TMCI US Equity☆

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 AdductoplastyTM 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 AdductoplastyTM System. The AdductoplastyTM 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):

Year Ended December 31, Change

Operating expenses

Interest and other income (expense), net 910 18 892 *

Debt extinguishment loss (4,483 ) — (4,483 ) *

* 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:

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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 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;

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

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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):

Year Ended December 31,

Net cash (used in) provided by:

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 7A. Quantitative and Qualitative Disclosures About Market Risk.

As a smaller reporting company as defined by Item 10 of Regulation S-K, we are not required to provide the information required by this item.

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Item 8. Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248) 70

Balance Sheets 71

Statements of Operations and Comprehensive Loss 72

Statements of Stockholders’ Equity 73

Statements of Cash Flows 74

Notes to Financial Statements 75

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Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Treace Medical Concepts, Inc.

Opinion on the financial statements

We have audited the accompanying balance sheets of Treace Medical Concepts, Inc. (a Delaware corporation) (the "Company") as of December 31, 2022 and 2021, the related statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

Change in accounting principle

As discussed in Note 3 to the financial statements, the Company has changed its method of accounting for leases in 2022 due to the adoption of Accounting Standards Codification Topic 842, Leases.

Basis for opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ GRANT THORNTON LLP

We have served as the Company’s auditor since 2018.

Jacksonville, FL

March 8, 2023

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TREACE MEDICAL CONCEPTS, INC.

Balance Sheets

(in thousands, except share and per share amounts)

December 31,

Assets

Current assets

Marketable securities, short-term 61,779 -

Prepaid expenses and other current assets 3,624 3,010

Operating lease right-of-use assets 10,138 —

Other non-current assets 146 —

Liabilities and Stockholders’ Equity

Current liabilities

Operating lease liabilities 339 —

Derivative liability on term loan — 173

Operating lease liabilities, net of current portion 15,539 —

Commitments and contingencies (Note 7)

Stockholders’ equity

Accumulated other comprehensive (loss) income (27 ) —

Total liabilities and stockholders’ equity $ 159,024 $ 140,821

The accompanying notes are an integral part of these financial statements.

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TREACE MEDICAL CONCEPTS, INC.

Statements of Operations and Comprehensive Loss

(in thousands, except share and per share amounts)

Year Ended December 31,

Operating expenses

Interest and other income (expense), net 910 18 (1,746 )

Debt extinguishment loss (4,483 ) — —

Convertible preferred stock cumulative and undeclared dividends — (196 ) (640 )

Net loss attributable to common stockholders $ (42,815 ) $ (20,748 ) $ (4,308 )

Other comprehensive income (loss):

Unrealized loss on marketable securities (27 ) — —

The accompanying notes are an integral part of these financial statements.

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TREACE MEDICAL CONCEPTS, INC.

Statements of Stockholders’ Equity

(in thousands, except share amounts)

Convertible Additional Accumulated Other Total

Preferred Stock Common Stock Paid-In Accumulated Comprehensive Stockholders’

Shares Amount Shares Amount Capital Deficit Loss Equity

Common stock issued upon exercise of stock options — — 335,025 — 364 — — 364

Share-based compensation expense — — — — 919 — — 919

Issuance of restricted stock awards — — 24,895 — — — — —

Share-based compensation expense — — — — 3,409 — — 3,409

Issuance of common stock upon net exercise of warrants — — 621,570 1 (1 ) — — —

Share-based compensation expense — — — — 8,111 — — 8,111

The accompanying notes are an integral part of these financial statements.

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TREACE MEDICAL CONCEPTS, INC.

Statements of Cash Flows

(in thousands)

Year Ended December 31,

Cash flows from operating activities

Adjustments to reconcile net loss to net cash used in operating activities

Provision for allowance for doubtful accounts 411 144 216

Non-cash lease expense 2,522 — —

Amortization of debt issuance costs 244 176 220

Impairment of capitalized surgical instruments — — 144

Gain on fair value adjustment to derivative liability (173 ) (72 ) —

Debt extinguishment loss 4,483 — 639

Loss on impairment of long-lived assets 346 — —

Other, net 25 — —

Net changes in operating assets and liabilities:

Prepaid expenses and other assets (668 ) (2,417 ) (103 )

Other non-current assets (146 ) — —

Operating lease liabilities 3,076 — —

Cash flows from investing activities

Purchases of available-for-sale marketable securities (63,409 ) — —

Maturities of available-for-sale marketable securities 1,729 — —

Cash flows from financing activities

Proceeds from interest bearing term debt 49,651 — 29,530

Proceeds from interest bearing revolving debt 3,850 — —

Payments on interest bearing debt (33,893 ) — (20,000 )

Proceeds from PPP Loan — — 1,788

Payments on PPP Loan — (1,788 ) —

Debt issuance costs (989 ) — (179 )

Proceeds from exercise of employee stock options 2,187 1,830 364

Net increase (decrease) in cash and cash equivalents (86,360 ) 87,754 5,940

Supplemental disclosure of cash flow information:

Unrealized losses on marketable securities $ 27 $ — $ —

Noncash financing activities:

Issuance of common stock upon exercise of warrants $ — $ 1 $ —

Initial fair value of derivative liability $ — $ — $ 245

The accompanying notes are an integral part of these financial statements.

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1. Formation and Business of the Company

The Company

Treace Medical Concepts, LLC was formed on July 29, 2013, as a Florida limited liability company. Effective July 1, 2014, the entity converted to a Delaware corporation and changed its name to Treace Medical Concepts, Inc. (the "Company"). The Company is a medical technology company with the goal of advancing the standard of care for the surgical management of bunion and related midfoot deformities. The Company received 510(k) clearance for the Lapiplasty System in March 2015 and began selling its surgical medical devices in September 2015. The Company has pioneered the 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. In addition, the Company offers other advanced instrumentation and implants for use in the Lapiplasty Procedure or other ancillary procedures performed in high frequency with bunion surgery. In 2021, the Company expanded its offerings with the AdductoplastyTM Midfoot Correction System, designed for reproducible correction of the midfoot to provide further support to hallux valgus patients. The Company operates from its corporate headquarters located in Ponte Vedra, Florida.

Initial Public Offering

On April 27, 2021, the Company completed its initial public offering ("IPO") of 12,937,500 shares of its common stock, which included the exercise in full of the underwriters’ option to purchase additional shares. As part of the IPO, 6,953,125 shares of common stock were issued and sold by the Company (inclusive of 703,125 shares pursuant to the exercise of the underwriters’ option) and 5,984,375 shares of common stock that were sold by the selling stockholders named in the prospectus (inclusive of 984,375 shares pursuant to the exercise of the underwriters’ option), at a price to the public of $17.00 per share. The Company received net proceeds of approximately $107.6 million, after deducting underwriting discounts and commissions of $8.3 million and offering expenses payable by the Company of $2.3 million. The Company did not receive any proceeds from the sale of the shares by the selling stockholders. 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.

