TREACE MEDICAL CONCEPTS, INC. (TMCI)

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our 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 with the goal of advancing the standard of care for the surgical management of bunion and related midfoot deformities. We have pioneered our proprietary Lapiplasty 3D Bunion Correction System—a combination of instruments, implants and surgical methods designed to surgically correct all three planes of the bunion deformity and secure the unstable joint, addressing the root cause of the bunion and helping patients get back to their active lifestyles. Although bunions are deformities typically caused by an unstable joint in the middle of the foot that leads to a three-dimensional ("3D") misalignment in the foot's anatomical structure, the majority of traditional surgical approaches focus on correcting the deformity from a two-dimensional ("2D") perspective and therefore fail to address the root cause of the disorder. To effectively restore the normal anatomy of bunion patients and improve clinical outcomes, we believe addressing the root cause of the bunion is critical, and we developed our first product, the Lapiplasty System, to correct the deformity across all three anatomic dimensions. Our other products often used in conjunction with bunion surgery include the Adductoplasty System, the Hammertoe PEEK Fixation System, the SpeedPlate Rapid Compression Implant System, and specialized osteotomes and release instruments. In addition, we recently announced our entrance into the metatarsal osteotomy segment with the Nanoplasty and Percuplasty Procedures, which both allow for a 3D correction of the bunion through cosmetically appealing, minimally invasive solutions. With our Lapiplasty System, new osteotomy systems, and other complementary products, we are continuing to execute our strategy of becoming a comprehensive bunion solutions company and supporting further penetration into the bunion market opportunity. See the "Innovation and Growth" section below and the "Our Solutions" section in Item 1 above for more information on our new products.

We were formed in 2013, and since receiving 510(k) clearance for the Lapiplasty System in March 2015, we have expanded our bunion related products in the United States. We market and sell our products to physicians, surgeons, ambulatory surgery centers and hospitals. Our procedures can be performed in either hospital outpatient or ambulatory surgery centers settings, and utilize existing, well-established reimbursement codes. We currently market and sell our products through a combination of a direct employee sales force and independent sales agencies in the United States. As of December 31, 2024, we had a field fleet of 329 team members. The field fleet includes our direct employee sales force, clinical specialists, and sales management, and an estimate of individuals from independent sales agencies focused on marketing and selling our products. Our direct employee sales force generated 82% of revenues in 2024. As of December 31, 2024, the number of active surgeons was 3,135 up from 2,855, an increase of 280 or 10% from the prior year. We define the number of active surgeons as the number of surgeons that performed at least one procedure using one of our systems in the trailing twelve-month period.

On February 10, 2023, we completed a follow-on public offering of 5,476,190 shares of our common stock, which included the exercise in full of the underwriters' option to purchase additional shares, at a price to the public of $21.00 per share. This offering resulted in net proceeds of approximately $107.5 million after deducting underwriting discounts and commissions of $6.9 million and offering expenses payable by us of approximately $0.6 million.

On June 12, 2023, we acquired certain assets of RPM-3D used in providing pre-operative planning and patient-specific guides for the surgical correction of foot and ankle deformities for $20.0 million in cash plus additional milestone payments of up to $10.0 million, which were subsequently reduced to $8.1 million. This acquisition added FDA-cleared patient specific instrumentation technologies and capabilities to our portfolio, building upon our pioneering 3D bunion correction and related midfoot solutions, as well as 22 additional patent applications (of which two U.S. patents have since been issued) that further expanded and reinforced our global intellectual property portfolio covering technologies for the correction of bunion and related deformities.

As of December 31, 2024, we had cash and cash equivalents of $11.4 million and marketable securities of $64.3 million available for sale to fund operations, an accumulated deficit of $190.0 million, and $54.0 million of principal outstanding under our term loan and revolving loan agreements.

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Economic Environment

There is continuing uncertainty in the macro-economic environment. Inflationary pressures and interest rate changes may result in higher costs for us. Inflation, recession fears, reduced consumer confidence and other adverse economic conditions may also negatively impact consumer demand for the elective surgeries that use our products. While we continuously work with suppliers to mitigate higher costs and continue to invest in our direct sales channel, patient education initiatives, clinical evidence and product innovations to build demand for our products, we expect these macro-economic challenges to continue for the foreseeable future, which likely will impact our results of operations.

We believe that our financial performance has depended, and in the foreseeable future will continue to depend, on many factors, including macro-economic conditions 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."

Increased Competition

Before we launched our flagship Lapiplasty System, there were no other products in the market that provided a 3D solution and specialized procedural instrumentation for traditionally freehand, difficult Lapidus surgeries. This allowed us to capitalize on our pioneering technology and grow our market share quickly. We are experiencing increased competition from the accelerating adoption of minimally invasive osteotomy solutions and from new Lapidus products, which has, and may continue to, negatively impact our growth rates and market share.

Innovation and Growth

We expect to continue to focus on long-term revenue growth through investments in our business and new products. In sales and marketing, we have dedicated meaningful resources and believe that we have built a sales force and management team that can support our future growth as well as our patient-focused outreach and education campaigns.

In research and development, our employee team and surgeon consultants are continually working on next-generation innovations for the surgical correction of bunions and other conditions that often present with bunions. In 2023, in addition to the acquisition of the assets of RPM-3D, we began the market release of (1) the SpeedPlate fixation platform, which can be used in the Lapiplasty and Adductoplasty Procedures, as well as other common bone fusion procedures of the foot, (2) the Hammertoe PEEK Fixation System designed to address hammertoe, claw toe and mallet toe deformities, which often present concomitantly with bunions, and (3) LapiTome and RazorTome Osteotomes, which are sterile, single-use instruments that are designed to facilitate more efficient removal and release of bone slices and soft tissue in Lapiplasty and Adductoplasty cases.

In early 2024, we introduced expanded SpeedPlate configurations designed to address additional fusion procedures throughout the foot, and in the fourth quarter of 2024, we began the limited market releases of the following new products: (1) the Nanoplasty and Percuplasty Systems, which are minimally-invasive 3D osteotomy systems; (2) IntelliGuide PSI Cut Guides for Lapiplasty and Adductoplasty Procedures, which are cut guides created specifically for an individual patient’s foot anatomy; (3) the Micro-Lapiplasty System, which is designed to allow the Lapiplasty Procedure to be performed through a minimally-invasive 2cm incision; (4) the Mini-Adductoplasty System, which is designed to allow the Adductoplasty midfoot correction procedure to be performed through an approximately 50% smaller incision; and (5) the SpeedMTP Rapid Compression Implant, a specialized implant for addressing bunions through MTP fusions. We expect to continue to expand the commercial availability of these new products and to release other new solutions during 2025.

Intellectual Property Strategy

We actively seek to protect the technology, inventions, and improvements that we consider important to our business using patents, trade secrets, trademarks and copyrights in the United States and foreign markets. As of December 31, 2024, our patent portfolio included 68 granted U.S. patents, with an additional 26 granted patents worldwide and over 100 pending patent applications. In keeping with our strategy of protecting our intellectual property rights, on October 14, 2024, we filed a lawsuit against Stryker and its subsidiary Wright Medical Technology, Inc. alleging infringement of 9 patents related to our innovative Lapiplasty 3D Bunion Correction technologies and unfair competition. The suit was filed in the United States District Court for the District of New Jersey, and seeks injunctive relief and damages.

Market Share Growth

The growth of our business depends on our ability to gain broader acceptance of our proprietary procedures and systems by successfully marketing and distributing these products. While surgeon adoption of our products and procedures remains

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critical to supporting revenue 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 support future sales growth, we intend to continue educating hospitals and facility administrators on the differentiated benefits associated with our procedures and systems, supported by our robust portfolio of clinical data on our existing procedures and additional clinical data we expect to develop on our new products. If we are unable to successfully continue to commercialize our procedures and systems, 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 the use of our cash and cash equivalents, marketable securities, and expected revenues. We may also raise funds by incurring debt and through offerings of our capital stock.

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 30% to 40% of full year revenues, and lower sales volumes in the subsequent first calendar quarter. Our sales volumes in the fourth quarter tend to be higher as many patients elect to have surgery after meeting their annual deductible and having time to recover over the winter holidays. Our sales volumes in subsequent first calendar quarters also tend to be lower versus the prior year fourth quarters 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; however, in some years the first quarter may benefit from additional sales volumes when high patient demand for surgeries in the fourth quarter cannot be fully accommodated and those surgical procedures are rolled over into the first quarter. Similar to the rest of the orthopaedic industry, we have experienced and expect to continue to experience lower sales volumes in the third quarter than throughout the rest of the year as elective procedures generally decline during the summer months.

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, more than 60% of all bunion surgical cases are 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 current CPT codes for the Lapiplasty Procedure are CPT 28740 and CPT 28297. CPT 28740 is classified under APC 5114, and CPT 28297 is classified under APC 5115. For Lapiplasty Procedures in which fusion is performed on multiple TMT joints, CPT 28730 applies and is classified under APC 5115. For Adductoplasty Procedures in which fusion is performed on multiple TMT joints, either CPT 28730 or CPT 28735 applies, both of which are classified under APC 5115. For the Nanoplasty and Percuplasty Procedures, CPT 28306 applies. For MTP fusions using the SpeedMTP implant or our other plates, CPT 28750 applies.

Components of Our Results of Operations

Revenue

We currently generate revenue from the sale of our implant kit systems, single-use sterile instruments, and other complementary products. Our systems bring together single-use implant kits, reusable instrument trays, and surgical techniques. We sell the kits and single-use instruments and other products to physicians, surgeons, hospitals and ambulatory surgery centers in the United States through a network of employee sales representatives and independent sales agencies.

No single customer accounted for 10% or more of our revenue during 2024. We expect our revenue to increase in absolute dollars in the foreseeable future as we expand our product offerings, new accounts and trained physician base, and as existing physician customers perform more Lapiplasty and other procedures using our products, though our rate of revenue growth may fluctuate from quarter to quarter due to a variety of factors, including seasonality, the macro-economic environment and competition.

