Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following
discussion and analysis of our financial condition and results of operations together with our financial statements and the notes to those
statements included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, this discussion
and analysis contains forward-looking statements that reflect our plans, estimates and beliefs. You should not place undue reliance on
these forward-looking statements, which involve risks and uncertainties. As a result of many factors, including but not limited to those
set forth under “Risk Factors,” our actual results may differ materially from those anticipated in these forward-looking
statements. See “Cautionary Note Regarding Forward-Looking Statements.”
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 CatamaranTM 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
CatamaranTM 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 December 31, 2024, we had an accumulated deficit of approximately $68.7 million. To date, we have financed
our operations primarily through public equity offerings, 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 Splits
On November 2, 2023, we effected
a 1-for-10 reverse stock split (the “2023 Reverse Stock Split”) by filing an amendment to our Amended and Restated Certificate
of Incorporation, as amended, with the Delaware Secretary of State. The 2023 Reverse Stock Split combined every ten shares of our common
stock issued and outstanding immediately prior to effecting the 2023 Reverse Stock Split into one share of common stock. No fractional
shares were issued in connection with the 2023 Reverse Stock Split.
On September 6, 2024, we
effected a 1-for-8 reverse stock split (the “2024 Reverse Stock Split”) by filing an amendment to the our Amended and Restated
Certificate of Incorporation, as amended, with the Delaware Secretary of State. The 2024 Reverse Stock Split combined every eight shares
of our common stock issued and outstanding immediately prior to effecting the 2024 Reverse Stock Split into one share of common stock.
No fractional shares were issued in connection with the 2024 Reverse Stock Split.
All historical share and
per share amounts reflected throughout this document have been adjusted to reflect the 2023 Reverse Stock Split and the 2024 Reverse Stock
Split. The authorized number of shares and the par value per share of our common stock were not affected by the 2023 Reverse Stock Split
or the 2024 Reverse Stock Split.
48
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion
and analysis of our financial condition and results of operations is based on our audited consolidated financial statements, which have
been prepared in accordance with United States generally accepted accounting principles (“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 other sources. Actual results could differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in the notes to our consolidated financial statements included
elsewhere in this Annual Report on Form 10-K, we believe that the accounting policies discussed below are those that are most critical
to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s
judgments and estimates. For more detail on our critical accounting policies, see Note 2 to our consolidated financial statements.
Revenue Recognition
Our revenue is derived from
the sale of our products to medical groups and hospitals in the United States. Revenue is recognized when control is transferred to the
customer, in an amount that reflects the consideration we expect to be entitled to in exchange for the goods or services, using the following
five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine
the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when
a performance obligation is satisfied.
We generate our revenue from
the sale of products to hospitals or medical facilities where our products are delivered in advance of a procedure. The performance obligation
is the delivery of the products along with the completion of the surgery and therefore, revenue is recognized upon delivery to the customers
and completion of the surgery, net of rebates and price discounts. We account for rebates and price discounts as a reduction to revenue.
Sales prices are specified prior to the transfer of control to the customer, via either the customer contract, agreed price list, purchase
order, or written communication with the customer. For direct sales to end-user customers, our standard payment terms are generally net
30 days.
We offer our standard warranty
to all customers. We do not sell any warranties on a standalone basis. Our warranty provides that our products are free of material defects
and conform to specifications, and includes an offer to replace or refund the purchase price of defective products. This assurance does
not constitute a service and is not considered a separate performance obligation. We estimate warranty liabilities at the time of revenue
recognition and record them as a charge to cost of goods sold.
Stock-Based Compensation
We account for all stock-based
compensation awards using a fair-value method on the grant date and recognize the fair value of each award as an expense over the requisite
service period.
We recognize compensation
costs related to stock-based awards granted to employees, directors, and consultants, including restricted stock units and stock
options, based on the estimated fair value of the awards on the date of grant. For restricted stock units, we estimate grant date
fair value based on the closing market price on the date of grant. For stock options, we estimate the grant date fair value using the Black-Scholes option-pricing model. The grant date fair value of the stock-based awards is
generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the
respective awards.
