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 (the
"Quarterly Report") and our audited financial statements and related notes
thereto for the year ended December 31, 2022, included in our Annual Report on
Form 10-K filed with the U.S. Securities and Exchange Commission on March 8,
2023 (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" and in the section titled "Risk Factors" included elsewhere in this
Quarterly Report on Form 10-Q. Please also see the section of this Quarterly
Report 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 70,000 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 191
territories in the United States. As of March 31, 2023, we had 167 direct sales
representatives and 24 independent sales agencies. In the three months ended
March 31, 2023, employee sales representatives generated approximately 79% of
revenues while approximately 21% of revenues came through independent sales
agencies.

On February 10, 2023, we completed a follow-on public offering of 5,476,190
shares of our 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 $107.5 million after
deducting underwriting discounts and commissions of $6.9 million and offering
expenses of $0.6 million, adding additional funds to our liquidity. As of March
31, 2023, we had cash and cash equivalents of $29.6 million and marketable
securities available-for-sale of $141.0 million to fund operations, an
accumulated deficit of $98.2 million, and $54.0 million of principal outstanding
under our term loan and revolving loan agreements.

COVID-19 Impact

The COVID-19 pandemic has had intermittent impacts on our business, operations
and financial results and condition. The COVID-19 pandemic and the related
reduction in elective procedures and limited hospital staffing and capacity due
to the governmental "shelter-in-place" requirement slowed our revenue growth in
2020 and 2021. While it is difficult to determine with certainty, we believe
that the COVID-19 pandemic did not have a significant impact on our 2022 or
first quarter 2023 operations and financial results.

There is still uncertainty around the potential impacts related to COVID-19,
especially if governments and hospitals respond as they did in 2020 and 2021 if
potentially more contagious and virulent variants of the virus emerge. We cannot
assure you that we will not experience additional negative impacts associated
with COVID-19 in the future, which could be significant.

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Economic Environment

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, blended average revenue per Lapiplasty
Procedure Kits sold, the number of active surgeons using the Lapiplasty System
and the surgeon 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, 2023 increased by 1,480 or 28% over the
same period of 2022. The blended average sales price per Lapiplasty Procedure
Kits sold was $6,244 during the three months ended March 31, 2023, a 13%
increase over the same period of 2022. We define the blended average sales price
as revenue divided by Lapiplasty Procedure Kits sold that includes the revenue
for ancillary products sold from our expanding product line. The number of
active surgeons as of March 31, 2023 was 2,499, an increase of 31.5% 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, 2023 increased by 3.2% over the same period of 2022, to an
average of 10.5 Lapiplasty Procedure Kits per active surgeon.

We believe that the number of Lapiplasty Procedure Kits sold, blended average
revenue per Lapiplasty Procedure Kits sold, number of active surgeons using the
Lapiplasty System and the surgeon 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 conditions 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.

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 2,000
facilities across the United States and plan to continue to increase access by
convincing 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.

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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 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 the fourth
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 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
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 significant amounts 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, as well as our
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 the three
months ended March 31, 2023. 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 customers perform
more Lapiplasty Procedures, though it may fluctuate from quarter to quarter due
to a variety of factors, including seasonality 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
materials plus the markup for the assembly of the components. Cost of goods sold
also includes royalties, allocated overhead for indirect labor, 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, surgical instrument
expense, physician education programs, training, shipping costs related to
sending products to our sales 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 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.

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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 ("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.

Interest income

Interest income consists of interest received on our money market funds and
marketable securities.

