10-Q
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"333

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

Form 10-Q

 

(Mark one)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2024

 

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from___ to___

Commission file number: 001-40355

 

Treace Medical Concepts, Inc.

 

(Exact name of registrant as specified in its charter)

 

 

Delaware

47-1052611

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

100 Palmetto Park Place

Ponte Vedra, Florida 32081

(Address of principal executive offices, including zip code)

 

(904) 373-5940

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common stock, $0.001 par value

TMCI

The Nasdaq Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

As of May 1, 2024, 62,008,135 shares of the registrant’s common stock, $0.001 par value per share, were outstanding.

 

 


 

TREACE MEDICAL CONCEPTS, INC.

 

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2024

 

Table of Contents

 

Part I: Financial Information

Item 1.

Condensed Financial Statements

3

 

Condensed Balance Sheets

3

 

Condensed Statements of Operations and Comprehensive Loss

4

 

Condensed Statements of Stockholders' Equity (Deficit)

5

 

Condensed Statements of Cash Flows

6

 

Notes to Condensed Financial Statements

7

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

16

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

24

Item 4.

Controls and Procedures

24

 

 

Part II: Other Information

 

Item 1.

Legal Proceedings

26

Item 1A.

Risk Factors

26

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

26

Item 3.

Defaults Upon Senior Securities

26

Item 4.

Mine Safety Disclosures

26

Item 5.

Other Information

26

Item 6.

Exhibits

26

 

Signatures

28

 

 


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

As used in this Quarterly Report on Form 10-Q ("Quarterly Report"), unless expressly indicated or the context otherwise requires, references to "Treace Medical Concepts," "we," "us," "our," or the "Company," refer to Treace Medical Concepts, Inc. This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as codified in Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business, operations and financial performance and condition. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "anticipate," "assume," "believe," "contemplate," "continue," "could," "due," "estimate," "expect," "goal," "intend," "may," "objective," "plan," "predict," "potential," "positioned," "seek," "should," "target," "will," "would" and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology.

These forward-looking statements include, but are not limited to, statements about:

the expected use of our products by physicians;
the expected growth of our business and our organization;
the extensive competition in our industry and new product introductions from other industry participants, both in the Lapidus market and the minimally invasive osteotomy market;
our ability to effectively respond to and mitigate the impact of challenges in the current market environment, including in response to increased competition;
the anticipated pace of growth in the foot and ankle market and our ability to increase our market share;
our ability to control and reduce expenses to help offset potential changes in revenue growth rates and other events;
our ability to maintain sufficient balance sheet strength and flexibility to continue executing on our strategic investments and growth initiatives for the foreseeable future;
our plans and expected timeline related to our products, or developing or acquiring new products, to address additional indications or otherwise;
our anticipated future product launches and the timing and market acceptance of such product launches;
expected seasonality;
our expectations regarding government and third-party payor coverage and reimbursement;
the economic success and viability of the hospitals, ambulatory surgery centers and other health care facilities and surgeons that use our products;
the impact of a bankruptcy filing by any of our customers;
our estimates of our expenses, ongoing losses, future revenue, capital requirements and our need for, or ability to obtain, additional financing;
our expected uses of our existing cash, cash equivalents and marketable securities and the sufficiency of such resources to fund our planned operations;
our ability to retain and recruit key personnel, including the continued development of a sales and marketing infrastructure;
our ability to obtain an adequate supply of materials and components for our products from our third-party suppliers, some of which are single-source suppliers;
our ability to obtain and maintain intellectual property protection for our products;
our ability to protect and enforce our intellectual property, and the time and expense involved in monitoring unauthorized uses of our intellectual property;

1


 

our ability to successfully defend against infringement of our intellectual property by third parties, including our competitors;
our ability to accurately forecast our future results of operations and financial goals or targets, including as a result of fluctuations in demand for our products and increased competition;
our ability to realize the anticipated benefits of our acquisitions, including the acquisition of MIOS Marketing, LLC d/b/a RedPoint Medical3D ("RPM-3D") assets, as rapidly or to the extent anticipated, if at all;
our ability to obtain, maintain and expand regulatory clearances for our products and any new products we develop or acquire;
our ability to expand our business in current and new geographic markets;
our compliance with Nasdaq requirements and government laws, rules and regulations;
the impact of inflationary pressures, interest rate changes, and general economic conditions on our business;
the impact of geopolitical tensions and international conflicts on the economy and our business;
our plans to conduct further clinical studies;
the impact of failures, defaults or instability of financial institutions where we have cash accounts; and
the effect of any infectious disease outbreak and its impact or potential impact on our business.

We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control and that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. These forward-looking statements are based on management's current expectations, estimates, forecasts and projections about our business and the industry in which we operate, and management's beliefs and assumptions, and are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors many of which are beyond our control. As a result, any or all of our forward-looking statements in this Quarterly Report may turn out to be inaccurate. Factors that may cause actual results to differ materially from current expectations include, among other things, those set forth in our Annual Report on Form 10-K for the year ended December 31, 2023 and any subsequent Quarterly Reports on Form 10-Q filed with the U.S. Securities and Exchange Commission ("SEC"), and this Quarterly Report under "Risk Factors" and elsewhere in this Quarterly Report. Our stockholders are urged to consider these factors carefully in evaluating the forward-looking statements.

These forward-looking statements speak only as of the date of this Quarterly Report. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report to conform these statements to actual results or to changes in our expectations. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

You should read this Quarterly Report and the documents that we reference in this Quarterly Report and have filed with the SEC as exhibits to this Quarterly Report with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

2


 

PART I—FINANCIAL INFORMATION

Item 1. Condensed Financial Statements.

TREACE MEDICAL CONCEPTS, INC.

Condensed Balance Sheets

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2024

 

 

2023

 

Assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

9,334

 

 

$

12,982

 

Marketable securities, short-term

 

 

100,672

 

 

 

110,216

 

Accounts receivable, net of allowance for doubtful accounts of $1,076 and $980 as of March 31, 2024 and December 31, 2023, respectively

 

 

30,083

 

 

 

38,063

 

Inventories

 

 

35,860

 

 

 

29,245

 

Prepaid expenses and other current assets

 

 

11,448

 

 

 

7,853

 

Total current assets

 

 

187,397

 

 

 

198,359

 

Property and equipment, net

 

 

24,517

 

 

 

22,298

 

Intangible assets, net of accumulated amortization of $713 and $475 as of March 31, 2024 and December 31, 2023, respectively

 

 

8,787

 

 

 

9,025

 

Goodwill

 

 

12,815

 

 

 

12,815

 

Operating lease right-of-use assets

 

 

9,064

 

 

 

9,264

 

Other non-current assets

 

 

146

 

 

 

146

 

Total assets

 

$

242,726

 

 

$

251,907

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable

 

$

21,149

 

 

$

11,835

 

Accrued liabilities

 

 

15,155

 

 

 

10,458

 

Accrued commissions

 

 

5,527

 

 

 

10,759

 

Accrued compensation

 

 

4,196

 

 

 

7,549

 

Other liabilities

 

 

1,022

 

 

 

4,432

 

Total current liabilities

 

 

47,049

 

 

 

45,033

 

Long-term debt, net of discount of $917 and $992 as of March 31, 2024 and December 31, 2023, respectively

 

 

53,083

 

 

 

53,008

 

Operating lease liabilities, net of current portion

 

 

16,166

 

 

 

15,891

 

Other long-term liabilities

 

 

37

 

 

 

37

 

Total liabilities

 

 

116,335

 

 

 

113,969

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

Preferred stock, $0.001 par value, 5,000,000 shares authorized as of March 31, 2024 and December 31, 2023; 0 shares issued and outstanding as of March 31, 2024 and December 31, 2023

 

 

 

 

 

 

Common stock, $0.001 par value, 300,000,000 shares authorized; 61,948,776 and 61,749,654 issued, and 61,929,172 and 61,749,654 outstanding as of March 31, 2024 and December 31, 2023, respectively

 

 

62

 

 

62

 

Additional paid-in capital

 

 

279,433

 

 

 

271,973

 

Accumulated deficit

 

 

(152,923

)

 

 

(134,247

)

Accumulated other comprehensive (loss) income

 

 

69

 

 

 

163

 

Treasury stock, at cost; 19,604 and 1,218 shares as of March 31, 2024 and December 31, 2023, respectively

 

 

(250

)

 

 

(13

)

Total stockholders’ equity

 

 

126,391

 

 

 

137,938

 

Total liabilities and stockholders’ equity

 

$

242,726

 

 

$

251,907

 

The accompanying notes are an integral part of these financial statements.

3


 

TREACE MEDICAL CONCEPTS, INC.