49
The Black-Scholes option-pricing
model requires the use of subjective assumptions to determine the fair value of stock-based awards. These assumptions include:
Expected Term—The
expected term represents the period that stock-based awards are expected to be outstanding. The expected term for option grants is determined
using the simplified method. The simplified method deems the expected term to be the midpoint between the vesting date and the contractual
life of the stock-based awards.
Expected Volatility—Since
we have only been publicly held since April 2022 and do not have any trading history for our common stock, the expected volatility was
estimated based on the average volatility for comparable publicly traded companies over a period equal to the expected term of the stock
option grants. The comparable companies were chosen based on their similar size, stage in the life cycle, or area of specialty.
Risk-Free Interest Rate—The
risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with
the expected term of option.
Expected Dividend—We
have never paid dividends on our common stock and have no plans to pay dividends on our common stock. Therefore, we used an expected dividend
yield of zero.
We account for forfeitures
as they occur.
Our board of directors intends
all options granted to be exercisable at a price per share not less than the per share fair value of our common stock underlying those
options on the date of grant.
Common Stock Warrants
We account for warrants for shares
of common stock as equity or liabilities in accordance with the accounting guidance for derivatives. The accounting guidance provides
a scope exception from classifying and measuring as a financial liability a contract that would otherwise meet the definition of a derivative
if the contract is both (i) indexed to the entity’s own stock and (ii) classified in the stockholders’ deficit section of
the consolidated balance sheet. We estimate the fair value of our warrants for shares of common stock by using the Black-Scholes option
pricing model. Warrants classified as equity are recorded as additional paid-in capital on the consolidated balance sheet and no further
adjustments to their valuation are made after the issuance of the warrants.
50
Financial Operations Overview
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, rebates, 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, overhead related to operation personnel and facility costs, quality inspection, packaging,
scrap and inventory obsolescence, as well as distribution-related expenses such as logistics and shipping costs. We anticipate that certain
of 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 salaries, commissions, stock-based compensation expense and travel and entertainment expenses of our sales and market
personnel along with commissions paid to our independent distributors. We expect our sales and marketing expenses to increase in absolute
dollars with the increased sales of The Catamaran System resulting in higher commissions and salaries, increased clinician and sales representative
training, and the cost to complete our clinical study to gain wider clinician adoption of The Catamaran System. Our sales and marketing
expenses may fluctuate from period to period due to the timing of sales and marketing activities related to the commercial activity 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 the development and refinement 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
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
Interest expense is related
to borrowings and includes deemed interest derived from the beneficial conversion prices of notes payable.
Other Income (Expense), Net
Other income and expenses
have not been significant to date.
51
Results of Operations (in thousands, except percentages)
Years Ended December 31,
Consolidated Statements of Operations Data in Dollars: 2024 2023
Operating expenses:
Interest and other income (expense), net:
Interest expense (34 ) (21 )
Other expense (56 ) —
Years Ended December 31,
Consolidated Statements of Operations Data as a Percent of Revenue: 2024 2023
Cost of goods sold 48 58
Operating expenses:
Research and development 79 108
General and administrative 237 240
Total operating expenses 472 580
Loss from operations (420 ) (537 )
Interest and other income (expense), net:
Gain on investments 6 6
Interest expense (1 ) (1 )
Other expense (2 ) —
Comparison of the years ended December 31, 2024 and 2023 (in
thousands, except percentages)
Revenue, Cost of Goods Sold, Gross Profit, and Gross Margin
Years Ended December 31,
Gross profit percentage 52 % 42 %
Revenue. The increase in revenue for
the year ended December 31, 2024 as compared to 2023 was primarily due to an increase in revenue per surgical procedure on a 0% change
in the number of surgical procedures in which The Catamaran System was used.
Cost of Goods Sold, Gross Profit, and Gross
Margin. The change in cost of goods sold for the year ended December 31, 2024 as compared to 2023 was due to the absorption of
production overhead costs into our standard cost and operating leverage created due to lower relative fixed costs.
52
Operating Expenses
Years Ended December 31,
Research and Development Expenses. Research
and development expenses for the year ended December 31, 2024 decreased as compared to 2023 primarily due to decreased professional fees
($528), stock-based compensation ($73) and payroll expenses ($39) as we move our focus from research to sustaining our Catamaran portfolio.
