of a facility lease. 19
Gain (Loss) on Investments, Interest Expense and Other Income (Expense), Net
Gain on investments increased approximately$1 for the twelve months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 , due to interest on our investments in money market and corporate debt securities. We did not have any investments in corporate debt securities during the three months endedMarch 31, 2021 . Interest expense increased approximately$263 , or 2,336%, for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 , primarily due to an$12.2 million increase in the level of borrowings associated with closing a new convertible debt offering during May throughJuly 2021 .
Liquidity and Capital Resources
As ofMarch 31, 2022 , we had cash and cash equivalents of$4.7 million . Since inception, we have financed our operations through private placements of preferred stock, debt financing arrangements, and the sale of our products. As ofMarch 31, 2022 , we had$13.8 million of outstanding debt and accrued interest, net of debt discounts. As ofMarch 31, 2022 , we had an accumulated deficit of$22.9 million . During the first three months of 2022 and 2021, we incurred net losses of$2.4 million and$0.2 million , respectively, and expect to incur additional losses in the future. We have not achieved positive cash flow from operations to date. Based on the Company's current level of expenditures, the Company believes that its existing cash and cash equivalents as ofMarch 31, 2022 will not provide sufficient funds to enable it to meet its obligations throughJune 2022 . OnApril 29, 2022 , the Company closed an initial public offering of its common stock. Based upon our current operating plan, we believe that the net proceeds from this initial public offering, together with our existing cash and cash equivalents, will enable us 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 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. If we need 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 or licensing arrangements. 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 ofMarch 31, 2022 : Payments Due By Period (In thousands) More Less than than Total 1 year 1-3 years 4-5 years 5 years
Principal obligations on the debt arrangements$ 12,893 $ 12,893 $ - $ - $ - Interest obligations on the debt arrangements 902 902 - - - Operating leases 1,263 286 598 378 - Purchase obligations - - - - - Total$ 15,058 $ 14,081 $ 598 $ 378 $ - 20
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:
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