TREACE MEDICAL CONCEPTS, INC. Management’s discussion and analysis of financial condition and results of operations. (Form 10-K)

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

Overview

We are a medical technology company driving a paradigm 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 42,000 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 118
territories in the United States. As of December 31, 2021, we had 81 direct
sales representatives and 37 independent sales agencies. In 2021, employee sales
representatives generated approximately 52% of revenues while approximately 48%
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 have 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 Series A
convertible preferred stock then outstanding were converted into shares of
common stock on a one-to-one basis plus 158,447 shares of common stock were
issued to pay accrued cumulative dividends on Series A convertible preferred
stock of $2.5 million. As of December 31, 2021, we had cash and cash equivalents
of $105.8 million, an accumulated deficit of $41.9 million and $30.0 million of
principal outstanding under our term loan agreement.

Impact of COVID-19

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. These restrictions began to adversely affect
our revenue growth and operating results during the three months ended March 31,
2020. 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 is
changing and cannot be predicted, particularly due to potentially more
contagious and virulent variants of the virus becoming prevalent and vaccination
rates in the United States slowing. For example, during the three months ended
September 30, 2021, the volume of procedures utilizing our product were
adversely impacted by elective surgery delays and cancellations, and hospital
capacity constraints due to increased hospitalizations caused by the COVID-19
Delta variant, particularly in Florida, Georgia, Texas and other areas
significantly impacted by COVID-19. In the 2021 fourth quarter and into the 2022
first quarter, we have continued to observe 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. We cannot assure you that we will not experience additional negative
impacts associated with COVID-19, which could be significant. The COVID-19
pandemic has negatively impacted our business, financial condition and results
of operations by significantly decreasing and delaying the number of procedures
performed using our products, and we expect the pandemic could continue to
negatively impact our business, financial condition and results of operations.
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Key business indicators

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 twelve months ended December 31, 2021 increased by 6,377 or 57.4%
over the twelve months ended December 31, 2020, and the number of active
surgeons as of December 31, 2021 was 1,783, an increase of 39.8% from the prior
year. The utilization rate for the twelve months ended December 31, 2021
increased 12.6% over the twelve months ended December 31, 2020 to an average of
9.8 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 noted in the section titled "Special Note
Regarding Forward-Looking Statements" and in the section titled "Risk Factors".

Adoption of the lapiplasty system

The growth of our business depends on our ability to gain broader acceptance of
the Lapiplasty System by successfully marketing and distributing the Lapiplasty
System and ancillary products. We currently have approval at over 1,500
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
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
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.
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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 TMT
joints, CPT 28730 applies and is classified under APC 5115.

Components of our operating results

Income

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 independent agencies and employee sales
representatives. 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 2021. 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.

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.
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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 it may fluctuate from quarter
to quarter.

Research and Development

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

General and Administrative

General and administrative expenses consist primarily of compensation for
personnel, including salaries, bonuses, benefits and share-based compensation,
related to finance, information technology, legal and human resource functions,
as well as professional services fees (including legal, audit and tax fees),
insurance costs, general corporate expenses and allocated facilities-related
expenses. We expect general and administrative expenses to continue to increase
in absolute dollars in the foreseeable future as we hire personnel and expand
our infrastructure to drive and support the anticipated growth in our
organization. Moreover, we have incurred, and expect to continue to incur,
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 and other income (expenses), net

Interest income and other income (expense), net consists of interest received on
our money market funds and a loss and penalties from the extinguishment of term
loans under the SVB Credit Facility.

Interest charges

Interest expense includes interest incurred and debt discount amortization related to outstanding borrowings during the periods presented.

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Operating results

Comparison of years ended December 31, 2021 and 2020

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

                                              Year Ended December 31,                Change
                                               2021              2020         Amount          %
Revenue                                    $      94,419       $  57,365     $  37,054         64.6 %
Cost of goods sold                                17,826          12,470         5,356         43.0 %
Gross profit                                      76,593          44,895        31,698         70.6 %
Operating expenses
Sales and marketing                               64,467          31,654        32,813        103.7 %
Research and development                          10,204           5,847         4,357         74.5 %
General and administrative                        18,432           6,539        11,893        181.9 %
Total operating expenses                          93,103          44,040        49,063        111.4 %
Loss from operations                             (16,510 )           855       (17,365 )          *
Interest and other income (expense), net              18          (1,746 )       1,764       (101.0 )%
Interest expense                                  (4,060 )        (2,777 )      (1,283 )       46.2 %
Other expense, net                                (4,042 )        (4,523 )         481        (10.6 )%
Net loss and comprehensive loss            $     (20,552 )     $  (3,668 )   $ (16,884 )      460.3 %



