UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2022~~2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-37474

Conformis, Inc.

(Exact name of registrant as specified in its charter)


Delaware			56-2463152
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification Number)


600 Technology Park Drive Billerica, MA			01821
(Address of principal executive offices)			(Zip Code)

(781) 345-9001

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant

was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and "emerging growth company," in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☒

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.			☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.00001 par value

CFMS

The Nasdaq Capital Market

As of ~~October~~July 31, ~~2022,~~2023, there were ~~187,918,888~~7,877,493 shares of Common Stock, $0.00001 par value per share, outstanding. The number of shares outstanding takes in account the 1-for-25 reverse stock split that was consummated on November 9, 2022.

Conformis, Inc.

INDEX


			Page

Part I - FINANCIAL INFORMATION
Item 1. Financial Statements (interim periods unaudited)			1
Consolidated Balance Sheets as of ~~September~~June 30 ~~30, 2022~~, 2023 and December 31, ~~2021~~2022			1
Consolidated Statements of Operations for the three and six ~~nine~~ months ended ~~September~~June 30 ~~30,~~, 2023 and 2022 ~~and 2021~~			2
Consolidated Statements of Comprehensive (Loss) Income for the three and ~~nine~~six months ended ~~September~~June 30 ~~30,~~, 2023 and 2022 ~~and 2021~~			3
Consolidated Statements of Changes in Stockholders' Equity for the three and ~~nine~~six months ended ~~September~~ June 30 ~~30,~~, 2023 and 2022 ~~and 2021~~			4
Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30 ~~30,~~, 2023 and 2022 ~~and 2021~~			6
Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			31

Item 4. Controls and Procedures			4846

Part II- OTHER INFORMATION
Item 1. Legal Proceedings			4947
Item 1A. Risk Factors			5049
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			5153
Item 5. Other Information			5253
Item 6. Exhibits			5354
Signatures			5455

PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

CONFORMIS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except share and per share data)


		September 30, 2022		December 31, 2021			June 30, 2023		December 31, 2022
		(unaudited)					(unaudited)
Assets	Assets					Assets
Current Assets	Current Assets					Current Assets
Cash and cash equivalents	Cash and cash equivalents	$	59,581	$	100,556	Cash and cash equivalents	$	26,182	$	48,667

Accounts receivable, net	Accounts receivable, net	9,472		9,079		Accounts receivable, net	7,676		9,773
Royalty and licensing receivable	Royalty and licensing receivable	141		280		Royalty and licensing receivable	121		134
Inventories, net	Inventories, net	18,017		15,204		Inventories, net	19,024		18,910
Prepaid expenses and other current assets	Prepaid expenses and other current assets	1,597		1,764		Prepaid expenses and other current assets	1,616		1,785
Total current assets	Total current assets	88,808		126,883		Total current assets	54,619		79,269
Property and equipment, net	Property and equipment, net	8,775		10,268		Property and equipment, net	7,455		8,154
Operating lease right-of-use assets	Operating lease right-of-use assets	6,462		7,536		Operating lease right-of-use assets	5,159		6,078
Other Assets	Other Assets					Other Assets
Restricted cash	Restricted cash	462		562		Restricted cash	462		462

Other long-term assets	Other long-term assets	86		92		Other long-term assets	86		85
Total assets	Total assets	$	104,593	$	145,341	Total assets	$	67,781	$	94,048

Liabilities and stockholders' equity	Liabilities and stockholders' equity					Liabilities and stockholders' equity
Current liabilities	Current liabilities					Current liabilities
Accounts payable	Accounts payable	$	6,562	$	6,557	Accounts payable	$	3,584	$	4,163
Accrued expenses	Accrued expenses	9,034		9,576		Accrued expenses	5,252		7,978
Operating lease liabilities	Operating lease liabilities	1,919		1,830		Operating lease liabilities	1,936		1,932

Total current liabilities	Total current liabilities	17,515		17,963		Total current liabilities	10,772		14,073

Other long-term liabilities						Other long-term liabilities	336		230

Long-term debt, less debt issuance costs	Long-term debt, less debt issuance costs	20,480		20,355		Long-term debt, less debt issuance costs	20,639		20,563
Operating lease liabilities	Operating lease liabilities	5,433		6,471		Operating lease liabilities	4,009		5,003
Total liabilities	Total liabilities	43,428		44,789		Total liabilities	35,756		39,869
Commitments and contingencies	Commitments and contingencies					Commitments and contingencies
Stockholders’ equity	Stockholders’ equity					Stockholders’ equity
Preferred stock, $0.00001 par value:	Preferred stock, $0.00001 par value:					Preferred stock, $0.00001 par value:
Authorized: 5,000,000 shares authorized at September 30, 2022 and December 31, 2021; no shares issued and outstanding as of September 30, 2022 and December 31, 2021		—		—
Authorized: 5,000,000 shares authorized at June 30, 2023 and December 31, 2022; no shares issued and outstanding as of June 30, 2023 and December 31, 2022						Authorized: 5,000,000 shares authorized at June 30, 2023 and December 31, 2022; no shares issued and outstanding as of June 30, 2023 and December 31, 2022	—		—
Common stock, $0.00001 par value:	Common stock, $0.00001 par value:					Common stock, $0.00001 par value:
Authorized: 300,000,000 shares authorized at September 30, 2022 and December 31, 2021; 187,850,760 and 186,042,390 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively		2		2
Authorized: 20,000,000 shares authorized at June 30, 2023 and December 31, 2022; 7,878,332 and 7,502,462 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively						Authorized: 20,000,000 shares authorized at June 30, 2023 and December 31, 2022; 7,878,332 and 7,502,462 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively	—		—
Additional paid-in capital	Additional paid-in capital	634,892		632,513		Additional paid-in capital	635,703		634,647
Accumulated deficit	Accumulated deficit	(577,608)		(530,851)		Accumulated deficit	(603,906)		(581,324)
Accumulated other comprehensive income (loss)		3,879		(1,112)
Accumulated other comprehensive income						Accumulated other comprehensive income	228		856
Total stockholders’ equity	Total stockholders’ equity	61,165		100,552		Total stockholders’ equity	32,025		54,179
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	104,593	$	145,341	Total liabilities and stockholders’ equity	$	67,781	$	94,048

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

CONFORMIS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(unaudited)

(in thousands, except share and per share data)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2022		2021		2022		2021			2023		2022		2023		2022
Revenue	Revenue									Revenue
Product	Product	$	13,642	$	14,130	$	43,668	$	43,040	Product	$	12,496	$	15,142	$	25,187	$	30,026
Royalty and licensing	Royalty and licensing	142		123		962		41,396		Royalty and licensing	527		153		673		820
Total revenue	Total revenue	13,784		14,253		44,630		84,436		Total revenue	13,023		15,295		25,860		30,846
Cost of revenue	Cost of revenue	8,927		8,231		28,572		24,703		Cost of revenue	11,189		9,835		18,923		19,645
Gross profit	Gross profit	4,857		6,022		16,058		59,733		Gross profit	1,834		5,460		6,937		11,201

Operating expenses	Operating expenses									Operating expenses
Sales and marketing	Sales and marketing	5,562		6,434		18,789		17,851		Sales and marketing	4,063		6,562		9,114		13,227
Research and development	Research and development	3,676		3,548		12,113		10,738		Research and development	2,158		3,958		4,616		8,437
General and administrative	General and administrative	7,608		7,407		24,634		20,762		General and administrative	7,918		7,693		14,941		17,026

Total operating expenses	Total operating expenses	16,846		17,389		55,536		49,351		Total operating expenses	14,139		18,213		28,671		38,690
(Loss) income from operations		(11,989)		(11,367)		(39,478)		10,382
Loss from operations										Loss from operations	(12,305)		(12,753)		(21,734)		(27,489)

Other income and expenses	Other income and expenses									Other income and expenses
Interest income	Interest income	12		20		43		77		Interest income	6		14		15		31
Interest expense	Interest expense	(526)		(601)		(1,430)		(1,802)		Interest expense	(668)		(453)		(1,305)		(904)
Other income		—		—		—		7,252

Foreign currency exchange transaction loss		(2,672)		(996)		(5,931)		(2,302)
Total other (expenses) income		(3,186)		(1,577)		(7,318)		3,225
(Loss) income before income taxes		(15,175)		(12,944)		(46,796)		13,607
Income tax provision		27		29		(39)		44

Net (loss) income		$	(15,202)	$	(12,973)	$	(46,757)	$	13,563
Foreign currency exchange transaction (loss) income										Foreign currency exchange transaction (loss) income	(13)		(2,432)		455		(3,259)
Total other expenses										Total other expenses	(675)		(2,871)		(835)		(4,132)
Loss before income taxes										Loss before income taxes	(12,980)		(15,624)		(22,569)		(31,621)
Income tax (benefit) provision										Income tax (benefit) provision	31		(100)		13		(66)

Net (loss) income per share
Basic		$	(0.08)	$	(0.07)	$	(0.26)	$	0.08
Diluted		$	(0.08)	$	(0.07)	$	(0.26)	$	0.08
Net loss										Net loss	$	(13,011)	$	(15,524)	$	(22,582)	$	(31,555)

Net loss per share										Net loss per share
Basic and diluted*										Basic and diluted*	$	(1.78)	$	(2.15)	$	(3.10)	$	(4.39)

Weighted average common shares outstanding	Weighted average common shares outstanding									Weighted average common shares outstanding
Basic		181,216,213		178,452,296		180,238,044		162,646,412
Diluted		181,216,213		178,452,296		180,238,044		167,369,631
Basic and diluted*										Basic and diluted*	7,316,286		7,211,851		7,291,542		7,189,634

*Adjusted for the 1-for-25 reverse stock split

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

CONFORMIS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive (Loss) Income

(unaudited)

(in thousands)

Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Net (loss) income $ (15,202) $ (12,973) $ (46,757) $ 13,563
Other comprehensive income
Foreign currency translation adjustments 2,141 906 4,991 2,100
Comprehensive (loss) income $ (13,061) $ (12,067) $ (41,766) $ 15,663


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net loss	$	(13,011)	$	(15,524)	$	(22,582)	$	(31,555)
Other comprehensive (loss) income
Foreign currency translation adjustments	(24)		2,113		(628)		2,850

Comprehensive loss	$	(13,035)	$	(13,411)	$	(23,210)	$	(28,705)

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

CONFORMIS, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders' Equity

(unaudited)

(in thousands, except share and per share data)


		Three Months Ended September 30, 2022																Three Months Ended June 30, 2023
		Common Stock			Additional Paid-In Capital				Accumulated Deficit			Accumulated Other Comprehensive Income						Common Stock					Additional Paid-In Capital				Accumulated Deficit				Accumulated Other Comprehensive Income
		Shares	Par Value								Total			Shares				Par Value							Total

Balance, June 30, 2022		188,227,075	$	2			$	634,096				$	(562,406)		$	1,738			$	73,430
Balance, March 31, 2023																	Balance, March 31, 2023	7,497,138			$	—			$	635,268			$	(590,895)			$	252			$	44,625
Issuance of common stock—restricted stock	Issuance of common stock—restricted stock	(376,315)	—		—				—			—			—		Issuance of common stock—restricted stock	381,194			—		—				—				—				—

Compensation expense related to issued stock options and restricted stock awards	Compensation expense related to issued stock options and restricted stock awards	—	—		796				—			—			796		Compensation expense related to issued stock options and restricted stock awards	—			—		435				—				—				435
Net loss	Net loss	—	—		—				(15,202)			—			(15,202)		Net loss	—			—		—				(13,011)				—				(13,011)
Other comprehensive income		—	—		—				—			2,141			2,141
Balance, September 30, 2022		187,850,760	$	2	$	634,892			$	(577,608)		$	3,879		$	61,165
Other comprehensive loss																	Other comprehensive loss	—			—		—				—				(24)				(24)
Balance, June 30, 2023																	Balance, June 30, 2023	7,878,332			$	—	$	635,703			$	(603,906)			$	228			$	32,025


		Nine Months Ended September 30, 2022																Six Months Ended June 30, 2023
		Common Stock			Additional Paid-In Capital				Accumulated Deficit			Accumulated Other Comprehensive (Loss) Income						Common Stock					Additional Paid-In Capital				Accumulated Deficit				Accumulated Other Comprehensive (Loss) Income
		Shares	Par Value								Total			Shares				Par Value							Total

Balance, December 31, 2021		186,042,390	$	2			$	632,513				$	(530,851)		$	(1,112)			$	100,552
Balance, December 31, 2022																	Balance, December 31, 2022	7,502,462			$	—			$	634,647			$	(581,324)			$	856			$	54,179
Issuance of common stock—restricted stock	Issuance of common stock—restricted stock	1,808,370	—		—				—			—			—		Issuance of common stock—restricted stock	375,870			—		—				—				—				—

Compensation expense related to issued stock options and restricted stock awards	Compensation expense related to issued stock options and restricted stock awards	—	—		2,379				—			—			2,379		Compensation expense related to issued stock options and restricted stock awards	—			—		1,056				—				—				1,056
Net loss	Net loss	—	—		—				(46,757)			—			(46,757)		Net loss	—			—		—				(22,582)				—				(22,582)
Other comprehensive income		—	—		—				—			4,991			4,991
Balance, September 30, 2022		187,850,760	$	2	$	634,892			$	(577,608)		$	3,879		$	61,165
Other comprehensive loss																	Other comprehensive loss	—			—		—				—				(628)				(628)
Balance, June 30, 2023																	Balance, June 30, 2023	7,878,332			$	—	$	635,703			$	(603,906)			$	228			$	32,025

Three Months Ended September 30, 2021
Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Loss
Shares Par Value Total
Balance, June 30, 2021 186,053,533 $ 2 $ 630,435 $ (501,902) $ (2,806) $ 125,729
Issuance of common stock—restricted stock (173,560) — — — — —
Issuance of common stock at public offering, less issuance costs of $5.4 million — — 14 — — 14
Compensation expense related to issued stock options and restricted stock awards — — 1,026 — — 1,026
Net loss — — — (12,973) — (12,973)
Other comprehensive income — — — — 906 906
Balance, September 30, 2021 185,879,973 $ 2 $ 631,475 $ (514,875) $ (1,900) $ 114,702


	Three Months Ended June 30, 2022
	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Income
	Shares*	Par Value								Total












Balance, March 31, 2022	7,413,309	$	2	$	633,249	$	(546,882)	$	(375)	$	85,994
Issuance of common stock—restricted stock	115,774	—		—		—		—		—






Compensation expense related to issued stock options and restricted stock awards	—	—		847		—		—		847
Net loss	—	—		—		(15,524)		—		(15,524)
Other comprehensive income	—	—		—		—		2,113		2,113
Balance, June 30, 2022	7,529,083	$	2	$	634,096	$	(562,406)	$	1,738	$	73,430

*Adjusted for the 1-for-25 reverse stock split

Nine Months Ended September 30, 2021
Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Loss
Shares Par Value Total
Balance, December 31, 2020 95,546,577 $ 1 $ 543,809 $ (528,438) $ (4,000) $ 11,372
Issuance of common stock—restricted stock 3,375,974 — — — — —
Issuance of common stock at public offering, less issuance costs of $5.4 million 80,952,381 1 79,636 — — 79,637
Issuance of common stock upon exercise of common stock warrants 6,005,041 — 5,253 — — 5,253
Compensation expense related to issued stock options and restricted stock awards — — 2,777 — — 2,777
Net income — — — 13,563 — 13,563
Other comprehensive income — — — — 2,100 2,100
Balance, September 30, 2021 185,879,973 $ 2 $ 631,475 $ (514,875) $ (1,900) $ 114,702


	Six Months Ended June 30, 2022
	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Income
	Shares*	Par Value								Total












Balance, December 31, 2021	7,441,696	$	2	$	632,513	$	(530,851)	$	(1,112)	$	100,552
Issuance of common stock—restricted stock	87,387	—		—		—		—		—






Compensation expense related to issued stock options and restricted stock awards	—	—		1,583		—		—		1,583
Net loss	—	—		—		(31,555)		—		(31,555)
Other comprehensive income	—	—		—		—		2,850		2,850
Balance, June 30, 2022	7,529,083	$	2	$	634,096	$	(562,406)	$	1,738	$	73,430

*Adjusted for the 1-for-25 reverse stock split

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

CONFORMIS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)

(in thousands)


		Nine Months Ended September 30,					Six Months Ended June 30,
		2022		2021			2023		2022
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net (loss) income		$	(46,757)	$	13,563
Net loss						Net loss	$	(22,582)	$	(31,555)

Adjustments to reconcile net (loss) income to net cash used in operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:						Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense	Depreciation and amortization expense	3,088		3,158		Depreciation and amortization expense	1,835		2,134

Stock-based compensation expense	Stock-based compensation expense	2,379		2,777		Stock-based compensation expense	1,056		1,583
Unrealized foreign exchange loss		5,676		2,238
Unrealized foreign exchange (gain) loss						Unrealized foreign exchange (gain) loss	(495)		3,115
Non-cash lease expense	Non-cash lease expense	1,137		1,073		Non-cash lease expense	780		752
Provision for bad debts on trade receivables		339		55
Provision for credit losses						Provision for credit losses	132		191

Impairment of long-term assets						Impairment of long-term assets	80		—

Gain on forgiveness of PPP loan		—		(4,772)
Non-cash interest expense	Non-cash interest expense	125		547		Non-cash interest expense	78		83

Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Accounts receivable	Accounts receivable	(731)		(483)		Accounts receivable	1,966		(648)
Royalty and licensing receivable	Royalty and licensing receivable	139		(14,378)		Royalty and licensing receivable	13		125
Inventories	Inventories	(2,811)		(1,894)		Inventories	(113)		(1,523)
Prepaid expenses and other assets	Prepaid expenses and other assets	171		524		Prepaid expenses and other assets	167		60

Accounts payable, accrued expenses and other liabilities	Accounts payable, accrued expenses and other liabilities	(1,549)		378		Accounts payable, accrued expenses and other liabilities	(4,054)		(1,079)
Contract liability		—		(14,000)
Advance on research and development		—		(3,168)

Net cash used in operating activities	Net cash used in operating activities	(38,794)		(14,382)		Net cash used in operating activities	(21,137)		(26,762)

Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Acquisition of property and equipment	Acquisition of property and equipment	(1,597)		(1,832)		Acquisition of property and equipment	(1,215)		(990)

Net cash used in investing activities	Net cash used in investing activities	(1,597)		(1,832)		Net cash used in investing activities	(1,215)		(990)

Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:

Proceeds from exercise of common stock warrant		—		5,253

Net proceeds from issuance of common stock		—		79,637

Net cash provided by financing activities	Net cash provided by financing activities	—		84,890		Net cash provided by financing activities	—		—
Foreign exchange effect on cash and cash equivalents	Foreign exchange effect on cash and cash equivalents	(684)		(138)		Foreign exchange effect on cash and cash equivalents	(133)		(263)
(Decrease) increase in cash, cash equivalents and restricted cash		(41,075)		68,538
Decrease in cash, cash equivalents and restricted cash						Decrease in cash, cash equivalents and restricted cash	(22,485)		(28,015)
Cash, cash equivalents and restricted cash beginning of period	Cash, cash equivalents and restricted cash beginning of period	101,118		29,135		Cash, cash equivalents and restricted cash beginning of period	49,129		101,118
Cash, cash equivalents and restricted cash end of period	Cash, cash equivalents and restricted cash end of period	$	60,043	$	97,673	Cash, cash equivalents and restricted cash end of period	$	26,644	$	73,103

Supplemental information:	Supplemental information:					Supplemental information:

Cash paid for interest	Cash paid for interest	1,147		1,064		Cash paid for interest	1,124		715
Non cash investing and financing activities:	Non cash investing and financing activities:					Non cash investing and financing activities:
Operating leases right-of-use assets obtained in exchange for lease obligations	Operating leases right-of-use assets obtained in exchange for lease obligations	63		3,763		Operating leases right-of-use assets obtained in exchange for lease obligations	(137)		63

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

CONFORMIS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

Note A—Organization and Basis of Presentation

Conformis, Inc. (together with its subsidiaries, collectively, the “Company”) is a medical technology company that uses its proprietary iFit Image-to-Implant technology platform to develop, manufacture and sell joint replacement implants that are individually sized and shaped, which the Company refers to as personalized, individualized, or sometimes as customized, to fit and conform to each patient’s unique anatomy. The Company also offers Identity Imprint, a new line of total knee replacement products that utilizes a proprietary algorithm to select the implant size that most closely meets the geometric and anatomic requirements of the patient’s knee. Conformis’ sterile, just-in-time, Surgery-in-a-Box delivery system is available with all of its implants and personalized, single-use instruments. The Company’s proprietary iFit technology platform is potentially applicable to all major joints.

The Company was incorporated in Delaware and commenced operations in 2004. The Company introduced its iUni and iDuo in 2007, its iTotal CR in 2011, its iTotal PS in 2015, its Conformis hip system in 2018, and its Identity Imprint in 2021. The Company has its corporate offices in Billerica, Massachusetts.

Merger Agreement with restor3d, Inc.

On June 22, 2023, the “Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with restor3d, Inc. (“restor3d”) and Cona Merger Sub Inc., a wholly owned subsidiary of restor3d (“Merger Sub”). Upon the terms and subject to the conditions set forth in the Merger Agreement, which has been unanimously adopted by the Board of Directors of the Company (the “Board”), Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation and a wholly owned subsidiary of restor3d (the “Merger”). The Board also unanimously resolved to recommend that the Company’s stockholders vote to adopt and approve the Merger Agreement and the Merger.

Pursuant to the Merger Agreement, upon the closing of the Merger (the “Closing”), each outstanding share of Company common stock, other than shares owned by the Company, restor3d or Merger Sub (which will be cancelled) and shares with respect to which appraisal rights are properly exercised and not withdrawn under Delaware law, will automatically be converted into the right to receive $2.27 in cash, without interest (the “Merger Consideration”).

If the Merger is consummated, the Company’s common stock will be delisted from The Nasdaq Capital Market and deregistered under the Securities Exchange Act of 1934.

In connection with the Merger, the vesting of each outstanding restricted stock unit of the Company will accelerate, and the holders of such units will receive an amount per unit equal to the Merger Consideration. All stock options and warrants of the Company that are currently outstanding have a strike price per share greater than the Merger Consideration, and will be cancelled in connection with the Merger without payment, unless exercised prior to consummation of the Merger.

The consummation of the Merger is subject to certain customary closing conditions, including (i) the adoption of the Merger Agreement by the holders of a majority of the outstanding shares of the Company’s common stock (the “Stockholder Approval”), and (ii) no temporary restraining order, preliminary or permanent injunction or other order is in effect preventing the consummation of the Merger. Moreover, each party’s obligations to consummate the Merger are subject to certain other conditions, including (a) the accuracy of the other party’s representations and warranties (subject to certain materiality exceptions), (b) the other party’s compliance in all material respects with its obligations under the Merger Agreement, and (c) in the case of restor3d and Merger Sub only, the absence of any event, change, or effect that would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect (as defined in the Merger Agreement). A special meeting of the stockholders of the Company is scheduled to be held on August 31, 2023 to vote on, among other things, a proposal to adopt the Merger Agreement. Subject to the satisfaction of the closing conditions, the parties anticipate that the Merger will be consummated by the end of the third quarter of 2023.

The Merger Agreement contains representations and warranties and covenants of the parties customary for a transaction of this nature. Until the earlier of the termination of the Merger Agreement and the closing of the Merger, the Company has agreed to use its reasonable best efforts to conduct its business in all material respects in the ordinary course of business and has agreed to certain other operating covenants and to not take certain specified actions prior to the consummation of the Merger, as set forth more fully in the Merger Agreement. The Company has also agreed to convene and hold a meeting of its stockholders for the purpose of obtaining the Stockholder Approval. In addition, the Merger Agreement requires that, subject to certain exceptions, the Board recommend that the Company’s stockholders approve the Merger Agreement.

In addition, the Company has agreed not to initiate, solicit or knowingly encourage takeover proposals from third parties. The Company has also agreed not to provide non-public information to, or, subject to certain exceptions, engage in discussions or negotiations with, third parties regarding takeover proposals. Notwithstanding these restrictions, prior to the receipt of the Stockholder Approval, the Company may under certain circumstances provide non-public information to and participate in discussions or negotiations with third parties with respect to takeover proposals.

Prior to obtaining the Stockholder Approval, the Board may, among other things, change its recommendation that the stockholders approve the Merger Agreement in connection with a Superior Offer or an Intervening Event (in each case, as defined in the Merger Agreement), or terminate the Merger Agreement to enter into an agreement providing for a Superior Offer, subject, in each case, to complying with notice and other specified conditions, including giving restor3d the opportunity to propose revisions to the terms of the Merger Agreement during a period following notice.

The Merger Agreement contains certain termination rights for the Company and restor3d, including, among others, the right of (1) the Company to terminate the Merger Agreement in order to enter into an agreement providing for a Superior Offer (subject to the Company’s compliance with certain obligations under the Merger Agreement related to such Superior Offer and such termination) and (2) restor3d to terminate the Merger Agreement if the Board changes its recommendation with respect to the Merger Agreement. The Merger Agreement also provides that under specified circumstances, including in the event of termination by the Company to enter into an agreement providing for a Superior Offer, the Company will be required to pay restor3d a termination fee of $0.9 million and provide restor3d with a non-exclusive license to the Company’s patents except with respect to certain knee and/or hip applications.

Liquidity and operations

These consolidated financial statements as of ~~September~~June 30, ~~2022~~2023 and for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, and related interim information contained within the notes to the Consolidated Financial Statements, have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

~~Liquidity and operations~~

Since the Company’s inception in June 2004, it has financed its operations primarily through private placements of preferred stock, its initial public offering in July 2015, other equity financings, debt and convertible debt financings, equipment purchase loans, patent licensing, and product revenue beginning in 2007. The Company has recurring losses and cash used in operating activities for the three and six months ended June 30, 2023 and 2022. At ~~September~~June 30, ~~2022,~~2023, the Company had an accumulated deficit of ~~$577.6~~$603.9 million and cash and cash equivalents of ~~$59.6~~$26.2 million, and $0.5 million in restricted cash allocated to a lease deposit.

~~The Company currently expects that its existing cash and cash equivalents~~In addition, as of ~~the~~such date, ~~hereof and anticipated revenue from operations will enable~~ the Company ~~to fund~~owed $21 million under its operations, capital expenditure requirements and debt service for the 12 months following the date of this filing. However, for the Company to meet its long-term operating plan, the Company expects that revenue growth, margin improvements and leveraging operating expenses will be necessary. To enhance its liquidity position, the Company has taken measures to manage its expenses, will continue to monetize the Company’s intellectual property, and will evaluate additional equity or debt financing opportunities. Whether the Company ultimately consummates such an additional equity and/or debt financing will depend on many factors, including market conditions. It cannot be assured that the Company will be successful in raising such additional financing, or in achieving the revenue growth, margin improvements and operating expense leverage.

~~On November 22, 2021, the Company and its subsidiary, ImaTx, Inc., entered into a Credit and Security Agreement (the “New Credit Agreement”)~~secured credit agreement with MidCap Financial Trust (“MidCap”), as agent, and certain lender parties ~~thereto.~~thereto. The ~~New Credit Agreement~~ credit agreement provides for a five-year, $21 million secured term loan ~~facility (the “Term Facility”). The New Credit Agreement refinanced and replaced~~facility. However, as further described below under “Item 1A. Risk Factors,” if the ~~Company’s prior 2019 secured credit facility~~proposed merger transaction with ~~Innovatus (the “2019 Secured Loan Agreement”). The Company used the amounts drawn~~restor3d is not consummated, absent us raising additional capital, MidCap could allege that a material adverse effect has occurred under the ~~New Credit Agreement~~credit agreement, which could permit MidCap to ~~repay all outstanding obligations~~accelerate amounts due under the 2019 Secured Loan Agreement, which 2019 Secured Credit Loan Agreement has been terminated. For further information regarding the 2019 Secured Loan Agreement and the New Credit Agreement see “Note I—Debt and Notes Payable”.agreement.

