TREACE MEDICAL CONCEPTS, INC. – 10-Q – 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 condensed financial statements and
related notes thereto included in this Quarterly Report on Form 10-Q and our
audited financial statements and related notes thereto for the year ended
December 31, 2021, included in our Annual Report on Form 10-K filed with the
U.S. Securities and Exchange Commission on March 4, 2022 (our "Annual Report").
This discussion and other parts of this Quarterly 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 our Annual Report under "Part I, Item 1A-Risk Factors". Please also see the
section titled "Special Note Regarding Forward-Looking Statements."

Overview

We are a medical technology company driving a fundamental shift in the surgical
treatment of Hallux Valgus (commonly known as bunions). We have pioneered our
proprietary Lapiplasty® 3D Bunion Correction™ System-a combination of innovative
instruments, implants and surgical methods designed to improve the inconsistent
clinical outcomes of traditional approaches to bunion surgery. 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. We recently 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 47,000 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 140
territories in the United States. As of March 31, 2022, we had 106 direct sales
representatives and 34 independent sales agencies. In the three months ended
March 31, 2022, employee sales representatives generated approximately 63% of
revenues while approximately 37% 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 had been 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 our 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 dividends on Series A convertible preferred stock of $2.5
million. As of March 31, 2022, we had cash and cash equivalents of $98.5
million, an accumulated deficit of $50.9 million and $30.0 million of principal
outstanding under our term loan agreement.

COVID-19 Impact

In March 2020, the World Health Organization declared the outbreak of a novel
coronavirus (COVID-19) as a pandemic, and in response to COVID-19 at that time,
certain states within the United States implemented shelter-in-place rules
requiring certain businesses not deemed "essential" to close and requiring
elective procedures to be delayed. While we are encouraged by our results since
restrictions were eased at the end of the second quarter of 2020 and with the
introduction of vaccines in early 2021, we are aware that the actual and
perceived impact of COVID-19 has been changing and cannot be predicted. In the
third and fourth quarters of 2021 we observed elective surgery delays and
cancellations and hospital staffing and capacity constraints, primarily related
to the surge of infections and hospitalizations from the Omicron variant of
COVID-19. In the early part of first quarter of 2022, we continued to observe
elective surgery delays and cancellations to a lesser degree. There is still
uncertainty around the duration and severity of business disruptions related to
COVID-19 and how it will impact our operations which could be significant.

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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 rate, 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 three months ended March 31, 2022 increased by 1,775 or 50.7% over
the same period of 2021, and the number of active surgeons as of March 31, 2022
was 1,901, an increase of 40.4% from the prior year. We define the number of
active surgeons as the number of surgeons that performed at least one procedure
using the Lapiplasty System in the trailing twelve-month period. The surgeon
utilization rate for the three months ended March 31, 2022 increased 9.8% over
the same period of 2021, to an average of 10.1 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 as described
above, those described below, those referenced in the section titled "Special
Note Regarding Forward-Looking Statements" and those set forth in our Annual
Report in the section titled "Part I, Item 1A-Risk Factors" and in the section
titled "Risk Factors" included elsewhere in this Quarterly Report on Form 10-Q.

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 1,600
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 driving
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
direct 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 System, we are continually 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.

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

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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 40% of full year revenues, and lower sales volumes
in the first calendar quarter. Our sales volumes in the fourth calendar quarter
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 the first calendar quarter 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
tarsometatarsal 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 the third quarter of 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
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 the three
months ended March 31, 2022. We expect our revenue to increase in absolute
dollars in the foreseeable future as we expand our sales territories, new
accounts and trained surgeon base and as existing surgeon customers perform more
Lapiplasty Procedures, though it may fluctuate from quarter to quarter due to a
variety of factors, including seasonality and Covid-19 pandemic events.

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 includes 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 our
products 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

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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, 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 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 these expenses 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 these expenses 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, rent 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, additional 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, though these expenses may
fluctuate from quarter to quarter.

Interest and other income (expense), net

Interest income and other income (expense), net consists of interest received on
our money market funds and losses on debt extinguishment.