Forward Stock Split

On April 16, 2021, in connection with the IPO, the Company filed an Amended and Restated Certificate of Incorporation with the Delaware Secretary of State to implement a 1.3375-for-1 forward stock split (the "Forward Stock Split"), effective on April 16, 2021, whereby each 1.0 share of Class A common stock issued and outstanding was reclassified as 1.3375 shares of Class A common stock and each 1.0 share of Series A convertible preferred stock (each a "Preferred Share") issued and outstanding was reclassified as 1.3375 Preferred Shares. In connection with the Forward Stock Split, the total number of shares of all classes of stock which the Company is authorized to issue was adjusted to 73,562,500, divided into 66,875,000 shares of Class A common stock and 6,687,500 Preferred Shares. There was no adjustment to the par value of $0.001 per share. All share and per share amounts in the accompanying financial statements for the prior periods have been retroactively adjusted to reflect the Forward Stock Split. In lieu of issuing fractional shares in connection with the Forward Stock Split, the Company paid cash in an amount equal to the fair value of such fractional shares (as determined in good faith by the Company’s board of directors).

Liquidity and Capital Resources

The Company has incurred operating losses to date and has an accumulated deficit of $84.7 million as of December 31, 2022. During the years ended December 31, 2022, 2021 and 2020, the Company used $30.6 million, $17.2 million and $4.5 million of cash in its operating activities, respectively. As of December 31, 2022, the Company had cash and cash equivalents of $19.5 million and marketable securities available for sale of $61.8 million.

Management believes that the Company’s existing cash, cash equivalents, and marketable securities will allow the Company to continue its planned operations for at least the next 12 months from the date of the issuance of these financial statements.

Coronavirus Pandemic

The coronavirus (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 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.

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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 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.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying financial statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP").

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations. An adjustment has been made to the Statements of Cash Flow for the fiscal years ended December 31, 2021 and December 31, 2020, for $0.3 million and $1.1 million, respectively, to reclassify non cash expense for inventory obsolescence to net changes in operating assets for inventory. This classification change does not change previously reported cash flows from operating activities in the Statements of Cash Flows.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may ultimately materially differ from these estimates and assumptions.

Significant estimates and assumptions include reserves and write-downs related to accounts receivable, inventories, the recoverability of long-term assets, valuation of equity instruments, valuation of common stock, stock-based compensation, deferred tax assets and related valuation allowances and impact of contingencies. The Company had no accrued contingent liabilities as of December 31, 2022 and 2021.

Segments

The Company operates and manages its business as one reportable and operating segment, which is the business of designing, manufacturing, and marketing medical devices for physicians, surgeons, ambulatory surgery centers and hospitals. The Company’s chief executive officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for purposes of allocating and evaluating financial performance. All long-lived assets are maintained in the United States.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original or remaining maturity at the time of purchase of 90 days or less to be cash equivalents. All of the Company's cash equivalents have liquid markets and high credit ratings. The Company maintains its cash in bank deposits, the balances of which at times may exceed federally insured limits.

Marketable Securities

The Company considers its debt securities and Yankee certificate of deposits ("Yankee CDs") to be available-for-sale securities. Available-for-sale securities are classified as cash equivalents or short-term marketable securities. The Company's marketable securities are classified as current assets based on their availability for sale to meet current operating requirements.

Marketable securities classified as available-for-sale are measured at fair value with temporary unrealized gains and losses reported in other comprehensive loss, and as a component of stockholders’ equity (deficit) until their disposition or maturity. The Company reviews all available-for-sale securities at each period end to determine if they remain available-for-sale based on the Company’s current intent and ability to sell the security if it is required to do so. Realized gains and losses from the sale of marketable securities, if any, are calculated using the specific-identification method. Premiums and discounts are amortized and accreted, respectively, using the effective interest method. Refer to Note 4, "Fair Value Measurements", for fair value disclosures for cash equivalents and short-term marketable securities.

Available-for-sale securities are subject to a periodic impairment review. The Company may recognize an impairment charge

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when a decline in the fair value of investments below the cost basis is determined to be other-than-temporary. In determining whether a decline in market value is other-than-temporary, various factors are considered, including the cause, duration of time and severity of the impairment, any adverse changes in the investees’ financial condition and the Company’s intent and ability to hold the security for a period of time sufficient to allow for an anticipated recovery in market value. Declines in fair value judged to be other-than-temporary are included in the Company’s statements of operations and comprehensive loss. The Company did not record any other-than-temporary impairments related to marketable securities in the Company’s consolidated statements of operations and comprehensive loss for the years ended December 31, 2022, 2021, or 2020.

Accounts Receivable and Allowances

Accounts receivable are generally from hospitals and ambulatory surgery centers and are stated at amounts billed less allowances for doubtful accounts. The Company continually monitors customer payments and maintains an allowance for losses resulting from a customer’s inability to make required payments. The Company considers factors such as historical experience, credit quality, age of the accounts receivable balances, geographic related risks and economic conditions that may affect a customer’s ability to pay. Accounts receivable are written off when individual balances are no longer collectible. As of December 31, 2022 and 2021, accounts receivable are presented net of an allowance for doubtful accounts of $0.7 million and $0.4 million, respectively. For the years ended December 31, 2022, 2021 and 2020, the Company recorded provisions for bad debts of $0.4 million, $0.1 million and $0.2 million, respectively.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of risk consist principally of cash, cash equivalents, marketable securities, and accounts receivable. The Company maintains its cash with established financial institutions and, at times, such balances with any one financial institution may be in excess of the Federal Deposit Insurance Corporation ("FDIC") insured limits. The Company's available for sale securities portfolio primarily consists of U.S. treasury and agency securities, money market funds, commercial paper, Yankee CDs, high credit quality asset-backed securities and corporate debt securities. The Company's investment policy requires its available for sale securities to meet certain criteria including investment type, credit ratings, and a maximum portfolio duration of one year.

The Company earns revenue from the sale of its products to customers such as hospitals and ambulatory surgery centers. The Company’s accounts receivable is derived from revenue earned from customers. The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral from its customers and independent sales agencies. At December 31, 2022 and 2021, no customer accounted for more than 10% of accounts receivable. For the years ended December 31, 2022, 2021 and 2020, there were no customers that represented 10% or more of revenue.

Leases

The Company determines whether an arrangement is or contains a lease at the inception of the arrangement and whether such a lease is classified as a financing lease or an operating lease at the commencement date of the lease. Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The Company determines the commencement date of a lease to be the date on which a lessor makes an underlying asset available for use by the Company. Leases with a term greater than one year are recognized on the balance sheet as operating lease right-of-use assets, operating lease liabilities and operating lease liabilities, net of current portion. The Company elected not to recognize right-of-use assets and lease liabilities for leases with terms of 12 months or less (short-term leases). As the interest rates implicit in our lease contracts are not readily determinable, the Company utilizes its incremental borrowing rate based on the information available at the commencement date to determine the present value of lease payments. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid, incentives received, or impairment charges if the Company determines the right-of-use asset is impaired. In the fourth quarter of 2022, the Company recorded an impairment to the right-of-use asset associated with the lease on its previous corporate headquarters. See Note 5 for further details of the impairment.

