Treace Medical Concepts, Inc. — Q2 2023 Form 10-Q
Business and period: Medical-technology company selling surgical systems and related products for bunion and midfoot deformities, principally its Lapiplasty System. This unaudited report covers the quarter and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Financial amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $42.0 | $30.0 | $84.1 | $59.0 |
| Gross profit | $34.3 | $24.7 | $68.4 | $48.6 |
| Gross margin | 81.7% | 82.3% | 81.3% | 82.3% |
| Operating expenses | $47.3 | $36.6 | $95.3 | $68.6 |
| Loss from operations | $(13.1) | $(11.9) | $(26.8) | $(20.0) |
| Net loss | $(12.3) | $(17.2) | $(25.7) | $(26.3) |
| Net loss per share, basic and diluted | $(0.20) | $(0.31) | $(0.43) | $(0.48) |
- Q2 revenue rose 40.0%; management reported Lapiplasty kit volume up 29% and blended revenue per kit up 8%. For the first half, revenue rose 42.6%, kit volume increased 29%, and blended revenue per kit rose 11%.
- Q2 operating expenses increased 29.3%, led by sales and marketing and general and administrative spending. Q2 operating loss widened despite higher revenue; the lower net loss mainly reflects the absence of the $4.5 million debt-extinguishment loss recorded in Q2 2022 and higher interest income.
- First-half operating cash use was $25.6 million, versus $17.8 million a year earlier. Investing cash use was $90.9 million, including marketable-security purchases and the RPM-3D acquisition; financing provided $109.1 million, principally from the February equity offering. Cash and cash equivalents decreased $7.4 million during the half.
- At June 30, cash and cash equivalents were $12.0 million and short-term marketable securities were $127.4 million, totaling $139.5 million. Current assets were $198.1 million and current liabilities $30.0 million. Management expects available cash, cash equivalents, and marketable securities to fund planned operations for at least 12 months from issuance of the statements.
- Debt principal outstanding was $54.0 million ($52.9 million net of discount and issuance costs), including $50.0 million of term debt and $4.0 million drawn on the revolving facility. The debt is secured by substantially all company assets, including intellectual property; stated interest rates were capped at 9% on the term loan and 7% on the revolver.
Material changes and notable items
- Q2 2023 gross margin declined 0.6 percentage points year over year, and first-half gross margin declined 1.0 point. Management cited product mix and higher inventory and obsolescence provisions, partly offset by lower royalty rates on newer products.
- Sales and marketing expense rose 26.9% in Q2 and 37.9% in the first half, reflecting expanded personnel, commissions, surgeon training, and marketing. General and administrative expense rose 43.0% in Q2 and 52.8% in the first half, including higher payroll and professional-service costs.
- In February 2023, the company issued 5.48 million shares at $21 per share, raising $107.5 million net. Shares outstanding were 61.5 million at June 30, versus 55.6 million at December 31, 2022.
- In June, the company acquired specified RPM-3D assets for $20.0 million in cash and recorded $2.8 million of contingent consideration. Up to another $10.0 million may be payable upon milestones. Management expects to integrate the patient-specific planning and guide technology in 2023 and anticipates commercial introduction in the second half of 2024.
Outlook, risks, and contingencies
- The filing provides no specific revenue or earnings guidance. Management expects continued near-term losses and further spending on sales capacity, marketing, research and development, and corporate infrastructure; it expects revenue to increase over time, subject to adoption, seasonality, and economic conditions.
- Management expects macroeconomic challenges, including inflation, higher interest rates, supply-chain constraints, and reduced consumer confidence, to continue through 2023 and potentially affect costs, lead times, and demand for elective procedures. The business is seasonal; historically, Q4 has represented approximately 35%–40% of annual revenue.
- Key business risks include gaining surgeon and facility adoption, reimbursement and coverage, competition, dependence on third-party suppliers (including some single-source suppliers), manufacturing quality and capacity, and the ability to retain and recruit commercial personnel. Further financing may be needed; equity financing could dilute shareholders and debt could impose restrictive covenants.
- The company reported no material legal proceedings and no accrued contingent liabilities at June 30. The RPM-3D milestone payments and the company’s royalty and lease commitments remain relevant obligations; remaining real-estate lease obligations were $27.0 million.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported during the quarter. The company stated that it would become a large accelerated filer beginning with its 2023 Form 10-K and would cease to qualify as an emerging growth company.
Investor facts to verify
- Whether kit-volume growth, surgeon adoption, and utilization continue to support revenue growth, and whether average revenue per kit holds up.
- Whether gross-margin pressure and rapidly growing operating expenses moderate as sales expand.
- Cash burn and available liquidity relative to the company’s stated 12-month runway, including the timing and terms of any further RPM-3D milestone payments.
- Debt terms, revolving-facility availability, covenant status, and the effect of secured borrowing on financial flexibility.
- Progress integrating RPM-3D technology and the expected timing of commercial launch in the second half of 2024.