TREACE MEDICAL CONCEPTS, INC. – 10-Q – Management report and analysis of the financial position and operating results.

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 and our audited
financial statements and related notes thereto for the year ended December 31,
2020, included in our prospectus dated April 22, 2021 filed with the U.S.
Securities and Exchange Commission, pursuant to Rule 424(b)(4) under the
Securities Act (the "Prospectus"). 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 Prospectus
in the section titled "Risk Factors." Please also see the section titled
"Special Note Regarding Forward-Looking Statements."

Overview

We are a commercial-stage orthopaedic medical device company with the goal of
advancing the standard of care for the surgical management of bunion
deformities. Bunions are complex three-dimensional (3D) deformities that
originate from an unstable joint in the middle of the foot. We have pioneered
our proprietary Lapiplasty® 3D Bunion Correction™ System (the "Lapiplasty
System") -a combination of instruments, implants and surgical methods (the
"Lapiplasty Procedure") designed to 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. Our mission is to be
the leader in the surgical treatment of bunions by establishing the Lapiplasty
System as the standard of care.

We were formed in 2013 and since receiving 510(k) clearance for the Lapiplasty
System in March 2015, we have sold more than 35,000 Lapiplasty Procedure Kits in
the United States. The Lapiplasty System is comprised of single-use implant kits
("Lapiplasty Procedure Kits") and reusable instrument trays. We market and sell
our Lapiplasty System 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 agents across 98 territories in the United States. As of
September 30, 2021, we had 59 direct sales representatives, 43 independent sales
agents, and ten regional sales vice presidents who are responsible for managing
the sales representatives and independent sales agents. For the three months
ended September 30, 2021, employee sales representatives generated approximately
53% of revenues while approximately 47% of revenues came through independent
sales agents. For the nine months ended September 30, 2021, employee sales
representatives generated approximately 50% of revenues while approximately 50%
of revenues came through independent sales agents.

For the three months ended September 30, 2021, we generated revenue of $21.6
million, with a gross margin of 80.4% and net loss of $6.4 million, compared to
revenue of $14.3 million, with a gross margin of 79.6% and net loss of $2.7
million for the three months ended September 30, 2020.

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, 6,953,125 shares of common stock were issued and
sold by us (inclusive of 703,125 shares pursuant to the exercise of the
underwriters' option) and 5,984,375 shares of common stock were sold by the
selling stockholders named in the Prospectus (inclusive of 984,375 shares
pursuant to the exercise of the underwriters' option), at a price to the public
of $17.00 per share. We received net proceeds of approximately $107.6 million,
after deducting underwriting discounts and commissions of $8.3 million and
offering expenses payable by us of $2.3 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 September 30, 2021, we had
cash and cash equivalents of $109.5 million, an accumulated deficit of
$35.3 million and $30.0 million of principal outstanding under our term loan
agreement.

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

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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 addition
to constraints in hospital capacity, we continue to observe disruptions from
deferral of elective procedures and hospital staffing shortages. 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.

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
plan and make strategic decisions. The number of Lapiplasty Procedure Kits sold
during the three months ended September 30, 2021 increased by 1,181 or 42.5%
over the three months ended September 30, 2020, and the number of active
surgeons1 as of September 30, 2021 was 1,592, an increase of 41% from September
30, 2020. The utilization rate for the three months ended September 30, 2021
increased 16.3% over the three months ended September 30, 2020 to an average of
10.0 Lapiplasty Procedure Kits per active surgeon.2

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"
(incorporated from our Prospectus).

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 1,000
facilities across the United States and plan to continue to increase access by
convincing even more surgeons and facility administrators that our products are
superior 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 marketing campaigns




1  We define the number of active surgeons as the number of surgeons that

performed at least one procedure using the lapiplasty system in the

twelve month period.

2 We define the utilization rate as the number of lipplasty procedure kits sold

   divided by the number of active surgeons.


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. 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 general and administrative, 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 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

Returned

We currently derive nearly all of our revenue from the sale of our proprietary
Lapiplasty System, and to a lesser extent from ancillary products. The
Lapiplasty System is comprised of single-use implant kits and reusable
instrument trays. We sell the Lapiplasty System to physicians, surgeons,
hospitals and ambulatory surgery centers in the United States through a network
of independent agents 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 Procedure 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, 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.

