Treace(TMCI) - 2024 Q3 - Quarterly Report

Special Note Regarding Forward-Looking Statements This section highlights that the report contains forward-looking statements about the company's business, operations, and financial performance, which are subject to risks and uncertainties, cautioning readers that actual results may differ materially and the company does not undertake to update them - Forward-looking statements cover business growth, product launches, competition, market environment, expense control, financial strength, seasonality, reimbursement, economic conditions, and intellectual property[4][5] - Actual results may differ materially due to unpredictable events and known/unknown risks, as these statements are based on management's current expectations, estimates, forecasts, and projections[6] - The company assumes no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future, except as required by law[7] Part I: Financial Information Item 1. Condensed Financial Statements This item presents the unaudited condensed financial statements, including the Balance Sheets, Statements of Operations and Comprehensive Loss, Statements of Stockholders' Equity, and Statements of Cash Flows, along with their accompanying notes, for the periods ended September 30, 2024 and December 31, 2023 (for balance sheet) or September 30, 2023 (for income statement and cash flow) Condensed Balance Sheets The condensed balance sheets provide a snapshot of the company's assets, liabilities, and stockholders' equity as of September 30, 2024, compared to December 31, 2023, showing a decrease in total assets and stockholders' equity, and a slight decrease in total liabilities | Metric | September 30, 2024 (in thousands) | December 31, 2023 (in thousands) | Change (in thousands) | | :-------------------------------- | :-------------------------------- | :------------------------------- | :-------------------- | | Total Assets | $212,924 | $251,907 | $(38,983) | | Total Liabilities | $108,018 | $113,969 | $(5,951) | | Total Stockholders' Equity | $104,906 | $137,938 | $(33,032) | | Current Asset | September 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :-------------------------------- | :-------------------------------- | :------------------------------- | | Cash and cash equivalents | $12,110 | $12,982 | | Marketable securities, short-term | $70,689 | $110,216 | | Accounts receivable, net | $24,177 | $38,063 | | Inventories | $43,611 | $29,245 | | Total current assets | $157,602 | $198,359 | | Current Liability | September 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :-------------------------------- | :-------------------------------- | :------------------------------- | | Accounts payable | $18,649 | $11,835 | | Accrued liabilities | $8,098 | $10,458 | | Accrued commissions | $5,347 | $10,759 | | Total current liabilities | $38,263 | $45,033 | | Long-term debt, net | $53,231 | $53,008 | | Accumulated deficit | $(189,489) | $(134,247) | Condensed Statements of Operations and Comprehensive Loss The company reported a net loss for both the three and nine months ended September 30, 2024, though the net loss for the three-month period improved compared to the prior year, with increased revenue and operating expenses leading to continued operational losses | Metric | Three Months Ended Sep 30, 2024 (in thousands) | Three Months Ended Sep 30, 2023 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | :------- | | Revenue | $45,086 | $40,758 | $4,328 | 10.6% | | Gross profit | $36,132 | $32,760 | $3,372 | 10.3% | | Total operating expenses | $51,266 | $50,578 | $688 | 1.4% | | Net loss | $(15,360) | $(17,521) | $2,161 | (12.3%) | | Net loss per share, basic and diluted | $(0.25) | $(0.28) | - | - | | Metric | Nine Months Ended Sep 30, 2024 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :-------------------- | :------- | | Revenue | $140,649 | $124,906 | $15,743 | 12.6% | | Gross profit | $112,787 | $101,194 | $11,593 | 11.5% | | Total operating expenses | $168,271 | $145,840 | $22,431 | 15.4% | | Net loss | $(55,242) | $(43,246) | $(11,996) | 27.7% | | Net loss per share, basic and diluted | $(0.89) | $(0.71) | - | - | Condensed Statements of Stockholders' Equity The statements detail changes in stockholders' equity components for the nine months ended September 30, 2024 and 2023, with the accumulated deficit increasing significantly due to ongoing net losses | Metric | December 31, 2023 (in thousands) | September 30, 2024 (in thousands) | Change (in thousands) | | :-------------------------------- | :------------------------------- | :-------------------------------- | :-------------------- | | Total Stockholders' Equity | $137,938 | $104,906 | $(33,032) | | Accumulated Deficit | $(134,247) | $(189,489) | $(55,242) | | Share-based Compensation Expense | Nine Months Ended Sep 30, 2024 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | | :--------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Total | $22,048 | $11,480 | Condensed Statements of Cash Flows For the nine months ended September 30, 2024, the company experienced net cash used in operating activities, but a significant net cash provided by investing activities, primarily from sales and maturities of marketable securities, contrasting with the prior year where investing activities used substantial cash | Cash Flow Activity | Nine Months Ended Sep 30, 2024 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | | :-------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net cash used in operating activities | $(32,960) | $(35,107) | | Net cash provided by (used in) investing activities | $31,954 | $(86,306) | | Net cash provided by (used in) financing activities | $134 | $109,218 | | Net increase (decrease) in cash and cash equivalents | $(872) | $(12,195) | | Cash and cash equivalents at end of period | $12,110 | $7,278 | Notes to Condensed Financial Statements These notes provide detailed information and explanations for the figures presented in the condensed financial statements, covering company formation, accounting policies, recent pronouncements, fair value measurements, balance sheet components, debt, commitments, equity, and net loss per