10-Q 1 tmci-20220331.htm 10-Q 10-Q
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333

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

Form 10-Q

 

(Mark one)

 

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

 

For the quarterly period ended March 31, 2022

 

or

 

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

For the transition period from___ to___

Commission file number: 001-40355

 

Treace Medical Concepts, Inc.

 

(Exact name of registrant as specified in its charter)

 

 

Delaware

47-1052611

(State or other jurisdiction of incorporation or organization)

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

 

203 Fort Wade Rd, Suite 150

Ponte Vedra, Florida 32081

(Address of principal executive offices, including zip code)

 

(904) 373-5940

(Registrant’s telephone number, including area code)

 

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

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common stock, $0.001 par value

TMCI

The Nasdaq Global Select Market

 

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

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

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

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

 

 

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

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

As of May 2, 2022, 55,278,942 shares of the registrant’s common stock, $0.001 par value per share, were outstanding.

 


TREACE MEDICAL CONCEPTS, INC.

 

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2022

 

Table of Contents

 

Item 1.

Unaudited Condensed Financial Statements

3

 

Condensed Balance Sheets

3

 

Condensed Statements of Operations and Comprehensive Loss

4

 

Condensed Statements of Stockholders' Equity (Deficit)

5

 

Condensed Statements of Cash Flows

6

 

Notes to Condensed Financial Statements

7

Item 2.

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

16

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

23

Item 4.

Controls and Procedures

24

 

 

Part II: Other Information

 

Item 1.

Legal Proceedings

25

Item 1A.

Risk Factors

25

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25

Item 3.

Defaults Upon Senior Securities

26

Item 4.

Mine Safety Disclosures

26

Item 5.

Other Information

26

Item 6.

Exhibits

26

 

Signatures

27

 

 


SPECIAL NOTES REGARDING FORWARD-LOOKING STATEMENTS

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

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

the expected use of our products by physicians;
the expected growth of our business and our organization;
our expected uses of our existing cash and cash equivalents and the sufficiency of such resources to fund our planned operations;
our expectations regarding government and third-party payor coverage and reimbursement;
our ability to retain and recruit key personnel, including the continued development of a sales and marketing infrastructure;
our ability to obtain an adequate supply of materials and components for our products from our third-party suppliers, some of which are single-source suppliers;
our plans and expected timeline related to our products, or developing new products, to address additional indications or otherwise;
our ability to manufacture sufficient quantities of our products with sufficient quality;
our ability to obtain and maintain intellectual property protection for our products;
our ability to identify and develop new and planned products and/or acquire new products;
our ability to obtain, maintain and expand regulatory clearances for our products and any new products we create;
our ability to expand our business into new geographic markets;
our compliance with Nasdaq requirements and government laws, rules and regulations both in the United States and internationally;
our estimates of our expenses, ongoing losses, future revenue, capital requirements and our need for, or ability to obtain, additional financing;
our expectations regarding the time during which we will be an emerging growth company under the JOBS Act;
the effect of the COVID-19 pandemic and its impact on our business;
developments and projections relating to our competitors or our industry; and
our plans to conduct further clinical trials.

We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control and that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. These forward-looking statements are based on management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate and management’s beliefs and assumptions and are not guarantees of future performance or development and involve

1


known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this Quarterly Report may turn out to be inaccurate. Factors that may cause actual results to differ materially from current expectations include, among other things, those set forth in our Annual Report on Form 10-K under “Part I, Item 1A-Risk Factors” and listed under "Risk Factors" and elsewhere in this Quarterly Report. Potential investors are urged to consider these factors carefully in evaluating the forward-looking statements.

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

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

2


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).

TREACE MEDICAL CONCEPTS, INC.

Condensed Balance Sheets

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

98,483

 

 

$

105,833

 

Accounts receivable, net of allowance for doubtful accounts of $509 and $414 as of March 31, 2022 and December 31, 2021, respectively

 

 

15,995

 

 

 

18,568

 

Inventories

 

 

11,112

 

 

 

10,561

 

Prepaid expenses and other current assets

 

 

1,723

 

 

 

3,010

 

Total current assets

 

 

127,313

 

 

 

137,972

 

Property and equipment, net

 

 

3,996

 

 

 

2,849

 

Operating lease right-of-use assets

 

 

15,069

 

 

 

 

Other non-current assets

 

 

134

 

 

 

 

Total assets

 

$

146,512

 

 

$

140,821

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable

 

$

3,448

 

 

$

4,056

 

Accrued liabilities

 

 

3,552

 

 

 

4,518

 

Accrued commissions

 

