“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 June 30, 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 August 5, 2022, 55,403,265 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 JUNE 30, 2022
Table of Contents
Item 1.
Unaudited Condensed Financial Statements
3
Condensed Balance Sheets
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
25
Item 4.
Controls and Procedures
Part II: Other Information
Legal Proceedings
27
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
28
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
Signatures
29
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:
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).
(in thousands, except share and per share amounts)
(unaudited)
June 30,
December 31,
2022
2021
Assets
Current assets
Cash and cash equivalents
$
101,533
105,833
Accounts receivable, net of allowance for doubtful accounts of $430 and $414 as of June 30, 2022 and December 31, 2021, respectively
16,501
18,568
Inventories
13,168
10,561
Prepaid expenses and other current assets
3,995
3,010
Total current assets
135,197
137,972
Property and equipment, net
8,741
2,849
Operating lease right-of-use assets
14,650
—
Other non-current assets
134
Total assets
158,722
140,821
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable
3,099
4,056
Accrued liabilities
4,809
4,518
Accrued commissions
4,308
5,181
Accrued compensation
4,038
4,455
Operating lease liabilities
383
Total current liabilities
16,637
18,210
Derivative liability on term loan
173
Long-term debt, net of discount of $1,438 and $635 as of June 30, 2022 and December 31, 2021, respectively
52,562
29,365
Operating lease liabilities, net of current portion
17,811
Total liabilities
87,010
47,748
Commitments and contingencies (Note 7)
Stockholders’ equity
Preferred stock, $0.001 par value, 5,000,000 shares authorized as of June 30, 2022 and December 31, 2021; 0 shares issued and outstanding as of June 30, 2022 and December 31, 2021
Common stock, $0.001 par value, 300,000,000 shares authorized; 55,391,309 issued and outstanding as of June 30, 2022; 300,000,000 shares authorized; 54,181,082 issued and outstanding as of December 31, 2021
46
45
Additional paid-in capital
139,841
134,933
Accumulated deficit
(68,175
)
(41,905
Total stockholders’ equity
71,712
93,073
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these financial statements.
Condensed Statement of Operations and Comprehensive Loss
Three Months Ended June 30,
Six Months Ended June 30,
Revenue
29,967
20,654
59,014
39,361
Cost of goods sold
5,651
3,944
11,157
7,271
Gross profit
24,316
16,710
47,857
32,090
Operating expenses
Sales and marketing
26,250
14,010
48,173
26,158
Research and development
2,984
2,422
6,036
4,290
General and administrative
7,015
4,329
13,677
7,095
Total operating expenses
36,249
20,761
67,886
37,543
Loss from operations
(11,933
(4,051
(20,029
(5,453
Interest and other income, net
128
139
Interest expense
(946
(1,038
(1,897
(2,069
Debt extinguishment loss
(4,483
Other expense, net
(5,301
(1,032
(6,241
(2,062
Net loss and comprehensive loss
(17,234
(5,083
(26,270
(7,515
Convertible preferred stock cumulative and undeclared dividends
(39
(196
Net loss attributable to common stockholders
(5,122
(7,711
Net loss per share attributable to common stockholders, basic and diluted
(0.31
(0.10
(0.48
(0.18
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted
55,308,273
49,187,285
55,071,368
43,556,107
Condensed Statement of Stockholders’ Equity (Deficit)
(in thousands, except share amounts)
Convertible
Additional
Total
Preferred Stock
Common Stock
Paid-In
Accumulated
Stockholders’
Shares
Amount
Capital
Deficit
Equity (Deficit)
Balances at December 31, 2021
54,181,082
Issuance of common stock upon exercise of stock options
1,097,860
1,371
1,372
Share-based compensation expense
1,409
Net loss
(9,036
Balances at March 31, 2022
55,278,942
137,713
(50,941
86,818
112,367
165
1,963
Balances at June 30, 2022
55,391,309
.
Balances at December 31, 2020
6,687,475
7,935
37,366,865
14,166
(21,353
776
690,551
568
570
402
(2,432
Balances at March 31, 2021
38,057,416
30
15,136
(23,785
(684
272,082
193
Vesting of restricted stock awards
5,866
875
Issuance of common stock from initial public offering, net of issuance costs and underwriting discount of $10.6 million
6,953,125
107,603
107,610
Issuance of common stock upon net exercise of warrants
621,570
(1
Conversion of convertible preferred stock and accrued dividends on convertible preferred stock into common stock
(6,687,475
(7,935
6,845,922
7,928
Balances at June 30, 2021
52,755,981
131,734
(28,868
102,911
(in thousands)
Cash flows from operating activities
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization expense
757
220
(Recovery) for allowance for doubtful accounts
(45
(72
3,372
1,277
Non-cash lease expense
1,165
Amortization of debt issuance costs
95
88
(Recovery) Provision of inventory obsolescence
(197
Gain on fair value adjustment to derivative liability
(173
4,483
Net changes in operating assets and liabilities:
Accounts Receivable
2,112
4,511
Inventory
(2,410
89
Prepaid expenses and other assets
(1,039
(2,919
(134
2,392
(957
656
(958
(600
Net cash used in operating activities
(17,807
(4,177
Cash flows from investing activities
Purchases of property and equipment
(6,649
(866
Net cash used in investing activities
Cash flows from financing activities
Repayment of PPP loan
(1,788
Proceeds from interest bearing term debt
49,651
Proceeds from interest bearing revolving debt
3,850
Debt issuance costs paid to third parties
(989
Repayment of term loan
(33,893
Proceeds from issuance of common stock upon initial public offering, net of issuance costs and underwriting fees of $10.6 million
Proceeds from exercise of employee stock options
1,537
763
Net cash provided by financing activities
20,156
106,585
Net (decrease) increase in cash and cash equivalents
(4,300
101,542
Cash and cash equivalents at beginning of period
18,079
Cash and cash equivalents at end of period
119,621
Supplemental disclosure of cash flow information:
Cash paid for interest
1,897
2,917
Operating lease right-of-use assets obtained in exchange for new lease liabilities
15,300
Supplemental disclosure of noncash investing activities:
Property and equipment received in exchange for lease liability
4,115
Supplemental disclosure of noncash financing activities:
Issuance of common stock upon exercise of warrants
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 $68.2 million as of June 30, 2022. During the six months ended June 30, 2022 and 2021, the Company used $17.8 million and $4.2 million of cash in its operating activities, respectively. As of June 30, 2022, the Company had cash and cash equivalents of $101.5 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
The Company prepared the unaudited interim condensed financial statements included in this report in accordance with accounting principles generally accepted in the U.S. (GAAP) for interim financial information and the rules and regulations of the Securities and Exchange Commission related to quarterly reports on Form 10-Q.