The Company considers the lease term to be the noncancelable period that the Company has the right to use the underlying asset, together with any periods where it is reasonably certain the Company will exercise an option to extend (or not terminate) the lease.

Rent expense for operating leases is recognized on a straight-line basis over the lease term and is presented in operating expenses on the statements of operations and comprehensive loss. The Company has elected to not separate lease and non-lease components for its real estate leases and instead accounts for each separate lease component and the non-lease components associated with that lease

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component as a single lease component. Variable lease payments are recognized as lease expense as incurred and are recorded in operating expenses on the statements of operations and comprehensive loss.

The Company has no finance leases.

Inventories

Inventories consist primarily of surgical kits and components as finished goods and are stated at the lower of cost or net realizable value. Cost is determined based on an average cost method which approximates the first-in, first-out basis and includes primarily outsourced manufacturing costs and direct manufacturing overhead costs. The Company reviews inventory for obsolescence and writes down inventory, as necessary. For the years ended December 31, 2022, 2021 and 2020, the Company recorded a provision to cost of goods sold of $0.1million, $0.3 million and $1.1 million, respectively, for obsolete inventory.

Property and Equipment, Net

Property and equipment are recorded at cost. Depreciation of property and equipment is recorded using the straight-line method over the following estimated useful lives as follows:

Years

Furniture, fixtures and equipment 7

Machinery and equipment 3

Capitalized surgical instruments 3

Computer equipment 3

Leasehold improvements Lesser of estimated useful life or lease term

Software 3

Long-lived assets are evaluated whenever a change in circumstances indicates that the carrying amount of an asset may not be recoverable. If assets are considered to be impaired, a charge is recorded for an amount that the carrying value exceeds the fair value.

Beginning January 1, 2021, the Company adjusted the useful life of its capitalized instruments from 18 months to 36 months to align with the expected life of the instruments. The change in useful life was made as a prospective adjustment and resulted in a decrease of depreciation expense of $0.3 million during the year ended December 31, 2021 and no material impact on earnings per share. The change in useful life is not expected to significantly impact annual depreciation expense.

Revenue Recognition

The Company generates revenue through the sale of its primary product, the Lapiplasty System, the Adductoplasty and Lapiplasty Mini-Incision Systems and ancillary products. The Lapiplasty and Adductoplasty Systems are comprised of single-use implant kits and reusable instrument trays. Implant kits and ancillary products are sold in the United States through a combination of a direct employee sales force and independent sales agencies. The Company invoices hospitals and ambulatory surgery centers for the implant kits and ancillary products and pays commissions to the sales representatives and independent sales agencies. The Company has no international sales.

For shipments to customers, the Company offers the right to return the product within 30 days for a full refund, and for returns between 30 and 90 days, the Company offers a full refund less 15% restocking fee. The Company does not have a history of product returns for refund. Customer invoices are generally payable within 30 days. The Company’s products are generally sold with a limited standard warranty to the original purchaser of the products against defects in workmanship and materials for 180 days. The Company’s liability is limited to providing, at the Company’s option, a full refund or credit of the purchase price, or repairing or replacing the product, provided that the customer returns the defective product within 180 days from the purchase date. To date, the Company has had negligible returns of any products alleged to be defective.

On January 1, 2019, the Company adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective method for all contracts not completed as of the date of adoption. In connection with the adoption of ASC 606, the Company also adopted the related amendments that impact the accounting for the incremental costs of obtaining a contract. Adoption of ASC 606 did not have any impact on the financial statements, except changes in the disclosures.

Under ASC 606, revenue is recognized when the customer obtains control of promised goods or services, in an amount that reflects consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps as prescribed by ASC 606:

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(i)

identify the contract(s) with a customer;

(ii)

identify the performance obligations in the contract;

(iii)

determine the transaction price;

(iv)

allocate the transaction price to the performance obligations in the contract; and

(v)

recognize revenue when (or as) the entity satisfies performance obligations.

A contract with a customer exists when (i) the Company enters into a legally enforceable contract with a customer that defines each party’s rights regarding the products to be transferred and identifies the payment terms related to these products, (ii) the contract has commercial substance, and (iii) the Company determines that collection of substantially all consideration for its products that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company considers signed agreements and purchase orders as a customer’s contract.

The Company identifies performance obligations based on the terms of the contract and customary business practices, which include products that are distinct, or a series of distinct goods that are substantially the same and that have the same pattern of transfer to the customer. The Company’s Lapiplasty System products are distinct performance obligations. The Company does not have any contracts with customers that contain multiple performance obligations.

The transaction price in the Company’s customer contracts includes fixed consideration to be contractually billed to the customer while variable consideration includes the right of return. The Company does not allocate the transaction price or any variable consideration to the right of return. The Company did not recognize a refund liability as of December 31, 2022 and 2021 and there were negligible returns during the year ended December 31, 2022 and no product returns during the years ended December 31, 2021 and 2020.

Revenue for products is recognized when a customer obtains control of the promised products, which is generally when the customer has the ability to (i) direct its use and (ii) obtain substantially all of the remaining benefits from it. Revenue recognition occurs when control of the product transfers to the customer which is generally at the time the product is used in surgery. When a customer purchases products directly from us before the time of surgery, revenue is recognized based upon the shipment terms.

Contract Costs

The Company applies the practical expedient to recognize the incremental costs of obtaining a contract as expense when incurred if the amortization period would be one year or less. These incremental costs include sales commissions paid to the Company’s independent sales agencies or employee sales representatives.

Cost of Goods Sold

Cost of goods sold consists primarily of costs for the purchase of the Company’s Lapiplasty and Adductoplasty Systems as well as ancillary products from third-party manufacturers. Direct costs from the Company’s 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 our products and personnel costs. The Company expenses all inventory provisions for excess and obsolete inventories as cost of goods sold. The Company records adjustments to its 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.

Research and Development Expenses

Research and development ("R&D") expenses consist primarily of engineering, product development, clinical studies to develop and support the Company’s 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 stock-based compensation, supplies, consulting, prototyping, testing, materials, travel expenses, depreciation and an allocation of facility overhead expenses. For the fiscal years ended December 31, 2022, 2021 and 2020, the Company's research and development costs were $13.6million, $10.2 million, and $5.8 million, respectively.

Shipping and Handling

The Company has elected to account for shipping and handling activities as fulfillment activities. As such, the Company does not evaluate shipping and handling as promised services to its customers. The Company may bill customers for shipping and handling costs. Amounts billed for shipping and handling are included in revenue. Shipping and handling costs incurred by the Company are included in sales and marketing expense. Shipping and handling costs totaled $0.8 million, $0.5 million, and $0.3 million, for the years ended 2022, 2021, and 2020, respectively.

