Treace Medical Concepts, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless stated otherwise. Treace is a commercial-stage orthopedic device company whose primary product is the Lapiplasty 3D Bunion Correction System and related products.
Financial performance and position
- Revenue: $18.7 million, up 66.2% from $11.3 million. The company attributed growth mainly to more Lapiplasty kits sold and an expanded customer base.
- Gross profit and margin: $15.4 million and 82.2%, versus $8.9 million and 78.8%. Management cited lower direct costs and lower royalties per unit.
- Operating expenses: $16.8 million, up 66.7%. Sales and marketing was $12.1 million; R&D $1.9 million; and general and administrative $2.8 million.
- Loss: Operating loss was $1.4 million, compared with $1.2 million. Net loss was $2.4 million versus $1.6 million; net loss attributable to common stockholders was $2.6 million, or $0.07 per share, versus $1.8 million, or $0.05 per share. Higher interest expense contributed to the larger net loss.
- Cash flow: Operating cash use was $0.4 million, compared with $0.9 million; investing cash use was $0.2 million; financing cash use was $1.2 million. Cash declined by $1.9 million during the quarter.
- Liquidity: Cash and cash equivalents were $16.2 million at March 31. Current assets were $36.5 million and current liabilities $8.6 million.
- Debt: Principal outstanding was $30.0 million under the CRG term loan, reported net of discount and issuance costs at $29.2 million. The loan bears 13% annual interest, matures June 2025, and has no scheduled principal payments before maturity. The company reported covenant compliance. It repaid its $1.8 million PPP loan in March.
Material changes and developments
- Lapiplasty kits sold increased 60%, from 2,187 to 3,503; active surgeons increased 30%, from 1,044 to 1,354.
- Sales and marketing expense rose 65.5%, and general and administrative expense more than doubled, reflecting higher commissions, payroll, marketing, and professional services costs. R&D expense rose 30.4%.
- After quarter-end, Treace completed its April 27 IPO. It issued 6.95 million primary shares at $17 per share and received approximately $107.1 million in net proceeds; the offering also included shares sold by existing stockholders. The filing presents pro forma cash of $123.2 million as of March 31 after giving effect to the IPO, not as the reported quarter-end balance.
- In connection with the IPO, preferred shares converted into common shares, and the company implemented a 1.3375-for-1 forward stock split. On April 28, holders cashlessly exercised warrants, resulting in 621,570 common shares issued.
Outlook, commentary, and risks
- Management expects revenue to grow as it expands sales territories, accounts, and physician adoption, but expects continued near-term losses and higher sales, R&D, and administrative spending, including public-company costs.
- Management believes existing cash, IPO proceeds, available borrowing capacity, and expected revenue will fund operations and capital needs for at least 24 months, based on assumptions that could prove incorrect. Additional financing may be needed; it may be unavailable or involve dilution or restrictive terms.
- COVID-19 previously delayed elective procedures and harmed revenue growth. Management said restrictions were not in effect in Q1 2021 but warned that future pandemic impacts and procedure volumes remain uncertain.
- The company reports seasonality: Q4 has historically represented approximately 40% of annual revenue, while Q1 is typically lower. Adoption by surgeons and facility approvals, reimbursement coverage, competition, and supply availability are key business risks.
- Royalties to surgeon advisors were $0.8 million in Q1 2021, with an aggregate rate of 4.3% of relevant net sales. The company also disclosed secured debt, minimum-liquidity and revenue covenants, and prepayment premiums under the CRG facility.
- Beginning in 2021, the estimated useful life of capitalized surgical instruments increased from 18 to 36 months, reducing Q1 depreciation by less than $0.1 million; the company expects an annual reduction of $0.2 million. No material legal proceedings or changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether post-IPO cash deployment and the stated 24-month funding estimate remain consistent with spending growth and operating losses.
- Whether kit and surgeon growth translates into sustained revenue growth, and how seasonality, procedure volumes, reimbursement, and COVID-related disruptions affect results.
- The CRG loan’s 13% interest cost, covenants, collateral, maturity obligations, and any applicable prepayment premiums.
- The effects of IPO-related share conversion, warrant exercise, equity plans, and outstanding options on share count and dilution.
- The MD&A results table appears to label a $2.432 million net loss as “loss from operations,” while the financial statements report operating loss of $1.402 million. Confirm against the detailed financial statements; the filing text contains this apparent inconsistency.