Basis of Presentation
The 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. 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 six months ended June 30, 2022 are 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 June 30, 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 June 30, 2022 and December 31, 2021, no customer accounted for more than 10% of accounts receivable. For the six months ended June 30, 2022 and 2021, 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.
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 June 30, 2022 and December 31, 2021:
June 30, 2022
Level 1
Level 2
Level 3
Assets:
Money market funds(1)
98,008
9
December 31, 2021
105,220
Liabilities:
Derivative liability
(1) Money market funds are included in cash and cash equivalents in the condensed balance sheets as of June 30, 2022 and December 31, 2021.
On April 29, 2022, in connection with the refinancing of its long-term debt, the Company repaid the outstanding principal and interest under its term loan facility with CRG Group LP (“CRG”) which also extinguished the embedded derivative liability.
The change in fair value of the derivative liability was $0.2 million and $0.1 million in the three and six months ended June 30, 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 and six months ended June 30, 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):
Fair value as of January 1, 2022
Change in fair value included in other expense, net
Fair value as of June 30, 2022
There were no assets or liabilities measured at fair value on a nonrecurring basis as of June 30, 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):
Cash
3,525
613
Cash equivalents:
Money market funds
Total cash and cash equivalents
Included in cash as of June 30, 2022 is $0.9 million pledged to Silicon Valley Bank (“SVB”) as collateral for the Company's corporate credit card program and is restricted from use by the Company. There was no cash pledged to SVB as of December 31, 2021.
10
The Company’s property and equipment, net consisted of the following (in thousands):
Furniture and fixtures, and equipment
180
Construction in progress
4,328
126
Machinery and equipment
673
274
Capitalized surgical equipment
6,083
4,442
Computer equipment
340
160
Leasehold improvements
268
Software
138
Total property and equipment
12,010
5,588
Less: accumulated depreciation and amortization
(3,269
(2,739
Depreciation and amortization expense on property and equipment was $0.4 million and $0.1 million for the three months ended June 30, 2022 and 2021, respectively. Depreciation and amortization expense on property and equipment was $0.8 million and $0.2 million for the six months ended June 30, 2022 and 2021, respectively.
Accrued liabilities consist of the following (in thousands):
Accrued royalty expense
1,397
1,522
Accrued interest
315
975
Accrued professional services
562
941
Other accrued expense
2,535
1,080
Total accrued liabilities
6. Long-Term Debt
The Company’s debt consisted of the following (in thousands):
Revolving line of credit
MidCap revolving credit facility
4,000
Term loans
CRG term loan facility
30,000
MidCap term loan facility
50,000
Total term and revolving loans
54,000
Less: debt discount and issuance costs
(1,438
(635
Total long-term debt
11
As of June 30, 2022, future payments of long-term debt were as follows (in thousands):
Fiscal Year
2022 (remaining six months)
2023
2024
2025
2026
33,333
2027
20,667
Total principal payments
Less: Unamortized debt discount and debt issuance costs
On April 29, 2022, the Company entered into a new five-year $150.0 million credit facility with entities affiliated with MidCap Financial Trust (“MidCap”), providing up to $120.0 million in term loans and a $30.0 million revolving credit facility.
The term loan provides for a 60-month term loan facility up to $120.0 million in borrowing capacity to the Company, over four tranches. At loan closing, the Company drew $50.0 million under tranche one. The remaining tranches provide up to an additional $70.0 million in borrowing capacity in the aggregate, subject to the achievement of certain revenue targets.
The revolving credit facility provides up to $30.0 million in borrowing capacity to the Company based on the borrowing base. The borrowing base is calculated based on certain accounts receivable and inventory assets. At loan closing, the Company drew $4.0 million under the revolving credit facility. The Company may request a $20.0 million increase in the revolving loan facility for a total commitment of up to $50.0 million. The Company is required to either (1) maintain a minimum drawn balance under the revolving facility agreement or (2) pay a minimum balance fee that is equal to the amount of the minimum balance deficit multiplied by the applicable interest rate during the period. If the outstanding balance under the revolving loan facility exceeds the lesser of (1) 50% of the revolving borrowing capacity or (2) 50% of the borrowing base, or the Company is in default, MidCap will apply funds collected from the Company's lockbox account to reduce the outstanding balance of the revolving loan facility (“Lockbox Deductions”). As of June 30, 2022, the Company's borrowing level has not activated the Lockbox Deductions, nor is it expected to for the next 12 months; therefore, the Company has determined that the revolving loan balance is long-term debt.
