TREACE MEDICAL CONCEPTS, INC. – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition
and results of operations together with our financial statements and related
notes thereto included elsewhere in this Annual Report. This discussion and
other parts of this Annual Report contain forward-looking statements that
involve risks and uncertainties, such as statements of our plans, objectives,
expectations and intentions that are based on the beliefs of our management, as
well as assumptions made by, and information currently available to, our
management. Our actual results could differ materially from those discussed in
these forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in the section
titled "Risk Factors." Please also see the section titled "Special Note
Regarding Forward-Looking Statements."

Overview

We are a medical technology company with the goal of advancing the standard of
care for the surgical management of bunion and related midfoot deformities. We
have pioneered our proprietary Lapiplasty 3D Bunion Correction System-a
combination of instruments, implants and surgical methods designed to surgically
correct all three planes of the bunion deformity and secure the unstable joint,
addressing the root cause of the bunion and helping patients get back to their
active lifestyles. Although bunions are deformities typically caused by an
unstable joint in the middle of the foot that leads to a three-dimensional
("3D") misalignment in the foot's anatomical structure, the majority of
traditional surgical approaches focus on correcting the deformity from a
two-dimensional ("2D") perspective and therefore fail to address the root cause
of the disorder. To effectively restore the normal anatomy of bunion patients
and improve clinical outcomes, we believe addressing the root cause of the
bunion is critical and have developed the Lapiplasty System to correct the
deformity across all three anatomic dimensions. Our mission is to be the leader
in the surgical treatment of bunions by establishing the Lapiplasty System as
the standard of care. In 2021, we expanded our offerings with the Adductoplasty™
Midfoot Correction System, designed for reproducible correction of the midfoot
to provide further support to hallux valgus patients.

We were formed in 2013 and since receiving 510(k) clearance for the Lapiplasty
System in March 2015, we have sold more than 65,000 Lapiplasty Procedure Kits in
the United States. We market and sell our Lapiplasty Systems to physicians,
surgeons, ambulatory surgery centers and hospitals. The Lapiplasty Procedure can
be performed in either hospital outpatient or ambulatory surgery centers
settings, and utilizes existing, well-established reimbursement codes. We
currently market and sell the Lapiplasty System through a combination of a
direct employee sales force and independent sales agencies across 193
territories in the United States. As of December 31, 2022, we had 168 direct
sales representatives and 25 independent sales agencies. In 2022, employee sales
representatives generated approximately 72% of revenues while approximately 28%
of revenues came through independent sales agencies.

On April 27, 2021, we completed our initial public offering ("IPO") of
12,937,500 shares of common stock, which included the exercise in full of the
underwriters' option to purchase additional shares. Before our IPO, our primary
sources of capital were private placements of common stock and convertible
preferred stock, debt financing agreements and revenue from the sale of our
products. As part of the IPO, we received net proceeds of approximately $107.6
million. Upon the completion of the IPO, all 6,687,475 shares of Series A
convertible preferred stock then outstanding were converted into shares of
common stock on a one-to-one basis plus 158,447 shares of common stock were
issued to pay accrued cumulative dividends on Series A convertible preferred
stock of $2.5 million. As of December 31, 2022, we had cash and cash equivalents
of $19.5 million and marketable securities of $61.8 million available for sale
to fund operations, an accumulated deficit of $84.7 million and $54.0 million of
principal outstanding under our term loan and revolving loan agreements.

On February 10, 2023, the Company completed a public offering of 5,476,190
shares of its common stock, which included the exercise in full of the
underwriters' option to purchase additional shares, at a price to the public of
$21.00 per share. This offering resulted in net proceeds of approximately $107.5
million after deducting underwriting discounts and commissions of $6.9 million
and offering expenses payable by the Company of approximately $0.6 million.

COVID-19 Impact

The COVID-19 pandemic has had, and we expect that it will continue to have
intermittent impacts on our business, operations, and financial results and
condition. Among other impacts, COVID-19 and its variants have slowed our
revenue growth by decreasing or delaying elective procedures, such as the
Lapiplasty Procedure, during various phases of the pandemic, including in
particular from March through May 2020 when governmental "shelter in place"
orders restricted elective procedures and in the second half of 2021 when more
virulent COVID-19 variants affected patient demand for elective procedures and
limited hospital staffing and capacity. While it is difficult to determine with
certainty, we believe that COVID-19 did not have a significant impact on our
2022 operations and financial results.