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Advertising Costs

Advertising costs are expensed as incurred and are included as a component of marketing and sales expenses. Advertising expense includes the cost of advertising across the various mediums we employ, including print, digital, radio and television. Advertising costs totaled approximately $15.0 million, $13.0million and $3.1 million, for the years ended 2022, 2021 and 2020, respectively.

Income Taxes

The Company accounts for income taxes under the liability method, whereby deferred tax assets and liabilities are determined based on the difference between the financial statements and tax bases of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to affect taxable income. A valuation allowance is established when necessary to reduce deferred tax assets when management estimates, based on available objective evidence, that it is more likely than not that the benefit will not be realized for the deferred tax assets.

The Company also follows the provisions of ASC 740-10, Accounting for Uncertainty in Income Taxes. ASC 740-10, which prescribes a comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of any uncertain tax positions that have been taken or expected to be taken on a tax return. No liability related to uncertain tax positions is recorded in the financial statements. It is the Company’s policy to include penalties and interest expense related to income taxes as part of the provision for income taxes.

Product Liability

The Company believes it carries adequate insurance for possible product liability claims. Accruals for product liability claims and legal defense costs in excess of insured amounts are recorded if it is probable that a liability has been incurred and the amount of any liability can be reasonably estimated. No accruals for product liability claims had been recorded as of December 31, 2022 and 2021.

Debt

Debt issuance costs and discount are amortized to interest expense using the effective interest method.

Stock-Based Compensation

The Company accounts for stock-based compensation arrangements with employees in accordance with ASC 718, Compensation—Stock Compensation, using a fair-value based method. The Company determines the fair value of stock options on the date of grant using the Black-Scholes option pricing model. The fair value for RSAs and RSUs awards is the fair value of the stock at the grant date.

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. The Company accrues for estimated forfeitures on share-based awards and adjusts stock-based compensation cost to actual as forfeitures occur. The estimated forfeitures are based on a historical analysis of actual forfeitures of awards.

The Company estimates the fair value of the stock-based awards using the Black-Scholes option-pricing model, which requires the input of highly subjective assumptions. The assumptions are as follows:

•

Expected Term. The expected term represents the period that the stock options are expected to remain outstanding. Prior to the closing of the IPO, the Company was using the probabilities of the anticipated timing of potential liquidity events to determine the expected term. After the closing of the IPO, the Company is using the "simplified" method, which is the simple average of the vesting period and the contractual term.

•

Expected Volatility. The expected volatility is derived from the historical stock volatilities of comparable publicly listed peers over a period approximately equal to the expected term of the options as the Company does not have sufficient trading history to determine the volatility of its common stock.

•

Risk-Free Interest Rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the stock-based awards’ expected term.

•

Expected Dividend Yield. The expected dividend yield is zero as the Company has not paid nor anticipates paying any dividends on the common stock in the foreseeable future.

•

Fair Market Value of Common Stock. Prior to the IPO, the fair market value of the common stock was determined by the board of directors with assistance from management and external valuation experts. The Company’s approach to estimating the fair market value of its common stock was consistent with the methods outlined in the American Institute

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of Certified Public Accountants’ Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Following our IPO, the fair market value of the common stock is based on its closing price on NASDAQ as reported on the date of grant.

The Company continues to use judgment in evaluating the expected volatility and expected terms utilized for the stock-based compensation calculations on a prospective basis. As the Company continues to accumulate additional data, the Company may make refinements to the assumptions, which could materially impact the future stock-based compensation expense.

Comprehensive Loss

The Company is required to report all components of comprehensive loss, including net loss, in the financial statements in the period in which they are recognized. Comprehensive loss is defined as a change in equity of a business enterprise during a period, resulting from transactions and other events and circumstances from non-owner sources. Comprehensive loss equaled $42.8 million for the year end December 31, 2022. Comprehensive loss equaled net loss for the years ended December 31, 2021 and 2020.

Net Loss Per Share Attributable to Common Stockholders

Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders, by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common shares and potentially dilutive securities outstanding for the period. For purposes of the diluted net loss per share calculation, common stock options, unvested restricted stock units and restricted stock awards are considered to be potentially dilutive securities. Because the Company has reported a net loss for the years ended December 31, 2022, 2021 and 2020, diluted net losses per common share were the same as basic net losses per common share for these periods.

Derivative Liability

The Company evaluates its financial instruments for embedded features and bifurcates embedded features from the host instrument that meet the definition of a derivative and if (i) the economic characteristics and risks of the embedded feature are not clearly and closely related to the host instrument, (ii) the hybrid instrument that embodies both the embedded feature and the host contract is not remeasured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (iii) a separate instrument with the same terms as the embedded feature would be considered a derivative instrument subject to the accounting requirements of derivative instruments.

The Company uses judgment in determining the fair value of embedded features that are bifurcated from the host instrument and accounted for as derivative instruments at the date of issuance and at every balance sheet date thereafter. The valuation method used in the determination of fair value is based on the type of derivative instrument. At each balance sheet date, the Company remeasures its derivative instruments at fair value with adjustments to fair value recognized within other expense, net.

3. Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASC 842"). The update establishes principles for recognition, measurement, presentation, and disclosure intended to increase transparency and comparability for the accounting of lease transactions. The standard requires lessees to recognize leases with terms greater than 12 months on the balance sheet and disclose key information about leasing arrangements. ASC 842 is effective for the Company for fiscal years beginning after December 15, 2021 and early application is permitted. The Company adopted the new standard as of January 1, 2022, using the required modified retrospective approach. Comparative periods were not adjusted and continue to be presented under the previous accounting guidance. The Company elected the package of practical expedients permitted under the ASC 842 transition guidance, which among other things, allowed it to carry forward the historical lease classification.

The impact of adoption was the recognition of right-of-use assets and lease liabilities of $1.9 million for real estate operating leases at January 1, 2022. In addition, ASC 842 requires new disclosures for lease transactions.

Refer to Note 8, "Operating Leases", for new lease disclosures.

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses. This new guidance will require financial instruments to be measured at amortized cost, and trade accounts receivable to be presented at the net amount expected to be collected.

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The new model requires an entity to estimate credit losses based on historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. In November 2019, the FASB issued ASU 2019-10, that is effective for fiscal years beginning after December 15, 2022, and interim periods within that fiscal year. The Company adopted the standard on January 1, 2023. The adoption of this guidance did not have a material impact on the Company's financial statements.

4. Fair Value Measurements

Assets and liabilities recorded at fair value in the financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels which are directly related to the amount of subjectivity associated with the inputs to the valuation of these assets or liabilities are as follows:

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.

Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.