Sales and Marketing Expenses. Sales
and marketing expenses for the year ended December 31, 2024 decreased as compared to 2023 primarily due to SpineSource transition fees
in 2023 ($932), decreased payroll and employee expenses ($499), and consulting and professional fees ($178), partially offset by increased
commission expense ($21) due to restructuring of our sales operations.
General and Administrative Expenses. General
and administrative expenses for the year ended December 31, 2024 increased as compared to 2023 primarily due to increased insurance costs
($331), legal and professional service fees ($289), payroll and employee expenses ($146), and bad debt expense ($41), partially offset
by decreases in stock-based compensation ($147) due to continued operating expenses.
Gain on Investments, Interest Expense
and Other Expense, Net
Years Ended December 31,
Other expense, net (56 ) — (56 )
Total operating expenses $ 93 $ 146 $ (53 )
Gain on Investments. Gain on investments
for the year ended December 31, 2024 increased as compared to 2023 due to interest on our higher amounts of investments in money market
and corporate debt securities.
Interest Expense. Interest expense for
the year ended December 31, 2024 increased as compared to 2023 primarily due to the convertible debt.
Other Expense, Net. Other expense, net
for the year ended December 31, 2024 was related to foreign exchange losses on the liquidation of our Swiss subsidiary.
Liquidity and Capital Resources
As of December 31, 2024, we had cash and cash
equivalents of $6.5 million. Since inception, we have financed our operations through private placements of preferred stock, debt
financing arrangements, our initial public offering, additional stock offerings and the sale of our products. As of December 31, 2024,
we had no outstanding debt.
In March 2025, we raised net proceeds of $2.7 million from the exercise of warrants under an inducement agreement.
Under the inducement agreement, the holder of the existing warrants to purchase an aggregate of 2,445,700 agreed to exercise the warrants
at a reduced exercise price of $1.25 per share in consideration for our agreement to issue new unregistered five-year warrants to purchase
up to an aggregate of 2,445,700 shares of common stock at an exercise price of $1.25 per share and new unregistered three-year warrants
to purchase up to an aggregate of 1,222,850 shares of common stock at an exercise price of $1.25 per share.
On March 25, 2025, we entered into a securities
purchase agreement for the issuance of 733,500 shares of our common stock (or common stock equivalents in lieu thereof) in a registered
direct offering at a purchase price of $2.00 per share. In a concurrent private placement, we also agreed to issue to the same investor
warrants to purchase up to 733,500 shares of our common stock at an exercise price of $2.00 per share, which will be exercisable immediately,
and will expire five years following the date of issuance. Pursuant to the agreements, we received proceeds, net of financial advisor
fees and other transaction expenses, of $1,234.
Also on March 25, 2025, we entered into a securities
purchase agreement for the issuance of 1,271,500 shares of our common stock (or common stock equivalents in lieu thereof) in a registered
direct offering at a purchase price of $2.00 per share. In a concurrent private placement, we also agreed to issue to the same investor
warrants to purchase up to 1,271,500 shares of our common stock at an exercise price of $2.00 per share, which will be exercisable immediately,
and will expire five years following the date of issuance. Pursuant to the agreements, we received proceeds, net of financial advisor
fees and other transaction expenses, of $2,290.
53
As of December 31, 2024, we had an accumulated
deficit of $68.7 million and we expect to incur additional losses in the future. We have not achieved positive cash flow from operations
to date. Based upon our current operating plan, our existing cash and cash equivalents will not be sufficient to fund our operating expenses
and working capital 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.
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:
Years Ended December 31,
Net cash (used in) provided by:
Effect of foreign currency translation on cash flow 46 38 8 21 %
The decrease in net cash used in operating activities
for the year ended December 31, 2024 as compared to 2023 was primarily attributable to our decreased net loss ($1,908) and decreased prepaid
expenses ($484) and increased depreciation and amortization ($209), partially offset increases in accounts receivable ($96) and decreases
in non-cash stock-based compensation expenses ($300).
Cash used in investing activities for the year
ended December 31, 2024 related to purchases of property and equipment ($186). Cash provided by investing activities for the year ended
December 31, 2023 consisted primarily of the net sales of short-term investments ($6,503) to fund operations, partially offset by purchases
of property and equipment ($361) as we acquired the components for our surgical tray sets.
