Tenon Medical, Inc. 10-K

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. (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 dedicated to transforming care for patients with certain sacro-pelvic disorders. The Company currently offers two systems to treat a diseased SI Joint. The Company has developed The Catamaran®™ SI Joint Fusion System (“The Catamaran System”) that offers a novel, less invasive approach to 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. In August 2025, the Company acquired substantially all of the assets of SiVantage, Inc. and SIMPL Medical, LLC, including the SImmetry +® SI Joint Fusion System (“The SImmetry + System”) that treats disorders of the SI Joint through minimally invasive lateral access solution that incorporates well-established orthopedic fusion principles-including joint decortication, bone graft placement, and rigid fixation-with the goal of achieving a true biological fusion across the SI Joint. We have incurred net losses since our inception in 2012. As of December 31, 2025, we had an accumulated deficit of approximately $81.3 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 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 2024 Reverse Stock Split. The authorized number of shares and the par value per share of our common stock were not affected by the 2024 Reverse Stock Split. 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 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 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 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 completion of the surgery and therefore, revenue is recognized upon 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. 50 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. 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 did not have any trading history for our common stock prior to that date, 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 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 balance sheet and no further adjustments to their valuation are made after the issuance of the warrants. Business Combinations We account for business combinations in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations , which requires that assets acquired and liabilities assumed be recorded at their respective fair values on the date of acquisition. The fair value of the consideration paid is assigned to the underlying net assets of the acquired business based on their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded to goodwill. Intangible assets acquired are amortized over the expected life of the asset. Fair value determinations and useful life estimates are based on, among other factors, estimates of expected future cash flows, estimates of appropriate discount rates, estimated useful lives of the intangible assets acquired and other factors. Although we believe the assumptions and estimates made have been reasonable and appropriate, actual results may vary significantly from estimated results. Our assumptions and estimates are subject to refinement and, as a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. 51 Financial Operations Overview Revenue We derive substantially all our revenue from sales of The Catamaran System and The SImmetry + System to a limited number of clinicians. Revenue from sales of The Catamaran System and The SImmetry + 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 and The SImmetry + System implants and tray sets. Cost of goods sold consists primarily of costs of the components of The Catamaran System and The SImmetry + System implants and instruments, overhead related to operations 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 products 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 and The SImmetry + 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 and The SImmetry + 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. 52 Results of Operations (in thousands, except percentages) Years Ended December 31, Statements of Operations Data in Dollars: 2025 2024 Revenue $ 3,944 $ 3,277 Cost of goods sold 1,586 1,566 Gross profit 2,358 1,711 Operating expenses: Research and development 2,149 2,603 Sales and marketing 6,026 5,109 General and administrative 6,975 7,765 Total operating expenses 15,150 15,477 Loss from operations (12,792 ) (13,766 ) Interest and other income (expense), net: Gain on investments 236 183 Interest expense — (34 ) Other expense — (56 ) Net loss $ (12,556 ) $ (13,673 ) Years Ended December 31, Statements of Operations Data as a Percent of Revenue: 2025 2024 Revenue 100 % 100 % Cost of goods sold 40 48 Gross profit 60 52 Operating expenses: Research and development 54 79 Sales and marketing 153 156 General and administrative 177 237 Total operating expenses 384 472 Loss from operations (324 ) (420 ) Interest and other income (expense), net: Gain on investments 6 6 Interest expense — (1 ) Other expense — (2 ) Net loss (318 )% (417 )% Comparison of the years ended December 31, 2025 and 2024 (in thousands, except percentages) Revenue, Cost of Goods Sold, Gross Profit, and Gross Margin Years Ended December 31, 2025 2024 $ Change % Change Revenue $ 3,944 $ 3,277 $ 667 20 % Cost of goods sold 1,586 1,566 20 1 % Gross profit $ 2,358 $ 1,711 $ 647 38 % Gross profit percentage 60 % 52 % Revenue. The increase in revenue for the year ended December 31, 2025 as compared to 2024 was primarily due to an increase in the number of surgical procedures and the addition of revenue related to The SImmetry + System. Cost of Goods Sold, Gross Profit, and Gross Margin. The change in cost of goods sold for the year ended December 31, 2025 as compared to 2024 was due to the absorption of production overhead costs into our standard cost and operating leverage created due to lower relative fixed costs and increased revenue volume. 