Condensed Statements of Operations and Comprehensive Loss

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

Revenue

 

$

51,108

 

 

$

42,195

 

Cost of goods sold

 

 

10,127

 

 

 

8,039

 

Gross profit

 

 

40,981

 

 

 

34,156

 

Operating expenses

 

 

 

 

 

 

Sales and marketing

 

 

40,328

 

 

 

33,655

 

Research and development

 

 

5,259

 

 

 

3,412

 

General and administrative

 

 

14,362

 

 

 

10,865

 

Total operating expenses

 

 

59,949

 

 

 

47,932

 

Loss from operations

 

 

(18,968

)

 

 

(13,776

)

Interest income

 

 

1,535

 

 

 

1,479

 

Interest expense

 

 

(1,317

)

 

 

(1,285

)

Other income, net

 

 

74

 

 

 

128

 

Other non-operating income (expense), net

 

 

292

 

 

 

322

 

Net loss

 

$

(18,676

)

 

$

(13,454

)

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

Unrealized gain (loss) on marketable securities

 

 

(94

)

 

 

(29

)

Comprehensive loss

 

$

(18,770

)

 

$

(13,483

)

 

 

 

 

 

 

 

Net loss per share attributable to common stockholders, basic and diluted

 

$

(0.30

)

 

$

(0.23

)

Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted

 

 

61,792,788

 

 

 

58,723,760

 

The accompanying notes are an integral part of these financial statements.

4


 

TREACE MEDICAL CONCEPTS, INC.

Condensed Statements of Stockholders’ Equity

(in thousands, except share amounts)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

 

 

 

 

Total

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

Comprehensive

 

 

Treasury

 

 

Stockholders’

 

 

Outstanding Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income (Loss)

 

 

Stock

 

 

Equity

 

Balances at December 31, 2023

 

61,749,654

 

 

$

62

 

 

$

271,973

 

 

$

(134,247

)

 

$

163

 

 

$

(13

)

 

$

137,938

 

Issuance of common stock upon exercise of stock options

 

20,294

 

 

 

 

 

 

52

 

 

 

 

 

 

 

 

 

 

 

 

52

 

Issuance of common stock for vesting of restricted stock units

 

177,610

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 

 

 

 

7,408

 

 

 

 

 

 

 

 

 

 

 

 

7,408

 

Net loss

 

 

 

 

 

 

 

 

 

 

(18,676

)

 

 

 

 

 

 

 

 

(18,676

)

Unrealized loss on available-for-sale marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

(94

)

 

 

 

 

 

(94

)

Shares directly withheld from employees for tax payment

 

(18,386

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(237

)

 

 

(237

)

Balances at March 31, 2024

 

61,929,172

 

 

$

62

 

 

$

279,433

 

 

$

(152,923

)

 

$

69

 

 

$

(250

)

 

$

126,391

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2022

 

55,628,208

 

 

$

55

 

 

$

145,221

 

 

$

(84,720

)

 

$

(27

)

 

$

 

 

$

60,529

 

Issuance of common stock upon exercise of stock options

 

125,890

 

 

 

 

 

 

352

 

 

 

 

 

 

 

 

 

 

 

 

352

 

Issuance of common stock for vesting of restricted stock units

 

50,415

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 

 

 

 

2,692

 

 

 

 

 

 

 

 

 

 

 

 

2,692

 

Issuance of common stock from public offering, net of issuance costs and underwriting discount of $7.5 million

 

5,476,190

 

 

 

6

 

 

 

107,521

 

 

 

 

 

 

 

 

 

 

 

 

107,527

 

Net loss

 

 

 

 

 

 

 

 

 

 

(13,454

)

 

 

 

 

 

 

 

 

(13,454

)

Unrealized loss on available-for-sale marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

(29

)

 

 

 

 

 

(29

)

Balances at March 31, 2023

 

61,280,703

 

 

$

61

 

 

$

255,786

 

 

$

(98,174

)

 

$

(56

)

 

$

 

 

$

157,617

 

The accompanying notes are an integral part of these financial statements.

5


 

TREACE MEDICAL CONCEPTS, INC.

Condensed Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

Cash flows from operating activities

 

 

 

 

 

 

Net loss

 

$

(18,676

)

 

$

(13,454

)

Adjustments to reconcile net loss to net cash used in operating
   activities

 

 

 

 

 

 

Depreciation and amortization expense

 

 

1,909

 

 

 

924

 

Provision for allowance for doubtful accounts

 

 

159

 

 

 

38

 

Share-based compensation expense

 

 

7,408

 

 

 

2,692

 

Non-cash lease expense

 

 

592

 

 

 

626

 

Amortization of debt issuance costs

 

 

75

 

 

 

74

 

Recovery of loss reserve for surgical instruments

 

 

 

 

 

(23

)

Accretion (amortization) of discount (premium) on marketable securities, net

 

 

(335

)

 

 

(297

)

Other, net

 

 

90

 

 

 

 

Net changes in operating assets and liabilities, net of acquisitions

 

 

 

 

 

 

Accounts receivable

 

 

7,821

 

 

 

3,793

 

Inventory

 

 

(6,615

)

 

 

(3,189

)

Prepaid expenses and other assets

 

 

(1,495

)

 

 

(963

)

Other non-current assets

 

 

 

 

 

(69

)

Payable to broker for unsettled marketable security purchases

 

 

 

 

 

710

 

Operating lease liabilities

 

 

(657

)

 

 

(478

)

Accounts payable

 

 

9,314

 

 

 

(3,592

)

Accrued liabilities

 

 

(6,918

)

 

 

(4,076

)

Other, net

 

 

107

 

 

 

25

 

Net cash used in operating activities

 

 

(7,221

)

 

 

(17,259

)

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

Purchases of available-for-sale marketable securities

 

 

(28,711

)

 

 

(99,550

)

Sales and maturities of available-for-sale marketable securities

 

 

36,396

 

 

 

20,548

 

Purchases of property and equipment

 

 

(3,927

)

 

 

(1,478

)

Net cash provided by (used in) investing activities

 

 

3,758

 

 

 

(80,480

)

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

Proceeds from issuance of common stock from public offering, net of issuance costs and underwriting discount of $7.5 million and $10.6 million

 

 

 

 

 

107,527

 

Proceeds from exercise of employee stock options

 

 

52

 

 

 

352

 

Taxes from withheld shares

 

 

(237

)

 

 

 

Net cash provided by (used in) financing activities

 

 

(185

)

 

 

107,879

 

Net increase (decrease) in cash and cash equivalents

 

 

(3,648

)

 

 

10,140

 

Cash and cash equivalents at beginning of period

 

 

12,982

 

 

 

19,473

 

Cash and cash equivalents at end of period

 

$

9,334

 

 

$

29,613

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

Cash paid for interest

 

$

1,317

 

 

$

1,285

 

Operating lease right-of-use asset and lease liability adjustment due to lease incentive

 

$

 

 

$

(35

)

Noncash investing activities

 

 

 

 

 

 

Unrealized (gains) losses, net on marketable securities

 

$

94

 

 

$

29

 

Unsettled matured marketable security and receivable from broker

 

$

2,100

 

 

$

 

The accompanying notes are an integral part of these financial statements.

6


 

TREACE MEDICAL CONCEPTS, INC.

Notes to Condensed Financial Statements

(unaudited)

1. Formation and Business of the Company

The Company

Treace Medical Concepts, LLC was formed on July 29, 2013, as a Florida limited liability company. Effective July 1, 2014, the entity converted to a Delaware corporation and changed its name to Treace Medical Concepts, Inc. (the "Company"). The Company is a medical technology company with the goal of advancing the standard of care for the surgical management of bunion and related midfoot deformities. The Company received 510(k) clearance for the Lapiplasty System in March 2015 and began selling its surgical medical devices in September 2015. The Company has pioneered the proprietary Lapiplasty 3D Bunion Correction System – a combination of instruments, implants and surgical methods designed to surgically correct all three planes of the bunion deformity and secure the unstable joint, addressing the root cause of the bunion. In addition, the Company offers advanced instrumentation and implants for use in other procedures performed in high frequency with bunion surgery. The Company operates from its corporate headquarters located in Ponte Vedra, Florida.

Initial Public Offering and Follow-on Offering

On April 27, 2021, the Company completed its initial public offering ("IPO"). The Company received net proceeds of $107.6 million from the IPO. On February 10, 2023, the Company completed a follow-on offering that resulted in net proceeds of $107.5 million.

Acquisition of RedPoint Medical3D

On June 12, 2023 (the "closing date"), the Company acquired certain assets of MIOS Marketing, LLC d/b/a RedPoint Medical3D ("RPM-3D"), a medical technology company offering pre-operative planning and patient-specific guides designed to deliver accurate surgical correction of deformities tailored to the patient's unique foot anatomy. RPM-3D's 22 patent applications further expand and reinforce the Company's global intellectual property portfolio covering technologies for the correction of bunion and related deformities.

The Company paid $20.0 million in exchange for certain assets used in providing pre-operative planning and patient-specific guides for the surgical correction of foot and ankle deformities and agreed to make additional payments upon completion of certain milestones. The original terms are as follows: $3.5 million upon completion of certain transition services at 12 months from the closing date, $3.5 million upon completion of certain technological advancements milestone within 12 months of the closing date, and, subject to prior completion of the transition services and the technological advancements milestone, up to $3.0 million upon the issuance of certain patent claims. Payments made for the transition services and patent claims require satisfaction of such milestones, as well as the continued service of key individuals.

In the first quarter of 2024, the Company and RPM-3D evaluated the status of the three milestones and amended the original terms associated with the milestone payments. The maximum amount to be paid upon the achievement of the milestone payments has been reduced from $10.0 million to $8.1 million and is subject to successful completion of the transition services milestone at the first anniversary date of the acquisition. Upon successful completion of the transition services milestone, the payments are scheduled as follows: $6.0 million on July 15, 2024 and $2.1 million on January 15, 2025. No milestone payments would be made if the transition services milestone is not achieved by the acquisition anniversary date.