The loans bear interest at an annual rate based on a 30-day forward looking secured overnight financing rate plus 0.10% (subject to a floor of 1.0% and a cap of 3.0% for both loan agreements) plus (1) 6.0% under the term loan agreement and (2) 4.0% under the revolving credit facility. Interest is payable monthly in arrears on the first day of each month and on the maturity of the loan agreements. The Company is obligated to pay interest only for the first 48 months and straight-line amortization for the remaining 12 months, subject to the Company’s election to extend the initial interest-only period by 12 months to 60 months total if the Company’s trailing twelve-month revenue is at or above certain levels. If the term loan is repaid before the maturity date or the revolving credit facility is terminated before the end of its term, the prepayment fees are 3.0% of the amount repaid in the first year, 2.0% in the second year and 1.0% in the third year and thereafter, and a final payment fee of 3.0% of the amount borrowed is due under the term loan. The revolving credit facility prepayment fees are based on the revolving loan commitment amount.
The loans are secured by substantially all of the Company’s assets, including intellectual property. The loan agreements and other ancillary documents contain customary representations and warranties and affirmative and negative covenants. Under the loan agreements, the Company is not required to meet any minimum level of revenue if liquidity (defined as unrestricted cash plus undrawn availability under the revolving loan agreement) is greater than the outstanding balance under the term loan. If liquidity falls below such outstanding balance, then the Company is subject to a minimum trailing twelve-month revenue covenant.
7. Commitments and Contingencies
License and Royalty Commitments
As of June 30, 2022 and December 2021, the Company has royalty agreements with certain members of its surgeon advisory board. The Company recognized royalty expense of $1.3 million and $0.8 million for the three months ended June 30, 2022 and 2021, respectively, and $2.7 million and $1.6 million for the six months ended June 30, 2022 and 2021,
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respectively. For the three and six month periods ended June 30, 2022 and 2021, the aggregate royalty rate was 4.6% and 4.1%, respectively.
Contingencies
From time to time, the Company may be a party to various litigation claims in the normal course of business. Legal fees and other costs associated with such actions are expensed as incurred. The Company assesses, in conjunction with legal counsel, the need to record a liability for litigation and contingencies. Accrual estimates are recorded when and if it is determinable that such a liability for litigation and contingencies are both probable and reasonably estimable. There were no accrued contingent liabilities as of June 30, 2022 and December 31, 2021.
8. Operating Leases
The Company’s leases consist of real estate leases in Ponte Vedra, Florida.
On February 9, 2022, the Company entered into a 10-year operating lease for a new corporate headquarters building in Ponte Vedra, Florida, with a lease commencement date of March 1, 2022. The Company's obligation to make rental payments on the new headquarters building is expected to begin during the third quarter of 2022.
The Company’s leases contain various options to renew, none of which the Company is reasonably certain to exercise. The lease agreements do not contain any residual value guarantees or restrictive covenants. For the new headquarters lease, the Company is provided a tenant improvement allowance for the construction of leasehold improvements. In exchange for construction management and supervision services related to these improvements, the Company pays the lessor a fee equal to one and a half percent (1.5%) of total construction costs.
In addition to base rent, the Company will pay variable costs related to its share of operating expenses under certain of its lease arrangements. These variable costs are recorded as lease expense as incurred and presented as operating expenses in the statements of operations and comprehensive loss. No variable costs have been incurred as of June 30, 2022.
Rent expense was $0.1 million and $0.3 million for the three and six months ended June 30, 2021, respectively.
Operating lease cost was $0.7 million and $1.1 million for the three and six months ended June 30, 2022, respectively. During the three and six months ended June 30, 2022, cash paid for amounts included in operating lease liabilities of $0.1 million and $0.3 million, respectively, was included in cash flows from operating activities on the condensed statements of cash flows.
Additional information related to operating leases is as follows:
Weighted average remaining lease term (years)
9.5
Weighted average discount rate
9.2%
The following table summarizes future minimum lease payments on operating leases as of December 31, 2021 (in thousands):
627
444
458
472
321
2,322
The following table summarizes a maturity analysis of operating lease liabilities showing the aggregate lease payments as of June 30, 2022 (in thousands):
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2022 remaining *
(430)
2,223
2,996
3,426
3,344
Thereafter
17,839
Total undiscounted lease payments
29,398
Less: imputed interest
(11,204)
Total discounted lease payments
18,194
Less: Current portion of lease liability
(383)
Noncurrent portion of lease liability
* Includes the tenant improvement allowance
9. Stockholders’ Equity
Stock Option Plans
During the six months ended June 30, 2022 and 2021, the Company granted stock options to employees to purchase an aggregate of 1,171,175 and 1,375,310 shares respectively, of the Company’s common stock. The weighted-average grant-date fair value of the employee stock options granted during the six months ended June 30, 2022 and 2021 were $7.37 and $4.98 per share, respectively.