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Cost of Goods Sold

Cost of goods sold consists primarily of costs for the purchase of our products from third-party manufacturers. Direct costs from our third-party manufacturers include 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, certain direct costs such as those incurred for shipping our products, sterilization, packaging, and personnel costs. We expense all inventory provisions for excess, obsolete and field losses as cost of goods sold. We evaluate the carrying value of our inventories in relation to historical sales, current inventory levels, and consideration of the life cycle of the product. A significant decrease in demand or development of products could result in an increase in the amount of excess or obsolete inventory on hand, which could lead to additional provisions. We expect our cost of goods sold to increase in absolute dollars in the foreseeable future to the extent more of our products are sold, though it may fluctuate from quarter to quarter.

Gross Profit and Gross Margin

We calculate gross profit as revenue less cost of goods sold, and gross margin as gross profit divided by revenue. Our gross margin has been and will continue to be affected by a variety of factors, primarily average selling prices, production, and ordering volumes, change in mix of customers, third-party manufacturing costs and cost-reduction strategies. We expect our gross profit to increase in the foreseeable future as our revenue grows, though our gross margin may fluctuate from quarter to quarter due to changes in average selling prices as we introduce new products, and as we adopt new manufacturing processes and technologies.

Operating Expenses

Sales and Marketing

Sales and marketing expenses consist primarily of compensation for personnel, including salaries, bonuses, benefits, sales commissions and share-based compensation, related to selling and marketing functions, surgical instrument expense, physician education programs, training, shipping costs related to sending products to our sales representatives, travel expenses, marketing initiatives including our direct-to-patient outreach program and advertising, market research and analysis and conferences and trade shows.

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 allocated facilities-related 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 our existing products and new 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 studies 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.

Interest Income

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

Interest Expense

Interest expense consists of interest incurred and amortization of debt discount and issuance costs related to outstanding borrowings.

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Results of Operations

Comparison of the years ended December 31, 2024 and 2023

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

Revenue. Revenue increased by $22.2 million, or 11.9%, in the year ended December 31, 2024, as compared to 2023. The increase was primarily driven by a product mix shift that resulted from increased adoption of newer technologies and increased sales of complementary products, an increase in the number of bunion procedure kits sold in 2024 as compared to 2023, and an increase in active surgeons.

Cost of Goods Sold, Gross Profit and Gross Margin. Cost of goods sold increased by $5.9 million, or 16.8%, in the year ended December 31, 2024, as compared to 2023. The increase in cost of goods sold was primarily due to a $3.7 million increase in direct costs of goods sold resulting from increased sales, a $0.9 million increase in allocations of payroll and related costs, a $0.9 million increase in inventory provisions, and a $0.3 million decrease in vendor rebates. Gross profit increased $16.3 million, or 10.7%, as compared to the same period in 2023, due to increased sales. Gross profit margin for the year ended December 31, 2024 decreased from 81.2% to 80.4%, as compared to the same period in 2023, primarily due to an increase in inventory provisions, a product mix shift to newer products, a decrease in vendor rebates, and an increase in allocations of payroll and related costs, partially offset by lower royalty rates on newer products.

Sales and Marketing Expenses. Sales and marketing expenses increased by $6.7 million, or 4.8%, in the year ended December 31, 2024, as compared to 2023. Sales and marketing expenses increased due to an increase of $7.5 million in payroll and related expenses from increased headcount of sales and marketing personnel, including stock compensation expense, an increase of $1.8 million in surgical instrument expense due to an increase in volume of surgical instruments, and a $0.6 million increase in commissions due to higher sales, partially offset by a decrease of $1.9 million in surgeon training and clinical-related costs and a decrease of $1.2 million in advertising fees for direct to consumer campaigns. Of the $7.5 million increase in payroll and related expenses, $0.9 million was related to a restructuring charge that includes severance and other post-employment benefits.

Research and Development Expenses. Research and development expenses increased by $5.1 million, or 33.3%, in the year ended December 31, 2024, as compared to 2023. The increase in research and development expenses was due to increases of $4.4 million in payroll and related costs resulting from increased headcount of research and development personnel, including stock compensation expense, an increase of $0.4 million related to the technological advancements milestone obligation from our acquisition of RPM-3D, and an increase of $0.4 million in allocated rent expense from the occupancy of our corporate headquarters building.

General and Administrative Expenses. General and administrative expenses increased by $8.7 million, or 18.5%, in the year ended December 31, 2024, as compared to 2023. The increase in general and administrative expenses was primarily related to $7.8 million in higher payroll and related costs due to higher stock compensation expense, a $2.6 million increase in the provision for allowance for credit losses that includes a $2.1 million write-off of receivables due from a customer that filed for bankruptcy in the second quarter, and a $0.5 million increase in amortization of finite-lived intangible assets from our

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acquisition of RPM-3D, partially offset by a $2.1 million decrease in compensation expense related to the milestone obligations for our acquisition of RPM-3D.

Interest Income. Interest income decreased by $1.8 million, or 27.5% in 2024 as compared to 2023. The decrease in interest income was primarily due to lower cash balances invested in marketable securities and slightly lower interest rates due to rate cuts during 2024.

For the comparison of the results of operations for the years ended December 31, 2023 and 2022, refer to our Annual Report on Form 10-K, for the year ended December 31, 2023, as filed with the U.S. Securities and Exchange Commission on February 27, 2024, in Part II Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Liquidity and Capital Resources

Overview

Before our IPO, our primary sources of capital were private placements of common stock and convertible preferred stock, debt financing agreements and revenue from the sale of our products. In April 2021, we received net proceeds of $107.6 million from our IPO. On February 10, 2023, we received net proceeds of $107.5 million from a follow-on public offering of our common stock.

In April 2022, we entered into a five-year $150.0 million loan arrangement, initially consisting of up to $120.0 million in term loans over four tranches and up to $30.0 million in a revolving loan facility with entities affiliated with MidCap. As of December 31, 2024, we have $50.0 million under the term loan and $4.0 million under the revolving loan facility outstanding. As of December 31, 2024, additional tranche availability from the term loan has expired and is no longer available.

As of December 31, 2024, we had cash and cash equivalents of $11.4 million and marketable securities of $64.3 million available for sale, an accumulated deficit of $190.0 million, and $54.0 million of principal outstanding under our term loan and revolving loan agreements. We believe that our existing cash and cash equivalents, marketable securities, 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 date of issuance of these financial statements. We may be required or decide to raise additional debt or equity financing to support further growth of our operations.

Funding Requirements

We use our cash, marketable securities, and revenues to fund our operations, which primarily include the costs of manufacturing our products, capital expenditures, as well as our operating expenses. We expect R&D expenses to increase as we continue to hire personnel and invest in next-generation innovations of our existing products and new products. The timing and amount of our operating and capital expenditures and use of available funding will depend on many factors, including:

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the scope and timing of our investment in our commercial infrastructure and sales force;

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

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

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the degree and rate of market acceptance of our products;

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the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, including enforcing our intellectual property rights against infringing products or technologies or enforcing contractual rights against parties breaching agreements with us, including the litigation proceeding we initiated against Stryker;

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the research and development activities we intend to undertake to improve the Lapiplasty System and other products, to commercialize PSI technologies, to gain share in the minimally invasive osteotomy market, and to develop or acquire additional products;

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the investments we make in acquiring other technologies, assets or businesses to expand our product portfolio;

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the success or emergence of new competing technologies or other adverse market developments;

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our need to implement additional infrastructure and internal systems;

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competitors' success in inducing surgical facilities to limit their use of our products and surgical facilities' decisions to narrow surgeons' access to our products;

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the effect of inflation, interest rate changes, and other general economic conditions on our operations and business;

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any product liability or other lawsuits related to our products;

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the expenses needed to attract and retain skilled personnel; and

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the impact of any infectious disease outbreak or natural or other disaster or event beyond our control on our business or on the healthcare industry, particularly elective surgeries where our products are used.

Based upon our current operating plan, we believe that our existing cash, cash equivalents, marketable securities, and available debt borrowings will enable us to fund our operating expenses and capital expenditure requirements for at least the next twelve months. We have based this estimate on assumptions that may prove to be wrong or that may change in the future, and we could utilize our available capital resources sooner than we expect. We may seek to raise any necessary additional capital through public or private equity offerings or debt financings, credit or loan facilities or a combination of one or more of these or other funding sources. Additional funds may not be available to us on acceptable terms or at all. If we fail to obtain necessary capital when needed on acceptable terms, or at all, we could be forced to delay, limit, reduce or terminate our product development programs, commercialization efforts, sales and marketing initiatives, or other operations. If we raise additional funds by issuing equity securities, our stockholders will suffer dilution, and the terms of any financing may adversely affect the rights of our stockholders. In addition, as a condition to providing additional funds to us, future investors may demand, and may be granted, rights superior to those of existing stockholders. Debt financing, if available, is likely to involve restrictive covenants limiting our flexibility in conducting future business activities, and in the event of insolvency, debt holders would be repaid before holders of our equity securities received any distribution of our corporate assets.

Cash Flows

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

Cash Flows from Operating Activities

Net cash used in operating activities for the year ended December 31, 2024 was $37.2 million, consisting primarily of a net loss of $55.7 million, adjusted for non-cash charges of $44.0 million and an increase in net operating assets. The non-cash charges consist primarily of share-based compensation expense of $30.6 million, depreciation and amortization expense of $8.4 million, provision for allowance for credit losses of $2.9 million primarily due to a $2.1 million write-off of receivables due from a significant customer that filed for bankruptcy in the second quarter 2024, and non-cash lease expense of $2.3 million, partially offset by net accretion of marketable securities of $1.1 million. The increase in net operating assets was primarily due to an increase of $10.0 million in inventories to meet demand for new products, an increase of $5.7 million in accounts receivable due to increased sales, an increase of $0.3 million to other non-current assets and a decrease of $7.9 million in accrued liabilities, a decrease of $2.5 million to operating lease liabilities, and a decrease of $1.3 million to accounts payable, which were partially offset by a $2.2 million increase to prepaid expenses and other assets. The decrease of $7.9 million in accrued liabilities consisted of a decrease of $4.2 million for milestone payments related to our acquisition of RPM-3D in the second quarter 2023 and a decrease of $3.7 million due to timing of payments.

