Treace Medical Concepts, Inc. — Q3 2023 Form 10-Q
Business context and reporting period. Treace Medical Concepts develops and sells surgical systems and related products for bunion and midfoot deformities, led by its Lapiplasty system. This unaudited report covers the three and nine months ended September 30, 2023; comparisons are to the corresponding 2022 periods. Amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $40.8 million | $33.1 million | $124.9 million | $92.1 million |
| Revenue growth | 23.3% | 35.7% | ||
| Gross profit | $32.8 million | $27.0 million | $101.2 million | $75.6 million |
| Gross margin | 80.4% | 81.6% | 81.0% | 82.1% |
| Operating loss | $(17.8) million | $(11.3) million | $(44.6) million | $(31.3) million |
| Net loss | $(17.5) million | $(12.1) million | $(43.2) million | $(38.4) million |
| Basic and diluted loss per share | $(0.28) | $(0.22) | $(0.71) | $(0.70) |
- Growth and margins: Q3 Lapiplasty kit sales rose 13% year over year and blended revenue per kit increased 9%. For the nine-month period, kit sales rose 23% and blended revenue per kit increased 10%. Gross margin declined in both comparisons, which management attributed principally to product mix, overhead and inventory obsolescence provisions.
- Expenses and profitability: Q3 operating expenses increased 32.1% to $50.6 million, led by sales and marketing and general and administrative costs. Nine-month operating expenses increased 36.4% to $145.8 million. Revenue growth did not offset higher operating costs, and net loss widened year over year in both periods.
- Cash flow: In the first nine months, operating activities used $35.1 million, versus $25.3 million in 2022; investing activities used $86.3 million, including marketable-security purchases, the RPM-3D acquisition and capital expenditures; financing activities provided $109.2 million, principally from the February stock offering. Cash and cash equivalents fell $12.2 million to $7.3 million.
- Liquidity and debt: At September 30, cash and cash equivalents were $7.3 million and short-term marketable securities were $114.9 million. Principal debt was $54.0 million ($50.0 million term loan and $4.0 million drawn on the revolving facility); net carrying value was $52.9 million. The revolver had $21.3 million of borrowing capacity available. Term and revolving interest rates were capped at 9% and 7%, respectively. Management stated that available cash, cash equivalents and marketable securities are expected to fund planned operations for at least 12 months from issuance of the statements.
- Other balance-sheet developments: Total assets were $240.4 million and stockholders’ equity was $137.9 million. Accumulated deficit reached $128.0 million. The company issued 5.48 million shares in its February follow-on offering for $107.5 million net proceeds; shares outstanding were 61.6 million at quarter-end, up from 55.6 million at year-end 2022.
Material changes, outlook and risks
- RPM-3D acquisition: In June 2023, Treace paid $20.0 million for assets including patient-specific planning and guide technology. The agreement provides for up to $10.0 million of additional milestone-related cash payments. The acquisition added $9.5 million of developed technology and $12.8 million of goodwill; no material pro forma operating results were presented. Commercial introduction of patient-specific products is expected in the second half of 2024.
- Products and operations: The company began market release of SpeedPlate, a hammertoe fixation system and two single-use osteotomes in September 2023. Management described continued investment in sales capacity, patient education, research and development, and product innovation.
- Outlook: No specific revenue or earnings guidance was provided in the supplied filing text. Management expects continued losses in the near term and rising sales, R&D and administrative investment. It expects revenue to grow over time, while noting quarterly fluctuation and seasonality; Q4 has historically represented approximately 35%–40% of annual revenue, while Q1 and Q3 tend to be seasonally weaker.
- Risks and contingencies: Management cited inflation, higher interest rates, supply-chain challenges, potential cost increases and longer lead times, and possible effects of economic conditions on elective procedures. Further risks include product adoption and facility access, reimbursement, competition, dependence on suppliers, and the possibility that additional financing may be needed; additional funding may be unavailable or dilutive. The company reported no accrued contingent liabilities for litigation and no legal proceedings believed likely to have a material effect. RPM-3D milestone and service-related payments remain relevant obligations.
- Reporting note: Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. The company expects to become a large accelerated filer with its 2023 Form 10-K and to lose emerging-growth-company status.
Investor facts to verify
- Whether kit-volume growth, surgeon adoption and utilization can sustain revenue growth as Q3 kit growth moderated from the prior-year comparison.
- Whether gross-margin pressure and operating-expense growth ease enough to narrow operating losses and cash burn.
- How much of the stated 12-month liquidity runway is consumed by operating needs, capital spending and remaining RPM-3D payments.
- The terms, timing and performance conditions for the RPM-3D milestone payments and the planned 2024 patient-specific product launch.
- Debt covenant headroom, interest costs and the impact of the secured debt and $26.4 million remaining operating-lease obligation.