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, 2023, we had an accumulated deficit of approximately $55.1 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 Splits
On April 6, 2022, the Company
effected a 1-for-2 reverse stock split (the “2022 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 2022 Reverse Stock Split combined every
two shares of our common stock issued and outstanding immediately prior to effecting the 2022 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 2022 Reverse Stock Split.
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. All historical share and per share
amounts reflected throughout this document have been adjusted to reflect the 2022 Reverse Stock Split and the 2023 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 2022 Reverse
Stock Split or the 2023 Reverse Stock Split.
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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.
Investments
We classify our investments
in marketable debt securities as available-for-sale and record them at fair value in our consolidated balance sheets. 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. We determine realized gains or losses on the sale of marketable debt securities on a
specific identification method and record such gains and losses as a component of other income (expense), net.
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,
calculated based on the terms agreed to with the customer. Historically, there have been no significant rebates or price discounts. 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. Prior to October 2022, we had an agreement in place with a national distributor, which included
standard terms that did not allow for payment contingent on resale of the product, obtaining financing, or other terms that could impact
the distributor’s payment obligation. We billed and collected directly with the end-user customers and recognized revenue based
on the gross sales price. 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 stock options, based on the estimated fair
value of the awards on the date of grant. We estimate the grant date fair value, and the resulting stock-based compensation, 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.
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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.
Prior to our initial public
offering, the estimated fair value of our common stock was determined at each valuation date by a third-party independent valuation firm
in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company
Equity Securities Issued as Compensation. These valuations took into account numerous factors, including developments at our company and
market conditions.
The May 21, 2021 valuation
used a hybrid method which combines the Probability Weighted Expected Return Method (“PWERM”) with the OPM. The PWERM considers
a set of discrete potential liquidity scenarios for the Company, the value common stock would receive in each scenario, and the time required
and risk inherent in achieving those values. The May 21, 2021 valuation examined the following scenarios for the Company: (i) an IPO;
(ii) remaining private and raising capital; and (iii) dissolution. Within the IPO scenario, 100% weighting was placed on the Market Approach
for determining the enterprise value. The Market Approach assumes that businesses operating in the same industry will share similar characteristics,
and therefore a comparison of the business to similar businesses whose financial information is publicly available may provide a reasonable
basis to estimate a subject business’s value. The equity value in the IPO scenario was estimated considering guideline IPOs, the
anticipated size of the Company’s offering, and forecasted cash and debt. The estimated common stock value as of the IPO was present
valued using a discount rate of 22.4% based on Company’s WACC, less an adjustment of 2.0% to reflect the risk reduction of an IPO
event.
The August 31, 2021 valuation
used a hybrid method which combines the Probability Weighted Expected Return Method (“PWERM”) with the OPM. The PWERM considers
a set of discrete potential liquidity scenarios for the Company, the value common stock would receive in each scenario, and the time required
and risk inherent in achieving those values. The August 31, 2021 valuation examined the following scenarios for the Company: (i) an IPO;
(ii) remaining private and raising capital; and (iii) dissolution. Within the IPO scenario, 100% weighting was placed on the Market Approach
for determining the enterprise value. The Market Approach assumes that businesses operating in the same industry will share similar characteristics,
and therefore a comparison of the business to similar businesses whose financial information is publicly available may provide a reasonable
basis to estimate a subject business’s value. The equity value in the IPO scenario was estimated considering guideline IPOs, the
anticipated size of the Company’s offering, and forecasted cash and debt. The estimated common stock value as of the IPO was present
valued using a discount rate of 32.0% based on Company’s WACC, less an adjustment of 5.0% to reflect the risk reduction of an IPO
event.