share 1. Formation and Business of the Company Treace Medical Concepts, Inc. was formed in 2013 and converted to a Delaware corporation in 2014, focusing on surgical management of bunion and midfoot deformities with its Lapiplasty 3D Bunion Correction System, completing an IPO in 2021 and a follow-on offering in 2023, and acquiring RPM-3D assets in June 2023 with later amended milestone payment terms - The company, Treace Medical Concepts, Inc., was formed as a Florida LLC on July 29, 2013, and converted to a Delaware corporation on July 1, 2014[17] - The company's core business is advancing the standard of care for surgical management of bunion and related midfoot deformities, primarily through its proprietary Lapiplasty 3D Bunion Correction System, which received 510(k) clearance in March 2015[17] - The company completed an IPO in April 2021, raising $107.6 million, and a follow-on offering in February 2023, raising $107.5 million[18][19] - It acquired certain assets of RPM-3D in June 2023 for $20.0 million, with milestone payment terms later amended in Q1 2024, reducing the maximum to $8.1 million, of which $6.0 million was paid in July 2024[18][19][21] 2. Summary of Significant Accounting Policies The unaudited interim condensed financial statements adhere to U.S. GAAP for interim financial information and SEC regulations, with management's estimates and assumptions being crucial, and the company managing credit risk through diversified investments without single customer concentration - The condensed financial statements are prepared in accordance with U.S. GAAP for interim financial information and SEC rules for Form 10-Q[22] - Significant estimates and assumptions include valuation of intangible assets and goodwill, reserves for accounts receivable and inventories, recoverability of long-term assets, deferred tax assets, contingencies, and stock-based compensation[26] - The company manages credit risk through diversified investments (U.S. treasury, money market funds, corporate debt, etc.) and notes that no single customer accounted for more than 10% of accounts receivable or revenue for the nine months ended September 30, 2024 and 2023[27][28] 3. Recent Accounting Pronouncements The company is evaluating the impact of two new FASB Accounting Standards Updates (ASUs): ASU 2023-07 on Segment Reporting, effective for fiscal years beginning after December 15, 2023, and ASU 2023-09 on Income Taxes, effective for annual periods beginning after December 15, 2024, both permitting early adoption and requiring retrospective or prospective application, respectively - ASU 2023-07 (Segment Reporting) requires new disclosures for reportable segments, effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024[29] - ASU 2023-09 (Income Taxes) requires specific categories in rate reconciliation and additional disclosures for income taxes paid and income/expense disaggregated by jurisdiction, effective for annual periods beginning after December 15, 2024[30][31] - The company is currently evaluating the impact of both new standards on its financial statements and related disclosures[29][31] 4. Fair Value Measurements The company categorizes assets and liabilities measured at fair value into a three-level hierarchy based on input observability, with total assets measured at fair value being $78.5 million as of September 30, 2024, primarily in Level 1 and Level 2 securities, and contingent consideration reclassified due to renegotiated terms for RPM-3D acquisition milestone payments - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs)[32] | Asset Type | Level 1 (in thousands) | Level 2 (in thousands) | Level 3 (in thousands) | Total (in thousands) | | :-------------------------------- | :--------------------- | :--------------------- | :--------------------- | :------------------- | | As of September 30, 2024: | | | | | | Money market funds | $7,775 | — | — | $7,775 | | U.S. treasury and government agencies | $10,635 | $1,000 | — | $11,635 | | Corporate debt | — | $39,200 | — | $39,200 | | Asset-backed securities | — | $16,698 | — | $16,698 | | Yankee CD | — | $3,156 | — | $3,156 | | Total assets | $18,410 | $60,054 | — | $78,464 | | As of December 31, 2023: | | | | | | Money market funds | $3,160 | — | — | $3,160 | | 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 (Dec 31, 2023) | — | — | $2,977 | $2,977 | | Contingent consideration (Sep 30, 2024) | — | — | — | — | - The technological advancements milestone payment for the RPM-3D acquisition, previously accounted for as Level 3 contingent consideration, was reclassified as research and development expense over the remaining service period due to renegotiated terms in the first quarter of 2024[37] 5. Balance Sheet Components This section details specific balance sheet accounts, showing decreases in cash and cash equivalents and marketable securities, an increase in property and equipment, net, and decreases in accrued liabilities and other liabilities, notably due to the reclassification of contingent consideration | Account | September 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :-------------------------------- | :-------------------------------- | :------------------------------- | | Cash and Cash Equivalents | $12,110 | $12,982 | | Marketable Securities - Short-term (Fair Value) | $70,689 | $110,216 | | Property and Equipment, net | $25,168 | $22,298 | | Accrued Liabilities | $8,098 | $10,458 | | Other Liabilities | $571 | $4,432 | - The increase in Property and Equipment, net, was primarily due to capitalized surgical equipment, with $16.6 million ready for intended use as of September 30, 2024, compared to $12.2 million as of December 31, 2023[45] - Other liabilities decreased significantly due to the reclassification of contingent consideration from $2,977k as of December 31, 2023, to $0k as of September 30, 2024, following renegotiated terms for the RPM-3D technological advancements milestone[48] 6. Long-Term Debt The company's long-term debt, net, remained stable at approximately $53.2 million as of September 30, 2024, primarily consisting of a $50.0 million term loan and a $4.0 million revolving line of credit from MidCap, with loans bearing interest