Restricted Stock Units
During the six months ended June 30, 2022, the Company granted 359,534 restricted stock units (“RSUs”) The weighted average grant-date fair value of RSUs granted during the six months ended June 30, 2022 was $18.28. The Company did not grant RSUs during the six months ended June 30, 2021.
Share-Based Compensation Expense
Share-based compensation expense is reflected in operating expenses in the condensed statements of operations and comprehensive loss as follows (in thousands):
690
370
1,221
517
176
103
326
166
1,097
1,825
594
10. Net Loss Per Share Attributable to Common Stockholders
The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders which is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. As the Company reported a net loss for the three and six months ended June 30, 2022 and 2021, basic net loss per share attributable to common stockholders was the same as diluted
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net loss per share attributable to common stockholders as the inclusion of potentially dilutive shares would have been antidilutive if included in the calculation (in thousands, except share and per share amounts):
Numerator
Adjust: Convertible preferred stock cumulative and undeclared dividends
Denominator
Weighted-average common stock outstanding, basic and diluted
The following potentially dilutive securities outstanding have been excluded from the computation of diluted weighted average shares outstanding because such securities have an antidilutive impact due to the Company’s net loss, in common stock equivalent shares:
Common stock options issued and outstanding
7,285,776
7,464,580
Unvested restricted stock units
377,935
29,024
7,663,711
7,493,604
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 and our audited financial statements and related notes thereto for the year ended December 31, 2021, included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 4, 2022 (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”. Please also see the section titled “Special Note Regarding Forward-Looking Statements.”
Overview
We are a medical technology company driving a fundamental shift in the surgical treatment of Hallux Valgus (commonly known as bunions). We have pioneered our 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. 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 mission is to be the leader in the surgical treatment of bunions by establishing the Lapiplasty System as the standard of care. We recently expanded our offerings with the Adductoplasty™ Midfoot Correction System, designed for reproducible correction of the midfoot to provide further support to hallux valgus patients.
We were formed in 2013 and since receiving 510(k) clearance for the Lapiplasty System in March 2015, we have sold more than 52,000 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 through a combination of a direct employee sales force and independent sales agencies across 152 territories in the United States. As of June 30, 2022, we had 123 direct sales representatives and 29 independent sales agencies. In the three months ended June 30, 2022, employee sales representatives generated approximately 68% of revenues while approximately 32% of revenues came through independent sales agencies. In the six months ended June 30, 2022, employee sales representatives generated approximately 66% of revenues while approximately 34% of revenues came through independent sales agencies.
On April 27, 2021, we completed our initial public offering (“IPO”) of 12,937,500 shares of common stock, which included the exercise in full of the underwriters’ option to purchase additional shares. Before our IPO, our primary sources of capital had been private placements of common stock and convertible preferred stock, debt financing agreements and revenue from the sale of our products. As part of the IPO, we received net proceeds of approximately $107.6 million. Upon the completion of the IPO, all 6,687,475 shares of our 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 dividends on Series A convertible preferred stock of $2.5 million. As of June 30, 2022, we had cash and cash equivalents of $101.5 million, an accumulated deficit of $68.2 million and $54.0 million of principal outstanding under our term loan agreement.
In April 2022, we entered a new five-year $150.0 million loan arrangement, comprising up to $120.0 million in term loans and $30.0 million in a revolving credit facility with entities affiliated with MidCap Financial Trust (“MidCap”). On the closing date for these loan agreements, we borrowed $50.0 million under the term loan and $4.0 million under the revolving credit facility. The term loan proceeds were partially used to repay our entire obligation under our term loan facility with CRG Group LP (“CRG”) amounting to $34.1 million, including principal of $30.0 million, accrued but unpaid interest of $0.4 million and fees of $3.7 million. In April 2022, we also terminated our revolving credit facility with Silicon Valley Bank (“SVB”), which had no outstanding balance when terminated. We recognized a loss from the extinguishment of the CRG term loan facility and the SVB revolving credit facility of $4.5 million (including fees paid of $3.7 million).
COVID-19 Impact and Economic Environment
Our business has been and may continue to be impacted by the COVID-19 pandemic. We are aware that the actual and perceived impact of COVID-19 has been changing and cannot be predicted. Since the pandemic began, we have experienced elective surgery delays and cancellations and hospital staffing and capacity constraints, primarily related to surges of infections and hospitalizations as variants of COVID-19 have emerged. We believe we will continue to experience market variability as a result of the pandemic that could influence sales, suppliers, patients, and customers. There is still uncertainty around the duration and severity of business disruptions related to COVID-19 and how it will impact our operations which could be significant.
There is also uncertainty in the macro-economic environment. Inflationary pressures and ongoing supply chain challenges may result in higher costs and longer lead times from suppliers. General economic conditions may also affect 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 channels, patient education initiatives, clinical evidence and product innovations to build demand for our products, we expect these macro-economic challenges to continue throughout 2022, which may impact our results of operations.
Key Business Metrics
We regularly review a number of operating and financial metrics, including the number of Lapiplasty Procedure Kits sold, the number of active surgeons using the Lapiplasty System and utilization rate, to evaluate our business, measure our performance, identify trends affecting our business, formulate our business plans and make strategic decisions. The number of Lapiplasty Procedure Kits sold during the three months ended June 30, 2022 increased by 1,458 or 39% over the same period of 2021, and the number of active surgeons as of June 30, 2022 was 2,047 an increase of 37% from the prior year. We define the number of active surgeons as the number of surgeons that performed at least one procedure using the Lapiplasty System in the trailing twelve-month period. The surgeon utilization rate for the six months ended June 30, 2022 increased by 2.8% over the same period of 2021, to an average of 10.1 Lapiplasty Procedure Kits per active surgeon.
