Item 1. Financial Statements (Unaudited).
Notes to Condensed Financial Statements
(unaudited)
1. Formation and Business of the Company
The Company
Treace Medical Concepts, LLC was formed on July 29, 2013. Effective July 1, 2014, the entity converted to a C Corporation and changed its name to Treace Medical Concepts, Inc. (the “Company”). The Company is a commercial-stage orthopedic medical device company driving a paradigm shift in the surgical treatment of Hallux Valgus (commonly known as bunions) with the goal of advancing the standard of care for the surgical management of bunion deformities. The Company has pioneered the proprietary Lapiplasty 3D Bunion Correction System – a combination of novel instruments, implants and surgical methods designed to improve the inconsistent clinical outcomes of traditional approaches to bunion surgery. In addition, the Company offers other advanced instrumentation and implants for use in the Lapiplasty Procedure or other ancillary procedures performed in high frequency with bunion surgery. The Company operates from its corporate headquarters located in Ponte Vedra, Florida.
The Company received 510(k) clearance for the Lapiplasty System in March 2015 and began selling its surgical medical devices in September 2015.
Initial Public Offering
On April 27, 2021, the Company completed its initial public offering (“IPO”) of 12,937,500 shares of its common stock, which included the exercise in full of the underwriters’ option to purchase additional shares. As part of the IPO, 6,953,125 shares of common stock were issued and sold by the Company (inclusive of 703,125 shares pursuant to the exercise of the underwriters’ option) and 5,984,375 shares of common stock were sold by the selling stockholders named in the prospectus (inclusive of 984,375 shares pursuant to the exercise of the underwriters’ option), at a price to the public of $17.00 per share. The Company received net proceeds of approximately $107.6 million, after deducting underwriting discounts and commissions of $8.3 million and offering expenses payable by the Company of $2.3 million. Upon the completion of the IPO, all 6,687,475 shares of 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 cumulative dividends on Series A convertible preferred stock of $2.5 million.
Forward Stock Split
On April 16, 2021, in connection with the IPO, the Company filed an Amended and Restated Certificate of Incorporation with the Delaware Secretary of State to implement a 1.3375-for-1 forward stock split (the “Forward Stock Split”), effective on April 16, 2021, whereby each 1.0 share of Class A common stock issued and outstanding was reclassified as 1.3375 shares of Class A common stock and each 1.0 share of Series A convertible preferred stock (each a “Preferred Share”) issued and outstanding was reclassified as 1.3375 Preferred Shares. In connection with the Forward Stock Split, the total number of shares of all classes of stock which the Company is authorized to issue was adjusted to 73,562,500, divided into 66,875,000 shares of Class A common stock and 6,687,500 Preferred Shares. There was no adjustment to the par value of $0.001 per share. All share and per share amounts in the accompanying financial statements for the prior period have been retroactively adjusted to reflect the Forward Stock Split. In lieu of issuing fractional shares in connection with the Forward Stock Split, the Company is obligated to pay cash in an amount equal to the fair value of such fractional shares (as determined in good faith by the Company’s Board of Directors).
Coronavirus Pandemic
The Company’s operations have been impacted by the coronavirus (“COVID-19”) pandemic beginning in 2020. In response to COVID-19, certain states within the United States implemented shelter-in-place rules requiring certain businesses not deemed “essential” to close and requiring elective procedures to be delayed. The Company’s revenue growth was adversely impacted, particularly by the restrictions on elective procedures, from March 2020 through May 2020, when such restrictions were largely eased. There is still uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the United States and international economies, especially as more potentially contagious and virulent variants of the virus are spreading. While the Company has experienced revenue growth during the
8
pandemic, if states implement shelter-in-place rules again or medical facilities implement restrictions on elective surgeries, the Company may be required to adjust its forecasted revenues and operating results.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared using accounting principles generally accepted in the United States of America (“GAAP”) and the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These condensed financial statements have been prepared on the same basis as the Company’s annual financial statements included in the final prospectus filed with SEC dated April 22, 2021 in connection with the Company’s IPO.
The unaudited condensed financial statements included herein reflect all adjustments, including normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. The results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for future quarters or for the fiscal year ending December 31, 2021.
Use of Estimates
The preparation of condensed financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed financial statements and the reported amounts of revenues and expenses during the reporting periods. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may ultimately materially differ from these estimates and assumptions.
Significant estimates and assumptions include reserves and write-downs related to accounts receivable, inventories, the recoverability of long term assets, valuation of equity instruments, valuation of common stock, stock-based compensation, deferred tax assets and related valuation allowances and impact of contingencies.
Property and Equipment, Net
Property and equipment is recorded at cost. Depreciation of property and equipment is recorded using the straight-line method over the following estimated useful lives of the related assets as follows:
|
|
Years
|
|
Furniture, fixtures and equipment
|
|
|
7
|
|
Machinery and equipment
|
|
|
3
|
|
Capitalized surgical instruments
|
|
|
3
|
|
Computer equipment
|
|
|
3
|
|
Leasehold improvements
|
|
5 or lease term,
whichever is shorter
|
|
Software
|
|
|
3
|
|
Beginning January 1, 2021, the Company adjusted the useful life of its capitalized instruments from 18 months to 36 months. The change in useful life was made as a prospective adjustment and resulted in a decrease of depreciation expense of less than $0.1 million and $0.1 million during the three and six months ended June 30, 2021 and no impact on earnings per share. The change in useful life is expected to reduce depreciation expense by $0.2 million per year.