The October 28, 2021 valuation
used a hybrid method which combines the Probability Weighted Expected Return Method (“PWERM”) with the OPM. The PWERM considers
a set of discrete potential liquidity scenarios for the Company, the value common stock would receive in each scenario, and the time required
and risk inherent in achieving those values. The October 28, 2021 valuation examined the following scenarios for the Company: (i) an IPO;
(ii) remaining private and raising capital; and (iii) dissolution. Within the IPO scenario, 100% weighting was placed on the Market Approach
for determining the enterprise value. The Market Approach assumes that businesses operating in the same industry will share similar characteristics,
and therefore a comparison of the business to similar businesses whose financial information is publicly available may provide a reasonable
basis to estimate a subject business’s value. The equity value in the IPO scenario was estimated considering guideline IPOs, the
anticipated size of the Company’s offering, and forecasted cash and debt. The estimated common stock value as of the IPO was present
valued using a discount rate of 27.2% based on Company’s WACC, less an adjustment of 5.0% to reflect the risk reduction of an IPO
event.
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In determining the enterprise
value within the remain private scenario, 100% weighting was applied to the DCF Method under the income approach, in the same manner as
in the December 31, 2018, 2019, and 2020 valuations. The discount rate in this scenario was determined to be 22.4% based on Company’s
WACC. Adjustments were made to the enterprise value for the Company’s cash and debt as of the valuation date to determine the equity
value in this scenario. The OPM was used to allocate the equity value to our common stock. The equity volatility rate was determined to
be 70.0% based on the volatility rate of certain comparable public companies. DLOMs of (i) 10.0% in the IPO scenario and (ii) 30.0% in
the remaining private scenario were applied to the common stock.
Following the closing of
the initial public offering, the fair value of our common stock was determined based on the closing price of our common stock on the Nasdaq
Capital Market.
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.
Income Taxes
We account for income taxes
under the asset and liability method, whereby deferred tax assets and liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected
to affect taxable income. We assess the likelihood that the resulting deferred tax assets will be realized. A valuation allowance is provided
when it is more likely than not that some portion or all of a deferred tax asset will not be realized.
We did not record a provision
or benefit for income taxes during the twelve months ended December 31, 2023 or 2022. We continue to maintain a full valuation allowance
against our net deferred tax assets.
We assess all material positions
taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or
challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s
sustainability and is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate
settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we will determine whether (i) the
factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate. The
recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a tax
benefit may change as new information becomes available.
The Tax Reform Act of 1986
limits the use of net operating loss and tax credit carryforwards in certain situations where changes occur in the stock ownership of
a company. We have not completed a study to determine whether any ownership changes per the provisions of Section 382 of the Tax Reform
Act of 1986, as amended, as well as similar state provisions, have occurred.
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, and the number of implants used for a particular patient. Similar to other
orthopedic companies, our revenue can also fluctuate from quarter to quarter due to a variety of factors, including reimbursement, changes
in independent sales representatives and physician activities.
Cost of Goods Sold, Gross Profit, and Gross Margin
We utilize contract manufacturers
for production of The Catamaran System implants and Catamaran Tray Sets. Cost of goods sold consists primarily of costs of the components
of The Catamaran System implants and instruments, quality inspection, packaging, scrap and inventory obsolescence, as well as distribution-related
expenses such as logistics and shipping costs. We anticipate that our cost of goods sold will increase in absolute dollars as case levels
increase.
Our gross margins have been
and will continue to be affected by a variety of factors, including the cost to have our product manufactured for us, pricing pressure
from increasing competition, and the factors described above impacting our revenue.
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Operating Expenses
Our operating expenses consist
of sales and marketing, research and development, and general and administrative expenses. Personnel costs are the most significant component
of operating expenses and consist of consulting expenses, salaries, sales commissions and other cash and stock-based compensation related
expenses. We expect operating expenses to increase in absolute dollars as we continue to invest and grow our business.
Sales and Marketing Expenses
Sales and marketing expenses
primarily consist of independent sales representative training and commissions in addition to salaries and stock-based compensation expense.
Starting in May 2021, commissions to our national distributor have been based on a percentage of sales and we anticipate that these commissions
will make up a significant portion of our sales and marketing expenses. We expect our sales and marketing expenses to increase in absolute
dollars with the commercial launch of The Catamaran System resulting in higher commissions and salaries, increased clinician and sales
representative training, and the start of clinical studies to gain wider clinician adoption of The Catamaran System. Our sales and marketing
expenses may fluctuate from period to period due to timing of sales and marketing activities related to the commercial launch of our product.