Net cash used in operating activities for the year ended December 31, 2023 was $34.6 million, consisting primarily of a net loss of $49.5 million and an increase in net operating assets of $9.7 million, which were partially offset by non-cash charges

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of $24.7 million. The non-cash charges consist primarily of share-based compensation expense of $17.4 million, depreciation and amortization expense of $5.4 million and non-cash lease expense of $2.5 million, offset by amortization and accretion of marketable securities of $1.4 million. The increase in net operating assets was primarily due to an increase of $9.8 million in inventories to meet demand for new products and safety stock, an increase of $9.3 million in accounts receivable due to sales growth in 2023, and an increase of $1.2 million in prepaid expenses and other assets (excluding unsettled securities transactions), which were partially offset by a $7.5 million increase to accrued liabilities and a $3.2 million increase to accounts payable due to timing of payments and growth of our operations. The increase of $7.5 million in accrued liabilities consisted of an increase of $4.2 million due to timing of payments, and an increase of $3.3 million due to increased accrued compensation expense related to our acquisition of RPM-3D in the second quarter 2023.

Net cash used in operating activities for the year ended December 31, 2022 was $30.6 million, consisting primarily of a net loss of $42.8 million and an increase in net operating assets of $5.8 million, which were partially offset by non-cash charges of $18.0 million. The increase in net operating assets was primarily due to an increase in accounts receivable resulting from higher sales revenue in 2022, higher inventories resulting from higher purchases in anticipation of growing demand in 2023 and to guard against supply chain risks, and an increase in prepaid expenses and other assets due to timing of payments, which were offset by increases in accounts payable and accrued liabilities due to timing of payments and growth of our operations. The non-cash charges primarily consisted of share-based compensation expense of $8.1 million, a loss on extinguishment of debt of $4.5 million, non-cash lease amortization of $2.5 million, depreciation and amortization expense of $2.1 million, and $0.4 million in provision for doubtful accounts primarily driven by higher account receivable balances at year end.

Cash Flows from Investing Activities

Net cash provided by investing activities for the year ended December 31, 2024 was $35.4 million, consisting of $118.5 million in sales and maturities of available for sale marketable securities, partially offset by $71.6 million in purchases of available for sale marketable securities from reinvestment of cash received from maturities and $11.6 million in purchases of property and equipment. The purchases in property and equipment included $9.5 million in capitalized surgical instruments for reusable instrument trays related to new products, and $2.1 million for equipment and leasehold improvements to support the growth of our business.

Net cash used in investing activities for the year ended December 31, 2023 was $81.3 million consisting of $169.9 million in purchases of marketable securities available for sale, $20.0 million for the acquisition of the RPM-3D assets, and $11.5 million in purchases of property and equipment, partially offset by $120.0 million in sales and maturities of marketable securities available for sale. The purchases of marketable securities were the result of cash invested from our public offering of common stock during the first quarter of 2023. The purchases of property and equipment consist of $5.0 million in purchases of capitalized surgical instruments for our reusable instrument trays driven by higher numbers of employee sales representatives and sales growth and $6.5 million of purchases of fixed assets and leasehold improvements primarily for our new corporate headquarters building.

Net cash used in investing activities for the year ended December 31, 2022 was $76.5 million consisting of $63.4 million in purchases of marketable securities available for sale, partially offset by $1.7 million in sales and maturities of marketable securities available for sale, and $14.8 million in purchases of property and equipment. The purchases of property and equipment consist of $5.1 million in purchases of capitalized surgical instruments for our reusable instrument trays driven by higher numbers of employee sales representatives and sales growth and $8.0 million of purchases of fixed assets and leasehold improvements primarily for our new corporate headquarters building.

Cash Flows from Financing Activities

Net cash provided by financing activities for the year ended December 31, 2024 was $0.2 million, consisting primarily of $0.4 million in proceeds from stock option exercises, partially offset by $0.3 million of shares repurchased for tax withholding from vesting of share-based compensation.

Net cash provided by financing activities for the year ended December 31, 2023 was $109.4 million, consisting of $107.5 million of net cash proceeds from our public offering of common stock in the first quarter of 2023 and $1.9 million from the exercise of stock options.

Net cash provided by financing activities for the year ended December 31, 2022 was $20.8 million, consisting of $53.5 million of net cash proceeds from the term loan agreement and revolving loan facility with MidCap and $2.2 million from the

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exercise of stock options, partially offset by the $33.9 million repayment of the CRG Group L.P. term loan and $1.0 million of third party debt issuance costs related to the new MidCap borrowings.

Royalty Agreements

We recognized royalties expense of $6.8 million and $6.9 million for the years ended December 31, 2024 and 2023, respectively. For the years ended December 31, 2024 and 2023, the aggregate royalty rate was 3.2% and 3.7%, respectively. Each of the royalty agreements with our surgeon consultants prohibits the payment of royalties on products sold to entities and/or individuals with whom any of the surgeon consultants is affiliated.

Operating Lease

We have commitments for future payments related to our corporate headquarters office located in Ponte Vedra, Florida. We entered into a 10-year lease in February 2022 for our headquarters which expires in July 2032. Lease payments comprise the base rent plus operating costs which includes taxes, insurance, and common area maintenance. We also have commitments for future payments related to our former headquarters which expire in April 2026 and have subleased this space for the remainder of our lease term. The remaining lease obligations are $23.3 million under these leases as of December 31, 2024.

Critical 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, "Summary of Significant Accounting Policies," of the Notes to the Financial Statements included in this Annual Report, we believe the following discussion addresses our most critical accounting policies, which are those that are most important to our financial condition and our results of operations and require our most difficult, subjective and complex judgments.

Stock-Based Compensation

We account for stock-based compensation arrangements at fair value. We determine the fair value on the grant date for stock options using the Black-Scholes model and performance-based restricted stock unit ("PSU") awards using a Monte Carlo valuation model.

The fair value of these 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 and are adjusted to actuals as they occur. The estimated forfeiture rate is based on historical analysis of actual forfeiture rates of similar awards.

The fair value of the stock options and PSUs are locked at grant date and will not fluctuate after grant date. However, the underlying inputs to the Black-Scholes option model and the Monte Carlo valuation model may change in the future for new grants which could impact the fair value of stock-based awards granted each year and could cause compensation expense to vary in future periods.

Goodwill and Other Intangible Assets

Our goodwill represents the excess of the cost over the fair value of net assets acquired. The determination of the value of goodwill and intangibles assets arising from acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of net tangible and intangible assets acquired. Goodwill is not amortized and is assessed for impairment using fair value measurement techniques on an annual basis or more frequently if facts and

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circumstances warrant such a review. Goodwill is considered to be impaired if we determine that the carrying value of our reporting unit exceeds its respective fair value.

We have a definite-lived intangible technology asset that is reviewed for impairment upon triggering events that indicate the carrying value of the asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount to future net undiscounted cash flows expected to be generated by the associated asset. If the asset's carrying value is determined to not be recoverable, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of the intangible asset. Calculating cash flows for this measurement requires us to make significant estimates and assumptions related to forecasts of future revenues, expenses and discount rates. Changes in these assumptions could have a significant impact on the fair value of the technology intangible. If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of the assets. The calculation of the fair value of the intangible assets involves Level 3 fair value measurements. Any impairment recognized could significantly impact our results of operations in the period of impairment.

Recently Issued Accounting Pronouncements

For information regarding recent accounting pronouncements and their expected impact on our future results of operations and financial condition, refer to Note 3, "Recent Accounting Pronouncements," of the Notes to the Financial Statements.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our 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 with the goal of advancing the standard of care for the surgical management of bunion and related midfoot deformities. We have pioneered our proprietary Lapiplasty 3D Bunion Correction System—a combination of instruments, implants and surgical methods designed to surgically correct all three planes of the bunion deformity and secure the unstable joint, addressing the root cause of the bunion and helping patients get back to their active lifestyles. Although bunions are deformities typically caused by an unstable joint in the middle of the foot that leads to a three-dimensional ("3D") misalignment in the foot's anatomical structure, the majority of traditional surgical approaches focus on correcting the deformity from a two-dimensional ("2D") perspective and therefore fail to address the root cause of the disorder. To effectively restore the normal anatomy of bunion patients and improve clinical outcomes, we believe addressing the root cause of the bunion is critical and have developed the Lapiplasty System to correct the deformity across all three anatomic dimensions. Our other products often used in conjunction with bunion surgery include the Adductoplasty System, the Hammertoe PEEK Fixation System, the SpeedPlate Rapid Compression Implant System, and specialized osteotomes and release instruments.

We were formed in 2013, and since receiving 510(k) clearance for the Lapiplasty System in March 2015, we have sold more than 90,000 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 and other products through a combination of a direct employee sales force and independent sales agencies across 249 territories in the United States. As of December 31, 2023, we had 227 direct sales representatives and 22 independent sales agencies. In 2023, employee sales representatives generated approximately 81% of revenues while approximately 19% of revenues came through independent sales agencies.

On February 10, 2023, we completed a follow-on public offering of 5,476,190 shares of our common stock, which included the exercise in full of the underwriters' option to purchase additional shares, at a price to the public of $21.00 per share. This offering resulted in net proceeds of approximately $107.5 million after deducting underwriting discounts and commissions of $6.9 million and offering expenses payable by us of approximately $0.6 million.

On June 12, 2023, we acquired certain assets of RPM-3D used in providing pre-operative planning and patient-specific guides for the surgical correction of foot and ankle deformities for $20.0 million in cash. In addition, we are obligated to pay additional amounts of up to $10.0 million in cash upon completion of certain milestones. This acquisition adds FDA-cleared patient specific instrumentation ("PSI") technologies and capabilities to our portfolio, building upon our pioneering 3D bunion correction and related midfoot solutions, as well as 22 additional patent applications that further expand and reinforce our global intellectual property portfolio covering technologies for the correction of bunion and related deformities.

As of December 31, 2023, we had cash and cash equivalents of $13.0 million and marketable securities of $110.2 million available for sale to fund operations, an accumulated deficit of $134.2 million and $54.0 million of principal outstanding under our term loan and revolving loan agreements.

