Treace(TMCI) - 2025 Q1 - Quarterly Report

Special Note Regarding Forward-Looking Statements This section outlines forward-looking statements and key risks that could cause actual results to differ materially - The report contains forward-looking statements about business growth, profitability, market share, product development, and financial performance, identifiable by terms like "anticipate," "expect," "will," and "may"[10] - Key factors that could cause actual results to differ materially include extensive competition, economic conditions, regulatory changes, intellectual property disputes, and the ability to retain and recruit key personnel[11][12][15] Part I: Financial Information Item 1. Condensed Financial Statements This section presents the company's unaudited condensed financial statements and detailed notes for the specified periods Condensed Balance Sheets This section summarizes the company's condensed balance sheets as of March 31, 2025, and December 31, 2024 Condensed Balance Sheet Highlights (in thousands) | Metric | March 31, 2025 | December 31, 2024 | Change (vs. Dec 31, 2024) | | :-------------------------------- | :------------- | :---------------- | :------------------------ | | Total Assets | $205,846 | $217,094 | $(11,248) | | Total Liabilities | $100,505 | $104,202 | $(3,697) | | Total Stockholders' Equity | $105,341 | $112,892 | $(7,551) | | Cash and cash equivalents | $13,372 | $11,350 | $2,022 | | Marketable securities, short-term | $62,717 | $64,327 | $(1,610) | | Accounts receivable, net | $31,110 | $40,803 | $(9,693) | | Inventories | $37,940 | $39,255 | $(1,315) | | Total current assets | $149,437 | $161,402 | $(11,965) | | Total current liabilities | $33,180 | $34,925 | $(1,745) | | Long-term debt, net | $53,380 | $53,306 | $74 | Condensed Statements of Operations and Comprehensive Loss This section details the company's condensed statements of operations and comprehensive loss for Q1 2025 and Q1 2024 Condensed Statements of Operations Highlights (in thousands) | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change (YoY) | % Change (YoY) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :----------- | :------------- | | Revenue | $52,570 | $51,108 | $1,462 | 2.9% | | Cost of goods sold | $10,677 | $10,127 | $550 | 5.4% | | Gross profit | $41,893 | $40,981 | $912 | 2.2% | | Sales and marketing expenses | $36,122 | $40,328 | $(4,206) | (10.4)% | | Research and development expenses | $5,562 | $5,259 | $303 | 5.8% | | General and administrative expenses | $15,791 | $14,362 | $1,429 | 9.9% | | Total operating expenses | $57,475 | $59,949 | $(2,474) | (4.1)% | | Loss from operations | $(15,582) | $(18,968) | $3,386 | (17.9)% | | Net loss | $(15,922) | $(18,676) | $2,754 | (14.7)% | | Net loss per share, basic and diluted | $(0.25) | $(0.30) | $0.05 | (16.7)% | Condensed Statements of Stockholders' Equity This section outlines changes in stockholders' equity for the three months ended March 31, 2025 Stockholders' Equity Changes (in thousands) | Metric | Balances at Dec 31, 2024 | Balances at Mar 31, 2025 | Change | | :------------------------------------ | :----------------------- | :----------------------- | :------- | | Total Stockholders' Equity | $112,892 | $105,341 | $(7,551) | | Net loss | $(15,922) | N/A | N/A | | Share-based compensation expense | $8,693 | N/A | N/A | | Treasury stock (shares withheld for tax) | $(401) | N/A | N/A | Condensed Statements of Cash Flows This section presents the company's condensed statements of cash flows for Q1 2025 and Q1 2024 Cash Flow Summary (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change (YoY) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :----------- | | Net cash provided by (used in) operating activities | $4,198 | $(7,221) | $11,419 | | Net cash provided by (used in) investing activities | $(1,894) | $3,758 | $(5,652) | | Net cash provided by (used in) financing activities | $(282) | $(185) | $(97) | | Net increase (decrease) in cash and cash equivalents | $2,022 | $(3,648) | $5,670 | | Cash and cash equivalents at end of period | $13,372 | $9,334 | $4,038 | Notes to Condensed Financial Statements This section provides detailed notes to the condensed financial statements, explaining accounting policies and specific components 1. Formation and Business of the Company This note describes the company's specialization in the Lapiplasty® 3D Bunion Correction System and product expansion - The company specializes in the Lapiplasty® 3D Bunion Correction System, designed to surgically correct bunion deformities across three anatomical planes and address the root cause[29] - The company is expanding its product offerings to become a