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 months ended March 31, 2023 and 2022

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

                                               Three Months Ended March 31,                 Change
                                                 2023                 2022           Amount          %
Revenue                                     $        42,195       $      29,047     $  13,148        45.3%
Cost of goods sold                                    8,039               5,130         2,909        56.7%
Gross profit                                         34,156              23,917        10,239        42.8%
Operating expenses
Sales and marketing                                  33,655              22,299        11,356        50.9%
Research and development                              3,412               3,052           360        11.8%
General and administrative                           10,865               6,662         4,203        63.1%
Total operating expenses                             47,932              32,013        15,919        49.7%
Loss from operations                                (13,776 )            (8,096 )      (5,680 )      70.2%
Interest income                                       1,479                   9         1,470            *
Interest expense                                     (1,285 )              (951 )        (334 )      35.1%
Other income, net                                       128                   2           126            *
Other non-operating income (expense), net               322                (940 )       1,262     (134.3)%
Net loss                                    $       (13,454 )     $      (9,036 )   $  (4,418 )      48.9%




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Comparison of the three months ended March 31, 2023 and 2022

Revenue. Revenue increased by $13.1 million, or 45.3%, for the three months
ended March 31, 2023 as compared to the same period in 2022. The increase in the
number of Lapiplasty Procedure Kits sold was 28% and 51% for the three months
ended March 31, 2023 and 2022, respectively. The increase in the volume of
Lapiplasty Procedure Kits sold resulted in 52% and 79% of the revenue growth
from the three months ended March 31, 2023 and 2022, respectively, as compared
to the same period in 2022 and 2021, respectively. In the three months ended
March 31, 2023, the remaining revenue growth was primarily a result of increased
adoption of our newer technologies and selling more ancillary products used in
bunion cases resulting in a 13% increase in average blended revenue per case
compared to the prior year.

Cost of Goods Sold, Gross Profit and Gross Margin. Cost of goods sold increased
by $2.9 million, or 56.7%, for the three months ended March 31, 2023 as compared
to the same period in 2022. The increase in cost of goods sold was primarily due
to a $1.7 million increase in direct costs of goods sold and a $0.2 million
increase in royalty expense resulting from increased sales, a $0.7 million
increase in overhead expenses resulting from increased headcount and a $0.2
million increase in reserves for inventory provision and obsolescence. During
the three months ended March 31, 2023, gross profit increased by $10.2 million,
or 42.8%, as compared to the same period in 2022, due to increased sales. Gross
profit margin for the three months ended March 31, 2023 decreased from 82.3% to
80.9%, as compared to the same period of 2022, primarily due to an increase in
payroll costs and an increase in inventory and obsolescence provisions,
partially offset by lower royalty rates on newer products.

Sales and Marketing Expenses. Sales and marketing expenses increased by $11.4
million, or 50.9%, for the three months ended March 31, 2023 as compared to the
same period in 2022. Sales and marketing expenses increased as a result of an
increase of $4.8 million in payroll and related expenses from increased
headcount of sales personnel, an increase of $3.8 million primarily for higher
commissions from increased sales by our employee sales representatives and
independent sales agencies, an increase of $2.0 million in advertising and
marketing-related expenses primarily due to higher advertising spending for
direct to consumer campaigns and sales meeting costs, an increase of $0.4
million in surgical instrument expense of surgical instruments and an increase
of $0.6 million in health care professional training and clinical-related
expenses.

Research and Development Expenses. R&D expenses increased by $0.4 million, or
11.8%, for the three months ended March 31, 2023 as compared to the same period
in 2022. The increase in R&D expenses was primarily due to an increase of $0.1
million in clinical expenses resulting primarily from increased purchases of
materials used in our prototypes and a $0.1 million increase in general business
expenses.

General and Administrative Expenses. General and administrative expenses
increased by $4.2 million, or 63.1%, for the three months ended March 31, 2023
as compared to the same period in 2022. The increase in general and
administrative expenses was primarily due to an increase of $2.3 million in
payroll and related costs as we increased headcount to support our growing
business, an increase of $0.7 million in rent expense and occupancy costs
related to moving into our new headquarters in the third quarter of 2022 and an
increase of $1.6 million in professional services primarily related to an
increase of $1.8 million in legal expenses, slightly offset by a decrease in
other professional services.

Interest income. Interest income increased by $1.5 million, for the three months
ended March 31, 2023 as compared to the same period of 2022. The increase in
interest income was due to higher cash balances invested in marketable
securities during the first quarter of 2023 due to our equity offering and
higher interest rates in the three months ended March 31, 2023, as compared to
the same period of 2022.

