Treace Medical Concepts, Inc. — FY 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual filing; it does not provide a separate fourth-quarter income statement. The company develops and sells surgical devices, primarily its Lapiplasty 3D bunion correction system, in the United States. Financial statements were audited by Grant Thornton, which issued an unqualified opinion.
Business context
Treace reported growth in its Lapiplasty business and launched the Adductoplasty midfoot system in the third quarter of 2021. It also launched the Lapiplasty Mini-Incision System. Sales are made through direct employees and independent agencies; at year-end, the company reported 81 direct sales representatives, 37 agencies and 1,783 active surgeons. Management’s strategy centers on expanding sales coverage, surgeon training, patient outreach and product offerings.
Key financial metrics
| Metric | 2021 | 2020 | Change or context |
|---|---|---|---|
| Revenue | $94.4 million | $57.4 million | Up 64.6% |
| Gross profit | $76.6 million | $44.9 million | Gross margin 81.1%, versus 78.3% |
| Operating expenses | $93.1 million | $44.0 million | Up 111.4%; sales and marketing drove much of the increase |
| Operating income (loss) | $(16.5) million | $0.9 million | Moved from operating income to loss |
| Net loss | $(20.6) million | $(3.7) million | 2021 net loss attributable to common stockholders was $(20.7) million, or $(0.43) per share |
| Cash from operating activities | $(17.2) million | $(4.5) million | Higher loss and working-capital needs |
| Cash from investing activities | $(2.7) million | $(1.1) million | Primarily purchases of surgical instruments and equipment |
| Cash from financing activities | $107.7 million | $11.5 million | 2021 included $107.6 million in net IPO proceeds |
At December 31, 2021, cash and cash equivalents were $105.8 million, including $105.2 million in money-market funds. Current assets were $138.0 million and current liabilities $18.2 million. Debt included $30.0 million principal under the CRG term loan, reported net of discount at $29.4 million; no amount was drawn on the $10.0 million SVB revolving facility, which was available subject to its terms. The CRG loan bears 13% annual interest and matures June 30, 2025, with principal due at maturity. The company repaid its $1.8 million PPP loan in 2021. No income tax provision was recorded, and deferred tax assets were fully offset by a valuation allowance.
Changes versus the prior comparable period
- Lapiplasty procedure kits sold increased 57.4%, from 11,113 in 2020 to 17,490 in 2021; revenue rose 64.6%, reflecting volume growth and a slight increase in average selling prices.
- Gross margin improved to 81.1%, principally due to lower per-unit direct costs and reduced instrument depreciation, partly offset by higher royalties as a percentage of sales.
- Sales and marketing expense increased 103.7% to $64.5 million, including higher commissions, advertising, marketing and sales headcount. Research and development rose 74.5% to $10.2 million; general and administrative expense rose 181.9% to $18.4 million, including public-company costs.
- Active surgeons increased 39.8% to 1,783, and average annual kit utilization per active surgeon rose 12.6% to 9.8.
- Cash increased from $18.1 million to $105.8 million, mainly reflecting the IPO; operating cash use also increased substantially.
Outlook, commentary and risks
- Outlook: No specific revenue or earnings guidance is provided. Management expects continued investment in sales, marketing, product development and public-company infrastructure, and anticipates operating at a loss in the near term. Management stated existing cash, available debt borrowings and expected revenue should fund operations for at least 12 months from the financial-statement issuance date, while cautioning that assumptions may change.
- COVID-19 and procedure volumes: Elective surgery delays, cancellations, staffing shortages and hospital capacity constraints affected demand in 2021, including during Delta- and Omicron-related surges, and continued into early 2022. Further disruption remains uncertain.
- Commercial and reimbursement risks: Growth depends on surgeon adoption, facility approvals, adequate reimbursement and training. The bunion-device market is competitive, and larger competitors may have greater resources and broader relationships. The company also identifies pricing pressure and the risk that its estimated addressable market may not be realized.
- Operations and regulatory risks: The company relies on third-party manufacturers, has no long-term supply contracts, and is subject to FDA device and quality requirements, product-liability exposure and extensive health-care fraud and abuse rules. Clinical studies, including ALIGN3D, may not produce supportive results.
- Debt and liquidity risks: CRG debt carries a 13% rate, has restrictive covenants and is secured by substantially all assets, including intellectual property, subject to an intercreditor arrangement. The company reported covenant compliance at year-end.
- Unusual and subsequent items: In February 2022, the company entered a 10-year triple-net lease for a new 125,562-square-foot headquarters, with rent starting at $22.60 per square foot and escalating to $27.00. This is a substantial expansion from its existing 23,060-square-foot leased headquarters. The company also prospectively extended the estimated useful life of capitalized surgical instruments from 18 to 36 months, reducing 2021 depreciation expense by $0.3 million.
Important facts for investors to verify
- Whether procedure-kit growth, surgeon adoption and utilization continue as hospital capacity normalizes, and how much growth is attributable to price versus volume.
- Whether gross margins can be sustained as royalties, product mix, manufacturing costs and pricing change.
- The cash-burn trajectory and whether management’s stated runway remains adequate after planned growth investments and the new headquarters lease.
- The CRG loan’s interest burden, maturity obligations, covenant headroom and potential financing needs.
- Independent evidence supporting the company’s clinical outcome and recurrence-rate claims, including longer-term ALIGN3D results.
- How much of future sales depends on reimbursement, facility approvals, independent agencies and elective-procedure capacity.
- Potential dilution from outstanding equity awards: 7.5 million options were outstanding at year-end, in addition to shares available under equity plans.