2. Summary of Significant Accounting Policies

The Company prepared the unaudited interim condensed financial statements included in this report in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and the rules and regulations of the Securities and Exchange Commission ("SEC") related to quarterly reports on Form 10-Q.

Basis of Presentation

The condensed financial statements have been prepared on the same basis as the Company’s annual financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on February 27, 2024. The condensed financial statements included herein reflect all adjustments, including normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 2024 are

7


 

not necessarily indicative of the results that may be expected for future quarters or for the fiscal year ending December 31, 2024.

Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification ("ASC") and Accounting Standards Updates ("ASU") of the Financial Accounting Standards Board ("FASB").

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may ultimately materially differ from these estimates and assumptions.

Significant estimates and assumptions include valuation of intangible assets and goodwill, reserves and write-downs related to accounts receivable, inventories, the recoverability of long-term assets, deferred tax assets and related valuation allowances, contingencies, and stock-based compensation. The Company had no accrued contingent liabilities as of March 31, 2024 and December 31, 2023.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of risk consist principally of cash, cash equivalents, marketable securities, and accounts receivable. The Company maintains its cash and cash equivalents balances with established financial institutions and, at times, such balances with any one financial institution may be in excess of the Federal Deposit Insurance Corporation ("FDIC") insured limits. The Company's available-for-sale securities portfolio primarily consists of U.S. treasury and agency securities, money market funds, commercial paper, Yankee CDs, high credit quality asset-backed securities and corporate debt securities. The Company's investment policy requires its available-for-sale securities to meet certain criteria including investment type, credit ratings, and a maximum portfolio duration of one year. If any of the financial institutions where the Company holds deposits were to fail or be taken over by the FDIC, its access to these accounts could be temporarily unavailable or permanently lost for the amounts in excess of the FDIC insured limits. The Company did not have material cash deposits in excess of the FDIC insured limits at March 31, 2024.

The Company earns revenue from the sale of its products to customers such as hospitals and ambulatory surgery centers. The Company’s accounts receivable is derived from revenue earned from customers. On March 31, 2024 and December 31, 2023, no customer accounted for more than 10% of accounts receivable. For the three months ended March 31, 2024 and 2023, there were no customers that represented 10% or more of revenue.

 

Accounts receivable as of March 31, 2024 includes $2.0 million, prior to an allowance for credit losses, due from a customer that has filed for bankruptcy in May 2024. The Company is assessing the impact of the bankruptcy filing related to this accounts receivable and its relationship with this customer. While the Company maintains an allowance for doubtful accounts, there can be no assurance that this receivable will be timely collected, if at all, or that the current allowance for doubtful accounts will be adequate to offset the credit risk related to this matter, and no assurance that the Company will have an ongoing relationship with this customer.

3. Recent Accounting Pronouncements

Recent Accounting Pronouncements Not Yet Adopted

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) ("ASC 280"). The update requires all public business entities to identify their reportable segments, including the basis of organization, types of products and services from which each reportable segment derives its revenues, and the title and position of the individual or the name of the group or committee identified as the chief operating decision maker ("CODM") and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. Public entities shall disclose on an annual and interim basis for each reportable segment including entities that only have one reportable segment, certain significant expense categories and amounts that are regularly provided to the CODM and included in reported segment profit or loss. ASC 280 is applied retrospectively to all prior periods presented in the financial statements. This new guidance is effective for fiscal years beginning after December 15, 2023, and interim periods

8


 

within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact of the new standard on its financial statements and related disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740) ("ASC 740"). The update requires all public business entities on an annual basis to (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold and an explanation, if not otherwise evident, of the individual reconciling items disclosed, such as the nature, effect, and underlying causes of the reconciling items and the judgment used in categorizing the reconciling items. In addition, the update requires certain new disclosures of the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions in which income taxes paid is equal to or greater than five percent of total income taxes paid (net of refunds received). Other new disclosures required include income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign. The new guidance is effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The amendments are to be applied on a prospective basis, with retrospective application permitted. The Company is currently evaluating the impact of the new standard on its financial statements and related disclosures.

4. Fair Value Measurements

Assets and liabilities recorded at fair value in the condensed financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels which are directly related to the amount of subjectivity associated with the inputs to the valuation of these assets or liabilities are as follows:

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.

Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.

Level 3—Unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis – The following assets and liabilities are measured at fair value on a recurring basis as of March 31, 2024 and December 31, 2023 (in thousands):

 

 

 

March 31, 2024

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

4,562

 

 

$

 

 

$

 

 

$

4,562

 

Short-term marketable securities at fair value

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury and government agencies

 

 

19,779

 

 

 

5,275

 

 

 

 

 

 

25,054

 

Commercial paper

 

 

 

 

 

1,933

 

 

 

 

 

 

1,933

 

Corporate debt

 

 

 

 

 

44,486

 

 

 

 

 

 

44,486

 

Asset-backed securities

 

 

 

 

 

23,042

 

 

 

 

 

 

23,042

 

Yankee CD

 

 

 

 

 

6,157

 

 

 

 

 

 

6,157

 

Total assets

 

$

24,341

 

 

$

80,893

 

 

$

 

 

$

105,234

 

 

9


 

 

December 31, 2023

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

3,160

 

 

$

 

 

$

 

 

$

3,160

 

Short-term marketable securities at fair value

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury and government agencies

 

 

14,005

 

 

 

15,364

 

 

 

 

 

 

29,369

 

Commercial paper

 

 

 

 

 

2,895

 

 

 

 

 

 

2,895

 

Corporate debt

 

 

 

 

 

46,586

 

 

 

 

 

 

46,586

 

Asset-backed securities

 

 

 

 

 

24,756

 

 

 

 

 

 

24,756

 

Yankee CD

 

 

 

 

 

6,610

 

 

 

 

 

 

6,610

 

Total assets

 

$

17,165

 

 

$

96,211

 

 

$

 

 

$

113,376

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

 

$

 

 

$

2,977

 

 

$

2,977

 

Total liabilities

 

$

 

 

$

 

 

$

2,977

 

 

$

2,977

 

The carrying amounts of the Company's money market funds classified as cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities, approximate their fair value due to the short-term nature of these assets and liabilities. Based on the borrowing rates currently available to the Company for debt with similar terms and consideration of default and credit risk, the carrying value of the term loan approximates fair value.

The Company's available-for-sale securities portfolio consists of investments in U.S. treasury and government agency securities, commercial paper, corporate debt securities, asset-backed securities, and Yankee CDs. Yankee CDs are certificates of deposit issued in the United States by a branch of a foreign bank and are denominated in U.S. dollars. The fair value of Level 1 securities is determined on trade prices in active markets for identical assets. The fair value of Level 2 securities is determined using valuation models using inputs that are observable either directly or indirectly, such as quoted prices for similar assets, interest rates, yield curves, credit spreads, default rates, loss severity, broker and dealer quotes, as well as other relevant economic measures. The Level 3 contingent consideration was recorded at fair value on the date of the acquisition and thereafter based on the consideration expected to be transferred on the projected payment date estimated as the probability weighted future cash flows, discounted back to the present value. This calculation uses unobservable inputs that reflect the Company's own assumptions as to the ability of the acquired business to meet the targeted benchmarks and the discount rate used in the determination of fair value.

 

Fair value as of December 31, 2023

 

$

2,977

 

Change in fair value prior to contract modification

 

 

53

 

Reclassification of contingent consideration due to contract modification

 

 

(3,030

)

Fair value as of March 31, 2024

 

$

-

 

Contingent consideration is included in other liabilities on the Condensed Balance Sheets. As of December 31, 2023, the balance was classified as current due to the timing of the expected payment and the change in fair value for the contingent consideration related to the technological advancements milestone payment was classified as research and development expense within the Condensed Statements of Operations and Comprehensive Loss. The Company has made no cash payments for contingent consideration since the acquisition date.

During the first quarter of 2024, the Company renegotiated with RPM-3D the terms for payment of the technological advancements milestone that was initially accounted for as contingent consideration. The renegotiated contract specifies that the technological advancements milestone payment will not be paid unless the transition services milestone is achieved. The technological advancements milestone payment is now tied to the continued service of key individuals from the date of the new contract until the transition services milestone determination date (which is the first anniversary date of the acquisition). Therefore, the Company is no longer accounting for the technological advancements milestone payment as contingent consideration at fair value, but rather as research and development expense over the remaining service period. The Company expects to pay the full amount for the technological advancements milestone of $3.5 million. See Note 1, "Formation and Business of the Company," of the Notes to Condensed Financial Statements for additional information on the acquisition of RPM-3D.

There were no assets or liabilities measured at fair value on a nonrecurring basis as of March 31, 2024 and December 31, 2023.