Research and Development Expenses
Our research and development
expenses primarily consist of engineering, product development, regulatory expenses, and consulting services, outside prototyping services,
outside research activities, materials, and other costs associated with development of our product. Research and development expenses
also include related personnel and consultants’ compensation and stock-based compensation expense. We expense research and development
costs as they are incurred. We expect research and development expense to increase in absolute dollars as we improve The Catamaran System,
develop new products, add research and development personnel, and undergo clinical activities that may be required for regulatory clearances
of future products.
General and Administrative Expenses
General and administrative
expenses primarily consist of salaries, consultants’ compensation, stock-based compensation expense, and other costs for finance,
accounting, legal, compliance, and administrative matters. We expect our general and administrative expenses to increase in absolute dollars
as we add personnel and information technology infrastructure to support the growth of our business. We also expect to incur additional
general and administrative expenses as a result of operating as a public company, including but not limited to: expenses related to compliance
with the rules and regulations of the SEC and those of The Nasdaq Stock Market LLC on which our securities are traded; additional insurance
expenses; investor relations activities; and other administrative and professional services. While we expect the general and administrative
expenses to increase in absolute dollars, we anticipate that it will decrease as a percentage of revenue over time.
Gain (Loss) on Investments
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.
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Results of Operations (in thousands, except percentages)
Years Ended December 31,
Consolidated Statements of Operations Data in Dollars: 2023 2022
Operating expenses:
Interest and other income (expense), net:
Interest expense (21 ) (354 )
Other expense — (18 )
Years Ended December 31,
Consolidated Statements of Operations Data as a Percent of Revenue: 2023 2022
Gross profit (loss) 42 (93 )
Operating expenses:
Research and development 108 409
General and administrative 240 1,074
Loss from operations (537 ) (2,710 )
Interest and other income (expense), net:
Gain on investments 6 26
Interest expense (1 ) (51 )
Other expense — (3 )
Comparison of the years ended December 31, 2023 and 2022 (in
thousands, except percentages)
Revenue, Cost of Goods Sold, Gross Profit, and Gross Margin
Years Ended December 31,
Gross profit (loss) percentage 42 % (93 )%
Revenue. The increase in revenue for
the year ended December 31, 2023 as compared to 2022 was primarily due to an increase of 312% in the number of surgical procedures in
which the Catamaran System was used.
Cost of Goods Sold, Gross Profit, and Gross
Margin. The increase in cost of goods sold for the year ended December 31, 2023 as compared to 2022 was due to an increase of
312% in the number of surgical procedures performed. Gross profit (loss) and gross margin percentage improved due to higher revenue associated
with the increase in the number of surgical procedures, operating leverage created due to lower relative fixed costs and the absorption
of more overhead into our standard cost.
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Operating Expenses
Years Ended December 31,
Research and Development Expenses. Research
and development expenses for the year ended December 31, 2023 increased as compared to 2022 primarily due to increased stock-based compensation
($509) and payroll expenses ($49), partially offset by decreased professional fees ($137).
Sales and Marketing Expenses. Sales
and marketing expenses for the year ended December 31, 2023 decreased as compared to 2022 primarily due to payments in 2022 in association
with the termination of the SpineSource sales agreement ($3,611) and decreased consulting and professional fees ($1,190), partially offset
by increased payroll expenses ($2,388), sales commissions ($1,388) and stock-based compensation ($100). 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 year ended December 31, 2023 decreased as compared to 2022 primarily due to a legal settlement accrual
in 2022 ($574) and decreased professional service fees ($852), partially offset by increased stock-based compensation ($639) and payroll
expenses ($271).
Gain (Loss) on Investments, Interest Expense
and Other Income (Expense), Net
Years Ended December 31,
Gain on Investments. Gain on investments
for the year ended December 31, 2023 decreased as compared to 2022 due to interest on our lower amounts of investments in money market
and corporate debt securities.