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Economic Environment

There is continuing uncertainty in the macro-economic environment. Inflationary pressures, interest rates, recession fears and reduced consumer confidence, and ongoing supply chain challenges have resulted, and may continue to result, in higher costs and longer lead times from suppliers and potentially reduced demand for our Lapiplasty Procedure kits and other products. General economic conditions may also negatively impact demand for elective surgeries. While we continuously work with suppliers to mitigate higher costs and longer lead times and continue to invest in our direct sales channel, patient education initiatives, clinical evidence and product innovations to build demand for our products, we expect these macro-economic challenges to continue for the foreseeable future, which likely will impact our results of operations.

Key Business Metrics

We regularly review a number of operating and financial metrics, including the number of Lapiplasty Procedure kits sold, blended average revenue per Lapiplasty Procedure kit sold, the number of active surgeons using the Lapiplasty System and the surgeon utilization rate, to evaluate our business, measure our performance, identify trends affecting our business, formulate our business plans and make strategic decisions. The number of Lapiplasty Procedure kits sold during the twelve months ended December 31, 2023 increased by 5,019, or 20%, over the twelve months ended December 31, 2022. The blended average sales price per Lapiplasty Procedure kits sold was $6,306 during the twelve months ended December 31, 2023, a 10% increase over the same period in 2022. We define the blended average sales price as revenue divided by Lapiplasty Procedure kit sold that includes the revenue for all products sold from our expanding product line. The number of active surgeons as of December 31, 2023 was 2,855, an increase of 20% from the prior year. We define the number of active surgeons as the number of surgeons that performed at least one procedure using the Lapiplasty System in the trailing twelve-month period. The surgeon utilization rate for the twelve months ended December 31, 2023 increased 0.6% over the twelve months ended December 31, 2022 to an average of 10.4 Lapiplasty Procedure kits per active surgeon.

We believe that the number of Lapiplasty Procedure kits sold, blended average revenue per Lapiplasty Procedure kit sold, number of active surgeons using the Lapiplasty System and the surgeon utilization rate are useful indicators of our ability to drive adoption of the Lapiplasty System and generate revenue and are helpful in tracking the progress of our business. While we believe these metrics are representative of our current business, we anticipate these metrics may be substituted by 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 macro-economic conditions 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 2,200 facilities across the United States and plan to continue to increase access by marketing to 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 supporting 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 support future sales growth, we intend to continue educating hospitals and facility administrators on the differentiated benefits associated with the Lapiplasty System, supported by our robust portfolio of clinical data. If we are unable to successfully continue to commercialize our Lapiplasty System, we may not be able to generate sufficient revenue to achieve or sustain profitability. In the near term, we expect we will continue to operate at a loss, and we anticipate we will finance our operations principally through the use of our cash and cash equivalents, marketable securities, and expected revenues. We may also raise funds by incurring debt and through offerings of our capital stock.

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 continue to expand our sales force and management team in the United States, as well as our patient focused outreach and education campaigns. We have approximately 340 employee sales representatives, associate sales representatives, clinical specialists, and sales managers at December 31, 2023. We plan to grow this specialized team in 2024 to ensure strong surgeon support and continued market penetration.

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In research and development, our team and surgeon consultants are continually working on next-generation innovations for the surgical correction of bunions and other conditions that often present with bunions. In 2021, we launched (1) the Lapiplasty Mini-Incision System, which is designed to allow the Lapiplasty Procedure to be performed through a miniature, 3.5cm incision as compared to the current 6cm to 8cm incision, and (2) the Adductoplasty System, which brings together our implants and instrumentation to provide a comprehensive system designed for reproducible realignment, stabilization, and fusion of the midfoot to address midfoot deformities that can occur in up to 30% of bunion patients. In 2022, we introduced (1) the 3-n-1 Guide, which combines three separate instruments and three procedure steps into one instrument and step, (2) the S4A plating system, which features advanced 3D contours designed to accommodate variations in patient anatomy, and (3) the SpeedRelease Instrument, which is a single-use instrument designed to make a challenging soft tissue release performed in the majority of Lapiplasty cases easier to perform and more reproducible for the surgeon. In 2023, in addition to the acquisition of the assets of RPM-3D discussed above, we began the market release of (1) the SpeedPlate fixation platform, which can be used in the Lapiplasty and Adductoplasty Procedures, as well as other common bone fusion procedures of the foot, (2) the Hammertoe PEEK Fixation System designed to address hammertoe, claw toe and mallet toe deformities, which often present concomitantly with bunions, and (3) LapiTome and RazorTome Osteotomes, which are sterile, single-use instruments that are designed to facilitate more efficient removal and release of bone slices and soft tissue in Lapiplasty and Adductoplasty cases.

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 to have net losses from these activities, 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 30 to 40% of full year revenues, and lower sales volumes in the subsequent first calendar quarter. Our sales volumes in the fourth quarter tend to be higher as many patients elect to have surgery after meeting their annual deductible and having time to recover over the winter holidays. Our sales volumes in subsequent first calendar quarters also tend to be lower as a result of adverse weather and by resetting annual patient healthcare insurance plan deductibles, both of which may cause patients to delay elective procedures; however, in some years the first quarter may benefit from additional sales volumes when high patient demand for surgeries in the fourth quarter cannot be fully accommodated and those surgical procedures are rolled over into the first quarter. Similar to the rest of the orthopaedic industry, we have experienced and expect to continue to experience lower sales volumes in the third quarter than throughout the rest of the year as elective procedures generally decline during the summer months.

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. For Adductoplasty Procedures in which fusion is performed on multiple TMT joints, either CPT 28730 or CPT 27835 applies and are classified under APC 5115.

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Components of Our Results of Operations

Revenue

We currently generate revenue from the sale of our proprietary Lapiplasty System and the minimally invasive variations, Adductoplasty System, Hammertoe PEEK Fixation System, SpeedPlate Implant Fixation Platform, single use osteotomes and release instruments, and other ancillary products. These systems bring together single-use implant kits, reusable instrument trays, and surgical techniques. We sell the kits and single use instruments and other products to physicians, surgeons, hospitals and ambulatory surgery centers in the United States through a network of employee sales representatives and independent sales agencies.

No single customer accounted for 10% or more of our revenue during 2023. We expect our revenue to increase in absolute dollars in the foreseeable future as we expand our product offerings, sales territories, new accounts and trained physician base and as existing physician customers perform more Lapiplasty Procedures, though it may fluctuate from quarter to quarter due to a variety of factors, including seasonality and the macro-economic environment.

Cost of Goods Sold

Cost of goods sold consists primarily of costs for the purchase of our products from third-party manufacturers. Direct costs from our third-party manufacturers include 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, certain direct costs such as those incurred for shipping our products, and personnel costs. We expense all inventory provisions for excess, obsolete and field losses 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 and products, third-party manufacturing costs and cost-reduction strategies. We expect our gross profit to increase in the foreseeable future as our revenue grows, though our gross margin may fluctuate from quarter to quarter due to changes in average selling prices as we introduce new products, and as we adopt new manufacturing processes and technologies.

Operating Expenses

Sales and Marketing

Sales and marketing expenses consist primarily of compensation for personnel, including salaries, bonuses, benefits, sales commissions and share-based compensation, related to selling and marketing functions, surgical instrument expense, physician education programs, training, shipping costs related to sending products to our sales representatives, travel expenses, marketing initiatives including our direct-to-patient outreach program and advertising, market research and analysis and conferences and trade shows. We expect sales and marketing expenses to continue to increase in absolute dollars in the foreseeable future as we continue to invest in our direct sales force and expand our marketing efforts, and as we continue to expand our sales and marketing infrastructure to both drive and support anticipated sales growth, though it may fluctuate from quarter to quarter.

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 other 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 studies, and other related activities.

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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.

Interest Income

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

Interest Expense

Interest expense consists of interest incurred and amortization of debt discount and issuance costs related to outstanding borrowings.

Results of Operations

Comparison of the years ended December 31, 2023 and 2022

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

* Not meaningful

Revenue. Revenue increased by $45.3 million, or 31.9%, in the year ended December 31, 2023, as compared to 2022. The increase was partially driven by a 20% increase in the number of Lapiplasty Procedure kits sold in 2023 compared to 2022 as the result of an expanded surgeon customer base. The increase in the volume of Lapiplasty Procedure kits sold resulted in 50.9% of the revenue growth from 2022 to 2023. The remaining revenue growth was a result of increased adoption of our newer technologies and selling more products used in bunion cases resulting in a 10% increase in average blended revenue per Lapiplasty Procedure kit sold compared to the same period in 2022.

Cost of Goods Sold, Gross Profit and Gross Margin. Cost of goods sold increased by $9.6 million, or 37.8%, in the year ended December 31, 2023, as compared to 2022. The increase in cost of goods sold was primarily due to a $6.7 million increase in direct costs of goods sold and a $0.5 million increase in royalty expense both resulting from increased sales, $1.8 million increase in overhead expenses resulting from an increase in our headcount to support our growing business, and a $0.7 million increase in inventory provisions. Gross profit increased $35.6 million from the year ended December 31, 2023 as compared to 2022, primarily due to sales growth. Gross profit margin for the year end December 31, 2023 decreased from 82.0% to 81.2%, as compared to the same period in 2022, primarily due to changes in product mix, an increase in overhead, and an increase in inventory provisions, partially offset by lower royalty rates on newer products.

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Sales and Marketing Expenses. Sales and marketing expenses increased by $36.3 million, or 34.7%, in the year ended December 31, 2023, as compared to 2022. The increase in sales and marketing expenses was due to growth in our overall business. Sales and marketing expenses increased due to an increase of $15.7 million in payroll and related expenses from increased headcount of sales and marketing personnel, an increase of $11.6 million for higher commissions from increased sales by our employee sales representatives and independent sales agencies, $2.5 million in surgeon training and clinical-related expenses, an increase of $2.2 million in surgical instrument expense, an increase of $1.9 million primarily due to higher advertising fees for direct to consumer campaigns and sales meeting costs, an increase of $1.2 million in professional services related to marketing, an increase of $0.5 million in shipping costs due to increased sales, and an increase of $0.3 million in rent expense and occupancy costs related to moving into our new headquarters building in third quarter of 2022.