10


 

5. Balance Sheet Components

Cash and Cash Equivalents

The Company’s cash and cash equivalents consisted of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2024

 

 

2023

 

Cash

 

$

4,772

 

 

$

9,822

 

Cash equivalents:

 

 

 

 

 

 

Money market funds

 

 

4,562

 

 

 

3,160

 

Total cash and cash equivalents

 

$

9,334

 

 

$

12,982

 

Marketable Securities

The Company's available-for-sale marketable securities consisted of the following (in thousands):

 

 

 

March 31, 2024

 

 

 

Amortized Cost

 

 

Gross Unrealized Gains

 

 

Gross Unrealized Losses

 

 

Fair Value

 

Marketable securities - short-term

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury and government agencies

 

$

25,069

 

 

$

2

 

 

$

(17

)

 

$

25,054

 

Commercial paper

 

 

1,933

 

 

 

-

 

 

 

-

 

 

 

1,933

 

Corporate debt

 

 

44,438

 

 

 

73

 

 

 

(25

)

 

 

44,486

 

Asset-backed securities

 

 

23,007

 

 

 

54

 

 

 

(19

)

 

 

23,042

 

Yankee CD

 

 

6,156

 

 

 

2

 

 

 

(1

)

 

 

6,157

 

Total marketable securities - short-term

 

$

100,603

 

 

$

131

 

 

$

(62

)

 

$

100,672

 

 

 

 

December 31, 2023

 

 

 

Amortized Cost

 

 

Gross Unrealized Gains

 

 

Gross Unrealized Losses

 

 

Fair Value

 

Marketable securities - short-term

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury and government agencies

 

$

29,377

 

 

$

8

 

 

$

(16

)

 

$

29,369

 

Commercial paper

 

 

2,893

 

 

 

2

 

 

 

 

 

 

2,895

 

Corporate debt

 

 

46,467

 

 

 

123

 

 

 

(4

)

 

 

46,586

 

Asset-backed securities

 

 

24,712

 

 

 

56

 

 

 

(12

)

 

 

24,756

 

Yankee CD

 

 

6,604

 

 

 

7

 

 

 

(1

)

 

 

6,610

 

Total marketable securities - short-term

 

$

110,053

 

 

$

196

 

 

$

(33

)

 

$

110,216

 

As of March 31, 2024, there were no available-for-sale securities with unrealized losses greater than 12 months. There was not an allowance for credit losses required as of March 31, 2024 and December 31, 2023.

As of March 31, 2024, the Company had no plans to sell securities with unrealized losses, and believes it is more likely than not that it would not be required to sell such securities before recovery of their amortized cost. For the three months ended March 31, 2024 and 2023, there were no material gains or losses from sales of available-for-sale securities.

As of March 31, 2024 and December 31, 2023, accrued interest of $1.0 million and $1.0 million, respectively, is excluded from the amortized cost basis of available-for-sale securities in the tables above and is recorded in prepaid expenses and other current assets on the Condensed Balance Sheets.

As of March 31, 2024, all marketable securities mature within two years, except for asset-backed securities. Asset-backed securities are not due at a single maturity date. As such, these securities were not included.

11


 

Property and equipment, net

The Company’s property and equipment, net consisted of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2024

 

 

2023

 

Furniture and fixtures, and equipment

 

$

2,564

 

 

$

2,494

 

Construction in progress

 

 

388

 

 

 

1,115

 

Machinery and equipment

 

 

2,711

 

 

 

2,423

 

Capitalized surgical equipment

 

 

17,726

 

 

 

14,253

 

Computer equipment

 

 

1,055

 

 

 

1,020

 

Leasehold improvements

 

 

10,097

 

 

 

9,425

 

Software

 

 

395

 

 

 

316

 

Total property and equipment

 

 

34,936

 

 

 

31,046

 

Less: accumulated depreciation and amortization

 

 

(10,419

)

 

 

(8,748

)

Property and equipment, net

 

$

24,517

 

 

$

22,298

 

Depreciation and amortization expense on property and equipment was $1.7 million and $0.9 million for the three months ended March 31, 2024 and 2023, respectively.

The Company did not record impairment charges for its property and equipment, net for the three months ended March 31, 2024 and 2023.

Accrued liabilities

Accrued liabilities consist of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2024

 

 

2023

 

Accrued royalties expense

 

$

1,860

 

 

$

2,305

 

Accrued interest

 

 

425

 

 

 

417

 

Accrued professional services

 

 

774

 

 

 

424

 

Accrued compensation expense for RPM-3D earn-out

 

 

7,602

 

 

 

3,340

 

Other accrued expense

 

 

4,494

 

 

 

3,972

 

Total accrued liabilities

 

$

15,155

 

 

$

10,458

 

Other liabilities

Other liabilities consist of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2024

 

 

2023

 

Current portion of operating lease liabilities

 

$

864

 

 

$

1,404

 

Contingent consideration

 

 

 

 

 

2,977

 

Other

 

 

158

 

 

 

51

 

Total other liabilities

 

$

1,022

 

 

$

4,432

 

 

Due to renegotiated terms, the Company is no longer classifying the technological advancements milestone as contingent consideration. See discussion of RPM3-D renegotiation in Note 4, "Fair Value Measurements," of the Notes to Condensed Financial Statements.

12


 

6. Long-Term Debt

The Company’s long-term debt consisted of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2024

 

 

2023

 

Revolving line of credit

 

 

 

 

 

 

MidCap revolving loan facility

 

$

4,000

 

 

$

4,000

 

Term loans

 

 

 

 

 

 

MidCap term loan facility

 

 

50,000

 

 

 

50,000

 

Total term and revolving loans

 

 

54,000

 

 

 

54,000

 

Less: debt discount and issuance costs

 

 

(917

)

 

 

(992

)

Total long-term debt, net

 

$

53,083

 

 

$

53,008

 

As of March 31, 2024, future payments of long-term debt were as follows (in thousands):

 

Fiscal Year

 

 

 

2024

 

$

 

2025

 

 

 

2026

 

 

33,333

 

2027

 

 

20,667

 

Total principal payments

 

 

54,000

 

Less: Unamortized debt discount and debt issuance costs

 

 

(917

)

Total long-term debt, net

 

$

53,083

 

MidCap Loan and Revolving Loan Facility

On April 29, 2022, the Company entered into a five-year $150.0 million loan facility with entities affiliated with MidCap Financial Trust ("MidCap"), providing up to $120.0 million in a term loan facility and a $30.0 million revolving loan facility.

The term loan facility provides for a 60-month term loan up to $120.0 million in borrowing capacity to the Company, over four tranches. At term loan closing, the Company drew $50.0 million under tranche one. At December 31, 2023, tranche two for $30.0 million expired. The remaining tranches provide up to an additional $40.0 million in borrowing capacity in the aggregate, subject to the achievement of certain revenue targets for the third and fourth tranches.

The revolving loan facility provides up to $30.0 million in borrowing capacity to the Company based on the borrowing base. The borrowing base is calculated based on certain accounts receivable and inventory assets. On March 31, 2024, the borrowing base allows a total of $20.2 million available to the Company under the revolving loan facility. The balance drawn as of March 31, 2024 is $4.0 million under the revolving loan facility. The Company may request an increase in the revolving loan facility up to $20.0 million for a total commitment of up to $50.0 million. The Company is required to either (i) maintain a minimum drawn balance under the revolving loan facility or (ii) pay a minimum balance fee that is equal to the amount of the minimum balance deficit multiplied by the applicable interest rate during the period. If the outstanding balance under the revolving loan facility exceeds the lesser of (i) 50% of the revolving borrowing capacity or (ii) 50% of the borrowing base, or the Company is in default, MidCap will apply funds collected from the Company's lockbox account to reduce the outstanding balance of the revolving loan facility ("Lockbox Deductions"). As of March 31, 2024, the Company's borrowing level has not activated the Lockbox Deductions, nor is it expected to for the next 12 months; therefore, the Company has determined that the revolving loan balance is long-term debt.

The loans bear interest at an annual rate based on a 30-day forward looking secured overnight financing rate plus 0.10% (subject to a floor of 1.0% and a cap of 3.0% for both loan agreements) plus (i) 6.0% under the term loan agreement and (ii) 4.0% under the revolving loan facility. Interest is payable monthly in arrears on the first day of each month and on the maturity of the loan agreements. The term loan and the revolving loan facility are accruing interest as of March 31, 2024 at the capped interest rates of 9% and 7%, respectively. The Company is obligated to pay interest only for the first 48 months and straight-line amortization for the remaining 12 months, subject to the Company’s election to extend the initial interest-only period by 12 months to 60 months total if the Company’s trailing twelve-month revenue is at or above certain levels. If the term loan is repaid before the maturity date or the revolving loan facility is terminated before the end of its term, the prepayment fees are 3.0% of the amount repaid in the first year, 2.0% in the second year and 1.0% in the third year and thereafter, and a final payment fee of 3.0% of the amount borrowed is due under the term loan. The revolving loan facility prepayment fees are based on the revolving loan commitment amount.

13


 

The loans are secured by substantially all of the Company’s assets, including intellectual property. The loan agreements and other ancillary documents contain customary representations and warranties and affirmative and negative covenants. Under the loan agreements, the Company is not required to meet any minimum level of revenue if liquidity (defined as unrestricted cash plus undrawn availability under the revolving loan agreement) is greater than the outstanding balance under the term loan. If liquidity falls below such outstanding balance, then the Company is subject to a minimum trailing twelve-month revenue covenant. The Company is not subject to this covenant on March 31, 2024.