at capped rates and secured by company assets | Debt Component | September 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :-------------------------------- | :-------------------------------- | :------------------------------- | | Revolving line of credit | $4,000 | $4,000 | | MidCap term loan facility | $50,000 | $50,000 | | Total long-term debt, net | $53,231 | $53,008 | - The company has a five-year $150.0 million loan facility with MidCap, comprising a $120.0 million term loan facility and a $30.0 million revolving loan facility[52][53][54] - As of September 30, 2024, $50.0 million was drawn under the term loan and $4.0 million under the revolving loan[52][53][54] - The loans bear interest at capped annual rates of 9% for the term loan and 7% for the revolving loan facility, and are secured by substantially all of the company's assets, including intellectual property[55][56] 7. Commitments and Contingencies The company has royalty agreements with surgeon consultants, recognizing $1.4 million in royalty expense for Q3 2024 (3.2% aggregate rate) and $4.6 million for the nine months ended September 30, 2024 (3.3% aggregate rate), with no accrued contingent liabilities reported | Metric | Three Months Ended Sep 30, 2024 (in thousands) | Three Months Ended Sep 30, 2023 (in thousands) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Royalty expense | $1,400 | $1,500 | | Aggregate royalty rate | 3.2% | 3.8% | | Metric | Nine Months Ended Sep 30, 2024 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | | :-------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Royalty expense | $4,600 | $4,700 | | Aggregate royalty rate | 3.3% | 3.8% | - The company reported no accrued contingent liabilities as of September 30, 2024, and December 31, 2023[59] 8. Stockholders' Equity The company granted a significant number of stock options, restricted stock units (RSUs), and performance share units (PSUs) during the nine months ended September 30, 2024, with higher volumes of RSUs and PSUs compared to the prior year, but lower weighted-average grant-date fair values, leading to substantially increased share-based compensation expense | Equity Instrument | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Stock options granted (shares) | 852,220 | 877,910 | | Wtd-avg grant-date fair value (stock options) | $4.96/share | $10.42/share | | Restricted Stock Units (RSUs) granted | 3,370,462 | 870,326 | | Wtd-avg grant-date fair value (RSUs) | $9.09/unit | $22.84/unit | | Performance Share Units (PSUs) granted (target shares) | 453,375 | 509,600 | | Wtd-avg grant-date fair value (PSUs) | $18.89/share | $30.90/share | | Share-Based Compensation Expense | Nine Months Ended Sep 30, 2024 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | | :--------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Cost of goods sold | $272 | $192 | | Sales and marketing expense | $5,052 | $3,087 | | Research and development expense | $3,174 | $1,274 | | General and administrative expense | $13,550 | $6,927 | | Total | $22,048 | $11,480 | 9. Net Loss Per Share Attributable to Common Stockholders The company reported a net loss per share of $(0.25) for the three months and $(0.89) for the nine months ended September 30, 2024, with basic and diluted net loss per share being the same due to potentially dilutive securities being antidilutive | Metric | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | | :-------------------------------- | :------------------------------ | :------------------------------ | | Net loss per share, basic and diluted | $(0.25) | $(0.28) | | Weighted-average shares outstanding | 62,229,463 | 61,562,494 | | Metric | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net loss per share, basic and diluted | $(0.89) | $(0.71) | | Weighted-average shares outstanding | 62,035,293 | 60,566,655 | - Potentially dilutive securities, totaling 11,951,275 common stock equivalent shares as of September 30, 2024 (vs. 8,792,753 in 2023), were excluded from diluted EPS computation because their inclusion would be antidilutive due to the company's net loss[68] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and operational results, highlighting its medical technology focus on bunion correction, the impact of the economic environment and competition, and strategies for innovation and growth, detailing components of results of operations, a comparison of financial performance, and an analysis of liquidity and capital resources Overview Treace Medical Concepts is a medical technology company focused on 3D bunion correction with its Lapiplasty System, having sold over 100,000 kits, and is expanding into new products like Nanoplasty™ to become a comprehensive bunion solutions company, holding $12.1 million in cash and $70.7 million in marketable securities, with an accumulated deficit of $189.5 million as of September 30, 2024 - The company is a medical technology firm focused on surgical management of bunion and related midfoot deformities, pioneering the Lapiplasty 3D Bunion Correction System[71] - Over 100,000 Lapiplasty Procedure kits have been sold in the United States since its 510(k) clearance in March 2015[72] | Financial Metric (as of Sep 30, 2024) | Amount (in millions) | | :------------------------------------ | :------------------- | | Cash and cash equivalents | $12.1 | | Marketable securities | $70.7 | | Accumulated deficit | $(189.5) | | Principal outstanding under term and revolving loans | $54.0 | Economic Environment The company anticipates continued macro-economic challenges, including inflationary pressures, interest rate changes, and recession fears, which may lead to higher costs and reduced demand for its products and elective surgeries, with management working to mitigate these impacts through supplier collaboration and strategic investments - The company expects continued macro-economic challenges, including inflationary pressures, interest rate changes, recession fears, and reduced consumer confidence[74] - These challenges may result in higher costs, potentially reduced demand for procedure kits and other products, and a negative impact on demand for elective surgeries[74] - The company is working with