~~On February 17, 2021,~~The recurring losses and uncertainties about the Company's ability to raise capital raise substantial doubt about the Company's ability to continue as a going concern within one year after the issuance date to these financial statements. The financial statements do not include any adjustments that might be necessary if the Company ~~closed an offering of its common stock under the Company's shelf registration statement on Form S-3, pursuant~~is unable to ~~which the Company issued and sold 80,952,381 shares of its common stock at~~continue as a ~~public offering price of $1.05 per share, for aggregate net proceeds of approximately $79.6 million. For further information regarding this public offering, see "Note J—Stockholders' Equity".~~going concern.

~~In December 2019,~~The Company plans to address matters that raise substantial doubt about its ability to continue as a ~~human infection originating in China was traced to a novel strain of coronavirus. The virus subsequently spread to other parts~~going concern through the completion of the ~~world, including~~Merger Agreement with restor3d. However, if the ~~United States and Europe, and caused unprecedented disruptions~~merger is not successful, the Company will require additional capital in the ~~global economy as efforts~~near-term to contain the spread of the virus intensified. In March 2020, the World Health Organization declared this coronavirus outbreak ("COVID-19") to be a pandemic. The Company has experienced significantly decreased demand forsupport its ~~products during the pandemic as healthcare providers~~business growth and ~~individuals have de-prioritized~~continued operations, and, ~~deferred medical procedures deemed to be elective, such as joint replacement procedures, which has had, and is expected to continue to have a significant negative effect~~based on the ~~Company's revenue. More recently,~~recent state of equity capital markets and the Company’s exploration of potential financing alternatives, the Company and its board of directors believe that it will be very challenging to obtain such financing on terms that would preserve value for the Company’s current stockholders. Absent the Company being able to obtain a sufficient level of new capital in the ~~third and fourth quarters of 2021,~~near-term, the Company ~~experienced higher levels~~could need to file for bankruptcy protection, which the Company and its board of ~~deferred and rescheduled knee and hip procedures as a~~directors believe would likely result in current Company stockholders receiving little, if any, value for their shares of Company common stock (and, in any event, an amount substantially less than the ~~surge in COVID-19 cases associated with~~$2.27 per share of common stock provided for by the ~~Delta and Omicron variants. During the first quarter of 2022, United States case counts peaked in January and then decreased during the second and third quarters.~~The future progression of the pandemic remains uncertain. To the extent that individuals in these markets continue to de-prioritize or delay deferrable procedures as a result of the COVID-19 pandemic or otherwise, our business, cash flows, financial condition and results of operations could continue to be negatively affected.Merger Agreement).

Basis of presentation and use of estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States ("U.S. 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 consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. The most significant estimates used in these consolidated financial statements include revenue recognition, accounts receivable valuation, inventory reserves, impairment assessments, income tax reserves and related allowances, and the lives of property and equipment. Actual results may differ from those estimates. The interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

Unaudited Interim Financial Information

The accompanying Interim Consolidated Financial Statements as of ~~September~~June 30, ~~2022~~2023 and for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, and related interim information contained within the notes to the Consolidated Financial Statements are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with GAAP. In management’s opinion, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited financial statements and include all adjustments (including normal recurring adjustments) necessary for the fair presentation of the Company’s financial position as of ~~September~~June 30, ~~2022,~~2023, results of operations for and stockholders' equity for the three and ~~nine~~six months ended ~~September~~June 30, 2023 and 2022, and ~~2021, and~~ comprehensive ~~(loss) income,~~loss, and cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021.~~2022. The results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 are not necessarily indicative of the results expected for the full year or any interim period.

Note B—Summary of Significant Accounting Policies

The Company's financial results are affected by the selection and application of accounting policies and methods. There were no material changes in the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 to the application of significant accounting policies and estimates as described in its audited consolidated financial statements for the year ended December 31, ~~2021.~~2022.

Concentrations of credit risk and other risks and uncertainties

Financial instruments that subject the Company to credit risk primarily consist of cash, cash equivalents, and accounts receivable. The Company maintains the majority of its cash with accredited financial institutions which mitigates potential risks related to concentration. The Company had ~~$0.8~~$0.6 million as of ~~September~~June 30, ~~2022~~2023 and $1.2 million as of December 31, ~~2021~~2022 held in foreign bank accounts that are not federally insured. In addition, the cash held in U.S bank accounts exceeds the federally insured limits.

The Company and its contract manufacturers rely on sole source suppliers and service providers for certain components. ~~There can be no assurance that a~~A shortage or stoppage of shipments of the materials or components that the Company purchases ~~will not~~could result in a delay in production or adversely affect the Company’s ~~business. On an ongoing basis, the Company validates alternate suppliers relative to certain key components as needed.~~operating results.

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, no customer represented greater than 10% of total revenue. For the three and six months ended ~~September~~June 30, ~~2021,~~2022, no customer represented greater than 10% of total revenue. For the nine months ended September 30, 2021, Stryker Corporation (“Stryker”), Wright Medical Technology, Inc. (“Wright Medical”), and Tornier, Inc. (“Tornier,” and collectively with Stryker and Wright Medical, the "Stryker Parties") represented 47% of total revenue. As of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively, there was no customer that represented greater than 10% of the total net receivable balance.

Principles of consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries including ImaTx, Inc., ConforMIS Europe GmbH, ConforMIS UK Limited, ConforMIS Hong Kong Limited, Conformis India LLP, and Conformis Cares LLC. All intercompany balances and transactions have been eliminated in consolidation.

Cash, cash equivalents and restricted cash

The Company considers all highly liquid investment instruments with original maturities of 90 days or less when purchased to be cash equivalents. The Company’s cash equivalents consist of demand deposits and money market accounts. Demand deposits and money market accounts are carried at cost which approximates their fair value. The Company has recorded restricted cash of $0.5 million ~~and $0.6 million~~ as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021, respectively.~~2022. Restricted cash consisted of security provided for lease obligations.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows.


		September 30, 2022		December 31, 2021			June 30, 2023		December 31, 2022
Cash and cash equivalents	Cash and cash equivalents	$	59,581	$	100,556	Cash and cash equivalents	$	26,182	$	48,667
Restricted cash	Restricted cash	462		562		Restricted cash	462		462
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows	Total cash, cash equivalents, and restricted cash shown in the statement of cash flows	$	60,043	$	101,118	Total cash, cash equivalents, and restricted cash shown in the statement of cash flows	$	26,644	$	49,129

Fair value of financial instruments

Certain of the Company’s financial instruments, including cash and cash equivalents (excluding money market funds), accounts receivable, accounts payable, accrued expenses and other liabilities are carried at cost, which approximates their fair value because of the short-term maturity. The carrying value of the debt approximates fair value because the interest rate under the obligation approximates market rates of interest available to the Company for similar instruments.

Accounts receivable and allowance for ~~doubtful accounts~~credit losses

Accounts receivable consist of billed and unbilled amounts due from medical facilities or independent distributors (the "Customer"). Upon completion of a procedure, revenue is recognized and an unbilled receivable is recorded. Under Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("ASC 606"), an enforceable contract is met either at or prior to the procedure being performed. Upon receipt of a purchase order from the Customer, the billed receivable is recorded and the unbilled receivable is reversed. As a result, the unbilled receivable balance fluctuates based on the timing of the Company's receipt of purchase orders from the medical facilities. In estimating whether accounts receivable can be collected, the Company performs evaluations of customers and continuously monitors collections and payments and estimates an allowance for ~~doubtful accounts~~credit losses based on the aging of the underlying invoices, collections experience to date and any specific collection issues that have been identified. The allowance for ~~doubtful accounts~~credit losses is recorded in the period in which revenue is recorded or when collection risk is identified.

Inventories

Inventories consist of raw materials, work-in-process components and finished goods. Inventories are stated at the lower of cost, determined using the first-in first-out method, or net realizable value. The Company regularly reviews its inventory quantities on hand and related cost and records a provision for any excess or obsolete inventory based on its estimated forecast of product demand and existing product configurations. The Company also reviews its inventory value to determine if it reflects the lower of cost or market, based on net

realizable value. Appropriate consideration is given to inventory items sold at negative gross margin, purchase commitments and other factors in evaluating net realizable value. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2022,~~

2023, the Company recognized provisions of ~~$1.2~~$0.6 million and ~~$3.6~~$0.9 million, respectively, to adjust its inventory value to the lower of cost or net realizable value for excess and obsolete reserves, and estimated unused product related to known and potential cancelled cases, which is included in cost of revenue. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, the Company recognized provisions of ~~$0.5~~$0.8 million and ~~$1.6~~$2.5 million, respectively, to adjust its inventory value to the lower of cost or net realizable value for excess and obsolete reserves, and estimated unused product related to known and potential cancelled cases, which is included in cost of revenue.

Property and equipment

Property and equipment is stated at cost less accumulated depreciation and is depreciated using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are amortized over their useful life or the life of the lease, whichever is shorter. Assets capitalized under capital leases are amortized in accordance with the respective class of assets and the amortization is included with depreciation expense. Maintenance and repair costs are expensed as incurred.

Long-lived assets

The Company tests impairment of long-lived assets when events or changes in circumstances indicate that the assets might be impaired. If changes in circumstances lead the Company to believe that any of its long-lived assets may be impaired, the Company will test the asset group for recoverability, by evaluating whether the estimated undiscounted cash flows, including estimated residual value, generated from the asset group are sufficient to support the carrying value of the assets. During the quarter ended ~~September~~June 30, ~~2022,~~2023, the Company had ~~experienced a significant decrease in its stock price and~~ incurred current-period operating losses associated with its asset group, and as such, an assessment for recoverability was performed. Based on the assessment, the Company deemed its asset group to be recoverable, and no impairment charges were recognized for the quarter ended ~~September~~June 30, ~~2022.~~2023.

Leases

The Company has elected not to separate non-lease components from all classes of leases. Non-lease components have been accounted for as part of the single lease component to which they are related.

Leases with an anticipated term, inclusive of renewals of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term.

The Company has elected the hindsight practical expedient to determine the lease term for existing leases. This practical expedient enables an entity to use hindsight in determining the lease term when considering options to extend and terminate leases as well as purchase the underlying assets. The operating lease right-of-use assets are subsequently assessed for impairment in accordance with the Company's accounting policy for long-lived assets.

Revenue Recognition

Product Revenue Recognition

Revenue is recognized when, or as, obligations under the terms of a contract are satisfied, which occurs when control of the promised products or services is transferred to customers. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer (“transaction price”). When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying the practical expedient in paragraph 606-10-32-18, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing component as of ~~September~~June 30, ~~2022.~~2023. Payment is typically due between 30 and 60 days from invoice.

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To the extent that the transaction price includes variable consideration, such as prompt-pay discounts or rebates, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the expected value to which the Company expects to be entitled. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Actual amounts of consideration ultimately received may differ from the Company's estimates. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available.

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines standalone selling prices based on observable prices or a cost-plus margin approach when one is not available. Revenue is recognized at the time the related performance obligation is satisfied by transferring control of a promised good or service to a customer. The Company's performance obligations are satisfied at the same time, typically upon surgery, therefore, product revenue is recognized at a point in time upon completion of the surgery. Since the Company does not have contracts that extend beyond a duration of one year, there is no transaction price related to performance obligations that have not been satisfied.

Certain customer contracts include terms that allow the Company to bill for orders that are cancelled after the product is manufactured and could result in revenue recognition over time. However, the impact of adopting over time revenue recognition was deemed immaterial.

Under the long-term Distribution Agreement with Stryker, the Company supplies patient specific instrumentation to Stryker and revenue is recognized at a point in time, that is, when Stryker obtains control of the products.

Unconditional rights to consideration are reported as receivables. Incidental items that are immaterial in the context of the contract are recognized as expense. The Company records a contract liability when there is an obligation to transfer goods or services to a customer for which the Company has received consideration from the customer. As of January 1, 2023, the contract liability balance was $0.2 million. There was no contract liability balance recorded as of January 1, 2022. At June 30, 2023, the Company had $0.6 million of contract liabilities recorded on the Consolidated Balance Sheets derived from contracts with customers. There were no contract assets recorded at June 30, 2023. The Company did not have any contract assets or liabilities recorded at June 30, 2022.

Royalty and Licensing Revenue Recognition

The Company receives ongoing sales-based royalties under its license agreement (the "MicroPort License Agreement") with MicroPort Orthopedics Inc., a wholly owned subsidiary of MicroPort Scientific Corporation, (collectively, "MicroPort"). Royalty revenue is recorded at the expected value of the royalty revenue.

On ~~September 30, 2019~~February 9, 2023, the Company entered into ~~an Asset Purchase~~a Settlement and License Agreement with ~~Howmedica Osteonics Corp.~~Bodycad Laboratories, Inc. ("Bodycad") and Exactech, Inc. ("Exactech"), ~~a wholly-owned subsidiary~~collectively, (the "Defendants"), pursuant to which the parties have agreed to terms for resolving all of ~~Stryker.~~their existing patent disputes. In ~~connection with entering into~~consideration of the ~~Asset Purchase Agreement,~~licenses, releases, covenants and other immunities granted by the Company ~~also entered into a Development Agreement, a~~to the Defendants, the Company received an upfront payment following the execution of the Settlement and License Agreement, and will receive an additional payment by June 30, 2023. The agreement provides for the grant of the licenses, covenants-not-to-sue, releases, and other ~~ancillary agreements contemplated by~~significant deliverables upon receipt of full payment from. These individual rights are not accounted for as separate performance obligations as (i) the ~~Asset Purchase Agreement with Stryker (collectively,~~nature of the ~~"Stryker Agreements").~~promise, within the context of the agreement, is to transfer combined items to which the promised rights are inputs and (ii) the Company's promise to transfer each individual right described above to the Defendants is not separately identifiable from other promises in the agreement. As a result, the Company accounts for the promises in the agreement as a single performance obligation. The ~~Company determined that~~Defendants legally obtained control of the ~~Asset Purchase Agreement~~licenses and other rights upon full payment to Conformis. As such, the ~~License Agreement are~~earnings process was completed and revenue was recognized upon receipt of the full payment, and all other revenue recognition criteria had been met within the scope of ASC 606. Under the Asset Purchase Agreement and License Agreement, the Company is required to provide certain assets and the right to use the license for a specific purpose. The assets and the right to use the license are highly interdependent and considered one performance obligation. The Company bifurcated the total transaction price of $30.0 million into two components; $5.0 million related to cost reimbursement for other services (development) and $25.0 million allocated to royalty revenue determined using the residual approach of deducting the cost reimbursement component from the total transaction price. The arrangement does not contain a significant financing component.

The Company records a contract liability when there is an obligation to transfer goods or services to a customer for which the Company has received consideration from the customer. The Company has concluded that Stryker meets the definition of a customer for a portion of the obligations under the Stryker Agreements. There was no contract liability balance as of January 1, 2022. As of January 1, 2021, the contract liability balance was $14.0 million, which was related to consideration received from the customer under the Asset Purchase Agreement and Development Agreement. The Company concluded the license rights under the License Agreement were functional and would be recognized at the point in time when 510(k) clearance was received from the U.S. Food and Drug Administration (the "FDA") as required under Milestone 3 in the License Agreement, or upon termination by Stryker and Stryker's election to purchase the license rights. On April 19, 2021, the Company achieved the third of three

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~~milestones under~~On April 26, 2023, the Company entered into a Settlement and License Agreement ~~when it received 510(k) clearance from~~with Exactech, pursuant to which the ~~FDA~~parties have agreed to terms for resolving all of their existing patent disputes. In consideration of the licenses, releases, covenants and ~~received $11.0 million from Stryker. In connection with the 510(k) clearance,~~other immunities granted by the Company recognized as royalty and license revenue the $14.0 million that was previously deferred as contract liability, plus the $11.0 million payment received, for a total aggregate of $25.0 million during the quarter ended June 30, 2021. There are no amounts recorded as contract liability as of September 30, 2022. In addition, during the quarter ended June 30, 2021,to Exactech, the Company ~~recorded $2.5 million in other income~~received a payment within 30 days following the execution of the agreement. The agreement provides for the ~~remaining portion~~grant of the ~~advance on research~~licenses, covenants-not-to-sue, releases, and ~~development, that was~~other significant deliverables upon receipt of full payment from Exactech. These individual rights are not ~~used~~accounted for as separate performance obligations as (i) the nature of the promise, within the context of the agreement, is to ~~offset against research~~transfer combined items to which the promised rights are inputs and ~~development expenses.~~(ii) the Company's promise to transfer each individual right described above to Exactech is not separately identifiable from other promises in the agreement. As a result, the Company accounts for the promises in the agreement as a single performance obligation. Exactech legally obtained control of the licenses and other rights upon full payment to Conformis and the completion of other deliverables.

On April 8, 2021, the Company entered into a license agreement (the “License Agreement”) with Paragon 28, Inc. ("Paragon 28"), granting Paragon 28 a non-exclusive license under a subset of the Company's U.S. patents for the use of patient-specific instruments with off-the-shelf implants in Paragon 28’s APEX 3D Total Ankle Replacement System. In consideration for the license, the Company received $0.5 million upon execution of the License Agreement, another $0.5 million in October 2021, and received an additional $0.5 million from Paragon 28 on April 7, 2022. In connection with this License Agreement, the Company recognized revenue of $1.0 million during the quarter ended June 30, 2021. The remaining $0.5 million was recognized as revenue during the quarter ended March 31, 2022.

On ~~June 30, 2021~~November 8, 2022 the Company entered into a ~~settlement and license agreement (the “Settlement~~Settlement and License ~~Agreement”)~~Agreement with ~~the Stryker Parties,~~Medacta USA, ("Medacta"), pursuant to which ~~the~~both parties have agreed to terms for resolving all of their ~~then-existing~~existing patent disputes. In consideration of the licenses, releases, covenants and other immunities granted by the Company to ~~the Stryker Parties, the Stryker Parties were~~Medacta, Medacta was required to ~~make a one-time payment to~~pay the Company a fee promptly after execution of ~~$15.0 million no later than October 15, 2021.~~the Settlement and License Agreement, which was received in full on December 12, 2022. The agreement provides for the grant of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon ~~execution~~receipt of the ~~contract.~~payment from Medacta. These individual rights are not accounted for as separate performance obligations as (i) the nature of the promise, within the context of the agreement, is to transfer combined items to which the promised rights are inputs and (ii) the Company's promise to transfer each individual right described above to ~~the Stryker Parties~~Medacta is not separately identifiable from other promises in the agreement. As a result, the Company accounts for the promises in the ~~Settlement and License Agreement~~agreement as a single performance obligation. ~~The Stryker Parties~~Medacta legally obtained control of the license and other rights upon ~~execution of the contract.~~payment to Conformis. As such, the earnings process is complete and revenue was recognized upon ~~the execution~~receipt of the ~~contract, when collectability became probable~~payment, and all other revenue recognition criteria had been met within the scope of ASC 606. In connection with the Settlement and License Agreement, the Company recognized licensing revenue ~~of $15.0 million~~ during the ~~quarter~~year ended ~~June 30, 2021 and payment in the same amount was received from the Stryker Parties on October 15, 2021.~~December 31, 2022. See “Note H—Commitments and Contingencies, Legal proceedings” for further discussion of the ~~Stryker Parties~~Medacta settlement.

Disaggregation of Revenue

See "Note K—Segment and Geographic Data" for disaggregated product revenue by ~~geography.~~geography and product category.

Variable Consideration

Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and which result from rebates that are offered within contracts between the Company and some of its customers. The amount of variable consideration which is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period.

The following table summarizes activity for rebate allowance reserve (in thousands):


		September 30, 2022		December 31, 2021			June 30, 2023		December 31, 2022
Beginning Balance	Beginning Balance	$	79	$	81	Beginning Balance	$	108	$	79
Provision related to current period sales	Provision related to current period sales	82		107		Provision related to current period sales	104		126

Payments or credits issued to customer		(97)		(109)
Payments or credits issued to customers						Payments or credits issued to customers	(91)		(97)
Ending Balance	Ending Balance	$	64	$	79	Ending Balance	$	121	$	108

1213

Costs to Obtain and Fulfill a Contract

The Company currently expenses commissions paid for obtaining product sales. Sales commissions are paid following the manufacture and implementation of the implant. Due to the period being less than one year, the Company will apply the practical expedient, whereby the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in sales and marketing expense. Further, the Company incurs costs to buy, build, replenish, restock, sterilize and replace the reusable instrumentation trays associated with the sale of its products and services. The reusable instrument trays are not contract specific and are used for multiple contracts and customers, therefore does not meet the criteria to capitalize under ASC 606.

Shipping and handling costs

Shipping and handling activities prior to the transfer of control to the customer (e.g., when control transfers after delivery) are considered fulfillment activities, and not performance obligations. Amounts invoiced to customers for shipping and handling are classified as revenue. Shipping and handling costs incurred are included in general and administrative expense. Shipping and handling expense was ~~$0.7~~$1.0 million ~~and $0.6 million~~ for each of the three months ended ~~September~~June 30, 2023 and 2022, and ~~2021, respectively, and $3.1~~$2.2 million and ~~$1.5~~$2.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively.

Taxes collected from customers and remitted to government authorities

The Company’s policy is to present taxes collected from customers and remitted to government authorities on a net basis and not to include tax amounts in revenue.

Research and development expense

The Company’s research and development costs consist of engineering, product development, quality assurance, clinical and regulatory expense. These costs primarily relate to employee compensation, including salary, benefits and stock-based compensation. The Company also incurs costs related to consulting fees, revenue share, materials and supplies, and marketing studies, including data management and associated travel expense. Research and development costs are expensed as incurred.

Advertising expense

Advertising costs are expensed as incurred, which are included in sales and marketing. Advertising expense was $0.2 million and $0.1 million for ~~each of~~ the three months ended ~~September~~June 30, 2023 and 2022, respectively, and ~~2021, and $0.3~~$0.6 million and $0.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively.

Segment reporting

Operating segments are defined as components of an enterprise about which separate financial information is available and is evaluated on a regular basis by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources to an individual segment and in assessing performance of the segment. The Company’s chief operating decision-maker is its chief executive officer. The Company’s chief executive officer reviews financial information presented on an aggregate basis for purposes of allocating resources and evaluating financial performance. The Company has one business segment and there are no segment managers who are held accountable for operations, operating results and plans for products or components below the aggregate Company level. Accordingly, in light of the Company’s current product offerings, management has determined that the primary form of internal reporting is aligned with the offering of the Conformis personalized joint replacement products and that the Company operates as one segment. See “Note K—Segment and Geographic Data.”

Foreign currency translation and transactions

The assets and liabilities of the Company’s foreign operations are translated into U.S. dollars at current exchange rates at the balance sheet date, and income and expense items are translated at average rates of exchange prevailing during the quarter. Net translation gains and losses are recorded in accumulated other comprehensive loss. Gains and losses from foreign currency transactions denominated in foreign currencies, including intercompany balances not of a long-term investment nature, are included in the Consolidated Statements of Operations.

1314

Income taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases, operating losses and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that includes the enactment date.

In evaluating the need for a valuation allowance, the Company considers all reasonably available positive and negative evidence, including recent earnings, expectations of future taxable income and the character of that income. In estimating future taxable income, the Company relies upon assumptions and estimates of future activity including the reversal of temporary differences. Presently, the Company believes that a full valuation allowance is required to reduce deferred tax assets to the amount expected to be realized.

The tax benefit from an uncertain tax position is only recognized if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from these positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The Company reviews its tax positions on an annual basis and more frequently as facts surrounding tax positions change. Based on these future events, the Company may recognize uncertain tax positions or reverse current uncertain tax positions, the impact of which would affect the consolidated financial statements.

The Company has operations in the U.S., Germany, the United Kingdom, and India. The operating results of German operations will be permanently reinvested in that jurisdiction. As a result, the Company has only provided for income taxes at local rates when required.

The Company is subject to U.S. federal, state, and foreign income taxes. The Company recorded a provision for income taxes of ~~$27,000~~$31,000 and ~~$29,000~~$(100,000) for the three months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively and ~~$(39,000)~~$13,000 and ~~$44,000~~$(66,000) for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. The Company recognizes interest and penalties related to income taxes as a component of income tax expense. As of ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, a cumulative balance of ~~$45,000~~$8,000 and ~~$54,000~~$45,000 of interest and penalties had been accrued, respectively.

On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") which included modifications to the limitation on business interest expense, net operating loss provisions, and other various U.S. tax law updates. The Company analyzed these aspects Please note that as result of the ~~CARES Act~~conclusion of a 2017 - 2019 Germany tax audit, the Company has reversed the respective uncertain tax positions for those years, resulting in a reduction of interest and ~~determined that there was no material impact on its consolidated financial statements.~~

~~On December 27,~~penalties, as they now apply to only tax years 2020 the U.S government enacted the Consolidated Appropriations Act, 2021 (the "Appropriations Act"), which included various tax extenders, an update to meals and entertainment expensing, and the deductibility of expenses related to the Paycheck Protection Program (“PPP”) loan proceeds. The Company applied the Appropriations Act in regards to expenses related to the PPP loan proceeds, which previously would have been non-deductible.- 2022.

The Inflation Reduction Act (IRA) was enacted on August 16, 2022. Based on review of the IRA, the Company does not expect any impact to its tax provision. In particular, the Company does not expect to pay Corporate Alternative Minimum Tax (CAMT) in future years based on its projected losses and not reaching the income thresholds. The IRA introduces a 15% CAMT for corporations whose average annual adjusted financial statement income for any consecutive three-tax-year period preceding the tax year exceeds $1 billion starting in 2023.

Stock-based compensation

The Company accounts for stock-based compensation in accordance with ASC 718, Stock Based Compensation ("ASC 718"). ASC 718 requires all stock-based payments to employees and consultants, including grants of stock options, to be recognized in the consolidated statements of operations based on their fair values. The Company uses the Black-Scholes option pricing model to determine the weighted-average fair value of options

granted and recognizes the compensation expense of stock-based awards on a straight-line basis over the vesting period of the award.

The determination of the fair value of stock-based payment awards utilizing the Black-Scholes option pricing model is affected by the stock price, exercise price, and a number of assumptions, including expected volatility of the stock, expected life of the option, risk-free interest rate and expected dividends on the stock. The Company evaluates the assumptions used to value the awards at each grant date and if factors change and different assumptions are utilized, stock-based compensation expense may differ significantly from what has been recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, the Company may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense.

Net ~~(loss) income~~loss per share

The Company calculates net loss per share in accordance with ASC 260, "Earnings per Share." Basic earnings per share (“EPS”) is calculated by dividing the net income or loss for the period by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted EPS is computed by dividing the net income or loss for the period by the weighted average number of common shares outstanding for the period and the weighted average number of dilutive common stock equivalents outstanding for the period determined using the treasury stock method.

