Treace(US:TMCI)2024-02-27 21:29Part I Business Treace Medical specializes in bunion and midfoot deformity correction with its Lapiplasty® System, driving substantial revenue growth - The company's core focus is advancing the standard of care for bunion surgery with its patented Lapiplasty® 3D Bunion Correction System®, which addresses the complex 3D deformity by correcting the unstable joint at the root of the problem1822 Market Opportunity for Bunion Treatment | Metric | Value | | :--- | :--- | | Americans Affected by Bunions | Approx. 67 million | | Annual Surgical Candidates (U.S.) | Approx. 1.1 million | | Total Annual Addressable Market | > $5 billion | | Current Annual Bunion Surgeries | Approx. 450,000 | Historical Revenue and Kit Sales Growth | Year | Revenue ($) | Lapiplasty® Procedure Kits Sold | | :--- | :--- | :--- | | 2020 | $57.4 million | 11,113 | | 2023 | $187.1 million | 29,675 | | CAGR (2020-2023) | 48.3% | 38.7% | - The company's commercial strategy relies on a direct employee sales force, supplemented by independent agencies, covering 249 territories in the U.S. In 2023, employee sales representatives generated approximately 81% of total revenue2966 Our Solutions Treace's solutions include the Lapiplasty® System for 3D bunion correction, minimally invasive options, and patient-specific instrumentation - The Lapiplasty® System is a comprehensive solution combining procedural instruments (Positioner, Compressor, 3-n-1® Guide) and single-use implant kits (Biplanar Plating, SpeedPlate™ Implants) to enable a reproducible 3D bunion correction4749 - In 2023, the company launched the SpeedPlate™ Rapid Compression Implant System, an enabling technology for its Micro-Lapiplasty™ minimally invasive procedure, and the Hammertoe PEEK Fixation System to address common co-occurring deformities5255 - The company acquired assets from RedPoint Medical3D (RPM-3D) in June 2023 to develop 3D-printed, patient-specific cut guides based on CT scans, with full commercialization planned for the second half of 202456 Clinical Advantages and Data The Lapiplasty® System is supported by robust clinical evidence, including the ALIGN3D™ study, showing low recurrence and improved patient outcomes Interim ALIGN3D Clinical Study Outcomes (Mean Follow-up: 33.8 months) | Key Outcome | Result | | :--- | :--- | | Recurrence Rate | 0.9% | | Time to Start Weight-Bearing | Average of 8.4 days (in a walking boot) | | Symptomatic Non-Union Rate | 1.8% | | Hardware Removal (due to pain) | 6.9% | | Patient-Reported Pain Improvement | 81% | | Patient-Reported Walking/Standing Improvement | 86% | - The company has completed enrollment in its ALIGN3D™ (173 patients) and Mini3D™ (105 patients) prospective clinical studies and is actively enrolling for its MTA3D™ study, demonstrating a commitment to generating supportive clinical evidence79 Commercial Strategy The commercial strategy emphasizes product innovation, direct sales, surgeon training, patient education, and clinical evidence, boosting surgeon utilization - The company requires surgeons to complete a simulated surgical training program before performing their first Lapiplasty® Procedure, supported by 12 clinical specialists who assist with training and live surgery support6869 - Surgeon utilization of the Lapiplasty® System increases with experience. As of year-end 2023, surgeons who started using the system in 2018 performed an average of 17.7 procedures in the trailing twelve months, compared to 8.0 procedures for those who started in 20207174 - A differentiated direct-to-patient outreach program educates potential surgical candidates through digital and traditional marketing, directing them to an educational website and a "Find a Doctor" tool to locate trained local surgeons7475 Intellectual Property Treace Medical protects its technology with a robust IP portfolio, including 52 owned U.S. patents and 141 pending applications as of December 2023 Patent Portfolio (as of Dec 31, 2023) | Patent Type | Count | | :--- | :--- | | Owned U.S. Patents | 52 | | Licensed U.S. Patents | 1 | | Owned Foreign Patents | 15 | | Pending Patent Applications (Global) | 141 | - The company owns U.S. trademark registrations for key marks including "Lapiplasty®", "Adductoplasty®", and "3D Bunion Correction®", and has several other applications pending for newer product names like "Micro-Lapiplasty™" and "SpeedPlate™"90 Government Regulation The company's medical devices are subject to FDA Class I/II regulations, 510(k) clearance, and ongoing compliance with QSR