We believe that the number of Lapiplasty Procedure Kits sold, number of active surgeons using the Lapiplasty System and utilization rate are useful indicators of our ability to drive adoption of the Lapiplasty System and generate revenue and are helpful in tracking the progress of our business. While we believe these metrics are representative of our current business, we anticipate these metrics may be substituted for additional or different metrics as our business grows.
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 COVID-19 impacts as described above, those described below, those referenced in the section titled “Special Note Regarding Forward-Looking Statements” and those set forth in our Annual Report in the section titled “Part I, Item 1A—Risk Factors” and in the section titled “Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q.
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. We currently have approval at over 1,750 facilities across the United States and plan to continue to increase access by convincing even more surgeons and facility administrators that our products are alternatives to traditional products used in bunion surgical procedures. While surgeon adoption of the Lapiplasty Procedure remains critical to driving 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 drive 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 offerings of our capital stock and by incurring debt.
Investments in Innovation and Growth
We expect to continue to focus on long-term revenue growth through investments in our business. In sales and marketing, we are dedicating meaningful resources to expand our sales force and management team in the United States, as
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well as our patient focused outreach and education campaigns. We are hiring additional direct sales representatives and employee field sales management to strategically access more regions with high densities of prospective patients and by focusing the efforts of our independent sales channel on our products. In research and development, our team and our surgeon advisory board are continually working on next-generation innovations of the Lapiplasty System and related products. In addition to expanding our Lapiplasty offerings with products like the Lapiplasty Mini-Incision System, we are continually exploring opportunities to advance our core Lapiplasty System instrumentation and implants to further improve surgical efficiency, enhance reproducibility of outcomes and speed surgical recovery for patients.
We are also pursuing the development and potential commercialization, if cleared, of new products to address ancillary surgical procedures performed routinely in connection with the Lapiplasty Procedure. For example, to help address midfoot deformities that can occur in up to 30% of bunion patients, we developed and, in September 2021, announced the commercial launch of the Adductoplasty™ System. The Adductoplasty™ System brings together our implants and instrumentation to provide a comprehensive system designed for reproducible realignment, stabilization, and fusion of the midfoot and thus, provides surgeons with a precision, instrumented approach to treat both the bunion and coexisting midfoot deformities.
Moreover, in our general and administrative functions, we expect to continue to hire personnel and expand our infrastructure to both drive and support our anticipated growth and operations as a public company. Accordingly, in the near term, we expect these activities to increase our net losses, 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 40% of full year revenues, and lower sales volumes in the first calendar quarter. Our sales volumes in the fourth calendar 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 the first calendar quarter also tend to be lower 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. The orthopaedic industry traditionally experiences lower sales volumes in the third quarter than throughout the rest of the year as elective procedures generally decline during the summer months. Although we follow orthopaedic industry trends generally, to date our third quarter sales volumes have not been lower than other quarters, but we may experience relatively lower sales volumes during third quarters in the future.
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 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 joints, CPT 28730 applies and is classified under APC 5115.
Components of Our Results of Operations
We currently derive nearly all of our revenue from the sale of our proprietary Lapiplasty System, and to a lesser extent from the Adductoplasty System, which we introduced in the third quarter of 2021, and ancillary products. The Lapiplasty and Adductoplasty Systems are comprised of single-use implant kits and reusable instrument trays. We sell the Lapiplasty and Adductoplasty Systems to physicians, surgeons, hospitals and ambulatory surgery centers in the United States through a network of employee sales representatives and independent agencies. Our primary product is the Lapiplasty System, which is an instrumented, reproducible approach to 3D bunion correction that helps patients rapidly return to weight-bearing in a
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post-operative boot. We also offer other advanced instrumentation and implants for use in the Lapiplasty and Adductoplasty Procedures or other ancillary procedures performed in high frequency with bunion surgery.
No single customer accounted for 10% or more of our revenue during the three and six months ended June 30, 2022. We expect our revenue to increase in absolute dollars in the foreseeable future as we expand our sales territories, new accounts and trained surgeon base and as existing surgeon customers perform more Lapiplasty Procedures, though it may fluctuate from quarter to quarter due to a variety of factors, including seasonality and COVID-19 pandemic events.
Cost of Goods Sold
Cost of goods sold consists primarily of manufacturing costs for the purchase of our Lapiplasty and Adductoplasty Systems and other products from third-party manufacturers. Direct costs from our third-party manufacturers includes 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, depreciation, certain direct costs such as those incurred for shipping our products and personnel costs. We expense all provisions for excess and obsolete inventories 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, physician education programs, training, 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 these expenses 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 related products, though these expenses 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 trial 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, rent expenses and allocated facilities-related expenses. We expect general and administrative expenses to continue to increase in absolute dollars in the foreseeable future as we hire personnel and expand our infrastructure to drive and support the
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anticipated growth in our organization. Moreover, we have incurred, and expect to continue to incur, additional general and administrative expenses associated with operating as a public company, including legal, accounting, insurance, compliance with the rules and regulations of the SEC and those of any stock exchange on which our securities are traded, investor relations, and other administrative and professional services expenses, though these expenses may fluctuate from quarter to quarter.