The following table sets forth the computation of basic and diluted earnings per share attributable to stockholders (in thousands, except share and per share data):
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands, except share and per share data) 2022 2021 2022 2021
Numerator:
Basic and diluted (loss) income per share
Net (loss) income $ (15,202) $ (12,973) $ (46,757) $ 13,563
Denominator:
Basic weighted average shares 181,216,213 178,452,296 180,238,044 162,646,412
Diluted weighted average shares 181,216,213 178,452,296 180,238,044 167,369,631
(Loss) income per share attributable to Conformis, Inc. stockholders:
Basic $ (0.08) $ (0.07) $ (0.26) $ 0.08
Diluted $ (0.08) $ (0.07) $ (0.26) $ 0.08


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands, except share and per share data)	2023		2022		2023		2022
Numerator:
Basic and diluted loss per share
Net loss	$	(13,011)	$	(15,524)	$	(22,582)	$	(31,555)
Denominator:

Basic and diluted weighted average shares*	7,316,286		7,211,851		7,291,542		7,189,634

Loss per share attributable to Conformis, Inc. stockholders:
Basic and diluted*	$	(1.78)	$	(2.15)	$	(3.10)	$	(4.39)

*Adjusted for the 1-for-25 reverse stock split

The following table sets forth potential shares of common stock equivalents that are not included in the calculation of diluted net loss per share because to do so would be anti-dilutive as of the end of each period presented:

Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Common stock warrants — 4,554,069 — —
Stock options and restricted stock awards 50,120 3,117,957 526,856 —


	Three Months Ended June 30,		Six Months Ended June 30,
	2023	2022	2023	2022











Stock options and restricted stock awards*	6,169	20,686	20,341	26,629

*Adjusted for the 1-for-25 reverse stock split

~~Recent accounting pronouncements~~Recently Adopted Accounting Standards

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which modifies the measurement approach for credit losses on financial assets measured on an amortized cost basis from an 'incurred loss' method to an 'expected loss' method. In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.” ASU 2019-11 is an accounting pronouncement that amends ASU 2016-13. The ASU 2019-11 amendment provides clarity and improves the codification to ASU 2016-13. The ~~pronouncements are concurrently effective for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years.~~Company adopted these ASUs as of January 1, 2023. The ~~Company is currently evaluating~~adoption of these ASUs has not had a material impact on the ~~effects of this pronouncement on its~~Company's consolidated financial ~~statements.~~statements or related disclosures.

Note C—Accounts Receivable

Accounts receivable consisted of the following (in thousands):


		September 30, 2022		December 31, 2021			June 30, 2023		December 31, 2022
Total receivables	Total receivables	$	10,058	$	9,336	Total receivables	$	8,310	$	10,383
Allowance for doubtful accounts and returns		(586)		(257)
Allowance for credit losses						Allowance for credit losses	(634)		(610)
Accounts receivable, net	Accounts receivable, net	$	9,472	$	9,079	Accounts receivable, net	$	7,676	$	9,773

The beginning accounts receivable balance as of January 1, 2023 and 2022, ~~and 2021,~~ was ~~$9.1~~$9.8 million and ~~$8.5~~$9.1 million, respectively. All activity within accounts receivables relate to normal operational activity from the period. Accounts receivable included unbilled receivable of ~~$1.5~~$1.2 million and ~~$1.1~~$1.4 million at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. Write-offs related to accounts receivable were approximately ~~$1,000~~$96,000 and ~~$5,000~~$0 for

the three months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively, and ~~$14,000~~$96,000 and ~~$76,000~~$13,000 for the ~~nine~~six months ended ~~September~~June 30, 2023 and 2022, ~~and 2021.~~respectively.

Summary of allowance for ~~doubtful accounts~~credit losses and returns activity was as follows (in thousands):


		September 30, 2022		December 31, 2021			June 30, 2023		December 31, 2022
Beginning balance	Beginning balance	$	(257)	$	(290)	Beginning balance	$	(610)	$	(257)
Provision for bad debts on trade receivables		(339)		(48)
Provision for expected credit losses						Provision for expected credit losses	(132)		(396)
Other allowances	Other allowances	(4)		3		Other allowances	12		(7)
Accounts receivable write offs	Accounts receivable write offs	14		78		Accounts receivable write offs	96		50
Ending balance	Ending balance	$	(586)	$	(257)	Ending balance	$	(634)	$	(610)

Note D—Inventories

Inventories consisted of the following (in thousands):


		September 30, 2022		December 31, 2021			June 30, 2023		December 31, 2022
Raw Material	Raw Material	$	7,345	$	6,109	Raw Material	$	9,149	$	9,699
Work in process	Work in process	3,115		3,187		Work in process	1,917		2,118
Finished goods	Finished goods	7,557		5,908		Finished goods	7,958		7,093
Total Inventories		$	18,017	$	15,204
Total inventories, net						Total inventories, net	$	19,024	$	18,910

Note E—Property and Equipment

Property and equipment consisted of the following (in thousands):

Estimated
Useful
Life
(Years) September 30, 2022 December 31, 2021
Equipment 5-7 $ 20,480 $ 20,091
Furniture and fixtures 5-7 765 873
Computer and software 3 10,976 10,540
Leasehold improvements 3-7 2,241 2,243
Reusable instruments 5 7,068 6,272
Molding and Tooling 5 463 379
Total property and equipment 41,993 40,398
Accumulated depreciation (33,218) (30,130)
Property and equipment, net $ 8,775 $ 10,268


	Estimated Useful Life (Years)	June 30, 2023		December 31, 2022
Equipment	5-7	$	20,499	$	20,490
Furniture and fixtures	5-7	765		765
Computer and software	3	11,113		11,037
Leasehold improvements	3-7	2,251		2,295
Reusable instruments	5	8,173		7,147
Molding and Tooling	5	556		489
Total property and equipment		43,357		42,223
Accumulated depreciation		(35,902)		(34,069)
Property and equipment, net		$	7,455	$	8,154

Depreciation expense related to property and equipment was ~~$1.0~~$0.9 million and ~~$1.1~~$1.0 million for the three months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively, and ~~$3.1~~$1.8 million and ~~$3.2~~$2.1 million for the ~~nine~~six months ended ~~September~~June 30, 2023 and 2022, respectively. For the six months ended June 30, 2023, the Company recognized $0.1 million in impairment charges related to unused manufacturing equipment and ~~2021, respectively.~~building improvements.

Note F—Accrued Expenses

Accrued expenses consisted of the following (in thousands):

September 30,
2022 December 31,
2021
Accrued employee compensation $ 3,334 $ 4,701
Accrued legal expense 3,267 2,140
Accrued vendor charges 331 462
Accrued revenue share expense 596 824
Accrued clinical trial expense 469 335
Accrued other 1,037 1,114
$ 9,034 $ 9,576


	June 30, 2023		December 31, 2022
Accrued employee compensation	$	2,214	$	4,279


Accrued legal expense	1,034		397

Accrued vendor charges	107		903
Accrued revenue share expense	318		791

Accrued clinical trial expense	—		342
Deferred revenue	585		215
Accrued other	994		1,051
	$	5,252	$	7,978

1718

Note G—Leases

The Company maintains its corporate headquarters in a leased building located in Billerica, Massachusetts. The Company maintains its design and manufacturing facilities in leased buildings located in Wilmington, Massachusetts, Wallingford, Connecticut and Hyderabad, India.

The Company's leases have remaining lease terms of approximately one~~-to-six~~-to-five years, some of which include one or more options to extend the leases for up to five years per renewal. The exercise of lease renewal options is at the sole discretion of the Company. The amounts disclosed in the Consolidated Balance Sheet pertaining to right-of-use assets and lease liabilities are measured based on management’s current expectations of exercising its available renewal options.

On May 11, 2021, the Company executed an amendment to extend the term of the Wilmington lease through September 30, 2027.

The Company’s existing leases are not subject to any restrictions or covenants which preclude its ability to pay dividends, obtain financing, or enter into additional leases.

As of ~~September~~June 30, ~~2022,~~2023, the Company had not entered into any leases which have not yet commenced which would entitle the Company to significant rights or create additional obligations.

The Company uses either its incremental borrowing rate or the implicit rate in the lease agreement as the basis to calculate the present value of future lease payments at lease commencement. The incremental borrowing rate represents the rate the Company would have to pay to borrow funds on a collateralized basis over a similar term and in a similar economic environment.

The components of lease expense and related cash flows were as follows (in thousands):


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2022		2021		2022		2021			2023		2022		2022		2021
Rent expense	Rent expense	$	485	$	491	$	1,450	$	1,372	Rent expense	$	486	$	486	$	974	$	965
Variable lease cost (1)	Variable lease cost (1)	128		110		329		315		Variable lease cost (1)	182		93		223		201
		$	613	$	601	$	1,779	$	1,687		$	668	$	579	$	1,197	$	1,166

(1) Variable operating lease expenses consist primarily of common area maintenance and real estate taxes for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021.~~2022.

As of ~~September~~June 30, ~~2022,~~2023, the remaining weighted-average lease term of the operating leases was ~~4.1~~3.4 years and the weighted-average discount rate was 6.0%.

The future minimum rental payments under these agreements as of ~~September~~June 30, ~~2022~~2023 were as follows (in thousands):


Year	Year	Minimum Lease Payments		Year	Minimum Lease Payments

2022 remainder of year		516

2023	2023	2,077		2023	897
2024	2024	2,128		2024	2,124
2025	2025	1,873		2025	1,869
2026	2026	971		2026	968
2027	2027	741		2027	741
Total lease payments	Total lease payments	$	8,306	Total lease payments	$	6,599
Present value adjustment	Present value adjustment	(954)		Present value adjustment	(654)
Present value of lease liabilities	Present value of lease liabilities	$	7,352	Present value of lease liabilities	$	5,945

1819

Note H—Commitments and Contingencies

License and revenue share agreements

Revenue share agreements

The Company is party to revenue share agreements with certain past and present members of its scientific advisory board under which these advisors agreed to participate on a scientific advisory board and to assist with the development of the Company’s personalized implant products and related intellectual property. These agreements provide that the Company will pay the advisor a specified percentage of the Company’s net revenue, ranging from 0.1% to 1.33%, with respect to the Company’s products on which the advisor made a technical contribution or, in some cases, products covered by one or more claims of one or more Company patents on which the advisor is a named inventor. The specific percentage is determined by reference to product classifications set forth in the agreement and is often tiered based on the level of net revenue collected by the Company on such product sales. The Company’s payment obligations under these agreements typically expire a fixed number of years after expiration or termination of the agreement or a fixed number of years after the first sale of a product, but in some cases expire on a product-by-product basis or expiration of the last to expire of the Company’s patents where the advisor is a named inventor that claims the applicable product.

The Company incurred aggregate revenue share expense including all amounts payable under the Company’s scientific advisory board revenue share agreements of ~~$0.4~~$0.3 million during the three months ended ~~September~~June 30, ~~2022,~~2023, representing ~~2.9% of product revenue and $1.7 million during the nine months ended September 30, 2022, representing 3.9%~~2.1% of product revenue and $0.6 million during the ~~three~~six months ended ~~September~~June 30, ~~2021,~~2023, representing ~~4.3%~~2.2% of product revenue and ~~$1.6~~$0.7 million during the ~~nine~~three months ended ~~September~~June 30, ~~2021,~~2022, representing ~~3.6%~~4.8% of product revenue and $1.3 million during the six months ended June 30, 2022, representing 4.3% of product revenue. Revenue share expense is included in research and development.

Other obligations

In the ordinary course of business, the Company is a party to certain non-cancellable contractual obligations typically related to product royalty and research and development. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. There have been no contingent liabilities requiring accrual at ~~September~~June 30, ~~2022~~2023 or December 31, ~~2021.~~2022.

Legal proceedings

In the ordinary course of the Company's business, the Company is subject to routine risk of litigation, claims and administrative proceedings on a variety of matters, including patent infringement, product liability, securities-related claims, and other claims in the United States and in other countries where the Company sells its products. In the case of matters below in which the Company is a defendant, adverse outcomes of these lawsuits could have a material adverse effect on the Company's business, financial condition or results of operations. The Company is presently unable to predict the outcome of these lawsuits or to reasonably estimate a range of potential losses, if any, related to the lawsuits. Legal costs associated with legal proceedings are accrued as incurred.

Proceedings and Complaints Related to the Merger Agreement

On July 27, 2023 and July 31, 2023, respectively, two purported Company stockholders filed separate complaints against the Company and the members of its board directors in the United States District Court for the Southern District of New York in cases captioned Burnett v. Conformis Inc., et al., 1:23-cv-06536 (S.D.N.Y.) and Anderson v. Conformis Inc., et al., 1:23-cv-06686 (S.D.N.Y.), respectively. The complaints each assert claims under Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder and Section 20(a) of the Exchange Act, and allege that the proxy statement filed with the SEC on July 24, 2023 regarding the proposed merger transaction with restor3d is materially incomplete and misleading because it fails to disclose certain purportedly material information. Among other remedies, the plaintiffs each seek to enjoin the merger. Between July 24, 2023 and July 27, 2023, counsel to four different purported Company stockholders sent demand letters to counsel for the Company making similar assertions and, in one instance, attaching a draft federal court complaint against the Company and the members of its board directors, asserting similar claims under Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder and Section 20(a) of the Exchange Act and also seeking to enjoin the merger. On July 31, 2023, the Company also received a demand under Section 220 of the Delaware General

Corporation Law seeking formal access to the Company’s books and records related to the proposed merger with restor3d and the process leading up to it.

Although the ultimate outcome of these matters cannot be predicted with certainty, the Company and the individual defendants believe the claims are without merit and intend to defend against these actions vigorously. If any plaintiffs are successful in obtaining an injunction prohibiting the completion of the merger on the agreed-upon terms, then such injunction may prevent the merger from being completed, or from being completed within the expected time frame. Additional lawsuits against the Company and/or its directors and officers in connection with the merger may be filed in the future. If additional similar complaints are filed or demand letters are sent, absent new or different allegations that are material, the Company will not necessarily announce such additional filings or letters. At this time, the Company is unable to estimate the potential loss or range of losses that might be incurred in connection with these matters.

Settlement and License Agreement with Medacta

On August 29, 2019, the Company filed a lawsuit against Medacta USA, Inc. in the United States District Court for the District of Delaware. The Company amended its complaint on December 23, 2019, and again on October 14, 2020, adding Medacta International SA (Medacta USA, Inc.’s parent company) as a defendant (Medacta USA, Inc. and Medacta International SA are referred to, together, as “Medacta”). The Company is seeking damages for Medacta’s infringement of certain of the Company’s patents related to patient-specific instrument and implant systems, alleging that Medacta’s multiple lines of patient-specific instruments, as well as the implant components used in conjunction with them, infringe four of the Company’s patents. The accused product lines include Medacta patient-specific instrument and implant systems for knee and shoulder replacement procedures. On January 6, 2020, Medacta filed its answer to the Company's complaint, denying that its patient-specific instrument and implant systems infringe the patents asserted by the Company. Medacta’s answer also alleges the affirmative defense that the Company's asserted patents are invalid. On January 21, 2021, Medacta International SA filed a partial motion to dismiss; on February 16, 2021, the Company filed its opposition to the motion; and on March 2, 2021, Medacta International SA filed its reply.On March 4, 2021, the court issued its opinion on claim construction, ruling in the Company’s favor on the construction of all of the disputed terms. On June 3, 2022, the court denied Medacta International SA’s motion to dismiss. On September 8, 2022, the parties notified the court

that an agreement in principle to settle the case had been reached. The trial schedule and case deadlines ~~have been~~ werecanceled, pending the parties’ preparation of and agreement to a definitive settlement agreement.

On October 20, 2021, the Company filed a lawsuit against Medacta Germany GmbH and Medacta International SA (together, “Medacta Europe”) in the Regional Court of Düsseldorf ("German Court"). We are seeking damages for Medacta Europe’s infringement of one of our German patents related to patient-specific instrument and implant systems through Medacta Europe’s sales of multiple lines of PSI, as well as the implant components used in conjunction with them, in Germany. The accused product lines include Medacta Europe’s patient-specific instrument and implant systems for knee, hip, and shoulder replacement procedures. Medacta Europe filed its statement of defense on January 31, 2022. The Company filed its reply to Medacta’s statement of defense on April 28, 2022. As of July 28, 2022, the Company delivered security deposits in the amount of EUR 146,000 to the German Court in order to maintain the action. On September 1, 2022, an oral hearing on infringement and liability was held.On September 9, 2022, the parties notified the court that an agreement in principle to settle the case had been reached, and the issuance of further rulings by the court ~~have been~~was delayed, pending the parties’ preparation of and agreement to a definitive settlement agreement.

On November 8, 2022, the Company entered into a non-exclusive, fully paid up, worldwide settlement and license agreement with Medacta, resolving the matters described in the two preceding paragraphs. Under the terms of this agreement, the Company granted a perpetual, irrevocable, non-exclusive license to Medacta to use patient-specific instrument technology covered by the Company's patents and patent applications with off-the-shelf implants for the knee and shoulder. This license does not extend to patient-specific implants. This license agreement provided for a single lump-sum payment by Medacta to the Company upon entering into the license agreement, which was paid in the fourth quarter of 2022.

Litigation with Osteoplastics

On March 20, 2020, Osteoplastics LLC ("Osteoplastics"), filed a lawsuit against the Company in the United States District Court for the District of Delaware, and Osteoplastics amended its complaint on April 2, 2020. Osteoplastics alleges that the Company’s proprietary software, including the Company’s iFit software platform, and the Company’s use of its proprietary software for designing and manufacturing medical devices, including implants, ~~infringes~~infringed seven patents owned by Osteoplastics. On June 15, 2020, the Company filed a motion to dismiss Osteoplastics’ complaint, and on October 21, 2020, the court denied the motion. On November 2, 2020, the Company filed its answer to the amended complaint, denying that it infringes the patents asserted by Osteoplastics. The Company’s answer also alleges the affirmative defense that Osteoplastics’ asserted patents are invalid. Trial is currently set to begin on July 24, 2023.

On April 24, 2020, the Company filed a lawsuit against Wright Medical Technology, Inc. and Tornier, Inc. (together, “Wright Medical”) in the United States District Court for the District of Delaware seeking damages for Wright Medical’s infringement of certain of the Company's patents related to patient-specific instrument and implant systems. The complaint alleged that Wright Medical’s multiple lines of patient-specific shoulder instruments, as well as the implant components used in conjunction with them, infringed four of the Company’s patents. The accused product lines included Wright Medical’s Tornier Blueprint 3D Planning + PSI shoulder replacement systems. On December 14, 2020, Wright Medical filed its answer to the amended complaint, denying that its patient-specific instrument and implant systems infringed the patents asserted by ~~the Company. Wright Medical’s answer also alleged the~~Osteoplastics and asserting certain affirmative ~~defense that the Company’s asserted patents are invalid.~~

defenses.

On June ~~30, 2021,~~19, 2023, the Company ~~reached~~entered into a settlement and license agreement ~~(the "Settlement and License Agreement")~~with ~~Stryker Corporation ("Stryker") and Wright Medical (collectively, the "Stryker Parties"), pursuant to which the parties agreed to terms for~~Osteoplastics, resolving the ~~outstanding~~ patent infringement lawsuit ~~described~~filed by Osteoplastics in ~~the preceding paragraph.~~March of 2020. ~~Wright Medical~~A Joint Stipulation of Dismissal with Prejudice was ~~acquired by Stryker in November 2020, subsequent to~~filed on June 22, 2023 and the ~~Company's commencement~~order of ~~the lawsuit. In consideration of the non-exclusive license to certain of the Company's patents, releases, covenants and other immunities granted~~dismissal was entered by the Company to the Stryker Parties, the Stryker Parties were required to make a one-time payment to the Company of $15.0 million no later than October 15, 2021. The Company recognized revenue of $15.0 million during the quarter endedCourt on June ~~30, 2021 and payment in the same amount was received from the Stryker Parties on October 15, 2021.~~23, 2023.

Litigation against DePuy

On April 30, 2021, the Company filed a lawsuit against DePuy Synthes, Inc., DePuy Synthes Products, Inc., and DePuy Synthes Sales, Inc. (collectively, “DePuy”) in the United States District Court for the District of Delaware, seeking damages for DePuy’s infringement of certain of the Company's patents related to patient-specific instrument and implant systems. The complaint alleges that DePuy’s multiple lines of PSI, as well as the implant components used in conjunction with them, infringe seven of the Company's patents. The accused product lines include DePuy’s patient-specific instrument and implant systems for knee and shoulder replacement procedures. On October 25, 2021, DePuy filed a partial motion to dismiss. On November 15, 2021, the Company filed an amended complaint. On December 6, 2021, DePuy filed a second partial motion to dismiss. The Company opposed the partial motion to dismiss on December 20, 2021, and DePuy filed a reply in support of its partial motion to dismiss on December 27, 2021. On February 14, 2022, the court denied DePuy's partial motion to dismiss. On February 28, 2022, DePuy filed its answer to the Company's amended complaint, denying that its patient-specific instrument and implant systems infringe the patents asserted by the Company. A claim construction hearing was held on February 6, 2023. Supplemental claim construction briefing was completed in March 2023 and a final claim construction order is pending. Discovery in the lawsuit is ongoing.

Litigation against Exactech

On June 3, 2021, the Company filed a lawsuit against Exactech, Inc. (“Exactech”) in the United States District Court for the Middle District of Florida seeking damages for Exactech’s infringement of certain of the Company's patents related to patient-specific instrument and implant systems. The complaint alleges that

Exactech’s line of patient-specific instruments for use with its ankle implant systems, as well as the ankle implant components used in conjunction with them, infringe five of the Company's patents. ~~Discovery~~

The Company and Exactech entered into a settlement and license Agreement with an effective date of April 26, 2023 that resolves the patent infringement lawsuit filed by the Company in June of 2021.Under the ~~lawsuit is ongoing.~~settlement and license agreement, the Company granted a non-exclusive license to Exactech to use patient-specific instrument technology covered by certain Company patents with off-the-shelf implants for the ankle in exchange for a lump-sum payment and additional consideration.

Litigation against Bodycad Laboratories

On June 3, 2021, the Company filed a lawsuit against Bodycad Laboratories, Inc., Bodycad USA Corp. (together, “Bodycad”), and Exactech (collectively, “Defendants”), in the United States District Court for the Middle District of Florida seeking damages for Defendants’ infringement of certain of the Company's patents related to patient-specific instrument and implant systems. The complaint alleges that Defendants’ line of patient-specific surgical systems for unicondylar knee replacement surgery and Bodycad’s line of patient-specific surgical systems for knee osteotomy surgery infringe six of the Company's patents. On August 2, 2021, Exactech filed its answer to the complaint, denying that it infringed our asserted patents and also alleging that our asserted patents are invalid. On August 20, 2021, Bodycad filed a motion to dismiss and for a more definite statement. On September 10, 2021, the Company filed an amended complaint that continued to accuse the same products of infringing six of the Company's patents. On September 24, 2021, Defendants filed a motion to dismiss, and the Company opposed the motion to dismiss on October 15, 2021. On March 30, 2022, the court denied Defendants motion to dismiss. ~~Discovery~~On February 9, 2023, the parties entered into a settlement and license agreement that resolves the patent infringement dispute filed by the Company in June of 2021.The parties agreed to an undisclosed amount for the ~~lawsuit is ongoing.~~dismissal of all

patent litigation between the companies along with a release and license to certain Company patents related to patient-specific instrumentation and knee implants.

Litigation against Aetna

On May 8, 2020, the Company and an individual plaintiff filed a lawsuit against Aetna, Inc. and Aetna Life Insurance Company (together, “Aetna”) in the United States District Court for the District of Massachusetts seeking damages for Aetna’s improper denial of coverage for personalized knee implants under its health plans and the ones it administers. The Company amended its complaint on August 13, 2020, alleging that Aetna violated its duties under state and federal law, including the Employee Retirement Income Security Act. On March 31, 2021, the court dismissed the Company’s claims against Aetna, but allowed the individual plaintiff’s claims to survive. The individual plaintiff settled his claims against Aetna in October 2021 and the Company subsequently filed a notice of appeal. The Company filed its appeal brief on April 15, 2022. Aetna filed its response to our appeal brief on June 15, 2022. The court is scheduled to hear oral arguments from the parties on the appeal briefs on November 8, 2022.

~~Adverse outcomes~~On January 23, 2023, the United States Court of ~~these lawsuits could have a material adverse effect on~~Appeals for the First Circuit revived the Company's ~~business, financial condition or results of operations.~~trade libel claims against Aetna, finding that Aetna’s policy claims that the Company's knee implants are “experimental” and “investigational” can plausibly be considered actionable product disparagement, and that the district court had erred in dismissing these claims. The court found that the Company has plausibly claimed that Aetna's policy decision caused orthopedic surgeons to stop prescribing its knee replacement implants. The court also revived the Company's related claims for unfair trade practice and interference with advantageous relations. The court issued a scheduling order on March 2, 2023 and discovery in the lawsuit has commenced. The Company intends to continue pursuing these claims against Aetna, and expects to incur additional legal expenses in 2023 (and potentially thereafter) in connection with doing so. The Company is seeking an award of monetary damages and equitable relief. The Company is not presently ~~unable~~able to predict the ultimate outcome of ~~these lawsuits~~this matter or to reasonably estimate a range of potential ~~losses,~~damages the Company may be awarded, if ~~any, related to the lawsuits.~~

~~Legal costs associated with legal proceedings are accrued as incurred.~~successful.

Indemnification

In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future, but have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. However, the Company may record charges in the future as a result of these indemnification obligations. In accordance with its bylaws, the Company has indemnification obligations to its officers and directors for certain events or occurrences, subject to certain limits, while they are serving at the Company’s request in such capacity. There have been no claims to date and the Company has a director and officer insurance policy that would be expected to enable it to recover a portion of any amounts paid for future claims.

Note I—Debt and Notes Payable

Long-term debt consisted of the following (in thousands):


		September 30, 2022		December 31, 2021			June 30, 2023		December 31, 2022

MidCap, Term Loan	MidCap, Term Loan	21,000		21,000		MidCap, Term Loan	21,000		21,000

Less unamortized debt issuance costs	Less unamortized debt issuance costs	(520)		(645)		Less unamortized debt issuance costs	(361)		(437)

Long-term debt, less debt issuance costs	Long-term debt, less debt issuance costs	$	20,480	$	20,355	Long-term debt, less debt issuance costs	$	20,639	$	20,563

Principal payments due as of ~~September~~June 30, ~~2022~~2023 consisted of the following (in thousands):


	Principal Payment



2023 (remainder of the year)	—
2024	1,750
2025	10,500
2026	8,750
Total	$	21,000

Principal
Payment
2022 (remainder of the year) —
2023 —
2024 1,750
2025 10,500
2026 8,750
Total $ 21,000

~~2019 Secured Loan Agreement~~

On June 25, 2019, the Company entered into the 2019 Secured Loan Agreement with Innovatus, as collateral agent and lender, East West Bank and the Lenders, pursuant to which the Lenders agreed to make term loans and revolving credit facility to the Company to repay existing indebtedness, for working capital and general business purposes, in a principal amount of up to $30 million.

On March 1, 2021, the Company entered into a fifth amendment to the 2019 Secured Loan Agreement, which, among other things, waived the trailing six-month revenue covenant milestones that apply to the quarters ending March 31, June 30, September 30 and December 31, 2021 and reduces the revenue covenant milestones that will apply in 2022. The revenue covenant milestones remain unchanged for 2023 and 2024. The amendment also increases the Company’s minimum cash covenant to $5 million until December 31, 2021. The term loan facility established under the 2019 Secured Loan Agreement was secured by substantially all of the Company's and its U.S. subsidiaries' properties, rights and assets.