comprehensive bunion solutions company and further penetrate the bunion market[29] 2. Summary of Significant Accounting Policies This note outlines the preparation of interim financial statements and significant accounting estimates and assumptions - The unaudited interim condensed financial statements are prepared in accordance with U.S. GAAP for interim financial information and SEC rules for Form 10-Q[30] - The company operates as a single reportable segment, focusing on designing, manufacturing, and marketing medical devices for bunion and related midfoot deformities[38] - Significant estimates and assumptions include valuation of intangible assets and goodwill, reserves for accounts receivable and inventories, and stock-based compensation[34] 3. Recent Accounting Pronouncements This note details the adoption of ASU 2023-07 and the evaluation of other recent accounting pronouncements - The company adopted ASU 2023-07, Segment Reporting, on January 1, 2024, which requires enhanced disclosures for reportable segments[39] - The company is currently evaluating the impact of ASU 2023-09 (Income Taxes) and ASU 2024-03 (Expense Disaggregation Disclosures), effective for annual periods beginning after December 15, 2024, and December 15, 2026, respectively[40][41] 4. Fair Value Measurements This note presents assets measured at fair value and their categorization into Level 1 and Level 2 inputs Assets Measured at Fair Value (in thousands) | Asset Category | March 31, 2025 (Total) | December 31, 2024 (Total) | | :------------------------------------ | :----------------------- | :------------------------ | | Cash equivalents (Money market funds, Corporate debt) | $5,299 | $5,995 | | Short-term marketable securities (U.S. treasury, Corporate debt, Asset-backed, Yankee CD) | $62,717 | $64,327 | | Total Assets at Fair Value | $68,016 | $70,322 | - Assets and liabilities measured at fair value are categorized into Level 1 (unadjusted quoted prices in active markets) and Level 2 (observable inputs other than Level 1 prices)[42][43] 5. Balance Sheet Components This note provides detailed breakdowns of cash, marketable securities, property and equipment, and accrued liabilities Cash and Cash Equivalents (in thousands) | Category | March 31, 2025 | December 31, 2024 | | :-------------------- | :------------- | :---------------- | | Cash | $8,073 | $5,355 | | Money market funds | $4,101 | $4,798 | | Corporate debt | $1,198 | $1,197 | | Total | $13,372 | $11,350 | Marketable Securities – Short-term (in thousands) | Category | March 31, 2025 (Fair Value) | December 31, 2024 (Fair Value) | | :------------------------------------ | :---------------------------- | :---------------------------- | | U.S. treasury and government agencies | $13,515 | $10,008 | | Corporate debt | $26,456 | $32,269 | | Asset-backed securities | $16,674 | $14,781 | | Yankee CD | $6,072 | $6,774 | | Total | $62,717 | $64,327 | Property and Equipment, Net (in thousands) | Category | March 31, 2025 | December 31, 2024 | | :------------------------------------ | :------------- | :---------------- | | Total property and equipment | $44,683 | $41,258 | | Less: accumulated depreciation and amortization | $(17,554) | $(15,305) | | Property and equipment, net | $27,129 | $25,953 | Accrued Liabilities (in thousands) | Category | March 31, 2025 | December 31, 2024 | | :------------------------------------ | :------------- | :---------------- | | Accrued royalties expense | $1,836 | $2,259 | | Accrued compensation expense for RPM-3D earn-out | $0 | $2,125 | | Other accrued expense | $3,179 | $2,056 | | Total accrued liabilities | $6,008 | $7,197 | 6. Long-Term Debt This note details the company's long-term debt, including the MidCap loan facilities and a legal cost financing agreement Long-Term Debt, Net (in thousands) | Category | March 31, 2025 | December 31, 2024 | | :------------------------------------ | :------------- | :---------------- | | MidCap revolving loan facility | $4,000 | $4,000 | | MidCap term loan facility | $50,000 | $50,000 | | Less: debt discount and issuance costs | $(620) | $(694) | | Total long-term debt, net | $53,380 | $53,306 | - The MidCap term loan and revolving loan facility are accruing interest at capped rates of 9% and 7%, respectively, as of March 31, 2025[64] - The company entered into a legal cost financing agreement on March 25, 2025, to defer up to $5.0 million in legal costs related to a patent dispute with Stryker, bearing 10% interest per annum[66] 7. Commitments and Contingencies This note discusses royalty expenses, a shareholder class action, and a patent infringement lawsuit against Stryker - Royalty expense for the three months ended March 31, 