Interest income and other income, net consists of interest received on our money market funds.
Interest Expense
Interest expense consists of interest incurred and amortization of debt discount and issuance costs related to outstanding borrowings during the reported periods.
Results of Operations
Comparison of the three and six months ended June 30, 2022 and 2021
The following table summarizes our results of operations for the periods presented below ($ in thousands):
Change
%
9,313
45.1
19,653
49.9
1,707
43.3
3,886
53.4
7,606
45.5
15,767
49.1
12,240
87.4
22,015
84.2
23.2
1,746
40.7
2,686
62.0
6,582
92.8
15,488
74.6
30,343
80.8
(7,882
194.6
(14,576
267.3
122
*
132
92
(8.9
)%
172
(8.3
(4,269
413.7
(4,179
202.7
(12,151
239.1
(18,755
249.6
* Not meaningful
Comparison of the three months ended June 30, 2022 and 2021
Revenue. Revenue increased by $9.3 million, or 45.1%, for the three months ended June 30, 2022 as compared to the same period in 2021. The increase in revenue was primarily due to an increased number of Lapiplasty Procedure Kits sold as the result of an expanded surgeon customer base, increased surgeon utilization and an increase in average sales prices from increased adoption of our ancillary products.
Cost of Goods Sold, Gross Profit and Gross Margin. Cost of goods sold increased by $1.7 million, or 43.3%, for the three months ended June 30, 2022 as compared to the same period in 2021. The increase in cost of goods sold was primarily due to $1.0 million increase in direct costs of goods sold and $0.5 million increase in royalty expense resulting from our increased sales, $0.3 million in overhead expenses resulting from increased headcount, and $0.3 million increase in
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depreciation expense from our surgical instruments, which were offset by a $0.4 million decrease in the provision for inventory and instrument obsolescence. During the three months ended June 30, 2022, gross profit increased by $7.6 million, or 45.5%, as compared to the same period in 2021 due to increased sales. Gross profit margin for the three months ended June 30, 2022 increased from 80.9% to 81.1%, as compared to the same period of 2021, primarily due to an increase in revenue from our increased sales and volume efficiencies.
Sales and Marketing Expenses. Sales and marketing expenses increased by $12.2 million, or 87.4%, for the three months ended June 30, 2022 as compared to the same period in 2021. The increase in sales and marketing expenses was due to investment in our direct sales force and our patient focused outreach and education campaigns. Sales and marketing expenses increased as a result of an increase of $4.9 million in payroll and related expenses resulting from increased headcount of sales personnel, an increase of $4.0 million in advertising and marketing-related expenses primarily due to higher advertising fees and a new television commercial campaign, an increase of $2.7 million in professional services primarily for higher commissions from increased sales by our direct sales representatives and independent sales agencies, and $0.6 million in other marketing-related expenses resulting from increased sales efforts.
Research and Development Expenses. R&D expenses increased by $0.6 million, or 23.2%, for the three months ended June 30, 2022 as compared to the same period in 2021. The increase in R&D expenses was due to increases of $0.6 million in payroll and related costs resulting from increased headcount of research and development personnel, and an increase of $0.3 million in clinical expenses resulting from increased purchases of materials used in our prototypes, which were offset by $0.3 million decrease in third party consulting fees.
General and Administrative Expenses. General and administrative expenses increased by $2.7 million, or 62.0%, for the three months ended June 30, 2022 as compared to the same period in 2021. The increase in general and administrative expenses was primarily due to an increase of $1.3 million in payroll and related costs as we increased headcount to support our growing business, an increase of $0.6 million in rent expense resulting from the new corporate headquarters lease that commenced for accounting purposes in the first quarter of 2022, an increase of $0.4 million in business-related expenses primarily resulting from increased insurance costs and fees, and an increase of $0.4 million in professional services primarily related to legal and audit expenses.
Interest and other income, net. Interest and other income, net increased $0.1 million. The increase is due to a slight increase in money market fund interest rates during the current period.
Interest Expense. Interest expense decreased by $0.1 million, or 8.9%, for the three months ended June 30, 2022 as compared to the same period of 2021. The decrease in interest expense was due to significantly lower interest rates on higher debt balances in the three months ended June 30, 2022, as compared to the same period of 2021, as a result of the debt refinancing in late April of the current period.
Debt Extinguishment Loss. Debt extinguishment loss increased by $4.5 million, for the three months ended June 30, 2022 as compared to the same period of 2021, due to our debt refinancing in the current period.
Comparison of the six months ended June 30, 2022 and 2021
Revenue. Revenue increased by $19.7 million, or 49.9%, for the six months ended June 30, 2022 as compared to the same period of 2021. The increase in revenue was primarily due to an increased number of Lapiplasty Procedure Kits sold as the result of an expanded customer base and an increase in average sales prices.
Cost of Goods Sold, Gross Profit and Gross Margin. Cost of goods sold increased by $3.9 million, or 53.4%, for the six months ended June 30, 2022 as compared to the same period in 2021. The increase in cost of goods sold was primarily due to $2.3 million increase in direct costs of goods sold resulting from increased sales, $1.1 million increase in royalty expense resulting from our increased sales, $0.4 million increase in depreciation expense from our surgical instruments, and $0.4 million increase in overhead expenses resulting from increase in our headcount offset by $0.3 million decrease in provision for inventory and instrument obsolescence. During the six months ended June 30, 2022, the gross profit increased by $15.8 million, or 49.1%, as compared to the same period of 2021 due to increased sales. Gross profit margin for the six months ended June 30, 2022 decreased from 81.5% to 81.1%, as compared to the same period of 2021, primarily due to an increase in royalty expense resulting from our increased sales and an increase in depreciation expense from surgical instruments.