Segments
The Company operates and manages its business as one reportable and operating segment, which is the business of designing, manufacturing, and marketing medical devices for physicians, surgeons, ambulatory surgery centers and hospitals. The Company’s chief executive officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for purposes of allocating and evaluating financial performance. All long-lived assets are maintained in the United States.
9
Concentration of Credit Risk
The Company earns revenue from the sale of its products to customers such as hospitals and ambulatory surgery centers. Sales of the Lapiplasty System and ancillary products accounted for the Company’s revenue for the three and six months ended June 30, 2021 and 2020. No single customer accounted for more than 10% of revenue for the three and six months ended June 30, 2021 and 2020. The Company’s accounts receivable are derived from revenue earned from customers. The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral from its customers. At June 30, 2021, and December 31, 2020, no customer accounted for more than 10% of accounts receivable or revenue.
Accounts Receivable and Allowances
Accounts receivable are generally from hospitals and ambulatory surgery centers and are stated at amounts billed less allowances for doubtful accounts. The Company continually monitors customer payments and maintains an allowance for estimated losses resulting from a customer’s inability to make required payments. The Company considers factors such as historical experience, credit quality, age of the accounts receivable balances, geographic related risks and economic conditions that may affect a customer’s ability to pay. Accounts receivable are written off when the Company deems individual balances are no longer collectible. As of June 30, 2021 and December 31, 2020, accounts receivable is presented net of an allowance for doubtful accounts of $0.3 million and $0.4 million, respectively. For the three months ended June 30, 2021 and 2020, the Company recorded a provision for bad debts of $0 and $0.2 million, respectively. For the six months ended June 30, 2021 and 2020, the Company recorded a recovery (provision) for bad debts of $0.1 million and $(0.2) million, respectively.
Inventories
Inventories consist primarily of surgical kits and components as finished goods and are stated at the lower of cost or net realizable value. Cost is determined based on an average cost method which approximates the first-in, first-out basis and includes primarily outsourced manufacturing costs and direct manufacturing overhead costs.
The Company reviews inventory for obsolescence and writes down inventory, as necessary. For the three months ended June 30, 2021 and 2020, the Company recorded a provision of $0.1 million and $0.1 million, respectively, for obsolete inventory to cost of goods sold. For the six months ended June 30, 2021 and 2020, the Company recorded a provision of $0.1 million and $0.4 million, respectively, for obsolete inventory to cost of goods sold.
Deferred Offering Costs
Deferred offering costs, consisting of legal, accounting and other fees and costs relating to the Company’s IPO, were capitalized and recorded on the balance sheet. The deferred offering costs are offset against the proceeds received upon the closing of the IPO. At the closing of the IPO, the Company offset the proceeds received by $2.3 million in offering costs. As of June 30, 2021 and December 31, 2020, $0 and $0.2 million, respectively, in deferred offering costs were recorded on the condensed balance sheets. During the three and six months ended June 30, 2021 and 2020, the Company did not write off any deferred offering costs.
3. Recent Accounting Pronouncements
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASC 842”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, which provides clarification to ASU 2016-02. In March 2019, the FASB issued ASU 2019-01, which provides clarification on implementation issues associated with adopting ASU 2016-02. These ASUs (collectively the “new leasing standard”) requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. ASC 842 provides a lessee with an option to not account for leases with a term of 12 month or less as leases in the scope of the new standard. ASC 842 supersedes the previous leases standard, ASC 840, Leases. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which allows entities to elect an optional transition
10
method where entities may continue to apply the existing lease guidance during the comparative periods and apply the new lease requirements through a cumulative effect adjustment in the period of adoption rather than in the earliest period presented. The new standard is effective for the Company for fiscal years beginning after December 15, 2021 and early application is permitted. The Company is classified as an emerging growth company (“EGC”) as of March 31, 2021 and December 31, 2020 and has decided to take advantage of the extended transition period granted to EGCs for complying with new or revised accounting standards. This provision allows an EGC to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. The Company is currently assessing the impact that this standard may have on its financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses. This new guidance will require financial instruments to be measured at amortized cost, and trade accounts receivable to be presented at the net amount expected to be collected. The new model requires an entity to estimate credit losses based on historical information, current information and reasonable and supportable forecasts, including estimates of prepayments. In November 2019, the FASB issued ASU 2019-10, according to which, the new standard is effective for the Company for fiscal years beginning after December 15, 2022, and interim periods within that fiscal year. The Company is currently evaluating the impact of the new standard on its financial statements.
4. Fair Value Measurements
Assets and liabilities recorded at fair value in the condensed financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels which are directly related to the amount of subjectivity associated with the inputs to the valuation of these assets or liabilities are as follows:
Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.
Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.