suppliers to mitigate higher costs and longer lead times, and investing in its direct sales channel, patient education, clinical evidence, and product innovations to build demand[74] Factors Affecting Our Business The company's financial performance is influenced by increased competition from minimally invasive osteotomy solutions and new Lapidus products, necessitating continuous innovation, with plans for new product introductions through 2025, active intellectual property protection including a recent lawsuit against Stryker, and business growth dependent on surgeon and facility adoption, seasonality, and critical third-party payor reimbursement Increased Competition The company is facing heightened competition from the growing adoption of minimally invasive osteotomy solutions and new Lapidus products, which is negatively impacting its growth rates and market share - The company is experiencing increased competition from the accelerating adoption of minimally invasive osteotomy solutions and new Lapidus products[77] - This increased competition has, and may continue to, negatively impact the company's growth rates and market share[77] Innovation and Growth The company is committed to long-term revenue growth through investments in sales, marketing, and R&D, having recently launched SpeedPlate, Hammertoe PEEK Fixation System, and LapiTome/RazorTome Osteotomes, and plans further releases in Q4 2024 or soon after, including Nanoplasty™, IntelliGuide™ PSI Cut Guides, Micro-Lapiplasty, and Mini-Adductoplasty systems - The company expects to focus on long-term revenue growth through investments in its business and new products, including dedicated resources for sales, marketing, and R&D[78] - Recent product releases in 2023 include the SpeedPlate fixation platform, Hammertoe PEEK Fixation System, and LapiTome and RazorTome Osteotomes[79] - New products expected for limited market release in Q4 2024 or soon thereafter include the Nanoplasty™ system, IntelliGuide™ PSI Cut Guides, expanded SpeedPlate configurations, Micro-Lapiplasty system, and Mini-Adductoplasty System[80] Intellectual Property Strategy The company actively protects its technology with 65 granted U.S. patents, 24 worldwide patents, and over 100 pending applications, and in October 2024, it filed a lawsuit against Stryker Corporation for infringement of 9 patents related to its Lapiplasty® 3D Bunion Correction® technologies - As of September 30, 2024, the company's patent portfolio includes 65 granted U.S. patents, 24 granted patents worldwide, and over 100 pending patent applications[81] - On October 14, 2024, the company filed a lawsuit against Stryker Corporation and its subsidiary Wright Medical Technology, Inc., alleging infringement of 9 patents related to its Lapiplasty® 3D Bunion Correction® technologies and unfair competition[81][140] Adoption of the Lapiplasty System and other products Business growth relies on increasing surgeon and facility adoption of the Lapiplasty System and new products, with the company planning to educate healthcare providers on product benefits, supported by clinical data, to facilitate market access and drive sales, expecting to operate at a loss in the near term and funding operations through existing cash, marketable securities, and expected revenues, potentially seeking additional financing - The growth of the business depends on gaining broader acceptance of the Lapiplasty System and other existing and new products by successfully marketing and distributing them to surgeons, hospitals, and ambulatory surgery centers[82] - The company intends to educate hospitals and facility administrators on the differentiated benefits of its systems, supported by clinical data, to facilitate greater access and support future sales growth[82] - In the near term, the company expects to continue operating at a loss and anticipates financing operations primarily through existing cash, cash equivalents, marketable securities, and expected revenues, with potential for additional debt or equity financing[82] Seasonality The company's business experiences seasonality, with higher sales in the fourth quarter due to patients meeting deductibles and holiday recovery time, and lower sales in the first quarter due to adverse weather and deductible resets, while third-quarter sales are typically lower due to summer declines in elective procedures - The company experiences seasonality with higher sales volumes in the fourth calendar quarter, historically accounting for approximately 30% to 40% of full year revenues, as patients elect surgery after meeting deductibles and for holiday recovery[84] - Lower sales volumes are typically seen in the first calendar quarter due to adverse weather and resetting annual patient healthcare insurance plan deductibles, and in the third quarter due to general declines in elective procedures during summer months[84] Coverage and Reimbursement Sales of the company's products are dependent on third-party payor reimbursement, with private payors historically covering a significant portion of bunion surgical cases, and Medicare providing payment rates for Lapiplasty procedures through Ambulatory Payment Classifications (APCs) with specific CPT codes - Sales of the company's products depend on third-party payor reimbursement, including government programs (Medicare, Medicaid), private insurance plans, and managed care programs[85] - Based on 2017 historical claims data, approximately 63% of Lapidus cases and 60% of all bunion surgical cases were paid by private payors[85] - Medicare payment rates for Lapiplasty Procedures are set under the Medicare hospital outpatient prospective payment system, with CPT codes 28297 and 28740 grouped under APC 5114, and CPT 28730 (for multiple TMT joints) under APC 5115[86] Components of Our Results of Operations This section outlines the key components of the company's financial results: revenue from various surgical systems, cost of goods sold including manufacturing and inventory provisions, gross profit and margin influenced by pricing and production, and operating expenses covering sales & marketing, R&D, and general & administrative functions, as well as interest income and