Treace Medical Concepts, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Financial statements are unaudited. Treace sells surgical systems for bunion and related foot procedures, primarily its Lapiplasty System.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $33.1m | $21.6m | $92.1m | $61.0m |
| Revenue growth | 52.9% | — | 51.0% | — |
| Gross profit | $26.4m | $17.4m | $74.3m | $49.5m |
| Gross margin | 80.0% | 80.4% | 80.7% | 81.1% |
| Operating expenses | $37.7m | $22.8m | $105.6m | $60.4m |
| Operating loss | $(11.3)m | $(5.5)m | $(31.3)m | $(10.9)m |
| Net loss | $(12.1)m | $(6.4)m | $(38.4)m | $(13.9)m |
| Net loss per share | $(0.22) | $(0.12) | $(0.70) | $(0.30) |
- For the nine months, operating cash outflow was $25.3m, investing cash outflow was $12.5m, and financing cash inflow was $20.5m. Cash and cash equivalents decreased $17.3m to $88.5m.
- At September 30, cash and cash equivalents were $88.5m, including $0.9m pledged as collateral. Current assets were $127.9m and current liabilities $22.6m. The company reported $54.0m principal outstanding on term and revolving debt ($52.6m net of discount and issuance costs).
- Operating lease liabilities totaled $19.4m, of which $0.3m was current. Stockholders’ equity was $62.2m; accumulated deficit was $80.3m.
Changes and operating developments
- Q3 revenue increased 52.9%; management attributed growth primarily to more Lapiplasty Procedure Kits sold, a larger surgeon base, and a modestly higher blended selling price from product mix. Kits sold increased 44% year over year; 2,218 surgeons were active, up 39%. Average utilization was 10.1 kits per active surgeon for the nine months, reported as up 1.6% year over year.
- Operating expenses grew faster than revenue: Q3 sales and marketing rose 56.6%, R&D 49.7%, and general and administrative 106.9%. Management cited expanded sales staffing and marketing, product development, and public-company and headquarters-related costs.
- Gross margin declined 0.4 percentage points in Q3 and 0.4 percentage points for the nine months, mainly due to instrument depreciation and allocated payroll costs, partly offset by lower inventory-obsolescence provisions.
- In April 2022, Treace refinanced its CRG debt with a five-year MidCap facility: up to $120m in term loans and a $30m revolving facility. It drew $50m term debt and $4m revolving debt at closing, used part of the proceeds to repay CRG, and recorded a $4.5m debt-extinguishment loss for the nine months. The debt is secured by substantially all assets, including intellectual property. Additional term-loan tranches depend on revenue targets; the agreements include covenants and prepayment fees.
- Treace began a 10-year lease for new headquarters in 2022. Property and equipment, net, increased to $14.1m from $2.8m at year-end 2021, alongside $12.5m of nine-month capital expenditures.
Outlook, risks and contingencies
- No specific numerical revenue or earnings guidance is provided. Management expects continued revenue growth as territories, accounts, and the trained surgeon base expand, but says it expects to operate at a loss in the near term and anticipates continued increases in sales, R&D, and administrative spending.
- Management believes available cash, debt availability, and expected revenues will fund planned operations for at least 12 months from the financial statement issuance date. It cautions that assumptions may change and additional capital may be needed; financing may be unavailable or dilutive or include restrictive terms.
- COVID-related elective-surgery delays, staffing and capacity constraints, inflation, higher interest rates, supply-chain challenges, and weaker demand for elective procedures may affect sales and costs. The company expects macroeconomic challenges to persist through 2022 and into 2023. Fourth-quarter sales have historically represented approximately 35%–40% of annual revenue, reflecting seasonality.
- Other risks include adoption and facility access, reimbursement and coverage, reliance on third-party and some single-source suppliers, and the company’s ability to scale manufacturing and its sales infrastructure. Management reported no material change to the risk factors in its 2021 Form 10-K.
- The filing reports no material legal proceedings and no accrued contingent liabilities. It lists October 5, 2022 amendments to the MidCap revolving and term credit agreements, but the supplied filing text does not explain their substantive terms.
Important facts for investors to verify
- Whether procedure-kit growth, surgeon adoption, and utilization continue to support revenue growth, including the effects of seasonality and elective-surgery disruptions.
- Whether expense growth moderates enough to improve operating leverage and whether gross margins stabilize.
- Cash consumption, capital spending, and the timing of any need for further financing relative to management’s 12-month liquidity assessment.
- MidCap borrowing availability, revenue-triggered tranche conditions, covenant headroom, interest costs, and the terms and effects of the October 2022 amendments.
- Execution and costs associated with the new headquarters, product launches, and commercial expansion, as well as ongoing supply-chain and reimbursement risks.