Level 3—Unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis – The following assets and liabilities are measured at fair valueon a recurring basis as of December 31, 2022 and December 31, 2021:

Level 1 Level 2 Level 3 Total

Assets:

Cash and cash equivalents

Short-term marketable securities at fair value

Level 1 Level 2 Level 3 Total

Assets:

Liabilities:

Derivative liability $ — $ — $ 173 $ 173

The carrying amounts of the Company’s money market funds classified as cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities, approximate their fair value due to the short-term nature of these assets and liabilities. The derivative liability is carried at fair value based on unobservable market inputs. Based on the borrowing rates currently available to the Company for debt with similar terms and consideration of default and credit risk, the carrying value of the term loan approximates their fair value.

The Company's available for sale securities portfolio consists of investments in U.S. treasury and government agency securities, commercial paper, corporate debt securities, asset-backed securities, and Yankee CDs. Yankee CDs are certificates of deposit issued in the United States by a branch of a foreign bank and are denominated in U.S. dollars. The fair value of level 1 securities is determined on trade prices in active markets for identical assets. The fair value of level 2 securities is determined using valuation models using inputs that are observable either directly or indirectly, such as quoted prices for similar assets, interest rates, yield curves, credit spreads, default rates, loss severity, broker and dealer quotes, as well as other relevant economic measures.

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As discussed in Note 6, in July 2020, the Company entered into a term loan facility with CR Group LP ("CRG") and accounted for embedded features in the agreement as a derivative liability with an initial fair value of $0.2 million that was a level 3 valuation. The derivative liability was accounted for at fair value using the income approach and inputs consisting of (i) the probability of events occurring that trigger an event of default of the Company’s term loans under the CRG term loan facility, ranging from 1% to 2%, (ii) the prepayment premium payable upon early redemption, and (iii) additional interest payable upon an event of default. The change in fair value of the derivative liability was $0.2 million and $0.1 million in the years ended December 31, 2022 and 2021, respectively, and was recorded as a component of other expense, net in the statements of operations and comprehensive loss. There was no adjustment to the fair value of the derivative liability recognized in net loss for the year ended December 31, 2020.

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial instruments (in thousands):

Derivative liability

Change in fair value included in other expense, net (72 )

Change in fair value included in other expense, net (173 )

Fair value as of December 31, 2022 $ —

There were no assets or liabilities measured at fair value on a nonrecurring basis as of December 31, 2022 and December 31, 2021.

5. Balance Sheet Components

Cash and Cash Equivalents

The Company’s cash and cash equivalents consisted of the following (in thousands):

December 31,

Cash equivalents:

Commercial paper 323 —

Corporate debt 2,197 —

Included in cash as of December 31, 2022 is $0.9 million pledged to Silicon Valley Bank (“SVB”) as collateral for the Company's corporate credit card program and is restricted from use by the Company. There was no cash pledged to SVB as of December 31, 2021.

Marketable Securities

The Company’s available-for-sale marketable securities consisted of the following (in thousands):

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value

Marketable securities - short-term

Property and Equipment, Net

The company’s property and equipment, net consisted of the following (in thousands):

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December 31,

Furniture and fixtures, and equipment $ 1,577 $ 180

Construction in progress 705 126

Machinery and equipment 928 274

Capitalized surgical equipment 9,248 4,442

Less: accumulated depreciation and amortization (4,263 ) (2,739 )

Depreciation and amortization expense was $2.1 million, $0.7 million and $1.2 million for the years ended December 31, 2022, 2021 and 2020, respectively.

In the fourth quarter of 2022, the Company recognized a $0.3 million impairment on a group of assets consisting of $0.2 million of property and equipment and $0.1 million related to the right-of-use asset associated with the lease of its previous corporate headquarters. The impairment loss is presented as a component of interest and other income, net in the statements of operations and comprehensive loss. The Company did not record impairment charges for its property and equipment, net for the years ended December 31, 2021 and 2020.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

December 31,

Accrued royalties expense $ 2,299 $ 1,522

Accrued professional services 1,727 941

Total accrued liabilities $ 6,216 $ 4,518

6. Long Term Debt

The Company’s debt consisted of the following (in thousands):

December 31,

Revolving line of credit

MidCap revolving loan facility $ 4,000 $ —

Term loans

CRG term loan facility — 30,000

MidCap term loan facility 50,000 —

Less: debt discount and issuance costs (1,289 ) (635 )

As of December 31, 2022, future payments of long-term debt were as follows (in thousands):

Fiscal Year

Total principal payments 54,000

Less: Unamortized debt discount and debt issuance costs (1,289 )

Total long-term debt, net $ 52,711

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MidCap Loan and Revolving Loan Facility

On April 29, 2022, the Company entered into a new five-year $150.0 million loan facility with entities affiliated with MidCap Financial Trust ("MidCap"), providing up to $120.0 million in term loans and a $30.0 million revolving loan facility.

The term loan facility provides for a 60-month term loan up to $120.0 million in borrowing capacity to the Company, over four tranches. At term loan closing, the Company drew $50.0 million under tranche one. The remaining tranches provide up to an additional $70.0 million in borrowing capacity in the aggregate, subject to the achievement of certain revenue targets for the third and fourth tranche.

The revolving loan facility provides up to $30.0 million in borrowing capacity to the Company based on the borrowing base. The borrowing base is calculated based on certain accounts receivable and inventory assets. As of December 31, 2022, the borrowing base allows a total of $24.5 million available to the Company under the revolving loan facility. The balance drawn as of December 31, 2022 is $4.0 million under the revolving loan facility. The Company may request an increase in the revolving loan facility in an amount up to $20.0 million for a total commitment of up to $50.0 million. The Company is required to either (i) maintain a minimum drawn balance under the revolving loan facility 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 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 the Company is in default, MidCap will apply funds collected from the Company's lockbox account to reduce the outstanding balance of the revolving loan facility (“Lockbox Deductions”). As of December 31, 2022, the Company's borrowing level has not activated the Lockbox Deductions, nor is it expected to for the next 12 months; therefore, the Company has determined that the revolving loan balance is long-term debt.

The loans bear interest at an annual rate based on a 30-day forward looking secured overnight financing rate plus 0.10% (subject to a floor of 1.0% and a cap of 3.0% for both loan agreements) plus (i) 6.0% under the term loan agreement and (ii) 4.0% under the revolving loan facility. Interest is payable monthly in arrears on the first day of each month and on the maturity of the loan agreements. The term loan agreement and the revolving loan facility are accruing interest as of December 31, 2022 at the capped interest rates of 9% and 7%, respectively. The Company is obligated to pay interest only for the first 48 months and straight-line amortization for the remaining 12 months, subject to the Company’s election to extend the initial interest-only period by 12 months to 60 months total if the Company’s trailing twelve-month revenue is at or above certain levels. If the term loan is repaid before the maturity date or the revolving loan facility is terminated before the end of its term, the prepayment fees are 3.0% of the amount repaid in the first year, 2.0% in the second year and 1.0% in the third year and thereafter, and a final payment fee of 3.0% of the amount borrowed is due under the term loan. The revolving loan facility prepayment fees are based on the revolving loan commitment amount.