MidCap Term Loan

On November 22, 2021, the Company and its subsidiary, ImaTx, Inc., entered into the New Credit Agreement with MidCap, as agent, and certain lender parties thereto. The New Credit Agreement provides for a five-year, $21 million secured Term Facility. The New Credit Agreement refinanced and replaced the prior secured loan agreement with Innovatus that the Company entered into in June 2019 (the “2019 Secured Loan ~~Agreement,~~Agreement”), which ~~2019 Secured Loan Agreement~~agreement has been terminated. The full amount of the $21 million Term Facility was borrowed on the date of entering into the New Credit Agreement, and the Company used these proceeds to repay all outstanding obligations under the 2019 Secured Loan Agreement.

The New Credit Agreement has a maturity date of November 1, 2026 and requires interest only payments through October 31, 2024, and thereafter, 24 monthly payments of principal and interest resulting in the Term Facility being fully paid by the maturity date. Interest is payable monthly in arrears at a rate of 5.7% per annum plus one month LIBOR subject to a LIBOR floor of 1%. In addition to the interest charged on the Term Facility, the Company is also obligated to pay certain fees, including an origination fee of 0.5% of the term loan due at closing and a final payment fee of 4.0% of the term loan at the time of final payment. On August 1, 2022, the Company entered into a New Credit Agreement, which replaced references to the LIBOR rate within the existing agreement, with the SOFR interest rate, such that interest will be payable monthly in arrears at a rate of 5.7% per annum plus one month SOFR subject to a SOFR floor of 1%. All other terms under the New Credit agreement remain the same.

The obligation of the Company with respect to the New Credit Agreement are secured by a security interest over substantially all of the personalproperty assets of the Company, including accounts receivable, deposit accounts, intellectual property, investment property, inventory, equipment and equity interests in its ~~subsidiaries.The~~subsidiaries. The New Credit Agreement contains customary affirmative and negative covenants, including limitations on our ability to incur additional debt, grant or permit additional liens, make investments and acquisitions, merge or consolidate with others, dispose of assets, pay dividends and distributions, pay subordinated indebtedness and enter into affiliate transactions. In addition, the New Credit Agreement contains a minimum liquidity covenant requiring the Company to maintain unrestricted cash and cash equivalents in excess of $4.0 million. The New Credit Agreement also includes events of default customary for facilities of this type and upon the occurrence of such events of default, subject to customary cure rights, all outstanding loans under the Term Facility may be accelerated.

As of ~~September~~June 30, ~~2022,~~2023, the Company believes that it was not in breach of any covenants under the ~~New Credit~~secured credit agreement. However, as further described below under “Item 1A. Risk Factors,” if the proposed merger transaction with restor3d is not consummated, absent the Company raising additional capital, MidCap could allege that a material adverse effect has occurred under the credit agreement, which could permit MidCap to accelerate amounts due under the agreement. Should such an event of default actually occur, absent the Company being able to obtain in the near-term, a sufficient level of capital, the Company could need to file for bankruptcy protection, which the Company and its board of directors believe would likely result in current Company stockholders receiving little, if any, value for their shares of Company common stock (and, in any event, an amount substantially less than the $2.27 per share of common stock provided for by the Merger Agreement.

The prepayment of the debt was accounted for as a debt extinguishment and the Company incurred a loss on the extinguishment of $1.1 million. This amount consisted of final payment fee, prepayment penalty and the

write-off of unamortized debt issuance costs. The loss on extinguishment of debt was recognized as interest expense within the consolidated statement of operations during the year ended December 31, 2021.

~~PPP Loan- East West Bank~~

On April 17, 2020, the Company entered into an approximately $4.7 million promissory note (the “PPP Note”) with East West Bank under the Paycheck Protection Program (“PPP”) offered by the U.S. Small Business Administration (the "SBA") to mitigate the negative financial and operational impacts of the COVID-19 pandemic. The interest rate on the PPP Note was a fixed rate of 1%per annum. The Company was initially required to make one payment of all outstanding principal plus all accrued unpaid interest on April 9, 2022 (the “Maturity Date”). The Company was required to pay regular monthly payments in an amount equal to one month’s accrued interest commencing on August 2, 2021, with all subsequent interest payments to be due on the same day of each month after that. All interest which accrues during the deferral period was to be payable on the Maturity Date. However, according to the terms of the PPP, all or a portion of the loan as well as any accrued interest could be fully forgiven if the funds were used for payroll costs (and at least 60% of the forgiven amount must have been used for payroll), interest on certain other outstanding debt, rent, and utilities. In accordance with the CARES Act, the Company used the proceeds of the loan primarily for payroll costs. The Company accounted for the PPP Note as a debt instrument in accordance with ASC 470-50-40-2, with the proceeds from the loan recognized as a long-term liability, less any debt issuance costs, within the consolidated balance sheet. Interest is accrued at the stated rate on a monthly basis by applying the interest method under ASC 835.

The Company submitted the loan forgiveness application to the lender on December 11, 2020. On June 30, 2021, the Company received notification through its lender that the SBA had rendered a final decision regarding its review of the PPP loan forgiveness application, fully approving the loan forgiveness application as of June 28, 2021. The Company accounted for the forgiveness of the PPP Note in accordance with ASC 405-20-40-1 and ASC 470-50-40-2, where the liability was derecognized from the balance sheet upon formal forgiveness of the loan. The resulting gain on forgiveness was measured based on the net carrying value of the PPP Note, which includes accrued interest and deferred financing costs. The Company recorded a gain on forgiveness of PPP loan of $4.8 million within Other income and expenses on the consolidated statement of operations for the three months ended June 30, 2021.

Note J—Stockholders’ Equity

Common stock

Common stockholders are entitled to dividends as and when declared by the board of directors, subject to the rights of holders of all classes of stock outstanding having priority rights as to dividends. There have been no dividends declared to date.

On March 30, 2021, the Company's board of directors adopted a resolution approving a Certificate of Amendment to the Company's Restated Certificate of Incorporation to increase the Company's number of authorized shares of Common Stock from 200,000,000 to 300,000,000 (the “Certificate of Amendment”). The Company's stockholders approved the Certificate of Amendment at the 2021 Annual Meeting. The total number of the Company's authorized common stock was decreased to 20,000,000 after giving effect to the Reverse Stock Split.

Reverse Stock Split

At the Company’s 2022 Annual Meeting of Stockholders, the Company’s stockholders approved a proposed amendment to the Company’s Restated Certificate of Incorporation to effect a reverse stock split of all of the Company’s outstanding shares of common stock by one of several fixed ratios between 1-for-2 and 1-for-10 and to correspondingly decrease the number of authorized shares of the Company’s common stock as disclosed in the Company’s proxy statement for the 2022 Annual Meeting of Stockholders. The reverse stock split was proposed to address the Company’s current non-compliance with Nasdaq’s $1.00 per share minimum bid price requirement.

On October 26, 2022, the Company held a Special Meeting of Stockholders and the Company’s stockholders approved an additional proposed amendment to the Company’s Restated Certificate of Incorporation to effect a reverse stock split of all of the Company’s outstanding shares of common stock by one of three fixed ratios, 1-for-15, 1-for-20 and 1-for-25, and to correspondingly adjust the number of authorized shares of the Company’s common stock by the approved ratio, 1-for-9, 1-for-12 and 1-for-15, respectively (the “Updated Reverse Stock Split Proposal”), as disclosed in the Company’s proxy statement for the October 26, 2022 Special Meeting of Stockholders. The Updated Reverse Stock Split Proposal amendment was proposed to address the Company’s current non-compliance at such time with Nasdaq’s $1.00 per share minimum bid price requirement.

The Company’s Board of Directors ~~has~~ determined to proceed with implementing the 1-for-25 reverse stock split that was approved by shareholder on October 26, ~~2022. The Company is currently working with its transfer agent, Nasdaq~~2022, and ~~other applicable parties to implement the~~such 1-for-25 reverse stock split was implemented in November 2022 (the “Reverse Stock Split”) . As a result of ~~2022.~~the Reverse Stock Split, each of the holders of the Company’s Common Stock received one (1) new share of Common Stock for every twenty-five (25) shares such shareholder held immediately prior. Fractional shares as a result of the Reverse Stock Split were paid in cash. The ~~Company will continue~~Reverse Stock Split also affected the Company’s outstanding stock options and warrants and resulted in the number of shares underlying such instruments being reduced and the exercise price being increased proportionately to ~~provide updates via press release~~the Reverse Stock Split ratio.

All share and ~~Form 8-K as~~per share information in this ~~matter is finalized.~~ report has been retroactively adjusted to give effect to the Reverse Stock Split for all periods presented, unless otherwise indicated. The total number of the Company’s authorized shares of preferred stock was not affected by the foregoing. However, the total number of the Company's authorized common stock was decreased to 20,000,000.In connection with the Reverse Stock Split, there was no change in the par value per share of $0.00001.

Preferred stock

The Company’s Restated Certificate of Incorporation authorizes the Company to issue 5,000,000 shares of preferred stock, $0.00001 par value, all of which is undesignated. No shares were issued and outstanding at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021.~~

2022.

Demand registration rights

In conjunction with a private placement, on June 25, 2019, the Company entered into a registration rights agreement (the "Registration Rights Agreement") with Innovatus, Innovatus Life Science Offshore Fund I, LP and Innovatus Life Sciences Offshore Fund I-A, LP (collectively, the "Innovatus Investors") pursuant to which the Company agreed to register for resale the shares held by the Innovatus Investors (the “Shares”) under certain circumstances. Under the Registration Rights Agreement, in the event that the Company receives a written request from the Innovatus Investors that the Company file with the SEC a registration statement covering the resale of all of the Shares, the Company shall promptly but no later than 120 days after the date of such request prepare and file with the SEC such registration statement. The Innovatus Investors have agreed to use best efforts not to make such a request, including by effecting any planned sales of Shares under Rule 144 under the Securities Act. The Company has agreed to use commercially reasonable efforts to cause such registration statement to become effective and to keep such registration statement effective until the date the Shares covered by such registration statement have been sold or may be resold pursuant to Rule 144 without restriction. The Company has agreed to be responsible for all fees and expenses incurred in connection with the registration of the Shares. The Company has granted the Innovatus Investors customary indemnification rights in connection with the registration statement. The Innovatus Investors have also granted the Company customary indemnification rights in connection with the registration statement.

Incidental registration rights

If the Company proposes to file a registration statement in connection with a public offering of its common stock, subject to certain exceptions, the holders of registrable shares are entitled to notice of registration and,

subject to specified exceptions, including market conditions, the Company will be required, upon the holder’s request, to register their then held registrable shares.

"At-the-market” program

~~In January 2017,~~On March 23, 2020, the Company filed a shelf registration statement on Form S-3 ~~which was declared effective by the SEC on May 9, 2017~~ (the "Shelf Registration Statement"). The Shelf Registration Statement allowed the Company to sell from time to time up to $200 million of common stock, preferred stock, debt securities, warrants, or units comprised of any combination of these securities, for its own account in one or more offerings. On May 10, 2017, the Company filed with the SEC a prospectus supplement (the “Prospectus Supplement”) for the sale and issuance of up to $50 million of its common stock and entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with Canaccord Genuity LLC (formerly, Canaccord Genuity Inc.) ("Canaccord") pursuant to which Canaccord agreed to sell shares of the Company's common stock from time to time, as its agent, in an “at-the-market” ("ATM") offering as defined in Rule 415 promulgated under the Securities Act of 1933, as amended (the "Securities Act"). The Company was not obligated to sell any shares under the Equity Distribution

Agreement. On August 4, 2020, the Company and Canaccord mutually agreed to terminate the Equity Distribution Agreement and, as of that date, the Company had sold 2,663,000 shares under the Equity Distribution Agreement resulting in net proceeds of $4.4 million.

~~On March 23, 2020, the Company filed a new shelf registration statement on Form S-3 (the "New Shelf~~ Registration Statement"), which was declared effective by the SEC on August 5, 2020. Under the ~~New~~ Shelf Registration Statement, the Company is permitted to sell from time to time up to $200 million of common stock, preferred stock, debt securities, warrants, or units comprised of any combination of these securities, for its own account in one or more offerings. On August 5, 2020, the Company filed with the SEC a prospectus supplement, for the sale and issuance of up to $25 million of its common stock and entered into a sales agreement (the “Sales Agreement”) with Cowen and Company, LLC (“Cowen”) pursuant to which the Company may offer and sell shares of the Company’s common stock to or through Cowen, acting as agent and/or principal, from time to time, in an “at-the-market” offering as defined in Rule 415 promulgated under the Securities Act, including without limitation sales made by means of ordinary brokers’ transactions on the NASDAQ Capital Market or otherwise at market prices prevailing at the time of sale, in block transactions, or as otherwise directed by the Company. Under the Sales Agreement, Cowen will use commercially reasonable efforts to sell the Common Stock from time to time, based upon instructions from the Company (including any price, time or size limits or other customary parameters or conditions the Company may impose). The Company will pay Cowen a commission of up to 3.0% of the gross sales proceeds of any Common Stock sold through Cowen under the Sales Agreement, and we ~~also~~have provided Cowen with customary indemnification rights. ~~The~~Any shares of Common Stock ~~being~~ offered pursuant to the Sales Agreement will be offered and sold pursuant to the ~~New~~ Shelf Registration Statement. The Company is not obligated to make any sales of Common Stock under the Sales Agreement. The offering of shares of Common Stock pursuant to the Sales Agreement will terminate upon the earlier of (i) the sale of all Common Stock subject to the Sales Agreement or (ii) termination of the Sales Agreement in accordance with its terms. As of ~~September 30, 2022,~~the date hereof, the Company ~~had~~has not sold any shares under the Sales Agreement.

~~Stock purchase agreement~~

On December 17, 2018, the Company entered into a stock purchase agreement (the "Stock Purchase Agreement") with Lincoln Park Capital ("LPC"). Upon entering into the Stock Purchase Agreement, the Company sold 1,921,968 shares of common stock for $1.0 million to LPC, representing a premium of 110% to the previous day's closing price. As consideration for LPC’s commitment to purchase shares of common stock under the Stock Purchase Agreement, the Company issued 354,430 shares to LPC. The Company has the right at its sole discretion to sell to LPC up to $20.0 million worth of shares over a 36-month period subject to the terms of the Stock Purchase Agreement. The Company controls the timing of any sales to LPC and LPC will be obligated to make purchases of the Company's common stock upon receipt of requests from the Company in accordance with the terms of the Stock Purchase Agreement. There are no upper limits to the price per share LPC may pay to purchase up to $20.0 million worth of common stock subject to the Stock Purchase Agreement, and the purchase price of the shares will be based on the then prevailing market prices of the Company's shares at the time of each sale to LPC as described in the Stock Purchase Agreement, provided that LPC will not be obligated to make purchases of the Company's common stock pursuant to receipt of a request from the Company on any business day on which the last closing trade price of the Company's common stock on the NASDAQ Capital Market (or alternative national exchange in accordance with the Stock Purchase Agreement) is below a floor price of $0.25 per share. No warrants, derivatives, financial or business covenants are associated with the Stock Purchase Agreement and LPC has agreed not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of shares of the Company's common stock. The Stock Purchase Agreement may be terminated by the Company at any time, at the Company's sole discretion, without any cost or penalty. On August 5, 2020, the Company filed with the SEC a prospectus supplement, for the sale and issuance of up to $17.6 million of its common stock pursuant to the Stock Purchase Agreement dated December 17, 2018. The Stock Purchase Agreement expired on January 1, 2022.

2021 common stock offering

On February 17, 2021, the Company closed an offering of its common stock under the ~~New~~ Shelf Registration Statement and issued and sold ~~80,952,381~~3,238,095 shares of its common stock at a public offering price of ~~$1.05~~$26.25 per share (adjusted for the 1-for-25 reverse stock split), for aggregate net proceeds of approximately $79.6 million. The Company intends to use the net proceeds of the offering of the shares for general corporate purposes.

~~Registered direct offering~~

On September 23, 2020, the Company and a healthcare-focused institutional investor entered into a subscription agreement, pursuant to which the Company sold (i) 8,512,088 shares of its common stock and accompanying warrants to purchase up to 8,512,088 shares of common stock and (ii) pre-funded warrants to purchase up to 9,492,953 shares of common stock and accompanying warrants to purchase up to 9,492,953 shares of common stock in a registered direct offering for gross proceeds of approximately $17.3 million. The common stock (or pre-funded warrants in lieu thereof) and accompanying warrants were sold as units, each consisting of one share (or one pre-funded warrant to purchase one share of common stock in lieu thereof) and one warrant to purchase one share of common stock, at an offering price of $0.9581 per unit.

The pre-funded warrants became exercisable immediately upon issuance, have an exercise price of $0.0001 per share and were exercisable until all of the pre-funded warrants were exercised in full. As of March 31, 2021, all pre-funded warrants were exercised. The warrants became exercisable immediately upon issuance, have an exercise price of $0.8748 per share, and will expire five years from the date of issuance. The pre-funded warrants and the warrants each prohibit the holder from exercising any portion thereof to the extent that the holder would own more than 9.99% of the number of shares of common stock outstanding immediately after exercise. The number of shares issuable upon exercise of the warrants and pre-funded warrants and the exercise price of the warrants and pre-funded warrants is adjustable in the event of stock splits, stock dividends, combinations of shares and similar recapitalization transactions. The net proceeds to the Company from the offering, after deducting the placement agent's fees and other estimated offering expenses payable by the Company, was approximately $15.9 million.

Warrants

The Company has issued warrants to certain investors and consultants to purchase shares of the Company’s common stock. Based on the Company’s assessment of the warrants granted in 2013 and 2014 relative to ASC 480, Distinguishing Liabilities from Equity, such warrants are classified as equity. According to ASC 480, an entity shall classify as a liability any financial instrument, other than an outstanding share, that, at inception, both a) embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such obligation and b) requires or may require the issuer to settle the obligation by transferring assets. The warrants do not contain any provision that requires the Company to repurchase the shares and are not indexed to such an obligation. The warrants also do not require the Company to settle by transferring assets. All of these warrants were exercisable immediately upon issuance.

In connection with the September 23, 2020 registered direct offering, the Company issued ~~9,492,953~~379,718 pre-funded common stock warrants with an exercise price of ~~$0.0001~~$0.0025 per share and an additional ~~18,005,041~~720,201 common stock warrants with an exercise price of ~~$0.8748~~$21.87 per ~~share.~~share (in each case, adjusted for the 1-for-25 reverse stock split). All of these warrants are exercisable for one share of common stock and were exercisable immediately. As of ~~September~~June 30, ~~2022,~~2023, approximately ~~6.0 million~~240,000 of the common stock warrants have been exercised. The pre-funded warrants were exercisable indefinitely, while the additional warrants are exercisable for 5 years from the date of issuance. All pre-funded warrants were exercised. Based on the Company’s assessment of the warrants granted relative to ASC 480, Distinguishing Liabilities from Equity and ASC 815-40, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, these warrants are classified as equity instruments. The fair value of the common stock warrants of approximately $10.2 million at the date of issuance was estimated using the Black-Scholes model which used the following inputs: term of 5 years, risk free rate of 0.28%, 0% dividend yield, volatility of 90.15%, an exercise price of ~~$0.875~~$21.87 and share price of ~~$0.833~~$20.83 per share based on the trading price of the Company’s common ~~stock.~~stock (adjusted for the 1-for-25 reverse stock split).

On June 22, 2023, the Company entered into a warrant exchange agreement with Armistice Capital Master Fund Ltd. (“Armistice”). Pursuant to the agreement, the Company issued 100,000 shares of the Company’s common stock to Armistice, in exchange for the cancellation of an existing warrant agreement pursuant to which Armistice had the right to acquire 480,000 shares of the Company’s common stock at an exercise price of $21.87 per share.

Warrants to purchase ~~12,020,926~~837 and 480,837 shares of common stock were outstanding as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021.~~2022, respectively. Outstanding common stock warrants are currently exercisable with varying exercise expiration dates from 2024 through 2025. At ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the weighted average warrant exercise price per share for common stock and the weighted average contractual life was as follows:


		Number of Common Warrants	Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life	Number of Warrants Exercisable	Weighted Average Price Per Share			Number of Common Stock Warrants	Weighted Average Exercise Price Per Share*		Weighted Average Remaining Contractual Life	Number of Warrants Exercisable*	Weighted Average Price Per Share*

Outstanding December 31, 2021		12,020,926	$	0.89	3.73	12,020,926	$	0.89
Outstanding December 31, 2022									Outstanding December 31, 2022	480,837	$	22.22	2.73	480,837	$	22.22
Granted	Granted	—	$	—	—	—	$	—	Granted	—	$	—	—	—	$	—

Exercised	Exercised	—	—		—	—	—		Exercised	—	—		—	—	—
Cancelled/expired	Cancelled/expired	—	—		—	—	—		Cancelled/expired	(480,000)	—		—	(480,000)	—
Outstanding September 30, 2022		12,020,926	$	0.89	2.98	12,020,926	$	0.89
Outstanding June 30, 2023									Outstanding June 30, 2023	837	$	224.00	1.36	837	$	224.00

Stock option plans

The 2015 Stock Incentive Plan ("2015 Plan") provides for an annual increase, to be added on the first day of each fiscal year, beginning with the fiscal year ending December 31, 2016 and continuing until, and including, the fiscal year ending December 31, 2025, equal to the lesser of (a) 3,000,000 shares of the Company's common stock, (b) 3% of the number of share of its common stock outstanding on the first day of such fiscal year and (c) an amount determined by the Company's board of directors. Effective January 1, ~~2022,~~2023, an additional ~~3,000,000~~120,000 shares of the Company's common stock were added to the 2015 Plan under the terms of this provision (adjusted for the 1-for-25 reverse stock split), and at the 2021 Annual Meeting of Stockholders on May 24, 2021, the Company' Stockholders approved a First Amendment to the 2015 Plan to increase by ~~6,000,000,~~240,000 (adjusted for the 1-for-25 reverse stock split), the maximum number of shares of common stock available for issuance under the 2015 Plan ("Plan Amendment"). As of ~~September~~June 30, ~~2022, 4,519,794~~2023, 31,549 shares of common stock were available for future issuance under the 2015 ~~Plan.~~Plan (adjusted for the 1-for-25 reverse stock split).

On April 29, 2019, the stockholders approved the Conformis, Inc. 2019 Sales Team Performance-Based Equity Incentive Plan ("2019 Sales Team Plan") for up to 3,000,000 shares of common stock available to grant to certain sales representatives or independent sales agents. The 2019 Sales Team Plan provides for the grant of performance-based equity, including incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock units and other stock-based awards. Shares covered by awards under the 2019 Sales Team Plan that expire or are terminated, surrendered, or cancelled without having been fully exercised or are forfeited in whole or in part (including as the result of shares subject to such award being repurchased by us at the original issuance price pursuant to a contractual repurchase right) or that result in any shares not being issued, will again be available for the grant of awards under the 2019 Sales Team Plan. Equity granted under the 2019 Sales Team Plan will expire ten years from the date of grant.

As of ~~September~~June 30, ~~2022,~~2023, there were ~~2,008,992~~100,842 shares of common stock available for future issuance under the 2019 Sales Team ~~Plan.~~Plan (adjusted for the 1-for-25 reverse stock split).

Activity under all stock option plans was as follows:


		Number of Options	Weighted Average Exercise Price per Share		Aggregate Intrinsic Value (in Thousands)			Number of Options	Weighted Average Exercise Price per Share		Aggregate Intrinsic Value (in Thousands)

Outstanding December 31, 2021		1,677,980	$	4.82	$	—
Outstanding December 31, 2022							Outstanding December 31, 2022	175,783	$	44.76	$	—
Granted	Granted	3,252,121	0.47		—		Granted	—	—		—

Expired	Expired	(354,537)	3.97		—		Expired	(4,727)	146.61		—
Cancelled/Forfeited	Cancelled/Forfeited	(86,969)	1.04		—		Cancelled/Forfeited	—	—		—
Outstanding September 30, 2022		4,488,595	$	1.81	$	—
Outstanding June 30, 2023							Outstanding June 30, 2023	171,056	$	41.95	$	—

Total vested and exercisable	Total vested and exercisable	1,067,203	$	6.05	$	—	Total vested and exercisable	66,708	$	88.56	$	—

The total fair value of stock options that vested during each of the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was ~~$0.0~~$0.2 million. The weighted average remaining contractual term for the total stock options outstanding was ~~8.34~~7.78 years as of ~~September~~June 30, ~~2022.~~2023. The weighted average remaining contractual term for the total stock options vested and exercisable was ~~4.43~~6.14 years as of ~~September~~June 30, ~~2022.~~

2023.

Restricted common stock award activity under the plan was as follows:


		Number of Shares	Weighted Average Fair Value			Number of Shares	Weighted Average Fair Value
Unvested December 31, 2021		7,133,795	$	1.06
Unvested December 31, 2022					Unvested December 31, 2022	237,966	$	18.77
Granted	Granted	3,083,403	0.43		Granted	300,598	1.50
Vested	Vested	(2,260,191)	0.96		Vested	(79,692)	17.26
Forfeited	Forfeited	(1,340,370)	0.92		Forfeited	(28,778)	14.24
Unvested September 30, 2022		6,616,637	$	0.82
Unvested June 30, 2023					Unvested June 30, 2023	430,094	$	7.28

The total fair value of restricted common stock awards that vested during the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was ~~$0.0~~$1.3 million and ~~$2.2~~$1.4 million, respectively.

Inducement Awards

In February 2020, the Company granted inducement awards outside of the 2015 Plan and 2019 Sales Team Plan (i) to the Company's Chief Financial Officer in the form of an option to purchase ~~125,000~~5,000 shares of the Company's common stock with an exercise price per share equal to ~~$0.98~~$24.50 and ~~125,000~~5,000 restricted stock units ~~and (ii) to~~(in each case, adjusted for the ~~Company's Senior Vice President, Operations in the form of an option to purchase 66,667 shares of the Company's common~~1-for-25 reverse stock ~~with an exercise price per share equal to $0.98 and 61,350 restricted stock units.~~split). The option and restricted stock unit awards were granted as inducements material to their commencement of employment with the Company in accordance with Nasdaq Listing Rule 5635(c)(4).

In August 2020, the Company granted inducement awards outside of the 2015 Plan and 2019 Sales Team Plan to the Company's Vice President, US Marketing in the form of an option to purchase 100,000 shares of the Company's common stock with an exercise price per share equal to $0.7427 and 100,000 restricted stock units. The option and restricted stock unit awards were granted as inducements material to his commencement of employment with the Company in accordance with Nasdaq Listing Rule 5635(c)(4).

In November 2020, the Company granted inducement awards outside of the 2015 Plan and 2019 Sales Team Plan to the Company's Vice President, International Sales and Marketing in the form of 75,000 restricted stock units. The restricted stock unit award was granted as an inducement material to his commencement of employment with the Company in accordance with NASDAQ Listing Rule 5635(c)(4).

In November 2021, the Company granted inducement awards outside of the 2015 Plan and 2019 Sales Team Plan to the Company's Vice President, Marketing in the form of 150,000 restricted stock units. The restricted stock unit award was granted as an inducement material to his commencement of employment with the Company in accordance with NASDAQ Listing Rule 5635(c)(4).