Level 3—Unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis – The following assets and liabilities are measured at fair value on a recurring basis as of June 30, 2021 and December 31, 2020:
|
|
June 30, 2021
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds(1)
|
|
$
|
119,425
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
119,425
|
|
Total
|
|
$
|
119,425
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
119,425
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
245
|
|
|
$
|
245
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
245
|
|
|
$
|
245
|
|
|
|
December 31, 2020
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds(1)
|
|
$
|
17,577
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,577
|
|
Total
|
|
$
|
17,577
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,577
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
245
|
|
|
$
|
245
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
245
|
|
|
$
|
245
|
|
|
(1)
|
Money market funds are included in cash and cash equivalents in the balance sheets as of June 30, 2021 and December 31, 2020.
|
11
As discussed in Note 6, in July 2020, the Company entered into a non-revolving term loan facility (the “CRG Term Loan Facility”) with CRG Servicing LLC (“CRG”) and accounted for embedded features in the agreement as a derivative liability with an initial fair value of $0.2 million. The derivative liability was accounted for at fair value using the income approach and inputs consisting of (a) the probability of events occurring that trigger an event of default of the Company’s term loans under the CRG Term Loan Facility, ranging from 1% to 2%, (b) the prepayment premium payable upon early redemption, and (c) additional interest payable upon an event of default. The Company recognized no adjustments to the fair value of the derivative liability in net loss for the three and six months ended June 30, 2021 and 2020.
There were no assets or liabilities measured at fair value on a nonrecurring basis as of June 30, 2021 and December 31, 2020.
5. Balance Sheet Components
Cash and Cash Equivalents
The Company’s cash and cash equivalents consisted of the following (in thousands):
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
Cash
|
|
$
|
196
|
|
|
$
|
502
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
119,425
|
|
|
|
17,577
|
|
Total cash and cash equivalents
|
|
$
|
119,621
|
|
|
$
|
18,079
|
|
Property and equipment, net
The Company’s property and equipment, net considered of the following (in thousands):
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
Furniture and fixtures, and equipment
|
|
$
|
131
|
|
|
$
|
131
|
|
Construction in progress
|
|
|
75
|
|
|
|
—
|
|
Machinery and equipment
|
|
|
291
|
|
|
|
226
|
|
Capitalized surgical equipment
|
|
|
3,030
|
|
|
|
2,652
|
|
Computer equipment
|
|
|
196
|
|
|
|
150
|
|
Leasehold improvements
|
|
|
191
|
|
|
|
168
|
|
Software
|
|
|
138
|
|
|
|
138
|
|
Total property and equipment
|
|
|
4,052
|
|
|
|
3,465
|
|
Less: accumulated depreciation and
amortization
|
|
|
(2,577
|
)
|
|
|
(2,636
|
)
|
Property and equipment, net
|
|
$
|
1,475
|
|
|
$
|
829
|
|
Depreciation and amortization expense on property and equipment was $0.1 million and $0.4 million for the three months ended June 30, 2021 and 2020, respectively. Depreciation and amortization expense on property and equipment was $0.2 million and $0.7 million for the six months ended June 30, 2021 and 2020, respectively.
Accrued liabilities
Accrued other liabilities consist of the following (in thousands):
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
Accrued royalties expense
|
|
$
|
898
|
|
|
$
|
1,032
|
|
Accrued expense
|
|
|
534
|
|
|
|
565
|
|
Other
|
|
|
525
|
|
|
|
251
|
|
Total accrued liabilities
|
|
$
|
1,957
|
|
|
$
|
1,848
|
|
12
6. Long Term Debt
Silicon Valley Bank
The Company entered into a Loan and Security Agreement dated April 18, 2018 (the “LSA”) with Silicon Valley Bank (“SVB”) as amended by a First Amendment to the Loan and Security (the “First Amendment”) dated February 14, 2019, a Second Amendment dated December 31, 2019 (the “Second Amendment”) and a Third Amendment dated August 3, 2020 (the “Third Amendment”). The LSA, as amended by the First Amendment, Second Amendment and Third Amendment (collectively the “SVB Credit Facility”) matures August 3, 2024.
The Company borrowed $10.0 million upon execution of the First Amendment and $10.0 million upon execution of the Second Amendment and repaid the term loans in August 2020 using the proceeds received from the CRG Term Loan Facility (described below). The term loans accrued interest, payable monthly in arrears, at a floating per annum rate equal to the greater of (i) prime rate plus 2.25% as published in the money rates section of the Wall Street Journal, or (ii) seven and one-half percent (7.5%) for tranche 1 and 2.
Under the Third Amendment, the SVB Credit Facility provides for up to $10.0 million in a revolving line of credit. Availability under the revolving line of credit is subject to a formula based on, among other things, eligible accounts receivable. Borrowings on the line of credit bear interest at a floating rate per annum equal to the greater of (a) 1.00% above the prime rate as published from time to time in the money rates section of the Wall Street Journal and (b) 5.00%, and includes a termination fee of 1.00% of the revolving line of credit if the termination occurs before August 3, 2022.
Under the terms of the SVB Credit Facility, the Company granted SVB first priority liens and security interests in substantially all of the Company’s assets (excluding its intellectual property but including any proceeds and rights to payments associated with our intellectual property) as collateral. The SVB Credit Facility also contains certain representations and warranties, indemnification provisions in favor of SVB, affirmative and negative covenants (including, among other things, requirements that the Company maintain a minimum amount of liquidity and achieve minimum revenue targets, limitations on other indebtedness, liens, acquisitions, investments and dividends and requirements relating to financial reporting, sales and leasebacks, insurance and protection of the Company’s intellectual property rights) and events of default (including payment defaults, breaches of covenants following any applicable cure period, investor abandonment, a material impairment in the perfection or priority of the lender’s security interest or in the collateral, and events relating to bankruptcy or insolvency).
