Treace Medical Concepts, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The company sells the Lapiplasty 3D Bunion Correction System and related orthopedic products. Financial statement amounts below are in millions of dollars unless noted.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $20.7 | $7.7 | $39.4 | $19.0 |
| Gross profit | $16.7 | $5.7 | $32.1 | $14.5 |
| Gross margin | 80.9% | 73.1% | 81.5% | 76.4% |
| Operating expenses | $20.8 | $7.2 | $37.5 | $17.2 |
| Loss from operations | $(4.1) | $(1.5) | $(5.5) | $(2.7) |
| Net loss | $(5.1) | $(2.0) | $(7.5) | $(3.6) |
Q2 revenue increased 166.9% year over year; first-half revenue rose 107.2%. Q2 basic and diluted loss per share was $0.10, versus $0.06 a year earlier; first-half loss per share was $0.18 versus $0.11. The filing’s MD&A describes Q2 net loss as $4.9 million, while the unaudited financial statements report $5.083 million; investors should note this inconsistency.
- Cash and liquidity: Cash and cash equivalents were $119.6 million at June 30, 2021, compared with $18.1 million at year-end 2020. Current assets were $140.8 million and current liabilities $9.9 million.
- Cash flow, first half: Operating activities used $4.2 million; investing activities used $0.9 million, principally for property and equipment; financing activities provided $106.6 million, including $107.6 million of net IPO proceeds. Cash increased $101.5 million.
- Debt: $30.0 million principal remained outstanding under the CRG term loan, carrying 13% annual interest and maturing June 2025. The company had no SVB revolver borrowings and $10.0 million available; it reported covenant compliance. The $1.8 million PPP loan was repaid in March 2021.
- Other metrics: Lapiplasty Procedure Kits sold increased 147% year over year in Q2. Active surgeons numbered 1,492 at June 30, up 217 from December 31, 2020. Gross margin improved; the company attributes this partly to lower per-unit costs, lower instrument depreciation and lower inventory-obsolescence provisions.
Material changes versus prior period
- Growth reflects an expanded customer base and recovery from pandemic-related elective-surgery restrictions that affected Q2 2020. The company cautions that this comparison includes the prior-year disruption.
- Sales and marketing expense rose 192.5% in Q2, R&D rose 146.6%, and general and administrative expense rose 209.0%, reflecting increased hiring, commissions, marketing, development activity, public-company costs and resumed operations.
- The April 2021 IPO generated $107.6 million net proceeds for the company. Preferred shares converted to common stock, and the company issued shares for accrued preferred dividends. Common shares outstanding were 52.8 million at June 30.
- Effective January 1, the estimated useful life of capitalized surgical instruments increased from 18 to 36 months, reducing depreciation expense by less than $0.1 million in Q2 and $0.1 million in the first half; management expects an annual reduction of about $0.2 million.
Outlook, commentary and risks
No formal revenue or earnings guidance is provided. Management expects revenue to grow as it expands territories, accounts and the trained physician base, while stating that losses are likely to continue in the near term. It expects sales and marketing, R&D, and general and administrative costs to increase as it invests in commercial expansion, product innovation and public-company infrastructure. Management believes available cash, borrowing availability and expected revenue can fund operations for at least twelve months, but notes estimates depend on assumptions and additional financing may be needed.
- COVID-19, including potential variants, renewed restrictions or limits on elective procedures, could again reduce procedure volumes and revenue.
- Growth depends on physician adoption, facility approvals, reimbursement and effective expansion of the sales organization. The business is also exposed to competition, product development and regulatory risks.
- Most third-party suppliers are single-source suppliers, creating potential supply and manufacturing risks. Debt agreements include liquidity and revenue covenants, collateral liens and other restrictions; CRG prepayment premiums may apply within the first two years.
- Surgeon-advisor royalty rates range from 0.4% to 3.0% by agreement; reported aggregate royalty rate was 4.1%. Q2 royalty expense was $0.9 million.
- The company reported no material legal proceedings, no material change to previously disclosed risk factors, and no off-balance-sheet arrangements. Operating lease commitments totaled $3.7 million, including an expanded lease not yet commenced at quarter-end.
Important facts for investors to verify
- Reconcile the MD&A’s $4.9 million Q2 net-loss figure with the financial statements’ $5.083 million net loss.
- Assess whether procedure-kit sales, surgeon adoption and facility access sustain growth after the COVID-affected comparison period.
- Monitor gross-margin durability against rising sales, marketing, development and public-company expenses, and the path to profitability.
- Review cash burn, CRG loan interest and maturity, revolver availability, covenant headroom and any need for additional financing.
- Evaluate COVID-19 and supply-chain exposure, reimbursement conditions, royalty obligations and potential dilution from outstanding equity awards.