7. Commitments and Contingencies

License and Royalty Commitments

The Company has entered into product development and fee for service agreements with members of its Surgeon Advisory Board and other surgeon consultants that specify the terms under which the consultant is compensated for his or her consulting services and grants the Company rights to the intellectual property created by the consultant in the course of such services. As products are commercialized with the assistance of members of the Surgeon Advisory Board and other surgeon consultants, the Company may agree to enter into a royalty agreement if such consultant's contributions to the product are novel, significant and innovative. Each of the royalty agreements may be subsequently amended to add the license of additional intellectual property covering new products, and as a result, multiple royalty rates and duration of royalty payments may be included in one royalty agreement.

As of March 31, 2024 and 2023, the Company's royalty agreements provide for (i) royalty payments for 10 years from first commercial sale of the relevant product and (ii) a royalty rate for each such agreement ranging from 0.4% to 3.0% of net sales for the particular product to which the surgeon contributed. The Company recognized royalty expense of $1.7 million and $1.6 million for the three months ended March 31, 2024 and 2023, respectively, resulting in an aggregate royalty rate of 3.4% and 3.9%, for the three months ended March 31, 2024 and 2023, respectively.

Contingencies

From time to time, the Company may be a party to various litigation claims in the normal course of business. Legal fees and other costs associated with such actions are expensed as incurred. The Company assesses, in conjunction with legal counsel, the need to record a liability for litigation and contingencies. Accrual estimates are recorded when and if it is determinable that such a liability for litigation and contingencies are both probable and reasonably estimable. There were no accrued contingent liabilities as of March 31, 2024 and December 31, 2023.

8. Stockholders’ Equity

Stock Options

During the three months ended March 31, 2024 and 2023, the Company granted stock options to employees to purchase an aggregate of 619,400 and 727,650 shares of the Company’s common stock, respectively. The weighted-average grant-date fair value of the employee stock options granted during the three months ended March 31, 2024 and 2023 was $5.98 and $10.58 per share, respectively.

Restricted Stock Units

During the three months ended March 31, 2024 and 2023, the Company granted 1,426,015 and 571,565 restricted stock units ("RSUs"), respectively. The weighted average grant-date fair value of RSUs granted during the three months ended March 31, 2024 and 2023 was $13.39 and $24.07, respectively.

Performance Share Units

The Company granted performance-based restricted stock unit ("PSU") awards in the first quarter of 2024 subject to market and service vesting conditions to certain executives under the Company's 2021 Incentive Award Plan. The actual number of PSUs that will vest at the end of the measurement period is determined based on the Company's total stockholder return ("TSR") ranking relative to the TSR of a published index of the Company's peers. The measurement period is three years. The grant date value of each target PSU award was determined using a Monte Carlo valuation model. Over the full three-year performance period, if the service vesting conditions are met, the actual number of PSUs earned may vary from zero, if performance thresholds are not met, to as much as 200% of target PSUs.

14


 

During the three months ended March 31, 2024 the Company granted 453,375 target PSUs. The weighted average grant-date fair value of the PSUs granted during the three months ended March 31, 2024 was $18.89.

Share-Based Compensation Expense

Share-based compensation expense is reflected in operating expenses in the Condensed Statements of Operations and Comprehensive Loss as follows (in thousands):

 

 

Three Months Ended March 31,

 

 

2024

 

 

2023

 

Cost of goods sold

$

90

 

 

$

76

 

Sales and marketing expense

 

1,697

 

 

 

822

 

Research and development expense

 

1,006

 

 

 

257

 

General and administrative expense

 

4,615

 

 

 

1,537

 

Total

$

7,408

 

 

$

2,692

 

 

9. Net Loss Per Share Attributable to Common Stockholders

The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders which is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. As the Company reported a net loss for the three months ended March 31, 2024 and 2023, basic net loss per share attributable to common stockholders was the same as diluted net loss per share attributable to common stockholders as the inclusion of potentially dilutive shares would have been antidilutive if included in the calculation (in thousands, except share and per share amounts):

 

 

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

Numerator

 

 

 

 

 

 

Net loss

 

$

(18,676

)

 

$

(13,454

)

Denominator

 

 

 

 

 

 

Weighted-average common stock outstanding,
   basic and diluted

 

 

61,792,788

 

 

 

58,723,760

 

Net loss per share attributable to common
   stockholders, basic and diluted

 

$

(0.30

)

 

$

(0.23

)

The following potentially dilutive securities outstanding have been excluded from the computation of diluted weighted average shares outstanding because such securities have an antidilutive impact due to the Company’s net loss, in common stock equivalent shares:

 

 

 

As of March 31,

 

 

 

2024

 

 

2023

 

Common stock options issued and outstanding

 

 

7,949,702

 

 

 

7,717,414

 

Unvested full value awards

 

 

2,545,925

 

 

 

1,086,697

 

Contingently issuable PSU shares

 

 

906,750

 

 

 

 

Total

 

 

11,402,377

 

 

 

8,804,111

 

 

15


 

Item 2. 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 condensed financial statements and related notes thereto included in this Quarterly Report on Form 10-Q (this "Quarterly Report") and our audited financial statements and related notes thereto for the year ended December 31, 2023, included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission ("SEC") on February 27, 2024 (our "Annual Report"). This discussion and other parts of this Quarterly Report contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report under "Part I, Item 1A—Risk Factors," and in the section titled "Risk Factors" and elsewhere in this Quarterly Report. Please also see the section of this Quarterly Report titled "Special Note Regarding Forward-Looking Statements."

Overview

We are a medical technology company with the goal of advancing the standard of care for the surgical management of bunion and related midfoot deformities. We have pioneered our proprietary Lapiplasty 3D Bunion Correction System—a combination of instruments, implants and surgical methods designed to surgically correct all three planes of the bunion deformity and secure the unstable joint, addressing the root cause of the bunion and helping patients get back to their active lifestyles. Although bunions are deformities typically caused by an unstable joint in the middle of the foot that leads to a three-dimensional ("3D") misalignment in the foot's anatomical structure, the majority of traditional surgical approaches focus on correcting the deformity from a two-dimensional ("2D") perspective and therefore fail to address the root cause of the disorder. To effectively restore the normal anatomy of bunion patients and improve clinical outcomes, we believe addressing the root cause of the bunion is critical and have developed the Lapiplasty System to correct the deformity across all three anatomic dimensions. Our other products often used in conjunction with bunion surgery include the Adductoplasty System, the Hammertoe PEEK Fixation System, the SpeedPlate Rapid Compression Implant System, and specialized osteotomes and release instruments.

We were formed in 2013, and since receiving 510(k) clearance for the Lapiplasty System in March 2015, we have sold more than 100,000 Lapiplasty Procedure kits in the United States. We market and sell our Lapiplasty Systems to physicians, surgeons, ambulatory surgery centers and hospitals. The Lapiplasty Procedure can be performed in either hospital outpatient or ambulatory surgery centers settings, and utilizes existing, well-established reimbursement codes. We currently market and sell the Lapiplasty System and other products through a combination of a direct employee sales force and independent sales agencies across the United States.

As of March 31, 2024, we had cash and cash equivalents of $9.3 million and marketable securities of $100.7 million available for sale to fund operations, an accumulated deficit of $152.9 million and $54.0 million of principal outstanding under our term loan and revolving loan agreements.

The Company previously provided certain key business metrics on a quarterly and annual basis that management reviewed as indicators of performance during our early stages of development. The Company is currently evaluating other operating and financial metrics at this time on an annual basis that will better track the progress of our business as the Company has expanded its products beyond Lapiplasty Procedure Kits.

Economic Environment

There is continuing uncertainty in the macro-economic environment. Inflationary pressures, interest rate changes, recession fears and reduced consumer confidence, and ongoing supply chain challenges have resulted, and may continue to result, in higher costs and longer lead times from suppliers and potentially reduced demand for our procedure kits and other products. General economic conditions may also negatively impact demand for elective surgeries. While we continuously work with suppliers to mitigate higher costs and longer lead times and continue to invest in our direct sales channel, patient education initiatives, clinical evidence and product innovations to build demand for our products, we expect these macro-economic challenges to continue for the foreseeable future, which likely will impact our results of operations.

16


 

Factors Affecting Our Business

We believe that our financial performance has been and in the foreseeable future, will continue to depend on many factors, including the macro-economic conditions as described above, those noted in our Annual Report, in the section titled "Special Note Regarding Forward-Looking Statements" and in the section titled "Risk Factors" and elsewhere in this Quarterly Report.

Adoption of the Lapiplasty System

The growth of our business depends on our ability to gain broader acceptance of the Lapiplasty System by successfully marketing and distributing the Lapiplasty System and ancillary products. While surgeon adoption of the Lapiplasty Procedure remains critical to supporting procedure growth, hospital and ambulatory surgery center facility approvals are necessary for both existing and future surgeon customers to access our products. To facilitate greater access to our products and support future sales growth, we intend to continue educating hospitals and facility administrators on the differentiated benefits associated with the Lapiplasty System, supported by our robust portfolio of clinical data. If we are unable to successfully continue to commercialize our Lapiplasty System, we may not be able to generate sufficient revenue to achieve or sustain profitability. In the near term, we expect we will continue to operate at a loss, and we anticipate we will finance our operations principally through the use of our cash and cash equivalents, marketable securities, and expected revenues. We may also raise funds by incurring debt and through offerings of our capital stock.