The Company issued warrants in connection with the SVB Credit Facility that gave the lender the right to purchase up to 713,330 shares of the Company’s Class A common stock (see Note 9). The Company valued the warrants based upon the probability-weighted expected return method and option pricing model using the Black-Scholes option pricing model and accounted for the warrants as debt discount and additional paid in capital on the balance sheets. On April 28, 2021, the holders of the warrants exercised their warrants in a cashless net exercise using the closing price of the Company’s common stock on the prior business day of $31.27 as permitted by the warrant agreement. The exercise price of the warrants was $4.0224. Accordingly, the transaction resulted in 621,570 shares of the Company’s common stock being issued to the warrant holders. The Company paid issuance costs in connection with the SVB Credit Facility of $0.3 million which were recorded as a reduction of debt. The debt discount and debt issuance costs are amortized over the term of the debt using the effective interest method and included within interest expense on the statement of operations.
The Company did not have any balances outstanding under the revolving line of credit as of June 30, 2021 and December 31, 2020. As of June 30, 2021, the Company had $10.0 million in available borrowings on the line of credit and was in compliance with all covenants under the SVB Credit Facility.
CRG Term Loan Facility
On July 31, 2020, the Company entered into the CRG Term Loan Facility, to obtain up to $50.0 million in financing over three tranches to be advanced no later than December 31, 2021. Principal amounts totaling $30 million were borrowed through December 31, 2020 and are currently outstanding. The CRG Term Loan Facility matures on June 30, 2025, and the Company can elect to make quarterly interest-only payments or to pay interest in-kind through December 31, 2020. The Company is not required to make any principal payments until the maturity of the CRG Term Loan Facility and all outstanding principal and accrued interest are due upon the maturity of the CRG Term Loan Facility. Interest under the CRG Term Loan Facility is applied to outstanding principal and accrued interest at a rate of 13.00% per annum. In an event of
13
default occurs, interest under the CRG Term Loan Facility will increase by 4.00%. If the Company repays the CRG Term Loan Facility within one year of the borrowing date, the Company is required to pay a premium of 20.00% of the aggregated outstanding principal amount of the loans that is repaid. If the Company repays the CRG Term Loan Facility between one and two years from the borrowing date, it is required to pay a premium of 11.00% of the aggregated outstanding principal amount of the loans that is repaid. The CRG Term Loan Facility does not require a prepayment premium for loans being prepaid on the prepayment date that is longer than two years from the initial borrowing date.
Under the terms of the CRG Term Loan Facility, the Company granted first priority liens and security interests in substantially all of the Company’s assets as collateral (including the Company’s intellectual property), provided that the priority of such liens are subject to an intercreditor agreement between CRG and SVB. The CRG Term Loan Facility also contains certain representations and warranties, indemnification provisions in favor of CRG, affirmative and negative covenants (including, among other things, requirements that the Company maintain a minimum amount of liquidity and achieve minimum revenue targets, comply with limitations on other indebtedness, liens, acquisitions, investments and dividends and requirements relating to financial reporting, sales and leasebacks, insurance and protection of the Company’s intellectual property rights) and events of default (including payment defaults, breaches of covenants following any applicable cure period, investor abandonment, a material impairment in the perfection or priority of the lender’s security interest or in the collateral, and events relating to bankruptcy or insolvency).
The Company paid $0.5 million in fees to CRG and $0.2 million in fees to third parties in connection with the CRG Term Loan Facility. The fees were recorded as debt issuance costs and classified as contra-debt. In addition, the Company recognized $0.2 million as debt discount on borrowings under the CRG Term Loan Facility due to embedded features contained in the agreement which resulted in a derivative liability. Debt issuance costs and debt discount are amortized to interest expense using the effective interest method.
As of June 30, 2021 and December 31, 2020, the balance outstanding under the CRG Term Loan Facility, net of debt issuance costs and debt discount, was $29.3 million and $29.2 million, respectively.
PPP Loan
The Company applied for and received a $1.8 million loan (the “PPP Loan”) under the Paycheck Protection Program ( the “PPP”) under the Coronavirus Aid Relief, and Economic Security Act (“CARES Act”). The PPP Loan, which was in the form of a promissory note, dated April 22, 2020, between the Company and SVB as the lender, was scheduled to mature on April 22, 2022 and accrued interest at a fixed rate of 1% per annum, and was payable monthly. The Company repaid $1.8 million borrowed under the PPP Loan in March 2021.
The Company’s debt consisted of the following (in thousands):
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
Revolving line of credit
|
|
|
|
|
|
|
|
|
SVB Credit Facility
|
|
$
|
—
|
|
|
$
|
—
|
|
Term loans
|
|
|
|
|
|
|
|
|
CRG Term Loan Facility
|
|
|
30,000
|
|
|
|
30,000
|
|
PPP Loan
|
|
|
—
|
|
|
|
1,788
|
|
Total term loans
|
|
|
30,000
|
|
|
|
31,788
|
|
Less: debt discount and issuance costs
|
|
|
(723
|
)
|
|
|
(811
|
)
|
Total debt
|
|
|
29,277
|
|
|
|
30,977
|
|
Short-term debt
|
|
|
—
|
|
|
|
1,788
|
|
Long-term debt
|
|
$
|
29,277
|
|
|
$
|
29,189
|
|
14
As of June 30, 2021, future payments under term loan, including interest only payments and the final payment, were as follows (in thousands):
Fiscal Year
|
|
|
|
|
2021 (remaining)
|
|
$
|
—
|
|
2022
|
|
|
—
|
|
2023
|
|
|
—
|
|
2024
|
|
|
—
|
|
2025
|
|
|
30,000
|
|
Total principal payments
|
|
|
30,000
|
|
Less: Unamortized debt discount and debt
issuance costs
|
|
|
(723
|
)
|
Total short-term and long-term debt
|
|
$
|
29,277
|
|
During the three months ended June 30, 2021 and 2020, the Company recorded $1.0 million and $0.4 million, respectively, in interest expense related to the borrowings under the SVB Credit Facility and CRG Credit Facility. During the three and six months ended June 30, 2021 and 2020, amortization of the debt discount was immaterial.