53 Operating Expenses Years Ended December 31, 2025 2024 $ Change % Change Research and development $ 2,149 $ 2,603 $ (454 ) (17 )% Sales and marketing 6,026 5,109 917 18 % General and administrative 6,975 7,765 (790 ) (10 )% Total operating expenses $ 15,150 $ 15,477 $ (1,491 ) (9 )% Research and Development Expenses. Research and development expenses for the year ended December 31, 2025 decreased as compared to 2024 primarily due to decreased stock-based compensation ($772) and payroll expenses ($1), partially offset by increased professional fees ($206). Sales and Marketing Expenses. Sales and marketing expenses for the year ended December 31, 2025 increased as compared to 2024 primarily due to increased commission expense ($544) related to our increased revenue and increased payroll and employee expenses ($174) and consulting and professional fees ($174), partially offset by decreased stock-based compensation ($13). General and Administrative Expenses . General and administrative expenses for the year ended December 31, 2025 decreased as compared to 2024 primarily due to decreased stock-based compensation ($1,367), insurance costs ($614) and professional service fees ($87), partially offset by acquisition expenses ($778) and increases in employee expenses ($321) and other fees and expenses ($206). Gain on Investments, Interest Expense and Other Expense, Net Years Ended December 31, 2025 2024 $ Change % Change Gain on investments $ 236 $ 183 $ 53 29 % Interest expense — (34 ) 34 100 % Other expense, net — (56 ) 56 100 % Total operating expenses $ 236 $ 93 $ 143 154 % Gain on Investments. Gain on investments for the year ended December 31, 2025 increased as compared to 2024 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 related to convertible debt, whose outstanding principal and interest were converted to common stock in 2024. 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, 2025, we had cash and cash equivalents of $3.8 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, 2025, we had no outstanding debt. As of December 31, 2025, we had an accumulated deficit of $81.3 million and we expect to incur additional losses in the future. We have not achieved positive cash flow from operations to date. On March 11, 2026, we entered into securities purchase agreements with certain accredited investors pursuant to which the Company issued and sold in a private placement 20% original issue discount senior convertible promissory notes in an aggregate principal amount of approximately $5.2 million for aggregate gross proceeds of approximately $4.3 million (the “Convertible Promissory Notes”). The Convertible Promissory Notes have a maturity date of September 11, 2026, which at the option of the Company can be extended to December 11, 2026. Following the 6-month anniversary of the issuance date, the Convertible Promissory Notes will be convertible any time at the option of the holder into shares of our common stock at a conversion price per share equal to the greater of 80% of the VWAP for the three trading days immediately prior to the date of conversion and $0.1567, subject to adjustment for stock splits and pro rata distributions as provided in the Convertible Promissory Notes. If the maturity date of the Convertible Promissory Notes is extended their outstanding principal amount will be increased by 5%. Any prepayment of the Convertible Promissory Notes will be paid at 102.5% of the principal amount being prepaid. In addition, we are required to prepay the Convertible Promissory Notes from 15% of the net proceeds we may receive from future securities financing transactions less certain amounts attributable to the original issue discount. 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 financial statements were filed. 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; (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. 54 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 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, 2025 2024 $ Change % Change Net cash (used in) provided by: Operating activities $ (10,745 ) $ (9,878 ) $ (867 ) 9 % Investing activities (1,023 ) (186 ) (837 ) 450 % Financing activities 8,989 14,125 (5,136 ) (36 )% Effect of foreign currency translation on cash flow — 46 (46 ) (100 )% Net change in cash and cash equivalents $ (2,779 ) $ 4,107 $ (6,886 ) (168 )% The increase in net cash used in operating activities for the year ended December 31, 2025 as compared to 2024 was primarily attributable to decreases in stock-based compensation ($2,154) and increased accounts receivable ($465) and prepaid expenses ($218), partially offset by a decrease in net loss ($1,117) and increases in accrued expenses ($819) and accounts payable ($550). Cash used in investing activities for the year ended December 31, 2025 consisted of the cash payment for the SI Acquisition ($750) and purchases of property and equipment ($273). Cash used in investing activities for the year ended December 31, 2024 related to purchases of property and equipment ($186). Cash provided by financing activities for the year ended December 31, 2025 consisted of gross proceeds from the issuance of common stock from our securities purchase agreements ($4,010), the exercise of warrants under the inducement agreement ($3,057) and the issuance of common stock and warrants ($2,850), net of total cash offering costs ($928). Cash provided by financing activities for the year ended December 31, 2024 consisted of gross proceeds from the issuance of common stock and warrants ($4,500), the exercise of warrants under the inducement agreement ($4,648), the issuance of Series A Convertible Preferred Stock ($2,605) and Series B Convertible Preferred Stock ($550) and from issuances of common stock ($2,106) and the exercise of warrants ($812), net of total cash offering costs ($1,096). Off-Balance Sheet Arrangements As of December 31, 2025 and 2024, we did not have any relationships with 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. 55