The loans are secured by all of the Company’s assets, including intellectual property. The loan agreements and other ancillary loan documents contain customary representations and warranties and affirmative and negative covenants. Under the loan agreements, the Company is not required to meet any minimum level of revenue if liquidity (defined as unrestricted cash plus undrawn availability under the revolving loan agreement) is greater than the outstanding balance under the term loan. If liquidity falls below such outstanding balance, then the Company is subject to a minimum trailing twelve-month revenue covenant. The Company is not subject to this covenant at December 31, 2022.

CRG Term Loan Facility

On July 31, 2020, the Company entered into a term loan facility with CRG Group L.P ("CRG"), which provided up to $50.0 million in financing over three tranches to be advanced no later than December 31, 2021. Principal amounts totaling $30.0 million were borrowed as of December 31, 2021 and until April 29, 2022, when the facility was repaid as part of the refinancing with MidCap. The CRG term loan facility provided for a maturity date as of June 30, 2025, and permitted the Company to elect to make quarterly interest-only payments or to pay interest in-kind through December 31, 2020. The Company was not required to make any principal payments until the maturity of the CRG term loan facility and all outstanding principal and accrued interest were due upon the maturity of the CRG term loan facility. Interest under the CRG term loan facility was applied to outstanding principal and accrued interest at a rate of 13.00% per annum and would increase by 4.0% if an event of default had occurred. The loan agreement provided that if the Company repaid the CRG term loan within one year of the borrowing date, the Company was required to pay a premium of 20.00% of the aggregated outstanding principal amount of the loans that was repaid. If the Company repaid the CRG term loan between one and two years from the borrowing date, it was required to pay a premium of 11.00% of the aggregated outstanding principal amount of the loans that it repaid. The CRG term loan facility did not require a prepayment premium for loans being prepaid after two years from the initial borrowing date.

Under the terms of the CRG term loan facility, the Company granted first priority liens and security interests in substantially all of the Company’s assets as collateral (including the Company’s intellectual property), provided that the priority of such liens was subject to an intercreditor agreement between CRG and SVB. The CRG term loan facility also contained certain representations and warranties, indemnification provisions in favor of CRG, affirmative and negative covenants and events of default.

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The Company paid $0.5 million in fees to CRG and $0.2 million in fees to third parties in connection with the CRG term loan facility. The fees were recorded as debt issuance costs and classified as contra-debt. In addition, the Company recognized $0.2 million as debt discount on borrowings under the CRG term loan facility due to embedded features contained in the agreement which resulted in a derivative liability (Note 4).

The CRG term loan facility was repaid in the second quarter of 2022 as part of the refinancing with MidCap. The Company incurred a $4.5 million loss on extinguishment of debt related to terminating its previously outstanding borrowing agreements.

During the years ended December 31, 2022, 2021, and 2020, the Company recognized $4.4 million, $4.1 million and $2.7 million, respectively, in interest expense related to the borrowings under the MidCap agreements and the CRG loan facility. During the years ended December 31, 2022 and 2021, amortization of the debt discount was $0.2 million. During the year ended December 31, 2020 amortization of the debt discount was $0.1 million.

7. Commitments and Contingencies

License and Royalty Commitments

The Company has entered into product development and fee for service agreements with members of its Surgeon Advisory Board that specify the terms under which the member is compensated for his or her consulting services and grants the Company rights to the intellectual property created by the member in the course of such services. As products are commercialized with the assistance of members of the Surgeon Advisory Board, the Company may agree to enter into a royalty agreement if the member’s contributions to the product are novel, significant and innovative.

As of December 31, 2022 and 2021, the Company has royalty agreements with certain members of its Surgeon Advisory Board providing for royalties based on each individual’s level of contribution. Each royalty agreement: (i) confirms the irrevocable transfer to the Company of all pertinent intellectual property rights; (ii) sets the applicable royalty rate; (iii) sets the period of time during which royalties are payable; (iv) is for a term of three years, renewable by the parties, and may be terminated by either party on 90 days’ notice for convenience (provided that if terminated by the Company for convenience the obligation to pay royalties is not affected); and (v) prohibits the payment of royalties on products sold to entities and/or individuals with whom the surgeon advisor or any other surgeon advisor entitled to royalties is affiliated. Each of the royalty agreements may be subsequently amended to add the license of additional intellectual property covering new products, and as a result, multiple royalty rates and duration of royalty payments may be included in one royalty agreement.

As of December 31, 2022 and 2021, the Company’s royalty agreements provide for (i) royalty payments for 10 years from first commercial sale of the relevant product and (ii) a royalty rate for each such agreement ranging from 0.4% to 3.0% of net sales for the particular product to which the surgeon contributed.

The Company recognized royalties expense of $6.5 million, $4.3 million and $2.4 million for the years ended December 31, 2022, 2021 and 2020, respectively, resulting in an aggregate royalty rate of 4.6%, 4.6% and 4.1%, for the years ended December 31, 2022, 2021 and 2020, respectively.

Contingencies

From time to time, the Company may be a party to various litigation claims in the normal course of business. Legal fees and other costs associated with such actions are expensed as incurred. The Company assesses, in conjunction with legal counsel, the need to record a liability for litigation and contingencies. Accrual estimates are recorded when and if it is determinable that such a liability for litigation and contingencies are both probable and reasonably estimable. There were no accrued contingent liabilities as of December 31, 2022 and 2021.

8. Operating Leases

The Company’s leases consist of real estate leases in Ponte Vedra, Florida.

On February 9, 2022, the Company entered into a 10-year operating lease for a new corporate headquarters building in Ponte Vedra, Florida, with a lease commencement date of March 1, 2022. The Company's obligation to make cash payments for the new headquarters building started in the third quarter of 2022.

The Company’s leases contain various options to renew, none of which the Company is reasonably certain to exercise. The lease agreements do not contain any residual value guarantees or restrictive covenants. For the new headquarters lease, the Company is provided a tenant improvement allowance for the construction of leasehold improvements. In exchange for construction management and supervision services related to these improvements, the Company paid the lessor a fee equal to one and a half percent (1.5%) of total construction costs.

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In addition to base rent, the Company will pay variable costs related to its share of operating expenses under certain of its lease arrangements. These variable costs are recorded as lease expense as incurred and presented as operating expenses in the statements of operations and comprehensive loss. Variable lease costs were $0.2 million for the twelve months ended December 31, 2022.

Rent expense was $0.6 and $0.2 for the twelve months ended December 31, 2021 and 2020, respectively.

Operating lease cost was $2.3 million for the twelve months ended December 31, 2022. During the twelve months ended December 31, 2022, cash paid for amounts included in operating lease liabilities of $1.2 million was included in cash flows from operating activities on the condensed statements of cash flows.

