TREACE MEDICAL CONCEPTS, INC. 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 endedDecember 31, 2021 , included in our Annual Report on Form 10-K filed with theU.S. Securities and Exchange Commission onMarch 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 ).
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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 endedJune 30, 2022 increased by 1,458 or 39% over the same period of 2021, and the number of active surgeons as ofJune 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 endedJune 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 acrossthe 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 inthe United States , as 17 -------------------------------------------------------------------------------- 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, inSeptember 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
Revenue
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 inthe 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 18 --------------------------------------------------------------------------------
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 endedJune 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 and other income, net
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
The following table summarizes our results of operations for the periods presented below ($ in thousands):
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2022 2021 Amount % 2022 2021 Amount %
Revenue $ 29,967 $ 20,654 $ 9,313 45.1 %
5,651 3,944 1,707 43.3 % 11,157 7,271 3,886 53.4 % Gross profit
24,316 16,710 7,606 45.5 % 47,857 32,090 15,767 49.1 %
Operating
expenses
Sales and
marketing 26,250 14,010 12,240 87.4 % 48,173 26,158 22,015 84.2 % Research and development
2,984 2,422 562 23.2 % 6,036 4,290 1,746 40.7 % General and administrative
7,015 4,329 2,686 62.0 % 13,677 7,095 6,582 92.8 % Total operating expenses
36,249 20,761 15,488 74.6 % 67,886 37,543 30,343 80.8 % Loss from operations
(11,933 ) (4,051 ) (7,882 ) 194.6 % (20,029 ) (5,453 ) (14,576 ) 267.3 %
Interest and
other income, net 128 6 122 * 139 7 132 *
Interest expense (946 ) (1,038 ) 92 (8.9 )% (1,897 ) (2,069 ) 172 (8.3 )%
Debt
extinguishment
loss (4,483 ) - (4,483 ) * (4,483 ) - (4,483 ) *
Other expense,
net (5,301 ) (1,032 ) (4,269 ) 413.7 % (6,241 ) (2,062 ) (4,179 ) 202.7 %
Net loss and
comprehensive
loss $ (17,234 ) $ (5,083 ) $ (12,151 ) 239.1 % $ (26,270 ) $ (7,515 ) $ (18,755 ) 249.6 %
* Not meaningful
Comparison of the three months ended
Revenue. Revenue increased by$9.3 million , or 45.1%, for the three months endedJune 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 endedJune 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 20 -------------------------------------------------------------------------------- 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 endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 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
Revenue. Revenue increased by$19.7 million , or 49.9%, for the six months endedJune 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 endedJune 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 endedJune 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 endedJune 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. 21 -------------------------------------------------------------------------------- Sales and Marketing Expenses. Sales and marketing expenses increased by$22.0 million , or 84.2%, for the six months endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 30, 2022 as compared to the same period of 2021 due to our debt refinancing during the current period.
Liquidity and Capital Resources
Overview
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. InApril 2021 , we received net proceeds of$107.6 million from our IPO. InApril 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 inApril 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 . InApril 2022 , we also terminated our credit facility with SVB which had no outstanding balance when terminated. As ofJune 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:
•
the scope and timing of our investment in our commercial infrastructure and sales force;
•
the costs of our ongoing commercialization activities including product sales, marketing, manufacturing and distribution;
•
the scope of our marketing efforts, including the degree to which we utilize direct to consumer campaigns;
•
the degree and rate of market acceptance of the Lapiplasty System;
•
the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, including enforcing our intellectual property rights against infringing products or technologies;
•
our need to implement additional infrastructure and internal systems;
•
the research and development activities we intend to undertake in order to improve the Lapiplasty System and to develop or acquire additional products;
•
the investments we make in acquiring other technologies, assets or businesses to expand our product portfolio;
•
the success or emergence of new competing technologies or other adverse market developments;
•
any product liability or other lawsuits related to our products;
•
the expenses needed to attract and retain skilled personnel;
•
the costs associated with being a public company; and
•
the impact of the COVID-19 pandemic, hospital staffing shortages, inflation, and other general economic conditions on our operations and business.
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:
Six Months Ended
2022 2021
Net cash (used in) provided by: Operating activities$ (17,807 ) $ (4,177 ) Investing activities (6,649 ) (866 ) Financing activities 20,156 106,585
Net (decrease) increase in cash and cash equivalents
23
--------------------------------------------------------------------------------Net cash used in operating activities for the six months endedJune 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 endedJune 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 was$6.6 million and$0.9 million for the six months endedJune 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 endedJune 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 endedJune 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 onApril 27, 2021 , offset by the repayment of our PPP loan from the SBA of$1.8 million inMarch 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 endedJune 30, 2022 and 2021, respectively, and$2.7 million and$1.6 million for the six months endedJune 30,2022 and 2021, respectively. For the three months endedJune 30, 2022 and 2021, the aggregate royalty rate was 4.4% and 4.0%, respectively. For the six months endedJune 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 inPonte Vedra, Florida . We entered into a 10-year lease inFebruary 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 ofJune 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 withU.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 24 --------------------------------------------------------------------------------
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 endedJune 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.
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