Research and Development Expenses. Research and development expenses increased by $1.9 million, or 13.7%, in the year ended December 31, 2023, as compared to 2022. The increase in research and development expenses was due to increases of $0.9 million in payroll and payroll-related costs resulting from increased headcount of research and development personnel, an increase of $0.6 million in product testing and validation, and an increase of $0.3 million in rent expense and occupancy costs related to moving into our new headquarters building in third quarter of 2022.

General and Administrative Expenses. General and administrative expenses increased by $14.0 million, or 42.5%, in the year ended December 31, 2023, as compared to 2022. The increase in general and administrative expenses was primarily due to an increase of $8.9 million in payroll and payroll-related costs from increased headcount to support our growing business, an increase of $4.2 million in professional services, primarily consisting of a $3.3 million increase in accrued compensation expense related to the milestone payments for our acquisition of RPM-3D in second quarter of 2023 and a $0.9 million increase in legal expenses, an increase of $0.7 million in rent expense and occupancy costs related to moving into our new headquarters building in third quarter of 2022, and a $0.5 million increase in amortization of finite-lived intangible assets from our acquisition of RPM-3D.

Interest Income. Interest income increased by $5.4 million in 2023 as compared to 2022. The increase in interest income was due to higher cash balances invested in marketable securities during 2023 due to our equity offering in the first quarter of 2023 and higher interest rates compared to 2022.

Interest Expense. Interest expense increased by $0.8 million, or 17.5%, from the year ended December 31, 2023 as compared to 2022. The increase in interest expense was due to a higher average debt balance in 2023 compared to 2022 and slightly higher interest rates on our outstanding debt in 2023 compared to 2022.

Debt Extinguishment Loss. Debt extinguishment loss decreased by $4.5 million, for the year ended December 31, 2023 as compared to the same period of 2022 due to our debt refinancing in 2022.

For the comparison of the results of operations for the years ended December 31, 2022 and 2021, refer to our Annual Report on Form 10-K, for the year ended December 31, 2022, as filed with the U.S Securities and Exchange Commission on March 8, 2023, in Part II Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Liquidity and Capital Resources

Overview

Before our IPO, our primary sources of capital were private placements of common stock and convertible preferred stock, debt financing agreements and revenue from the sale of our products. In April 2021, we received net proceeds of $107.6 million from our IPO. On February 10, 2023, we completed a follow-on public offering of 5,476,190 shares of our common stock, which included the exercise in full of the underwriters' option to purchase additional shares, at a price to the public of $21.00 per share. This offering resulted in net proceeds of approximately $107.5 million after deducting underwriting discounts and commissions of $6.9 million and offering expenses payable by us of approximately $0.6 million.

In April 2022, we entered into a five-year $150.0 million loan arrangement, initially consisting of up to $120.0 million in term loans over four tranches and up to $30.0 million in a revolving loan facility with entities affiliated with MidCap. As of December 31, 2023, we have $50.0 million under the term loan and $4.0 million under the revolving loan facility outstanding. As of December 31, 2023, tranche two ($30.0 million) of the term loan expired and is no longer available. Tranches three and four provide up to an additional $40.0 million in borrowing capacity in the aggregate, subject to the achievement of certain revenue targets.

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As of December 31, 2023, we had cash and cash equivalents of $13.0 million and marketable securities of $110.2 million available for sale, an accumulated deficit of $134.2 million and $54.0 million of principal outstanding under our term loan and revolving loan agreements. We believe that our existing cash and cash equivalents, marketable securities, available debt borrowings, and expected revenues will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months from the date of the issuance of these financial statements. We may be required or decide to raise additional financing to support further growth of our operations.

Funding Requirements

We use our cash to fund our operations, which primarily includes product costs as well as our sales and marketing and R&D expenses and related personnel costs. We expect our sales and marketing expenses to increase for the foreseeable future as we continue to invest in our direct sales force and expand our marketing efforts, and as we continue to expand our sales and marketing infrastructure to both drive and support anticipated sales growth. We also expect R&D expenses to increase for the foreseeable future as we continue to hire personnel and invest in next-generation innovations of our 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 also incur and will continue to incur additional expenses as a result of operating as a public company. In the second quarter of 2023, funds were used for the acquisition of RPM-3D, and from time to time in the future, 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 and capital expenditures will depend on many factors, including:

•
the scope and timing of our investment in our commercial infrastructure and sales force;

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

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

•
the degree and rate of market acceptance of the Lapiplasty System and our other products;

•
the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, including enforcing our intellectual property rights against infringing products or technologies or enforcing contractual rights against parties breaching agreements with us;

•
our need to implement additional infrastructure and internal systems;

•
the research and development activities we intend to undertake in order to improve the Lapiplasty System and other products, to commercialize PSI technologies, 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;

•
the effect of inflation, interest rate changes, and other general economic conditions on our operations and business;

•
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 any infectious disease outbreak on our business.

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Based upon our current operating plan, we believe that our existing cash, cash equivalents, marketable securities, and available debt borrowings will enable us to fund our operating expenses and capital expenditure requirements for at least the next twelve months. We have based this estimate on assumptions that may prove to be wrong or that may change in the future, and we could utilize our available capital resources sooner than we expect. We may seek to raise any necessary additional capital through public or private equity offerings or debt financings, credit or loan facilities or a combination of one or more of these or other funding sources. Additional funds may not be available to us on acceptable terms or at all. If we fail to obtain necessary capital when needed on acceptable terms, or at all, we could be forced to delay, limit, reduce or terminate our product development programs, commercialization efforts, sales and marketing initiatives, or other operations. If we raise additional funds by issuing equity securities, our stockholders will suffer dilution and the terms of any financing may adversely affect the rights of our stockholders. In addition, as a condition to providing additional funds to us, future investors may demand, and may be granted, rights superior to those of existing stockholders. Debt financing, if available, is likely to involve restrictive covenants limiting our flexibility in conducting future business activities, and, in the event of insolvency, debt holders would be repaid before holders of our equity securities received any distribution of our corporate assets.

Cash Flows

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

Net Cash Used in Operating Activities

Net cash used in operating activities for the year ended December 31, 2023 was $34.6 million, consisting primarily of a net loss of $49.5 million and an increase in net operating assets of $9.7 million, which were partially offset by non-cash charges of $24.7 million. The non-cash charges consist primarily of share-based compensation expense of $17.4 million, depreciation and amortization expense of $5.4 million and non-cash lease expense of $2.5 million, offset by amortization and accretion of marketable securities of $1.4 million. The increase in net operating assets was primarily due to an increase of $9.8 million in inventories to meet demand for new products and safety stock, an increase of $9.3 million in accounts receivable due to sales growth in 2023, and an increase of $1.2 million in prepaid expenses and other assets (excluding unsettled securities transactions), which were partially offset by a $7.5 million increase to accrued liabilities and a $3.2 million increase to accounts payable due to timing of payments and growth of our operations. The increase of $7.5 million in accrued liabilities consisted of an increase of $4.2 million due to timing of payments, and an increase of $3.3 million due to increased accrued compensation expense related to our acquisition of RPM-3D in the second quarter 2023.

Net cash used in operating activities for the year ended December 31, 2022 was $30.6 million, consisting primarily of a net loss of $42.8 million and an increase in net operating assets of $5.8 million, which were partially offset by non-cash charges of $18.0 million. The increase in net operating assets was primarily due to an increase in accounts receivable resulting from higher sales revenue in 2022, higher inventories resulting from higher purchases in anticipation of growing demand in 2023 and to guard against supply chain risks, and an increase in prepaid expenses and other assets due to timing of payments, which were offset by increases in accounts payable and accrued liabilities due to timing of payments and growth of our operations. The non-cash charges primarily consisted of share-based compensation expense of $8.1 million, a loss on extinguishment of debt of $4.5 million, non-cash lease amortization of $2.5 million, depreciation and amortization expense of $2.1 million, and $0.4 million in provision for doubtful accounts primarily driven by higher account receivable balances at year end.

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Net cash used in operating activities for the year ended December 31, 2021 was $17.2 million, consisting primarily of a net loss of $20.6 million and an increase in net operating assets of $1.0 million, which were partially offset by non-cash charges of $4.3 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, and amortization of debt issuance costs of $0.2 million.

Net Cash Used in Investing Activities

Net cash used in investing activities for the year ended December 31, 2023 was $81.3 million consisting of $169.9 million in purchases of marketable securities available for sale, $20.0 million for the acquisition of the RPM-3D assets, and $11.5 million in purchases of property and equipment, partially offset by $120.0 million in sales and maturities of marketable securities available for sale. The purchases of marketable securities were the result of cash invested from our public offering of common stock during the first quarter of 2023. The purchases of property and equipment consist of $5.0 million in purchases of capitalized surgical instruments for our reusable instrument trays driven by higher numbers of employee sales representatives and sales growth and $6.5 million of purchases of fixed assets and leasehold improvements primarily for our new corporate headquarters building.

Net cash used in investing activities for the year ended December 31, 2022 was $76.5 million consisting of $63.4 million in purchases of marketable securities available for sale, partially offset by $1.7 million in sales and maturities of marketable securities available for sale, and $14.8 million in purchases of property and equipment. The purchases of property and equipment consist of $5.1 million in purchases of capitalized surgical instruments for our reusable instrument trays driven by higher numbers of employee sales representatives and sales growth and $8.0 million of purchases of fixed assets and leasehold improvements primarily for our new corporate headquarters building.

Net cash used in investing activities for the year ended December 31, 2021 was $2.7 million, consisting of purchases of capitalized surgical instruments for our reusable instrument trays.

Net Cash Provided by Financing Activities

Net cash provided by financing activities for the year ended December 31, 2023 was $109.4 million, consisting of $107.5 million of net cash proceeds from our public offering of common stock in the first quarter of 2023 and $1.9 million from the exercise of stock options.

Net cash provided by financing activities for the year ended December 31, 2022 was $20.8 million, consisting of $53.5 million of net cash proceeds from the term loan agreement and revolving loan facility with MidCap and $2.2 million from the exercise of stock options, partially offset by the $33.9 million repayment of the CRG Group L.P. term loan and $1.0 million of third party debt issuance costs paid to related to the new MidCap borrowings.

Net cash provided by financing activities for the year ended December 31, 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 Paycheck Protection Program loan of $1.8 million.

