UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2016
 
OR
 
¨ 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)
28 Crosby Drive
Bedford, MA
01730
(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    x    No   ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes   x     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. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
o
Accelerated filer
o
 
 
 
 
Non-accelerated filer
x   (Do not check if a smaller reporting company)
Smaller reporting company
o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
 
As of October 31, 2016 , there were 42,883,156 shares of Common Stock, $0.00001 par value per share, outstanding.
 




ConforMIS, Inc.
 
INDEX
 
 
Page
 
 
 
 
 
 




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, 2016
 
December 31, 2015
 
(unaudited)
 
 
Assets
 
 
 
Current Assets
 

 
 

Cash and cash equivalents
$
34,986

 
$
117,185

Investments
38,337

 

Accounts receivable, net
13,839

 
14,867

Inventories
11,755

 
11,520

Prepaid expenses and other current assets
2,242

 
2,451

Total current assets
101,159

 
146,023

Property and equipment, net
14,985

 
10,966

Other Assets
 

 
 

Restricted cash
300

 
600

Investments
2,497

 

Intangible assets, net
808

 
995

Goodwill
753

 
753

Other long-term assets
29

 
32

Total assets
$
120,531

 
$
159,369

 
 
 
 
Liabilities and stockholders' equity
 

 
 

Current liabilities
 

 
 

Accounts payable
$
4,392

 
$
4,718

Accrued expenses
6,246

 
7,811

Deferred revenue
305

 
305

Current portion of long-term debt
257

 
295

Total current liabilities
11,200

 
13,129

Other long-term liabilities
166

 
220

Deferred revenue
4,396

 
4,625

Long-term debt

 
183

Total liabilities
15,762

 
18,157

Commitments and contingencies

 

Stockholders’ equity
 

 
 

Preferred stock, $0.00001 par value:
 

 
 

Authorized: 5,000,000 shares authorized as of September 30, 2016 and December 31, 2015; no shares issued and outstanding as of September 30, 2016 and December 31, 2015

 

Common stock, $0.00001 par value:
 

 
 

Authorized: 200,000,000 shares authorized as of September 30, 2016 and December 31, 2015; 42,758,693  and 41,110,127 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively

 

Additional paid-in capital
472,778

 
467,075

Accumulated deficit
(367,190
)
 
(325,342
)
Accumulated other comprehensive loss
(819
)
 
(521
)
Total stockholders’ equity
104,769

 
141,212

Total liabilities and stockholders’ equity
$
120,531

 
$
159,369

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

1


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,
 
2016
 
2015
 
2016
 
2015
Revenue
 

 
 

 
 

 
 

Product
$
18,400

 
$
13,490

 
$
57,486

 
$
43,953

Royalty
243

 
404

 
740

 
3,863

Total revenue
18,643

 
13,894

 
58,226

 
47,816

Cost of revenue
12,645

 
11,132

 
39,564

 
32,371

Gross profit
5,998

 
2,762

 
18,662

 
15,445

 
 
 
 
 
 
 
 
Operating expenses
 

 
 

 
 

 
 

Sales and marketing
9,301

 
9,433

 
31,063

 
27,584

Research and development
4,099

 
3,885

 
12,474

 
12,218

General and administrative
5,503

 
5,656

 
17,285

 
16,790

Total operating expenses
18,903

 
18,974

 
60,822

 
56,592

Loss from operations
(12,905
)
 
(16,212
)
 
(42,160
)
 
(41,147
)
 
 
 
 
 
 
 
 
Other income and expenses
 

 
 

 
 

 
 

Interest income
127

 
24

 
409

 
92

Interest expense
(4
)
 
(911
)
 
(104
)
 
(1,380
)
Other income (expense)
34

 

 
34

 
208

Total other income/(expenses), net
157

 
(887
)
 
339

 
(1,080
)
Loss before income taxes
(12,748
)
 
(17,099
)
 
(41,821
)
 
(42,227
)
Income tax provision
14

 
8

 
27

 
29

 
 
 
 
 
 
 
 
Net loss
$
(12,762
)
 
$
(17,107
)
 
$
(41,848
)
 
$
(42,256
)
 
 
 
 
 
 
 
 
Net loss per share - basic and diluted
$
(0.31
)
 
$
(0.45
)
 
$
(1.01
)
 
$
(2.69
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic and diluted
41,682,244

 
37,933,069

 
41,332,958

 
15,688,686

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

2


CONFORMIS, INC. AND SUBSIDIARIES
 
Consolidated Statements of Comprehensive Loss
(unaudited)
(in thousands)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net loss
$
(12,762
)
 
$
(17,107
)
 
$
(41,848
)
 
$
(42,256
)
Other comprehensive income (loss)
 

 
 

 
 
 
 
Foreign currency translation adjustments
(167
)
 
(60
)
 
(300
)
 
154

Change in unrealized gain (loss) on available-for-sale securities, net of tax
(8
)
 

 
2

 

Comprehensive loss
$
(12,937
)
 
$
(17,167
)
 
$
(42,146
)
 
$
(42,102
)
 
The accompanying notes are an integral part of these consolidated financial statements.