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Cost of goods sold

Cost of goods sold consists primarily of costs related to manufacturing costs
for the purchase of our Lapiplasty System 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, rent and information technology, certain direct costs such as
those incurred for shipping our products and personnel costs. We expense all
inventory 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 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, patent costs, 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. Additionally, R&D
expenses include costs associated with our clinical studies, including clinical
trial design, clinical trial site initiation and study costs, data management,
related travel expenses and the cost of products used for clinical trials,
internal and external costs associated with our regulatory compliance and
quality assurance functions and allocated overhead costs. 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 our
expand infrastructure to both drive and support the anticipated growth in our
organization and due to additional 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 associated with operating as a public company,
though it may fluctuate from quarter to quarter.

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Interest and other income, net

Interest income and other income, net, consists of interest earned on our money
market fund.

Interest Expense

Interest expense consists of interest incurred and the amortization of the debt discount
related to borrowings in progress during the periods presented.

Results of operations

For the three and nine months ended September 30, 2021 and 2020

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


                                     Three Months                                          Nine Months
                                         Ended                                                Ended
                                     September 30,                Change                  September 30,                 Change
                                   2021         2020        Amount         %            2021          2020        Amount         %
Revenue                          $ 21,619     $ 14,266     $  7,353         51.5 %    $  60,980     $ 33,260     $ 27,720         83.3 %
Cost of goods sold                  4,248        2,911        1,337         45.9 %       11,519        7,386        4,133         56.0 %
Gross profit                       17,371       11,355        6,016         53.0 %       49,461       25,874       23,587         91.2 %
Operating expenses
Sales and marketing                15,984        8,103        7,881        

97.3% 42,142 20,229 21,913 108.3%
Research and development

            2,537        1,511        1,026         

67.9% 6,827 3,925 2,902 73.9%
General and administrative 4,310 1,804 2,506 138.9% 11,405 4,500 6,905 153.4%
Total operating expenses

           22,831       11,418       11,413        

100.0% 60,374 28,654 31,720 110.7%
Operating loss

               (5,460 )        (63 )     (5,397 )                   (10,913 )     (2,780 )     (8,133 )
Interest and other income
(expense), net                          5       (1,784 )      1,789       -100.3 %           12       (1,748 )      1,760       (100.7 )%
Interest expense                     (963 )       (808 )       (155 )       19.2 %       (3,032 )     (1,707 )     (1,325 )       77.6 %
Other expense, net                   (958 )     (2,592 )      1,634        (63.0 )%      (3,020 )     (3,455 )        435        (12.6 )%
Net loss and comprehensive
loss                               (6,418 )     (2,655 )     (3,763 )      141.7 %      (13,933 )     (6,235 )     (7,698 )      123.5 %


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The following shows the three months and nine months results of operations as a
percentage of revenue.



                                               Three Months Ended              Nine Months Ended
                                                 September 30,                   September 30,
                                              2021            2020            2021           2020
Revenue                                         100.0 %         100.0 %         100.0 %        100.0 %
Cost of goods sold                               19.6 %          20.4 %          18.9 %         22.2 %
Gross profit                                     80.4 %          79.6 %          81.1 %         77.8 %
Operating expenses
Sales and marketing                              73.9 %          56.8 %          69.1 %         60.8 %
Research and development                         11.7 %          10.6 %          11.2 %         11.8 %
General and administrative                       19.9 %          12.6 %          18.7 %         13.5 %
Total operating expenses                        105.6 %          80.0 %          99.0 %         86.2 %
Loss from operations                            (25.2 )%         (0.4 )%        (17.9 )%        (8.4 )%
Interest and other income (expense), net          0.0 %         (12.5 )%          0.0 %         (5.3 )%
Interest expense                                 (4.5 )%         (5.7 )%         (5.0 )%        (5.1 )%
Other expense, net                               (4.5 )%        (18.2 )%         (5.0 )%       (10.4 )%
Net loss and comprehensive loss                 (29.7 )%        (18.6 )%        (22.9 )%       (18.8 )%



Comparison of the three months ended September 30, 2021 and 2020

Revenue. Revenue increased $7.4 million, or 51.5%, from $14.3 million during the
three months ended September 30, 2020, to $21.6 million during the three months
ended September 30, 2021. The increase in revenue was primarily due to an
increased number of Lapiplasty Procedure Kits sold as the result of an expanded
customer base.