Interest Expense. Interest expense increased by $0.3 million, or 35.1%, for the
three months ended March 31, 2023 as compared to the same period of 2022. The
increase in interest expense was due to higher debt balances as a result of the
debt refinancing in the second quarter of 2022 slightly offset by lower interest
rates on our outstanding debt in the three months ended March 31, 2023, as
compared to the same period of 2022.


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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
partly used to repay our term loan 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 revolving loan facility. On February 10,
2023, we completed a follow-on public offering of 5,476,190 shares of our 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 $107.5 million after deducting underwriting
discounts and commissions of $6.9 million and offering expenses of $0.6 million.

As of March 31, 2023, we had cash and cash equivalents of $29.6 million and
marketable securities of $141.0 million available for sale, an accumulated
deficit of $98.2 million and $54.0 million principal outstanding under the term
and revolving loans with MidCap. 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 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 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 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 or enforcing
contractual rights against parties breaching agreements with us;

•

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;

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•

the costs associated with being a public company;

•

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

•

inflation, interest rate changes, banking sector instability, 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 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 (in thousands):

                                                           Three Months 

Ended March 31,

                                                             2023           

2022

Net cash (used in) provided by:
Operating activities                                    $       (17,259 )     $      (7,241 )
Investing activities                                            (80,480 )            (1,481 )
Financing activities                                            107,879               1,372

Net increase (decrease) in cash and cash equivalents $ 10,140

  $      (7,350 )

Net Cash Used in Operating Activities

Net cash used in operating activities for the three months ended March 31, 2023
was $17.3 million, consisting primarily of a net loss of $13.5 million, adjusted
for non-cash charges of $4.0 million and an increase in net operating assets.
The non-cash charges consist primarily of share-based compensation expense of
$2.7 million, depreciation and amortization expense of $0.9 million and non-cash
lease expense of $0.6 million. The increase in net operating assets was
primarily due to a decrease in accounts payable and accrued liabilities of $7.7
million during the first quarter due to timing of payments, an increase of $3.2
million in inventories for added safety stock to meet demand for new products
and to avoid potential supply chain issues and a $1.0 million increase in
prepaid expenses and other current assets, which were partially offset by a $3.8
million decrease in accounts receivable from collections of higher sales in the
fourth quarter of 2022.

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 of $1.4 million.

Net Cash Used in Investing Activities

Net cash used in investing activities was $80.5 million for the three months
ended March 31, 2023, consisting primarily of $99.6 million in purchases of
marketable securities available for sale and $1.5 million in purchases of
property and equipment, partially offset by $20.5 million in maturities of
marketable securities available for sale. The purchases of marketable securities
were the result of cash invested from our public offering of common stock during
the three months ended March 31, 2023. The purchases in property and equipment
were $0.6 million in capitalized surgical instruments for our reusable
instrument trays and $0.9 for new equipment purchased to support the growth of
our business.

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Net cash used in investing activities was $1.5 million for the three months
ended March 31, 2022, 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 $107.9 million for the three
months ended March 31, 2023, consisting primarily of $107.5 million of net cash
proceeds from our public offering of common stock and $0.4 million from exercise
of stock options.

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

Surgeon Advisory Board Royalty Agreements

We recognized royalty expense of $1.6 million and $1.4 million for the three
months ended March 31, 2023 and 2022, respectively. For the three months ended
March 31, 2023 and 2022, the aggregate royalty rate was 3.9% and 4.8%,
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 the
base rent stated in the lease plus operating costs which include taxes,
insurance, and common area maintenance. The remaining lease obligation was $25.4
million under these leases as of March 31, 2023.

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, 2023.

Recently Issued Accounting Pronouncements

Refer to Note 3, "Recent Accounting Pronouncements", to our condensed financial
statements included elsewhere in this Quarterly Report for accounting
pronouncements adopted as of this Quarterly Report. There have been no newly
issued accounting pronouncements impacting the Company's unaudited interim
financial statements.