3


CONFORMIS, INC. AND SUBSIDIARIES
 
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 
 
Nine Months Ended September 30,
 
2016
 
2015
Cash flows from operating activities
 

 
 

Net loss
$
(41,848
)
 
$
(42,256
)
 
 
 
 
Adjustments to reconcile net loss to net cash used by operating activities:
 

 
 

Depreciation and amortization expense
2,334

 
1,891

Amortization of debt discount
3

 
135

Stock-based compensation expense
3,490

 
2,594

Provision for bad debts on trade receivables
243

 
171

Impairment of long-term assets
123

 

Disposal of long term-assets

 
2

Amortization/accretion on investments
229

 

Tax effect, unrealized gain/loss on investments
(1
)
 

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
785

 
687

Inventories
(235
)
 
(2,974
)
Prepaid expenses and other assets
212

 
(969
)
Accounts payable and accrued liabilities
(1,892
)
 
2,242

Deferred royalty revenue
(229
)
 
5,009

Other long-term liabilities
(54
)
 
(31
)
Net cash used in operating activities
(36,840
)
 
(33,499
)
 
 
 
 
Cash flows from investing activities:
 

 
 

Acquisition of property and equipment
(6,289
)
 
(3,666
)
Decrease (increase) in restricted cash
300

 
3,717

Purchase of investments
(57,559
)
 

Maturity of investments
16,500

 

Net cash used in investing activities
(47,048
)
 
51

 
 
 
 
Cash flows from financing activities:
 

 
 

Proceeds from exercise of common stock options
2,213

 
561

Proceeds from exercise of common stock warrant

 
18

Proceeds from exercise of preferred stock warrant

 
4,458

Payments on long-term debt
(224
)
 
(10,207
)
Net proceeds from issuance of common stock

 
139,766

Net cash provided by financing activities
1,989

 
134,596

Foreign exchange effect on cash and cash equivalents
(300
)
 
154

(Decrease) increase in cash and cash equivalents
(82,199
)
 
101,302

Cash and cash equivalents, beginning of period
117,185

 
37,900

Cash and cash equivalents, end of period
$
34,986

 
$
139,202

 
 
 
 
Non cash investing and financing activities
 

 
 

Accrued financing costs

 
407

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

4


CONFORMIS, INC. AND SUBSIDIARIES
 
Notes to Consolidated Financial Statements
(unaudited)


Note A—Organization and Basis of Presentation
 
ConforMIS, Inc. and its subsidiaries (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 customized, to fit each patient’s unique anatomy. The Company’s proprietary iFit® technology platform is potentially applicable to all major joints. The Company offers a broad line of customized knee implants designed to restore the natural shape of a patient’s knee.
 
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 and its iTotal PS in 2015. The Company has its corporate offices in Bedford, Massachusetts.
 
Liquidity and operations
 
Since the Company’s inception in June 2004, it has financed its operations through private placements of preferred stock, its initial public offering (the "IPO") in July 2015, bank debt and convertible debt financings, equipment purchase loans, and, beginning in 2007, product revenue. To date, the Company’s product revenue has continued to grow from year-to-year; however, it has not yet attained profitability and continues to incur operating losses. At September 30, 2016 , the Company had an accumulated deficit of $367.2 million
     
The Company’s principal sources of funds are revenue generated from the sale of its products and the net proceeds from the IPO.
 
As of September 30, 2016 , the Company had cash and cash equivalents, and short-term and long-term investments of $75.8 million and $0.3 million in restricted cash allocated to lease deposits.  As of December 31, 2015 , the Company had cash and cash equivalents of $117.2 million and $0.6 million in restricted cash allocated to lease deposits.
 
As of September 30, 2016 , based on its current operating plan, the Company expects that its existing cash and cash equivalents as of September 30, 2016 and anticipated revenue from operations, including from projected sales of its products, will enable it to fund operating expenses and capital expenditure requirements and pay its debt service as it becomes due for at least the next 12 months.
 
In the event the Company’s existing cash and available financing are not sufficient to fund its operations, the Company may need to engage in equity or debt financings to secure additional funds. The Company may not be able to obtain additional financing on terms favorable to the Company, or at all.
 
Basis of presentation and use of estimates
 
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States 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 the valuation of accounts receivable, inventory reserves, intangible valuation, equity instruments, 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, 2015 .


5


Unaudited Interim Financial Information

The accompanying Interim Consolidated Financial Statements as of September 30, 2016 and for the three and nine months ended September 30, 2016 and 2015 , 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 generally accepted accounting principles in the United States, or U.S. 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 30, 2016 , results of operations for the three and nine months ended September 30, 2016 and 2015 , and cash flows for the nine months ended September 30, 2016 and 2015 . The results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results expected for the full year or any interim period.

Note B—Summary of Significant Accounting Policies
 
Concentrations of credit risk and other risks and uncertainties
 
Financial instruments that subject the Company to credit risk primarily consist of cash, cash equivalents, investments, and accounts receivable. The Company maintains the majority of its cash and investments with accredited financial institutions.
 