Cost of Goods Sold, Gross Profit and Gross Margin. Cost of goods sold increased
$1.3 million, or 45.9%, from $2.9 million during the three months ended
September 30, 2020, to $4.2 million during the three months ended September 30,
2021. The increase in cost of goods sold was primarily due to $0.8 million
increase in direct costs of goods sold resulting from increased sales, $0.5
million increase in royalty expense resulting from our increased sales, and $0.1
million increase in overhead expenses, which were offset by a reduction of $0.1
million in depreciation expense from our surgical instruments. Gross profit and
gross margin increased from $11.4 million and 79.6%, respectively, during the
three months ended September 30, 2020, to $17.4 million and 80.4%, respectively,
during the three months ended September 30, 2021, primarily due to the decreased
per unit direct costs of goods sold and depreciation expense of our surgical
instruments, which were offset by an increase in royalties expense as a percent
of sales.

Sales and Marketing Expenses. Sales and marketing expenses increased
$7.9 million, or 97.3%, from $8.1 million during the three months ended
September 30, 2020, to $16.0 million during the three months ended September 30,
2021. The increase in sales and marketing expenses was primarily due to growth
in our overall business and normalization of sales operations compared to the
three months ended September 30, 2020, during which we delayed expenditures for
surgeon education events, patient outreach campaigns and other planned sales and
marketing expenses in connection with the pandemic. Sales and marketing expenses
also increased as a result of an increase of $2.1 million in professional
services primarily for higher commissions from increased sales, an increase of
$2.3 million in advertising and marketing-related expenses primarily due to
higher advertising fees and a new television commercial campaign, an increase of
$1.7 million in payroll and payroll-related expenses resulting from increased
headcount of sales personnel, and $0.5 million in other marketing-related
expenses resulting from increased sales efforts.

Research and Development Expenses. Research and development expenses increased
$1.0 million, or 67.9%, from $1.5 million for the three months ended September
30, 2020, to $2.5 million during the three months ended September 30, 2021. The
increase in research and development expenses was due to an increase of $0.5
million in payroll and payroll-related costs resulting from increased headcount
of research personnel, an increase of $0.2 million in professional services from
higher consulting and patent filing fees, and an increase of $0.1 million in
clinical expenses resulting from increased purchases of materials used in our
prototypes.

General and Administrative Expenses. General and administrative expenses
increased $2.5 million, or 138.9%, from $1.8 million during the three months
ended September 30, 2020, to $4.3 million during the three months ended
September 30, 2021. The increase in general and administrative expenses was
primarily due to an increase of $0.7 million in payroll and payroll-related
costs as we increased headcount in our business, an increase of $0.8 million in
business-related expenses

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resulting mainly from the increase in costs and insurance costs, an increase in
$ 0.4 million in professional services mainly related to law and audit
expenses and an increase of $ 0.1 million in rental charges resulting from the
the expansion of our head office.

Interest and Other Income (Expense), Net. The increase in interest and other
income (expense), net during the three months ended September 30, 2021, was
primarily due to the recognition of loss of $0.6 million from the extinguishment
of term loans under the SVB Credit Facility and $1.2 million paid as a
prepayment penalty upon termination of the loans under the SVB Credit Facility.

Interest Expense. Interest expense increased $0.2 million from $0.8 million
during the three months ended September 30, 2020, to $1.0 million during the
three months ended September 30, 2021. The increase in interest expense was
primarily due to an increase of $10.0 million in balances outstanding on our CRG
Term Loan Facility for all three months in the current quarter as compared to
two months for the prior year quarter.

Comparison of the nine months ended September 30, 2021 and 2020

Revenue. Revenue increased $27.7 million, or 83.3%, from $33.3 million during
the nine months ended September 30, 2020, to $61.0 million during the nine
months ended September 30, 2021. The increase in revenue was primarily due to an
increased number of Lapiplasty Procedure Kits sold as the result of an expanded
customer base and normalization of sales compared to the nine months ended
September 30, 2020, which was 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 were largely
eased.