expense Revenue Revenue is generated from the sale of proprietary surgical systems like Lapiplasty, Adductoplasty, and SpeedPlate, along with ancillary products, to healthcare providers in the U.S., with the company expecting revenue to increase with expanded product offerings, sales territories, and physician adoption, though quarterly fluctuations are anticipated - Revenue is generated from the sale of proprietary Lapiplasty System, Adductoplasty System, Hammertoe PEEK Fixation System, SpeedPlate Implant Fixation Platform, single-use osteotomes, release instruments, and other ancillary products[87] - Products are sold to physicians, surgeons, hospitals, and ambulatory surgery centers in the United States through employee sales representatives and independent sales agencies[87] - The company expects revenue to increase in absolute dollars due to expanded product offerings, sales territories, new accounts, trained physician base, and increased procedure volumes, though quarterly fluctuations are anticipated[88] Cost of Goods Sold Cost of goods sold primarily includes costs from third-party manufacturers (raw materials, assembly markup), royalties, allocated overhead, and direct costs like shipping and sterilization, with inventory provisions for excess, obsolete, and field losses expensed here, and the company expecting cost of goods sold to increase in absolute dollars with higher sales volumes - Cost of goods sold primarily consists of costs for purchasing products from third-party manufacturers (raw materials plus assembly markup), royalties, allocated overhead, and direct costs such as shipping, sterilization, packaging, and personnel[89] - Inventory provisions for excess, obsolete, and field losses are expensed as cost of goods sold, based on assumptions about future demand, past usage, manufacturing changes, and market conditions[89] - The company expects cost of goods sold to increase in absolute dollars in the foreseeable future as more products are sold[89] Gross Profit and Gross Margin Gross profit is revenue minus cost of goods sold, and gross margin is gross profit divided by revenue, with these metrics influenced by average selling prices, production volumes, customer mix, manufacturing costs, and cost-reduction strategies, and the company anticipating gross profit to grow with revenue, but gross margin may fluctuate due to new product introductions and manufacturing changes - Gross profit is calculated as revenue less cost of goods sold, and gross margin as gross profit divided by revenue[91] - Gross margin is affected by average selling prices, production and ordering volumes, changes in customer mix, third-party manufacturing costs, and cost-reduction strategies[91] - The company expects gross profit to increase as revenue grows, but gross margin may fluctuate due to new product introductions and changes in manufacturing processes and technologies[91] Operating Expenses Operating expenses are categorized into Sales and Marketing, Research and Development, and General and Administrative, primarily consisting of personnel compensation (including share-based compensation), professional services, and costs associated with product commercialization, development, and corporate functions Sales and Marketing Sales and marketing expenses cover personnel compensation (salaries, bonuses, commissions, share-based compensation), surgical instrument costs, physician education, training, shipping, travel, and various marketing initiatives including direct-to-patient outreach and advertising - Sales and marketing expenses primarily include compensation for personnel (salaries, bonuses, benefits, sales commissions, share-based compensation) involved in selling and marketing functions[92] - Other components include surgical instrument expense, physician education programs, training, shipping costs, travel expenses, marketing initiatives (direct-to-patient outreach, advertising), market research, and conferences/trade shows[92] Research and Development R&D expenses include costs for engineering, product development, clinical studies, regulatory activities, and other development-related expenses, comprising personnel compensation (including share-based compensation), supplies, consulting, prototyping, testing, materials, travel, depreciation, and allocated facility overhead, and are expected to increase with continued investment in innovations and personnel - Research and development (R&D) expenses primarily consist of costs for engineering, product development, clinical studies, regulatory expenses, and other activities related to products and technologies in development[93] - These expenses include personnel compensation (salaries, bonuses, benefits, share-based compensation), supplies, consulting, prototyping, testing, materials, travel, depreciation, and allocated facility overhead[93] - R&D expenses are expected to increase in absolute dollars as the company continues to hire personnel and invest in next-generation innovations of the Lapiplasty System and other products[93] General and Administrative General and administrative expenses primarily consist of compensation for finance, IT, legal, and HR personnel (including share-based compensation), professional services (legal, audit, tax), insurance, general corporate expenses, and allocated facilities costs, with the company possessing the necessary infrastructure to support organizational growth - General and administrative expenses primarily consist of compensation for personnel (salaries, bonuses, benefits, share-based compensation) in finance, information technology, legal, and human resource functions[94] - Other components include professional services fees (legal, audit, tax), insurance costs, general corporate expenses, and allocated facilities-related expenses[94] Interest Income Interest income is derived from the company's money market funds and marketable securities - Interest income consists of interest received on the company's money market funds and marketable securities[95] Interest Expense Interest expense includes interest incurred and the amortization of debt discount and issuance costs related to outstanding borrowings - Interest expense consists