However, there is still uncertainty around the potential impacts related to
COVID-19 especially if potentially more contagious and virulent variants of the
virus emerge. If states implement shelter-in-place rules again, medical
facilities implement restrictions on

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elective surgeries as a result of COVID-19 surges, or other pandemic disruptions
occur, we may be required to adjust our operations as well as our forecasted
revenues and operating results. We cannot assure you that we will not experience
additional negative impacts associated with COVID-19 in the future, which could
be significant. For more information, refer to Item 1A, "Risk Factors-The
ongoing global COVID-19 pandemic has adversely affected, and may continue to
adversely affect, our business, financial condition and results of operations."

Economic Environment

During the year ended December 31, 2022 and continuing into 2023, there is
uncertainty in the macro-economic environment. Inflationary pressures, rising
interest rates, reduced consumer confidence, and ongoing supply chain challenges
may result in higher costs and longer lead times from suppliers and potentially
reduced demand for our Lapiplasty Procedure Kits. General economic conditions
may also negatively impact demand for elective surgeries. While we continuously
work with suppliers to mitigate higher costs and longer lead times and continue
to invest in our direct sales channel, patient education initiatives, clinical
evidence and product innovations to build demand for our products, we expect
these macro-economic challenges to continue throughout 2023, which may impact
our results of operations.

Key Business Metrics

We regularly review a number of operating and financial metrics, including the
number of Lapiplasty Procedure Kits sold, the number of active surgeons using
the Lapiplasty System and utilization rates, to evaluate our business, measure
our performance, identify trends affecting our business, formulate our business
plans and make strategic decisions. The number of Lapiplasty Procedure Kits sold
during the twelve months ended December 31, 2022 increased by 7,166 or 41.0%
over the twelve months ended December 31, 2021, and the number of active
surgeons as of December 31, 2022 was 2,387, an increase of 33.9% from the prior
year. The utilization rate for the twelve months ended December 31, 2022
increased 5.3% over the twelve months ended December 31, 2021 to an average of
10.3 Lapiplasty Procedure Kits per active surgeon.

We believe that the number of Lapiplasty Procedure Kits sold, number of active
surgeons using the Lapiplasty System and utilization rate are useful indicators
of our ability to drive adoption of the Lapiplasty System and generate revenue
and are helpful in tracking the progress of our business. While we believe these
metrics are representative of our current business, we anticipate these metrics
may be substituted for additional or different metrics as our business grows.

Factors Affecting Our Business

We believe that our financial performance has been and in the foreseeable
future, will continue to depend on many factors, including COVID-19 and
macro-economic conditions as described above, those described below, those noted
in the section titled "Special Note Regarding Forward-Looking Statements" and in
the section titled "Risk Factors".

Adoption of the Lapiplasty System

The growth of our business depends on our ability to gain broader acceptance of
the Lapiplasty System by successfully marketing and distributing the Lapiplasty
System and ancillary products. We currently have approval at over 1,900
facilities across the United States and plan to continue to increase access by
convincing even more surgeons and facility administrators that our products are
alternatives to traditional products used in bunion surgical procedures. While
surgeon adoption of the Lapiplasty Procedure remains critical to supporting
procedure growth, hospital and ambulatory surgery center facility approvals are
necessary for both existing and future surgeon customers to access our products.
To facilitate greater access to our products and drive future sales growth, we
intend to continue educating hospitals and facility administrators on the
differentiated benefits associated with the Lapiplasty System, supported by our
robust portfolio of clinical data. If we are unable to successfully continue to
commercialize our Lapiplasty System, we may not be able to generate sufficient
revenue to achieve or sustain profitability. In the near term, we expect we will
continue to operate at a loss, and we anticipate we will finance our operations
principally through offerings of our capital stock and by incurring debt.

Investments in Innovation and Growth

We expect to continue to focus on long-term revenue growth through investments
in our business. In sales and marketing, we are dedicating meaningful resources
to expand our sales force and management team in the United States, as well as
our patient focused outreach and education campaigns. We are hiring additional
employee sales representatives and employee field sales management to
strategically access more regions with high densities of prospective patients
and by focusing the efforts of our independent sales channel on our products. In
research and development, our team and our Surgeon Advisory Board are
continually working on next-generation innovations of the Lapiplasty System and
related products. In addition to expanding our Lapiplasty offerings with
products like the Lapiplasty Mini-Incision and Micro-Lapiplasty Minimally
Invasive Systems, we are continually
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exploring opportunities to advance our core Lapiplasty System instrumentation
and implants to further improve surgical efficiency, enhance reproducibility of
outcomes and speed surgical recovery for patients. In 2022, we introduced (i)
the 3-n-1 Guide, which combines three separate instruments and three procedure
steps into one instrument and step, (ii) the S4A plating system, which features
advanced 3D contours designed to accommodate variations in patient anatomy, and
(iii) the SpeedRelease Instrument, which is a single-use instrument designed to
make a challenging soft tissue release performed in the majority of Lapiplasty
cases easier to perform and more reproducible for the surgeon.