Interest Expense

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

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Results of Operations

Comparison the three months ended March 31, 2022 and 2021

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

                                              Three Months Ended March 31,                 Change
                                                2022                 2021           Amount          %
Revenue                                    $       29,047       $       18,707     $  10,340         55.3 %
Cost of goods sold                                  5,506                3,327         2,179         65.5 %
Gross profit                                       23,541               15,380         8,161         53.1 %
Operating expenses
Sales and marketing                                21,923               12,148         9,775         80.5 %
Research and development                            3,052                1,868         1,184         63.4 %
General and administrative                          6,662                2,766         3,896        140.9 %
Total operating expenses                           31,637               16,782        14,855         88.5 %
Loss from operations                               (8,096 )             (1,402 )      (6,694 )          *
Interest and other income (expense), net               11                    1            10            *
Interest expense                                     (951 )             (1,031 )          80         (7.8 )%
Other expense, net                                   (940 )             (1,030 )          90         (8.7 )%
Net loss and comprehensive loss            $       (9,036 )     $       (2,432 )   $  (6,604 )      271.5 %

Comparison of the three months ended March 31, 2022 and 2021

Revenue. Revenue increased by $10.3 million, or 55.3%, for the three months
ended March 31, 2022 as compared to the same period of 2021. The increase in
revenue was primarily due to an increased number of Lapiplasty Procedure Kits
sold as the result of an expanded customer base and a slight increase in average
sales prices.

Cost of Goods Sold, Gross Profit and Gross Margin. Cost of goods sold increased
by $2.2 million, or 65.5%, for the three months ended March 31, 2022 as compared
to the same period of 2021. The increase in cost of goods sold was primarily due
to $1.2 million increase in direct costs of goods sold resulting from increased
sales, $0.6 million increase in royalty expense resulting from our increased
sales, and $0.3 million increase in depreciation expense from our surgical
instruments. During the three months ended March 31, 2022, the gross profit
increased by $8.1 million, or 53.1%, as compared to the same period of 2021 due
to increased sales. Gross profit margin for the three months ended March 31,
2022 decreased from 82.2% to 81.0%, as compared to the same period of 2021,
primarily due to an increase in royalty expense resulting from our increased
sales and an increase in depreciation expense from surgical instruments.

Sales and Marketing Expenses. Sales and marketing expenses increased by $9.8
million, or 80.5%, for the three months ended March 31, 2022 as compared to the
same period of 2021. The increase in sales and marketing expenses was primarily
due to growth in our overall business. Sales and marketing expenses increased as
a result of an increase of $4.5 million in payroll, payroll-related expenses
resulting from increased headcount of sales personnel, an increase of $3.1
million in advertising and marketing-related expenses primarily due to higher
advertising fees and a new television commercial campaign, an increase of $1.6
million in professional services primarily for higher commissions from increased
sales by our direct sales representatives and independent sales agencies, and
$0.5 million in other marketing-related expenses resulting from increased sales
efforts.

Research and Development Expenses. Research and development expenses increased
by $1.2 million, or 63.4%, for the three months ended March 31, 2022 as compared
to the same period of 2021. The increase in research and development expenses
was due to an increase of $0.8 million in payroll and payroll-related costs
resulting from increased headcount of research and development personnel, an
increase of $0.2 million in clinical expenses resulting from increased purchases
of materials used in our prototypes and an increase of $0.2 million in third
party consulting fees.

General and Administrative Expenses. General and administrative expenses
increased by $3.9 million, or 140.9%, for the three months ended March 31, 2022
as compared to the same period of 2021. The increase in general and
administrative expenses was primarily due to an increase of $1.4 million in
payroll and payroll-related costs as we increased headcount in our business, an
increase of $1.3 million in business-related expenses primarily resulting from
increased insurance costs and fees, an increase of $0.9 million in professional
services primarily related to legal and audit expenses, and an increase of $0.2
million in rent expense resulting from the new corporate headquarters lease that
commenced for accounting purposes in the current quarter.

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Interest Expense. Interest expense decreased by $0.1 million, or 7.8%, for the
three months ended March 31, 2022 as compared to the same period of 2021. The
decrease in interest expense was primarily due to lower outstanding debt
balances in the three months ended March 31, 2022, as compared to the same
period of 2021 as a result of repayment of our PPP loan in March 2021.