of interest incurred and amortization of debt discount and issuance costs related to outstanding borrowings[96] Results of Operations This section provides a detailed comparison of the company's financial performance for the three and nine months ended September 30, 2024, versus the same periods in 2023, covering revenue, cost of goods sold, gross profit, and various operating expenses Comparison of the three months ended September 30, 2024 and 2023 Revenue increased by 10.6% to $45.1 million, driven by product mix shift and active surgeons, with gross profit rising 10.3%, but gross margin slightly decreasing to 80.1% due to inventory provisions and product mix, while sales and marketing expenses decreased by 2.3%, R&D expenses increased by 14.1% due to higher payroll, general and administrative expenses increased by 6.6% primarily from higher payroll and legal fees partially offset by lower RPM-3D milestone compensation, and net loss improved by 12.3% | Metric | 3 Months Ended Sep 30, 2024 (in thousands) | 3 Months Ended Sep 30, 2023 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Revenue | $45,086 | $40,758 | $4,328 | 10.6% | | Cost of goods sold | $8,954 | $7,998 | $956 | 12.0% | | Gross profit | $36,132 | $32,760 | $3,372 | 10.3% | | Sales and marketing | $32,775 | $33,542 | $(767) | (2.3%) | | Research and development | $4,963 | $4,350 | $613 | 14.1% | | General and administrative | $13,528 | $12,686 | $842 | 6.6% | | Net loss | $(15,360) | $(17,521) | $2,161 | (12.3%) | - Gross profit margin for the three months ended September 30, 2024, decreased from 80.4% to 80.1%, primarily due to increases in inventory provisions, a product mix shift to newer products, and allocations of payroll and related costs, partially offset by lower royalty rates[98] - General and administrative expenses increased due to higher payroll and related costs (including stock compensation) and professional services (legal fees), partially offset by a $1.5 million decrease in compensation expense related to RPM-3D milestone obligations that were fully expensed in Q2 2024[101][102] Comparison of the nine months ended September 30, 2024 and 2023 Revenue increased by 12.6% to $140.6 million, driven by new technologies and ancillary product sales, with cost of goods sold increasing by 17.5%, leading to a slight decrease in gross profit margin to 80.2%, while sales and marketing expenses rose 9.7% primarily due to higher payroll and commissions, R&D expenses increased significantly by 36.2% due to increased headcount and RPM-3D milestone obligations, general and administrative expenses increased by 25.4% mainly from higher payroll and a $2.1 million write-off of receivables due to customer bankruptcy, and net loss worsened by 27.7% | Metric | 9 Months Ended Sep 30, 2024 (in thousands) | 9 Months Ended Sep 30, 2023 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Revenue | $140,649 | $124,906 | $15,743 | 12.6% | | Cost of goods sold | $27,862 | $23,712 | $4,150 | 17.5% | | Gross profit | $112,787 | $101,194 | $11,593 | 11.5% | | Sales and marketing | $110,784 | $100,970 | $9,814 | 9.7% | | Research and development | $15,379 | $11,288 | $4,091 | 36.2% | | General and administrative | $42,108 | $33,582 | $8,526 | 25.4% | | Net loss | $(55,242) | $(43,246) | $(11,996) | 27.7% | - Gross profit margin for the nine months ended September 30, 2024, decreased from 81.0% to 80.2%, primarily due to a product mix shift to newer products, an increase in inventory provisions, and higher payroll allocations, partially offset by lower royalty rates[104] - General and administrative expenses increased primarily due to $6.2 million in higher payroll and related costs (including stock compensation expense) and a $2.3 million increase in the provision for allowance for credit losses, which includes a $2.1 million write-off of receivables from a customer that filed for bankruptcy[107] Liquidity and Capital Resources The company's liquidity as of September 30, 2024, includes $12.1 million in cash and $70.7 million in marketable securities, with $54.0 million in outstanding debt, and management believes these resources, along with expected revenues, are sufficient for at least the next twelve months, but may seek additional financing, while operating activities used $33.0 million in cash for the nine months ended September 30, 2024, investing activities provided $32.0 million, and financing activities provided $0.1 million, with the company also having royalty and operating lease commitments Overview The company's capital sources include IPO and follow-on offering proceeds, debt financing, and product sales, holding $12.1 million in cash, $70.7 million in marketable securities, and $54.0 million in outstanding debt, with an accumulated deficit of $189.5 million as of September 30, 2024, and management believes current resources are sufficient for the next twelve months, but may pursue additional financing - The company's primary capital sources include net proceeds from its IPO ($107.6 million in April 2021) and a follow-on public offering ($107.5 million in February 2023), debt financing, and revenue from product sales[109] | Financial Metric (as of Sep 30, 2024) | Amount (in millions) | | :------------------------------------ | :------------------- | | Cash and cash equivalents | $12.1 | | Marketable securities | $70.7 | | Accumulated deficit | $(189.5) | | Principal outstanding under term and revolving loans | $54.0 | - Management believes existing cash, cash equivalents, marketable securities, available debt borrowings, and expected revenues will be sufficient to meet capital requirements and fund operations for at least twelve months, but the company may seek additional debt or equity financing[110] Funding Requirements The company's funding requirements are driven by manufacturing costs, sales & marketing, R&D, and general & administrative expenses, with future expenditures dependent on commercial infrastructure, product commercialization, marketing efforts, market acceptance, intellectual property protection, R&D for new products, acquisitions, economic conditions, and other factors, and failure to obtain necessary capital could lead to delays or