* Not meaningful


Revenue. Revenue increased by $37.1 million, or 64.6%, from the year ended
December 31, 2021 as compared to 2020. The increase was primarily due to a 57.4%
increase in the number of Lapiplasty Procedure Kits sold in 2021 compared to
2020 as the result of an expanded customer base and a slight increase in average
sales prices. In addition, revenues in 2020 were adversely impacted by
government-mandated restrictions on elective procedures in response to the
COVID-19 pandemic that lasted from March 2020 through May 2020 when such
restrictions began to ease. Although the restrictions were eased at the end of
the second quarter of 2020 and vaccines were introduced in early 2021, the
volume of procedures utilizing our product in 2021 were adversely impacted by
elective surgery delays or cancellations and hospital staffing and capacity
constraints, primarily related to the surge of infections and hospitalizations
from the Delta and Omicron variants of COVID-19.

Cost of Goods Sold, Gross Profit and Gross Margin. Cost of goods sold increased
by $5.4 million, or 43.0%, in the year ended December 31, 2021 as compared to
2020. The increase in cost of goods sold was primarily due to $4.0 million
increase in direct costs of goods sold resulting from increased sales, $1.9
million increase in royalty expense resulting from our increased sales, and $0.5
million increase in overhead expenses resulting from expansion of our
headquarters and headcount and the normalization of operations compared to the
year ended December 31, 2020, which was adversely impacted by pandemic-related
restrictions on elective surgeries. The increases were partially offset by a
decrease in provision for inventory obsolescence of $0.9 million and $0.3
million decrease in depreciation expense of our surgical instruments due to a
prospective adjustment that was made on January 1, 2021 to the useful life of
our capitalized instruments to align with the expected life of the instruments.
Gross profit and gross margin increased to $76.6 million and 81.1%,
respectively, from the year ended December 31, 2021 as compared to 2020,
primarily due to the decreased per unit direct costs of goods sold and
depreciation expense of our surgical instruments, which were partially offset by
an increase in royalty expense as a percent of sales.

Sales and Marketing Expenses. Sales and marketing expenses increased by $32.8
million, or 103.7%, from the year ended December 31, 2021 as compared to 2020.
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 $9.7 million in professional services primarily for higher
commissions from increased sales by our independent sales agencies, an increase
of $11.4 million in advertising and marketing-related expenses primarily due to
higher advertising fees and a new television commercial campaign, an increase of
$9.5 million in payroll and payroll-related expenses resulting from increased
headcount of sales personnel, and $2.2 million in other marketing-related
expenses resulting from increased sales efforts. Additionally, we experienced
delayed expenditures for surgeon education events, patient outreach campaigns
and other planned sales and marketing expenses in connection with the pandemic
in 2020.

Research and Development Expenses. Research and development expenses increased
by $4.4 million, or 74.5%, from the year ended December 31, 2021 as compared to
2020. The increase in research and development expenses was due to an increase
of $3.1 million in payroll and payroll-related costs resulting from increased
headcount of research and development personnel, an increase of $1.1 million in
professional services from higher consulting fees, and an increase of $0.4
million due to increased purchases of prototypes.
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General and Administrative Expenses. General and administrative expenses
increased by $11.9 million, or 181.9%, from the year ended December 31, 2021 as
compared to 2020. The increase in general and administrative expenses was
primarily due to an increase of $5.8 million in payroll and payroll-related
costs due to increased headcount in our business, an increase of $3.0 million in
business-related expenses primarily resulting from increased insurance costs and
fees, an increase of $2.6 million in professional services primarily related to
legal and audit expenses, and an increase of $0.3 million in rent expense
resulting from the expansion of our headquarters.

Interest and Other Income (Expense), Net. Interest and other income (expense),
net increased by $1.8 million, or 101%, in 2021 as compared to 2020. The
increase was primarily due to the recognition of a $0.6 million loss from the
extinguishment of term loans under the SVB Credit Facility and $1.2 million
prepayment penalty paid upon termination of the loans under the SVB Credit
Facility in 2020.

Interest Expense. Interest expense increased by $1.3 million, or 46.2%, during
2021 as compared to 2020. The increase in interest expense was primarily due to
higher interest due under our CRG loan of $30.0 million, which is outstanding
from July 2020.

For the comparison of the results of operations for the years ended December 31,
2020 and 2019, refer to our Registration Statement on Form S-1 as filed with the
U.S Securities and Exchange Commission on April 19, 2021.