We are also pursuing the development and potential commercialization, if
cleared, of new products to address ancillary surgical procedures performed
routinely in connection with the Lapiplasty Procedure. For example, to help
address midfoot deformities that can occur in up to 30% of bunion patients, we
developed and, in September 2021, announced the commercial launch of the
Adductoplasty™ System. The Adductoplasty™ System brings together our implants
and instrumentation to provide a comprehensive system designed for reproducible
realignment, stabilization, and fusion of the midfoot and thus, provides
surgeons with a precision, instrumented approach to treat both the bunion and
coexisting midfoot deformities.

Moreover, in our general and administrative functions, we expect to continue to
hire personnel and expand our infrastructure to both drive and support our
anticipated growth and operations as a public company. Accordingly, in the near
term, we expect these activities to increase our net losses, but in the longer
term we anticipate they will positively impact our business and results of
operations.

Seasonality

We have experienced and expect to continue to experience seasonality in our
business, with higher sales volumes in the fourth calendar quarter, historically
accounting for approximately 35% to 40% of full year revenues, and lower sales
volumes in subsequent first calendar quarter. Our sales volumes in fourth
calendar quarters tend to be higher as many patients elect to have surgery after
meeting their annual deductible and having time to recover over the winter
holidays. Our sales volumes in subsequent first calendar quarters also tend to
be lower as a result of adverse weather and by resetting annual patient
healthcare insurance plan deductibles, both of which may cause patients to delay
elective procedures. The orthopaedic industry traditionally experiences lower
sales volumes in the third quarter than throughout the rest of the year as
elective procedures generally decline during the summer months. Although we
follow orthopaedic industry trends generally, to date our third quarter sales
volumes have not been lower than other quarters, but we may experience
relatively lower sales volumes during third quarters in the future.

Coverage and Reimbursement

Hospitals, ambulatory surgery centers and surgeons that purchase or use our
products generally rely on third-party payors to reimburse for all or part of
the costs and fees associated with procedures using our products. As a result,
sales of our products depend, in part, on the extent to which the procedures
using our products are covered by third-party payors, including government
programs such as Medicare and Medicaid, private insurance plans and managed care
programs. Based on historical claims data from 2017, approximately 63% of
Lapidus cases and 60% of all bunion surgical cases were paid by private payors.

Medicare payment rates to hospital outpatient departments are set under the
Medicare hospital outpatient prospective payment system, which groups clinically
similar hospital outpatient procedures and services with similar costs to
ambulatory payment classifications ("APCs"). Each APC is assigned a single lump
sum payment rate, which includes payment for the primary procedure as well as
any integral, ancillary, and adjunctive services. The primary CPT codes for the
Lapiplasty Procedure, CPT 28297 and CPT 28740, are grouped together under APC
5114. For Lapiplasty Procedures in which fusion is performed on multiple TMT
joints, CPT 28730 applies and is classified under APC 5115.

Components of our Results of Operations

Revenue

We currently derive nearly all of our revenue from the sale of our proprietary
Lapiplasty System, and to a lesser extent from the Adductoplasty System, which
we introduced in 2021, and ancillary products. The Lapiplasty and Adductoplasty
Systems are comprised of single-use implant kits and reusable instrument trays.
We sell the Lapiplasty and Adductoplasty Systems to physicians, surgeons,
hospitals and ambulatory surgery centers in the United States through a network
of employee sales representatives and independent sales agencies. Our primary
product is the Lapiplasty System, which is an instrumented, reproducible
approach to 3D bunion correction that helps patients rapidly return to
weight-bearing in a post-operative boot. We also offer other advanced
instrumentation and implants for use in the Lapiplasty and Adductoplasty
Procedures or other ancillary procedures performed in high frequency with bunion
surgery.

No single customer accounted for 10% or more of our revenue during 2022. We
expect our revenue to increase in absolute dollars in the foreseeable future as
we expand our sales territories, new accounts and trained physician base and as
existing physician
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customers perform more Lapiplasty Procedures, though it may fluctuate from
quarter to quarter due to a variety of factors, including seasonality, COVID-19
pandemic impacts, and the macro-economic environment.

Cost of Goods Sold

Cost of goods sold consists primarily of manufacturing costs for the purchase of
our Lapiplasty and Adductoplasty Systems and other products from third-party
manufacturers. Direct costs from our third-party manufacturers include costs for
raw materials plus the markup for the assembly of the components. Cost of goods
sold also includes royalties, allocated overhead for indirect labor,
depreciation, certain direct costs such as those incurred for shipping, and
personnel costs. We expense all provisions for excess and obsolete inventories
as cost of goods sold. We record adjustments to our inventory valuation for
estimated excess, obsolete and non-sellable inventories based on assumptions
about future demand, past usage, changes to manufacturing processes and overall
market conditions. We expect our cost of goods sold to increase in absolute
dollars in the foreseeable future to the extent more of our products are sold,
though it may fluctuate from quarter to quarter.