Interest Expense. Interest expense for
the year ended December 31, 2023 decreased as compared to 2022 primarily due to the conversion of our convertible debt in association
with our initial public offering in April 2022.
Other Expense, Net. Other income and expenses
were not significant during the twelve months ended December 31, 2023 and 2022.
Liquidity and Capital Resources
As of December 31, 2023, we had cash and cash
equivalents of $2.4 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 December 31, 2023, we had outstanding debt of
$1.2 million.
As of December 31, 2023, we had an accumulated
deficit of $55.1 million. During the years ended December 31, 2023 and 2022, we incurred net losses of $15.6 million and $18.9 million,
respectively, and 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.
On February 20, 2024, we entered into a Securities
Purchase Agreement with certain investors, pursuant to which we agreed to sell, issue and deliver to these investors, in a private placement
offering, a total of 172,239 shares of our Series A Preferred Stock and warrants to purchase 258,374 shares of our common stock, par
value $0.001 per share, at an exercise price equal to $1.2705 per share for an aggregate offering price of $2,605,000.
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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.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31,
2023:
Payments Due By Period (In thousands)
Less than More than
Total 1 year 1-3 years 4-5 years 5 years
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:
Years Ended December 31,
Net cash (used in) provided by:
Effect of foreign currency translation on cash flow 38 7 31 (443 )%
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The increase in net cash used in operating activities
for the year ended December 31, 2023 as compared to 2022 was primarily attributable to decreases in our accrued expenses ($2,387) and
accounts payable ($189) and increases in prepaid expenses ($244) and accounts receivable ($138), partially offset by our decreased net
loss ($3,336), adjusted for increases in non-cash stock-based compensation expenses ($1,248) and a decrease in common stock issued for
services ($1,561).
Cash provided by investing activities for the
year ended December 31, 2023 consisted primarily of the net sales of short-term investments of approximately $6.5 million as used those
amounts to fund operations, partially offset by purchases of property and equipment of $0.4 million as we acquired the components for
our surgical tray sets. Cash used in investing activities for the year ended December 31, 2022 consisted primarily of the net purchase
of short-term investments of approximately $2.0 million as we invested a portion of our IPO proceeds, in addition to purchases of property
and equipment of $0.8 million as we acquired the components for our surgical tray sets.
Cash provided by financing activities for the
year ended December 31, 2023 consisted of the $5.3 million, net of relevant expenses, received from our offerings of stock in 2023 in
addition to $1.2 million from the issuance of the Convertible Notes. Cash provided by financing activities for the year ended December
31, 2022 consisted of the $14.1 million cash received from our initial public offering in April 2022, net of relevant expenses.
Off-Balance Sheet Arrangements
As of December 31, 2023 and 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 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.6
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Tenon Medical, Inc.
Consolidated Financial Statements
December 31, 2023 and 2022
Contents
Audited Consolidated Financial Statements:
Consolidated Balance Sheets F-4
Consolidated Statements of Operations and Comprehensive Loss F-5
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
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 sheet of Tenon Medical, Inc. (the “Company”) as of December 31, 2023, the related consolidated statements of operations
and comprehensive loss, preferred stock and stockholders’ equity, and cash flows for the year 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, 2023, and the consolidated results of
its operations and its cash flows for the year 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 consolidated financial statements
based on our audit. 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 audit in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit 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 audit, 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 audit 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 audit 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 audit provides a reasonable basis for
our opinion.
/s/ Haskell & White LLP
We have served as the Company’s auditor since 2023.
Irvine, California
March 29, 2024
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and
Stockholders of Tenon Medical, Inc. and Subsidiary
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Tenon
Medical, Inc and Subsidiary (collectively the “Company”) as of December 31, 2022, and the related consolidated statements
of operations and comprehensive loss, consolidated statements of convertible preferred stock and stockholders’ equity (deficit),
and consolidated statements of cash flows for the year then ended, and the related notes (collectively referred to as the consolidated
financial statements).