2025, was $1.6 million (3.1% aggregate royalty rate), compared to $1.7 million (3.4%) in the same period of 2024[68] - A shareholder class action complaint was filed on April 11, 2025, alleging federal securities law violations by the company and certain officers, currently in the preliminary stage[72] - The company filed a patent infringement lawsuit against Stryker Corporation on October 14, 2024, alleging infringement of 9 patents related to its Lapiplasty® 3D Bunion Correction® technologies[90][133] 8. Stockholders' Equity This note provides details on equity awards granted and share-based compensation expense for Q1 2025 and Q1 2024 Equity Awards Granted (Q1 2025 vs. Q1 2024) | Award Type | Q1 2025 (Units) | Q1 2025 (Avg. Fair Value) | Q1 2024 (Units) | Q1 2024 (Avg. Fair Value) | | :-------------------- | :-------------- | :------------------------ | :-------------- | :------------------------ | | Restricted Stock Units (RSUs) | 1,938,595 | $9.33 | 1,426,015 | $13.39 | | Performance Share Units (PSUs) | 560,625 | $11.17 | 453,375 | $18.89 | Share-Based Compensation Expense (in thousands) | Expense Category | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Cost of goods sold | $99 | $90 | | Sales and marketing expense | $1,414 | $1,697 | | Research and development expense | $1,125 | $1,006 | | General and administrative expense | $6,055 | $4,615 | | Total | $8,693 | $7,408 | 9. Net Loss Per Share Attributable to Common Stockholders This note presents the calculation of net loss per share and discusses potentially dilutive securities Net Loss Per Share (Basic and Diluted) | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Net loss | $(15,922) | $(18,676) | | Weighted-average common stock outstanding | 62,661,447 | 61,792,788 | | Net loss per share, basic and diluted | $(0.25) | $(0.30) | - Potentially dilutive securities, totaling 14.7 million shares as of March 31, 2025, were excluded from diluted EPS calculation due to the company's net loss[80] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section reviews the company's business, financial performance, and outlook, highlighting product innovation, competition, and liquidity Overview This section provides an overview of the company's medical technology focus, product innovations, and financial position - The company is a medical technology firm focused on surgical management of bunion and midfoot deformities, known for its proprietary Lapiplasty 3D Bunion Correction System[82] - Recently introduced Nanoplasty and Percuplasty Procedures for minimally invasive 3D bunion correction, expanding into the metatarsal osteotomy segment[82] Financial Position (as of March 31, 2025, in millions) | Metric | Amount | | :------------------------------------ | :----- | | Cash and cash equivalents | $13.4 | | Marketable securities | $62.7 | | Accumulated deficit | $(205.9) | | Principal outstanding under term loan and revolving loan | $54.0 | Economic Environment This section discusses the impact of inflationary pressures, interest rate changes, and macroeconomic conditions on the company - Inflationary pressures and interest rate changes are expected to result in higher costs for the company[85] - Macroeconomic conditions, including recession fears and reduced consumer confidence, may negatively impact patient demand for elective surgeries[85] - New U.S. tariff policies are expected to increase inventory costs and reduce gross margins, though not materially at current rates[85] Increased Competition This section addresses increased competition from minimally invasive solutions and new Lapidus products impacting growth - The company is experiencing increased competition from the accelerating adoption of minimally invasive osteotomy solutions and new Lapidus products[86] - This increased competition has, and may continue to, negatively impact the company's growth rates and market share[86] Innovation and Growth This section outlines the company's strategy for long-term revenue growth through investments in new products and R&D - The company expects to continue focusing on long-term revenue growth through investments in its business and new products, including sales and marketing and R&D[87] - New products launched in late 2024 include Nanoplasty™ and Percuplasty™ Systems (minimally-invasive 3D osteotomy), IntelliGuide™ PSI Cut Guides, Micro-Lapiplasty™ System, Mini-Adductoplasty™ System, and SpeedMTP™ Rapid Compression Implant[89] - In Q1 2025, the company launched the SpeedAkin™ implant and the SpeedPlate™ Micro-Quad implant, with plans to expand commercial availability of new products throughout 2025[89] Intellectual Property Strategy This section details the company's patent