Gross Profit and Gross Margin

We calculate gross profit as revenue less cost of goods sold, and gross margin
as gross profit divided by revenue. Our gross margin has been and will continue
to be affected by a variety of factors, primarily average selling prices,
production and ordering volumes, change in mix of customers, third-party
manufacturing costs and cost-reduction strategies. We expect our gross profit to
increase in the foreseeable future as our revenue grows, though our gross margin
may fluctuate from quarter to quarter due to changes in average selling prices
as we introduce new products, and as we adopt new manufacturing processes and
technologies.

Operating Expenses

Sales and Marketing

Sales and marketing expenses consist primarily of compensation for personnel,
including salaries, bonuses, benefits, sales commissions and share-based
compensation, related to selling and marketing functions, physician education
programs, training, shipping costs related to sending products to our sale
representatives, travel expenses, marketing initiatives including our
direct-to-patient outreach program and advertising, market research and analysis
and conferences and trade shows. We expect sales and marketing expenses to
continue to increase in absolute dollars in the foreseeable future as we
continue to invest in our direct employee sales force and expand our marketing
efforts, and as we continue to expand our sales and marketing infrastructure to
both drive and support anticipated sales growth, though it may fluctuate from
quarter to quarter.

Research and Development

Research and development ("R&D") expenses consist primarily of engineering,
product development, clinical studies to develop and support our products,
regulatory expenses, and other costs associated with products and technologies
that are in development. These expenses include compensation for personnel,
including salaries, bonuses, benefits and share-based compensation, supplies,
consulting, prototyping, testing, materials, travel expenses, depreciation and
an allocation of facility overhead expenses. We expect R&D expenses to continue
to increase in absolute dollars in the foreseeable future as we continue to hire
personnel and invest in next-generation innovations of the Lapiplasty System and
related products, though it may fluctuate from quarter to quarter due to a
variety of factors, including the level and timing of our new product
development efforts, as well as our clinical development, clinical trial and
other related activities.

General and Administrative

General and administrative expenses consist primarily of compensation for
personnel, including salaries, bonuses, benefits and share-based compensation,
related to finance, information technology, legal and human resource functions,
as well as professional services fees (including legal, audit and tax fees),
insurance costs, general corporate expenses and allocated facilities-related
expenses. We expect general and administrative expenses to continue to increase
in absolute dollars in the foreseeable future as we hire personnel and expand
our infrastructure to drive and support the anticipated growth in our
organization. Moreover, we have incurred, and expect to continue to incur,
general and administrative expenses associated with operating as a public
company, including legal, accounting, insurance, compliance with the rules and
regulations of the SEC and those of any stock exchange on which our securities
are traded, investor relations, and other administrative and professional
services expenses.

Interest and other income (expense), net

Interest income and other income (expense), net consists of interest received on
our money market funds and marketable securities and impairments of long-lived
assets.
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Interest Expense

Interest expense consists of interest incurred and amortization of debt discount
and issuance costs related to outstanding borrowings during the reported
periods.

Results of Operations

Comparison of the years ended December 31, 2022 and 2021

The following table summarizes our results of operations for the periods
indicated ($ in thousands):

                                             Year Ended December 31,                Change
                                               2022             2021         Amount           %
Revenue                                    $    141,838       $  94,419     $  47,419          50.2 %
Cost of goods sold                               27,523          17,826         9,697          54.4 %
Gross profit                                    114,315          76,593        37,722          49.2 %
Operating expenses
Sales and marketing                             102,576          64,467        38,109          59.1 %
Research and development                         13,584          10,204         3,380          33.1 %
General and administrative                       32,999          18,432        14,567          79.0 %
Total operating expenses                        149,159          93,103        56,056          60.2 %
Loss from operations                            (34,844 )       (16,510 )     (18,334 )           *
Interest and other income (expense), net            910              18           892             *
Interest expense                                 (4,398 )        (4,060 )        (338 )         8.3 %
Debt extinguishment loss                         (4,483 )             -        (4,483 )           *
Other expense, net                               (7,971 )        (4,042 )      (3,929 )        97.2 %
Net loss                                   $    (42,815 )     $ (20,552 )   $ (22,263 )       108.3 %



* Not meaningful


Revenue. Revenue increased by $47.4 million, or 50.2%, from the year ended
December 31, 2022, as compared to 2021. The increase was primarily due to a
41.0% increase in the number of Lapiplasty Procedure Kits sold in 2022 compared
to 2021 as the result of an expanded customer base. The increase in the volume
of Lapiplasty Procedure Kits sold resulted in 70% of the revenue growth from
2021 to 2022. The remaining revenue growth was a result of increased adoption of
our newer technologies and selling more ancillary products. In addition,
revenues in 2021 were adversely impacted by elective surgery delays or
cancellations and hospital staffing and capacity constraints, primarily related
to the surge of infections and hospitalizations from the Delta and Omicron
variants of COVID-19.