Cash 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 December 31, 2021, we had cash and cash equivalents
of $105.8 million, an accumulated deficit of $41.9 million and $30.0 million of
principal outstanding under our term loan agreement with CRG. We repaid $1.8
million in borrowings outstanding from the Paycheck Protection Program loan
program (the "PPP Loan") under the Coronavirus Aid Relief and Economic Recovery
Act in 2021. We have an existing credit facility with SVB that provides 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 financial statements as of and for the
year ended December 31, 2021. We may be required or decide to raise additional
financing to support further growth of our operations.

Short-term and long-term bonds

Silicon Valley Bank loan

On August 3, 2020, we entered into the Third Amendment to the Loan and Security
Agreement (the "Third Amendment"), with SVB which terminated the third tranche
term loan and increased the revolving line of credit to $10.0 million. The Loan
and Security Agreement ("LSA"), as amended by the First Amendment, Second
Amendment, and Third Amendment (collectively, the "SVB Credit Facility") matures
August 3, 2024. The SVB Credit Facility incurs interest at the greater of (i)
1.00% above the Prime Rate or (ii) 5.00% and is subject to a termination fee of
1.00%.

As of December 31, 2021, we had $10 million of availability to borrow under the
revolving line of credit and no borrowings outstanding related to our revolving
line of credit.

Under the terms of the SVB Credit Facility, we granted SVB first-priority liens
and security interests in substantially all of our assets (excluding our
intellectual property but including any proceeds and rights to payments
associated with our intellectual property) as collateral. The SVB Credit
Facility also contains certain representations and warranties, indemnification
provisions in favor of SVB, affirmative and negative covenants (including, among
other things, requirements that we maintain a minimum amount of liquidity and
achieve minimum revenue targets, limitations on other indebtedness, liens,
acquisitions, investments and dividends and requirements relating to financial
reporting, sales and leasebacks, insurance and protection of our intellectual
property rights) and events of default (including payment defaults, breaches of
covenants following any applicable cure period, investor abandonment, a material
impairment in the perfection or priority of the lender's security interest or in
the collateral), and events relating to bankruptcy or insolvency). As of
December 31, 2021, we were in compliance with all covenants under the SVB Credit
Facility.

CRG Term Loan Facility

On July 31, 2020, we entered into a non-revolving term loan facility with CRG
(the "CRG Term Loan Facility") to obtain up to $50.0 million in financing over
three tranches to be advanced no later than December 31, 2021. Principal
borrowings outstanding excluding discount and issuance costs as of December 31,
2021, totaled $30.0 million.
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The CRG Term Loan Facility matures on June 30, 2025, and we can elect to make
quarterly interest-only payments, to pay 7.50% interest in cash and 5.5%
interest in-kind. We are not required to make any principal payments until the
maturity of the CRG Term Loan Facility and all outstanding principal and accrued
interest are due upon the maturity of the CRG Term Loan Facility. Interest under
the CRG Term Loan Facility is applied to outstanding principal and accrued
interest at a rate of 13.00% per annum. If an event of default occurs, interest
under the CRG Term Loan Facility will increase by 4.00%. If we repay the CRG
Term Loan Facility within one year of the applicable borrowing date, we are
required to pay a premium of 20.00% of the aggregated outstanding principal
amount of the loans that is repaid. If we repay the CRG Term Loan Facility
between one and two years from the applicable borrowing date, we are required to
pay a premium of 11.00% of the aggregated outstanding principal amount of the
loans that is repaid. The CRG Term Loan Facility does not require a prepayment
premium for loans being prepaid on the prepayment date that is after two years
from the applicable borrowing date.

Under the terms of the CRG Term Loan Facility, we granted CRG first priority
liens and security interests in substantially all of our assets as collateral
(including our intellectual property), provided that the priority of such liens
are subject to an intercreditor agreement between CRG and SVB. The CRG Term Loan
Facility also contains certain representations and warranties, indemnification
provisions in favor of CRG, affirmative and negative covenants (including, among
other things, requirements that we maintain a minimum amount of liquidity and
achieve minimum revenue targets, limitations on other indebtedness, liens,
acquisitions, investments and dividends and requirements relating to financial
reporting, sales and leasebacks, insurance and protection of our intellectual
property rights) and events of default (including payment defaults, breaches of
covenants following any applicable cure period, investor abandonment, a material
impairment in the perfection or priority of the lender's security interest or in
the collateral, and events relating to bankruptcy or insolvency). As of December
31, 2021, we were in compliance with all covenants under the CRG Term Loan
Facility.

Financing needs

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 and also expect to increase the
size of our administrative function to support the growth of our business. 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 business infrastructure and sales force;

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

the scope of our marketing efforts, including the extent to which we use direct-to-consumer campaigns;

the degree and rate of market acceptance of the lapiplasty system;

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

our need to implement additional internal infrastructure and systems;

research and development activities that we intend to undertake in order to improve the lapiplasty system and to develop or acquire additional products;

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 legal claims related to our products;

expenditures necessary to attract and retain qualified 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.