portfolio and its patent infringement lawsuit against Stryker Corporation - The company's patent portfolio includes 75 granted U.S. patents, 26 granted patents worldwide, and over 150 pending patent applications[90] - On October 14, 2024, the company filed a lawsuit against Stryker Corporation alleging infringement of 9 patents related to its Lapiplasty® 3D Bunion Correction® technologies and unfair competition[90] Market Share Growth This section discusses strategies for gaining broader acceptance of proprietary procedures and securing facility approvals - Business growth depends on gaining broader acceptance of proprietary procedures and systems by surgeons and securing hospital and ambulatory surgery center facility approvals[91] - The company plans to educate hospitals and facility administrators on the differentiated benefits of its procedures and systems, supported by clinical data, to facilitate access and sales growth[91] - The company expects to operate at a loss in the near term and anticipates financing operations through existing cash, marketable securities, and expected revenues, potentially raising additional debt or equity[91] Seasonality This section explains the company's seasonal sales patterns, with higher volumes in Q4 and lower volumes in Q1-Q3 - The company experiences seasonality with higher sales volumes in the fourth calendar quarter, historically accounting for approximately 30% to 40% of full-year revenues[92] - Lower sales volumes are typically observed in the first calendar quarter due to resetting annual patient healthcare insurance plan deductibles and adverse weather[92] - Sales volumes also tend to be lower in the second and third quarters as elective procedures generally decline during the spring and summer months[92] Coverage and Reimbursement This section addresses the dependence on third-party payor reimbursement for product sales, including government and private plans - Sales of the company's products depend on third-party payor reimbursement, including government programs (Medicare, Medicaid) and private insurance plans[93] - Based on 2017 claims data, private payors covered approximately 63% of Lapidus cases and 60% of all bunion surgical cases[93] - Medicare payment rates for Lapiplasty procedures (CPT 28297 and CPT 28740) are grouped under APC 5114, while multiple tarsometatarsal (TMT) joint fusions (CPT 28730 or CPT 27835) are classified under APC 5115[94] Components of Our Results of Operations This section defines the components of revenue, cost of goods sold, and operating expenses for the company - Revenue is generated from the sale of implant kit systems, single-use sterile instruments, and other complementary products to physicians, surgeons, hospitals, ambulatory surgery centers, and stocking distributors[95] - Cost of goods sold primarily includes costs for product purchases from third-party manufacturers, royalties, allocated overhead, shipping, sterilization, packaging, and personnel costs, with inventory provisions expensed here[97] - Operating expenses are categorized into Sales and Marketing (personnel, commissions, education, advertising), Research and Development (engineering, clinical studies, regulatory, personnel), and General and Administrative (finance, IT, legal, HR, professional services)[99][100][101] Results of Operations (Comparison of the three months ended March 31, 2025 and 2024) This section compares the company's financial performance for Q1 2025 and Q1 2024, highlighting key changes Key Financial Performance (Q1 2025 vs. Q1 2024, in thousands) | Metric | 2025 | 2024 | Change | % Change | | :------------------------------------ | :----- | :----- | :----- | :------- | | Revenue | $52,570 | $51,108 | $1,462 | 2.9% | | Cost of goods sold | $10,677 | $10,127 | $550 | 5.4% | | Gross profit | $41,893 | $40,981 | $912 | 2.2% | | Gross profit margin | 79.7% | 80.2% | (0.5)% | (0.6)% | | Sales and marketing expenses | $36,122 | $40,328 | $(4,206) | (10.4)% | | Research and development expenses | $5,562 | $5,259 | $303 | 5.8% | | General and administrative expenses | $15,791 | $14,362 | $1,429 | 9.9% | | Loss from operations | $(15,582) | $(18,968) | $3,386 | (17.9)% | | Net loss | $(15,922) | $(18,676) | $2,754 | (14.7)% | - The decrease in sales and marketing expenses was primarily due to a $3.7 million reduction in advertising spend for direct-to-consumer campaigns and a $3.5 million decrease in payroll and related costs from optimizing the sales force structure[107] - Interest income decreased by $0.7 million, or 45.2%, primarily due to lower balances invested in marketable securities and slightly lower interest rates[110] Liquidity and Capital Resources This section