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. 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 57,000 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 172
territories in the United States. As of September 30, 2022, we had 143 direct
sales representatives and 29 independent sales agencies. In the three months
ended September 30, 2022, employee sales representatives generated approximately
74% of revenues while approximately 26% of revenues came through independent
sales agencies. In the nine months ended September 30, 2022, employee sales
representatives generated approximately 69% of revenues while approximately 31%
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 September 30, 2022, we had cash and cash equivalents of $88.5
million, an accumulated deficit of $80.3 million and $54.0 million of principal
outstanding under our term and revolving loan agreements.

In April 2022, we entered a new five-year $150.0 million loan arrangement,
comprising up to $120.0 million in term loans and $30.0 million in a revolving
credit facility with entities affiliated with MidCap Financial Trust ("MidCap").
On the closing date for these loan agreements, we borrowed $50.0 million under
the term loan and $4.0 million under the revolving credit facility. The term
loan proceeds were partially used to repay our entire obligation under our term
loan facility with CRG Group LP ("CRG") amounting to $34.1 million, including
principal of $30.0 million, accrued but unpaid interest of $0.4 million and fees
of $3.7 million. In April 2022, we also terminated our revolving credit facility
with Silicon Valley Bank ("SVB"), which had no outstanding balance when
terminated. We recognized a loss from the extinguishment of the CRG term loan
facility and the SVB revolving credit facility of $4.5 million (including fees
paid of $3.7 million).


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COVID-19 Impact and Economic Environment

Our business has been and may continue to be impacted by the COVID-19 pandemic.
We are aware that the actual and perceived impact of COVID-19 has been changing
and cannot be predicted. Since the pandemic began, we have experienced elective
surgery delays and cancellations and hospital staffing and capacity constraints,
primarily related to surges of infections and hospitalizations as variants of
COVID-19 have emerged. We believe we may continue to experience market
variability as a result of the pandemic that could influence sales, suppliers,
patients, and customers. 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.

There is also 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 reduced demand for our Lapiplasty Procedure Kits. General economic
conditions may also affect 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 channels, patient education initiatives, clinical
evidence and product innovations to build demand for our products, we expect
these macro-economic challenges to continue throughout 2022 and into 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 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 September 30, 2022 increased by 1,742 or 44% over
the same period of 2021, and the number of active surgeons as of September 30,
2022 was 2,218 an increase of 39% 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 nine months ended September 30, 2022 increased by 1.6%
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 and other
macro-economic impacts 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 1,850
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

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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 and Micro-Incision Systems, 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. As an
example of our investments in innovation and growth, in 2022 alone, we
introduced (a) our Lapiplasty S4A Anatomic Plating Kit, an advanced,
three-dimensional contoured plate; (b) our Lapiplasty 3-n-1™ Guide, an advanced
instrument that combines three separate instruments into one precision tool
aimed to reduce surgical time and increase the reproducibility and efficiency of
the Lapiplasty Procedure; and (c) the SpeedRelease™ and TriTome™ Tissue Release
Instruments, which are sterile-packaged, single-use tissue cutting instruments
specially designed to provide a more accurate and complete surgical release of
key soft tissue anatomy commonly involved in the Lapiplasty and Adductoplasty
Procedures.

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 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.

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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 and
nine months ended September 30, 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 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

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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 ("IT"), 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, net

Interest income and other income, net consists of interest received on our money
market funds.

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 three and nine months ended September 30, 2022 and 2021

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

                                      Three Months Ended                                Nine Months Ended September
                                        September 30,                   Change                      30,                        Change
                                     2022            2021         Amount         %         2022             2021         Amount         %
Revenue                           $   33,055       $  21,619     $ 11,436       52.9%   $   92,069       $   60,980     $  31,089      51.0%
Cost of goods sold                     6,624           4,248        2,376       55.9%       17,781           11,519         6,262      54.4%
Gross profit                          26,431          17,371        9,060       52.2%       74,288           49,461        24,827      50.2%
Operating expenses
Sales and marketing                   25,034          15,984        9,050       56.6%       73,207           42,142        31,065      73.7%
Research and development               3,799           2,537        1,262       49.7%        9,835            6,827         3,008      44.1%
General and administrative             8,916           4,310        4,606      106.9%       22,593           11,405        11,188      98.1%
Total operating expenses              37,749          22,831       14,918       65.3%      105,635           60,374        45,261      75.0%
Loss from operations                 (11,318 )        (5,460 )     (5,858 )