and healthcare fraud and abuse laws - The company's currently marketed products are Class I exempt devices and Class II devices, which require FDA 510(k) premarket notification clearance rather than the more stringent Premarket Approval (PMA) process108 - After receiving 510(k) clearance, any significant modification to a device's safety, effectiveness, or intended use requires a new 510(k) submission111 - The company is subject to numerous healthcare laws, including the federal Anti-Kickback Statute, the False Claims Act, and the Physician Payments Sunshine Act, which govern its relationships with physicians and require reporting of payments and transfers of value127128131 Human Capital As of December 2023, Treace Medical had 516 employees, a 22% increase, with a focus on talent development, low turnover, and high equity participation Employee Statistics (2023) | Metric | Value | | :--- | :--- | | Total Full-Time Employees (Year-End) | 516 | | Year-over-Year Employee Growth | 22% | | New Hires in Sales Team | 76% | | Undesired Turnover Rate | < 7% | | Employees with Equity Grants | ~80% | - A 2022 employee engagement survey showed an 87% engagement rate, comparing favorably to the 76% average for benchmark medical device and biotechnology companies138 Risk Factors The company faces risks including net losses, intense competition, Lapiplasty® dependence, payor reimbursement, product liability, supply chain, and healthcare regulations - The company has a history of net losses, incurring $49.5 million in 2023 and $42.8 million in 2022, with an accumulated deficit of $134.2 million as of December 31, 2023148 - Revenue is primarily generated from the Lapiplasty® System, making the company highly dependent on its continued market adoption by surgeons, patients, and payors161 - The business is subject to intense competition from larger, more established medical device manufacturers like Stryker, Johnson & Johnson (DePuy Synthes), and Zimmer Biomet, who may have greater financial resources and market presence153154 - Relationships with physicians and third-party payors are subject to extensive federal and state healthcare fraud and abuse laws (e.g., Anti-Kickback Statute), with potential for substantial penalties for non-compliance219 Cybersecurity The company maintains a cybersecurity risk management program guided by industry standards, overseen by the CIO and Audit Committee, with no material incidents - The cybersecurity program is guided by industry frameworks including CIS, NIST, and ISO 27000, and is integrated into the company's overall risk management framework297 - Governance is managed by the CIO, who reports to the CFO and provides regular updates to the Audit Committee. The Audit Committee is delegated responsibility for cybersecurity oversight by the full Board of Directors304305 - The company has not experienced any cybersecurity incidents in the past three years that have materially affected its business, operations, or financial condition303 Properties As of December 2023, the company leases a 125,000 square foot corporate headquarters in Ponte Vedra, Florida, with the lease expiring in July 2032 - The company's corporate headquarters is a leased facility of approximately 125,000 square feet in Ponte Vedra, Florida, with the lease expiring in July 2032307 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under "TMCI" since April 2021, has never paid dividends, and repurchased shares in Q4 2023 for tax obligations - The company's common stock has been trading on the NASDAQ Global Select Market under the symbol "TMCI" since its IPO on April 23, 2021311 - The company has never declared or paid cash dividends and does not intend to in the foreseeable future, with future earnings planned for reinvestment into the business313 Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, revenue grew 31.9% to $187.1 million, but increased operating expenses led to a $49.5 million net loss, despite a $107.5 million stock offering - In June 2023, the company acquired assets from RPM-3D for $20.0 million in cash, with up to $10.0 million in additional milestone payments, to add patient-specific instrumentation (PSI) capabilities to its portfolio323 Key Business Metrics (2023 vs. 2022) | Metric | 2023 | % Change from 2022 | | :--- | :--- | :--- | | Lapiplasty® Kits Sold | 29,675 | +20% | | Blended Avg. Revenue per Kit | $6,306 | +10% | | Active Surgeons (Year-End) | 2,855 | +20% | | Avg. Kits per Active Surgeon | 10.4 | +0.6% | - The business experiences seasonality, with the