Increased Competition

Before we launched our flagship Lapiplasty system, there were no other products in the market that provided a 3D solution and specialized procedural instrumentation for these traditionally freehand, difficult Lapidus surgeries, which allowed us to capitalize on our pioneering technology and grow our market share quickly. We are experiencing increased competition from the accelerating adoption of minimally invasive osteotomy solutions and from new Lapidus products, which has, and may continue to, negatively impact our growth rates and market share.

Investments in Innovation and Growth

We expect to continue to focus on long-term revenue growth through investments in our business and new products. In sales and marketing, we are dedicating meaningful resources to continue to expand our sales force and management team in the United States, as well as our patient focused outreach and education campaigns.

In research and development, our team and surgeon consultants are continually working on next-generation innovations for the surgical correction of bunions and other conditions that often present with bunions. In 2021, we launched (1) the Lapiplasty Mini-Incision System, which is designed to allow the Lapiplasty Procedure to be performed through a miniature, 3.5cm incision as compared to the current 6cm to 8cm incision, and (2) the Adductoplasty System, which brings together our implants and instrumentation to provide a comprehensive system designed for reproducible realignment, stabilization, and fusion of the midfoot to address midfoot deformities that can occur in up to 30% of bunion patients. In 2022, we introduced (1) the 3-n-1 Guide, which combines three separate instruments and three procedure steps into one instrument and step, (2) the S4A plating system, which features advanced 3D contours designed to accommodate variations in patient anatomy, and (3) the SpeedRelease Instrument, which is a single-use instrument designed to make a challenging soft tissue release performed in the majority of Lapiplasty cases easier to perform and more reproducible for the surgeon. In 2023, in addition to the acquisition of the assets of RPM-3D, we began the market release of (1) the SpeedPlate fixation platform, which can be used in the Lapiplasty and Adductoplasty Procedures, as well as other common bone fusion procedures of the foot, (2) the Hammertoe PEEK Fixation System designed to address hammertoe, claw toe and mallet toe deformities, which often present concomitantly with bunions, and (3) LapiTome and RazorTome Osteotomes, which are sterile, single-use instruments that are designed to facilitate more efficient removal and release of bone slices and soft tissue in Lapiplasty and Adductoplasty cases.

In our general and administrative functions, we expect to support our anticipated growth in the Company. Accordingly, in the near term, we expect to have net losses from these activities, but in the longer term we anticipate they will positively impact our business and results of operations.

Seasonality

We have experienced and expect to continue to experience seasonality in our business, with higher sales volumes in the fourth calendar quarter, historically accounting for approximately 30% to 40% of full year revenues, and lower sales volumes in the subsequent first calendar quarter. Our sales volumes in the fourth quarter tend to be higher as many patients elect to have surgery after meeting their annual deductible and having time to recover over the winter holidays. Our sales volumes in

17


 

subsequent first calendar quarters also tend to be lower versus the prior year fourth quarter as a result of adverse weather and by resetting annual patient healthcare insurance plan deductibles, both of which may cause patients to delay elective procedures; however, in some years the first quarter may benefit from additional sales volumes when high patient demand for surgeries in the fourth quarter cannot be fully accommodated and those surgical procedures are rolled over into the first quarter. Similar to the rest of the orthopaedic industry, we have experienced and expect to continue to experience lower sales volumes in the third quarter than throughout the rest of the year as elective procedures generally decline during the summer months.

Coverage and Reimbursement

Hospitals, ambulatory surgery centers and surgeons that purchase or use our products generally rely on third-party payors to reimburse for all or part of the costs and fees associated with procedures using our products. As a result, sales of our products depend, in part, on the extent to which the procedures using our products are covered by third-party payors, including government programs such as Medicare and Medicaid, private insurance plans and managed care programs. Based on historical claims data from 2017, approximately 63% of Lapidus cases and 60% of all bunion surgical cases were paid by private payors.

Medicare payment rates to hospital outpatient departments are set under the Medicare hospital outpatient prospective payment system, which groups clinically similar hospital outpatient procedures and services with similar costs to ambulatory payment classifications ("APCs"). Each APC is assigned a single lump sum payment rate, which includes payment for the primary procedure as well as any integral, ancillary, and adjunctive services. The primary current procedure terminology ("CPT") codes for the Lapiplasty Procedure, CPT 28297 and CPT 28740, are grouped together under APC 5114. For Lapiplasty Procedures in which fusion is performed on multiple tarsometatarsal ("TMT") joints, CPT 28730 applies and is classified under APC 5115. For Adductoplasty Procedures in which fusion is performed on multiple TMT joints, either CPT 28730 or CPT 27835 applies and are classified under APC 5115.

Components of Our Results of Operations

Revenue

We currently generate revenue from the sale of our proprietary Lapiplasty System and the minimally invasive variations, Adductoplasty System, Hammertoe PEEK Fixation System, SpeedPlate Implant Fixation Platform, single use osteotomes and release instruments, and other ancillary products. These systems bring together single-use implant kits, reusable instrument trays, and surgical techniques. We sell the kits and single use instruments and other products to physicians, surgeons, hospitals and ambulatory surgery centers in the United States through a network of employee sales representatives and independent sales agencies.

No single customer accounted for 10% or more of our revenue during the three months ended March 31, 2024. We expect our revenue to increase in absolute dollars in the foreseeable future as we expand our product offerings, sales territories, new accounts and trained physician base and as existing physician customers perform more Lapiplasty and other procedures using our products, though it may fluctuate from quarter to quarter due to a variety of factors, including seasonality and the macro-economic environment.

Cost of Goods Sold

Cost of goods sold consists primarily of costs for the purchase of our products from third-party manufacturers. Direct costs from our third-party manufacturers include costs for raw materials plus the markup for the assembly of the components. Cost of goods sold also includes royalties, allocated overhead for indirect labor, certain direct costs such as those incurred for shipping our products, sterilization, packaging, and personnel costs. We expense all inventory provisions for excess, obsolete and field losses as cost of goods sold. We record adjustments to our inventory valuation for estimated excess, obsolete and non-sellable inventories based on assumptions about future demand, past usage, changes to manufacturing processes and overall market conditions. We expect our cost of goods sold to increase in absolute dollars in the foreseeable future to the extent more of our products are sold, though it may fluctuate from quarter to quarter.

Gross Profit and Gross Margin

We calculate gross profit as revenue less cost of goods sold, and gross margin as gross profit divided by revenue. Our gross margin has been and will continue to be affected by a variety of factors, primarily average selling prices, production, and ordering volumes, change in mix of customers, third-party manufacturing costs and cost-reduction strategies. We expect our

18


 

gross profit to increase in the foreseeable future as our revenue grows, though our gross margin may fluctuate from quarter to quarter due to changes in average selling prices as we introduce new products, and as we adopt new manufacturing processes and technologies.

Operating Expenses

Sales and Marketing

Sales and marketing expenses consist primarily of compensation for personnel, including salaries, bonuses, benefits, sales commissions and share-based compensation, related to selling and marketing functions, surgical instrument expense, physician education programs, training, shipping costs related to sending products to our sales representatives, travel expenses, marketing initiatives including our direct-to-patient outreach program and advertising, market research and analysis and conferences and trade shows. We expect sales and marketing expenses to continue to increase in absolute dollars in the foreseeable future as we continue to invest in our direct sales force and expand our marketing efforts, and as we continue to expand our sales and marketing infrastructure to both drive and support anticipated sales growth, though it may fluctuate from quarter to quarter.

Research and Development

Research and development ("R&D") expenses consist primarily of engineering, product development, clinical studies to develop and support our products, regulatory expenses, and other costs associated with products and technologies that are in development. These expenses include compensation for personnel, including salaries, bonuses, benefits and share-based compensation, supplies, consulting, prototyping, testing, materials, travel expenses, depreciation, and an allocation of facility overhead expenses. We expect R&D expenses to continue to increase in absolute dollars in the foreseeable future as we continue to hire personnel and invest in next-generation innovations of the Lapiplasty System and other products, though it may fluctuate from quarter to quarter due to a variety of factors, including the level and timing of our new product development efforts, as well as our clinical development, clinical studies and other related activities.

General and Administrative

General and administrative expenses consist primarily of compensation for personnel, including salaries, bonuses, benefits, and share-based compensation, related to finance, information technology, legal and human resource functions, as well as professional services fees (including legal, audit and tax fees), insurance costs, general corporate expenses and allocated facilities-related expenses. We expect general and administrative expenses to continue to increase in the foreseeable future as we support the growth of our organization.

Interest Income

Interest income consists of interest received on our money market funds and marketable securities.

Interest Expense

Interest expense consists of interest incurred and amortization of debt discount and issuance costs related to outstanding borrowings.