107.3% (31,347 ) (10,913 ) (20,434 ) 187.2%
Interest and other income, net

           375               5          370           *          514               12           502          *
Interest expense                      (1,190 )          (963 )       (227 )     23.6%       (3,087 )         (3,032 )         (55 )     1.8%
Debt extinguishment loss                   -               -            -           *       (4,483 )              -        (4,483 )        *
Other expense, net                      (815 )          (958 )        143  

(14.9%) (7,056 ) (3,020 ) (4,036 ) 133.6%
Net loss and comprehensive loss $ (12,133 ) $ (6,418 ) $ (5,715 )

    89.0%   $  (38,403 )     $  (13,933 )   $ (24,470 )   175.6%

* Not meaningful

Comparison of the three months ended September 30, 2022 and 2021

Revenue. Revenue increased by $11.4 million, or 52.9%, for the three months
ended September 30, 2022 as compared to the same period in 2021. The increase in
revenue was primarily due to an increased number of Lapiplasty Procedure Kits
sold as the result of an expanded surgeon customer base, and to a slightly
higher blended average sales price from a product mix shift due to increased
adoption of our newer technologies and selling more ancillary products.

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Cost of Goods Sold, Gross Profit and Gross Margin. Cost of goods sold increased
by $2.4 million, or 55.9%, for the three months ended September 30, 2022 as
compared to the same period in 2021. The increase in cost of goods sold was
primarily due to a $1.3 million increase in direct costs of goods sold and a
$0.5 million increase in royalty expense resulting from our increased sales, a
$0.3 million increase in overhead expenses resulting from increased headcount,
and a $0.3 million increase in depreciation expense from our surgical
instruments. During the three months ended September 30, 2022, gross profit
increased by $9.1 million, or 52.2%, as compared to the same period in 2021 due
to increased sales. Gross profit margin for the three months ended September 30,
2022 decreased from 80.4% to 80.0%, as compared to the same period of 2021,
primarily due to an increase in allocations of payroll and related expenses, and
an increase in capitalized surgical instruments depreciation partially offset by
a decrease in royalty expense in relation to products sold in the quarter and
lower inventory and obsolescence provisions.

Sales and Marketing Expenses. Sales and marketing expenses increased by $9.1
million, or 56.6%, for the three months ended September 30, 2022 as compared to
the same period in 2021. Sales and marketing expenses increased as a result of
an increase of $5.7 million in payroll and related expenses resulting from
increased headcount of sales personnel, a $0.7 million increase in advertising
and marketing-related expenses primarily due to higher advertising fees, an
increase of $1.8 million in professional services primarily for higher
commissions from increased sales by our direct sales representatives and
independent sales agencies, and $0.7 million in other marketing-related expenses
resulting from increased sales efforts. These increases in sales and marketing
expenses were as a result of our ongoing investment in our direct sales force
and our patient focused outreach and education campaigns.

Research and Development Expenses. R&D expenses increased by $1.3 million, or
49.7%, for the three months ended September 30, 2022 as compared to the same
period in 2021. The increase in R&D expenses was due to increases of $0.9
million in payroll and related costs resulting from increased headcount of
research and development personnel, and an increase of $0.3 million in clinical
expenses resulting primarily from increased purchases of materials used in our
prototypes.

General and Administrative Expenses. General and administrative expenses
increased by $4.6 million, or 106.9%, for the three months ended September 30,
2022 as compared to the same period in 2021. The increase in general and
administrative expenses was primarily due to an increase of $2.6 million in
payroll and related costs as we increased headcount to support our growing
business, an increase of $0.5 million in rent expense and occupancy costs
related to moving into our new headquarters' building during the quarter, and an
increase of $1.1 million in professional services primarily related to legal and
IT expenses related to conversion to a new service provider.

Interest and other income, net. Interest and other income, net increased $0.4
million. The increase is due to a significant increase in money market fund
interest rates during the current period.