discusses the company's liquidity position, capital requirements, and cash flow activities for Q1 2025 Liquidity Position (as of March 31, 2025, in millions) | Metric | Amount | | :------------------------------------ | :----- | | Cash and cash equivalents | $13.4 | | Marketable securities | $62.7 | | Outstanding principal 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 the next twelve months[112][114] - Net cash provided by operating activities was $4.2 million for Q1 2025, a significant improvement from $7.2 million used in Q1 2024, driven by a reduced net loss and favorable changes in operating assets and liabilities[116][117] - Net cash used in investing activities was $1.9 million for Q1 2025, primarily for purchases of marketable securities and property and equipment, while net cash used in financing activities was $0.3 million, mainly for shares repurchased for tax withholding on vested RSUs[118][120] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section confirms no material changes to market risk information from the previously disclosed Annual Report on Form 10-K - There have been no material changes from the market risk information previously disclosed in the Annual Report on Form 10-K[127] Item 4. Controls and Procedures Management concluded that disclosure controls were effective as of March 31, 2025, with no material changes in internal control over financial reporting - Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2025, providing reasonable assurance for timely and accurate information disclosure[127] - No material changes in internal control over financial reporting were identified during the period covered by this Quarterly Report[128] - Management acknowledges the inherent limitations of any control system, which can only provide reasonable, not absolute, assurance against errors and fraud[129] Part II: Other Information Item 1. Legal Proceedings This section details a federal securities class action lawsuit and a patent infringement lawsuit filed against Stryker - A shareholder class action complaint was filed on April 11, 2025, alleging federal securities law violations by the company and certain officers, currently in the preliminary stage with an amended complaint filed on April 28, 2025[132] - The company filed a lawsuit against Stryker Corporation on October 14, 2024, alleging infringement of 9 patents related to its Lapiplasty® 3D Bunion Correction® technologies and unfair competition[133] - Management disputes the allegations in the class action complaint and intends to defend vigorously, with the outcome remaining uncertain and no estimable potential impact on financial statements at this time[132] Item 1A. Risk Factors This section confirms no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K - There have been no material changes from the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2024[134] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the repurchase of 52,605 common shares at an average price of $7.62, primarily for tax withholding Issuer Purchases of Equity Securities (Three Months Ended March 31, 2025) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :------------------------------------ | :----------------------------- | :--------------------------- | | January 1 to January 31, 2025 | 34,685 | $7.30 | | February 1 to February 28, 2025 | — | — | | March 1 to March 31, 2025 | 17,920 | $8.23 | | Totals | 52,605 | $7.62 | - The repurchases primarily include restricted shares withheld from employees to offset tax withholding obligations that occur upon vesting and release of restricted shares[136][137] Item 3. Defaults Upon Senior Securities This section confirms no defaults upon senior securities were reported during the period - No defaults upon senior securities were reported[138] Item 4. Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[139] Item 5. Other Information No other information is reported under this item - No other information to report[140] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including credit agreement amendments and officer certifications - Includes Amendment No. 2 to Credit and Security Agreement (Revolving Loan) and Amendment No. 2 to Credit and Security Agreement (Term Loan) dated April 24, 2025[141] - Contains certifications from the Principal Executive Officer (John T. Treace) and Principal Financial Officer (Mark L. Hair) as Exhibits 31.1, 31.2, 32.1, and 32.2[141] Signatures The Quarterly Report was officially signed on May 8, 2025, by the Chief Executive Officer and Chief Financial Officer - The report was signed by John T. Treace, Chief Executive Officer, and Mark L. Hair, Chief Financial Officer, on May 8, 2025[147]