In March 2022, the Company granted inducement awards outside of the 2015 Plan and 2019 Sales Team Plan to the Company's Chief Legal Officer and Corporate Secretary in the form of an option to purchase ~~450,000~~18,000 shares of the Company's common stock with an exercise price per share equal to ~~$0.61~~$15.25 and ~~450,000~~18,000 restricted stock ~~units.~~units (in each case, adjusted for the 1-for-25 reverse stock split). The option and restricted stock unit awards were granted as inducements material to her commencement of employment with the Company in accordance with NASDAQ Listing Rule 5635(c)(4).

In April 2022, the Company granted inducement awards outside of the 2015 Plan and 2019 Sales Team Plan to the Company's Chief Operating Officer in the form of an option to purchase ~~425,000~~17,000 shares of the Company's common stock with an exercise price per share equal to ~~$0.64~~$16.00 and ~~425,000~~17,000 restricted stock ~~units.~~units (in each case, adjusted for the 1-for-25 reverse stock split). The option and restricted stock unit awards were granted as inducements material to his commencement of employment with the Company in accordance with NASDAQ Listing Rule 5635(c)(4).

Stock-based compensation

The Company uses the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of stock-based payment awards on the date of grant using a pricing model is affected by the value of the Company’s common stock as well as assumptions regarding a number of complex and subjective variables. The valuation of the Company’s common stock prior to its initial public offering was performed with the assistance of an independent third-party valuation firm using a methodology that includes various inputs including the Company’s historical and projected financial results, peer company public data and market metrics, such as risk-free interest and discount rates. As the valuations included unobservable inputs that were primarily based on the Company’s own assumptions, the inputs were considered level 3 inputs within the fair value hierarchy.

The fair value of options at date of grant was estimated using the Black-Scholes option pricing model, based on the following assumptions:


		Three Months Ended September 30,		Nine Months Ended September 30,			Three Months Ended June 30,		Six Months Ended June 30,
		2022	2021	2022	2021		2023	2022	2023	2022
Risk-free interest rate	Risk-free interest rate	—%	—%	2.61%	—%	Risk-free interest rate	—%	2.68%	—%	2.61%
Expected term (in years)	Expected term (in years)	0.00	0.00	6.72	0.00	Expected term (in years)	0.00	6.52	0.00	6.72
Dividend yield	Dividend yield	—%	—%	—%	—%	Dividend yield	—%	—%	—%	—%
Expected volatility	Expected volatility	—%	—%	89.21%	—%	Expected volatility	—%	89.39%	—%	89.21%

Risk-free interest rate. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options.

Expected term. The expected term of stock options represents the period the stock options are expected to remain outstanding and is based on the “SEC Shortcut Approach” as defined in “Share-Based Payment” (SAB 107) ASC 718-10-S99, “Compensation-Stock Compensation-Overall-SEC Materials,” which is the midpoint between the vesting date and the end of the contractual term. With certain stock option grants, the exercise price may exceed the fair value of the common stock. In these instances, the Company adjusts the expected term accordingly.

Dividend yield. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.

Expected volatility. Expected volatility measures the amount that a stock price has fluctuated or is expected to fluctuate during a period. ~~Prior to July 1, 2021, the~~The Company ~~estimated volatility using the historical volatilities of similar public entities. Since July 1, 2021, the Company has estimated~~estimates volatility based on the historical volatility of the Company's stock.

Forfeitures. The Company recognizes forfeitures as they occur.

Stock-based compensation expense was ~~$0.8~~$0.4 million and ~~$1.0~~$0.8 million for the three months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively, and ~~$2.4~~$1.1 million and ~~$2.8~~$1.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. Stock-based compensation expense was calculated based on awards ultimately expected to vest. To date, the amount of stock-based compensation capitalized as part of inventory was not material.

The following is a summary of stock-based compensation expense (in thousands):


		Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
		2022		2021		2022		2021				2023		2022		2023		2022
Cost of revenues	Cost of revenues	$	18	$	26	$	(1)	$	49		Cost of revenues	$	16	$	16	$	31	$	(20)
Sales and marketing	Sales and marketing	125		181		460		516			Sales and marketing	5		159		140		336
Research and development	Research and development	107		127		377		436			Research and development	70		132		141		270
General and administrative	General and administrative	546		692		1,543		1,776			General and administrative	344		540		744		997
		$	796	$	1,026	$	2,379	$	2,777			$	435	$	847	$	1,056	$	1,583

As of ~~September~~June 30, ~~2022,~~2023, the Company had ~~$1.1~~$0.9 million of total unrecognized compensation expense for options that will be recognized over a weighted average period of ~~4.47~~4.06 years. As of ~~September~~June 30, ~~2022,~~2023, the Company had ~~$5.7~~$2.9 million of total unrecognized compensation expense for restricted awards that will be recognized over a weighted average period of ~~2.28~~3.24 years.

Note K—Segment and Geographic Data

The Company operates as one reportable segment as described in Note B to the Consolidated Financial Statements. The countries in which the Company has local revenue generating operations have been combined into the following geographic areas: the United States (including Puerto Rico), Germany and the rest of world, which consists of Europe predominately (including the United Kingdom) and other foreign countries. Sales are attributable to a geographic area based upon the customer’s country of domicile and distributors managed by that respective country. Product revenue is also presented by knee and hip which are the Company's major product lines. Net property, plant and equipment are based upon physical location of the assets.

Geographic and product category information consisted of the following (in thousands):


											Three Months Ended June 30,
		Three Months Ended September 30,				Nine Months Ended September 30,					2023			2022
		2022		2021		2022		2021
Product revenue	Product revenue									Product revenue	Knee	Hip	Total	Knee	Hip	Total
United States	United States	$	12,037	$	12,405	$	38,166	$	37,434	United States	$9,809	$968	$10,777	$12,671	$744	$13,415
Germany	Germany	661		1,226		2,545		4,242		Germany	736	—	736	707	—	707
Rest of world	Rest of world	944		499		2,957		1,364		Rest of world	983	—	983	1,020	—	1,020
		$	13,642	$	14,130	$	43,668	$	43,040		$11,528	$968	$12,496	$14,398	$744	$15,142


		September 30, 2022		December 31, 2021			Six Months Ended June 30,
Property and equipment, net
							2023			2022

Product revenue						Product revenue	Knee	Hip	Total	Knee	Hip	Total
United States	United States	$	8,667	$	10,131	United States	$19,575	$1,770	$21,345	$24,610	$1,520	$26,130
Germany	Germany	38		43		Germany	1,562	—	1,562	1,885	—	1,885
Rest of World		70		94
Rest of world						Rest of world	2,280	—	2,280	2,011	—	2,011
		$	8,775	$	10,268		$23,417	$1,770	$25,187	$28,506	$1,520	$30,026

Geographic information consisted of the following (in thousands):


	June 30, 2023		December 31, 2022
Property and equipment, net
United States	$	7,376	$	8,065
Germany	38		29
Rest of World	41		60
	$	7,455	$	8,154

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to promote an understanding of the financial condition and results of operations and should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the ‘‘Risk Factors’’ section of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021,~~2022, our actual results could differ materially from the results described, in or implied, by these forward-looking statements.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, our ability to raise additional funds, plans and objectives of management, effects of pandemics or other widespread health problems, ~~such as the ongoing COVID-19 pandemic on our business,~~ and expected market growth are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would” or the negative of these terms or other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

These forward-looking statements include, among other things, statements about:

•whether our capital resources will be adequate to meet the needs of our business and our ability to raise any additional capital;

•our ability to continue as a going concern;

•our estimates regarding the potential market opportunity and timing of estimated commercialization for our current and future products, including our iUni, iDuo, iTotal CR, iTotal PS, iTotal Identity, Identity Imprint, ~~Conformis~~ Cordera hip system, Actera Hip System and the planned launch of our new ~~hip stem and~~product extensions, including the cementless option of the Identity Imprint knee ~~platform;~~platform and our Platinum Services℠ Program;

•our expectations regarding the transition of our U.S. knee implant business to Identity Imprint™ and our new Image-to-Implant® Platinum Services℠ Program offering, and related operational and regulatory risks we may be exposed to as a result of such transition;

•our expectations regarding our sales, expenses, gross margin and other results of operations;

•our strategies for growth and sources of new sales;

•maintaining and expanding our customer base and our relationships with our independent sales representatives and distributors;

•our current and future products and plans to promote them;

•the anticipated trends and challenges in our business and in the markets in which we operate;

•the implementation of our business model, strategic plans for our business, products, product candidates and technology;

•our ability to successfully develop and commercialize planned ~~products;~~products and services;

•the future availability of raw materials used to manufacture, and finished components for, our products from third-party suppliers, including single source suppliers;

•product liability claims;

•litigation claims against Aetna;

•patent infringement claims;

•our ability to retain and hire necessary employees and to staff our operations appropriately;

•our ability to compete in our industry and with innovations by our competitors;

•potential reductions in reimbursement levels by third-party payors and cost containment efforts of accountable care organizations;

•our ability to obtain reimbursement or direct payment for our products and services;

•our ability to protect proprietary technology and other intellectual property and potential claims against us for infringement of the intellectual property rights of third parties;

•potential challenges relating to changes in and compliance with governmental laws and regulations affecting our United States and international businesses, including regulations of the U.S. Food and Drug Administration (the "FDA") and foreign government regulators, such as more stringent requirements for regulatory clearance of our products;

•~~the anticipated adequacy of our capital resources to meet the needs of our business or our ability to raise any additional capital;~~

•~~anticipated continuing~~potential further negative impacts related to the COVID-19 pandemic, including with respect to the magnitude of further resurgent case waves, the effectiveness of vaccines against current and future variant strains and public adoption rates of vaccines (including booster shots), and the actions that we have taken and are planning in response, including our ability to continue production and manufacturing activities at desired levels, the reliability of our supply chain, the pandemic’s effect on labor conditions, our ability to meet obligations and covenants under our loan agreements, the duration of decreased demand for our products, and whether or when the demand for elective surgery procedures will increase;

•our ability to satisfy all applicable NASDAQ continued listing requirements;

•~~our expectations to implement a 1-for-25 reverse stock split in November 2022;~~ and

•risks associated with the Merger Agreement, including:

•the risk that the proposed Merger may not be completed in a timely manner or at all;

•the failure to satisfy any of the conditions to the consummation of the proposed Merger, including the adoption of the Merger Agreement by our ~~ability~~stockholders;

•the occurrence of any event, change or other circumstance that could give rise to ~~continue as a going concern.~~the termination of the Merger Agreement; and

•the outcome of any legal proceedings that have been or may be instituted against the Company related to the Merger Agreement or the proposed Merger.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section, that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, collaborations, joint ventures or investments that we may make or enter into.

You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q and our other filings with the SEC completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Trademarks

Solely for convenience, our trademarks and trade names in this report are referred to without the ® and ™ symbols, but such references should not be construed as any indicator that we will not assert, to the fullest extent under applicable law, our rights thereto.

Overview

We are a medical technology company and innovator in the orthopedic industry since our founding in 2004. In particular, we believe that we are a leader in the development, manufacturing, and sales of patient-specific products and instrumentation that are individually sized and shaped to fit each patient's unique knee and hip anatomy.The worldwide market for total knee and hip replacement products is approximately ~~$17.1~~$17 billion annually.In the U.S., elective total joint procedures are shifting from ~~hospitals~~the hospital to outpatient facilities and ambulatory surgery centers ("ASCs").We believe that approximately 50% of all primary hip and knee procedures will be performed in ASCs within the next five years.

A key driver in the outpatient shift of orthopedic procedures is the ongoing changes by the Centers for Medicare & Medicaid Services ("CMS"). In recent years, CMS removed key musculoskeletal services from the inpatient-only list, including total knee arthroplasty in 2018 and total hip arthroplasty in 2020. CMS also continues to expand the ASCs covered procedure list, including total knee arthroplasty in 2020 and total hip arthroplasty in 2021.

As healthcare costs rise, governments and government agencies, including CMS, are looking to reduce their healthcare expenditures markedly through reimbursement reductions and cost-shifting to patients.

As patients assume more of their overall healthcare costs, we believe that they are increasingly seeking treatment options that are tailored more closely to their individual needs. We have observed that this movement in healthcare consumerism appears to have accelerated and evolved during the COVID-19 pandemic.As one of the more important decisions individuals have to make, patients want more from the healthcare industry and are willing to pay out-of-pocket for premium products and services. With this healthcare consumerism on the rise, Conformis is evolving its portfolio and business model to address the changing market dynamics.

On January 6, 2022, we announced the launch of our new Image-to-Implant® Platinum ~~Services℠~~ Services℠ Program, a premium service offering for the U.S. market. New to orthopedics, this program addresses the rapidly evolving demands of the healthcare marketplace where generic products are being commoditized and patients are increasingly willing to pay a premium for ~~personalized treatment options.~~deluxe services. As of September 1, 2022, U.S. medical facility customers are only able to ~~purchase~~obtain our fully personalized iTotal Identity knee system through participation in our Image-to-Implant Platinum Services℠Program.

Both Medicare and most commercial payors permit patients to pay out-of-pocket for non-covered, deluxe services. Through the Image-to-Implant® Platinum ~~Services℠~~Services℠ Program, Conformis is bringing this approach to orthopedics by enabling participating medical facilities to establish and offer patients an out-of-pocket services upgrade to obtain the Company’s fully personalized iTotal Identity™ knee system. Combined with ~~its~~our new Made-to-Measure Identity Imprint™ knee system, ~~Conformis~~we believe that we now ~~addresses~~address multiple market segments within knee arthroplasty:

•the Identity Imprint™ knee system provides a data-informed high-quality knee implant system that provides a level of personalization through its patient-specific instruments ("PSI") and proprietary algorithms for pre-surgical planning, but is only available in pre-designed standard sizes, all at a price comparable to standard off-the-shelf options; and

•the Image-to-Implant® Platinum Services℠ Program gives patients in the United States the opportunity to upgrade to a fully-personalized iTotal Identity™ knee implant system by paying an incremental deluxe services fee.

As of December 31, ~~2021,~~2022, we had sold a total of more than ~~137,000~~149,000 knee implants, including more than ~~111,000~~123,000 total knee implants and 26,000 partial knee implants. In multiple clinical studies, iTotal CR, our cruciate-retaining total knee replacement implant, demonstrated superior clinical outcomes, including with respect to function, kinematics and objective functional measures, and greater patient satisfaction compared to those of standard, or off-the-shelf, implants that it was tested against. On August 16, 2021, the first procedure was performed using the Imprint knee replacement system. Imprint, available in both cruciate retaining ("CR") and posterior stabilized ("PS") implants, utilizes a proprietary algorithm to select the appropriate implant size from 12 standard sizes that most closely meet the geometric and anatomic requirements of the patient’s knee based on the individual’s CT scan. As with ~~Conformis’~~our personalized iTotal knee product line, Imprint uses ~~Conformis’~~our sterile Surgery-in-a-Box delivery system, which we believe provides ASCs and hospitals with greater procedural efficiency and improved sterilization cost savings over comparable systems. With the ~~growing~~ interest in our Imprint system from ASC customers, we have prioritized applying our porous-coated technology to the Imprint system which will be our ~~Imprint system.~~first cementless TKA product offering. We ~~anticipate~~are targeting a limited commercial launch of the porous-coated technology in the second half of 2023, however the launch may be delayed to the first half of ~~2023.~~2024 due to regulatory or technical challenges.

On November 11, 2019, we entered full commercial launch of the Conformis ~~hip system. In September 2020, we announced the Cordera~~personalized hip system, ~~and in December 2020, we commenced~~now branded as Cordera Rx. Since the ~~U.S. commercial~~ launch of the ~~Cordera Match~~personalized hip system, ~~one of~~we have introduced multiple ~~planned~~ product line extensions ~~featuring~~including Cordera Standard, Cordera Pro and Cordera Match. In November 2022, we completed the ~~Cordera hip system. We are planning for a limited commercial launch of~~first procedure using our ~~Actera hip system,~~Actera™ Hip System, a second hip stem within our hip ~~portfolio, in~~portfolio. The system, designed for hip reconstruction, uses the ~~fourth quarter~~cutting-edge tri-taper stem design, and features a range of ~~2022.~~sizes and angles derived from our data analytics. This cementless hip stem component features a proximally coated titanium spray with a

hydroxyapatite layer to encourage initial and long-term fixation. We believe that the system’s tri-taper stem design will beenable surgeons to treat a broader range of patient anatomies and the shorter ~~stem conducive~~length options offer easier access to the ~~popular direct anterior approach~~femur while maintaining the fixation and ~~be offered~~integrity required for long term success of the implant. For the initial limited launch, the Actera™ Hip System will feature a range of standard sizes in both stem and cup components. We plan to launch future Actera™ line extensions that will offer additional personalization options for surgeons to choose what best fits their patients, even for complex anatomies. The new system is currently rolling out to select sites across the ~~most common standard sizes.~~U.S., and we currently anticipate the commercial launch to occur in mid-2023.

All of our currently marketed knee and hip replacement products and related design software have been cleared by the ~~FDA~~U.S. Food and Drug Administration (the "FDA") under the premarket notification process of Section 510(k) of the federal Food, Drug, and Cosmetic Act (the "FDCA"). We have received CE Certificates of Conformity allowing us to affix the CE Mark.

We market our products and services to orthopedic surgeons, hospitals, and other medical facilities, and patients. We use direct sales representatives, independent sales representatives and distributors to market and sell our products in the United States, Germany, the United Kingdom, Austria, Ireland, Switzerland, Spain, Portugal, the Netherlands, Belgium, the Dutch Antilles, Brazil, Suriname, Australia, the United Arab Emirates, the Sultanate of Oman, Italy, Poland and other markets.

We were incorporated in Delaware and commenced operations in 2004.

~~COVID-19 Pandemic Update~~Recent Developments – Agreement and Plan of Merger

On June 22, 2023, we entered into the Merger Agreement with restor3d and Merger Sub. Upon the terms and subject to the conditions set forth in the Merger Agreement, which has been unanimously adopted by our Board of Directors (the “Board”), Merger Sub will merge with and into us, with us continuing as the surviving corporation and a wholly owned subsidiary of restor3d (the “Merger”). The Board also unanimously resolved to recommend that our stockholders vote to adopt and approve the Merger Agreement and the Merger.

Pursuant to the Merger Agreement, upon the closing of the Merger (the “Closing”), each outstanding share of our common stock, other than shares owned by us, restor3d or Merger Sub (which will be cancelled) and shares with respect to which appraisal rights are properly exercised and not withdrawn under Delaware law, will automatically be converted into the right to receive $2.27 in cash, without interest (the “Merger Consideration”).

If the Merger is consummated, our common stock will be delisted from The Nasdaq Capital Market and deregistered under the Securities Exchange Act of 1934.

In ~~December 2019,~~connection with the Merger, the vesting of each of our outstanding restricted stock unit will accelerate, and the holders of such units will receive an amount per unit equal to the Merger Consideration. All of our stock options and warrants that are currently outstanding have a ~~human infection originating~~strike price per share greater than the Merger Consideration, and will be cancelled in ~~China was traced~~connection with the Merger without payment, unless exercised prior to ~~a novel strain of coronavirus. The virus subsequently spread to other parts~~consummation of the ~~world,~~Merger.

The consummation of the Merger is subject to certain customary closing conditions, including (i) the ~~United States~~adoption of the Merger Agreement by the holders of a majority of the outstanding shares of our common stock (the “Stockholder Approval”), and ~~Europe,~~(ii) no temporary restraining order, preliminary or permanent injunction or other order is in effect preventing the consummation of the Merger. Moreover, each party’s obligations to consummate the Merger are subject to certain other conditions, including (a) the accuracy of the other party’s representations and ~~caused unprecedented disruptions~~warranties (subject to certain materiality exceptions), (b) the other party’s compliance in all material respects with its obligations under the Merger Agreement, and (c) in the ~~global economy as efforts to contain~~case of restor3d and Merger Sub only, the ~~spread~~absence of any event, change, or effect that would, individually or in the ~~virus intensified. In March 2020, the World Health Organization declared this coronavirus outbreak (COVID-19) to~~aggregate, reasonably be a pandemic. We have experienced significantly decreased demand for our products during the pandemic as healthcare providers and individuals have de-prioritized and deferred medical procedures deemed to be elective, such as joint replacement procedures, which has had and is expected ~~to continue~~ to have a ~~significant negative effect~~Material Adverse Effect (as defined in the Merger Agreement). A special meeting of our stockholders is scheduled to be held on ~~our revenue.~~August 31, 2023 to vote on, among other things, a proposal to adopt the Merger Agreement. Subject to the satisfaction of the closing conditions, the parties anticipate that the Merger will be consummated by the end of the third quarter of 2023.

~~More recently,~~

we have agreed to use its reasonable best efforts to conduct its business in all material respects in the ~~third~~ordinary course of business and ~~fourth quarters of 2021, we experienced higher levels of deferred~~has agreed to certain other operating covenants and ~~rescheduled knee and hip procedures as a result~~to not take certain specified actions prior to the consummation of the ~~surge~~Merger, as set forth more fully in ~~COVID-19 cases associated~~the Merger Agreement. We have also agreed to convene and hold a meeting of its stockholders for the purpose of obtaining the Stockholder Approval. In addition, the Merger Agreement requires that, subject to certain exceptions, the Board recommend that our stockholders approve the Merger Agreement.

In addition, we have agreed not to initiate, solicit or knowingly encourage takeover proposals from third parties. We have also agreed not to provide non-public information to, or, subject to certain exceptions, engage in discussions or negotiations with, third parties regarding takeover proposals. Notwithstanding these restrictions, prior to the ~~Delta and Omicron variants. During the first quarter of 2022, United States case counts peaked in January and then decreased during the second and third quarters.The future progression~~receipt of the ~~pandemic remains uncertain. To~~Stockholder Approval, we may under certain circumstances provide non-public information to and participate in discussions or negotiations with third parties with respect to takeover proposals.

Prior to obtaining the ~~extent~~Stockholder Approval, the Board may, among other things, change its recommendation that ~~individuals~~the stockholders approve the Merger Agreement in ~~these markets continue~~connection with a Superior Offer or an Intervening Event (in each case, as defined in the Merger Agreement), or terminate the Merger Agreement to ~~de-prioritize or delay deferrable procedures as~~enter into an agreement providing for a ~~result~~Superior Offer, subject, in each case, to complying with notice and other specified conditions, including giving restor3d the opportunity to propose revisions to the terms of the ~~COVID-19 pandemic~~ Merger Agreement during a period following notice.

The Merger Agreement contains certain termination rights for us and restor3d, including, among others, the right of (1) we to terminate the Merger Agreement in order to enter into an agreement providing for a Superior Offer (subject to our compliance with certain obligations under the Merger Agreement related to such Superior Offer and such termination) and (2) restor3d to terminate the Merger Agreement if the Board changes its recommendation with respect to the Merger Agreement. The Merger Agreement also provides that under specified circumstances, including in the event of termination by us to enter into an agreement providing for a Superior Offer, we will be required to pay restor3d a termination fee of $0.9 million and provide restor3d with a non-exclusive license to our patents except with respect to certain knee and/or ~~otherwise, our business, cash flows, financial condition and results of operations could continue to be negatively affected.~~hip applications.

Components of our results of operations

The following is a description of factors that may influence our results of operations, including significant trends and challenges that we believe are important to an understanding of our business and results of operations.

Revenue

Our product revenue is generated from sales to hospitals and other medical facilities that are served through a direct sales force, independent sales representatives and distributors in the United States, Germany, the United Kingdom, ~~Austria, Ireland,~~ Switzerland, ~~Spain, Portugal, the Netherlands, Belgium, the Dutch Antilles, Brazil, Suriname,~~ Australia, ~~the United Arab Emirates, the Sultanate of Oman, Italy, Poland~~ and other markets. In order for surgeons to use our products, the medical facilities where these surgeons treat patients typically require us to enter into pricing agreements. The process of negotiating a pricing agreement can be lengthy and time-consuming, requiring extensive management time and may not be successful.

Revenue from sales of our products fluctuates principally based on the selling price of the joint replacement product, as the sales price of our products varies among hospitals and other medical facilities. In addition, our product revenue may fluctuate based on the product sales mix and mix of sales by geography. Our product revenue from international sales can be significantly impacted by fluctuations in foreign currency exchange rates, as our sales are denominated in the local currency in the countries in which we sell our products. We expect our product revenue to fluctuate from quarter-to-quarter due to a variety of factors, including seasonality, as we have historically experienced lower sales in the summer months and higher sales around year-end, the timing of the introduction of our new products, if any, and the impact of the buying patterns and implant volumes of medical facilities.

Royalty and licensing revenue for the ~~nine~~six months ended ~~September~~June 30, 2023 includes revenue generated from our settlement and license agreements with Bodycad and Exactech. Royalty and licensing revenue for the six months ended June 30, 2022 includes revenue of $0.5 million generated from our license agreement (the "License Agreement") with Paragon 28. Royalty and licensing revenue for the nine months ended September 30, 2021 includes revenue of $15.0 million generated from our settlement with Stryker Corporation (“Stryker”), Wright Medical Technology, Inc. (“Wright Medical”), and Tornier, Inc. (“Tornier” and, collectively with Stryker and Wright Medical, the "Stryker Parties"), $25.0 million recognized under the Development and License Agreements with Stryker, and $1.0 million generated from the License Agreement with Paragon 28. Ongoing royalty revenue is generated from our license agreement (the "MicroPort License Agreement") with MicroPort Orthopedics Inc., a wholly owned subsidiary of MicroPort Scientific Corporation, or collectively, MicroPort. The MicroPort License Agreement will expire upon the expiration of the last to expire of our patents and patent applications licensed to MicroPort, which currently is expected to occur in 2031.

We provide certain information regarding our financial results or projected financial results on a non-GAAP "constant currency basis." This information estimates the impact of changes in foreign currency rates on the translation of our current or projected future period financial results as compared to the applicable comparable period. This impact is derived by taking the adjusted current or projected local currency results and translating them into U.S. dollars based upon the foreign currency exchange rates for the applicable comparable period. It does not include any other effect of changes in foreign currency rates on our results or business. Non-GAAP information is not a substitute for, and is not superior to, information presented on a GAAP basis.

This non-GAAP financial measure may be different from non-GAAP financial measures used by other companies, limiting its usefulness for comparison purposes. Moreover, presentation of revenue on a constant currency basis is provided for year-over-year comparison purposes, and investors should be cautioned that the effect of changing foreign currency exchange rates has an actual effect on our operating results. We consider the use of a period over period revenue comparison on a constant currency basis to be helpful to investors, as it provides a revenue growth measure free of positive or negative volatility due to currency fluctuations.

Cost of revenue

We produce our computer aided designs, or CAD, in-house and in India and use them to direct most of our product manufacturing efforts. We manufacture all of our patient-specific instruments, or iJigs, tibial trays used in our total knee implants, and polyethylene tibia tray inserts for our iTotal CR and our iTotal PS product, in our facility in Wilmington, Massachusetts. We polish our femoral implants used in our total and partial knee products in our facility in Wallingford, Connecticut. Starting in 2019, we began to manufacture the lateral partial tibial tray components in our facility in Wilmington, Massachusetts. We outsource the production of the remainder of the partial knee tibial components, femoral castings, and other knee and hip components to third-party suppliers. Our suppliers make our personalized implant components using the CAD designs we supply. Cost of revenue consists primarily of costs of raw materials, manufacturing personnel, outsourced CAD labor, manufacturing supplies, inbound freight, manufacturing overhead, and depreciation expense. Also included in cost of revenue for the three months ended June 30, 2023, is a settlement paid in connection with our patent licensing and enforcement activities related to the Osteoplastic Settlement and License Agreement.