 

3,882

 

 

 

5,181

 

Accrued compensation

 

 

4,060

 

 

 

4,455

 

Operating lease liabilities

 

 

435

 

 

 

 

Total current liabilities

 

 

15,377

 

 

 

18,210

 

Derivative liability on term loan

 

 

83

 

 

 

173

 

Long-term debt, net of discount of $590 and $635 as of March 31, 2022 and December 31, 2021, respectively

 

 

29,410

 

 

 

29,365

 

Operating lease liabilities, net of current portion

 

 

14,824

 

 

 

 

Total liabilities

 

 

59,694

 

 

 

47,748

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

Preferred stock, $0.001 par value, 5,000,000 shares authorized as of March 31, 2022 and December 31, 2021; 0 shares issued and outstanding as of March 31, 2022 and December 31, 2021

 

 

 

 

 

 

Common stock, $0.001 par value, 300,000,000 shares authorized; 55,278,942 issued and outstanding as of March 31, 2022; 300,000,000 shares authorized; 54,181,082 issued and outstanding as of December 31, 2021

 

 

46

 

 

 

45

 

Additional paid-in capital

 

 

137,713

 

 

 

134,933

 

Accumulated deficit

 

 

(50,941

)

 

 

(41,905

)

Total stockholders’ equity

 

 

86,818

 

 

 

93,073

 

Total liabilities and stockholders’ equity

 

$

146,512

 

 

$

140,821

 

 

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

3


TREACE MEDICAL CONCEPTS, INC.

Condensed Statement of Operations and Comprehensive Loss

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Revenue

 

$

29,047

 

 

$

18,707

 

Cost of goods sold

 

 

5,506

 

 

 

3,327

 

Gross profit

 

 

23,541

 

 

 

15,380

 

Operating expenses

 

 

 

 

 

 

Sales and marketing

 

 

21,923

 

 

 

12,148

 

Research and development

 

 

3,052

 

 

 

1,868

 

General and administrative

 

 

6,662

 

 

 

2,766

 

Total operating expenses

 

 

31,637

 

 

 

16,782

 

Loss from operations

 

 

(8,096

)

 

 

(1,402

)

Interest and other income, net

 

 

11

 

 

 

1

 

Interest expense

 

 

(951

)

 

 

(1,031

)

Other expense, net

 

 

(940

)

 

 

(1,030

)

Net loss and comprehensive loss

 

 

(9,036

)

 

 

(2,432

)

Convertible preferred stock cumulative and undeclared dividends

 

 

 

 

 

(158

)

Net loss attributable to common stockholders

 

$

(9,036

)

 

$

(2,590

)

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

 

$

(0.16

)

 

$

(0.07

)

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

 

 

54,827,665

 

 

 

37,854,687

 

 

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

4


TREACE MEDICAL CONCEPTS, INC.

Condensed Statement of Stockholders’ Equity (Deficit)

(in thousands, except share amounts)

(unaudited)

 

 

 

Convertible

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Total

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity (Deficit)

 

Balances at December 31, 2021

 

 

 

 

$

 

 

 

54,181,082

 

 

$

45

 

 

$

134,933

 

 

$

(41,905

)

 

$

93,073

 

Issuance of common stock upon exercise of stock options

 

 

 

 

 

 

 

 

1,097,860

 

 

 

1

 

 

 

1,371

 

 

 

 

 

 

1,372

 

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,409

 

 

 

 

 

 

1,409

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,036

)

 

 

(9,036

)

Balances at March 31, 2022

 

 

 

 

$

 

 

 

55,278,942

 

 

$

46

 

 

$

137,713

 

 

$

(50,941

)

 

$

86,818

 

.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2020

 

 

6,687,475

 

 

$

7,935

 

 

 

37,366,865

 

 

$

28

 

 

$

14,166

 

 

$

(21,353

)

 

$

776

 

Issuance of common stock upon exercise of stock options

 

 

 

 

 

 

 

 

690,551

 

 

 

2

 

 

 

568

 

 

 

 

 

 

570

 

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

402

 

 

 

 

 

 

402

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,432

)

 

 

(2,432

)

Balances at March 31, 2021

 

 

6,687,475

 

 

$

7,935

 

 

 

38,057,416

 

 

$

30

 

 

$

15,136

 

 

$

(23,785

)

 

$

(684

)

 

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

 

 

 

5


TREACE MEDICAL CONCEPTS, INC.