Cash provided by financing activities for the
year ended December 31, 2024 consisted primarily of net proceeds from the issuance of common stock and warrants ($3,846), the exercise
of warrants under the inducement agreement ($4,306), the issuance of Series A Convertible Preferred Stock ($2,567) and Series B Convertible
Preferred Stock ($489) and from issuances of common stock ($2,105). Cash provided by financing activities for the year ended December
31, 2023 consisted of the net proceeds received from our offerings of stock in 2023 ($5,303) in addition to proceeds from the issuance
of the Convertible Notes ($1,250).
Off-Balance Sheet Arrangements
As of December 31, 2024 and 2023, 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company is a smaller reporting company as
defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.
54
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Tenon Medical, Inc.
Consolidated Financial Statements
December 31, 2024 and 2023
Contents
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 200) F-2
Audited Consolidated Financial Statements:
Consolidated Balance Sheets F-3
Consolidated Statements of Operations and Comprehensive Loss F-4
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Stockholders and Board of Directors
Tenon Medical, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Tenon Medical,
Inc. (the “Company”) as of December 31, 2024 and 2023, the related consolidated statements of operations and comprehensive
loss, convertible preferred stock and stockholders’ equity, and cash flows for each of the years then ended, and the related notes
(collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly,
in all material respects, the consolidated financial position of the Company as of December 31, 2024 and 2023, and the consolidated results
of its operations and its cash flows for each of the years then ended, in conformity with U.S. generally accepted accounting principles.
Going Concern
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As described in Note 2 to the consolidated financial statements, the Company
has experienced recurring losses, negative cash flows from operations, and has limited capital resources. These matters raise substantial
doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are also described
in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform,
an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal
control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for
our opinion.
/s/ Haskell & White LLP
We have served as the Company’s auditor since 2023.
Irvine, California
March 26, 2025
F-2
Tenon Medical, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
December 31, December 31,
ASSETS
Current assets:
Cash and cash equivalents $ 6,535 $ 2,428
Accounts receivable, net 863 518
Prepaid expenses and other current assets 206 389
Property and equipment, net 752 961
Operating lease right-of-use asset 399 646
Deferred offering costs 431 798
Liabilities and Stockholders’ EQUITY
Current liabilities:
Current portion of accrued commissions 303 470
Current portion of operating lease liability 287 256
Accrued commissions, net of current portion 1,862 1,999
Operating lease liability, net of current portion 141 428
Commitments and contingencies (Note 9)
Stockholders’ equity:
Accumulated other comprehensive loss — (46 )
Total stockholders’ equity 5,971 778
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 9,843 $ 6,345
The accompanying notes are an integral part
of these consolidated financial statements.
See Report of Independent Registered Public
Accounting Firm.
F-3
Tenon Medical, Inc.
Consolidated Statements of Operations and Comprehensive
Loss
(In thousands, except per share data)
Years Ended December 31,
Operating Expenses
Other Income (Expense)
Interest expense (34 ) (21 )
Other expense, net (56 ) —
Total Other Income (Expense), net 93 146
Net Loss Per Share of Common Stock
Weighted-Average Shares of Common Stock Outstanding
Consolidated Statements of Comprehensive Loss:
Unrealized loss on investments — 16
Foreign currency translation adjustment 46 38
The accompanying notes are an integral part
of these consolidated financial statements.
See Report of Independent Registered Public
Accounting Firm.
F-4
Tenon Medical, Inc.
Consolidated Statements of Convertible Preferred
Stock and Stockholders’ Equity
(In thousands, except share data)
Shares Amount Shares Amount Shares Amount Capital Deficit Loss Total
Stock-based compensation expense — — — — — — 4,145 4,145
Release of restricted stock units — — — — 7,650 — — —
Issuance of common stock, net of issuance costs — — — — 29,013 — 495 495
Common stock issued for services — — — — 12,364 — 289 289
Issuance of common stock upon exercise of warrants — — — — 10,250 — 258 258
Warrants issued in connection with convertible debt — — — — — — 58 58
Shares issued for reverse stock split — — — — 303 — — —
Other comprehensive income — — — — — — — 54 54
Stock-based compensation expense — — — — — — 3,845 3,845
Release of restricted stock units — — — — 9,926 — — —
Issuance of common stock upon exercise of warrants — — — — 32,266 — 812 — — 812
Issuance of common stock for reverse stock split — — — — 147,825 1 (1 ) — — —
Other comprehensive income — — — — — — — — 46 46
The accompanying notes are an integral part
of these consolidated financial statements.