7. Commitments and Contingencies
Operating Lease
The Company has commitments for future payments related to its lease of office space located in Ponte Vedra, Florida. The Company leases its office space under an operating lease agreement expiring in 2026. Lease payments comprise of the base rent stated in the lease plus operating costs which include taxes, insurance and common area maintenance.
In November 2019 the Company amended the lease agreement to include additional space of the second floor of their existing building. In March 2021, the Company again amended the lease agreement to further expand the Company’s office space and extend the lease expiration date to five years from the commencement of the Company’s leasing of the expanded premises. The amended lease has not commenced as of June 30, 2021.
The future minimum rental obligations required under non-cancelable leases at June 30, 2021, including the future minimum rental obligations under the amended lease which had not commenced as of the period end, were as follows (in thousands):
Fiscal Year
|
|
|
|
|
2021 (remaining)
|
|
$
|
439
|
|
2022
|
|
|
897
|
|
2023
|
|
|
722
|
|
2024
|
|
|
744
|
|
2025 & thereafter
|
|
|
925
|
|
Total minimum lease payments
|
|
$
|
3,727
|
|
Total rent expense was $0.1 million and $0.1 million for the three months ended June 30, 2021 and 2020, respectively. Total rent expense was $0.3 million and $0.1 million for the six months ended June 30, 2021 and 2020, respectively.
License and Royalty Commitments
The Company has entered into product development and fee for service agreements with members of its Surgeon Advisory Board that specify the terms under which the member is compensated for his or her consulting services and grants the Company rights to the intellectual property created by the member in the course of such services. As products are commercialized with the assistance of members of the Surgeon Advisory Board, the Company may agree to enter into royalty agreement if the member’s contributions to the product are novel, significant and innovative.
15
As of June 30, 2021 and December 31, 2020, the Company has royalty agreements with certain members of its Surgeon Advisory Board providing for royalties based on each individual’s level of contribution. Each royalty agreement: (i) confirms the irrevocable transfer to the Company of all pertinent intellectual property rights; (ii) sets the applicable royalty rate; (iii) sets the period of time during which royalties are payable; (iv) is for a term of three years, renewable by the parties, and may be terminated by either party on 90 days’ notice for convenience (provided that if terminated by the Company for convenience the obligation to pay royalties is not affected); and (v) prohibits the payment of royalties on products sold to entities and/or individuals with whom the surgeon advisor or any other surgeon advisor entitled to royalties is affiliated. Each of the royalty agreements may be subsequently amended to add the license of additional intellectual property covering new products, and as a result, multiple royalty rates and duration of royalty payments may be included in one royalty agreement.
As of June 30, 2021 and December 31, 2020, the Company’s royalty agreements provide for (i) royalty payments for 10 years from first commercial sale of the relevant product and (ii) a royalty rate for each such agreement ranging from 0.4% to 3.0% of net sales for the particular product to which the surgeon contributed.
The Company recognized royalties’ expense of $0.9 million and $0.3 million for the three months ended June 30, 2021 and 2020, respectively, and $1.6 million and $0.8 million for the six months ended June 30, 2021 and 2020, respectively. For the three and six month periods ended June 30, 2021 and 2020, the aggregate royalty rate was 4.1% and 4.3%, respectively.
Contingencies
From time to time, the Company may be a party to various litigation claims in the normal course of business. Legal fees and other costs associated with such actions are expensed as incurred. The Company assesses, in conjunction with legal counsel, the need to record a liability for litigation and contingencies. Accrual estimates are recorded when and if it is determinable that such a liability for litigation and contingencies are both probable and reasonably estimable.
8. Income Taxes
The Company has not recorded an income tax provision for the three and six months ended June 30, 2021 and 2020 due to its operating losses. All losses before income taxes were generated in the United States.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax assets, projected future taxable income, and tax planning strategies in making this assessment. Due to the Company’s history of net losses, the deferred tax assets have been fully offset by full valuation allowance of $5.5 million and $5.5 million as of June 30, 2021 and December 31, 2020, respectively. There were no changes in the deferred tax asset valuation allowance for the three and six months ended June 30, 2021 and 2020.
The Company had unused federal and state net operating loss carryforwards of approximately $14.6 million and $9.5 million, respectively as of June 30, 2021, and federal and state net operating loss carryforwards of approximately $14.6 million and $9.5 million, respectively, as of December 31, 2020. The net operating loss carryforwards begin to expire in 2034 and research and development tax credit carryforwards of $0.4 million and $0.4 million as of June 30, 2021 and December 31, 2020, respectively, begin to expire in 2037.