Cost of Goods Sold, Gross Profit and Gross Margin. Cost of goods sold increased
by $9.7 million, or 54.4%, in the year ended December 31, 2022, as compared to
2021. The increase in cost of goods sold was primarily due to a $5.6 million
increase in direct costs of goods sold and a $2.2 million increase in royalty
expense both resulting from increased sales, $1.1 million increase in
depreciation expense from our surgical instruments, $1.1 million increase in
overhead expenses resulting from an increase in our headcount, which was
partially offset by a $0.2 million decrease in provision for inventory and
instrument obsolescence. Gross profit increased $37.7 million from the year
ended December 31, 2022 as compared to 2021, primarily due to sales growth.
Gross profit margin for the year end December 31, 2022 decreased from 81.1% to
80.6%, as compared to the same period of 2021, primarily due to depreciation
expense from an increase in capitalized surgical instruments, and an increase in
payroll costs, which were partially offset by a decrease in inventory and
obsolescence provisions.

Sales and Marketing Expenses. Sales and marketing expenses increased by $38.1
million, or 59.1%, from the year ended December 31, 2022, as compared to 2021.
The increase in sales and marketing expenses was due to growth in our overall
business. Sales and marketing expenses increased due to an increase of $20.6
million in payroll and related expenses from increased headcount of sales and
marketing personnel, an increase of $10.1 million primarily for higher
commissions from increased sales by our employee sales representatives and
independent sales agencies, an increase of $4.3 million in advertising and
marketing-related expenses primarily due to higher advertising fees for direct
to consumer campaigns and sales meeting costs, an increase of $1.3 million in
clinical-related expenses from surgeon training, and $1.1 million in other
marketing-related expenses.

Research and Development Expenses. Research and development expenses increased
by $3.4 million, or 33.1%, from the year ended December 31, 2022, as compared to
2021. The increase in research and development expenses was due to increases of
$2.4 million in payroll and payroll-related costs resulting from increased
headcount of research and development personnel, an increase of $0.9 million in
clinical expenses primarily from $0.4 million of increased spending for
purchases of materials used in our prototypes and a $0.3 million increase in
clinical studies costs.
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General and Administrative Expenses. General and administrative expenses
increased by $14.6 million, or 79.0%, from the year ended December 31, 2022, as
compared to 2021. The increase in general and administrative expenses was
primarily due to an increase of $6.7 million in payroll and payroll-related
costs from increased headcount to support our growing business, an increase of
$2.7 million in rent expense and occupancy costs related to moving into our new
headquarters building during the year, an increase of $2.5 million in
business-related expenses primarily resulting from increased insurance costs and
banking and credit card processing fees, and an increase of $3.2 million in
professional services primarily related to a $2.2 million increase in legal
expenses primarily related to litigation to protect our intellectual property
rights and IT expenses related to conversion to a new service provider. Legal
expenses increased $2.2 million in the current year primarily related to
litigation to protect our intellectual property rights.

Interest and Other Income (Expense), Net. Interest and other income (expense),
net increased by $0.9 million in 2022 as compared to 2021. The increase was due
to a $1.3 million increase in interest income from higher money market fund
interest rates during 2022 and investing in marketable securities in the fourth
quarter of 2022 that earn higher interest rates than money market funds. This
increase was partially offset by a $0.3 million loss from an impairment related
to assets associated with our previous corporate headquarters operating lease.

Interest Expense. Interest expense increased by $0.3 million, or 8.3%, from the
year ended December 31, 2022 as compared to 2021. The increase in interest
expense was primarily due to a higher debt balance partially offset by lower
interest rates on the new debt as a result of the debt refinancing in the second
quarter of 2022.

Debt Extinguishment Loss. Debt extinguishment loss increased by $4.5 million,
for the year ended December 31, 2022 as compared to the same period of 2021 due
to our refinancing during the second quarter of 2022.

For the comparison of the results of operations for the years ended December 31,
2021 and 2020, refer to our Annual Report on Form 10-K as filed with the U.S
Securities and Exchange Commission on March 4, 2022.

