Treace Medical Concepts, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. The company sells surgical systems and related products, primarily its Lapiplasty 3D bunion-correction system, and also offers the Adductoplasty midfoot-correction system. Financial statements are unaudited.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Revenue | $30.0 million | $20.7 million | $59.0 million | $39.4 million |
| Gross profit | $24.3 million | $16.7 million | $47.9 million | $32.1 million |
| Gross margin | 81.1% | 80.9% | 81.1% | 81.5% |
| Operating expenses | $36.2 million | $20.8 million | $67.9 million | $37.5 million |
| Operating loss | $(11.9) million | $(4.1) million | $(20.0) million | $(5.5) million |
| Net loss | $(17.2) million | $(5.1) million | $(26.3) million | $(7.5) million |
| Net loss per share, diluted | $(0.31) | $(0.10) | $(0.48) | $(0.18) |
- Q2 revenue increased 45.1% year over year; first-half revenue increased 49.9%. Management attributed growth primarily to more procedure kits sold, a larger surgeon base, higher utilization and, in Q2, greater adoption of ancillary products.
- Q2 Lapiplasty kit sales were up 39% year over year; active surgeons totaled 2,047, up 37%. First-half utilization averaged 10.1 kits per active surgeon, up 2.8%.
- Sales and marketing expense rose 87% in Q2 and 84% in the first half, reflecting sales-force expansion, advertising and marketing campaigns, and higher commissions. Total operating expenses rose 75% and 81%, respectively.
- First-half operating cash outflow was $17.8 million, versus $4.2 million a year earlier. Investing cash outflow was $6.6 million, mainly for property, equipment and surgical instruments. Financing provided $20.2 million.
- Cash and cash equivalents were $101.5 million at June 30, 2022, including $0.9 million pledged as collateral. Current assets were $135.2 million and current liabilities were $16.6 million.
Debt, liquidity and balance-sheet developments
- At June 30, gross term and revolving borrowings totaled $54.0 million; debt net of discount and issuance costs was $52.6 million. Stockholders’ equity was $71.7 million and accumulated deficit was $68.2 million.
- On April 29, 2022, the company refinanced with a five-year MidCap facility: up to $120 million of term loans and a $30 million revolving facility. It drew $50 million of term debt and $4 million on the revolver at closing. Additional term-loan tranches are subject to revenue targets; revolver availability depends on a borrowing base.
- Proceeds partly repaid the CRG term loan. Refinancing resulted in a $4.5 million debt-extinguishment loss, including $3.7 million of fees. The MidCap loans are secured by substantially all company assets, including intellectual property.
- Management said existing cash, available debt borrowings and expected revenue should fund planned operations for at least 12 months from the issuance of the financial statements. It also noted that additional financing may be needed; availability and terms are not assured.
Outlook, risks and other notable items
- No specific revenue or earnings guidance was provided. Management expects revenue to grow as territories, accounts and the trained surgeon base expand, but expects continued operating losses in the near term and higher sales, R&D and administrative spending as it invests in growth.
- Management expects macroeconomic challenges to continue through 2022. Identified risks include COVID-related elective-surgery delays and hospital staffing or capacity constraints, inflation, supply-chain costs and delays, dependence on third-party suppliers (including some single-source suppliers), and variability in elective-surgery demand and reimbursement.
- The business is seasonal: historically, Q4 has contributed about 40% of annual revenue; Q1 is typically weaker. The company also described possible Q3 softness in the broader orthopedic industry.
- A new 10-year headquarters lease commenced in 2022. Operating lease liabilities totaled $18.2 million on the balance sheet; undiscounted future lease payments were $29.4 million.
- The company reported no material legal proceedings or accrued contingent liabilities, and no material changes to the risk factors in its 2021 Form 10-K. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether surgeon adoption, kit volume and utilization continue to support revenue growth, and how much growth comes from ancillary products or pricing.
- Whether the rapid increase in commercial and administrative spending can translate into improved operating leverage and margins.
- Cash burn and the assumptions behind management’s 12-month liquidity assessment, including usable cash, borrowing-base availability and covenant conditions.
- MidCap facility terms, including conditional access to additional tranches, collateral, prepayment fees and revenue-covenant triggers.
- Effects of elective-surgery disruption, supplier constraints, inflation, reimbursement and seasonality on demand and costs.