Interest Expense. Interest expense increased by $0.2 million, or 23.6%, for the
three months ended September 30, 2022 as compared to the same period of 2021.
The increase in interest expense was due to higher debt balances slightly offset
by lower interest rates in the three months ended September 30, 2022, as
compared to the same period of 2021, as a result of the debt refinancing in the
second quarter of this year.

Comparison of the nine months ended September 30, 2022 and 2021

Revenue. Revenue increased by $31.1 million, or 51.0%, for the nine months ended
September 30, 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 surgeon customer base, and to a slightly
higher blended average sales price from a product mix shift due to increased
adoption of our newer technologies and selling more ancillary products.

Cost of Goods Sold, Gross Profit and Gross Margin. Cost of goods sold increased
by $6.3 million, or 54.4%, for the nine months ended September 30, 2022 as
compared to the same period in 2021. The increase in cost of goods sold was
primarily due to $3.6 million increase in direct costs of goods sold resulting
from increased sales, $1.6 million increase in royalty expense resulting from
our increased sales, $0.8 million increase in depreciation expense from our
surgical instruments, and $0.7 million increase in overhead expenses resulting
from increase in our headcount offset by $0.4 million decrease in provision for
inventory and instrument obsolescence. During the nine months ended September
30, 2022, our gross profit increased by $24.8 million, or 50.2%, as compared to
the same period of 2021 due to increased sales. Gross profit margin for the nine
months ended September 30, 2022 decreased from 81.1% to 80.7%, as compared to
the same period of 2021, primarily due to an increase in depreciation expense
from an increase in capitalized surgical instruments, an increase in allocations
of payroll and related costs partially offset by a decrease in inventory and
obsolescence provisions.

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Sales and Marketing Expenses. Sales and marketing expenses increased by $31.1
million, or 73.7%, for the nine months ended September 30, 2022 as compared to
the same period in 2021. Sales and marketing expenses increased by $15.1 million
in payroll and related expenses from increased headcount of sales personnel,
$7.8 million in advertising and marketing-related expenses primarily due to
higher advertising fees and a new television commercial campaign, $6.3 million
in professional services primarily for higher commissions from increased sales
by our direct sales representatives and independent sales agencies, and $1.7
million in other marketing-related expenses resulting from increased sales
efforts. These increases in sales and marketing expense were as a result of our
ongoing investment in our direct sales force and our patient focused outreach
and education campaigns.

Research and Development Expenses. R&D expenses increased by $3.0 million, or
44.1%, for the nine months ended September 30, 2022 as compared to the same
period in 2021. The increase in R&D expenses was due to $2.2 million in payroll
and related costs resulting from increased headcount of research and development
personnel, $0.8 million in clinical expenses resulting from primarily increased
purchases of materials used in our prototypes.

General and Administrative Expenses. General and administrative expenses
increased by $11.2 million, or 98.1%, for the nine months ended September 30,
2022 as compared to the same period in 2021. The increase in general and
administrative expenses was primarily due to increases of $5.4 million in
payroll and related costs as we increased headcount to support the growing
business, a $2.0 million in business-related expenses primarily resulting from
increased insurance costs and fees, $2.4 million in professional services
primarily related to legal and audit fees, and expenses related to IT
optimization that included a new service provider, $1.4 million in rent expense
and occupancy costs related to moving into our new headquarters.

Interest Income and other, net. Interest and other income, net increased $0.5
million. The increase is primarily due to an increase in money market fund
interest rates during the current period.

Interest Expense. Interest expense decreased by $0.1 million, or 1.8%, for the
nine months ended September 30, 2022 as compared to the same period of 2021. The
decrease in interest expense was due to significantly lower interest rates on
higher debt balances during the nine months ended September 30, 2022 as compared
to the same period of 2021 as a result of the debt refinancing in second quarter
of this year.

Debt Extinguishment Loss. Debt extinguishment loss increased by $4.5 million,
for the nine months ended September 30, 2022 as compared to the same period of
2021 due to our debt refinancing during the second quarter of this year.

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, comprising up to $120.0 million in term loans and $30.0
million in a revolving credit 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 credit facility. The term loan proceeds
were partly used to repay our term loan facility obligation with CRG and an
early termination fee to 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 credit facility.