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Sales and Marketing Expenses. Sales and marketing expenses increased by $22.0 million, or 84.2%, for the six months ended June 30, 2022 as compared to the same period in 2021. The increase in sales and marketing expenses was due to investment in our direct sales force and our patient focused outreach and education campaigns. Sales and marketing expenses increased by $9.4 million in payroll and related expenses from increased headcount of sales personnel, $7.1 million in advertising and marketing-related expenses primarily due to higher advertising fees and a new television commercial campaign, $4.4 million in professional services primarily for higher commissions from increased sales by our direct sales representatives and independent sales agencies, and $1.1 million in other marketing-related expenses resulting from increased sales efforts.
Research and Development Expenses. R&D expenses increased by $1.7 million, or 40.7%, for the six months ended June 30, 2022 as compared to the same period in 2021. The increase in R&D expenses was due to $1.3 million in payroll and related costs resulting from increased headcount of research and development personnel, $0.5 million in clinical expenses resulting from increased purchases of materials used in our prototypes, which were offset by a $0.1 million decrease in third party consulting fees.
General and Administrative Expenses. General and administrative expenses increased by $6.6 million, or 92.8%, for the six months ended June 30, 2022 as compared to the same period in 2021. The increase in general and administrative expenses was primarily due to increases of $2.7 million in payroll and related costs as we increased headcount to support the growing business, 1.7 million in business-related expenses primarily resulting from increased insurance costs and fees, $1.3 million in professional services primarily related to legal and audit fees, and $0.9 million in rent expense resulting from the new corporate headquarters lease that commenced for accounting purposes in the first quarter of 2022.
Interest Income and other, net. Interest and other income, net increased $0.1 million. The increase is due to a slight increase in money market fund interest rates during the current period.
Interest Expense. Interest expense decreased by $0.2 million, or 8.3%, for the six months ended June 30, 2022 as compared to the same period of 2021. The decrease in interest expense was due to significantly lower interest rates on higher debt balances during the six months ended June 30, 2022 as compared to the same period of 2021 as a result of the debt refinancing in late April of 2022.
Debt Extinguishment Loss. Debt extinguishment loss increased by $4.5 million, for the six months ended June 30, 2022 as compared to the same period of 2021 due to our debt refinancing during the current period.
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. In April 2022, we entered a new five-year $150.0 million loan arrangement, comprising up to $120.0 million in term loans and $30.0 million in a revolving credit facility with entities affiliated with MidCap. On the closing date in April 2022, we borrowed $50.0 million under the term loan and $4.0 million under the revolving credit facility. The term loan proceeds were partly used to repay our entire obligation under our term loan facility with CRG amounting to $34.1 million, including principal of $30.0 million, interest of $0.4 million and fees of $3.7 million. In April 2022, we also terminated our credit facility with SVB which had no outstanding balance when terminated.
As of June 30, 2022, we had cash and cash equivalents of $101.5 million, an accumulated deficit of $68.2 million, and the $54 million indebtedness outstanding under the term and revolving loans with MidCap. We believe that our existing cash and cash equivalents, 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 and Adductoplasty Systems and ancillary products, as well as our sales and marketing and R&D expenses and related personnel costs. We expect 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
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continue to hire personnel and invest in next-generation innovations of the Lapiplasty System and related 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 also incur additional expenses as a result of operating as a public company. From time to time, 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 expenditures will depend on many factors, including:
Based upon our current operating plan, we believe that our existing cash and cash equivalents, 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 period presented below:
Net cash (used in) provided by:
Operating activities
Investing activities
Financing activities
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Net Cash Used in Operating Activities
Net cash used in operating activities for the six months ended June 30, 2022, was $17.8 million, consisting primarily of a net loss of $26.3 million, adjusted for non-cash charges of $9.5 million and a decrease of $1.0 million in net operating assets. The non-cash charges primarily consisted of a $4.5 million loss on extinguishment of the CRG term loan, share-based compensation expense of $3.4 million, non-cash lease expense of $1.2 million and depreciation and amortization expense of $0.8 million. The decrease in net operating assets was primarily due to a decrease in accounts receivable resulting from higher sales in fourth quarter 2021, an increase in operating lease liabilities, which were more than offset by increases in inventories, prepaid expenses and other assets, and decreases in accounts payable and accrued liabilities due to timing of payments and growth of our operations.
Net cash used in operating activities for the six months ended June 30, 2021 was $4.2 million, consisting primarily of a net loss of $7.5 million, adjusted for non-cash charges of $1.6 million and an increase of $1.7 million in net operating assets. The non-cash charges primarily consisted of share-based compensation expense of $1.3 million and depreciation and amortization expense of $0.2 million. The increase in net operating assets was primarily due to a decrease of $4.5 million in accounts receivable resulting from higher sales in fourth quarter 2020, which was partially offset by a $2.9 million decrease in prepaid expenses due to timing of payments.
Net Cash Used in Investing Activities
Net cash used in investing activities was $6.6 million and $0.9 million for the six months ended June 30, 2022 and 2021, respectively, consisting primarily of purchases of capitalized surgical instruments for our reusable instrument trays during both periods.