Liquidity and Capital Resources

Overview

Before our IPO, our primary sources of capital were private placements of common
stock and convertible preferred stock, debt financing agreements and revenue
from the sale of our products. In April 2021, we received net proceeds of $107.6
million from our IPO. In April 2022, we entered a new five-year $150.0 million
loan arrangement, consisting of up to $120.0 million in term loans and up to
$30.0 million in a revolving loan facility with entities affiliated with MidCap.
On the closing date in April 2022, we borrowed $50.0 million under the term loan
and $4.0 million under the revolving loan facility. The term loan proceeds were
partially used to repay our term loan obligation with CRG and an early
termination fee to Silicon Valley Bank ("SVB") amounting to $34.1 million
including principal of $30.0 million, interest of $0.4 million and fees of $3.7
million. There was no outstanding principal at termination of the SVB loan
facility. We repaid $1.8 million in borrowings outstanding from the Paycheck
Protection Program loan program (the "PPP Loan') under the Coronavirus Aid
Relief and Economic Recovery Act in 2021.

As of December 31, 2022, we had cash and cash equivalents of $19.5 million and
marketable securities of $61.8 million available for sale, an accumulated
deficit of $84.7 million and $54.0 million of principal outstanding under our
term loan and revolving loan agreements. We believe that our existing cash and
cash equivalents, marketable securities and available debt borrowings and
expected revenues will be sufficient to meet our capital requirements and fund
our operations for at least twelve months from the issuance of our financial
statements as of and for the year ended December 31, 2022. We may be required or
decide to raise additional financing to support further growth of our
operations. See Note 13, "Subsequent Events", for information about our recent
offering of our common stock.

Long-Term Obligations

MidCap Term Loan and Revolving Loan Facility

On April 29, 2022, we entered into a new five-year $150 million loan facility
with MidCap, providing up to $120 million in term loans and a $30 million
revolving loan facility.

The term loan provides for a 60-month term loan facility up to $120 million in
borrowing capacity, over four tranches. At loan closing, we drew $50 million
under tranche one. The remaining tranches provide up to an additional $70
million in borrowing capacity in the aggregate, subject to certain revenue
targets for tranches three and four.

The revolving loan facility provides up to $30 million in borrowing capacity
subject to a borrowing base. The borrowing base is calculated based on certain
accounts receivable and inventory assets. At loan closing, we drew $4 million
under the revolving loan facility. We may request a $20 million increase in the
revolving loan facility for a total commitment of up to $50 million. We are
required to either (i) maintain a minimum drawn balance under the revolving
facility agreement or (ii) pay a minimum balance fee that is equal to the amount
of the minimum balance deficit multiplied by the applicable interest rate during
the period. If the outstanding
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balance under the revolving loan facility exceeds the lesser of (i) 50% of the
revolving borrowing capacity or (ii) 50% of the borrowing base, or we are in
default, MidCap will apply funds collected from our lockbox account to reduce
the outstanding balance of the revolving loan facility ("Lockbox Deductions").
As of December 31, 2022, our borrowing base level has not activated the Lockbox
Deductions.

The loans are secured by substantially all our assets, including intellectual
property. The loan agreements and other ancillary documents contain customary
representations and warranties and affirmative and negative covenants. Under the
loan agreements, we are not required to meet any minimum level of revenue if
liquidity (defined as unrestricted cash plus undrawn availability under the
revolving loan agreements) is greater than the outstanding balance under the
term loan. Our marketable securities qualify as unrestricted cash under the loan
agreements. If liquidity falls below such outstanding balance, then we are
subject to a minimum trailing twelve-month revenue covenant.

Funding Requirements

We use our cash to fund our operations, which primarily include the costs of
manufacturing our Lapiplasty and Adductoplasty Systems and ancillary products,
as well as our sales and marketing and R&D expenses and related personnel costs.
We expect our sales and marketing expenses to increase in the foreseeable future
as we continue to invest in our employee sales force and expand our marketing
efforts, and as we continue to expand our sales and marketing infrastructure to
both drive and support anticipated sales growth. We also expect R&D expenses to
increase in the foreseeable future as we continue to hire personnel and invest
in next-generation innovations of the Lapiplasty System and related products. In
addition, we expect our general and administrative expenses to increase in the
foreseeable future as we hire personnel and expand our infrastructure to both
drive and support the anticipated growth in our organization. We will also incur
additional expenses as a result of operating as a public company. From time to
time, we may also consider additional investments in technologies, assets and
businesses to expand or enhance our product offerings. The timing and amount of
our operating expenditures will depend on many factors, including:

•

the scope and timing of our investment in our commercial infrastructure and
sales force;

•

the costs of our ongoing commercialization activities including product sales,
marketing, manufacturing and distribution;

•

the scope of our marketing efforts, including the degree to which we utilize
direct to consumer campaigns;

•

the degree and rate of market acceptance of the Lapiplasty and Adductoplasty
Systems and our ancillary products;