See Reports of Independent Registered Public
Accounting Firms.
F-5
Tenon Medical, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Years Ended December 31,
Cash Flows from Operating Activities
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense 3,845 4,145
Depreciation and amortization 408 199
Provision for losses on accounts receivable 41 —
Amortization of operating right-of-use asset 247 227
Increase (decrease) in cash resulting from changes in:
Accounts receivable (386 ) (290 )
Prepaid expenses and other assets 183 (301 )
Accounts payable (64 ) (117 )
Accrued expenses (171 ) (99 )
Operating lease liability (256 ) (227 )
Net cash used in operating activities (9,878 ) (12,183 )
Cash Flows from Investing Activities
Sales of short-term investments — 6,996
Purchases of short-term investments — (493 )
Purchases of property and equipment (186 ) (361 )
Net cash (used in) provided by investing activities (186 ) 6,142
Cash Flows from Financing Activities
Gross proceeds from issuance of Series A convertible preferred stock 2,605 —
Gross proceeds from issuance of Series B convertible preferred stock 550 —
Gross proceeds from exercise of warrants under inducement agreement 4,648 —
Gross proceeds from issuance of common stock and warrants — 4,808
Gross proceeds from issuance of common stock 2,106 495
Gross proceeds from issuance of convertible notes payable — 1,250
Gross proceeds from exercise of warrants 812 258
Net cash provided by financing activities 14,125 6,302
Effect of foreign currency translation on cash flow 46 38
Net Increase in Cash and Cash Equivalents 4,107 299
Cash and Cash Equivalents at Beginning of Year 2,428 2,129
Cash and Cash Equivalents at End of Year $ 6,535 $ 2,428
Cash Equivalents at End of Year $ — $ —
Supplemental Disclosures of Cash Flow Information
Non-cash investment and financing activities:
Warrant modification costs $ 992 $ —
The accompanying notes are an integral part
of these consolidated financial statements.
See Report of Independent Registered Public
Accounting Firm.
F-6
Notes to Consolidated Financial Statements (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 The CatamaranTM SI Joint Fusion System (“The
Catamaran System”) that offers a novel, less 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 The Catamaran System and is currently focused on the US market.
Since the national launch of The Catamaran System in October 2022, the Company is focused on three commercial opportunities: 1) Primary
SI Joint procedures, 2) Revision procedures of failed SI Joint implants and 3) SI Joint fusion adjunct to a spine fusion construct.
Basis of consolidation
The consolidated financial statements of the
Company for the year ended December 31, 2023 include the accounts of 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. In 2024, TTAG was dissolved and, as such, the financial statements for the year ended December 31, 2024 only
include the accounts of the Company since the date of dissolution. TTAG had no substantial operations.
2. Summary of Significant Accounting Principles
Basis of presentation
The accompanying
consolidated financial statements have been prepared on the accrual basis in accordance with generally accepted accounting principles
as promulgated in the United States of America (“U.S. GAAP”).
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.
Based on the Company’s expected level of revenues and expenditures, the Company believes that its existing cash and cash equivalents
as of December 31, 2024 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 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 (see Note 13). The consolidated financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
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, obsolescence of inventory, the fair value of accrued commissions
and stock-based compensation.
Reverse Stock Splits
On November 2, 2023, the Company effected a 1-for-10
reverse stock split (the “2023 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 2023 Reverse Stock Split combined every ten shares of our common
stock issued and outstanding immediately prior to effecting the 2023 Reverse Stock Split into one share of common stock. No fractional
shares were issued in connection with the 2023 Reverse Stock Split.