Condensed Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities

 

 

 

 

 

 

Net loss

 

$

(9,036

)

 

$

(2,432

)

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

 

 

 

 

 

 

Depreciation and amortization expense

 

 

334

 

 

 

117

 

Provision (Recovery) for allowance for doubtful accounts

 

 

30

 

 

 

(77

)

Share-based compensation expense

 

 

1,409

 

 

 

402

 

Non-cash lease expense

 

 

336

 

 

 

 

Amortization of debt issuance costs

 

 

45

 

 

 

43

 

Recovery of inventory obsolescence

 

 

(3

)

 

 

(27

)

Gain on fair value adjustment to derivative liability

 

 

(90

)

 

 

 

Net changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts Receivable

 

 

2,542

 

 

 

3,769

 

Inventory

 

 

(548

)

 

 

478

 

Prepaid expenses and other assets

 

 

1,233

 

 

 

(379

)

Other non-current assets

 

 

(134

)

 

 

 

Operating lease liabilities

 

 

(133

)

 

 

 

Accounts payable

 

 

(607

)

 

 

(1,173

)

Accrued liabilities

 

 

(2,619

)

 

 

(1,167

)

Net cash used in operating activities

 

 

(7,241

)

 

 

(446

)

Cash flows from investing activities

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,481

)

 

 

(196

)

Net cash used in investing activities

 

 

(1,481

)

 

 

(196

)

Cash flows from financing activities

 

 

 

 

 

 

Repayment of PPP Loan

 

 

 

 

 

(1,788

)

Proceeds from exercise of employee stock options

 

 

1,372

 

 

 

569

 

Net cash provided by (used in) financing activities

 

 

1,372

 

 

 

(1,219

)

Net decrease in cash and cash equivalents

 

 

(7,350

)

 

 

(1,861

)

Cash and cash equivalents at beginning of period

 

 

105,833

 

 

 

18,079

 

Cash and cash equivalents at end of period

 

$

98,483

 

 

$

16,218

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Cash paid for interest

 

$

951

 

 

$

1,945

 

Operating lease right-of-use assets obtained in exchange for new lease liabilities

 

$

15,300

 

 

$

 

Supplemental disclosure of noncash financing activities:

 

 

 

 

 

 

Unpaid offering costs included in accounts payable and accrued liabilities

 

$

 

 

$

1,118

 

 

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

6


TREACE MEDICAL CONCEPTS, INC.

Notes to Condensed Financial Statements

(unaudited)

1. Formation and Business of the Company

The Company

Treace Medical Concepts, LLC was formed on July 29, 2013 as a Florida limited liability company. Effective July 1, 2014, the entity converted to a Delaware corporation and changed its name to Treace Medical Concepts, Inc. (the “Company”). The Company is a medical technology company driving a fundamental shift in the surgical treatment of Hallux Valgus (commonly known as "bunions"). The Company received 510(k) clearance for the Lapiplasty® System in March 2015 and began selling its surgical medical devices in September 2015. The Company has pioneered the proprietary Lapiplasty 3D Bunion Correction System – a combination of innovative instruments, implants and surgical methods designed to improve the inconsistent clinical outcomes of traditional approaches to bunion surgery. In addition, the Company offers other advanced instrumentation and implants for use in the Lapiplasty Procedure or other ancillary procedures performed in high frequency with bunion surgery. The Company recently expanded its offerings with the Adductoplasty™ Midfoot Correction System, designed for reproducible correction of the midfoot to provide further support to hallux valgus patients. The Company operates from its corporate headquarters located in Ponte Vedra, Florida.

Initial Public Offering

On April 27, 2021, the Company completed its initial public offering (“IPO”) of 12,937,500 shares of its common stock, which included the exercise in full of the underwriters’ option to purchase additional shares. As part of the IPO, 6,953,125 shares of common stock were issued and sold by the Company (inclusive of 703,125 shares pursuant to the exercise of the underwriters’ option) and 5,984,375 shares of common stock that were sold by the selling stockholders named in the prospectus (inclusive of 984,375 shares pursuant to the exercise of the underwriters’ option), at a price to the public of $17.00 per share. The Company received net proceeds of approximately $107.6 million, after deducting underwriting discounts and commissions of $8.3 million and offering expenses payable by the Company of $2.3 million. The Company did not receive any proceeds from the sale of the shares by the selling stockholders. Upon the completion of the IPO, all 6,687,475 shares of Series A convertible preferred stock then outstanding were converted into shares of common stock on a one-to-one basis plus 158,447 shares of common stock were issued to pay accrued cumulative dividends on Series A convertible preferred stock of $2.5 million.