19


 

Results of Operations

Comparison of the three months ended March 31, 2024 and 2023

The following table summarizes our results of operations for the periods presented below ($ in thousands):

 

 

 

Three Months Ended March 31,

 

 

Change

 

 

2024

 

 

2023

 

 

Amount

 

 

%

Revenue

 

$

51,108

 

 

$

42,195

 

 

$

8,913

 

 

21.1%

Cost of goods sold

 

 

10,127

 

 

 

8,039

 

 

 

2,088

 

 

26.0%

Gross profit

 

 

40,981

 

 

 

34,156

 

 

 

6,825

 

 

20.0%

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

40,328

 

 

 

33,655

 

 

 

6,673

 

 

19.8%

Research and development

 

 

5,259

 

 

 

3,412

 

 

 

1,847

 

 

54.1%

General and administrative

 

 

14,362

 

 

 

10,865

 

 

 

3,497

 

 

32.2%

Total operating expenses

 

 

59,949

 

 

 

47,932

 

 

 

12,017

 

 

25.1%

Loss from operations

 

 

(18,968

)

 

 

(13,776

)

 

 

(5,192

)

 

37.7%

Interest income

 

 

1,535

 

 

 

1,479

 

 

 

56

 

 

3.8%

Interest expense

 

 

(1,317

)

 

 

(1,285

)

 

 

(32

)

 

2.5%

Other income, net

 

 

74

 

 

 

128

 

 

 

(54

)

 

(42.2%)

Other non-operating income (expense), net

 

 

292

 

 

 

322

 

 

 

(30

)

 

(9.3%)

Net loss

 

$

(18,676

)

 

$

(13,454

)

 

$

(5,222

)

 

38.8%

Comparison of the three months ended March 31, 2024 and 2023

Revenue. Revenue increased by $8.9 million, or 21.1%, for the three months ended March 31, 2024 as compared to the same period in 2023. The increase was driven by a higher volume of procedure kits sold as a result of an expanded surgeon customer base. The remaining revenue growth was primarily a result of a product mix shift that resulted from increased adoption of newer technologies and increased sales of complementary products used in bunion and related midfoot procedures.

Cost of Goods Sold, Gross Profit and Gross Margin. Cost of goods sold increased by $2.1 million, or 26.0%, for the three months ended March 31, 2024 as compared to the same period in 2023. The increase in cost of goods sold was primarily due to a $1.7 million increase in direct costs of goods sold resulting from increased sales. During the three months ended March 31, 2024, gross profit increased by $6.8 million, or 20.0%, as compared to the same period in 2023, due to increased sales. Gross profit margin for the three months ended March 31, 2024 decreased from 80.9% to 80.2%, as compared to the same period in 2023, primarily due to a product mix shift to newer products, partially offset by lower royalty rates.

Sales and Marketing Expenses. Sales and marketing expenses increased by $6.7 million, or 19.8%, for the three months ended March 31, 2024 as compared to the same period in 2023. The increase in sales and marketing expenses was due to growth in our overall business. Sales and marketing expenses increased due to $4.6 million in higher payroll and related expenses from increased headcount of sales and marketing personnel, including stock compensation expense, an increase of $1.2 million due to higher costs for conferences and events due to an expanding sales force and surgeon base, an increase of $0.6 million due to higher advertising fees for direct to consumer campaigns, and an increase of $0.6 million in surgical instrument expense due to an increase in volume of surgical instruments, partially offset by a $0.3 million decrease in clinical-related expenses.

Research and Development Expenses. R&D expenses increased by $1.8 million, or 54.1%, for the three months ended March 31, 2024 as compared to the same period in 2023. The increase in R&D expenses was primarily due to a $1.6 million increase in payroll and related costs resulting from increased headcount of research and development personnel, including stock compensation expense, and a $0.2 million increase related to the technological advancements milestone obligation from our acquisition of RPM-3D.

General and Administrative Expenses. General and administrative expenses increased by $3.5 million, or 32.2%, for the three months ended March 31, 2024 as compared to the same period in 2023. The increase in general and administrative expenses was primarily related to $3.3 million in higher payroll and related costs, primarily due to higher stock compensation expense, and a $1.1 million increase in compensation expense related to the milestone obligations for our acquisition of RPM-3D, partially offset by a $1.4 million decrease in legal fees.

20


 

Liquidity and Capital Resources

Overview

Before our IPO, our primary sources of capital were private placements of common stock and convertible preferred stock, debt financing agreements and revenue from the sale of our products. In April 2021, we received net proceeds of $107.6 million from our IPO. On February 10, 2023, we received net proceeds of $107.5 million from a follow-on public offering of our common stock.

As of March 31, 2024, we had cash and cash equivalents of $9.3 million and marketable securities of $100.7 million available for sale, an accumulated deficit of $152.9 million and $54.0 million principal outstanding under the term and revolving loans with MidCap. We believe that our existing cash and cash equivalents, marketable securities and available debt borrowings and expected revenues will be sufficient to meet our capital requirements and fund our operations for at least twelve months from the issuance of our condensed financial statements. We may be required or decide to raise additional financing to support further growth of our operations.

Funding Requirements

We use our cash to fund our operations, which primarily include the costs of manufacturing our Lapiplasty, Adductoplasty, and SpeedPlate and other ancillary products, as well as our sales and marketing and R&D expenses and related personnel costs. We expect our sales and marketing expenses to increase for the foreseeable future as we continue to invest in our direct sales force and expand our marketing efforts, and as we continue to expand our sales and marketing infrastructure to both drive and support anticipated sales growth. We also expect R&D expenses to increase for the foreseeable future as we continue to hire personnel and invest in next-generation innovations of our existing products and new products. In addition, we expect our general and administrative expenses to increase for the foreseeable future as we hire personnel and expand our infrastructure to both drive and support the anticipated growth in our organization. We will continue to incur additional expenses as a result of operating as a public company. In the second quarter of 2023, funds were used for the acquisition of the RPM-3D, and from time to time in the future, we may also consider additional investments in technologies, assets, and businesses to expand or enhance our product offerings. The timing and amount of our operating and capital expenditures will depend on many factors, including:

the scope and timing of our investment in our commercial infrastructure and sales force;
the costs of our ongoing commercialization activities including product sales, marketing, manufacturing, and distribution;
the scope of our marketing efforts, including the degree to which we utilize direct to consumer campaigns;
the degree and rate of market acceptance of the Lapiplasty System and our other products;
the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, including enforcing our intellectual property rights against infringing products or technologies or enforcing contractual rights against parties breaching agreements with us;
our need to implement additional infrastructure and internal systems;
the research and development activities we intend to undertake in order to improve the Lapiplasty System and other products, to commercialize PSI technologies, and to develop or acquire additional products;
the investments we make in acquiring other technologies, assets or businesses to expand our product portfolio;
the success or emergence of new competing technologies or other adverse market developments;
the effect of inflation, interest rate changes, and other general economic conditions on our operations and business;
any product liability or other lawsuits related to our products;
the expenses needed to attract and retain skilled personnel;
the costs associated with being a public company; and
the impact of any infectious disease outbreak on our business.

21


 

Based upon our current operating plan, we believe that our existing cash, cash equivalents, marketable securities, and available debt borrowings will enable us to fund our operating expenses and capital expenditure requirements for at least the next twelve months. We have based this estimate on assumptions that may prove to be wrong or that may change in the future, and we could utilize our available capital resources sooner than we expect. We may seek to raise any necessary additional capital through public or private equity offerings or debt financings, credit or loan facilities or a combination of one or more of these or other funding sources. Additional funds may not be available to us on acceptable terms or at all. If we fail to obtain necessary capital when needed on acceptable terms, or at all, we could be forced to delay, limit, reduce or terminate our product development programs, commercialization efforts, sales and marketing initiatives, or other operations. If we raise additional funds by issuing equity securities, our stockholders will suffer dilution and the terms of any financing may adversely affect the rights of our stockholders. In addition, as a condition to providing additional funds to us, future investors may demand, and may be granted, rights superior to those of existing stockholders. Debt financing, if available, is likely to involve restrictive covenants limiting our flexibility in conducting future business activities, and, in the event of insolvency, debt holders would be repaid before holders of our equity securities received any distribution of our corporate assets.

Cash Flows

The following table sets forth the primary sources and uses of cash and cash equivalents for the periods presented below (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

Net cash (used in) provided by:

 

 

 

 

 

 

Operating activities

 

$

(7,221

)

 

$

(17,259

)

Investing activities

 

 

3,758

 

 

 

(80,480

)

Financing activities

 

 

(185

)

 

 

107,879

 

Net increase (decrease) in cash and cash equivalents

 

$

(3,648

)

 

$

10,140

 

Cash Flows from Operating Activities

Net cash used in operating activities for the three months ended March 31, 2024 was $7.2 million, consisting primarily of a net loss of $18.7 million, adjusted for non-cash charges of $9.9 million and a decrease in net operating assets. The non-cash charges consist primarily of share-based compensation expense of $7.4 million, depreciation and amortization expense of $1.9 million, and non-cash lease expense of $0.6 million. The decrease in net operating assets was primarily due to an increase of $9.3 million in accounts payable primarily due to higher inventory and direct to consumer advertising purchases and a $7.8 million decrease in accounts receivable from higher sales in the fourth quarter of 2023, partially offset by a decrease of $6.9 million in accrued liabilities due to timing of payments, and an increase of $6.6 million in inventories to meet demand for new products.