On September 6, 2024, the Company effected a 1-for-8
reverse stock split (the “2024 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 2024 Reverse Stock Split combined every eight shares of our common
stock issued and outstanding immediately prior to effecting the 2024 Reverse Stock Split into one share of common stock. No fractional
shares were issued in connection with the 2024 Reverse Stock Split.
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All historical share and per share amounts reflected
throughout this document have been adjusted to reflect the 2023 Reverse Stock Split and the 2024 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 2023 Reverse Stock Split or the 2024
Reverse Stock Split.
Segments
The Company operates in one business segment.
Although the Company’s Swiss subsidiary is located in a different geographical area, management uses one measurement of profitability
and does not segregate its business for internal reporting. See Note 12.
Cash and cash equivalents
The Company considers all highly liquid investments
with maturities of 90 days or less at the date of purchase to be cash equivalents.
Investments
The Company classifies its investments in marketable
securities as available-for-sale and records them at fair value in its consolidated balance sheets. The net unrealized gains and losses
are recorded as a separate component of stockholders’ equity. Realized gains and losses are recorded in the consolidated statements
of operations and comprehensive loss. The Company determines any realized gains or losses on the sale of marketable debt securities on
a specific identification method and records such gains and losses as a component of other income (expense) net.
Accounts receivable and expected credit
losses
Accounts receivable are derived from products
delivered to customers and are stated at their net realizable value. The Company records an allowance for estimated uncollectible accounts
in an amount approximating anticipated losses. Individual uncollectible accounts are written off against the allowance when collection
of the individual accounts appears doubtful. In determining the amount of the allowance, the Company considers its historical level of
credit losses. The Company also makes judgments about the creditworthiness of significant customers based on ongoing credit evaluations,
and the Company assesses current economic trends that might impact the level of credit losses in the future. Historically, the Company
has had no significant write-offs of accounts receivable. However, since the Company cannot reliably predict future changes in the financial
stability of its customers, it cannot guarantee that its allowances will continue to be adequate. If actual credit losses are significantly
greater than the allowance, the Company would increase its general and administrative expenses and increase its reported net losses. The
Company’s allowance for expected credit losses was $41 and $0 at December 31, 2024 and 2023, respectively.
Inventory
Inventory is stated at lower of cost or net
realizable value. The Company establishes the inventory basis by determining the cost based on standard costs approximating the
purchase costs on a first-in, first-out basis. The excess and obsolete inventory is estimated based on quantities on hand,
expectations of future demand and market conditions. Inventory write-downs are charged to cost of goods sold. As of December 31,
2024 and 2023, inventory consisted of finished goods and raw materials.
Deferred offering costs
Deferred offering costs, which consist of
direct incremental legal, consulting, banking, and accounting fees relating to the Company’s future offerings, are
capitalized, and are offset against proceeds received upon the effectiveness of the offering or the closing of an equity
transaction. In the event an anticipated offering is terminated, deferred offering costs will be expensed.
Property and equipment, net
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Equipment, computers,
software, and furniture and fixtures are depreciated over periods ranging from three to seven years, and leasehold improvements over the
shorter of the lease term or the life of the asset. Construction in progress pertains to the cost of individual components of a custom
instrument set used for surgical placement of the Company’s products that have not yet been placed into service. The cost of maintenance
and repairs is charged to expense as incurred; significant renewals and betterments are capitalized. Deductions are made for retirements
resulting from renewals or betterments.
Leases
The Company leases its headquarters in Los Gatos,
California. At the inception of a contract, the Company assesses whether that contract is, or contains, a lease. The Company’s assessment
is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether the Company obtains the right to substantially
all the economic benefit from the use of the asset throughout the term, and (3) whether the Company has the right to direct the use of
the asset. At inception of a lease, the Company allocates the consideration in the contract to each lease and non-lease component based
on the component’s relative stand-alone price to determine the lease payments. Lease and non-lease components are accounted for
separately.
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Leases are classified as either finance leases
or operating leases based on criteria in accordance with Accounting Standards Codification (“ASC”) 842, Leases. The
Company’s facility lease is classified as an operating lease. Right-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 right-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. The Company has elected not to
recognize ROU assets and lease liabilities for short-term operating leases that have a term of 12 months or less. Lease expense for operating
leases is recognized on a straight-line basis over the lease term and is included in operating expenses in the consolidated statements