# Treace Medical Concepts, Inc.: Form 10-Q for the period ended Mar 31, 2024

- Company: [Treace Medical Concepts, Inc.](/companies/tmci.md) (CIK 1630627)
- Form: 10-Q
- Filed: 2024-05-07
- Accepted by EDGAR: May 7, 2024, 16:10 ET
- Period: 2024-03-31
- Accession: 0000950170-24-054480
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1630627/000095017024054480/tmci-20240331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1630627/000095017024054480/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-01-01 to 2024-03-31 | $51.1m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2024-01-01 to 2024-03-31 | $10.1m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2024-01-01 to 2024-03-31 | $41.0m | us-gaap:GrossProfit |
| Research and development | 3 months, 2024-01-01 to 2024-03-31 | $5.3m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2024-01-01 to 2024-03-31 | −$19.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2024-01-01 to 2024-03-31 | $1.3m | us-gaap:InterestExpense |
| Net income | 3 months, 2024-01-01 to 2024-03-31 | −$18.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-01-01 to 2024-03-31 | −$0.30 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-01-01 to 2024-03-31 | −$0.30 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-01-01 to 2024-03-31 | 61,792,788 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2024-01-01 to 2024-03-31 | −$7.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2024-01-01 to 2024-03-31 | $3.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2024-03-31 | $9.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2024-03-31 | $187.4m | us-gaap:AssetsCurrent |
| Total assets | at 2024-03-31 | $242.7m | us-gaap:Assets |
| Current liabilities | at 2024-03-31 | $47.0m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-03-31 | $116.3m | us-gaap:Liabilities |
| Long-term debt | at 2024-03-31 | $53.1m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2024-03-31 | $126.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 35,048 characters.

*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.

### 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 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 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.

### 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, 2024 | 2023 | Change 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.

### 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.

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):

| Net cash (used in) provided by: | Three Months Ended March 31, 2024 | 2023 |
| --- | ---: | ---: |
| 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.

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.

## Market risk

As filed, 1,680 characters.

### 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*

| Fair value of marketable securities | Change in fair value 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.

## Controls and procedures

As filed, 3,148 characters.

### 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 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.

## Risk factors

As filed, 228 characters.

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

Filed May 7, 2024.
Source: SEC EDGAR, the filing index for accession 0000950170-24-054480. Last ingested by Listed: Oct 29, 2026, 04:31 ET. No prices; not investment advice.