The federal and state net operating loss carryforwards and credits may be subject to significant limitations under Section 382 and Section 383 of the Internal Revenue Code and similar provisions under state law. The Tax Reform Act contains provisions that limit the federal net operating loss carryforwards that may be used in any given year in the event of special occurrences, including significant ownership changes. A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders, who own at least 5% of the Company’s stock, increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. The Company may have previously experienced, and may in the future experience, one or more Section 382 “ownership changes,” including in connection with the IPO. If so, the Company may lose some or all of the tax benefits of its carryforwards and credits. Based on the Company’s analysis as of June 30, 2021, the Company has determined that it does not expect these limitations to impair its ability to use its net operating losses prior to expiration.
The Company generally provides for income taxes in interim periods based on the estimated annual effective tax rate for the year, adjusting for discrete items in the quarter in which they arise. The annual effective tax rate before discrete items
16
was 25.5% for each of the three and six months ended June 30, 2021 and 2020. The Company’s effective tax rate for the three and six months ended June 30, 2021 was based on best estimates, which may fluctuate through the remainder of the year due to the volatility and uncertainty of global economic conditions in connection with the COVID-19 pandemic.
9. Stockholders’ Equity
Convertible Preferred Stock
Under the Company’s Amended and Restated Certificate of Incorporation in effect immediately before completion of the IPO, the Company was authorized to issue up to 6,687,500 shares of Series A convertible preferred stock (the “Preferred Shares”), with 6,687,475 shares issued and outstanding as of December 31, 2020. Immediately before the completion of the IPO, all outstanding Preferred Shares were converted into shares of the Company’s common stock. Accordingly, no Preferred Shares were outstanding as of June 30, 2021.
Dividends—Dividends on the Preferred Shares accrued at the rate of 8% per annum on the original issue price and holders of the Preferred Shares had general preference rights with respect to dividends and distributions to holders of Common Stock. Accrued dividends were payable in cash or, at the election of the Company’s Board of Directors, paid in kind by issuing Class A Common Stock at the then per share value as determined by an independent appraiser.
Upon the closing of the IPO in April 2021, the Company issued 158,447 shares of Class A Common Stock to settle accrued and unpaid Preferred Shares dividend of $2.5 million on the Preferred Shares. At December 31, 2020, the Company had accrued and unpaid Preferred Shares dividend of $2.3 million on the Preferred Shares.
Voting Rights—Holders of the Preferred Shares were entitled to vote with holders of Class A Common Stock equal to the number of shares of Class A Common Stock into which the Preferred Shares were convertible.
Conversion— Before the Preferred Shares conversion into the Company’s common stock in connection with the IPO, the terms applicable to each Preferred Share provided that it was convertible, at the option of the holder at any time after the date of issuance and upon a deemed liquidation event, as defined in the Certificate of Incorporation, into the number of fully paid and non-assessable shares of Class A Common Stock as determined by dividing the original issue price per share of the Preferred Shares by the conversion price per share in effect at the time of conversion. The original conversion price per Preferred Share was the original issue price, and was subject to adjustment, as described in the Company’s Amended and Restated Certificate of Incorporation in effect at the time the Preferred Shares were originally issued.
In addition, upon conversion, the Company was required to pay all accrued and unpaid dividends on such converted Preferred Shares (i) in cash, or (ii) upon the election of the Company’s Board of Directors or the holders of Preferred Shares to receive payment of the dividends in kind, by issuing the holder additional shares of Class A Common Stock equal to the quotient of the accrued and unpaid dividends on the Preferred Shares with respect to the converted shares, divided by the most recent per share value, as determined by an independent appraiser. The Amended and Restated Certificate of Incorporation in effect immediately before the Company’s IPO incorporated a provision whereby any accrued but unpaid dividends on the Preferred Shares automatically converted into common stock upon the Company’s initial public offering, with April 16, 2021 being the date used for the purpose of calculating such accrued and unpaid dividends.
Common Stock
On April 27, 2021, the Company filed its Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware and its Amended and Restated Bylaws became effective in connection with the closing of the Company’s IPO. The Amended and Restated Certificate of Incorporation authorized 300,000,000 shares of common stock, deleted all references to the various series of preferred stock that were previously authorized and created 5,000,000 shares of undesignated preferred stock with terms to be set by the Board of Directors. The Amended and Restated Certificate of Incorporation in effect immediately before the Company’s IPO authorized the Company to issue up to 50,000,000 Class A Common Stock voting shares (which was adjusted to 66,875,000 shares with the Forward Stock Split) and 1,000,000 Class B Common Stock non-voting shares.