Additional information related to operating leases is as follows:

Weighted average remaining lease term (years) 9.1

Weighted average discount rate 9.1 %

The following table summarizes future minimum lease payments on operating leases as of December 31, 2021 (in thousands):

Fiscal Year

The following table summarizes a maturity analysis of operating lease liabilities showing the aggregate lease payments as of December 31, 2022 (in thousands):

Fiscal Year

Total undiscounted lease payments 25,901

Less: imputed interest (10,023 )

Total discounted lease payments 15,878

Less: Current portion of lease liability (339 )

Noncurrent portion of lease liability $ 15,539

* Amount presented is net of allowance for tenant improvements.

9. Income Taxes

The Company has not recorded an income tax provision for years ended December 31, 2022, 2021 and 2020 due to its operating losses. All losses before income taxes were generated in the United States.

Reconciliation of the statutory federal income tax to the Company’s effective tax is as follows:

December 31,

Income tax at the statutory rate (21 )% (21 )% (21 )%

Stock-based and other compensation (5 ) (8 ) —

State taxes, net of federal benefit (1 ) (6 ) (4 )

Research and development credits (1 ) (1 ) (4 )

Change in valuation allowance 26 32 28

Effective tax rate 0 % 0 % 0 %

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The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and deferred tax liabilities were as follows (in thousands):

December 31,

Deferred income tax assets

Net operating loss carryforwards $ 15,979 $ 8,264

Stock option compensation expense 1,590 456

Research and development expenses 1,032 717

Research and development credits 954 —

Operating lease liabilities 3,539 —

Net deferred tax assets $ 3,897 $ —

Deferred income tax liabilities

Property and equipment $ (1,537 ) $ —

Operating lease right-of-use assets (2,331 ) —

Other (29 ) —

Gross deferred income tax liabilities $ (3,897 ) —

Net deferred tax liabilities $ — $ —

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax assets, projected future taxable income, and tax planning strategies in making this assessment. Due to the Company’s history of net losses, the net, deferred tax assets have been fully offset by a full valuation allowance of $22.9 million and $11.9 million as of December 31, 2022 and December 31, 2021, respectively. The Company’s changes in the deferred tax asset valuation allowance for the years ended December 31, 2022 and 2021, were $10.9 million and $6.4 million, respectively.

The Company had unused federal and state net operating loss carryforwards of approximately $71.2 million and $34.0 million, respectively as of December 31, 2022, and federal and state net operating loss carryforwards of approximately $35.4 million and $17.2 million, respectively, as of December 31, 2021. The net operating loss carryforwards begin to expire in 2034. The Company's research and development tax credit carryforwards were $1.0million and $0.7 million as of December 31, 2022 and 2021, respectively, and begin to expire in 2037.

The federal and state net operating loss carryforwards and credits may be subject to significant limitations under Section 382 and Section 383 of the Internal Revenue Code and similar provisions under state law. The Tax Reform Act contains provisions that limit the federal net operating loss carryforwards that may be used in any given year in the event of special occurrences, including significant ownership changes. A Section 382 "ownership change" generally occurs if one or more stockholders or groups of stockholders, who own at least 5% of the Company’s stock, increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. The Company may have previously experienced, and may in the future experience, one or more Section 382 "ownership changes," including in connection with the Company’s initial public offering. If so, the Company may lose some or all of the tax benefits of its carryforwards and credits.

Management has reviewed and evaluated the relevant technical merits of each of its tax positions in accordance with accounting principles generally accepted in the United States of America for accounting for uncertainty in income taxes and determined that there are no uncertain tax positions that would have a material impact on the financial statements of the Company. The Company is not subject to U.S. Federal and state income tax examinations by tax authorities for tax years before 2017.

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10. Stockholders’ Equity

Series A Convertible Preferred Stock

Immediately before the completion of the IPO, all outstanding shares of Series A convertible preferred stock were converted into shares of the Company’s common stock. Accordingly, no shares of Series A convertible preferred stock were outstanding as of December 31, 2022 or 2021.

Upon the closing of the IPO in April 2021, the Company issued 158,447 shares of commonstock, to settle accrued and unpaid Series A convertible preferred stock dividends of $2.5 million. At December 31, 2020, the Company had accrued and unpaid dividends of $2.3 million on the Series A convertible preferred stock outstanding.

Preferred Stock

Upon the closing of the IPO, the Company is authorized to issue 5,000,000 shares of preferred stock. As of December 31, 2022, and December 31, 2021, no shares of preferred stock were outstanding.

Common Stock

On April 27, 2021, the Company amended and restated its Certificate of Incorporation, which became effective upon the closing of the IPO. The Company is authorized to issue 300,000,000 shares of common stock.

Warrants for Class A Common Stock

On April 28, 2021, Silicon Valley Bank exercised their warrants in a cashless net exercise using the closing price of the Company’s common stock on the prior business day of $31.27 as permitted by the warrant agreement. Accordingly, the transaction resulted in 621,570 shares of the Company’s common stock being issued to the warrant holders. The Company issued these warrants in 2019 to Silicon Valley Bank in connection with the terms of its debt agreement.

Shares Reserved for Future Issuance

The Company has reserved shares of common stock for future issuances as follows:

December 31,

Common stock available for Employee Stock Purchase Plan 1,046,437 504,627

Share-based Incentive Plans

In April 2021, prior to the IPO closing, the Company’s board of directors and stockholders approved the 2021 Incentive Award Plan ("2021 Plan"), which became effective upon the IPO closing. The Company initially reserved 5,046,278 shares of common stock for issuance of share-based compensation awards, including stock options, restricted stock ("RSA"), restricted stock units ("RSU") and other stock-based awards. The number of shares initially reserved for issuance or transfer pursuant to awards under the 2021 Plan will be increased by (i) the number of shares represented by awards outstanding under the Company’s 2014 Stock Option Plan ("2014 Plan") and collectively with the 2021 Plan, the "Stock Plans") that become available for issuance under the terms of the 2021 Plan and (ii) an annual increase on the first day of each fiscal year beginning in 2022 and ending in 2031, equal to the lesser of (i) 5.0% of the shares of stock outstanding (on an as converted basis) on the last day of the immediately preceding fiscal year and (ii) such smaller number of shares of stock as determined by the Company's board of directors; provided, however, that no more than 37,847,090 shares of stock may be issued upon the exercise of incentive stock options.

Prior to the IPO, the Company was authorized to issue stock purchase rights and to grant options to purchase Class A common stock to employees, directors, and consultants under the 2014 Plan. Stock options under the 2014 Plan have a term of no more than ten years from the date of grant and vest in equal installments over a maximum of five years. No future awards can be granted under the 2014 Plan. The shares underlying outstanding and unexercised options granted to employees, directors and consultants under the 2014 Plan may become available for issuance under the 2021 Plan as follows: (i) to the extent that such an option award terminates, expires or lapses for any reason or is settled in cash without the delivery of shares, any shares subject to the award at such time will be available for future grants under the 2021 Plan; (ii) to the extent shares are tendered or withheld to satisfy the grant, exercise price or tax withholding obligation with respect to any award under the 2014 Plan, such tendered or withheld shares will be available for future

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grants under the 2021 Plan; and (iii) to the extent that the Company repurchases the shares prior to vesting so that shares are returned to the Company, such shares will be available for future grants under the 2021 Plan.