We calculate gross margin as revenue less cost of revenue divided by revenue. Our gross margin has been and will continue to be affected by a variety of factors, including primarily volume of units produced, mix of product components manufactured by us versus sourced from third parties, our average selling price, foreign exchange rates, the geographic mix of sales, product sales mix, manufacturing efficiencies, raw material costs, the number of cancelled sales orders resulting in wasted implants, and royalty revenue.

We expect our gross margin from the sale of our products, which excludes royalty and licensing revenue, to expand over time to the extent we are successful in reducing our manufacturing costs per unit, increasing our manufacturing efficiency, and increasing sales volume through the launch of Identity Imprint™ and our Image-to-Implant® Platinum Services℠ Program. We believe that areas of opportunity to expand our gross margin in the future, if and as the volume of our product sales increases, include the following:

•absorbing overhead costs across a larger volume of product sales;

•increased sales mix of our higher margin Identity ImprintTM product and an increased selling price as a result of our Image-to-Implant® Platinum Services℠ Program;

•obtaining more favorable pricing for the materials used in the manufacture of our products;

•obtaining more favorable pricing of certain components of our products manufactured for us by third parties;

•increasing the proportion of our CAD design activities that is performed in-house at our India facility; ~~and~~

•developing new versions of our software used in the design of our joint replacement implants, which we believe will reduce costs associated with the design ~~process.~~process; and

•improving the efficiency of our internal manufacturing processes.

We also continue to explore other opportunities to reduce our manufacturing costs. However, these and the above opportunities may not be realized. In addition, our gross margin may fluctuate from period to period.

Operating expenses

Our operating expenses consist of sales and marketing, research and development and general and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, stock-based compensation, and sales commissions.

Sales and marketing. Sales and marketing expense consists primarily of personnel costs, including salary, employee benefits and stock-based compensation for personnel employed in sales, marketing, customer service, ~~market access,~~ medical education and training, as well as investments in surgeon training programs, industry events and other promotional activities. In addition, our sales and marketing expense includes sales commissions and bonuses, generally based on a percentage of sales, to our sales managers, direct sales representatives and independent sales representatives. Recruiting, training and retaining productive sales representatives ~~as well as~~and educating surgeons about the benefits of our products are required to generate and grow revenue. We expect sales and marketing expense to ~~increase~~decrease in 2023 as ~~we build up~~part of our ~~sales and support personnel and expand our marketing efforts.~~cost reduction plans. Our sales and marketing expense may fluctuate from period to period due to the seasonality of our revenue and the timing and extent of our expenses.

Research and development. Research and development expense consists primarily of personnel costs, including salary, employee benefits and stock-based compensation for personnel employed in research and development, regulatory and clinical areas. Research and development expense also includes costs associated with product design, product refinement and improvement efforts before and after receipt of regulatory clearance, development of prototypes, testing, clinical study programs and regulatory activities, contractors and consultants, and equipment and software to support our development.As our revenue increases, we will also incur additional ~~expenses~~expense for revenue share payments to our past and present scientific advisory board ~~members.~~members, including one of our past directors. We expect research and development expense to ~~increase~~decrease in ~~absolute dollars~~2023 as ~~we develop new products to expand~~part of our ~~product pipeline, add research and development personnel and conduct clinical activities.~~cost reduction plans.

General and administrative. General and administrative expense consists primarily of personnel costs, including salary, employee benefits and stock-based compensation for our administrative personnel that support our general operations, including executive management, general legal and intellectual property, finance and accounting, information technology and human resources personnel. General and administrative expense also includes outside legal costs associated with intellectual property and general legal matters, financial audit fees, insurance, fees for other consulting services, depreciation expense, long-lived asset impairment charges, freight, facilities expense, allocation of manufacturing training costs, and ~~facilities~~severance expense.We expect our general and administrative expense ~~will increase~~to decrease in ~~absolute dollars as we increase~~2023 primarily due to lower litigation and other expenses associated with our ~~headcount and expand our infrastructure to support growth in our business and our operations. As our revenue increases, we also incur additional expenses for freight.~~cost reduction plans. Our general and administrative expense may fluctuate from period to period due to the timing and extent of the expenses.

Total other (expenses) income, net

Total other income (expenses), net consists primarily of interest expense and amortization of debt discount associated with our term loans outstanding during the year, ~~gain on forgiveness of PPP loan, income related to the development agreement with Stryker,~~ and gains (losses) from foreign currency transactions. The effect of exchange rates on our foreign currency-denominated asset and liability balances are recorded as foreign currency translation adjustments in the consolidated statements of comprehensive loss.

Income tax provision

Income tax provision consists primarily of a provision for income taxes in foreign jurisdictions in which we conduct business. We maintain a full valuation allowance for deferred tax assets including net operating loss carryforwards and research and development credits and other tax credits.

Consolidated results of operations

Comparison of the three months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022

The following table sets forth our results of operations expressed as dollar amounts, percentage of total revenue and year-over-year change (in thousands):


		2022				2021				2022 vs 2021					2023				2022				2023 vs 2022
Three Months Ended September 30,		Amount		As a% of Total Revenue		Amount		As a% of Total Revenue		$ Change		% Change
Three Months Ended June 30,														Three Months Ended June 30,	Amount		As a% of Total Revenue		Amount		As a% of Total Revenue		$ Change		% Change
Revenue	Revenue													Revenue
Product revenue	Product revenue	$	13,642	99	%	$	14,130	99	%	$	(488)	(3)	%	Product revenue	$	12,496	96	%	$	15,142	99	%	$	(2,646)	(17)	%
Royalty and licensing	Royalty and licensing	142		1		123		1		19		15		Royalty and licensing	527		4		153		1		374		244
Total revenue	Total revenue	13,784		100		14,253		100		(469)		(3)		Total revenue	13,023		100		15,295		100		(2,272)		(15)
Cost of revenue	Cost of revenue	8,927		65		8,231		58		696		8		Cost of revenue	11,189		86		9,835		64		1,354		14
Gross profit	Gross profit	4,857		35		6,022		42		(1,165)		(19)		Gross profit	1,834		14		5,460		36		(3,626)		(66)

Operating expenses:	Operating expenses:													Operating expenses:
Sales and marketing	Sales and marketing	$	5,562	40	%	$	6,434	45	%	$	(872)	(14)	%	Sales and marketing	$	4,063	31	%	$	6,562	43	%	$	(2,499)	(38)	%
Research and development	Research and development	3,676		27		3,548		25		128		4		Research and development	2,158		17		3,958		26		(1,800)		(45)
General and administrative	General and administrative	7,608		55		7,407		52		201		3		General and administrative	7,918		61		7,693		50		225		3

Total operating expenses	Total operating expenses	16,846		122		17,389		122		(543)		(3)		Total operating expenses	14,139		109		18,213		119		(4,074)		(22)
Loss from operations	Loss from operations	(11,989)		(87)		(11,367)		(80)		(622)		(5)		Loss from operations	(12,305)		(94)		(12,753)		(83)		448		4
Total other (expenses) income, net	Total other (expenses) income, net	(3,186)		(23)		(1,577)		(11)		(1,609)		(102)		Total other (expenses) income, net	(675)		(5)		(2,871)		(19)		2,196		76
Loss before income taxes	Loss before income taxes	(15,175)		(110)		(12,944)		(91)		(2,231)		(17)		Loss before income taxes	(12,980)		(100)		(15,624)		(102)		2,644		17
Income tax provision	Income tax provision	27		—		29		—		(2)		(7)		Income tax provision	31		—		(100)		(1)		131		131
Net loss	Net loss	$	(15,202)	(110)	%	$	(12,973)	(91)	%	$	(2,229)	(17)	%	Net loss	$	(13,011)	(100)	%	$	(15,524)	(101)	%	$	2,513	16	%

Product revenue. Product revenue was ~~$13.6~~$12.5 million for the three months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$14.1~~$15.1 million for the three months ended ~~September~~June 30, ~~2021,~~2022, a decrease of ~~$0.5~~$2.6 million or 3%17%. The decrease in product revenue was primarily due to declines in U.S. knee orders ~~from U.S. hospitals~~following our business model transition and ~~the impact of foreign currency exchange rates offset by increases in orders from ambulatory surgery centers.~~manufacturing/supply chain challenges.

The following table sets forth, for the periods indicated, our product revenue by geography expressed as U.S. dollar amounts, percentage of product revenue and year-over-year change (in thousands):


		2022				2021				2022 vs 2021					2023				2022				2023 vs 2022
Three Months Ended September 30,		Amount		As a % of Product Revenue		Amount		As a % of Product Revenue		$ Change		% Change
Three Months Ended June 30,														Three Months Ended June 30,	Amount		As a % of Product Revenue		Amount		As a % of Product Revenue		$ Change		% Change
United States	United States	$	12,037	88	%	$	12,405	88	%	$	(368)	(3)	%	United States	$	10,777	86	%	$	13,415	89	%	$	(2,638)	(20)	%
Germany	Germany	661		5		1,226		9		(565)		(46)		Germany	736		6		707		5		29		4
Rest of world	Rest of world	944		7		499		3		445		89		Rest of world	983		8		1,020		6		(37)		(4)
Product revenue	Product revenue	$	13,642	100	%	$	14,130	100	%	$	(488)	(3)	%	Product revenue	$	12,496	100	%	$	15,142	100	%	$	(2,646)	(17)	%

Product revenue in the United States was generated through our direct sales force and independent sales representatives. The percentage of product revenue generated in the United States was ~~88%~~86% for ~~each of~~ the three months ended ~~September~~June 30, ~~2022 and 2021.~~2023 compared to 89% for the three months ended June 30, 2022.

The United States product revenue decreased ~~$0.4~~$2.6 million to ~~$12.0~~$10.8 million or 3%20% year over year. The decrease in product revenue was primarily due to declines in U.S. knee orders ~~from U.S. hospitals offset by increases in orders from ambulatory surgery centers.~~following our business model transition and manufacturing/supply chain challenges. Following the September 1, 2022t transition to the new business model, we have seen a reduction in our orders as existing customers migrate to the new product and service offering. ~~While we believe the majority~~Additionally, some of ~~the impact~~our existing customers have chosen not to offer our fully personalized iTotal Identity product given it will require an out-of-pocket patient pay upgrade and some have chosen not to order Identity Imprint given it is ~~temporary~~not a fully personalized knee system. Germany and ~~did not materially impact revenue in the third quarter~~Rest of ~~2022, the lower orders we are currently experiencing will impact U.S. revenue in the fourth quarter of 2022 and may impact future quarters into 2023. Germany~~World product revenue decreased $0.6 million to $0.7 million, or 46% year over year on a reported basis and 38% on a constant currency basis. We believe the decline was primarily due to reimbursement denials from Medizinischer Dienst der Krankenversicherung ("MDK"), foreign currency exchange rates, and the shift in certain distributors that were previously managed by Germany. Starting in 2022, these distributors are reported inremained flat year-over-year.

Rest of World revenue. Rest of World product revenue increased $0.4 million to $0.9 million, or 89% year-over-year on a reported basis and 109% on a constant currency basis. The increase is primarily due to the shift in distributors that were previously managed by Germany now being managed by other countries, an increase in elective surgeries in the UK which were lower in the prior period as a result of the COVID-19 pandemic, and growth in Australia.

Royalty and licensing revenue. Royalty and licensing revenue was ~~$0.1~~$0.5 million for ~~each of~~ the three months ended ~~September~~June 30, 2023 compared to $0.2 million for the three months ended June 30, 2022, an increase of $0.4 million or 244%. The increase in royalty and ~~2021.~~licensing revenue was driven by revenue recognized under the License Agreements with Bodycad and Exactech.

Cost of revenue, gross profit and gross margin. Cost of revenue was ~~$8.9~~$11.2 million for the three months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$8.2~~$9.8 million for the three months ended ~~September~~June 30, ~~2021,~~2022, an increase of ~~$0.7~~$1.4 million, or 8%14%. Gross profit was ~~$4.9~~$1.8 million for the three months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$6.0~~$5.5 million for the three months ended ~~September~~June 30, ~~2021,~~2022, a decrease of ~~$1.2~~$3.6 million or ~~19%~~66%. Gross margin decreased ~~710~~2,160 basis points to ~~35%~~14% for the three months ended ~~September~~June 30, ~~2022~~2023 from ~~42%~~36% for the three months ended ~~September~~June 30, ~~2021.~~2022. The decrease in gross margin was driven primarily by ~~increased material~~a settlement paid in connection with the Osteoplastic Settlement and ~~labor costs, higher cancelled case inventory expense, and a reduction in product selling price.~~License Agreement.

Sales and marketing. Sales and marketing expense was ~~$5.6~~$4.1 million for the three months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$6.4~~$6.6 million for the three months ended ~~September~~June 30, ~~2021,~~2022, a decrease of ~~$0.9~~$2.5 million or ~~14%~~38%. The decrease was due primarily to lower ~~marketing and~~ tradeshow expenses of ~~$0.6 million, travel and entertainment of $0.1~~$0.4 million, commission expense of ~~$0.1~~$0.9 million, personnel costs of $0.8 million, professional and outside services of $0.2 million, and ~~other expense~~travel and entertainment expenses of ~~$0.1~~$0.2 million. Sales and marketing expense decreased as a percentage of total revenue to ~~40%~~31% for the three months ended ~~September~~June 30, ~~2022~~2023 compared to ~~45%~~43% for the three months ended ~~September~~June 30, ~~2021.~~2022.

Research and development. Research and development expense was ~~$3.7~~$2.2 million for the three months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$3.5~~$4.0 million for the three months ended ~~September~~June 30, ~~2021, an increase~~2022, a decrease of ~~$0.1~~$1.8 million, or 4%45%. The ~~increase~~decrease was due primarily to ~~an increase in~~lower professional and outside services ~~of $0.2~~$0.3 million, ~~project prototype and supply~~personnel costs of ~~$0.1~~$0.8 million, ~~partially offset by lower~~and revenue share expense of ~~$0.2~~$0.7 million. Research and development expense ~~increased~~decreased as a percentage of total revenue to ~~27%~~17% for the three months ended ~~September~~June 30, ~~2022~~2023 compared to ~~25%~~26% for the three months ended ~~September~~June 30, ~~2021.~~2022.

General and administrative. General and administrative expense was ~~$7.6~~$7.9 million for the three months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$7.4~~$7.7 million for the three months ended ~~September~~June 30, ~~2021,~~2022, an increase of $0.2 million, or 3%. The increase was primarily due to ~~higher personnel costs~~an increase in professional and outside services of ~~$0.6~~$0.9 million, ~~shipping costs of $0.2 million and other costs of $0.2 million,~~which was partially offset by ~~lower~~a decrease in legal ~~fees~~expenses of ~~$0.6 million and insurance costs of $0.2~~$0.7 million. General and administrative expense increased as a percentage of total revenue to ~~55%~~61% for the three months ended ~~September~~June 30, ~~2022~~2023 from ~~52%~~50% for the three months ended ~~September~~June 30, ~~2021.~~2022.

Total other (expenses) income, net. Other (expenses) income, net was ~~$3.2~~$0.7 million of other expenses for the three months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$1.6~~$2.9 million of other expenses for the three months ended ~~September~~June 30, ~~2021,~~2022, a change of ~~$1.6~~$2.2 million, or ~~102%~~76%. The change was primarily due to ~~an increase~~a decrease in foreign currency exchange transaction loss of ~~$1.7~~$2.4 million, partially offset by ~~lower~~higher interest expense of ~~$0.1~~$0.2 million.

Income taxes. Income tax provision was ~~$27,000~~$31,000 and ~~$29,000~~$(100,000) for the three months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. We continue to generate losses for U.S. federal and state tax purposes and have net operating loss carryforwards creating a deferred tax asset. We maintain a full valuation allowance for deferred tax assets.

Comparison of the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022

The following table sets forth our results of operations expressed as dollar amounts, percentage of total revenue and year-over-year change (in thousands):


		2022				2021				2022 vs 2021					2023				2022				2023 vs 2022
Nine Months Ended September 30,		Amount		As a% of Total Revenue		Amount		As a% of Total Revenue		$ Change		% Change
Six Months Ended June 30,														Six Months Ended June 30,	Amount		As a% of Total Revenue		Amount		As a% of Total Revenue		$ Change		% Change
Revenue	Revenue													Revenue
Product revenue	Product revenue	$	43,668	98	%	$	43,040	51	%	$	628	1	%	Product revenue	$	25,187	97	%	$	30,026	97	%	$	(4,839)	(16)	%
Royalty and licensing		962		2		41,396		49		(40,434)		(98)	%
Royalty														Royalty	673		3		820		3		(147)		(18)	%
Total revenue	Total revenue	44,630		100		84,436		100		(39,806)		(47)	%	Total revenue	25,860		100		30,846		100		(4,986)		(16)	%
Cost of revenue	Cost of revenue	28,572		64		24,703		29		3,869		16	%	Cost of revenue	18,923		73		19,645		64		(722)		(4)	%
Gross profit	Gross profit	16,058		36		59,733		71		(43,675)		(73)	%	Gross profit	6,937		27		11,201		36		(4,264)		(38)	%

Operating expenses:	Operating expenses:													Operating expenses:
Sales and marketing	Sales and marketing	$	18,789	42	%	$	17,851	21	%	$	938	5	%	Sales and marketing	$	9,114	35	%	$	13,227	43	%	$	(4,113)	(31)	%
Research and development	Research and development	12,113		27		10,738		13		1,375		13	%	Research and development	4,616		18		8,437		27		(3,821)		(45)
General and administrative	General and administrative	24,634		55		20,762		25		3,872		19	%	General and administrative	14,941		58		17,026		55	%	(2,085)		(12)

Total operating expenses	Total operating expenses	55,536		124		49,351		58		6,185		13	%	Total operating expenses	28,671		111		38,690		125		(10,019)		(26)
(Loss) income from operations		(39,478)		(88)		10,382		12		(49,860)		(480)
Total other (expenses) income, net		(7,318)		(16)		3,225		4		(10,543)		(327)	%
(Loss) income before income taxes		(46,796)		(105)		13,607		16		(60,403)		(444)
Loss from operations														Loss from operations	(21,734)		(84)		(27,489)		(89)		5,755		21
Total other income (expenses), net														Total other income (expenses), net	(835)		(3)		(4,132)		(13)		3,297		80
Loss before income taxes														Loss before income taxes	(22,569)		(87)		(31,621)		(103)		9,052		29
Income tax provision	Income tax provision	(39)		—		44		—		(83)		(189)		Income tax provision	13		—		(66)		—		79		120
Net (loss) income		$	(46,757)	(105)	%	$	13,563	16	%	$	(60,320)	(445)	%
Net loss														Net loss	$	(22,582)	(87)	%	$	(31,555)	(102)	%	$	8,973	28	%

Product revenue. Product revenue was ~~$43.7~~$25.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, compared to ~~$43.0~~$30.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021, an increase~~2022, a decrease of ~~$0.6~~$4.8 million or 1%16%. ~~We believe the increase is~~The decrease in product revenue was primarily due to ~~an increase~~declines in ~~elective surgeries, which were lower in the prior period as a result of the COVID-19 pandemic.~~U.S. knee orders following our business model transition and manufacturing/supply chain challenges.

The following table sets forth, for the periods indicated, our product revenue by geography expressed as U.S. dollar amounts, percentage of product revenue and year-over-year change (in thousands):


		2022				2021				2022 vs 2021					2023				2022				2023 vs 2022
Nine Months Ended September 30,		Amount		As a % of Product Revenue		Amount		As a % of Product Revenue		$ Change		% Change
Six Months Ended June 30,														Six Months Ended June 30,	Amount		As a % of Product Revenue		Amount		As a % of Product Revenue		$ Change		% Change
United States	United States	$	38,166	87	%	$	37,434	87	%	$	732	2	%	United States	$	21,345	85	%	$	26,130	87	%	$	(4,785)	(18)	%
Germany	Germany	2,545		6		4,242		10		(1,697)		(40)		Germany	1,562		6		1,885		6		$	(323)	(17)
Rest of world	Rest of world	2,957		7		1,364		3		1,593		117		Rest of world	2,280		9		2,011		7		269		13
Product revenue	Product revenue	$	43,668	100	%	$	43,040	100	%	$	628	1	%	Product revenue	$	25,187	100	%	$	30,026	100	%	$	(4,839)	(16)	%

Product revenue in the United States was generated through our direct sales force and independent sales representatives. The percentage of product revenue generated in the United States was 85% for the six months ended June 30, 2023 compared to 87% for ~~each of~~ the ~~nine~~six months ended ~~September~~June 30, ~~2022 and 2021.~~

2022.

The United States product revenue ~~increased $0.7~~decreased $4.8 million to ~~$38.2~~$21.3 million or 2%18% year over year. ~~We believe the increase~~The decrease in product revenue ~~inside the United States~~ was primarily due to declines in U.S. knee orders following our business model transition and manufacturing/supply chain challenges. Following the September 1, 2022 transition to the new business model, we have seen a reduction in our orders as existing customers migrate to the new product and service offering. Additionally, some of our existing customers have chosen not to offer our fully personalized iTotal Identity product given it will require an ~~increase in elective surgeries, which were lower in the prior period as~~out-of-pocket patient pay upgrade and some have chosen not to order Identity Imprint given it is not a ~~result of the COVID-19 pandemic.~~ fully personalized knee system.

Germany product revenue decreased ~~$1.7~~$0.3 million to ~~$2.5~~$1.6 million, or ~~40%~~17% year over year on a reported basis and ~~34%~~15% on a constant currency basis. We believe the

decline was primarily due to continued reimbursement ~~denials~~headwinds from ~~"MDK"~~Medizinischer Dienst der Krankenversicherung ("MDK"), operational disruptions, and ~~the shift in certain distributors that were previously managed by Germany. Starting in 2022, these distributors are reported in Rest of World revenue.~~foreign currency exchange rates. Rest of World product revenue increased ~~$1.6~~$0.3 million to ~~$3.0~~$2.3 million, or ~~117%~~13% year-over-year on a reported basis and ~~131.7%~~18% on a constant currency ~~basis,~~basis. The increase is primarily due to ~~the shift in distributors that were previously managed by Germany now being managed by other countries,~~ an increase in elective surgeries in the UK which were lower in the prior period as a result of the COVID-19 pandemic, and growth in Australia.

Royalty ~~and licensing revenue~~.revenue. Royalty ~~and licensing~~ revenue was ~~$1.0~~$0.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022 compared to $41.4~~2023 and $0.8 million ~~for~~or the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, a decrease of ~~$40.4~~$0.1 million or ~~98%~~18%. The decrease in royalty and licensing revenue was driven by revenue recognized in the prior year which included $25.0 million in revenue recognized in connection with 510(k) clearance from the FDA for the achievement of the third of three milestones under the License Agreement with Stryker, $15.0 million in revenue recognized under the Settlement and License Agreement with the Stryker Parties, and $1.0 million in revenue recognized under the License Agreement with Paragon 28.

Cost of revenue, gross profit and gross margin. Cost of revenue was ~~$28.6~~$18.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$24.7~~$19.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, an increase of ~~$3.9~~$0.7 million, or ~~16%~~4%. Gross profit was ~~$16.1~~$6.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$59.7~~$11.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, a decrease of ~~$43.7~~$4.3 million or ~~73%~~38%. Gross margin decreased ~~3,500~~900 basis points to 27% for the six months ended June 30, 2023 from 36% for the ~~nine~~six months ended ~~September~~June 30, ~~2022 from 71% for the nine months ended September 30, 2021. The~~2022. This decrease in gross margin was driven primarily by ~~licensing revenue recognized~~a settlement paid in connection with the ~~prior year under the Development and License Agreements with Stryker and the~~Osteoplastic Settlement and License Agreement, ~~with the Stryker Parties.~~higher cancelled case inventory expense, and a reduction in product selling price.

Sales and marketing. Sales and marketing expense was ~~$18.8~~$9.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$17.9~~$13.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021, an increase~~2022, a decrease of ~~$0.9~~$4.1 million, or 5%31%. The ~~increase~~decrease was due primarily to ~~higher~~decreases in personnel costs of $1.2 million, commission expense of ~~$0.1~~$1.5 million, ~~marketing~~professional and outside services of $0.2 million, tradeshow ~~expense~~expenses of $0.5 million, travel and entertainment expenses of $0.3 million, ~~personnel related cost~~and marketing expenses of $0.4 ~~million, and travel and entertainment of $0.1~~ million. Sales and marketing expense ~~increased~~decreased as a percentage of total revenue to ~~42%~~35% for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to ~~21% for~~43% the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022.

Research and development. Research and development expense was ~~$12.1~~$4.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$10.7~~$8.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021, an increase~~2022, a decrease of ~~$1.4~~$3.8 million, or ~~13%~~45%. The ~~increase~~decrease was due primarily to ~~an increase~~decreases in personnel costs of $1.8 million, professional and outside services of $0.9 million, and revenue share expense of ~~$0.1 million, and a reduction of $0.7 million of cost allocated to the advance on research and development, partially offset by lower personnel related costs of $0.3~~$1.1 million. Research and development expense ~~increased~~decreased as a percentage of total revenue to 18% for the six months ended June 30, 2023 from 27% for the ~~nine~~six months ended ~~September~~June 30, ~~2022 from 13% for the nine months ended September 30, 2021.~~2022.

General and administrative. General and administrative expense was ~~$24.6~~$14.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$20.8~~$17.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021, an increase~~2022, a decrease of ~~$3.9~~$2.1 million, or ~~19%~~12%. The ~~increase~~decrease was due primarily ~~due~~ to ~~higher legal fees of $0.8 million, freight~~decreases in personnel costs of ~~$1.6~~$0.1 million, ~~professional services~~legal expenses of ~~$0.6~~$1.8 million, ~~personnel related~~insurance costs of $0.2 million, ~~travel and entertainment~~depreciation expense of $0.1 million, ~~information technology~~shipping and handling expenses of ~~$0.3~~$0.2 million, ~~bad debt expense of $0.3 million,~~ and ~~an increase in~~ other costs of ~~$0.2~~$0.1 million, partially offset by ~~a decrease~~an increase in ~~insurance costs~~professional and outside services of ~~$0.3~~$0.4 million. General and administrative expense increased as a percentage of total revenue to 58% for the six months ended June 30, 2023 from 55% for the ~~nine~~six months ended ~~September~~June 30, ~~2022 from 25% for the nine months ended September 30, 2021.~~2022.

Total other income (expenses) ~~income,~~, net. Other income (expenses) ~~income,~~, net was ~~$7.3~~$0.8 million of other expenses for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$3.2~~$4.1 million of other ~~income~~expenses for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, a ~~change~~decrease of ~~$10.5~~expense of $3.3 million or ~~327%~~80%. The change was primarily due to ~~an increase of $3.6~~a $3.7 million decrease in foreign currency exchange transaction loss, and the prior year recognition of a gain on forgiveness of PPP loan of $4.8 million, and $2.5 million for the unused portion of the advance on research and development under the Development Agreement with Stryker, partially offset by ~~lower~~higher interest expense of $0.4 million.

Income taxes. Income tax provision was approximately ~~$(39,000)~~$13,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~$44,000~~$(66,000) for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. We continue to generate losses for U.S. federal and state tax purposes and have net operating loss carryforwards creating a deferred tax asset. We maintain a full valuation allowance for deferred tax assets.