fourth quarter historically being the strongest (30-40% of annual revenue) due to patients meeting insurance deductibles, and the first and third quarters being comparatively weaker333 Results of Operations In 2023, revenue grew 31.9% to $187.1 million, but a 34.5% increase in operating expenses, particularly sales and marketing, led to a $49.5 million net loss Comparison of Operations for Years Ended December 31 ($ in thousands) | Metric | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $187,118 | $141,838 | 31.9% | | Gross Profit | $151,937 | $116,306 | 30.6% | | Gross Margin | 81.2% | 82.0% | (0.8) pts | | Sales and Marketing | $140,894 | $104,567 | 34.7% | | Research and Development | $15,440 | $13,584 | 13.7% | | General and Administrative | $47,031 | $32,999 | 42.5% | | Loss from Operations | $(51,428) | $(34,844) | 47.6% | | Net Loss | $(49,527) | $(42,815) | 15.7% | - The increase in G&A expenses was primarily driven by an $8.9 million increase in payroll-related costs and a $4.2 million increase in professional services, which included $3.3 million in accrued compensation for RPM-3D acquisition milestones349 Liquidity and Capital Resources As of December 2023, the company held $123.2 million in cash and marketable securities, bolstered by a $107.5 million stock offering, with $54.0 million outstanding on its loan facility Cash Flow Summary (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(34,575) | $(30,648) | | Net cash used in investing activities | $(81,299) | $(76,518) | | Net cash provided by financing activities | $109,383 | $20,806 | - Net cash from financing activities in 2023 was primarily driven by $107.5 million in net proceeds from a public stock offering in February366 - Net cash used in investing activities in 2023 included $20.0 million for the RPM-3D acquisition, $11.5 million for property and equipment, and a net $49.9 million for the purchase of marketable securities363 Financial Statements and Supplementary Data Audited 2023 financial statements show total assets grew to $251.9 million and revenue to $187.1 million, but net loss widened to $49.5 million due to operating investments Balance Sheet Highlights (as of Dec 31, in thousands) | Account | 2023 | 2022 | | :--- | :--- | :--- | | Cash, cash equivalents & marketable securities | $123,198 | $81,252 | | Total Assets | $251,907 | $159,024 | | Total Liabilities | $113,969 | $98,495 | | Total Stockholders' Equity | $137,938 | $60,529 | Statement of Operations Highlights (Year ended Dec 31, in thousands) | Account | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Revenue | $187,118 | $141,838 | $94,419 | | Gross Profit | $151,937 | $116,306 | $77,531 | | Loss from Operations | $(51,428) | $(34,844) | $(16,510) | | Net Loss | $(49,527) | $(42,815) | $(20,552) | - The company acquired assets from RPM-3D on June 12, 2023, for $20.0 million in cash and up to $10.0 million in contingent consideration, resulting in the recognition of $12.8 million in goodwill and $9.5 million in intangible assets468469470 Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with an unqualified auditor opinion - Management concluded that as of December 31, 2023, the company's disclosure controls and procedures were effective532 - Based on the COSO 2013 framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2023533 - The independent auditor, Grant Thornton LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting for the year ended December 31, 2023538 Part III Directors, Executive Officers, Corporate Governance, Executive Compensation, and Other Matters Information for Items 10-14, covering directors, executive compensation, and governance, is incorporated by reference from the forthcoming 2024 Proxy Statement - Information regarding Directors, Executive Officers, Corporate Governance (Item 10), Executive Compensation (Item 11), Security Ownership (Item 12), Certain Relationships and Related Transactions (Item 13), and Principal Accountant Fees and Services (Item 14) is incorporated by reference from the forthcoming 2024 Proxy Statement550551552 Part IV Exhibits, Financial Statement Schedules This section lists financial statements, schedules, and exhibits, including a valuation and qualifying account roll-forward and an exhibit index Schedule II: Valuation and Qualifying Accounts (in thousands) | Account | 2021 Balance | 2022 Balance | 2023 Balance | | :--- | :--- | :--- | :--- | | Allowance for doubtful accounts | $414 | $735 | $980 | | Deferred tax asset valuation allowance | $11,941 | $22,864 | $35,211 |