termination of programs - Cash, marketable securities, and revenues are used to fund operations, primarily manufacturing costs, sales and marketing, R&D, and general and administrative expenses[111] - Future operating and capital expenditures depend on factors such as investment in commercial infrastructure, product commercialization, marketing efforts, market acceptance, intellectual property protection (including litigation), R&D for new products, acquisitions, and general economic conditions[111] - Failure to obtain necessary additional capital on acceptable terms could force the company to delay, limit, reduce, or terminate product development programs, commercialization efforts, sales and marketing initiatives, or other operations[112] Cash Flows For the nine months ended September 30, 2024, net cash used in operating activities was $33.0 million, primarily due to net loss and inventory increases, partially offset by non-cash charges, while net cash provided by investing activities was $32.0 million, mainly from marketable securities sales, and net cash provided by financing activities was $0.1 million | Cash Flow Activity | Nine Months Ended Sep 30, 2024 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | | :-------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net cash used in operating activities | $(32,960) | $(35,107) | | Net cash provided by (used in) investing activities | $31,954 | $(86,306) | | Net cash provided by (used in) financing activities | $134 | $109,218 | | Net increase (decrease) in cash and cash equivalents | $(872) | $(12,195) | - Net cash used in operating activities for the nine months ended September 30, 2024, was $33.0 million, driven by a net loss of $55.2 million, partially offset by non-cash charges of $30.6 million (including $22.0 million in share-based compensation and $6.2 million in depreciation/amortization) and changes in operating assets and liabilities[116] - Net cash provided by investing activities was $32.0 million, primarily from $93.4 million in sales and maturities of marketable securities, partially offset by $52.9 million in purchases of marketable securities and $8.5 million in property and equipment purchases[118] Royalty Agreements The company has royalty agreements with surgeon consultants, with royalty expenses of $1.4 million (3.2% aggregate rate) for the three months and $4.6 million (3.3% aggregate rate) for the nine months ended September 30, 2024, prohibiting royalty payments on products sold to entities affiliated with the surgeon advisors | Metric | Three Months Ended Sep 30, 2024 (in thousands) | Three Months Ended Sep 30, 2023 (in thousands) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Royalty expense | $1,400 | $1,500 | | Aggregate royalty rate | 3.2% | 3.8% | | Metric | Nine Months Ended Sep 30, 2024 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | | :-------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Royalty expense | $4,600 | $4,700 | | Aggregate royalty rate | 3.3% | 3.8% | - Royalty agreements with surgeon consultants prohibit the payment of royalties on products sold to entities and/or individuals with whom any of the surgeon advisors is affiliated[123] Operating Lease The company has remaining lease obligations of $24.3 million as of September 30, 2024, primarily for its corporate headquarters (10-year lease expiring July 2032) and former headquarters (expiring April 2026, with subleases obtained) - As of September 30, 2024, the company has remaining lease obligations of $24.3 million[124] - This includes a 10-year lease for its corporate headquarters in Ponte Vedra, Florida, entered in February 2022 and expiring in July 2032[124] - The company also has commitments for its former headquarters, expiring in April 2026, for which subleases have been obtained[124] Critical Accounting Policies and Estimates The company's financial statements rely on management's estimates and assumptions, which may differ from actual results, with goodwill valued at $12.8 million as of September 30, 2024, qualitatively assessed for impairment with no impairment identified, and no material changes to critical accounting policies occurring during the nine months ended September 30, 2024 Goodwill Goodwill was valued at $12.8 million as of September 30, 2024, and December 31, 2023, with the company performing a qualitative impairment analysis on July 1, 2024, and concluding that no quantitative impairment test was necessary as the fair value of goodwill was not more likely than not less than its carrying amount - Goodwill was $12.8 million as of September 30, 2024, and December 31, 2023[126] - The company's annual impairment testing date for goodwill is July 1, 2024[126] - A qualitative analysis was performed, concluding that it was not more likely than not that the fair value of goodwill was less than its carrying amount, thus no quantitative impairment test was necessary[126] Recently Issued Accounting Pronouncements For information on new accounting pronouncements not yet adopted, refer to Note 3, "Recent Accounting Pronouncements," in the Notes to Condensed Financial Statements - Refer to Note 3, "Recent Accounting Pronouncements," of the Notes to Condensed Financial Statements for details on new accounting pronouncements not yet adopted[128] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate and credit risk, with interest rates on current debt capped, and a hypothetical 50 basis point decrease in rates potentially impacting the fair value of marketable securities, while credit risk in the available-for-sale securities portfolio is managed through diversification and investment criteria Interest Rate Risk The company's investment activities aim to preserve principal and provide liquidity, with a hypothetical 50 basis point increase in interest rates resulting in a $162k change in fair value of marketable securities, while a 50 basis point decrease would result in a $(165)k change, and outstanding debt has capped interest rates (9% for term debt, 7% for revolving loan) mitigating risk to rising rates | Fair Value of Marketable Securities (Sep 30, 2024) | Change in Fair Value (Down 50 bps) | Change in Fair Value (Up 50 