Surgeon Advisory Board Royalty Agreements

We recognized royalties expense of $6.9 million and $6.5 million for the years ended December 31, 2023 and 2022, respectively. For the years ended December 31, 2023 and 2022, the aggregate royalty rate was 3.7% and 4.6%, respectively. Each of the royalty agreements with our surgeon consultants 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 new corporate headquarters office located in Ponte Vedra, Florida. We entered into a 10-year lease in February 2022 for our new location which expires in July 2032. Lease payments comprise the base rent plus operating costs which includes taxes, insurance, and common area maintenance. We also have commitments for future payments related to our former headquarters which expire in April 2026. We have obtained subleases for this space. The remaining lease obligations are $25.7 million under these leases.

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Critical 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, "Summary of Significant Accounting Policies," of the Notes to the Financial Statements included in this Annual Report, we believe the following discussion addresses our most critical accounting policies, which are those that are most important to our financial condition and our results of operations and require our most difficult, subjective and complex judgments.

Stock-Based Compensation

We account for stock-based compensation arrangements at fair value. We determine the fair value on the grant date for stock options using the Black-Scholes model and performance-based restricted stock unit ("PSU") awards using a Monte Carlo valuation model.

The fair value of these 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 and are adjusted to actuals as they occur. The estimated forfeiture rate is based on historical analysis of actual forfeiture rates of similar awards.

The fair value of the stock options and PSUs are locked at grant date and will not fluctuate after grant date. However, the underlying inputs to the Black-Scholes option model and the Monte Carlo valuation model may change in the future for new grants which could impact the fair value of stock-based awards granted each year and could cause compensation expense to vary in future periods.

Goodwill and Other Intangible Assets

Our goodwill represents the excess of the cost over the fair value of net assets acquired. The determination of the value of goodwill and intangibles assets arising from acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of net tangible and intangible assets acquired. Goodwill is not amortized and is assessed for impairment using fair value measurement techniques on an annual basis or more frequently if facts and circumstances warrant such a review. Goodwill is considered to be impaired if we determine that the carrying value of our reporting unit exceeds its respective fair value.

We have a definite lived intangible technology asset that is reviewed for impairment upon triggering events that indicate the carrying value of the asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount to future net undiscounted cash flows expected to be generated by the associated asset. If the asset's carrying value is determined to not be recoverable, the impairment to be recognized is measured by the amount by which the carry amount exceeds the fair market value of the intangible asset. Calculating cash flows for this measurement requires us to make significant estimates and assumptions related to forecasts of future revenues, expenses and discount rates. Changes in these assumptions could have a significant impact on the fair value of the technology intangible. If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of the assets. The calculation of the fair value of the intangible assets involves Level 3 fair value measurements. Any impairment recognized could significantly impact our results of operations in the period of impairment.

Recently Issued Accounting Pronouncements

For information regarding recent accounting pronouncements and their expected impact on our future results of operations and financial condition, refer to Note 3, "Recent Accounting Pronouncements," of the Notes to the Financial Statements.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our 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 with the goal of advancing the standard of care for the surgical management of bunion and related midfoot deformities. We have pioneered our proprietary Lapiplasty 3D Bunion Correction System—a combination of instruments, implants and surgical methods designed to surgically correct all three planes of the bunion deformity and secure the unstable joint, addressing the root cause of the bunion and helping patients get back to their active lifestyles. Although bunions are deformities typically caused by an unstable joint in the middle of the foot that leads to a three-dimensional ("3D") misalignment in the foot’s anatomical structure, the majority of traditional surgical approaches focus on correcting the deformity from a two-dimensional ("2D") perspective and therefore fail to address the root cause of the disorder. To effectively restore the normal anatomy of bunion patients and improve clinical outcomes, we believe addressing the root cause of the bunion is critical and have developed the Lapiplasty System to correct the deformity across all three anatomic dimensions. Our mission is to be the leader in the surgical treatment of bunions by establishing the Lapiplasty System as the standard of care. In 2021, we expanded our offerings with the Adductoplasty™ Midfoot Correction System, designed for reproducible correction of the midfoot to provide further support to hallux valgus patients.

We were formed in 2013 and since receiving 510(k) clearance for the Lapiplasty System in March 2015, we have sold more than 65,000 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 193 territories in the United States. As of December 31, 2022, we had 168 direct sales representatives and 25 independent sales agencies. In 2022, employee sales representatives generated approximately 72% of revenues while approximately 28% 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 were 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, 2022, we had cash and cash equivalents of $19.5 million and marketable securities of $61.8 million available for sale to fund operations, an accumulated deficit of $84.7 million and $54.0 million of principal outstanding under our term loan and revolving loan agreements.

On February 10, 2023, the Company completed a public offering of 5,476,190 shares of its common stock, which included the exercise in full of the underwriters' option to purchase additional shares, at a price to the public of $21.00 per share. This offering resulted in net proceeds of approximately $107.5 million after deducting underwriting discounts and commissions of $6.9 million and offering expenses payable by the Company of approximately $0.6 million.

COVID-19 Impact

The COVID-19 pandemic has had, and we expect that it will continue to have intermittent impacts on our business, operations, and financial results and condition. Among other impacts, COVID-19 and its variants have slowed our revenue growth by decreasing or delaying elective procedures, such as the Lapiplasty Procedure, during various phases of the pandemic, including in particular from March through May 2020 when governmental “shelter in place” orders restricted elective procedures and in the second half of 2021 when more virulent COVID-19 variants affected patient demand for elective procedures and limited hospital staffing and capacity. While it is difficult to determine with certainty, we believe that COVID-19 did not have a significant impact on our 2022 operations and financial results.

However, there is still uncertainty around the potential impacts related to COVID-19 especially if potentially more contagious and virulent variants of the virus emerge. If states implement shelter-in-place rules again, medical facilities implement restrictions on

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elective surgeries as a result of COVID-19 surges, or other pandemic disruptions occur, we may be required to adjust our operations as well as our forecasted revenues and operating results. We cannot assure you that we will not experience additional negative impacts associated with COVID-19 in the future, which could be significant. For more information, refer to Item 1A, "Risk Factors—The ongoing global COVID-19 pandemic has adversely affected, and may continue to adversely affect, our business, financial condition and results of operations."

Economic Environment

During the year ended December 31, 2022 and continuing into 2023, there is uncertainty in the macro-economic environment. Inflationary pressures, rising interest rates, reduced consumer confidence, and ongoing supply chain challenges may result in higher costs and longer lead times from suppliers and potentially reduced demand for our Lapiplasty Procedure Kits. General economic conditions may also negatively impact demand for elective surgeries. While we continuously work with suppliers to mitigate higher costs and longer lead times and continue to invest in our direct sales channel, patient education initiatives, clinical evidence and product innovations to build demand for our products, we expect these macro-economic challenges to continue throughout 2023, which may impact our results of operations.

Key Business Metrics

We regularly review a number of operating and financial metrics, including the number of Lapiplasty Procedure Kits sold, the number of active surgeons using the Lapiplasty System and utilization rates, 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, 2022 increased by 7,166 or 41.0% over the twelve months ended December 31, 2021, and the number of active surgeons as of December 31, 2022 was 2,387, an increase of 33.9% from the prior year. The utilization rate for the twelve months ended December 31, 2022 increased 5.3% over the twelve months ended December 31, 2021 to an average of 10.3 Lapiplasty Procedure Kits per active surgeon.

We believe that the number of Lapiplasty Procedure Kits sold, number of active surgeons using the Lapiplasty System and utilization rate are useful indicators of our ability to drive adoption of the Lapiplasty System and generate revenue and are helpful in tracking the progress of our business. While we believe these metrics are representative of our current business, we anticipate these metrics may be substituted for additional or different metrics as our business grows.

Factors Affecting Our Business

We believe that our financial performance has been and in the foreseeable future, will continue to depend on many factors, including COVID-19 and macro-economic conditions 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 1,900 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 supporting procedure growth, hospital and ambulatory surgery center facility approvals are necessary for both existing and future surgeon customers to access our products. To facilitate greater access to our products and drive future sales growth, we intend to continue educating hospitals and facility administrators on the differentiated benefits associated with the Lapiplasty System, supported by our robust portfolio of clinical data. If we are unable to successfully continue to commercialize our Lapiplasty System, we may not be able to generate sufficient revenue to achieve or sustain profitability. In the near term, we expect we will continue to operate at a loss, and we anticipate we will finance our operations principally through offerings of our capital stock and by incurring debt.

Investments in Innovation and Growth

We expect to continue to focus on long-term revenue growth through investments in our business. In sales and marketing, we are dedicating meaningful resources to expand our sales force and management team in the United States, as well as our patient focused outreach and education campaigns. We are hiring additional employee sales representatives and employee field sales management to strategically access more regions with high densities of prospective patients and by focusing the efforts of our independent sales channel on our products. In research and development, our team and our Surgeon Advisory Board are continually working on next-generation innovations of the Lapiplasty System and related products. In addition to expanding our Lapiplasty offerings with products like the Lapiplasty Mini-Incision and Micro-Lapiplasty Minimally Invasive Systems, we are continually

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exploring opportunities to advance our core Lapiplasty System instrumentation and implants to further improve surgical efficiency, enhance reproducibility of outcomes and speed surgical recovery for patients. In 2022, we introduced (i) the 3-n-1 Guide, which combines three separate instruments and three procedure steps into one instrument and step, (ii) the S4A plating system, which features advanced 3D contours designed to accommodate variations in patient anatomy, and (iii) the SpeedRelease Instrument, which is a single-use instrument designed to make a challenging soft tissue release performed in the majority of Lapiplasty cases easier to perform and more reproducible for the surgeon.

We are also pursuing the development and potential commercialization, if cleared, of new products to address ancillary surgical procedures performed routinely in connection with the Lapiplasty Procedure. For example, to help address midfoot deformities that can occur in up to 30% of bunion patients, we developed and, in September 2021, announced the commercial launch of the Adductoplasty™ System. The Adductoplasty™ System brings together our implants and instrumentation to provide a comprehensive system designed for reproducible realignment, stabilization, and fusion of the midfoot and thus, provides surgeons with a precision, instrumented approach to treat both the bunion and coexisting midfoot deformities.