At December 31, 2022, 4,769,842 shares of common stock remain available for issuance as awards under the 2021 Plan. In January 2023, the number of shares of common stock available for issuance under the 2021 Plan was increased by 2,781,410 shares as a result of the automatic increase provision in the 2021 Plan.

Stock Options

Options under the 2021 Plan may be granted for periods of up to 10 years at exercise prices no less than the fair market value of the Company's common stock on the date of grant; provided, however, that the exercise price of an incentive stock option granted to a 10% stockholder may not be less than 110% of the fair market value of the shares on the date of grant and such option may not be exercisable after the expiration of five years from the date of grant. Stock options granted vest ratably over four years.

Stock option activity under the Stock Plans is set forth below:

Outstanding Options

The aggregate intrinsic value of options exercised during the years ended December 31, 2022, 2021 and 2020 was $25.9million, $39.1 million and $1.9 million, respectively. The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock options and the fair value of the Company’s common stock for stock options that were in-the-money as of year-end. Aggregate intrinsic values of options outstanding, options vested and expected to vest, and options exercisable were $98.7 million, $94.9 million and $69.6 million as of December 31, 2022, respectively.

Restricted Stock Units and Awards

Full value award activity under the Stock Plans is set forth below:

Full Value Awards

RSUs and RSAs granted under the 2021 Plan generally vest annually over 4 years in equal installments. The total fair value of RSUs and RSAs vested during 2021 was not material. The Company did not grant RSAs and RSUs during the year ended December 31, 2020, and had no unvested RSAs and RSUs as of December 31, 2020.

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Employee Share Purchase Plan

In April 2021, the Company’s board of directors and stockholders approved the 2021 Employee Stock Purchase Plan ("ESPP"). The Company initially reserved 504,627 shares of common stock for purchase under the ESPP. The number of shares of common stock reserved for issuance under the ESPP will be automatically increased each year for ten calendar years beginning in 2022 by the number of shares equal to the lesser of 1% of the total number of shares of common stock outstanding as of the last day of the immediately preceding fiscal year or such number of shares as may be determined by the Company's board of directors; provided that the maximum number of shares that may be issued under the ESPP is 7,064,790 shares. Each offering to the employees to purchase stock under the ESPP will begin on a date to be determined by the Company’s Compensation Committee and will end no later than six months thereafter. The ESPP allows an eligible employee to purchase shares of the Company's common stock at a discount through payroll deductions of up to 15% of the employee’s eligible compensation. At the end of each offering period, employees are able to purchase shares at 85% of the lower of the fair market value of its common stock at the beginning of the offering period or at the end of each applicable offering period. The occurrence and duration of offering periods under the ESPP are subject to the determinations of the Company’s Compensation Committee, in its sole discretion. The Company has not yet commenced any enrollment periods under the ESPP.

In January 2023, the number of shares of common stock available for issuance under the ESPP was increased by 556,282 to 1,602,719 shares as a result of the automatic increase provision in the ESPP.

Stock-Based Compensation

The weighted-average grant date fair values of the stock options granted were $7.52, $6.19 and $2.26 per share for the years ended December 31, 2022, 2021 and 2020, respectively.

The Company uses the Black-Scholes option pricing model to determine the fair value of stock options at the grant dates with the following assumptions for options granted during 2022, 2021 and 2020 fiscal years:

December 31,

Stock-based compensation expense is reflected in the statements of operations and comprehensive loss as follows (in thousands):

Years Ended December 31,

As of December 31, 2022, there was $12.8 million of unrecognized stock-based compensation expense related to common stock options, which the Company expects to recognize over a weighted-average period of 2.3 years. As of December 31, 2022, there was $7.8 million of unrecognized stock-based compensation expense related to RSAs and RSUs, which the Company expects to recognize over a weighted-average period of 3.3 years.

The total grant date fair value of shares vested during the years ended December 31, 2022, 2021 and 2020 were $5.3 million, $2.0 million and $0.9 million, respectively.

11. Employee Benefit Plan

Effective as of January 2021, the Company began sponsoring a 401(k) profit sharing plan trust for its employees who satisfy certain eligibility requirements. An employee will be eligible to become a participant in the plan for purposes of (i) elective deferrals and matching contributions after completing 3 consecutive months of service beginning on the employee’s date of hire and (ii) employer profit sharing contributions after completing 1 year of service.

The Company matches employee contributions to the 401(k) plan at a rate equal to 100% of the first 3% of the employee’s pre-tax salary contributed and 50% of any additional contributions, including and up to 5% of the employee’s pre-tax salary. Participants vest in their Company matching contributions after 90 days of service and in any potential future nonelective contributions by the Company on a one-to-six year graded vesting schedule.

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Employer contributions under this plan were $1.0 million and $0.7 million for the years ended December 31, 2022 and 2021, respectively.

12. Net Loss Per Share Attributable to Common Stockholders

The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders which is computed by dividing the net loss attributable to common stockholders by the weighted- average number of shares of common stock outstanding for the period. As the Company reported a net loss for the years ended December 31, 2022, 2021 and 2020, respectively, basic net loss per share attributable to common stockholders was the same as diluted net loss per share attributable to common stockholders as the inclusion of potentially dilutive shares would have been antidilutive if included in the calculation (in thousands, except share and per share amounts):

Years Ended December 31,

Numerator

Net loss attributable to common stockholders (42,815 ) (20,748 ) (4,308 )

Denominator

The following potentially dilutive securities outstanding have been excluded from the computation of diluted weighted average shares outstanding because such securities have an antidilutive impact due to the Company’s net loss, in common stock equivalent shares:

December 31,

Series A convertible preferred stock outstanding — — 6,687,475

Warrants to purchase Class A common stock — — 713,330

13. Subsequent Events

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.

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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation and supervision of our Chief Executive Officer and our Chief Financial Officer, have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) before filing this Annual Report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2022, the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Management's Annual Report on Internal Control Over Financial Reporting

The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Management conducted an assessment of the effectiveness of the Company's internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control–Integrated Framework (2013 Framework). Based on this assessment, our management concluded that, as of December 31, 2022, our internal control over financial reporting was effective based on those criteria.

Attestation Report on Internal Control over Financial Reporting

As an emerging growth company, under Section 103 of the JOBS Act, we are not required to provide, and this report does not include an attestation report of our independent registered public accounting firm regarding our internal control over financial reporting.

Changes in internal control over financial reporting

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended December 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent limitation on the effectiveness of internal control