Treace Medical Concepts, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless noted. Treace sells surgical systems for bunion and related foot procedures, primarily its Lapiplasty system, and recently introduced Adductoplasty. Financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $29.0 million | $18.7 million | +55.3% |
| Gross profit / margin | $23.5 million / 81.0% | $15.4 million / 82.2% | Margin down 1.2 percentage points |
| Operating expenses | $31.6 million | $16.8 million | +88.5% |
| Loss from operations | $(8.1) million | $(1.4) million | Loss widened |
| Net loss | $(9.0) million | $(2.4) million | Loss widened |
| Net loss per share, diluted | $(0.16) | $(0.07) | |
| Operating cash flow | $(7.2) million | $(0.4) million | Cash use increased |
| Capital expenditures | $1.5 million | $0.2 million |
Revenue growth reflected more Lapiplasty kits sold, an expanded customer base and a slight increase in average selling prices. Kits sold rose 50.7%; active surgeons reached 1,901, up 40.4%; and average quarterly utilization increased 9.8% to 10.1 kits per active surgeon. Gross margin declined mainly due to higher royalty expense and depreciation on surgical instruments.
Operating expense growth reflected substantial investment in sales and marketing (up 80.5%), research and development (up 63.4%) and general and administrative expense (up 140.9%). Sales and marketing increases included salesforce payroll, advertising and commissions; G&A increases included personnel, insurance and professional services.
Balance sheet, debt and liquidity
- At March 31, 2022, cash and cash equivalents were $98.5 million, down from $105.8 million at year-end 2021. Total current assets were $127.3 million and current liabilities were $15.4 million.
- At quarter-end, the company had $30.0 million principal outstanding under its CRG term loan, reported at $29.4 million net of discount and issuance costs. The loan carried a 13% annual interest rate. The SVB revolving facility had no outstanding balance and $10.0 million available.
- Management said existing cash and expected revenues would fund planned operations for at least 12 months from issuance of the interim financial statements. The company reported an accumulated deficit of $50.9 million and expects to continue operating at a loss in the near term.
- Operating lease liabilities were $15.3 million on the balance sheet. A new 10-year headquarters lease commenced for accounting purposes in Q1; lease expense was $0.4 million for the quarter.
Material developments, outlook and risks
- Post-quarter refinancing: On April 29, 2022, Treace entered a five-year facility with MidCap affiliates, comprising up to $120 million in term loans and a $30 million revolving facility. It drew $50 million of term debt and $4 million on the revolver, partly to repay CRG, including $30 million principal, $0.4 million interest and $3.7 million fees. The SVB facility was terminated. Additional term-loan tranches depend on revenue targets; the debt is secured by substantially all assets, including intellectual property, and includes covenants and prepayment fees.
- Management expects revenue to grow as territories, accounts and surgeon adoption expand, while sales, R&D and administrative spending are expected to rise. The filing gives no specific revenue or earnings guidance. Management’s cash runway estimate depends on assumptions that may change.
- COVID-19 continued to cause some elective-surgery delays and cancellations early in Q1, though to a lesser degree than in late 2021. Hospital staffing and capacity constraints, seasonality, reimbursement, product adoption and the ability to maintain product supply and quality could affect results.
- The company noted that Q1 is typically a lower-volume period and Q4 has historically represented about 40% of annual revenue. It also relies on third-party manufacturers, including some single-source suppliers. No material legal proceedings or accrued contingent liabilities were reported; the filing stated risk factors were not materially changed from the 2021 Form 10-K.
Important facts for investors to verify
- Whether procedure-kit sales, surgeon adoption and utilization sustain growth, and how much growth reflects expanded sales capacity versus pricing.
- Whether gross margin stabilizes as volume grows, given higher royalties, instrument depreciation and manufacturing costs.
- Cash burn and the assumptions underlying management’s stated 12-month liquidity outlook.
- Actual borrowing, pricing, revenue-based conditions and covenant compliance under the MidCap facility, including the costs of refinancing and the use of remaining borrowing capacity.
- The persistence of elective-procedure disruptions, seasonality, reimbursement coverage and third-party supply constraints.