Net Cash Provided by Financing Activities
Net cash provided in financing activities was $20.2 million for the six months ended June 30, 2022, consisting of $53.5 million of net cash proceeds from the new term loan agreement and revolving credit facility with MidCap and $1.5 million from exercise of stock options offset by the $33.9 million repayment of the CRG term loan.
Net cash provided in financing activities was $106.6 million for the six months ended June 30, 2021, consisting primarily of net cash proceeds of $107.6 million from the issuance of shares of common stock, net of $10.6 million in issuance costs, upon completion of our IPO on April 27, 2021, offset by the repayment of our PPP loan from the SBA of $1.8 million in March 2021 and proceeds from exercise of stock options of $0.7 million.
Surgeon Advisory Board Royalty Agreements
We recognized royalty expense of $1.3 million and $0.8 million for the three months ended June 30, 2022 and 2021, respectively, and $2.7 million and $1.6 million for the six months ended June 30,2022 and 2021, respectively. For the three months ended June 30, 2022 and 2021, the aggregate royalty rate was 4.4% and 4.0%, respectively. For the six months ended June 30, 2022 and 2021, the aggregate royalty rate was 4.6% and 4.1%, respectively. Each of the royalty agreements with our surgeon advisory board members 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 real estate leases located in Ponte Vedra, Florida. We entered into a 10-year lease in February 2022 for our new corporate headquarters location. Lease payments comprise the base rent stated in the lease plus operating costs which include taxes, insurance and common area maintenance. The remaining lease obligation was $29.4 million under these leases as of June 30, 2022.
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
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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 six months ended June 30, 2022.
Recently Issued Accounting Pronouncements
Refer to Note 3, “Recent Accounting Pronouncements”, to our condensed financial statements included elsewhere in this Quarterly Report for new accounting pronouncements not yet adopted as of the date of this Quarterly Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
The primary objectives of our investment activities are to preserve principal and provide liquidity. The risk associated with fluctuating interest rates is primarily limited to our cash equivalents, which are carried at quoted market prices. Since our results of operations are not dependent on investments, the risk associated with fluctuating interest rates is limited to our investment portfolio, and we believe that a hypothetical 10% change in interest rates would not have a significant impact on our condensed financial statements included elsewhere in this Quarterly Report. As of June 30, 2022, our investments consisted only of low-yield overnight sweep investments. We do not currently use or plan to use financial derivatives in our investment portfolio.
Foreign Currency Risk
Our business is conducted in U.S. dollars. We do not currently maintain a program to hedge exposures to non-U.S. dollar currencies. Any transactions that may be conducted in foreign currencies are not expected to have a material effect on our results of operations, financial position or cash flows.
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures
Our management, with the participation and supervision of our Chief Executive Officer and our Chief Financial Officer, have evaluated 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 are 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 Rule 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.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
We are not a party to any legal proceedings, the result of which would have a material effect on our business or results from operations. From time to time, we may become involved in various legal proceedings that arise in the ordinary course of our business.
Item 1A. Risk Factors.
As of the date of this Quarterly Report, there have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 4, 2022. Any of these factors could result in a significant or material adverse effect on our result of operations or financial conditions. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. We may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
The registration statement on Form S-1 (File Nos. 333-254863) and the registration statement on Form S-1 (File No. 333- 255451) filed pursuant to Rule 462(b) relating thereto, each relating to the IPO of shares of our common stock, became effective on April 22, 2021. On April 27, 2021, we completed our IPO of 12,937,500 shares of 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 issued and sold by us (inclusive of 703,125 shares pursuant to the exercise of the underwriters’ option) and 5,984,375 shares of common stock 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. We received net proceeds of approximately $107.6 million, after deducting underwriting discounts of $8.3 million and commissions and offering expenses payable by us of $2.3 million.
No payments for such expenses were made directly or indirectly to (i) any of our officers or directors or their associates, (ii) any persons owning 10% or more of any class of our equity securities or (iii) any of our affiliates.
We maintain the funds received from our IPO in a savings account, pending their use. There has been no material change in the planned use of proceeds from our IPO from that described in the Prospectus dated April 22, 2021 filed with the SEC pursuant to Rule 424(b)(4).
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Item 6. Exhibits.
Exhibit
Number
Description
10.1*
Credit and Security Agreement (Revolving Loan) dated as of April 29, 2022,by and among Treace Medical Concepts, Inc. and Midcap Funding IV Trust.
10.2*
Credit and Security Agreement (Term Loan) dated as of April 29, 2022 by and among Treace Medical Concepts, Inc. and Midcap Financial Trust.
31.1
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1†
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2†
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
Portions of this exhibit have been omitted in accordance with Item 601(b)(10) of Regulation S-K because it (i) is not material and (ii) would be competitively harmful if publicly disclosed.
†
The certifications attached as Exhibit 32.1 and 32.2 that accompany this Quarterly Report are deemed furnished and not filed with the U.S. Securities and Exchange Commission and are not to be incorporated by reference into any filing of Treace Medical Concepts, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report, irrespective of any general incorporation language contained in such filing.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 10, 2022
By:
/s/ John T. Treace
Name:
John T. Treace
Title:
Chief Executive Officer and Director (Principal Executive Officer)
/s/ Mark L. Hair
Mark L. Hair
Chief Financial Officer (Principal Financial and Accounting Officer)