Treace Medical Concepts, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; financial statements are unaudited. Treace develops and sells surgical systems for bunion and related midfoot deformities, led by its Lapiplasty System. Unless noted otherwise, amounts are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $42.2 million | $29.0 million |
| Gross profit / gross margin | $34.2 million / 80.9% | $23.9 million / 82.3% |
| Operating expenses | $47.9 million | $32.0 million |
| Operating loss | $13.8 million | $8.1 million |
| Net loss / loss per share | $13.5 million / $0.23 | $9.0 million / $0.16 |
| Cash used in operating activities | $17.3 million | $7.2 million |
Revenue rose 45.3% year over year. Gross margin fell 1.4 percentage points. Sales and marketing costs increased 50.9%, general and administrative costs increased 63.1%, and research and development costs increased 11.8%.
At March 31, 2023, cash and cash equivalents were $29.6 million and short-term marketable securities were $141.0 million, or $170.7 million combined. Current assets were $223.1 million and current liabilities were $23.3 million. Debt principal outstanding was $54.0 million ($52.8 million net of discount and issuance costs); the debt is secured by substantially all company assets, including intellectual property. The company reported $15.4 million in long-term operating lease liabilities; management separately reported remaining lease obligations of $25.4 million.
Investing cash outflow was $80.5 million, mainly reflecting purchases of marketable securities, partly offset by maturities. Financing cash inflow was $107.9 million, primarily from the February follow-on offering. The offering issued 5,476,190 shares at $21.00 per share and generated $107.5 million in net proceeds. The accumulated deficit was $98.2 million.
Business trends and changes from the prior year
- Lapiplasty Procedure Kits sold increased 28%; the filing says volume contributed 52% of revenue growth. Blended average revenue per kit rose 13%, partly due to newer technologies and ancillary products.
- Active surgeons reached 2,499, up 31.5% year over year. Average utilization was 10.5 kits per active surgeon, up 3.2%.
- Gross margin declined primarily because of higher payroll costs and inventory and obsolescence provisions, partly offset by lower royalty rates on newer products.
- Operating cash use increased year over year, with lower accounts payable and accrued liabilities, higher inventory, and increased operating losses among the factors discussed.
- The 2022 comparative statement reclassified $0.4 million of surgical instrument expense from cost of goods sold to sales and marketing; the reclassification did not affect net loss.
Outlook, risks and notable items
- No specific quantitative revenue or earnings guidance is provided. Management expects revenue to increase over the foreseeable future, while also expecting ongoing losses and continued investment in sales, marketing, R&D, and infrastructure.
- Management believes existing cash, cash equivalents, and marketable securities will fund planned operations for at least 12 months from issuance of the interim statements. It cautions that this estimate depends on assumptions and that additional capital may be needed.
- Management expects inflation, higher interest rates, supply-chain challenges, and broader economic conditions to continue affecting the business in 2023, potentially increasing costs or reducing demand for elective procedures. COVID-19 was not considered a significant Q1 2023 impact, but future effects remain uncertain.
- Other material business risks include adoption of the Lapiplasty System, facility approvals, reimbursement and coverage, competition, product development and regulatory clearances, manufacturing and single-source supplier availability, and attracting and retaining sales personnel.
- The company disclosed a risk of loss or delayed access to funds held at financial institutions and credit risk in its short-term investments. It said it had no material cash deposits at Silicon Valley Bank at the time of its takeover or at quarter-end.
- MidCap debt bears capped rates of 9% on the term loan and 7% on the revolver. A minimum-revenue covenant applies if defined liquidity falls below the term-loan balance; the company said it was not subject to that covenant at quarter-end. No material legal proceedings or accrued contingent liabilities were reported.
Important facts for investors to verify
- Whether revenue growth, kit volumes, surgeon adoption, and utilization continue beyond a seasonally weaker first quarter.
- Whether gross margin stabilizes as sales expand, given rising inventory provisions, payroll, and manufacturing-related costs.
- The pace of operating cash use and whether the stated 12-month liquidity outlook remains supportable; review cash, securities, and debt availability together.
- The effect of sales-force and marketing investment, share-based compensation, and follow-on share issuance on future expenses and dilution.
- Debt terms, collateral, interest costs, covenant triggers, and the timing of scheduled principal payments, which begin in 2026 under the disclosed schedule.
- Exposure to elective-procedure demand, reimbursement changes, supply-chain disruption, and financial-institution or investment-issuer credit events.