17
Shares Reserved for Future Issuance
As of June 30, 2021 and December 31, 2020, the Company had reserved shares of common stock for future issuances as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Series A convertible preferred stock outstanding
|
|
|
—
|
|
|
|
6,687,475
|
|
Warrants to purchase Class A common stock
|
|
|
—
|
|
|
|
713,330
|
|
Common stock options and restricted stock awards issued and outstanding
|
|
|
8,501,658
|
|
|
|
8,081,828
|
|
Estimated preferred share conversion for dividends in kind
|
|
|
—
|
|
|
|
334,316
|
|
Common stock available for future grants
|
|
|
238,742,361
|
|
|
|
—
|
|
Class A common stock available for future grants
|
|
|
—
|
|
|
|
13,691,186
|
|
Class B common stock available for future grants
|
|
|
—
|
|
|
|
1,000,000
|
|
Total
|
|
|
247,244,019
|
|
|
|
30,508,135
|
|
Stock Option Plan
2021 Incentive Award Plan
In April 2021, the Company’s Board of Directors and stockholders approved the 2021 Incentive Award Plan (“2021 Plan”). The Company has initially reserved 5,046,278 shares of common stock for issuance pursuant to a variety of stock-based compensation awards, including stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards and other stock-based awards. The number of shares initially reserved for issuance or transfer pursuant to awards under the 2021 Plan will be increased by (i) the number of shares represented by awards outstanding under the Company’s 2014 Stock Plan (“2014 Plan”) that become available for issuance under the counting provisions described below following the effective date and (ii) an annual increase on the first day of each fiscal year beginning in 2022 and ending in 2031, equal to the lesser of (i) 5.0% of the shares of stock outstanding (on an as converted basis) on the last day of the immediately preceding fiscal year and (ii) such smaller number of shares of stock as determined by our board of directors; provided, however, that no more than 37,847,090 shares of stock may be issued upon the exercise of incentive stock options. At June 30, 2021, the 2021 Plan is authorized to grant awards for up to 3,682,837 shares of Common Stock which may include incentive stock options, non-statutory stock options, or stock purchase rights.
Under the 2014 Plan, the Company was authorized to issue stock purchase rights and to grant options to purchase Class A Common Stock to employees, directors and consultants. Stock options under the 2014 Plan have a term of no more than ten years from the date of grant and vest in equal installments over a maximum of five years. No other awards can be granted under the 2014 Plan. 1,293,589 shares of common stock remain reserved for outstanding awards issued under the 2014 Stock Plan at the time of adoption of the 2021 Stock Plan.
Activity under the Stock Plans is set forth below:
|
|
Outstanding Options
|
|
|
|
Number of
Shares
|
|
|
Weighted-
Average
Remaining
Contractual
Term
(in Years)
|
|
|
Weighted-
Average
Exercise
Price
|
|
Balance, December 31, 2020
|
|
|
8,081,828
|
|
|
|
6.86
|
|
|
$
|
1.82
|
|
Options granted
|
|
|
1,375,310
|
|
|
|
|
|
|
$
|
10.02
|
|
Options exercised
|
|
|
(962,633
|
)
|
|
|
|
|
|
$
|
0.81
|
|
Options canceled
|
|
|
(11,871
|
)
|
|
|
|
|
|
$
|
4.55
|
|
Balance, June 30, 2021
|
|
|
8,482,634
|
|
|
|
7.67
|
|
|
$
|
3.83
|
|
Options vested and expected to vest at June 30, 2021
|
|
|
7,873,245
|
|
|
|
7.01
|
|
|
$
|
3.60
|
|
Options vested and exercisable at June 30, 2021
|
|
|
4,420,030
|
|
|
|
5.71
|
|
|
$
|
1.13
|
|
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock options and the fair value of the Company’s common stock for stock options that were in-the-money as of period end.
18
Aggregate intrinsic values of options outstanding, options vested and expected to vest and options exercisable were $232.7 million, $217.8 million and $133.2 million as of June 30, 2021, respectively.
Restricted Stock Awards
In June 2021, the Company granted restricted stock awards (“RSA”). During the three months ended June 30, 2021 and 2020, the Company granted 24,890 RSAs and 0 RSAs, respectively, and during the six months ended June 30, 2021 and 2020, the Company granted 24,890 RSAs and 0 RSAs, respectively. The Company had 19,024 RSAs and 0 RSAs outstanding as of June 30, 2021 and December 31, 2020, respectively. The weighted average grant-date fair value per share of RSAs outstanding as of June 30, 2021 and December 31, 2020 was $35.46 and $0, respectively.
Employee Share Purchase Plan
In April 2021, the Company’s Board of Directors and stockholders approved the 2021 Employee Stock Purchase Plan (“ESPP”). The Company has initially reserved 504,627 shares of common stock for purchase under the ESPP. Each offering to the employees to purchase stock under the ESPP will begin on a date to be determined by the Company’s Compensation Committee and will end no later than six months thereafter. On each purchase date, which falls on the last date of each offering period, ESPP participants will purchase shares of common stock at a price per share equal to 85% of the lesser of (1) the fair market value per share of the common stock on the offering date or (2) the fair market value of the common stock on the purchase date. The occurrence and duration of offering periods under the ESPP are subject to the determinations of the Company’s Compensation Committee, in its sole discretion. The Company has not yet commenced any enrollment periods under the ESPP.
Stock-Based Compensation
During the three months ended June 30, 2021 and 2020, the Company granted stock options to employees to purchase an aggregate of 863,716 and 17,500 shares, respectively, of the Company’s common stock. During the six months ended June 30, 2021 and 2020, the Company granted stock options to employees to purchase an aggregate of 1,375,310 and 379,725 shares, respectively. The weighted-average grant date fair value of the employee stock options granted during the three months ended June 30, 2021 and 2020 were $6.46 and $2.41 per share, respectively. The weighted-average grant date fair value of the employee stock options granted during the six months ended June 30, 2021 and 2020 were $4.98 and $1.92 per share, respectively.