In our opinion, the consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash
flows for the year ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The 2022 consolidated financial statements were prepared assuming that
the Company would continue as a going concern. As of December 31, 2022, the Company had suffered recurring losses from operations, incurred
negative cash flows from operating activities, and had stated that substantial doubt exists about the Company’s ability to continue
as a going concern. The 2022 consolidated financial statements did 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 audit. 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 audit in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement, whether due to error or fraud.
Our audit of the consolidated financial
statements 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. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
/s/ Armanino
LLP
San Jose,
California
March 10,
2023
We began serving as the Company’s auditor in 2021. In 2023,
we became the predecessor auditor.
F-3
Tenon
Medical, Inc.
Consolidated
Balance Sheets
(In
thousands, except share data)
December 31, December 31,
Assets
Current assets:
Cash and cash equivalents $ 2,428 $ 2,129
Short-term investments — 6,441
Operating lease right-of-use asset 646 873
Deferred offering costs 798 25
Liabilities and Stockholders’ EQUITY
Current liabilities:
Current portion of accrued commissions 470 1,035
Current portion of operating lease liability 256 228
Accrued commissions, net of current portion 1,999 1,624
Operating lease liability, net of current portion 428 683
Commitments and contingencies (Notes 6 and 10)
Stockholders’ equity:
Accumulated other comprehensive loss (46 ) (100 )
Total stockholders’ equity 778 6,252
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 6,345 $ 11,089
The
accompanying notes are an integral part of these consolidated financial statements.
See Reports of Independent Registered Public
Accounting Firms.
F-4
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 (21 ) (354 )
Other expense, net — (18 )
Total Other Income (Expense), net 146 (192 )
Net Loss Per Share of Common Stock
Basic and diluted $ (8.59 ) $ (23.62 )
Weighted-Average Shares of Common Stock Outstanding
Consolidated Statements of Comprehensive Loss:
Unrealized loss on investments 16 (16 )
Foreign currency translation adjustment 38 7
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 Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(In
thousands, except share data)
Shares Amount Shares Amount Shares Amount Capital Deficit Loss Total
Stock-based compensation expense — — — — — — 2,897 — — 2,897
Other comprehensive loss — — — — — — — — (9 ) (9 )
Stock-based compensation expense — — — — — — 4,145 4,145
Release of restricted stock units — — — — 61,200 — — —
Issuance of common stock, net of issuance costs — — — — 232,100 1 494 495
Common stock issued for services — — — — 98,909 — 289 289
Issuance of common stock upon exercise of warrants — — — — 82,000 — 258 258
Warrants issued in connection with convertible debt — — — — — — 58 58
Shares issued for reverse stock split — — — — 2,422 — — —
Other comprehensive income — — — — — — — 54 54
The
accompanying notes are an integral part of these consolidated financial statements.
See Reports of Independent Registered Public
Accounting Firms.
F-6
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:
Unrealized loss on investments — (16 )
Non-cash interest expense — 362
Stock-based compensation expense 4,145 2,897
Common stock issued for services — 1,561
Depreciation and amortization 199 78
Loss on write-off of fixed assets — 77
Amortization of operating right-of-use asset 227 211
Increase (decrease) in cash resulting from changes in:
Accounts receivable (290 ) (152 )
Prepaid expenses and other assets (301 ) (57 )
Accounts payable (117 ) 72
Operating lease liability (227 ) (202 )
Net cash used in operating activities (12,183 ) (12,025 )
Cash Flows from Investing Activities
Sales of short-term investments 6,996 8,079
Purchases of short-term investments (493 ) (10,116 )
Purchases of property and equipment (361 ) (847 )
Net cash provided by (used in) investing activities 6,142 (2,884 )
Cash Flows from Financing Activities
Proceeds from issuance of common stock, net of issuance costs 495 —
Proceeds from issuance of convertible notes payable 1,250 —
Proceeds from exercise of warrants 258 —
Deferred offering costs (509 ) (25 )