Cost of Goods Sold, Gross Profit and Gross Margin. Cost of goods sold increased
$4.1 million, or 56.0%, from $7.4 million during the nine months ended September
30, 2020, to $11.5 million during the nine months ended September 30, 2021. The
increase in cost of goods sold was primarily due to $2.9 million increase in
direct costs of goods sold resulting from increased sales, $1.3 million increase
in royalty expense resulting from our increased sales, and $0.4 million increase
in overhead expenses resulting from expansion of our headquarters and headcount
and the normalization of operations compared to the nine months ended September
30, 2020, which was adversely impacted by pandemic-related restrictions on
elective surgeries. The increases are offset by a decrease in provision for
inventory obsolescence of $0.3 million resulting from a lower number of days in
inventory and $0.6 million decrease in depreciation expense of our surgical
instruments resulting from lower average net book value of surgical instruments.
Gross profit and gross margin increased from $25.9 million and 77.8%,
respectively, during the nine months ended September 30, 2020, to $49.5 million
and 81.1%, respectively, during the nine months ended September 30, 2021,
primarily due to the decreased per unit direct costs of goods sold, depreciation
expense of our surgical instruments, and provision for inventory obsolescence.

Sales and Marketing Expenses. Sales and marketing expenses increased
$21.9 million, or 108.3% from $20.2 million during the nine months ended
September 30, 2020, to $42.1 million during the nine months ended September 30,
2021. The increase in sales and marketing expenses was primarily due to growth
in our overall business and normalization of sales operations compared to the
nine months ended September 30, 2020, in which we delayed expenditures for
surgeon education events, patient outreach campaigns and other planned sales and
marketing expenses to respond to the pandemic. Sales and marketing expenses
increased as a result of an increase of $7.1 million in professional services
primarily for higher commissions from increased sales, an increase of
$4.9 million in advertising and marketing-related expenses from higher
advertising fees, a new television commercial campaign and, public relations
expenses, an increase of $4.9 million in payroll and payroll-related expenses
resulting from increased headcount of sales personnel, $1.0 million in travel
and related expenses, and an increase $1.7 million in clinical-related expenses
resulting from increased sales.

Research and Development Expenses. Research and development expenses increased
$2.9 million, or 73.9%, from $3.9 million for the nine months ended September
30, 2020, to $6.8 million during the nine months ended September 30, 2021. The
increase in research and development expenses was primarily due to an increase
of $1.6 million in payroll and payroll-related costs resulting from increased
headcount of research personnel, an increase of $0.7 million in professional
services from higher consulting and patent filing fees, and an increase of $0.3
million in clinical expenses resulting from higher purchases of materials used
in our prototypes.

General and Administrative Expenses. General and administrative expenses
increased $6.9 million, or 153.4%, to $11.4 million during the nine months ended
September 30, 2021, from $4.5 million during the nine months ended September 30,
2020, when we implemented salary reductions, headcount freeze, and other actions
in response to the pandemic. The increase in general and administrative expenses
was primarily due to an increase of $3.2 million in payroll and payroll-related

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costs as we increased headcount in our business, an increase of $1.3 million in
business-related expenses primarily resulting from increased insurance costs and
fees, an increase of $1.3 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. The increases are offset by a
decrease of $0.3 million in bad debt expense.

Interest and Other Income (Expense), Net. The decrease in interest and other
income (expense), net during the three months ended September 30, 2021, was
primarily due to the recognition of loss of $0.6 million from the extinguishment
of term loans under the SVB Credit Facility and $1.2 million paid as a
prepayment penalty upon termination of the loans under the SVB Credit Facility.

Interest Expense. Interest expense increased $1.3 million from $1.7 million
during the nine months ended September 30, 2020, to $3.0 million during the nine
months ended September 30, 2021. The increase in interest expense was primarily
due to an increase of $30.0 million in balances outstanding on our term loans
and credit facility.

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. As of September 30, 2021, we had cash and cash
equivalents of $109.4 million, an accumulated deficit of $35.3 million and
$30.0 million of principal outstanding under our term loan agreement. 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 March 2021. In July 2020, we entered into the new term loan agreement
with CRG Servicing LLC ("CRG") to obtain up to $50.0 million in financing over
three tranches. We borrowed $30.0 million under the new facility with CRG and
repaid prior existing outstanding debt under our credit facility with Silicon
Valley Bank ("SVB"). We also amended our existing credit facility with SVB to
increase the revolving line of credit from $5.0 million to $10.0 million. We
received net proceeds of $107.6 million from our IPO. 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. We may be required or decide to raise
additional financing to support further growth of our operations.

Short and long term obligations

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%.

From September 30, 2021, we have had $ 10.0 million availability to borrow under
the revolving line of credit and no outstanding loans 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
September 30, 2021, we were in compliance with all covenants under the SVB
Credit Facility.

