Treace Medical Concepts, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; comparative periods ended September 30, 2020. Amounts below are in U.S. dollars. The company sells orthopedic medical devices, principally its Lapiplasty 3D Bunion Correction System. This was its first year as a public company following its April 2021 IPO.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $21.6 million | $14.3 million | $61.0 million | $33.3 million |
| Gross profit / margin | $17.4 million / 80.4% | $11.4 million / 79.6% | $49.5 million / 81.1% | $25.9 million / 77.8% |
| Operating expenses | $22.8 million | $11.4 million | $60.4 million | $28.7 million |
| Operating loss | $5.5 million | $0.1 million | $10.9 million | $2.8 million |
| Net loss | $6.4 million | $2.7 million | $13.9 million | $6.2 million |
| Net loss per share, basic and diluted | $(0.12) | $(0.08) | $(0.30) | $(0.18) |
- Q3 revenue grew 51.5%; nine-month revenue grew 83.3%. Management attributed growth mainly to more procedure kits sold and an expanded customer base. Kit sales increased 42.5% year over year in Q3; active surgeons reached 1,592, up 41%, while utilization rose 16.3% to 10 kits per active surgeon.
- Q3 operating expenses doubled year over year, with sales and marketing up 97.3%, R&D up 67.9%, and general and administrative up 138.9%. Nine-month operating expenses rose 110.7%. Management cited commercial expansion, higher commissions and marketing, staffing, and public-company costs.
- Cash and cash equivalents were $109.5 million at September 30, 2021, versus $18.1 million at December 31, 2020. IPO proceeds provided $107.6 million net. Current assets were $135.4 million and current liabilities $10.7 million.
- For the first nine months, operating cash use was $13.4 million, investing cash use was $1.8 million, and financing cash provided was $106.6 million. Capital expenditures were $1.8 million.
- Principal debt outstanding was $30.0 million under the CRG term loan, reported net of discount and issuance costs as $29.3 million. The CRG loan bears 13% interest and matures June 30, 2025, with principal due at maturity. The company also had $10.0 million available under its SVB revolving line, with no balance drawn; it reported compliance with both lenders’ covenants.
Material changes and business developments
- Revenue growth was accompanied by higher losses: Q3 net loss increased to $6.4 million from $2.7 million, and nine-month net loss to $13.9 million from $6.2 million. Operating costs grew faster than revenue, particularly sales and marketing.
- The company completed its IPO on April 27, 2021, issuing 6.95 million new shares and receiving approximately $107.6 million net. Outstanding Series A preferred stock converted to common stock; the company reported 52.8 million common shares outstanding at quarter-end.
- In September, the company announced the commercial launch of its Adductoplasty Midfoot Correction System. It also expanded its commercial organization and headquarters.
- Gross margin improved year over year, reflecting lower per-unit direct costs and lower instrument depreciation, partly offset by higher royalty costs. Nine-month royalty expense was $2.8 million; the aggregate royalty rate was 4.5%.
Outlook, risks and unusual items
- Management expected continued revenue growth and further increases in sales, marketing, R&D, and administrative spending. It anticipated operating losses in the near term and stated existing cash, available borrowings, and expected revenue should fund operations for at least 12 months. No specific revenue or earnings guidance was provided.
- COVID-19 Delta-related hospital capacity constraints, elective-surgery deferrals, and staffing shortages adversely affected procedure volumes in Q3, particularly in Florida, Georgia, Texas, and other affected areas. Further disruption remained uncertain.
- Other key risks include the ability to expand physician and facility adoption, reimbursement and coverage, reliance on third-party and some single-source suppliers, product manufacturing and quality, regulatory clearances, intellectual property, competition, and the need for additional capital if resources are insufficient.
- The CRG facility is costly and secured by substantially all company assets, including intellectual property, subject to the SVB intercreditor arrangement. Early repayment can trigger premiums. Management reported covenant compliance at quarter-end.
- The company changed the estimated useful life of capitalized surgical instruments from 18 to 36 months prospectively, reducing depreciation expense by less than $0.1 million in Q3 and $0.1 million for the nine months; it expects an annual reduction of approximately $0.2 million.
- The company reported no material legal proceedings and no off-balance-sheet arrangements. Its risk factors were unchanged in any material respect from those in its IPO prospectus. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether procedure-kit sales, active-surgeon growth, and utilization continue to support revenue growth despite COVID-related procedure disruption.
- Whether gross margins can be sustained as product mix, manufacturing costs, royalties, and inventory provisions change.
- The pace of operating-expense growth and the company’s path toward reducing operating losses and cash burn.
- The terms, interest burden, covenants, collateral, maturity, and any repayment premiums under the CRG loan and SVB credit facility.
- How much of the $109.5 million cash balance remains available after planned commercial, R&D, and infrastructure investments; management’s runway estimate depends on assumptions that may change.
- Potential dilution from outstanding equity awards: 8.86 million options and restricted awards were reported at September 30, 2021.