The Company uses the Black-Scholes option pricing model to determine the fair value of stock options at the grant dates with the following weighted-average assumptions for options granted during the three months ended June 30, 2021 and 2020:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
2021
|
|
2020
|
|
|
2021
|
|
2020
|
Expected term (in years)
|
|
5.27 - 6.25 years
|
|
2.67 years
|
|
|
1.97 - 6.25 years
|
|
2.67 - 2.97 years
|
Expected volatility
|
|
35.57% - 36.55%
|
|
49.29%
|
|
|
35.57% - 55.60%
|
|
37.09% - 49.29%
|
Risk-free interest rate
|
|
1.03% - 1.07%
|
|
0.23%
|
|
|
0.07% - 1.07%
|
|
0.23% - 1.53%
|
Expected dividend yield
|
|
0.00%
|
|
0.00%
|
|
|
0.00%
|
|
0.00%
|
Expected Term
The expected term represents the period that the stock options are expected to remain outstanding. For stock options issued subsequent to the IPO, the Company’s expected term is calculated using the simplified method, which is available where there is insufficient historical data about exercise patterns and post-vesting employment termination behavior. The simplified method is based on the vesting period and the contractual term for each grant. The midpoint between the vesting date and the maximum contractual expiration is used as the expected term under this method. Prior to the IPO, the Company determined the expected term based upon the probabilities of the anticipated timing of potential liquidity events.
Expected Volatility
The expected volatility is derived from the historical stock volatilities of several comparable publicly listed peers over a period approximately equal to the expected term of the options as the Company had insufficient trading history to
19
determine the volatility of its common stock. In evaluating similarity, the Company considered factors such as industry, stage of life cycle and size.
Risk-Free Interest Rate
The risk-free interest rate assumption is based on the U.S. Treasury yield curve in effect at the date of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the stock-based awards’ expected term.
Expected Dividend Yield
The expected dividend yield is zero as the Company has not paid nor does it anticipate paying any dividends on its common stock in the foreseeable future.
Fair Value of Common Stock
Prior to the IPO, the fair value of the Company’s common stock was determined by the Board of Directors with assistance from Management and, in part, on input from an independent third-party valuation firm. The Board of Directors determined the fair value of common stock by considering a number of objective and subjective factors, including valuations of comparable companies, sales of convertible preferred stock, operating and financial performance, probabilities of anticipated timing of potential liquidity events, the lack of liquidity of the Company’s common stock and the general and industry-specific economic outlook. Subsequent to the IPO, the fair value of the Company’s common stock is determined based on its closing price.
Stock-Based Compensation Expense
Stock-based compensation expense is reflected in the statements of operations and comprehensive loss as follows (in thousands):
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Sales and marketing expense
|
|
$
|
370
|
|
|
$
|
86
|
|
|
$
|
517
|
|
|
$
|
181
|
|
Research and development expense
|
|
|
103
|
|
|
|
59
|
|
|
|
166
|
|
|
|
108
|
|
General and administrative expense
|
|
|
402
|
|
|
|
103
|
|
|
|
594
|
|
|
|
168
|
|
Total
|
|
$
|
875
|
|
|
$
|
248
|
|
|
$
|
1,277
|
|
|
$
|
457
|
|
As of June 30, 2021 and December 31, 2020, there was $10.3 million and $4.1 million, respectively, of unrecognized stock-based compensation expense related to unvested common stock options, which the Company expects to recognize over a weighted-average period of 1.86 years and 3.01 years, respectively.
10. Net Loss Per Share Attributable to Common Stockholders
The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders which is computed by dividing the net loss attributable to common stockholders by the weighted- average number of shares of common stock outstanding for the period. As the Company reported a net loss for the three and six months ended June 30, 2021 and 2020, basic net loss per share attributable to common stockholders was the same as diluted
20
net loss per share attributable to common stockholders as the inclusion of potentially dilutive shares would have been antidilutive if included in the calculation (in thousands, except share and per share amounts):
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,083
|
)
|
|
$
|
(1,973
|
)
|
|
$
|
(7,515
|
)
|
|
$
|
(3,580
|
)
|
Adjust: Convertible preferred stock cumulative
and undeclared dividends
|
|
|
(39
|
)
|
|
|
(159
|
)
|
|
|
(196
|
)
|
|
|
(318
|
)
|
Net loss attributable to common stockholders
|
|
|
(5,122
|
)
|
|
|
(2,132
|
)
|
|
|
(7,711
|
)
|
|
|
(3,898
|
)
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common stock outstanding,
basic and diluted
|
|
|
49,187,285
|
|
|
|
37,068,288
|
|
|
|
43,556,107
|
|
|
|
37,060,491
|
|
Net loss per share attributable to common
stockholders, basic and diluted
|
|
$
|
(0.10
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.11
|
)
|
The following potentially dilutive securities outstanding have been excluded from the computation of diluted weighted average shares outstanding because such securities have an antidilutive impact due to the Company’s net loss, in common stock equivalent shares:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Series A convertible preferred stock outstanding
|
|
|
—
|
|
|
|
6,687,475
|
|
Warrants to purchase Class A common stock
|
|
|
—
|
|
|
|
713,330
|
|
Common stock option and restricted stock awards issued and outstanding
|
|
|
8,501,658
|
|
|
|
8,081,828
|
|
Total
|
|
|
8,501,658
|
|
|
|
15,482,633
|
|
21