 

Liquidity and Capital Resources

The Company has incurred operating losses to date and has an accumulated deficit of $50.9 million as of March 31, 2022. During the three months ended March 31, 2022 and 2021, the Company used $7.2 million and $0.4 million of cash in its operating activities, respectively. As of March 31, 2022, the Company had cash and cash equivalents of $98.5 million.

Management believes that the Company’s existing cash and cash equivalents will allow the Company to continue its planned operations for at least the next 12 months from the date of the issuance of these interim condensed financial statements.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared using accounting principles generally accepted in the United States of America (“GAAP”) and the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These condensed financial statements have been prepared on the same basis as the Company’s annual financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on March 4, 2022, except for the adoption of new lease accounting guidance as discussed below in Note 8, “Operating Leases”.

The unaudited condensed financial statements included herein reflect all adjustments, including normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 2022 are

7


not necessarily indicative of the results that may be expected for future quarters or for the fiscal year ending December 31, 2022.

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

Use of Estimates

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

Significant estimates and assumptions include reserves and write-downs related to accounts receivable, inventories, the recoverability of long-term assets, valuation of equity instruments, valuation of common stock, stock-based compensation, deferred tax assets and related valuation allowances and impact of contingencies. The Company had no accrued contingent liabilities as of March 31, 2022 and December 31, 2021.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of risk consist principally of cash, cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents balances with established financial institutions and, at times, such balances with any one financial institution may be in excess of the Federal Deposit Insurance Corporation (“FDIC”) insured limits.

The Company earns revenue from the sale of its products to customers such as hospitals and ambulatory surgery centers. The Company’s accounts receivable is derived from revenue earned from customers. The Company performs ongoing credit evaluations of its customers’ financial condition. At March 31, 2022 and December 31, 2021, no customer accounted for more than 10% of accounts receivable. For the three months ended March 31, 2022 and 2021 and there were no customers that represented 10% or more of revenue.

Leases

The Company determines whether an arrangement is or contains a lease at the inception of the arrangement and whether such a lease is classified as a financing lease or operating lease at the commencement date of the lease. Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The Company determines the commencement date of a lease to be the date on which a lessor makes an underlying asset available for use by the Company. Leases with a term greater than one year are recognized on the balance sheet as operating lease right-of-use assets, operating lease liabilities and operating lease liabilities, net of current portion. The Company elected not to recognize right-of-use assets and lease liabilities for leases with terms of 12 months or less (short-term leases). As the interest rates implicit in our lease contracts are not readily determinable, the Company utilizes its incremental borrowing rate based on the information available at the commencement date to determine the present value of lease payments. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid, incentives received, or impairment charges if the Company determines the right-of-use asset is impaired.

The Company considers the lease term to be the noncancelable period that the Company has the right to use the underlying asset, together with any periods where it is reasonably certain the Company will exercise an option to extend (or not terminate) the lease.

Rent expense for operating leases is recognized on a straight-line basis over the lease term and is presented in operating expenses on the statements of operations and comprehensive loss. The Company has elected to not separate lease and non-lease components for its real estate leases and instead accounts for each separate lease component and the non-lease components associated with that lease component as a single lease component. Variable lease payments are recognized as lease expense as incurred and are recorded in operating expenses on the statements of operations and comprehensive loss.

The Company has no finance leases.

Refer to Note 8, "Operating Leases", for new lease disclosures.

8


3. Recent Accounting Pronouncements

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses. This guidance will require financial instruments measured at amortized cost, and trade accounts receivable to be presented at the net amount expected to be collected. The model requires an entity to estimate credit losses based on historical information, current conditions and reasonable and supportable forecasts of future economic conditions. In November 2019, the FASB issued ASU 2019-10, which provides that this standard is effective for the Company for fiscal years beginning after December 15, 2022, and interim periods within that fiscal year. The Company is currently evaluating the impact of this standard on its financial statements.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASC 842”). The update establishes principles for recognition, measurement, presentation, and disclosure intended to increase transparency and comparability for the accounting of lease transactions. The standard requires lessees to recognize leases with terms greater than 12 months on the balance sheet and disclose key information about leasing arrangements. ASC 842 is effective for the Company for fiscal years beginning after December 15, 2021 and early application is permitted. The Company adopted the new standard as of January 1, 2022, using the required modified retrospective approach. Comparative periods were not adjusted and continue to be presented under the previous accounting guidance. The Company elected the package of practical expedients permitted under the ASC 842 transition guidance, which among other things, allowed it to carry forward the historical lease classification.

The impact of adoption was the recognition of right-of-use assets and lease liabilities of $1.9 million for real estate operating leases at January 1, 2022. In addition, ASC 842 requires new disclosures for lease transactions.