Moreover, in our general and administrative functions, we expect to continue to hire personnel and expand our infrastructure to both drive and support our anticipated growth and operations as a public company. Accordingly, in the near term, we expect these activities to increase our net losses, but in the longer term we anticipate they will positively impact our business and results of operations.

Seasonality

We have experienced and expect to continue to experience seasonality in our business, with higher sales volumes in the fourth calendar quarter, historically accounting for approximately 35% to 40% of full year revenues, and lower sales volumes in subsequent first calendar quarter. Our sales volumes in fourth calendar quarters tend to be higher as many patients elect to have surgery after meeting their annual deductible and having time to recover over the winter holidays. Our sales volumes in subsequent first calendar quarters also tend to be lower as a result of adverse weather and by resetting annual patient healthcare insurance plan deductibles, both of which may cause patients to delay elective procedures. The orthopaedic industry traditionally experiences lower sales volumes in the third quarter than throughout the rest of the year as elective procedures generally decline during the summer months. Although we follow orthopaedic industry trends generally, to date our third quarter sales volumes have not been lower than other quarters, but we may experience relatively lower sales volumes during third quarters in the future.

Coverage and Reimbursement

Hospitals, ambulatory surgery centers and surgeons that purchase or use our products generally rely on third-party payors to reimburse for all or part of the costs and fees associated with procedures using our products. As a result, sales of our products depend, in part, on the extent to which the procedures using our products are covered by third-party payors, including government programs such as Medicare and Medicaid, private insurance plans and managed care programs. Based on historical claims data from 2017, approximately 63% of Lapidus cases and 60% of all bunion surgical cases were paid by private payors.

Medicare payment rates to hospital outpatient departments are set under the Medicare hospital outpatient prospective payment system, which groups clinically similar hospital outpatient procedures and services with similar costs to ambulatory payment classifications ("APCs"). Each APC is assigned a single lump sum payment rate, which includes payment for the primary procedure as well as any integral, ancillary, and adjunctive services. The primary CPT codes for the Lapiplasty Procedure, CPT 28297 and CPT 28740, are grouped together under APC 5114. For Lapiplasty Procedures in which fusion is performed on multiple TMT joints, CPT 28730 applies and is classified under APC 5115.

Components of our Results of Operations

Revenue

We currently derive nearly all of our revenue from the sale of our proprietary Lapiplasty System, and to a lesser extent from the Adductoplasty System, which we introduced in 2021, and ancillary products. The Lapiplasty and Adductoplasty Systems are comprised of single-use implant kits and reusable instrument trays. We sell the Lapiplasty and Adductoplasty Systems to physicians, surgeons, hospitals and ambulatory surgery centers in the United States through a network of employee sales representatives and independent sales agencies. Our primary product is the Lapiplasty System, which is an instrumented, reproducible approach to 3D bunion correction that helps patients rapidly return to weight-bearing in a post-operative boot. We also offer other advanced instrumentation and implants for use in the Lapiplasty and Adductoplasty Procedures or other ancillary procedures performed in high frequency with bunion surgery.

No single customer accounted for 10% or more of our revenue during 2022. 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

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customers perform more Lapiplasty Procedures, though it may fluctuate from quarter to quarter due to a variety of factors, including seasonality, COVID-19 pandemic impacts, and the macro-economic environment.

Cost of Goods Sold

Cost of goods sold consists primarily of manufacturing costs for the purchase of our Lapiplasty and Adductoplasty Systems and other products from third-party manufacturers. Direct costs from our third-party manufacturers include costs for 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, and personnel costs. We expense all provisions for excess and obsolete inventories as cost of goods sold. We record adjustments to our inventory valuation for estimated excess, obsolete and non-sellable inventories based on assumptions about future demand, past usage, changes to manufacturing processes and overall market conditions. We expect our cost of goods sold to increase in absolute dollars in the foreseeable future to the extent more of our products are sold, though it may fluctuate from quarter to quarter.

Gross Profit and Gross Margin

We calculate gross profit as revenue less cost of goods sold, and gross margin as gross profit divided by revenue. Our gross margin has been and will continue to be affected by a variety of factors, primarily average selling prices, production and ordering volumes, change in mix of customers, third-party manufacturing costs and cost-reduction strategies. We expect our gross profit to increase in the foreseeable future as our revenue grows, though our gross margin may fluctuate from quarter to quarter due to changes in average selling prices as we introduce new products, and as we adopt new manufacturing processes and technologies.

Operating Expenses

Sales and Marketing

Sales and marketing expenses consist primarily of compensation for personnel, including salaries, bonuses, benefits, sales commissions and share-based compensation, related to selling and marketing functions, physician education programs, training, shipping costs related to sending products to our sale representatives, travel expenses, marketing initiatives including our direct-to-patient outreach program and advertising, market research and analysis and conferences and trade shows. We expect sales and marketing expenses to continue to increase in absolute dollars in the foreseeable future as we continue to invest in our direct employee 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, 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 (expense), net

Interest income and other income (expense), net consists of interest received on our money market funds and marketable securities and impairments of long-lived assets.

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Interest Expense

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

Results of Operations

Comparison of the years ended December 31, 2022 and 2021

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

* Not meaningful

Revenue. Revenue increased by $47.4 million, or 50.2%, from the year ended December 31, 2022, as compared to 2021. The increase was primarily due to a 41.0% increase in the number of Lapiplasty Procedure Kits sold in 2022 compared to 2021 as the result of an expanded customer base. The increase in the volume of Lapiplasty Procedure Kits sold resulted in 70% of the revenue growth from 2021 to 2022. The remaining revenue growth was a result of increased adoption of our newer technologies and selling more ancillary products. In addition, revenues 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 $9.7 million, or 54.4%, in the year ended December 31, 2022, as compared to 2021. The increase in cost of goods sold was primarily due to a $5.6 million increase in direct costs of goods sold and a $2.2 million increase in royalty expense both resulting from increased sales, $1.1 million increase in depreciation expense from our surgical instruments, $1.1 million increase in overhead expenses resulting from an increase in our headcount, which was partially offset by a $0.2 million decrease in provision for inventory and instrument obsolescence. Gross profit increased $37.7 million from the year ended December 31, 2022 as compared to 2021, primarily due to sales growth. Gross profit margin for the year end December 31, 2022 decreased from 81.1% to 80.6%, as compared to the same period of 2021, primarily due to depreciation expense from an increase in capitalized surgical instruments, and an increase in payroll costs, which were partially offset by a decrease in inventory and obsolescence provisions.

Sales and Marketing Expenses. Sales and marketing expenses increased by $38.1 million, or 59.1%, from the year ended December 31, 2022, as compared to 2021. The increase in sales and marketing expenses was due to growth in our overall business. Sales and marketing expenses increased due to an increase of $20.6 million in payroll and related expenses from increased headcount of sales and marketing personnel, an increase of $10.1 million primarily for higher commissions from increased sales by our employee sales representatives and independent sales agencies, an increase of $4.3 million in advertising and marketing-related expenses primarily due to higher advertising fees for direct to consumer campaigns and sales meeting costs, an increase of $1.3 million in clinical-related expenses from surgeon training, and $1.1 million in other marketing-related expenses.

Research and Development Expenses. Research and development expenses increased by $3.4 million, or 33.1%, from the year ended December 31, 2022, as compared to 2021. The increase in research and development expenses was due to increases of $2.4 million in payroll and payroll-related costs resulting from increased headcount of research and development personnel, an increase of $0.9 million in clinical expenses primarily from $0.4 million of increased spending for purchases of materials used in our prototypes and a $0.3 million increase in clinical studies costs.

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General and Administrative Expenses. General and administrative expenses increased by $14.6 million, or 79.0%, from the year ended December 31, 2022, as compared to 2021. The increase in general and administrative expenses was primarily due to an increase of $6.7 million in payroll and payroll-related costs from increased headcount to support our growing business, an increase of $2.7 million in rent expense and occupancy costs related to moving into our new headquarters building during the year, an increase of $2.5 million in business-related expenses primarily resulting from increased insurance costs and banking and credit card processing fees, and an increase of $3.2 million in professional services primarily related to a $2.2 million increase in legal expenses primarily related to litigation to protect our intellectual property rights and IT expenses related to conversion to a new service provider. Legal expenses increased $2.2 million in the current year primarily related to litigation to protect our intellectual property rights.

Interest and Other Income (Expense), Net. Interest and other income (expense), net increased by $0.9 million in 2022 as compared to 2021. The increase was due to a $1.3 million increase in interest income from higher money market fund interest rates during 2022 and investing in marketable securities in the fourth quarter of 2022 that earn higher interest rates than money market funds. This increase was partially offset by a $0.3 million loss from an impairment related to assets associated with our previous corporate headquarters operating lease.

Interest Expense. Interest expense increased by $0.3 million, or 8.3%, from the year ended December 31, 2022 as compared to 2021. The increase in interest expense was primarily due to a higher debt balance partially offset by lower interest rates on the new debt as a result of the debt refinancing in the second quarter of 2022.

Debt Extinguishment Loss. Debt extinguishment loss increased by $4.5 million, for the year ended December 31, 2022 as compared to the same period of 2021 due to our refinancing during the second quarter of 2022.

For the comparison of the results of operations for the years ended December 31, 2021 and 2020, refer to our Annual Report on Form 10-K as filed with the U.S Securities and Exchange Commission on March 4, 2022.

Liquidity and Capital Resources

Overview

Before our IPO, our primary sources of capital were private placements of common stock and convertible preferred stock, debt financing agreements and revenue from the sale of our products. In April 2021, we received net proceeds of $107.6 million from our IPO. In April 2022, we entered a new five-year $150.0 million loan arrangement, consisting of up to $120.0 million in term loans and up to $30.0 million in a revolving loan facility with entities affiliated with MidCap. On the closing date in April 2022, we borrowed $50.0 million under the term loan and $4.0 million under the revolving loan facility. The term loan proceeds were partially used to repay our term loan obligation with CRG and an early termination fee to Silicon Valley Bank ("SVB") amounting to $34.1 million including principal of $30.0 million, interest of $0.4 million and fees of $3.7 million. There was no outstanding principal at termination of the SVB loan facility. 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.