As of September 30, 2022, we had cash and cash equivalents of $88.5 million, an
accumulated deficit of $80.3 million, and the $54 million principal outstanding
under the term and revolving loans with MidCap. 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.

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 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

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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 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; and

•

the impact of the COVID-19 pandemic, hospital staffing shortages, 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 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.

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Cash Flows

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

                                                  Nine Months Ended 

September 30,

                                                   2022                     

2021

Net cash (used in) provided by:
Operating activities                        $           (25,290 )     $          (13,441 )
Investing activities                                    (12,506 )                 (1,805 )
Financing activities                                     20,509                  106,626
Net (decrease) increase in cash and cash
equivalents                                 $           (17,287 )     $           91,380

Net Cash Used in Operating Activities

Net cash used in operating activities for the nine months ended September 30,
2022, was $25.3 million, consisting primarily of a net loss of $38.4 million,
adjusted for non-cash charges of $13.1 million and relatively flat net operating
assets. The non-cash charges primarily consisted of a $4.5 million loss on
extinguishment of the CRG term loan, share-based compensation expense of $5.6
million, non-cash lease expense of $2.0 million and depreciation and
amortization expense of $1.2 million. The slight increase in net operating
assets was primarily due to an increase in inventory during third quarter for
higher expected fourth quarter sales, an increase in prepaid expenses and other
current assets, which were offset by increases in accounts payable and accrued
liabilities due to timing of payments and growth of our operations.

Net cash used in operating activities for the nine months ended September 30,
2021 was $13.4 million, consisting primarily of a net loss of $13.9 million,
adjusted for non-cash charges of $2.7 million and an increase of $2.2 million in
net operating assets. The non-cash charges primarily consisted of share-based
compensation expense of $2.1 million and depreciation and amortization expense
of $0.4 million. The increase in net operating assets was primarily due to an
increase in inventory during third quarter for higher expected fourth quarter
sales and an increase in prepaid expense and other current assets offset by a
decrease of $2.7 million in accounts receivable resulting from higher
receivables from fourth quarter 2020 sales and increase in accounts payable and
accrued liabilities due to timing of payments and growth of our operations.

Net Cash Used in Investing Activities

Net cash used in investing activities was $12.5 million for the nine months
ended September 30, 2022, consisting primarily of $7.2 million of leasehold
improvements and furniture and equipment for our new headquarters' building and
$3.6 million for purchases of capitalized surgical instruments for our reusable
instrument trays.

Net cash used in investing activities was $1.8 million for the nine months ended
September 30, 2021, consisting primarily of purchases of capitalized surgical
instruments for our reusable instrument trays.

Net Cash Provided by Financing Activities

Net cash provided in financing activities was $20.5 million for the nine months
ended September 30, 2022, consisting of $53.5 million of net cash proceeds from
the new term loan agreement and revolving credit facility with MidCap and $1.9
million from exercise of stock options offset by the $33.9 million repayment of
the CRG term loan and $1 million of debt issuance costs paid to third parties.

Net cash provided in financing activities was $106.6 million for the nine months
ended September 30, 2021, consisting primarily of net cash proceeds of $107.6
million from the issuance of shares of common stock, net of $10.6 million in
issuance costs, upon completion of our IPO on April 27, 2021, offset by the
repayment of our PPP loan from the Small Business Administration of $1.8 million
in March 2021 and proceeds from exercise of stock options of $0.8 million.

Surgeon Advisory Board Royalty Agreements

We recognized royalty expense of $1.6 million and $1.1 million for the three
months ended September 30, 2022 and 2021, respectively, and $4.3 million and
$2.8 million for the nine months ended September 30, 2022 and 2021,
respectively. For the three months ended September 30, 2022 and 2021, the
aggregate royalty rate was 4.8% and 5.3%, respectively. For the nine months
ended September 30, 2022 and 2021, the aggregate royalty rate was 4.7% and 4.5%,
respectively. Each of

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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 the
base rent stated in the lease plus operating costs which include taxes,
insurance and common area maintenance. The remaining lease obligation was $30.3
million under these leases as of September 30, 2022.

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 nine months ended
September 30, 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.