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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 flow

The following table presents the main sources and uses of cash and cash equivalents for the periods presented below (in thousands):

                                                  Year Ended December 31,
                                              2021          2020         

2019

Net cash (used in) provided by:
Operating activities                        $ (17,193 )   $ (4,494 )   $ (7,673 )
Investing activities                           (2,705 )     (1,069 )     (1,211 )
Financing activities                          107,652       11,503       19,739

Net increase in cash and cash equivalents $87,754 $5,940 $10,855

Net cash used in operating activities

Net cash used in operating activities for 2021 was $17.2 million, consisting
primarily of a net loss of $20.6 million and an increase in net operating assets
of $1.3 million, which were partially offset by non-cash charges of $4.6
million. The increase in net operating assets was primarily due to an increase
in accounts receivable resulting from higher revenues in 2021, higher
inventories resulting from higher purchases in anticipation of growing demand in
2022, and an increase in prepaid expenses and other assets due to timing of
payments and growth of our operations, which were offset by increases in
accounts payable and accrued liabilities due to timing of payments and growth of
our operations. The non-cash charges primarily consisted of depreciation and
amortization expense of $0.7 million, share-based compensation expense of $3.4
million, amortization of debt issuance costs of $0.2 million and the provision
for inventory obsolescence of $0.3 million.

Net cash used in operating activities for 2020 was $4.5 million, consisting
primarily of a net loss of $3.7 million and an increase in net operating assets
of $5.3 million, which were partially offset by non-cash charges of $4.5
million. The increase in net operating assets was primarily due to an increase
in accounts receivable resulting from higher revenues in 2020 and inventories
resulting from higher purchases in anticipation of growing demand in 2021, which
were offset by increases in accounts payable and accrued liabilities due to
timing of payments and growth of our operations. The non-cash charges primarily
consisted of depreciation and amortization expense of $1.2 million, provision
for excess and obsolete inventories of $1.1 million, share-based compensation
expense of $0.9 million, provision for allowance for doubtful accounts of $0.2
million, amortization of debt issuance costs of $0.2 million and impairment of
surgical instruments of $0.1 million.

Net cash used in operating activities for 2019 was $7.7 million, consisting
primarily of a net loss of $4.3 million and an increase in net operating assets
of $5.3 million, partially offset by non-cash charges of $1.9 million. The
increase in net operating assets was primarily due to an increase in accounts
receivable resulting from higher revenues in 2019, inventories resulting from
increased purchases in anticipation of growing demand in 2020 and prepaid
expenses to support the growth of our operations, partially offset by increases
in accrued liabilities and accounts payable, due to timing of payments and
growth of our operations. The non-cash charges primarily consisted of
depreciation and amortization expense of $0.8 million, stock-based compensation
expense of $0.8 million, provision for doubtful accounts of $0.1 million and
amortization of debt issuance costs and warrant discount of $0.1 million.

Net cash used in investment activities

Net cash used in investing activities was $2.7 million, $1.1 million and $1.2 million in 2021, 2020 and 2019, respectively, consisting of capitalized surgical instrument purchases for our reusable instrument trays.

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Net cash provided by financing activities

Net cash provided by financing activities in 2021 was $107.7 million, consisting
primarily of net proceeds from our IPO of $107.6 million and $1.8 million
proceeds from exercise of stock options, partially offset by repayment of our
PPP Loan from the SBA of $1.8 million.

Net cash provided by financing activities in 2020 was $11.5 million, consisting
primarily of additional borrowings under the CRG Term Loan Facility of $29.5
million, net of debt discount, partially offset by repayment of the term loans
under the SVB Credit Facility of $20.0 million, borrowing under SBA Loan of $1.8
million and cash received of $0.3 million from the exercise of stock options,
partially offset by debt issuance costs of $0.2 million.

Net cash provided by financing activities in 2019 was $19.7 million, consisting
primarily of additional borrowings under the term loan agreement of $20.0
million and cash received of $0.1 million from the exercise of stock options,
partially offset by debt issuance costs of $0.3 million.

Surgeons Advisory Council Royalty Agreements

We recognized royalties' expense of $4.3 million and $2.4 million for the years
ended December 31, 2021 and 2020, respectively. For the years ended December 31,
2021 and 2020, the aggregate royalty rate was 4.6% and 4.1%, respectively. Each
of the SAB Royalty Agreements 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 office lease located in
Ponte Vedra, Florida which expires in 2026. 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 $2.3 million under
this lease as of December 31, 2021.



Significant Accounting Policies and Estimates

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

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

Stock-based compensation

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

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

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

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

Recently issued accounting pronouncements

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

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