•

the costs of filing, prosecuting, defending and enforcing any patent claims and
other intellectual property rights, including enforcing our intellectual
property rights against infringing products or technologies;

•

our need to implement additional infrastructure and internal systems;

•

the research and development activities we intend to undertake in order to
improve the Lapiplasty System and to develop or acquire additional products;

•

the investments we make in acquiring other technologies, assets or businesses to
expand our product portfolio;

•

the success or emergence of new competing technologies or other adverse market
developments;

•

any product liability or other lawsuits related to our products;

•

the expenses needed to attract and retain skilled personnel;

•

the costs associated with being a public company;

•

the impact of the COVID-19 pandemic, hospital staffing shortages, and delays of
elective procedures; and

•

inflation, interest rate changes, and other general economic conditions on our
operations and business.

Based upon our current operating plan, we believe that our existing cash, cash
equivalents, and marketable securities will enable us to fund our operating
expenses and capital expenditure requirements for at least the next twelve
months. We have based this estimate on assumptions that may prove to be wrong or
that may change in the future, and we could utilize our available capital
resources sooner than we expect. We may seek to raise any necessary additional
capital through public or private equity or debt financing, credit or loan
facilities or a combination of one or more of these or other funding sources.
Additional funds may not be available to us on acceptable terms or at all. If we
fail to obtain necessary capital when needed on acceptable terms, or at all, we
could be forced to delay, limit, reduce or terminate our product development
programs, commercialization efforts, sales and marketing initiatives, or other
operations. If we raise additional funds by issuing equity securities, our
stockholders will suffer dilution and the terms of any financing may adversely
affect the rights of our stockholders. In addition, as a condition to providing
additional funds to us, future investors may demand, and may be granted, rights
superior to those of existing stockholders. Debt financing, if available, is
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likely to involve restrictive covenants limiting our flexibility in conducting
future business activities, and, in the event of insolvency, debt holders would
be repaid before holders of our equity securities received any distribution of
our corporate assets.

Cash Flows

The following table sets forth the primary sources and uses of cash and cash
equivalents for the periods presented below (in thousands):

                                                         Year Ended 

December 31,

                                                    2022           2021     

2020

Net cash (used in) provided by:
Operating activities                             $  (30,648 )   $  (17,193 )   $   (4,494 )
Investing activities                                (76,518 )       (2,705 )       (1,069 )
Financing activities                                 20,806        107,652         11,503
Net increase (decrease) in cash and cash
equivalents                                      $  (86,360 )   $   87,754     $    5,940

Net Cash Used in Operating Activities

Net cash used in operating activities for the year ended December 31, 2022 was
$30.6 million, consisting primarily of a net loss of $42.8 million and an
increase in net operating assets of $5.8 million, which were partially offset by
non-cash charges of $18.0 million. The increase in net operating assets was
primarily due to an increase in accounts receivable resulting from higher sales
revenue in 2022, higher inventories resulting from higher purchases in
anticipation of growing demand in 2023 and to guard against supply chain risks,
and an increase in prepaid expenses and other assets due to timing of payments,
which were offset by increases in accounts payable and accrued liabilities due
to timing of payments and growth of our operations. The non-cash charges
primarily consisted of share-based compensation expense of $8.1 million, a loss
on extinguishment of debt of $4.5 million, non-cash lease amortization of $2.5
million, and depreciation and amortization expense of $2.1 million, $0.4 million
in provision for doubtful accounts primarily driven by higher account receivable
balances at year end.

Net cash used in operating activities for 2021 was $17.2 million, consisting
primarily of a net loss of $20.6 million and an increase in net operating assets
of $1.0 million, which were partially offset by non-cash charges of $4.3
million. The increase in net operating assets was primarily due to an increase
in accounts receivable resulting from higher revenues in 2021, higher
inventories resulting from higher purchases in anticipation of growing demand in
2022, and an increase in prepaid expenses and other assets due to timing of
payments and growth of our operations, which were offset by increases in
accounts payable and accrued liabilities due to timing of payments and growth of
our operations. The non-cash charges primarily consisted of depreciation and
amortization expense of $0.7 million, share-based compensation expense of $3.4
million, amortization of debt issuance costs of $0.2 million.

Net Cash Used in Investing Activities

Net cash used in investing activities for the year ended December 31, 2022, was
$76.5 million consisting of a $63.4 million in purchases of marketable
securities available for sale and $14.8 million in purchases of property and
equipment. The purchases of property and equipment consist of $5.1 million in
purchases of capitalized surgical instruments for our reusable instrument trays
driven by higher numbers of employee sales representatives and sales growth and
$8.0 million of purchases of fixed assets and leasehold improvements primarily
for our new corporate headquarters building, partially offset by $1.7 million in
maturities of marketable securities available for sale.