Liquidity, capital resources and plan of operations

Reverse Stock Split

On October 26, 2022, our Board of Directors approved a 1-for-25 reverse stock split of our Common Stock ("Reverse Stock Split"), which was implemented in November 2022. As a result of the Reverse Stock Split, each of the holders of our Common Stock received one (1) new share of Common Stock for every twenty-five (25) shares such shareholder held immediately prior. Fractional shares as a result of the Reverse Stock Split were paid in cash. The Reverse Stock Split also affected the Company’s outstanding stock options and warrants and resulted in the shares underlying such instruments being reduced and the exercise price being increased proportionately to the Reverse Stock Split ratio.

All share and per share information has been retroactively adjusted to give effect to the Reverse Stock Split for all periods presented, unless otherwise indicated. The total number of our authorized shares of preferred stock was not affected by the foregoing. However, the total number of our authorized common stock was decreased to 20,000,000 after giving effect to the Reverse Stock Split. In connection with the Reverse Stock Split, there was no change in the par value per share of $0.00001.

Sources of liquidity and funding requirements

From our inception in June 2004 through the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, we have financed our operations primarily through private placements of preferred stock, our initial public offering in 2015, other equity financings, debt and convertible debt financings, equipment purchase loans, patent licensing, and product revenue beginning in 2007. We have not yet attained profitability and continue to incur operating losses and negative operating cash flows. As of ~~September~~June 30, ~~2022,~~2023, we had an accumulated deficit of ~~$577.6~~$603.9 million.In addition, as of such date, the Company owed $21 million under its secured credit agreement with MidCap. As further described below under “Item 1A. Risk Factors,” absent us raising additional capital, MidCap could allege that a material adverse effect has occurred under the credit agreement, which could permit MidCap to accelerate amounts due under the agreement. For further information regarding the credit agreement see “Note I—Debt and Notes Payable” in the financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.

~~In January 2017,~~We expect to incur substantial expenditures in the foreseeable future in connection with the following:

•expansion of our sales and marketing efforts, including the expanded advertising of our Platinum Services℠ Program;

•expansion of our manufacturing capacity;

•funding research and development activities related to new and existing products, including our porous-coated technology for the Imprint system and Actera™ line extensions;

•pursuing and maintaining appropriate regulatory clearances and approvals for our existing products and any new products that we may develop; and

•enforcing our intellectual property rights and pursuing our claims against Aetna.

On March 23, 2020, we filed a shelf registration statement on Form S-3 (the "Shelf Registration Statement"), which was declared effective by the SEC on ~~May 9, 2017 (the "2017 Shelf Registration Statement"). The 2017~~August 5, 2020. Under the Shelf Registration Statement, ~~allowed us~~we are permitted to sell from time to time up to $200 million of common stock, preferred stock, debt securities, warrants, or units comprised of any combination of these securities, for our own account in one or more offerings. On May 10, 2017, we filed with the SEC a prospectus supplement, pursuant to which we could issue and sell up to $50 million of our common stock and entered into an Equity Distribution Agreement with Canaccord Genuity LLC (formerly

Canaccord Genuity Inc.) or Canaccord, pursuant to which Canaccord agreed to sell shares of our common stock from time to time, as our agent in an “at-the-market,” or ATM, offering as defined in Rule 415 promulgated under the Securities Act. We are not obligated to sell any number of shares under the Equity Distribution Agreement. On August 4, 2020, we and Canaccord mutually agreed to terminate the Equity Distribution Agreement, and as of that date, we had sold 2,663,000 shares under the Equity Distribution Agreement resulting in net proceeds of $4.4 million.

On March 23, 2020, we filed a new shelf registration statement on Form S-3 or the New Shelf Registration Statement, which was declared effective by the SEC on August 5, 2020. Under the New Shelf Registration Statement, we will be permitted to sell from time to time up to $200 million of common stock, preferred stock, debt securities, warrants, or units comprised of any combination of these securities, for its own account in one or more offerings. The ~~New~~ Shelf Registration Statement is intended to provide us flexibility to conduct sales of ~~its~~our registered securities, subject to market conditions and our future capital needs.

On August 5, 2020, we filed with the SEC a prospectus supplement, for the sale and issuance of up to $25 million of ~~its~~our common stock and entered into an ~~at-the-market~~ATM issuance sales agreement (the "Sales Agreement"), with Cowen and Company, LLC ~~or Cowen,~~("Cowen"), pursuant to which we may offer and sell shares of the our common stock to or through Cowen, acting as agent and/or principal, from time to time in an “at-the-market” offering as defined in Rule 415 promulgated under the Securities Act of 1933, as amended, including without limitation sales made by means of ordinary brokers’ transactions on the Nasdaq Capital Market or otherwise at market prices prevailing at

the time of sale, in block transactions, or as otherwise directed by us. Under the Sales Agreement, Cowen will use commercially reasonable efforts to sell the Common Stock from time to time, based upon instructions from us (including any price, time or size limits or other customary parameters or conditions we may impose). We will pay Cowen a commission of up to 3.0% of the gross sales proceeds of any Common Stock sold through Cowen under the Sales Agreement, and ~~also~~we have provided Cowen with customary indemnification rights. ~~The~~Any shares of Common Stock ~~being~~ offered pursuant to the Sales Agreement will be offered and sold pursuant to the ~~New~~ Shelf Registration Statement. We are not obligated to make any sales of Common Stock under the Sales Agreement. The offering of shares of Common Stock pursuant to the Sales Agreement will terminate upon the earlier of (i) the sale of all Common Stock subject to the Sales Agreement or (ii) termination of the Sales Agreement in accordance with its terms.As of ~~September 30, 2022,~~the date thereof, we ~~had~~have not sold any shares under the Sales Agreement.

On December 17, 2018, we entered into a stock purchase agreement (the "Stock Purchase Agreement"), with Lincoln Park Capital, or "LPC." Upon entering into the Stock Purchase Agreement, we sold 1,921,968 shares of common stock for $1.0 million to LPC, representing a premium of 110% to the previous day's closing price. As consideration for LPC’s commitment to purchase shares of common stock under the Stock Purchase Agreement, we issued 354,430 shares to LPC. We have the right at our sole discretion to sell to LPC up to $20.0 million worth of shares over a 36-month period subject to the terms of the Stock Purchase Agreement. We will control the timing of any sales to LPC and LPC will be obligated to make purchases of our common stock upon receipt of requests from us in accordance with the terms of the Stock Purchase Agreement. There are no upper limits to the price per share LPC may pay to purchase the up to $20.0 million worth of common stock subject to the Stock Purchase Agreement, and the purchase price of the shares will be based on the then prevailing market prices of our shares at the time of each sale to LPC as described in the Stock Purchase Agreement, provided that LPC will not be obligated to make purchases of our common stock pursuant to receipt of a request from us on any business day on which the last closing trade price of our common stock on the Nasdaq Capital Market (or alternative national exchange in accordance with the Stock Purchase Agreement) is below a floor price of $0.25 per share. No warrants, derivatives, financial or business covenants are associated with the Stock Purchase Agreement and LPC has agreed not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of shares of our common stock. The Stock Purchase Agreement may be terminated by us at any time, at our sole discretion, without any cost or penalty. On August 5, 2020, we filed with the SEC a prospectus supplement, for the sale and issuance of up to $17.6 million of its common stock pursuant to the Stock Purchase Agreement dated December 17, 2018. The Stock Purchase Agreement expired on January 1, 2022.

On September 23, 2020, we and a healthcare-focused institutional investor entered into a subscription agreement the "Subscription Agreement," pursuant to which we sold (i) 8,512,088 shares of its common stock and accompanying warrants to purchase up to 8,512,088 shares of common stock and (ii) pre-funded warrants to purchase up to 9,492,953 shares of common stock and accompanying warrants to purchase up to 9,492,953 shares of common stock in a registered direct offering for gross proceeds of approximately $17.3 million. The common stock (or one pre-funded warrant in lieu thereof) and accompanying warrants were sold as units, each consisting of one share (or one pre-funded warrant to purchase one share of common stock in lieu thereof) and one warrant to purchase one share of common stock, at an offering price of $0.9581 per unit. The net proceeds to us from the offering, after deducting the placement agent's fees and other estimated offering expenses payable by us, was approximately $15.9 million.

The pre-funded warrants became exercisable immediately upon issuance, have an exercise price of $0.0001 per share and were exercisable until all of the pre-funded warrants were exercised in full. As of March 31, 2021, all pre-funded warrants were exercised. The warrants became exercisable immediately upon issuance, have an exercise price of $0.8748 per share, and will expire five years from the date of issuance. As of September 30,November 8, 2022 approximately 6.0 million of these warrants have been exercised. The pre-funded warrants and the warrants each prohibit the holder from exercising any portion thereof to the extent that the holder would own more than 9.99% of the number of shares of common stock outstanding immediately after exercise. The number of shares issuable upon exercise of the warrants and pre-funded warrants and the exercise price of the warrants and pre-funded warrants is adjustable in the event of stock splits, stock dividends, combinations of shares and similar recapitalization transactions.

~~On November 22, 2021,~~ we entered into a ~~Credit~~Settlement and ~~Security~~License Agreement ~~(the “New Credit Agreement”)~~ with ~~MidCap Financial Trust (“MidCap”), as agent,~~Medacta, pursuant to which the parties agreed to terms for resolving the then-existing patent disputes. In consideration of the licenses, releases, covenants and certain lender parties thereto. The New Credit Agreement provides for a five-year, $21 million secured term loan facility (the “Term Facility”). The New Credit Agreement refinanced and replaced our prior 2019 credit facility with Innovatus (the “2019 Secured Loan Agreement”).~~We used the amounts drawn under the New Credit Agreement to repay all outstanding obligations under the 2019 Secured Loan Agreement, which 2019 Secured Credit Loan Agreement has been terminated.~~

The New Credit Agreement contains customary affirmative and negative covenants, including limitations on our ability to incur additional debt, grant or permit additional liens, make investments and acquisitions, merge or consolidate with others, dispose of assets, pay dividends and distributions, pay subordinated indebtedness and enter into affiliate transactions. In addition, the New Credit Agreement contains a minimum liquidity covenant requiring theother immunities granted by us to maintain unrestricted cash and cash equivalents in excess of $4.0 million. The New Credit Agreement also includes events of default customary for facilities of this type and upon the occurrence of such events of default, subject to customary cure rights, all outstanding loans under the Term Facility may be accelerated. As of September 30, 2022, we were not in breach of covenants under the New Credit Agreement. For further information regarding the 2019 Secured Loan Agreement and the Amendments, and the New Credit

~~Agreement see “Note I—Debt and Notes Payable” in the financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.~~

On September 30, 2019, we entered into an Asset Purchase Agreement with Howmedica Osteonics Corp., a subsidiary of Stryker Corporation also known as Stryker Orthopaedics, or Stryker. In connection with entering into the Asset Purchase Agreement, we also entered into a Development Agreement, a License Agreement, and other ancillary agreements contemplated by the Asset Purchase Agreement with Stryker. Under the terms of the agreements, we agreed to sell and license to Stryker certain assets relating to our patient-specific instrumentation technology, and to develop, manufacture, and supply patient-specific instrumentation for use in connection with Stryker's "off-the-shelf" non-personalized knee implant offerings. We received $14 million upfront and became eligible to receive up to an additional $16 million in milestone payments pursuant to the License Agreement and the Development Agreement. As of June 30, 2021, we had successfully completed the third of three milestones with Stryker and received $11.0 million, for a total aggregate received of $16.0 million for achievement of these milestones. Under the long-term Distribution Agreement, we will supply patient-specific instrumentation to Stryker.

~~The Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"),~~Medacta, Medacta was enacted on March 27, 2020 in the United States. On April 17, 2020, we entered into an approximately $4.7 million promissory note (the "PPP Note"), with East West Bank as the lender under the PPP offered by the SBA, to mitigate the negative financial and operational impacts of the COVID-19 pandemic. The interest rate on the PPP Note is a fixed rate of 1% per annum. We are required to make one payment of all outstanding principal plus all accrued unpaid interest on April 9, 2022 (the "Maturity Date"). We were required to pay ~~regular monthly payments in an amount equal to one month’s accrued interest commencing on August 2, 2021, with all subsequent interest payments to be due on the same day of each month~~us a fee promptly after ~~that. All interest which accrues during the deferral period were to be payable on the Maturity Date. According to the terms~~execution of the ~~PPP, all or a portion~~Settlement and License Agreement, which was received in full on December 12, 2022. The agreement provides for the grant of the ~~loan as well as any accrued interest may be fully forgiven if the funds are used for payroll costs (and at least 60%~~licenses, covenants-not-to-sue, releases, and other significant deliverables upon receipt of the forgiven amount must have been used for payroll), interest on certain other outstanding debt, rent, and utilities. In accordance with the CARES Act, we used the proceeds of the loan primarily for payroll costs. We submitted the loan forgiveness application to the lender on December 11, 2020. We resubmitted the application on February 23, 2021 with additional supporting documentation as requested by the lender. On March 4, 2021, our lender submitted our application to the SBA for their review and on June 30, 2021, we received notification through our lender that the SBA had rendered a final decision regarding its review of the PPP loan forgiveness application, fully approving the loan forgiveness application as of June 28, 2021.payment from Medacta.

On February 17, 2021, we closed an offering of our common stock under the ~~New~~ Shelf Registration Statement and issued and sold ~~80,952,381~~3,238,095 shares of our common stock at a public offering price of ~~$1.05~~$26.25 per share (adjusted for the 1-for-25 reverse stock split), for aggregate net proceeds of approximately $79.6 million. We intend to use the net proceeds of the offering of the shares for general corporate purposes, which may include research and development costs, sales and marketing costs, clinical studies, manufacturing development, the acquisition or licensing of other businesses or technologies, repayment and refinancing of debt, including our secured term loan facility, working capital and capital expenditures.

On April 8, 2021, we entered into a License Agreement with Paragon 28, granting Paragon 28 a non-exclusive license under a subset of our U.S. patents for the use of patient-specific instruments with off-the-shelf implants. In connection with this License Agreement, we recognized revenue of $1.0 million during the quarter ended June 30, 2021 and $0.5 million during the quarter ended March 31, 2022. see “Note B—Summary of Significant Accounting Policies” in the financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.

On June 30, 2021 we entered into a Settlement and License Agreement with the Stryker Parties, pursuant to which the parties have agreed to terms for resolving all of their existing patent disputes. Under the Settlement and License Agreement, we granted to the Stryker Parties a royalty-free, non-exclusive, worldwide license to certain of our patents for the Stryker Parties' patient-specific instrumentation used with off-the-shelf knee, hip, and shoulder implants. Under the agreement, the Stryker Parties are required to pay us a one-time payment of $15.0 million no later than October 15, 2021. The payment was received in October 2021.

~~We expect to incur substantial expenditures in the foreseeable future in connection with the following:~~

•~~expansion of our sales and marketing efforts;~~

•~~expansion of our manufacturing capacity;~~

•~~funding research, development and clinical activities related to our existing products and product platform, including iFit design software and product support;~~

•~~funding research, development and clinical activities related to new products that we may develop, including other joint replacement products;~~

•~~pursuing and maintaining appropriate regulatory clearances and approvals for our existing products and any new products that we may develop; and~~

•~~preparing, filing and prosecuting patent applications, and maintaining and enforcing our intellectual property rights and position.~~

We anticipate that our principal sources of funds in the future will be revenue generated from the sales of our products, available sales of shares under the Sales Agreement, additional equity or debt financing, and revenues that we may generate in connection with licensing our intellectual property. Additionally, in order for us to meet our long-term operating plan, revenue growth, gross margin improvements and leveraging operating expenses will be necessary to reduce cash used in operations. We will need to generate significant additional revenue to achieve and maintain profitability, and even if we achieve profitability, we cannot be sure that we will remain profitable for any substantial period of time. It is also possible that we may allocate significant amounts of capital toward products or technologies for which market demand is lower than anticipated and, as a result, abandon such efforts. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, or if we expend capital on projects that are not successful, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, and we may even have to scale back our operations. Our failure to become and remain profitable could impair our ability to raise capital, expand our business, maintain our research and development efforts or continue to fund our operations.

~~We may need to engage in additional equity or debt financings to secure additional funds. We may not be able to obtain additional financing on terms favorable to us, or at all.~~ To the extent that we raise additional capital through the future ~~sales~~sale of equity or debt, the ownership interest of our stockholders will be diluted. The terms of these future equity or debt securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders or involve negative covenants that restrict our ability to take specific actions, such as incurring additional debt or making capital expenditures.

Our consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The recurring losses and uncertainties about the Company's ability to raise capital raise substantial doubt about the Company's ability to continue as a going concern within one year after the issuance date of these financial statements. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

~~At September 30, 2022, we had cash and cash equivalents of $59.6 million and $0.5 million in restricted cash allocated to lease deposits. Based on our current operating plan, we expect to~~We fund our operations, capital expenditure requirements and debt service with existing cash and cash equivalents as of ~~September~~June 30, ~~2022, anticipated revenue from~~2023, and plans to address matters that raise substantial doubt about our ability to continue as a going concern through the completion of the proposed merger transaction with restor3d during the third quarter of 2023. However, if the merger is not successful, we will require additional capital in the near-term to support its business growth and continued operations, ~~revenue~~and, based on the recent state of equity capital markets and our exploration of potential financing alternatives, we and our board of directors believe that ~~may~~it will be ~~generated~~very challenging to obtain such financing on terms that would preserve value for our current stockholders. Absent the Company being able to obtain a sufficient level of new capital in ~~connection with licensing intellectual property, available sales~~the near-term, we could need to file for bankruptcy protection, which we and our board of directors believe would likely result in our current stockholders receiving little, if any, value for their shares ~~under the Sales Agreement, funds from potential exercises~~ of our common stock ~~warrants, and additional equity or debt financing. We have based this expectation on assumptions that may prove to be wrong, such as~~(and, in any event, an amount substantially less than the ~~revenue that we expect to generate from~~$2.27 per share of common stock provided for by the ~~sale of our products, the gross profit we expect to generate from those revenues, and the fact that we could use our capital resources sooner than we expect.~~

The COVID-19 pandemic has negatively impacted and will continue to impact our business, operations and financial condition. As part of our response to COVID-19, we took certain measures in preserving liquidity. In addition to the furlough implemented in March through April 2020, we have eliminated, reduced, or are deferring significant non-essential expense including sales, marketing, quality, clinical, regulatory and all general and administrative expense. In addition, we are working with suppliers to help match future revenue and expense.

Merger Agreement.

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Cash flows

The following table sets forth a summary of our cash flows for the periods indicated, as well as the year-over-year change (in thousands):


		Nine Months Ended September 30,									Six Months Ended June 30,
		2022		2021		$ Change		% Change			2023		2022		$ Change		% Change
Net cash (used in) provided by:	Net cash (used in) provided by:									Net cash (used in) provided by:
Operating activities	Operating activities	$	(38,794)	$	(14,382)	$	(24,412)	(170)	%	Operating activities	$	(21,137)	$	(26,762)	$	5,625	21	%
Investing activities	Investing activities	(1,597)		(1,832)		235		13		Investing activities	(1,215)		(990)		(225)		(23)
Financing activities	Financing activities	—		84,890		(84,890)		(100)		Financing activities	—		—		—		100
Effect of exchange rate on cash	Effect of exchange rate on cash	(684)		(138)		(546)		(396)		Effect of exchange rate on cash	(133)		(263)		130		49
Total	Total	$	(41,075)	$	68,538	$	(109,613)	(160)	%	Total	$	(22,485)	$	(28,015)	$	5,530	20	%

Net cash used in operating activities. Net cash used in operating activities was ~~$38.8~~$21.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$14.4~~$26.8 million used in operating activities for the ~~nine~~six months ended ~~September~~June 30, ~~2021, an increase~~2022, a decrease in use of ~~$24.4~~$5.6 million. The ~~$24.4~~$5.6 million ~~increase~~decrease in net cash used in operating activities was primarily affected by ~~an increase~~a decrease in net loss of ~~$60.3~~$9.0 million, ~~an increase~~a decrease in accounts receivable of ~~$0.2~~$2.6 million, ~~an increase~~a decrease in prepaid expense and other assets of ~~$0.4~~$0.1 million, an increase ~~in advance on research and development under the Stryker Agreements of $3.2 million, an increase in contract liability of $14.0 million, an increase in inventory of $0.9 million, a decrease~~ in royalty and licensing receivable of ~~$14.5~~$0.1 million, a decrease in inventory of $1.4 million, and a decrease in accounts payable, accrued expenses and other liabilities of ~~$1.9~~$3.0 million. Non-cash reconciling items include ~~an increase~~decrease in unrealized foreign exchange gain/loss of ~~$3.4~~$3.6 million, a decrease in depreciation expense of $0.3 million and ~~an increase on gain on forgiveness~~a decrease in stock compensation expense of ~~PPP loan of $4.8~~$0.5 million.

Net cash used in investing activities. Net cash used in investing activities was ~~$1.6~~$1.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, and for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 net cash used in investing activities was ~~$1.8~~$1.0 million, ~~a decrease~~an increase of $0.2 million. The ~~decrease~~increase is due to ~~a decrease~~an increase in costs related to the acquisition of property, plant, and equipment.

Net cash provided by financing activities. Net cash provided by financing activities was $0.0 million for each of the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023 and for the nine months ended September 30, 2021 was $84.9 million, a decrease of $84.9 million. Net cash provided by financing activities in the prior year included $79.6 million of net proceeds from the issuance of common stock under the New Shelf Registration Statement and $5.3 million of proceeds from the exercise of common stock warrants.2022.

Contractual obligations and commitments

There have not been any material changes to our contractual obligations and commitments disclosed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report filed on Form 10-K for the year ended December 31, ~~2021~~2022 other than changes in our debt facilities as disclosed in "Note I—Debt and Notes Payable" in the financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.

Revenue share agreements

We are party to revenue share agreements with certain past and present members of our scientific advisory board under which these advisors agreed to participate on our scientific advisory board and to assist with the development of our personalized implant products and related intellectual property. These agreements provide that we will pay the advisor a specified percentage of our net revenue, ranging from 0.1% to 1.33%, with respect to our products on which the advisor made a technical contribution or, in some cases, which we covered by a claim of one of or patents on which the advisor is a named inventor. The specific percentage is determined by reference to product classifications set forth in the agreement and is tiered based on the level of net revenue collected by us on such product sales. Our payment obligations under these agreements typically expire a fixed number of years after expiration or termination of the agreement, but in some cases expire on a product-by-product basis or expiration of the last to expire of our patents where the advisor is a named inventor that claims the applicable product.

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The aggregate revenue share percentage of net revenue from our currently marketed knee replacement products, including percentages under revenue share agreements with all of our scientific advisory board members, ranges, depending on the particular product, from 0.1% to 0.6%. We incurred aggregate revenue share expense including all amounts payable under our scientific advisory board revenue share agreements of ~~$0.4~~$0.3 million during the three months ended ~~September~~June 30, ~~2022,~~2023, representing ~~2.9%~~2.1% of product revenue, and ~~$0.6~~$0.7 million during the three months ended ~~September~~June 30, ~~2021,~~2022, representing ~~4.3%~~4.8% of product revenue. Revenue share expense is included in research and development. For further information, see “Note H—Commitments and Contingencies” to the consolidated financial statements appearing in this Quarterly Report on Form 10-Q.

Segment information

We have one primary business activity and operate as one reportable segment.

Off-balance sheet arrangements

Through ~~September~~June 30, ~~2022,~~2023, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical accounting policies and estimates

We have prepared our consolidated financial statements in conformity with accounting principles generally accepted in the United States. Our preparation of these financial statements and related disclosures requires us 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 revenue and expenses during the reporting periods. We believe the critical accounting policies and estimates that require the use

of significant estimates and judgments in the preparation of our consolidated financial statements include revenue recognition, inventory valuations, impairment assessments, and income tax reserves and related allowances. We evaluate our estimates and judgments on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates are more fully described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical accounting policies and estimates” in our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of ~~September~~June 30, ~~2022.~~2023. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of ~~September~~June 30, ~~2022,~~2023, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended ~~September~~June 30, ~~2022~~2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the ordinary course of our business, we are subject to routine risk of litigation, claims and administrative proceedings on a variety of matters, including patent infringement, product liability, securities-related claims, and other claims in the United States and in other countries where we sell our products. In the case of matters below in which we are a defendant, adverse outcomes of these lawsuits could have a material adverse effect on our business, financial condition or results of operations. We are presently unable to predict the outcome of these lawsuits or to reasonably estimate a range of potential losses, if any, related to the lawsuits. Legal costs associated with legal proceedings are accrued as incurred.

Proceedings and Complaints Related to the Merger Agreement

On July 27, 2023 and July 31, 2023, respectively, two purported Company stockholders filed separate complaints against us and the members of our board directors in the United States District Court for the Southern District of New York in cases captioned Burnett v. Conformis Inc., et al., 1:23-cv-06536 (S.D.N.Y.) and Anderson v. Conformis Inc., et al., 1:23-cv-06686 (S.D.N.Y.), respectively. The complaints each assert claims under Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder and Section 20(a) of the Exchange Act, and allege that the proxy statement filed with the SEC on July 24, 2023 regarding the proposed merger transaction with restor3d is materially incomplete and misleading because it fails to disclose certain purportedly material information. Among other remedies, the plaintiffs each seek to enjoin the merger. Between July 24, 2023 and July 27, 2023, counsel to four different purported Company stockholders sent demand letters to our counsel making similar assertions and, in one instance, attaching a draft federal court complaint against us and the members of its board directors, asserting similar claims under Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder and Section 20(a) of the Exchange Act and also seeking to enjoin the merger. On July 31, 2023, we also received a demand under Section 220 of the Delaware General Corporation Law seeking formal access to our books and records related to the proposed merger with restor3d and the process leading up to it.

Although the ultimate outcome of these matters cannot be predicted with certainty, we and the individual defendants believe the claims are without merit and intend to defend against these actions vigorously. If any plaintiffs are successful in obtaining an injunction prohibiting the completion of the merger on the agreed-upon terms, then such injunction may prevent the merger from being completed, or from being completed within the expected time frame. Additional lawsuits against us and/or our directors and officers in connection with the merger may be filed in the future. If additional similar complaints are filed or demand letters are sent, absent new or different allegations that are material, we will not necessarily announce such additional filings or letters. At this time, we are unable to estimate the potential loss or range of losses that might be incurred in connection with these matters.

Settlement and License Agreement with Medacta

On August 29, 2019, we filed a lawsuit against Medacta USA, Inc. in the United States District Court for the District of Delaware. We amended our complaint on December 23, 2019, and again on October 14, 2020, adding Medacta International (Medacta USA, Inc.’s parent company) as a defendant (Medacta USA, Inc. and Medacta International SA are referred to, together, as “Medacta”). We are seeking damages for Medacta’s infringement of certain of our patents related to patient-specific instrument and implant systems, alleging that Medacta’s multiple lines of patient-specific instruments, as well as the implant components used in conjunction with them, infringe four of our patents. The accused product lines include Medacta patient-specific instrument and implant systems for knee and shoulder replacement procedures. On January 6, 2020, Medacta filed its answer to our original complaint, denying that its patient-specific instrument and implant systems infringe the patents asserted by us. Medacta’s answer also alleges the affirmative defense that our asserted patents are invalid. On January 21, 2021, Medacta International SA filed a partial motion to dismiss; on February 16, 2021, we filed our opposition to the motion; and on March 2, 2021, Medacta International SA filed its reply. On March 4, 2021, the court issued its opinion on claim construction, ruling in our favor on the construction of all of the disputed terms. On June 3, 2022, the court denied Medacta International SA’s motion to dismiss. On September 8, 2022, the parties notified the court that an agreement in principal to settle the case had been reached. The trial schedule and case deadlines have been canceled, pending the parties’ preparation of and agreement to a definitive settlement agreement.

