Tenon Medical is targeting a $20 million IPO for commercialization

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A quick look at Tenon Medical

According to an S-1/A registration statement, Tenon Medical (TNON) has requested to raise $20 million in an initial public offering of its common stock.

The company is developing a medical product Treatment of sacroiliac joint pain.

TNON management has proposed rather high IPO prices – effectively pricing the IPO for perfection.

I’m on hold for TNON due to management’s inflated price expectations.

Company & Technology

Based in Los Gatos, California, Tenon was formed to develop its catamaran SIJ fusion system of instruments and implants to treat the pain associated with sacroiliac joint disorders.

Management is led by President and CEO Steven M. Foster, who was previously Global Commercialization President of Safe Orthopedics SAS related to a lumbar spine fusion surgical kit.

Tenon has booked investments at market value of $13.7 million as of December 31, 2021 from investors including Zuhlke Ventures AG, TCTUG, SpineSource, WS Investment, K&A Investment and others.

Cones – customer acquisition

The company has FDA approval (510[k]) for its surgical implant system and is preparing a national market launch.

TNON will sell its products through a distributor go-to-market model. This offers the advantages of a quick start and simplified organization, but the disadvantage of not controlling the company’s own direct sales force, allowing for potentially more effective sales efforts and closer customer relationships.

Sales and marketing expenses as a percentage of total sales have increased sharply, while sales have increased only slightly, as shown in the following figures:

Sales & Marketing	Expenses vs. Income
Period	percentage
2021	1339.6%
2020	66.9%

(Source)

The Sales and Marketing Effectiveness Multiplier, defined as how many dollars of additional new revenue generated by each dollar of sales and marketing spend, was 0.1x for the most recent reporting period. (Source)

Tenon market and competition

According to a 2021 market research report by Verified Market Research, the global chronic back pain treatment market was estimated at US$6.3 billion in 2018 and is projected to reach nearly US$9.3 billion by 2026.

This represents a projected CAGR of almost 5% from 2019 to 2026.

The main drivers for this expected growth are an increase in the number of cases of nerve pain due to a significant increase in geriatric populations due to the aging of the world population.

Also, there are five categories of lower back pain:

• discogenic pain

• Lumbar spinal canal stenosis

• Sacroiliac pain

• facet joint pain

• Other

Key contestants or other industry participants include:

• Johnson&Johnson

• Pfizer

• Sanofi

• Endo-Pharma

• note

• Vortex Technologies

• Medtronic

• Boston Scientific

• bio wave

• Royal Phillips

• SI bone

Tenon Medical’s financial performance

The company’s recent financial results can be summarized as follows:

• Increasing top-line earnings from a tiny base

• Increase in gross profit and gross margin

• High operating losses

• Significant cash used in operations

The following are relevant financial results arising from the company’s registration statement:

total revenue
Period	total revenue	% variance vs. before
2021	$159,800	264.7%
2020	$43,820
gross profit (loss)
Period	gross profit (loss)	% variance vs. before
2021	$105,028	310.9%
2020	$25,563
gross margin
Period	gross margin
2021	65.72%
2020	58.34%
Operating Profit (Loss)
Period	Operating Profit (Loss)	operating margin
2021	$(6,460,722)	-4043.0%
2020	$(536,289)	-1223.8%
net income (loss)
Period	net income (loss)	net margin
2021	$(7,048,398)	-4410.8%
2020	$(585,178)	-366.2%
Cash flow from operations
Period	Cash flow from operations
2021	$(4,292,564)
2020	$(167,363)
(Glossary of terms)

(Source)

As of December 31, 2021, Tenon had $916,677 in cash and $16.2 million in total debt.

Free cash flow for the twelve months ended December 31, 2021 was negative ($4.4 million).

Tenon Medical IPO details

Tenon intends to raise $20 million in gross proceeds from an initial public offering of its common stock and is offering 4 million shares at a proposed mid-price of $5.00 per share.

No existing shareholder has expressed an interest in buying shares at the IPO price.

Assuming a successful IPO, the Company’s enterprise value at IPO would be approximately $35.7 million, excluding the impact of insurer over-allotment options.

The free float to outstanding share ratio (excluding over-allotments by underwriters) will be approximately 33.16%. A number below 10% is generally considered a “low float” stock, which can experience significant price volatility.

Management says it will use the net proceeds from the IPO as follows:

Proposed Use of Proceeds (SEC EDGAR)

(Source)

Management’s presentation of the company’s roadshow is not available.

Regarding pending lawsuits, the company is being sued by a former CEO for unpaid wages and other claims totaling $3.3 million plus attorneys’ fees and other costs, while management believes the claim should be increased to $600,000 -dollars should be capped. Management has not provided any information on the possible outcome of the matter.

The listed bookrunners for the IPO are The Benchmark Company and Valuable Capital Limited.

Valuation metrics for Tenon

Below is a table of relevant cap and valuation numbers for the company:

Measure [TTM]	quantity
Market capitalization at IPO	$60,305,960
Enterprise value	$35,732,276
price / sale	377.38
EV / Revenue	223.61
EV / EBITDA	-5.53
earnings per share	-$0.56
operating margin	-4043.01%
net margin	-4410.76%
Ratio of float to shares outstanding	33.16%
Proposed IPO midpoint price per share	$5.00
Net Free Cash Flow	-$4,394,976
Free cash flow yield per share	-7.29%
Debt / EBITDA multiple	0.00
sales growth rate	264.67%
(Glossary of terms)

(Source)

Commentary on Tenon’s IPO

TNON is seeking funding from the US public capital market for its continued commercialization and R&D efforts.

From a tiny base, the company’s financial metrics have produced increasing revenue, growing gross profit and gross margin, much higher operating losses, and high cash burn for operations.

Free cash flow for the twelve months ended December 31, 2021 was negative ($4.4 million).

Sales and marketing expenses have risen sharply in relation to total sales as sales have grown only slightly; its sales and marketing efficiency multiple was 0.1x in 2021.

The company currently plans not to pay dividends on its shares and anticipates using future earnings to reinvest in the company’s growth efforts.

The market opportunity for Low Back Pain Treatment is large and is expected to grow at a moderate growth rate while there are significant key players as competitors.

The benchmark company is the leading underwriter and the IPOs it has managed over the past 12 months have generated an average negative return (29.6%) since its IPO. This is a lower performance for all major underwriters over the period.

The main risk to the company’s stock is that it will likely need additional capital to continue with its plans. So in the absence of significant upside catalysts, the stock can be diluted as equity subscribes.

In terms of valuation, the IPO seems perfectly valued with a suggested EV/sales of almost 224x.

Given the expensive nature of the IPO, I’m waiting for it.

Estimated IPO Price Date: To be announced.