Refer to Note 8, "Operating Leases", for new lease disclosures.

4. Fair Value Measurements

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

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

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

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

Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis – The following assets and liabilities are measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021:

 

 

 

March 31, 2022

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds(1)

 

$

97,800

 

 

$

 

 

$

 

 

$

97,800

 

Total

 

$

97,800

 

 

$

 

 

$

 

 

$

97,800

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability

 

$

 

 

$

 

 

$

83

 

 

$

83

 

Total

 

$

 

 

$

 

 

$

83

 

 

$

83

 

 

9


 

 

 

December 31, 2021

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds(1)

 

$

105,220

 

 

$

 

 

$

 

 

$

105,220

 

Total

 

$

105,220

 

 

$

 

 

$

 

 

$

105,220

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability

 

$

 

 

$

 

 

$

173

 

 

$

173

 

Total

 

$

 

 

$

 

 

$

173

 

 

$

173

 

 

(1) Money market funds are included in cash and cash equivalents in the condensed balance sheets as of March 31, 2022 and December 31, 2021.

The derivative liability was accounted for at fair value using the income approach and inputs consisting of (a) the probability of events occurring that trigger an event of default of the Company’s term loans under the CRG Group LP ("CRG") Term Loan Facility (the “CRG Term Loan Facility”), ranging from 1% to 2%, (b) the prepayment premium payable upon early redemption, and (c) additional interest payable upon an event of default. The change in fair value of the derivative liability was $0.1 million in the three months ended March 31, 2022, and was recorded as a component of other expense, net in the condensed statement of operations and comprehensive loss. There was no adjustment to the fair value of the derivative liability recognized in net loss for the three months ended March 31, 2021.

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial instruments (in thousands):

 

 

 

Derivative liability

 

Fair value as of January 1, 2022

 

$

173

 

Change in fair value included in other expense, net

 

 

(90

)

Fair value as of March 31, 2022

 

 

83

 

There were no assets or liabilities measured at fair value on a nonrecurring basis as of March 31, 2022 and December 31, 2021.

5. Balance Sheet Components

Cash and Cash Equivalents

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Cash

 

$

683

 

 

$

613

 

Cash equivalents:

 

 

 

 

 

 

Money market funds

 

 

97,800

 

 

 

105,220

 

Total cash and cash equivalents

 

$

98,483

 

 

$

105,833

 

 

10


Property and equipment, net

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Furniture and fixtures, and equipment

 

$

180

 

 

$

180

 

Construction in progress

 

 

621

 

 

 

126

 

Machinery and equipment

 

 

391

 

 

 

274

 

Capitalized surgical equipment

 

 

5,089

 

 

 

4,442

 

Computer equipment

 

 

256

 

 

 

160

 

Leasehold improvements

 

 

268

 

 

 

268

 

Software

 

 

138

 

 

 

138

 

Total property and equipment

 

 

6,943

 

 

 

5,588

 

Less: accumulated depreciation and amortization

 

 

(2,947

)

 

 

(2,739

)

Property and equipment, net

 

$

3,996

 

 

$

2,849

 

 

Depreciation and amortization expense on property and equipment was $0.3 million and $0.1 million for the three months ended March 31, 2022 and 2021, respectively.

Accrued liabilities

Accrued liabilities consist of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Accrued royalty expense

 

$

1,469

 

 

$

1,522

 

Accrued interest

 

 

 

 

 

975

 

Accrued professional services

 

 

590

 

 

 

941

 

Other accrued expense

 

 

1,493

 

 

 

1,080

 

Total accrued liabilities

 

$

3,552

 

 

$

4,518

 

 

6. Long Term Debt

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Revolving line of credit

 

 

 

 

 

 

SVB credit facility

 

$

 

 

$

 

Term loans

 

 

 

 

 

 

CRG Term Loan Facility

 

 

30,000

 

 

 

30,000

 

Total term loans

 

 

30,000

 

 

 

30,000

 

Less: debt discount and issuance costs

 

 

(590

)

 

 

(635

)

Total long-term debt

 

$

29,410

 

 

$

29,365

 

 

As of March 31, 2022, future payments under term loan were as follows (in thousands):

 

Fiscal Year

 

 

 

2022 (remaining nine months)

 

$

 

2023

 

 

 

2024

 

 

 

2025

 

 

30,000

 

Total principal payments

 

 

30,000

 

Less: Unamortized debt discount and debt issuance costs

 

 

(590

)

Total short-term and long-term debt