Net cash used in investing activity was $2.7 million and $1.1 million, in 2021
and 2020, respectively, consisting of purchases of capitalized surgical
instruments for our reusable instrument trays.

Net Cash Provided by Financing Activities

Net cash provided by financing activities for the year ended December 31, 2022,
was $20.8 million, consisting of $53.5 million of net cash proceeds from the new
term loan agreement and revolving loan facility with MidCap and $2.2 million
from the exercise of stock options, partially offset by the $33.9 million
repayment of the CRG term loan and $1.0 million of third party debt issuance
costs paid to related to the new MidCap borrowings.

Net cash provided by financing activities for the year ended December 31, 2021,
was $107.7 million, consisting primarily of net proceeds from our IPO of $107.6
million and $1.8 million proceeds from exercise of stock options, partially
offset by repayment of our PPP Loan of $1.8 million.
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Net cash provided by financing activities in 2020 was $11.5 million, consisting
primarily of additional borrowings under the CRG term loan facility of $29.5
million, net of debt discount, partially offset by repayment of the term loans
under the SVB loan facility of $20.0 million, borrowing under a PPP Loan of $1.8
million and cash received of $0.3 million from the exercise of stock options,
partially offset by debt issuance costs of $0.2 million.

Surgeon Advisory Board Royalty Agreements

We recognized royalties expense of $6.5 million and $4.3 million for the years
ended December 31, 2022 and 2021, respectively. For the years ended December 31,
2022 and 2021, the aggregate royalty rate was 4.6%. Each of the royalty
agreements with our Surgeon Advisory Board members prohibits the payment of
royalties on products sold to entities and/or individuals with whom any of the
surgeon advisors is affiliated.

Operating Lease

We have commitments for future payments related to our new corporate
headquarters office located in Ponte Vedra, Florida. We entered into a 10-year
lease in February 2022 for our new location which expires in July 2032. Lease
payments comprise the base rent plus operating costs which includes taxes,
insurance, and common area maintenance. We also have commitments for future
payments related to our former headquarters which expire in April 2026. We have
obtained a sublease for a portion of this space and continue to actively market
the remainder of the space. The remaining lease obligations are $25.9 million
under these leases.

Critical Accounting Policies and Estimates

Management's discussion and analysis of our financial condition and results of
operations is based on our financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles. The preparation
of these financial statements requires us to make estimates and assumptions for
the reported amounts of assets, liabilities, revenue, expenses and related
disclosures. Our estimates are based on our historical experience and on various
other factors that we believe are reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions and any such differences may be material.

While our significant accounting policies are more fully described in Note 2 of
our financial statements included in this Annual Report on Form 10-K, we believe
the following discussion addresses our most critical accounting policies, which
are those that are most important to our financial condition and results of
operations and require our most difficult, subjective and complex judgments.

Stock-Based Compensation

We account for stock-based compensation arrangements with employees in
accordance with ASC 718, Compensation-Stock Compensation, using a fair-value
based method. We determine the fair value of stock options on the date of grant
using the Black-Scholes option pricing model.

The fair value of time-based awards is recognized over the period during which
an award holder is required to provide services in exchange for the award, known
as the requisite service period, which is typically the vesting period using the
straight-line method. Stock-based compensation expense is recorded net of
estimated forfeitures in our statements of operations.

We estimate the fair value of our stock options using the Black-Scholes
option-pricing model, which requires the input of highly subjective assumptions
regarding the expected volatility of our stock, the expected life of the stock
award and our expected dividend rate. We primarily use historical data to
determine the assumptions to be used in the Black-Scholes model and have no
reason to believe that future data is likely to differ materially from
historical data. However, changes in the assumptions regarding future stock
price volatility, future dividend payments and future stock award exercise could
result in a change in the assumptions used to value awards in the future and may
result in a material change to the fair value calculation of stock-based awards.

Fair Value of Common Stock

Prior to our IPO, the estimated fair value of the common stock underlying our
stock options and stock awards was determined at each grant date by our board of
directors, with assistance from management and external appraisers. All options
to purchase shares of our common stock were intended to be exercisable at a
price per share not less than the per-share fair value of our common stock
underlying those options on the date of grant. The approach to estimate the fair
value of our common stock was consistent with the methods outlined in the
American Institute of Certified Public Accountants' Practice Aid, Valuation of
Privately-Held-Company Equity Securities Issued as Compensation, or Practice
Aid. Subsequent to our IPO, the fair value of our common stock is determined
based on its closing market price.
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Recently Issued Accounting Pronouncements

Refer to Note 3, "Recent Accounting Pronouncements", to our audited financial
statements included elsewhere in this Annual Report on Form 10-K for new
accounting pronouncements as of the date of this Annual Report on Form 10-K.