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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 September 30,
2021, totaled $30 million.

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
September 30, 2021, we were in compliance with all covenants under the CRG Term
Loan Facility.

Funding Requirements

We use our cash to fund our operations, which primarily include the costs of
manufacturing our Lapiplasty System 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 products

        sales, marketing, manufacturing and distribution;


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


  • the degree and rate of market acceptance of the Lapiplasty System;


• the costs of filing, pursuing, defending and enforcing any patent

claims and other intellectual property rights, including the application of our

intellectual property rights against counterfeit products or technologies;

  • our need to implement additional infrastructure and internal systems;

• the research and development activities that 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;


                                       29
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  • 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 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 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 shows the main sources and uses of liquidity and liquidity.
equivalents for the period presented below:

                                       Nine Months Ended                  Change
                                         September 30,
                                     2021             2020         Amount          %
                                        (in thousands, other than percent change)
Net cash (used in) provided by:
Operating activities              $   (13,441 )     $  (6,942 )   $ (6,499 )        93.6 %
Investing activities                   (1,805 )          (981 )       (824 )        84.0 %
Financing activities                  106,626          11,180       95,446         853.7 %
Net increase in cash and
  cash equivalents                $    91,380       $   3,257     $ 88,123       2,705.5 %



Net cash used in operating activities

Net cash used in operating activities for the nine months ended September 30,
2021, increased by $6.5 million from the nine months ended September 30, 2020,
due to an increase in operating assets and liabilities of $1.6 million offset by
an increase in net loss of $7.7 million and decrease in noncash charges of $0.4
million. The decrease in net operating assets was primarily due to reduced
purchases of inventories of $1.7 million, reduced settlements of accrued
liabilities of $1.0 million due to greater decrease in accrued commissions and
accrued compensation for the nine months ended September 30, 2020, as compared
to the nine months ended September 30, 2021. This decrease in net operating
assets is offset by an increase in prepaid expenses and other assets of $3.0
million resulting from an increase in general prepaid expenses due to our
overall growth.

Net cash used in investment activities

Net cash used in investing activities during the nine months ended September 30,
2021, increased by $0.8 million from the nine months ended September 30, 2020.
The increase was primarily due to increased level of purchases of capitalized
surgical instruments for our reusable surgical kits during the nine months ended
September 30, 2021, as compared to the nine months ended September 30, 2020.

                                       30

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Net cash provided by financing activities

Net cash provided by financing activities during the nine months ended September
30, 2021, increased by $95.5 million from the nine months ended September 30,
2020. The increase cash provided by financing activities was due to an increase
in proceeds from the exercise of stock options of $0.7 million and the receipt
of net cash proceeds of $107.6 million from the issuance shares of common stock,
net of $10.6 million in issuance costs, upon completion of our IPO on April 27,
2021. The increase is offset by the repayment of our PPP Loan from the SBA of
$1.8 million in March 2021. During the nine months ended September 30, 2020, we
received $10.0 million in net proceeds from borrowings on interest bearing debt
while during the nine months ended September 30, 2021, we did not have any
proceeds from borrowings on interest bearing debt.

Surgeon Advisory Council royalty agreements

We recognized royalties' expense of $1.1 million and $0.6 million for the three
months ended September 30, 2021 and 2020, respectively, and $2.8 million and
$1.4 million for the nine months ended September 30, 2021 and 2020,
respectively. For the three months ended September 30, 2021 and 2020, the
aggregate royalty rate was 5.3% and 4.2%, respectively. For the nine months
ended September 30, 2021 and 2020, the aggregate royalty rate was 4.5% and 4.3%,
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.

Off-balance sheet provisions

We did not have during the period presented, and we currently have no
off-balance sheet arrangements, such as structured finance,
variable interest entities or entities.

Critical accounting conventions 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.

Beginning January 1, 2021, the Company adjusted the useful life of its
capitalized instruments from 18 months to 36 months to align with the expected
life of the instruments. The change in useful life is expected to reduce
depreciation expense by $0.2 million per year. During the three and nine months
ended September 30, 2021, there were no other material changes to our critical
accounting policies or in the methodology used for estimates from those
described in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in the Prospectus.

Recently published accounting position papers

See note 3 of our summary financial statements included elsewhere in this
Quarterly report for new accounting positions not yet adopted at
date of this quarterly report.


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