As of December 31, 2022, we had cash and cash equivalents of $19.5 million and marketable securities of $61.8 million available for sale, an accumulated deficit of $84.7 million and $54.0 million of principal outstanding under our term loan and revolving loan agreements. We believe that our existing cash and cash equivalents, marketable securities and available debt borrowings and expected revenues will be sufficient to meet our capital requirements and fund our operations for at least twelve months from the issuance of our financial statements as of and for the year ended December 31, 2022. We may be required or decide to raise additional financing to support further growth of our operations. See Note 13, "Subsequent Events", for information about our recent offering of our common stock.

Long-Term Obligations

MidCap Term Loan and Revolving Loan Facility

On April 29, 2022, we entered into a new five-year $150 million loan facility with MidCap, providing up to $120 million in term loans and a $30 million revolving loan facility.

The term loan provides for a 60-month term loan facility up to $120 million in borrowing capacity, over four tranches. At loan closing, we drew $50 million under tranche one. The remaining tranches provide up to an additional $70 million in borrowing capacity in the aggregate, subject to certain revenue targets for tranches three and four.

The revolving loan facility provides up to $30 million in borrowing capacity subject to a borrowing base. The borrowing base is calculated based on certain accounts receivable and inventory assets. At loan closing, we drew $4 million under the revolving loan facility. We may request a $20 million increase in the revolving loan facility for a total commitment of up to $50 million. We are required to either (i) maintain a minimum drawn balance under the revolving facility agreement or (ii) pay a minimum balance fee that is equal to the amount of the minimum balance deficit multiplied by the applicable interest rate during the period. If the outstanding

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balance under the revolving loan facility exceeds the lesser of (i) 50% of the revolving borrowing capacity or (ii) 50% of the borrowing base, or we are in default, MidCap will apply funds collected from our lockbox account to reduce the outstanding balance of the revolving loan facility ("Lockbox Deductions"). As of December 31, 2022, our borrowing base level has not activated the Lockbox Deductions.

The loans are secured by substantially all our assets, including intellectual property. The loan agreements and other ancillary documents contain customary representations and warranties and affirmative and negative covenants. Under the loan agreements, we are not required to meet any minimum level of revenue if liquidity (defined as unrestricted cash plus undrawn availability under the revolving loan agreements) is greater than the outstanding balance under the term loan. Our marketable securities qualify as unrestricted cash under the loan agreements. If liquidity falls below such outstanding balance, then we are subject to a minimum trailing twelve-month revenue covenant.

Funding Requirements

We use our cash to fund our operations, which primarily include the costs of manufacturing our Lapiplasty and Adductoplasty Systems and ancillary products, as well as our sales and marketing and R&D expenses and related personnel costs. We expect our sales and marketing expenses to increase in the foreseeable future as we continue to invest in our employee 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 in 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 in the foreseeable future as we hire personnel and expand our infrastructure to both drive and support the anticipated growth in our organization. We will also incur additional expenses as a result of operating as a public company. From time to time, we may also consider additional investments in technologies, assets and businesses to expand or enhance our product offerings. The timing and amount of our operating expenditures will depend on many factors, including:

•
the scope and timing of our investment in our commercial infrastructure and sales force;

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

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

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the degree and rate of market acceptance of the Lapiplasty and Adductoplasty Systems and our ancillary products;

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

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our need to implement additional infrastructure and internal systems;

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the research and development activities we intend to undertake in order to improve the Lapiplasty System and to develop or acquire additional products;

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the investments we make in acquiring other technologies, assets or businesses to expand our product portfolio;

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the success or emergence of new competing technologies or other adverse market developments;

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any product liability or other lawsuits related to our products;

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the expenses needed to attract and retain skilled personnel;

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the costs associated with being a public company;

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

•
inflation, interest rate changes, and other general economic conditions on our operations and business.

Based upon our current operating plan, we believe that our existing cash, cash equivalents, and marketable securities will enable us to fund our operating expenses and capital expenditure requirements for at least the next twelve months. We have based this estimate on assumptions that may prove to be wrong or that may change in the future, and we could utilize our available capital resources sooner than we expect. We may seek to raise any necessary additional capital through public or private equity or debt financing, 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

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likely to involve restrictive covenants limiting our flexibility in conducting future business activities, and, in the event of insolvency, debt holders would be repaid before holders of our equity securities received any distribution of our corporate assets.

Cash Flows

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

Net Cash Used in Operating Activities

Net cash used in operating activities for the year ended December 31, 2022 was $30.6 million, consisting primarily of a net loss of $42.8 million and an increase in net operating assets of $5.8 million, which were partially offset by non-cash charges of $18.0 million. The increase in net operating assets was primarily due to an increase in accounts receivable resulting from higher sales revenue in 2022, higher inventories resulting from higher purchases in anticipation of growing demand in 2023 and to guard against supply chain risks, and an increase in prepaid expenses and other assets due to timing of payments, which were offset by increases in accounts payable and accrued liabilities due to timing of payments and growth of our operations. The non-cash charges primarily consisted of share-based compensation expense of $8.1 million, a loss on extinguishment of debt of $4.5 million, non-cash lease amortization of $2.5 million, and depreciation and amortization expense of $2.1 million, $0.4 million in provision for doubtful accounts primarily driven by higher account receivable balances at year end.

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 $1.0 million, which were partially offset by non-cash charges of $4.3 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.

Net Cash Used in Investing Activities

Net cash used in investing activities for the year ended December 31, 2022, was $76.5 million consisting of a $63.4 million in purchases of marketable securities available for sale and $14.8 million in purchases of property and equipment. The purchases of property and equipment consist of $5.1 million in purchases of capitalized surgical instruments for our reusable instrument trays driven by higher numbers of employee sales representatives and sales growth and $8.0 million of purchases of fixed assets and leasehold improvements primarily for our new corporate headquarters building, partially offset by $1.7 million in maturities of marketable securities available for sale.

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

Net Cash Provided by Financing Activities

Net cash provided by financing activities for the year ended December 31, 2022, was $20.8 million, consisting of $53.5 million of net cash proceeds from the new term loan agreement and revolving loan facility with MidCap and $2.2 million from the exercise of stock options, partially offset by the $33.9 million repayment of the CRG term loan and $1.0 million of third party debt issuance costs paid to related to the new MidCap borrowings.

Net cash provided by financing activities for the year ended December 31, 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 of $1.8 million.

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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 loan facility of $20.0 million, borrowing under a PPP 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.

Surgeon Advisory Board Royalty Agreements

We recognized royalties expense of $6.5 million and $4.3 million for the years ended December 31, 2022 and 2021, respectively. For the years ended December 31, 2022 and 2021, the aggregate royalty rate was 4.6%. Each of the royalty agreements with our Surgeon Advisory Board members prohibits the payment of royalties on products sold to entities and/or individuals with whom any of the surgeon advisors is affiliated.

Operating Lease

We have commitments for future payments related to our new corporate headquarters office located in Ponte Vedra, Florida. We entered into a 10-year lease in February 2022 for our new location which expires in July 2032. Lease payments comprise the base rent plus operating costs which includes taxes, insurance, and common area maintenance. We also have commitments for future payments related to our former headquarters which expire in April 2026. We have obtained a sublease for a portion of this space and continue to actively market the remainder of the space. The remaining lease obligations are $25.9 million under these leases.

Critical 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 options 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 expected dividend rate. 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.

Fair Value of Common Stock

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.

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Recently Issued Accounting Pronouncements

Refer to 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.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our 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.

COVID-19 Impact

In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, and in response to COVID-19 at that time, certain states within the United States implemented shelter-in-place rules requiring certain businesses not deemed “essential” to close and requiring elective procedures to be delayed. 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 Metrics

We regularly review a number of operating and financial metrics, including the number of Lapiplasty Procedure Kits sold, the number of active surgeons using the Lapiplasty System and utilization rate, to evaluate our business, measure our performance, identify trends affecting our business, formulate our business plans and make strategic decisions. The number of Lapiplasty Procedure Kits sold during the 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 Results of Operations

Revenue

We currently derive nearly all of our revenue from the sale of our proprietary Lapiplasty System, and to a lesser extent from the Adductoplasty System, which we introduced in the third quarter of 2021, and ancillary products. The Lapiplasty and Adductoplasty Systems are comprised of single-use implant kits and reusable instrument trays. We sell the Lapiplasty and Adductoplasty Systems to physicians, surgeons, hospitals and ambulatory surgery centers in the United States through a network of 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 (expense), 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 Expense

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

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Results of Operations

Comparison of the years ended December 31, 2021 and 2020

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

* 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.

Liquidity and Capital Resources

Overview

Before our IPO, our primary sources of capital were private placements of common stock and convertible preferred stock, debt financing agreements and revenue from the sale of our products. In April 2021, we received net proceeds of $107.6 million from our IPO. As of 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 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%.

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.

Funding Requirements

We use our cash to fund our operations, which primarily include the costs of manufacturing our Lapiplasty and Adductoplasty Systems and ancillary products, as well as our sales and marketing and research and development expenses and related personnel costs. We expect our sales and marketing expenses to increase for the foreseeable future as we continue to invest in our direct sales force and expand our marketing efforts, and as we continue to expand our sales and marketing infrastructure to both drive and support anticipated sales growth. We also expect R&D expenses to increase for the foreseeable future as we continue to hire personnel and invest in next-generation innovations of the Lapiplasty System and related products. In addition, we expect our general and administrative expenses to increase for the foreseeable future as we hire personnel and expand our infrastructure to both drive and support the anticipated growth in our organization. We will also incur additional expenses as a result of operating as a public company 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:

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the scope and timing of our investment in our commercial infrastructure and sales force;

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

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

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

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

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our need to implement additional infrastructure and internal systems;

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the research and development activities we intend to undertake in order to improve the Lapiplasty System and to develop or acquire additional products;

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the investments we make in acquiring other technologies, assets or businesses to expand our product portfolio;

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the success or emergence of new competing technologies or other adverse market developments;

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any product liability or other lawsuits related to our products;

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the expenses needed to attract and retain skilled personnel;

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the costs associated with being a public company; and

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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 Flows

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

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 Investing 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 purchases of capitalized surgical instruments 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.

Surgeon Advisory Board 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.

Critical 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 Stock

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

Refer to 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.