Net cash used in operating activities for the three months ended March 31, 2023 was $17.3 million, consisting primarily of a net loss of $13.5 million, adjusted for non-cash charges of $4.0 million and an increase in net operating assets. The non-cash charges consist primarily of share-based compensation expense of $2.7 million, depreciation and amortization expense of $0.9 million and non-cash lease expense of $0.6 million. The increase in net operating assets was primarily due to a decrease in accounts payable and accrued liabilities of $7.7 million during the first quarter due to timing of payments, an increase of $3.2 million in inventories for added safety stock to meet demand for new products and to avoid potential supply chain issues and a $1.0 million increase in prepaid expenses and other current assets, which were partially offset by a $3.8 million decrease in accounts receivable from collections of higher sales in the fourth quarter of 2022.

Cash Flows from Investing Activities

Net cash provided by investing activities was $3.8 million for the three months ended March 31, 2024, consisting primarily of $36.4 million in sales and maturities of available for sale marketable securities, partially offset by $28.7 million in purchases of available for sale marketable securities and $3.9 million in purchases of property and equipment. The net of marketable securities maturities and purchases of $7.7 million was primarily used to fund our current operations. The purchases in property and equipment included $3.5 million in capitalized surgical instruments for the reusable instrument trays related to new products, and $0.4 million for furniture, equipment, and leasehold improvements to support the growth of our business.

22


 

Net cash used in investing activities was $80.5 million for the three months ended March 31, 2023, consisting primarily of $99.6 million in purchases of available for sale marketable securities and $1.5 million in purchases of property and equipment, partially offset by $20.5 million in maturities of available for sale marketable securities. The purchases of marketable securities were the result of cash invested from our public offering of common stock during the three months ended March 31, 2023. The purchases in property and equipment were $0.6 million in capitalized surgical instruments for our reusable instrument trays and $0.9 for new equipment purchased to support the growth of our business.

Cash Flows from Financing Activities

Net cash used in financing activities was $0.2 million for the three months ended March 31, 2024, consisting primarily of $0.2 million of shares repurchased for tax withholding on vested RSUs, partially offset by proceeds from stock option exercises.

Net cash provided in financing activities was $107.9 million for the three months ended March 31, 2023, consisting primarily of $107.5 million of net cash proceeds from our public offering of common stock and $0.4 million from exercise of stock options.

Royalty Agreements

We recognized royalty expense of $1.7 million and $1.6 million for the three months ended March 31, 2024 and 2023, respectively. For the three months ended March 31, 2024 and 2023, the aggregate royalty rate was 3.4% and 3.9%, respectively. Each of the royalty agreements with our surgeon consultants prohibits the payment of royalties on products sold to entities and/or individuals with whom any of the surgeon advisors is affiliated.

Operating Lease

We have commitments for future payments related to our new corporate headquarters office located in Ponte Vedra, Florida. We entered into a 10-year lease in February 2022 for our new location which expires in July 2032. Lease payments comprise the base rent plus operating costs which includes taxes, insurance, and common area maintenance. We also have commitments for future payments related to our former headquarters which expire in April 2026. We have obtained subleases for this space. The remaining lease obligations are $25.1 million under these leases as of March 31, 2024.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations is based on our condensed financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these condensed financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. 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 value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material.

Our critical accounting policies and estimates are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" in our Annual Report. There had been no material changes to these accounting policies during the three months ended March 31, 2024.

Recently Issued Accounting Pronouncements

Refer to Note 3, "Recent Accounting Pronouncements," of the Notes to Condensed Financial Statements for accounting pronouncements adopted as of this Quarterly Report. There have been no newly issued accounting pronouncements impacting the Company's unaudited interim condensed financial statements.

23


 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market Risk

Our primary market risk exposures are interest rate and credit risk.

Interest Rate Risk

The primary objectives of our investment activities are to preserve principal and provide liquidity. Since our investments may be used to fund operations, we performed sensitivity testing which measures the impact on the fair market value of the investments if a hypothetical 50 basis points increase and decrease in interest rates occurred. The interest rate risk analysis assumes using an immediate and parallel shift in interest rates.

The following table presents our estimate of the impact on fair value based on the scenario discussed above (in thousands):

 

March 31, 2024

 

 

Change in fair value

Fair value of marketable securities

 

Down 50 bps

 

Up 50 bps

$105,234

 

$284

 

($284)

Under our current outstanding debt terms, we do not have a risk to rising interest rates as the interest rates are capped at 9% for the term debt and 7% for the revolving loan facility. If a 235-basis point decrease in the 30-day forward looking secured overnight financing rate occurred, we would start to experience a reduction in our interest rate expense from current levels.

Credit Risk

We manage our credit risk within the available-for-sale securities portfolio, by maintaining a well-diversified investment portfolio that limits the investments to certain types of investments such as U.S. Treasury and agency securities, money market funds, commercial paper, Yankee CDs, and high credit quality asset-backed securities and corporate debt securities. In addition, the overall portfolio requires a maximum portfolio duration of one year.

Item 4. Controls and Procedures.

Evaluation of disclosure controls and procedures

Our management, with the participation and supervision of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent limitation on the effectiveness of internal control

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur

24


 

because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

25


 

PART II—OTHER INFORMATION

We are not a party to any legal proceedings which we believe would have a material effect on our business or results of operations. From time to time, we may become involved in various legal proceedings that arise in the ordinary course of our business.

Item 1A. Risk Factors.

There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K under "Part I, Item 1ARisk Factors" for the year ended December 31, 2023, filed with the SEC on February 27, 2024.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities

The following table presents information with respect to the Company's repurchases of stock during the three months ended March 31, 2024.

 

Period

 

Total Number of Shares Purchased

 

 

Average Price Paid Per Share

 

 

Total Number of Shares Purchased as part of Publicly Announced Plans or Programs

 

 

Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs

 

January 1 to January 31, 2024

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

February 1 to February 29, 2024

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

March 1 to March 31, 2024(1)(2)

 

 

18,386

 

 

$

12.89

 

 

 

-

 

 

 

-

 

Totals

 

 

18,386

 

 

$

12.89

 

 

 

-

 

 

 

-

 

(1)
Includes restricted shares withheld pursuant to the terms of awards under the Company’s share-based compensation plans to offset tax withholding obligations that occur upon vesting and release of restricted shares.
(2)
The value of the restricted shares withheld is the closing price of the Company's common stock on the date the relevant transaction occurs.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

On March 15, 2024, Sean Scanlan, the Company's Chief Innovation Officer, adopted a Rule 10b5-1 trading arrangement providing for the potential exercise of vested stock options and the associated sale of up to 80,000 shares of Company common stock underlying such options, intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act. This plan is scheduled to terminate no later than March 15, 2025.

Item 6. Exhibits.

 

Exhibit

Number

Description

10.1+

 

Non-Employee Director Compensation Policy (incorporated by reference to Exhibit 10.14 to the Registrant’s Form 10-K, as filed by the Registrant with the SEC on February 27, 2024)

31.1*

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

26


 

32.2

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.

101.SCH

Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents

104

 

Cover Page Interactive Data File (embedded within the Inline XBRL document)

*

Filed herewith.

+

Indicates management contract or compensatory plan.

The certifications attached as Exhibit 32.1 and 32.2 to this Quarterly Report are deemed furnished and not filed with the U.S. Securities and Exchange Commission and are not to be incorporated by reference into any filing of Treace Medical Concepts, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report, irrespective of any general incorporation language contained in such filing.

 

27


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Treace Medical Concepts, Inc.

 

 

 

 

 

 

 

Date: May 7, 2024

 

By:

 

/s/ John T. Treace

 

 

 

 

 

Name:

John T. Treace

 

 

 

 

 

Title:

Chief Executive Officer (Principal Executive Officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

Date: May 7, 2024

 

By:

 

/s/ Mark L. Hair

 

 

 

 

 

Name:

Mark L. Hair

 

 

 

 

 

Title:

Chief Financial Officer (Principal Financial Officer)

 

 

28


EX-31.1

 

Exhibit 31.1

CERTIFICATION PURSUANT TO

RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John T. Treace, certify that:

1. I have reviewed this Form 10-Q of Treace Medical Concepts, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date: May 7, 2024

By:

/s/ John T. Treace

John T. Treace

Chief Executive Officer (Principal Executive Officer)

 

 


EX-31.2

 

Exhibit 31.2

CERTIFICATION PURSUANT TO

RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Mark L. Hair, certify that:

1. I have reviewed this Form 10-Q of Treace Medical Concepts, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date: May 7, 2024

By:

/s/ Mark L. Hair

Mark L. Hair

Chief Financial Officer

(Principal Financial Officer)

 

 


EX-32.1

 

 

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Treace Medical Concepts, Inc. (the “Company”) on Form 10-Q for the period ending March 31, 2024 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 7, 2024

By:

/s/ John T. Treace

John T. Treace

Chief Executive Officer

(Principal Executive Officer)

 

 


EX-32.2

 

.

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Treace Medical Concepts, Inc. (the “Company”) on Form 10-Q for the period ending March 31, 2024 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 7, 2024

By:

/s/ Mark L. Hair

Mark L. Hair

Chief Financial Officer

(Principal Financial Officer)