bps) | | :------------------------------------------------- | :------------------------------- | :----------------------------- | | $78,464 (in thousands) | $162 (in thousands) | $(165) (in thousands) | - The company's current outstanding debt terms include capped interest rates of 9% for the term debt and 7% for the revolving loan facility, which mitigates the risk to rising interest rates[130] - A 194-basis point decrease in the 30-day forward looking secured overnight financing rate would be required for the company to experience a reduction in its interest rate expense from current levels[130] Credit Risk The company manages credit risk within its available-for-sale securities portfolio by maintaining a diversified portfolio of high-quality investments, including U.S. Treasury and agency securities, money market funds, commercial paper, Yankee CDs, and corporate debt, with a maximum portfolio duration of one year - The company manages credit risk within its available-for-sale securities portfolio by maintaining a well-diversified investment portfolio[131] - Investments are limited to certain types, including U.S. Treasury and agency securities, money market funds, commercial paper, Yankee CDs, and high credit quality asset-backed and corporate debt securities[131] - The overall portfolio is required to have a maximum duration of one year[131] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of September 30, 2024, with no material changes in internal control over financial reporting identified, but acknowledges the inherent limitations of any control system, which can only provide reasonable, not absolute, assurance against errors or fraud Evaluation of disclosure controls and procedures Management, with CEO and CFO participation, evaluated the effectiveness of disclosure controls and procedures as of September 30, 2024, concluding they were effective in providing reasonable assurance for timely and accurate information disclosure - Management, with the participation of the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of September 30, 2024[132] - Based on the evaluation, disclosure controls and procedures were concluded to be effective in providing reasonable assurance that required information is recorded, processed, summarized, and reported within specified time periods[132] Changes in internal control over financial reporting No material changes in internal control over financial reporting were identified during the period covered by this Quarterly Report - No change in internal control over financial reporting was identified during the period covered by this Quarterly Report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting[133] Inherent limitation on the effectiveness of internal control Management acknowledges that no control system can prevent all errors or fraud, providing only reasonable assurance due to inherent limitations such as faulty judgments, simple mistakes, circumvention by individuals or collusion, and management override, and controls may also become inadequate over time - Management does not expect that disclosure controls or internal control over financial reporting will prevent all errors and all fraud, as a control system can provide only reasonable, not absolute, assurance[134] - Inherent limitations include faulty judgments, simple errors or mistakes, circumvention by individual acts or collusion, and management override of controls[134][136] - Controls may become inadequate over time due to changes in conditions or deterioration in compliance with policies or procedures[136] Part II: Other Information Item 1. Legal Proceedings The company is not currently a party to any legal proceedings expected to have a material adverse effect on its business, but it filed a lawsuit on October 14, 2024, against Stryker Corporation and Wright Medical Technology, Inc., alleging infringement of 9 patents related to its Lapiplasty® 3D Bunion Correction® technologies and unfair competition, seeking injunctive relief and damages - The company is not a party to any legal proceedings believed to have a material adverse effect on its business or results of operations[139] - On October 14, 2024, the company filed a lawsuit against Stryker Corporation and its subsidiary Wright Medical Technology, Inc., alleging infringement of 9 patents related to its Lapiplasty® 3D Bunion Correction® technologies and unfair competition[140] - The lawsuit was filed in the United States District Court for the District of New Jersey and seeks injunctive relief and damages[140] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2023 - There have been no material changes from the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2023[141] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section states that there were no unregistered sales of equity securities or use of proceeds to report - No unregistered sales of equity securities and use of proceeds to report[141] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities to report - No defaults upon senior securities to report[141] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company - Mine Safety Disclosures are not applicable to the company[141] Item 5. Other Information This section states that there is no other information to report - No other information to report[141] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report, including certifications from the Principal Executive Officer and Principal Financial Officer, and XBRL-related documents - Exhibits include certifications of the Principal Executive Officer (31.1, 32.1) and Principal Financial Officer (31.2, 32.2), and Inline XBRL documents (101.INS, 101.SCH, 104)[138] - Certifications 32.1 and 32.2 are deemed furnished and not filed with the SEC, and are not to be incorporated by reference into any other filings[143] Signatures The report is signed by John T. Treace, Chief Executive Officer, and Mark L. Hair, Chief Financial Officer, on November 5, 2024, certifying its submission - The report was duly signed on behalf of Treace Medical Concepts, Inc. by John T. Treace, Chief Executive Officer, and Mark L. Hair, Chief Financial Officer[144] - The signing date for the report was November 5, 2024[144]