On October 20, 2021, we filed a lawsuit against Medacta Germany GmbH and Medacta International SA (together, “Medacta Europe”) in the Regional Court of Düsseldorf ("German Court"). We are seeking damages for Medacta Europe’s infringement of one of our German patents related to patient-specific instrument and implant systems through Medacta Europe’s sales of multiple lines of PSI, as well as the implant components used in conjunction with them, in Germany. The accused product lines include Medacta Europe’s patient-specific instrument and implant systems for knee, hip, and shoulder replacement procedures. Medacta Europe filed its statement of defense on January 31, 2022. On April 28, 2022, we filed our reply to Medacta’s statement of defense. On September 1, 2022, an oral hearing on infringement and liability was held. On September 9, 2022, the parties notified the court that an agreement in principal to settle the case had been reached, and the issuance of further rulings by the court have been delayed, pending the parties’ preparation of and agreement to a definitive settlement agreement.

On November 8, 2022, we entered into a non-exclusive, fully paid up, worldwide settlement and license agreement with Medacta, resolving the matters described in the two preceding paragraphs. Under the terms of this agreement, we granted a perpetual, irrevocable, non-exclusive license to Medacta to use patient-specific instrument technology covered by our patents and patent applications with off-the-shelf implants for the knee and shoulder. This license does not extend to patient-specific implants. This license agreement provided for a single lump-sum payment by Medacta to us upon entering into the license agreement, which was paid in the fourth quarter of 2022.

Litigation with Osteoplastics

On March 20, 2020, Osteoplastics LLC ("Osteoplastics") filed a lawsuit against us in the United States District Court for the District of Delaware, and Osteoplastics amended its complaint on April 2, 2020. Osteoplastics is seeking damages relating to allegations that our proprietary software, including our iFit software platform, and our use of our proprietary software for designing and manufacturing medical devices, including implants, ~~infringes~~infringed seven patents owned by Osteoplastics. On June 15, 2020, we filed a motion to dismiss Osteoplastics’ complaint, and on October 21, 2020, the court denied the motion. On November 2, 2020, we filed our answer to the amended complaint, denying that we ~~infringe the patents asserted by Osteoplastics. Our answer also alleges the affirmative defense that Osteoplastics’ asserted patents are invalid. Trial is currently set to begin on July 24, 2023.~~

On April 24, 2020, we filed a lawsuit against Wright Medical Technology, Inc. and Tornier, Inc. (together, “Wright Medical"), in the United States District Court for the District of Delaware, seeking damages for Wright Medical’s infringement of certain of our patents related to patient-specific instrument and implant systems. The complaint alleged that Wright Medical’s multiple lines of patient-specific shoulder instruments, as well as the implant components used in conjunction with them, infringed four of our patents. The accused product lines included Wright Medical’s Tornier Blueprint 3D Planning + PSI shoulder replacement systems. On December 14, 2020, Wright Medical filed its answer to the amended complaint, denying that its patient-specific instrument and implant systems infringed the patents asserted by ~~us. Wright Medical’s answer also alleged the~~Osteoplastics and asserting certain affirmative ~~defense that the our asserted patents are invalid.~~defenses.

On June ~~30, 2021,~~19, 2023, we ~~reached~~entered into a settlement and license agreement ~~(the “Settlement and License Agreement”)~~ with ~~Stryker Corporation (“Stryker”) and Wright Medical (together, the “Stryker Parties”), pursuant to~~

~~which the parties have agreed to terms for~~Osteoplastics, resolving the ~~outstanding~~ patent infringement lawsuit filed by Osteoplastics in March of 2020. A Joint Stipulation of Dismissal with Prejudice was filed on June 22, 2023 and the order of dismissal was entered by the Court on June 23, 2023.

Litigation against Wright Medical. Wright Medical was acquired by Stryker in November 2020. Under the terms of the Settlement and License Agreement, the Stryker Parties will make a one-time payment of $15 million to Conformis no later than October 15, 2021, and be granted a non-exclusive license with respect to certain Conformis patents. The payment of $15 million was made and received on October 15, 2021.DePuy

On April 30, 2021, we filed a lawsuit against DePuy Synthes, Inc., DePuy Synthes Products, Inc., and DePuy Synthes Sales, Inc. (together, “DePuy”) in the United States District Court for the District of Delaware seeking damages for DePuy’s infringement of certain of our patents related to patient-specific instrument and implant systems. The complaint alleges that DePuy’s multiple lines of patient-specific instruments, as well as the implant components used in conjunction with them, infringe seven of our patents. The accused product lines include DePuy’s patient-specific instrument and implant systems for knee and shoulder replacement procedures. On October 25, 2021, DePuy filed a partial motion to dismiss. On November 15, 2021, we filed an amended complaint. On December 6, 2021, DePuy filed a second partial motion to dismiss. We opposed the partial motion to dismiss on December 20, 2021, and DePuy filed a reply in support of its partial motion to dismiss on December 27, 2021. On February 14, 2022, the court denied DePuy’s partial motion to dismiss. On February 28, 2022, DePuy filed its answer to our amended complaint, denying that its patient-specific instrument and implant systems infringe the patents asserted by us. A claim construction hearing was held on February 6, 2023. Supplemental claim construction briefing was completed in March 2023 and a final claim construction order is pending. Discovery in the lawsuit is ongoing.

Litigation against Exactech

On June 3, 2021, we filed a lawsuit against Exactech, Inc. (“Exactech”) in the United States District Court for the Middle District of Florida seeking damages for Exactech’s infringement of certain of our patents related to patient-specific instrument and implant systems. The complaint alleges that Exactech’s line of patient-specific instruments for use with its ankle implant systems, as well as the ankle implant components used in conjunction with them, infringe five of our patents. ~~Discovery in the lawsuit is ongoing.~~

We and Exactech entered into a settlement and license Agreement with an effective date of April 26, 2023 that resolves the patent infringement lawsuit filed by us in June of 2021. Under the settlement and license agreement, we granted a non-exclusive license to Exactech to use patient-specific instrument technology covered by certain of our patents with off-the-shelf implants for the ankle in exchange for a lump-sum payment and additional consideration.

Litigation against Bodycad Laboratories

On June 3, 2021, we filed a lawsuit against Bodycad Laboratories, Inc., Bodycad USA Corp. (together, “Bodycad”), and Exactech (collectively, “Defendants”), in the United States District Court for the Middle District of Florida seeking damages for Defendants’ infringement of certain of our patents related to patient-specific instrument and implant systems. The complaint alleges that Defendants’ line of patient-specific surgical systems for unicondylar knee replacement surgery and Bodycad’s line of patient-specific surgical systems for knee osteotomy surgery infringe six of our patents. On August 2, 2021, Exactech filed its answer to the complaint, denying that it infringed our asserted patents and also alleging that our asserted patents are invalid.On August 20, 2021, Bodycad filed a motion to dismiss and for a more definite statement.On September 10, 2021, we filed an amended complaint that continued to accuse the same products of infringing six of our patents.On September 24, 2021, Defendants filed a motion to dismiss, and we opposed the motion to dismiss on October 15, 2021. On March 30, 2022, the court denied Defendants motion to dismiss. ~~Discovery~~On February 9, 2023, the parties entered into a settlement and license agreement that resolves the patent infringement dispute filed by us in June of 2021. The parties agreed to an undisclosed amount for the ~~lawsuit is ongoing.~~dismissal of all patent litigation between the companies along with a release and license to certain Company patents related to patient-specific instrumentation and knee implants.

Litigation against Aetna

On May 8, 2020, we and an individual plaintiff filed a lawsuit against Aetna, Inc. and Aetna Life Insurance Company (together, “Aetna”) in the United States District Court for the District of Massachusetts seeking damages for Aetna’s improper denial of coverage for personalized knee implants under its health plans and the ones it administers. We amended our complaint on August 13, 2020, alleging that Aetna violated its duties under state and federal law, including the Employee Retirement Income Security Act. On March 31, 2021, the court dismissed our claims against Aetna, but allowed the individual plaintiff’s claims to survive. The individual plaintiff settled his claims against Aetna in October 2021 and we subsequently filed a notice of appeal. We filed our appeal brief on April 15, 2022. Aetna filed its response to our appeal brief on June 15, 2022. The court is scheduled to hear oral arguments from the parties on the appeal briefs on November 8, 2022.

~~Adverse outcomes~~On January 23, 2023, the United States Court of Appeals for the First Circuit revived our trade libel claims against Aetna, finding that Aetna’s policy claims that our knee implants are “experimental” and “investigational” can plausibly be considered actionable product disparagement, and that the district court had erred in dismissing these ~~lawsuits could~~claims. The court found that we have plausibly claimed that Aetna's policy decision caused orthopedic surgeons to stop prescribing its knee replacement implants. The court also revived our related claims for unfair trade practice and interference with advantageous relations. The court issued a ~~material adverse effect~~scheduling order on ~~our business, financial condition or results of operations.~~March 2, 2023 and discovery in the lawsuit has commenced.We intend to continue pursuing these claims against Aetna, and expect to incur additional legal expenses in 2023 (and potentially thereafter) in connection with doing so. We are seeking an award of monetary damages and equitable relief. We are not presently ~~unable~~able to predict the ultimate outcome of ~~these lawsuits~~this matter or to reasonably estimate a range of potential ~~losses,~~damages we may be awarded, if ~~any, related to the lawsuits.~~successful.

ITEM 1A. RISK FACTORS

We operate in a rapidly changing environment that involves a number of risks that may have a material adverse effect on our business, financial condition and results of operations. The following description of risk factors consists of updates to the risk factors previously disclosed in Part 1, Item 1A in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021~~2022. For a detailed discussion of the other risks that affect our business, please refer to the entire section entitled “Risk Factors” in our Annual Report on Form 10-K. ~~There have been no material changes to our risk factors as previously disclosed in our Annual Report on Form 10-K.~~ Risk factors and

other information included in our Form 10-Q should be carefully considered. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. Please see page 31 of this Quarterly Report on Form 10-Q for a discussion of some of the forward-looking statements that are qualified by these risk factors. If any of the risks actually occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected.

Risks related to our financial position

If the Merger is not consummated, we ~~fail~~expect to ~~maintain compliance with the requirements for continued listing on the Nasdaq Capital Market,~~need to raise additional capital to continue our ~~common stock could be delisted from trading, which would adversely affect the ability to sell~~operations and execute our ~~stock in the public market, the liquidity of our common stock~~operating plans, and doubt may exist regarding our ability to ~~raise additional capital.~~continue operating as a going concern.

~~Our common stock is currently listed~~As of June 30, 2023, we had cash and cash equivalents totaling $26 million, and we owed $21 million under our secured credit agreement with MidCap. As of June 30, 2023, we had an accumulated deficit of $604 million. Based on our operating plans and current liquidity resources, we do not believe that we have sufficient resources to fund operations and meet our contractual obligations for the ~~Nasdaq Capital Market~~12 months following the issuance date of the accompanying consolidated quarterly financial statements. The accompanying consolidated financial statements were prepared under the symbol “CFMS.” On December 31, 2021, we received a notification letter from Nasdaq’s Listing Qualifications Staff notifying us that the closing bid price for our common stock had been below $1.00 for the previous 30 consecutive business days andassumption that we ~~therefore are~~will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.

If the Merger is not consummated, we expect to need to raise additional capital, in ~~compliance with~~ the ~~minimum bid price requirement for continued inclusion~~near-term, and we may need to delay, scale back or eliminate some planned operations or reduce expenses to remain a going concern, any of which would have a significant negative impact on ~~The Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2). On June 30, 2022, Nasdaq’s Listing Qualifications Staff notified us that it has extended~~our prospects and financial condition, as well as the ~~time period for us to regain compliance with the minimum bid requirement until December 27, 2022. To regain compliance, the closing bid~~trading price of our common ~~stock must~~stock. There can be ~~at least $1.00 or higher for a minimum of ten consecutive business days.~~

~~We intend to continue monitoring the closing bid price of our common stock and have given written notice to Nasdaq~~no assurance that we ~~intend~~would be able raise a sufficient level of capital on terms favorable to ~~regain compliance with the minimum bid price requirement during this additional 180-day compliance period by effecting a reverse stock split, if necessary. At our 2022 Annual Meeting of Stockholders,~~us and our stockholders, ~~approved~~or at all. If we are unable to obtain these additional funds on a ~~proposed amendment~~timely basis, there will be an increased risk of insolvency and up to a total loss of investment by our ~~Restated Certificate of Incorporation~~stockholders. In addition, absent us raising additional capital, MidCap could allege that a material adverse effect has occurred under the credit agreement, which could permit MidCap to ~~effect a reverse stock split of all of our outstanding~~accelerate amounts due under the agreement. These events could lead to us needing to file for bankruptcy protection, which we believe would likely result in current Company stockholders receiving little, if any, value for their shares of ~~common stock by one of several fixed ratios between 1-for-2 and 1-for-10 and to correspondingly decrease the number of authorized shares of our~~Company common stock.

~~On October 26, 2022, we held a Special Meeting~~We maintain cash deposits in excess of ~~Stockholders~~federally insured limits. Adverse developments affecting financial institutions, including bank failures, could adversely affect our liquidity and our stockholders approved an additional proposed amendment to our Restated Certificate of Incorporation to effect a reverse stock split of all of our outstanding shares of common stock by one of three fixed ratios, 1-for-15, 1-for-20 and 1-for-25, and to correspondingly adjust the number of authorized shares of our common stock by the approved ratio, 1-for-9, 1-for-12 and 1-for-15, respectively (the “Updated Reverse Stock Split Proposal”), as disclosed in our proxy statement for the October 26, 2022 Special Meeting of Stockholders. ~~The Updated Reverse Stock Split Proposal amendment was proposed to address our current non-compliance with Nasdaq’s $1.00 per share minimum bid price requirement.~~financial performance.

~~Our Board of Directors has determined~~We maintain domestic cash deposits in Federal Deposit Insurance Corporation (“FDIC”) insured banks that exceed FDIC insurance limits. We also maintain cash deposits in foreign banks where we operate, which are not insured by the FDIC or similar agencies. Bank failures, events involving limited liquidity, defaults, non-performance, or other adverse developments that affect financial institutions, or concerns or rumors about such events, may lead to ~~proceed with implementing~~liquidity constraints. For example, on March 10, 2023, Silicon Valley Bank failed and was taken into receivership by the 1-for-25 reverse stock split that was approved by shareholder on October 26, 2022. We are currently working with our transfer agent, Nasdaq and other applicable parties to implement the reverse stock split in November of 2022. We will continue to provide updates via press release and Form 8-K as this matter is finalized.

It is our intent and expectation that our common stock will trade higher than Nasdaq’s $1.00 per share minimum bid requirement following implementation of the 1-for-25 reverse stock split. However, thereFDIC. There can be no assurance that our ~~bid~~deposits in excess of the FDIC or other comparable insurance limits will be backstopped by the U.S. or applicable foreign government, or that any bank or financial institution with which we do business will be able to obtain needed liquidity from other banks, government institutions, or by acquisition in the event of a failure or liquidity crisis. In the event of a failure of any financial institutions where we maintain our deposits or other assets, we may incur a loss to the extent such loss exceeds the FDIC insurance limitation, which could have a material adverse effect upon our liquidity, financial condition and our results of operations.

Risks related to the Merger Agreement

Failure to consummate the Merger could materially and negatively impact the price ~~will remain above this level and allow us to regain compliance. Any potential delisting~~ of our common stock, as well as our future business and financial results, and could lead to various outcomes that include a risk of credit agreement default and/or bankruptcy.

The Merger Agreement contains a number of conditions that must be satisfied or waived prior to the completion of the Merger, including the approval of the Company’s stockholders. We cannot assure you that all of the conditions to the Merger will be so satisfied or waived. If the conditions to the Merger are not satisfied or waived, we may be unable to consummate the Merger.

If the Merger is not completed, our ongoing business may be adversely affected as follows: (i) we may experience negative reactions from the ~~Nasdaq~~financial markets, including negative impacts on the market price of our common stock; (ii) some of management’s attention will have been directed to the Merger instead of being directed to our own operations and the pursuit of other opportunities that could have been beneficial to us; (iii) we will have expended time and resources that could otherwise have been spent on our existing business; and (iv) we may be required, in certain circumstances, to pay a cash termination fee of $0.9 million (and provide restor3d with a non-

exclusive license to the Company’s patents except with respect to certain knee and/or hip applications), as provided in the Merger Agreement.

Additionally, in approving the Merger Agreement, our Board of Directors considered a number of factors and potential benefits, including the fact that the Merger consideration to be received by holders of our common stock represented a premium of approximately 96% to the closing price of our common stock on June 22, 2023, the last completed trading day prior to the Board's approval of the Merger Agreement. If the Merger is not completed, the holders of our common stock will not realize this benefit of the Merger. Moreover, we would also have nevertheless incurred substantial transaction-related fees and costs and the loss of management time and resources.

In addition, in approving the Merger Agreement, our Board considered and identified several significant risks that will apply if the Merger is not ultimately consummated, including the following:

•Industry Competition and Limited Resources: the Company faces intense competition in the joint replacement industry from large, well-established companies that have significantly greater financial resources, larger sales forces and networks of distributors, and a greater number of established relationships, compared to the Company, which has a limited number of commercialized products and limited financial resources;

•Continued Incurrence of Net Losses: the Company has incurred significant net operating losses in every year since its inception (including a net loss of approximately $50 million for the most recently completed fiscal year), and, given the challenges growing product revenue described above, the Board expects it will continue to incur net operating losses for the next several years;

•Need for Additional Near-Term Capital ~~Market~~: the Company will require additional capital in the near-term to support its business growth and continued operations, and, based on the recent state of equity capital markets and the Company’s exploration of potential financing alternatives, the Board believes it will be very challenging to obtain such financing on terms that would preserve value for our current stockholders;

•Risk of Credit Agreement Default: the Company owes $21 million under its secured credit agreement, which contains customary affirmative and negative covenants, including that the Company may not undergo a material adverse effect, and the Board believes that the Company’s continued incurrence of net operating losses in the upcoming months creates risk that the Company’s lender will assert the existence of such a material adverse effect should the Company’s current cash balance (approximately $26 million as of June 30, 2023), combined with projected future cash flows, indicate that a material impairment exists on the lender’s prospects of being repaid the loan amounts when due;

•Risk of Bankruptcy: should an event of default occur under the Company’s secured credit agreement, absent the Company being able to obtain new near-term debt or equity financing, the Company could need to file for bankruptcy protection, which the Board believes would likely result in current Company stockholders receiving little, if any, value for their shares of Company common stock (and, in any event, an amount substantially less than the $2.27 per share of common stock provided for by the Merger Agreement);

•Employee Retention and Hiring: the foregoing circumstances create risk that absent a sale transaction, such as the proposed Merger, the Company would have difficulty retaining its senior management and employees, or otherwise being able to recruit, retain and motivate qualified executives and other key employees amid intense competition from competitors and other companies in the life sciences industry; and

•Customer Risks: the foregoing circumstances also create risk that absent a sale transaction, customers may refrain from using the Company’s products over concern regarding the Company’s long-term viability and ability to service its product portfolio.

The Merger Agreement limits our ability to pursue alternatives to the Merger and may discourage other companies from trying to acquire us for greater consideration than what restor3d has agreed to pay.

The Merger Agreement contains provisions that make it more difficult for ~~stockholders~~us to sell our ~~stock~~business to a company other than restor3d. These provisions include a general prohibition on us soliciting any acquisition proposal or offer for a competing transaction. If we or restor3d terminate the Merger Agreement in certain circumstances (including if we agree to be or are subsequently acquired by another company), we may in some circumstances be required to pay to restor3d a termination fee of $0.9 million (and provide restor3d with a non-exclusive license to the Company’s patents except with respect to certain knee and/or hip applications), as provided in the ~~public market~~Merger Agreement. Further, our board of directors has agreed in the Merger Agreement, subject to limited exceptions, that it will not withdraw or modify in a manner adverse to restor3d its recommendation that our stockholders approve the Merger.

Expenses related to the proposed Merger are significant and ~~would likely~~may adversely affect our operating results.

We have incurred and expect to continue to incur significant expenses in connection with the proposed Merger, including legal and investment banking fees, which may adversely affect our operating results.

We are subject to business uncertainties and contractual restrictions while the Merger is pending, which could adversely affect our business.

The Merger Agreement generally requires us to conduct our businesses in the ordinary course of business consistent with past practice, and use our reasonable best efforts to preserve intact our present business organization, material assets, properties, contracts and authorizations, present employees, and relationships and goodwill with suppliers, licensors, licensees, contractors, partners and others having material business dealings with us. In addition, the Merger Agreement restricts us, unless we first obtain restor3d’s consent, from taking certain specified actions until the proposed Merger occurs or the Merger Agreement terminates. These restrictions may prevent us from pursuing otherwise attractive business opportunities and making other changes to our business before completion of the Merger or, if the Merger is not completed, termination of the Merger Agreement.

Uncertainties associated with the Merger may cause a loss of management and other key employees and disrupt our business relationships, which could adversely affect our business.

Uncertainty about the effect of the Merger on our employees, customers and suppliers may have an adverse effect on our business. These uncertainties may impair our ability to attract, retain and motivate key personnel until the Merger is completed. Employee retention may be particularly challenging during the pendency of the Merger. If key employees depart and as we face additional uncertainties relating to the Merger, our business relationships may be subject to disruption as suppliers and other third parties attempt to negotiate changes in existing business relationships or consider entering into business relationships with parties other than the Company. If key employees depart or if our existing business relationships suffer, our results of operations may be adversely affected. The adverse effects of such disruptions could be further exacerbated by any delay in the completion of the Merger.

Lawsuits have been filed, and other lawsuits may be filed, against us and members of our board of directors challenging the Merger, and an adverse ruling in any such lawsuit may delay or prevent the completion of the Merger or result in ~~decreased liquidity, limited availability~~an award of market quotations for shares of our common stock, limited availability of news and analyst coverage regarding our Company, a decreased ability to issue additional securities and increased volatility in the price of our common stock.damages against us.

On July 27, 2023 and July 31, 2023, respectively, two purported Company stockholders filed separate complaints against us and the members of our board of directors in the United States District Court for the Southern District of New York in cases captioned Burnett v. Conformis Inc., et al., 1:23-cv-06536 (S.D.N.Y.) and Anderson v. Conformis Inc., et al., 1:23-cv-06686 (S.D.N.Y.), respectively. The complaints each assert claims under Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder and Section 20(a) of the Exchange Act, and allege that the proxy statement that we filed with the SEC on July 24, 2023 regarding the Merger is materially incomplete and misleading because it fails to disclose certain purportedly material information. Among other remedies, the plaintiffs each seek to enjoin the Merger. Between July 24, 2023 and July 27, 2023, counsel to four different purported Company stockholders sent demand letters to our counsel making similar assertions and, in one instance, attaching a draft federal court complaint against us and the members of our board of directors, asserting similar claims under Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder and Section 20(a)

of the Exchange Act and also seeking to enjoin the Merger. On July 31, 2023, we also received a demand under Section 220 of the Delaware General Corporation Law seeking formal access to our books and records related to the Merger with restor3d and the process leading up to it.

Although the ultimate outcome of these matters cannot be predicted with certainty, we and the individual defendants believe the claims are without merit and intend to defend against these actions vigorously. If any plaintiffs are successful in obtaining an injunction prohibiting the completion of the Merger on the agreed-upon terms, then such injunction may prevent the Merger from being completed, or from being completed within the expected time frame. Additional lawsuits against us and/or our directors and officers in connection with the Merger may be filed in the future. If additional similar complaints are filed or demand letters are sent, absent new or different allegations that are material, we will not necessarily announce such additional filings or letters. At this time, we are unable to estimate the potential loss or range of losses that might be incurred in connection with these matters.

ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Securities

We did not sell any shares of our common stock, shares of our preferred stock or warrants to purchase shares of our stock, or grant any stock options or restricted stock awards, during the period covered by this Quarterly Report on Form 10-Q that were not registered under the Securities Act and that have not otherwise been described in a Current Report on Form 8-K.

ITEM 5. OTHER INFORMATION

None.

5253

ITEM 6. EXHIBITS

The exhibits filed as part of this Quarterly Report on Form 10-Q are set forth on the Exhibit Index, which Exhibit Index is incorporated herein by reference.

EXHIBIT INDEX


Exhibit Number						Description of Exhibit

2.1						Agreement and Plan of Merger, dated as of June 22, 2023, between Conformis, Inc., restor3d, Inc. and Cona Merger Sub Inc.
10.1†						Settlement and License Agreement, entered into as of June 19, 2023, by and between Osteoplastics, LLC and Conformis, Inc.
10.2						Warrant Exchange Agreement, entered into on June 22, 2023, between Conformis, Inc. and Armistice Capital Master Fund Ltd.
31.1*						Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*						Certification of Interim Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*#						Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*#						Certification of Interim Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS						XBRL Instance Document
101.SCH						XBRL Taxonomy Extension Schema Document
101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB						XBRL Taxonomy Extension Label Linkbase Database
101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF						XBRL Taxonomy Extension Definition Linkbase Document


*			Filed herewith.
†			Certain private or confidential portions of this exhibit that are not material were omitted by means of redacting a portion of the text and replacing it with a bracketed asterisk.
#			This certification will not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent specifically incorporated by reference into such filing.

5354

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: ~~11/~~8/2/~~2022~~2023

CONFORMIS, INC.

By:

/s/ Mark A. Augusti

Mark A. Augusti
President and Chief Executive Officer
(On behalf of the Registrant)

Date: ~~11/~~8/2/~~2022~~2023

CONFORMIS, INC.

By:

/s/ ~~Robert Howe~~Christine Desrochers

~~Robert Howe~~Christine Desrochers
Chief Financial Officer (Principal Financial Officer)

5455


	Three Months Ended September 30, 2021
	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss
	Shares	Par Value								Total












Balance, June 30, 2021	186,053,533	$	2	$	630,435	$	(501,902)	$	(2,806)	$	125,729
Issuance of common stock—restricted stock	(173,560)	—		—		—		—		—



Issuance of common stock at public offering, less issuance costs of $5.4 million	—	—		14		—		—		14


Compensation expense related to issued stock options and restricted stock awards	—	—		1,026		—		—		1,026
Net loss	—	—		—		(12,973)		—		(12,973)
Other comprehensive income	—	—		—		—		906		906
Balance, September 30, 2021	185,879,973	$	2	$	631,475	$	(514,875)	$	(1,900)	$	114,702


	Nine Months Ended September 30, 2021
	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss
	Shares	Par Value								Total












Balance, December 31, 2020	95,546,577	$	1	$	543,809	$	(528,438)	$	(4,000)	$	11,372
Issuance of common stock—restricted stock	3,375,974	—		—		—		—		—




Issuance of common stock at public offering, less issuance costs of $5.4 million	80,952,381	1		79,636		—		—		79,637
Issuance of common stock upon exercise of common stock warrants	6,005,041	—		5,253		—		—		5,253
Compensation expense related to issued stock options and restricted stock awards	—	—		2,777		—		—		2,777
Net income	—	—		—		13,563		—		13,563
Other comprehensive income	—	—		—		—		2,100		2,100
Balance, September 30, 2021	185,879,973	$	2	$	631,475	$	(514,875)	$	(1,900)	$	114,702


	Principal Payment


2022 (remainder of the year)	—
2023	—
2024	1,750
2025	10,500
2026	8,750
Total	$	21,000