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. As of March 31, 2022, we had cash and cash equivalents of
$98.5 million, an accumulated deficit of $50.9 million, $30.0 million of
principal outstanding under our term loan agreement with CRG and an existing
credit facility with SVB providing a revolving line of credit of $10.0 million.
We believe that our existing cash and cash equivalents, 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 condensed financial statements. We may be required or decide to
raise additional financing to support further growth of our operations.

In April 2022, we entered a new five-year $150 million loan arrangement,
comprising up to $120 million in term loans and $30 million in a revolving
credit facility with entities affiliated with MidCap Financial. On the closing
date, we borrowed $50 million under the term loan and $4 million under the
revolving credit facility. The proceeds were partly used to repay our entire
obligation under our CRG Term Loan Facility amounting to $34.1 million,
including principal of $30.0 million, interest of $0.4 million and fees of $3.7
million. In April 2022, we terminated our credit facility with SVB.

Refer to Note 11, "Subsequent events", in the Notes to condensed financial
statements, for more information about our new term loan and revolving line of
credit facilities.

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 research and development expenses and
related personnel costs. We expect our sales and marketing expenses to increase
for the foreseeable future as we continue to invest in our direct 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 for 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 for 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 System;

•

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;

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•

the expenses needed to attract and retain skilled personnel;

•

the costs associated with being a public company; and

•

the impact of the COVID-19 pandemic, hospital staffing shortages, and general
economic conditions on our operations and business.

Based upon our current operating plan, we believe that our existing cash and
cash equivalents, 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 offerings or debt financings, 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 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 period presented below:

                                               Three Months Ended March 31,
                                                 2022                 2021
Net cash (used in) provided by:
Operating activities                        $       (7,241 )     $         (446 )
Investing activities                                (1,481 )               (196 )
Financing activities                                 1,372              

(1,219 )
Net decrease in cash and cash equivalents $ (7,350 ) $ (1,861 )

Net Cash Used in Operating Activities

Net cash used in operating activities for the three months ended March 31, 2022
was $7.2 million, consisting primarily of a net loss of $9.0 million, which was
partially offset by non-cash charges of $1.8 million. The non-cash charges
primarily consisted of depreciation and amortization expense of $0.3 million and
share-based compensation expense of $1.4 million.

Net cash used in operating activities for the three months ended March 31, 2021
was $0.4 million, consisting primarily of a net loss of $2.4 million, which was
partly offset by a decrease in net operating assets of $1.5 million and non-cash
charges of $0.5 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, and a decrease 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 share-based
compensation expense of $0.4 million.

Net Cash Used in Investing Activities

Net cash used in investing activities was $1.5 million and $0.2 million for the
three months ended March 31, 2022 and 2021, respectively, consisting primarily
of purchases of capitalized surgical instruments for our reusable instrument
trays.

Net Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities was $1.4 million for the three months
ended March 31, 2022, consisting primarily of proceeds from exercise of stock
options.

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Net cash used in financing activities was $1.2 million for the three months
ended March 31, 2021, consisting primarily of repayment of our PPP Loan from the
SBA of $1.8 million, partially offset by proceeds of $0.6 million from exercise
of stock options.

Surgeon Advisory Board Royalty Agreements

We recognized royalty expense of $1.4 million and $0.8 million for the three
months ended March 31, 2022 and 2021, respectively. For the three months ended
March 31, 2022 and 2021, the aggregate royalty rate was 4.8% and 4.3%,
respectively. 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 real estate leases
located in Ponte Vedra, Florida. We entered into a 10-year lease in February
2022 for our new corporate headquarters location. Lease payments comprise of the
base rent stated in the lease plus operating costs which include taxes,
insurance and common area maintenance. The remaining lease obligation was $26.8
million under these leases as of March 31, 2022.

Refer to Note 8, "Operating Leases", for more information on our operating
leases.

Critical Accounting Policies and Estimates

Management's discussion and analysis of our financial condition and results of
operations is based on our condensed financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles. The
preparation of these condensed 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.

Our critical accounting policies and estimates are described in "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Critical Accounting Policies and Estimates" in our Annual Report. There had been
no material changes to these accounting policies during the three months ended
March 31, 2022.

Recently Issued Accounting Pronouncements

Refer to Note 3, "Recent Accounting Pronouncements", to our condensed financial
statements included elsewhere in this Quarterly Report for new accounting
pronouncements not yet adopted as of the date of this Quarterly Report.