The Company and its contract manufacturers rely on sole source suppliers for certain components. There can be no assurance that a shortage or stoppage of shipments of the materials or components that the Company purchases will not result in a delay in production or adversely affect the Company’s business. The Company is in the process of validating alternate suppliers relative to certain key components, which are expected to be phased in during the coming periods.
 
For the three and nine months ended September 30, 2016 and 2015 , no customer represented greater than 10% of revenue. There were no customers that represented greater than 10% of total gross receivable balance as of September 30, 2016 or December 31, 2015 .
 
Principles of consolidation
 
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries including ImaTx, Inc. ("ImaTx"), ConforMIS Europe GmbH, ConforMIS UK Limited and ConforMIS Hong Kong Limited. All material intercompany balances and transactions have been eliminated in consolidation.
 
Cash and cash equivalents
 
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 on deposit with certain financial institutions. Demand deposits are carried at cost which approximates their fair value. Money market accounts are carried at fair value based upon level 1 inputs. The associated risk of concentration is mitigated by banking with credit worthy financial institutions.
 
The Company had $2.5 million as of September 30, 2016 and $2.1 million as of December 31, 2015 held in foreign bank accounts. In addition, the Company has recorded restricted cash of $0.3 million as of September 30, 2016 and $0.6 million as of December 31, 2015 . Restricted cash consisted of security provided for lease obligations.
 
Investment securities

The Company classifies its investment securities as available-for-sale. Those investments with maturities less than 12 months at the date of purchase are considered short-term investments. Those investments with maturities greater than 12 months at the date of purchase are considered long-term investments. The Company’s investment securities classified as available-for-sale are recorded at fair value based upon quoted market prices at period end. Unrealized gains and losses, deemed temporary in nature, are reported as a separate component of accumulated other comprehensive income (loss).


6


A decline in the fair value of any security below cost that is deemed other than temporary results in a charge to earnings and the corresponding establishment of a new cost basis for the security. Premiums (discounts) are amortized (accreted) over the life of the related security the constant yield method. Dividend and interest income are recognized when earned and reported in other income. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities sold.

Fair value of financial instruments
 
Certain of the Company’s financial instruments, including cash and cash equivalents but 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. Based on borrowing rates currently available to the Company for loans with similar terms, the carrying value of the Company’s long-term debt approximates its fair value. Financial instruments including money market funds and investments are carried at fair value.
 
Accounts receivable and allowance for doubtful accounts
 
Accounts receivable consist of amounts due from 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 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 is recorded in the period in which revenue is recorded or at the time potential 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 market 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, with market determined based on net realizable value. Appropriate consideration is given to inventory items sold at negative gross margins, purchase commitments and other factors in evaluating net realizable value.

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.
 
Intangibles and other long-lived assets
 
Intangible assets consist of developed technology and other intellectual property rights licensed from ImaTx. Intangible assets are carried at cost less accumulated amortization.
 
The Company tests impairment of long-lived assets when events or changes in circumstances indicate that the assets might be impaired. For assets with determinable useful lives, amortization is computed using the straight-line method over the estimated economic lives of the respective intangible assets.
 
Furthermore, periodically the Company assesses whether long-lived assets, including intangible assets, should be tested for recoverability whenever events or circumstances indicate that their carrying value may not be recoverable.
 
The amount of impairment, if any, is measured based on fair value, which is determined using estimated undiscounted cash flows to be generated from such assets or group of assets. If the cash flow estimates or the significant operating assumptions upon which they are based change in the future, the Company may be required to record impairment charges. During the nine months ended September 30, 2016 , the Company recognized an impairment of long-term assets of $0.1 million in connection with certain manufacturing equipment previously

7


purchased that will be returned to the seller in exchange for credit toward a future purchase, which value is less than the book value of the equipment. During the nine months ended September 30, 2015 , no such impairment charges were recognized.
 
Goodwill
 
Goodwill relates to amounts that arose in connection with the acquisition of Imaging Therapeutics, Inc. (formerly known as Osteonet.com, renamed ImaTx, Inc.) in 2009. The Company tests goodwill at least annually for impairment, or more frequently when events or changes in circumstances indicate that the assets may be impaired. This impairment test is performed annually during the fourth quarter at the reporting unit level. Goodwill may be considered impaired if the carrying value of the reporting unit, including goodwill, exceeds the reporting unit’s fair value. The Company is comprised of one reporting unit. When testing goodwill for impairment, the Company primarily looks to the fair value of the reporting unit, which is typically estimated using a discounted cash flow approach, which requires the use of assumptions and judgments including estimates of future cash flows and the selection of discount rates.  During the nine months ended September 30, 2016 , and 2015 , there were no triggering events which would require an interim goodwill impairment assessment.
 
Revenue recognition

Product
 
The Company generates revenue from the sale of customized implants and instruments to medical facilities through the use of a combination of direct sales personnel, independent sales representatives and distributors in the United States, Germany, the United Kingdom, Ireland, Austria, Switzerland, Singapore and Hong Kong.
 
Revenue is recognized when all of the following criteria are met:
 
persuasive evidence of an arrangement exists;
the sales price is fixed or determinable;
collection of the relevant receivable is probable at the time of sale; and
delivery has occurred or services have been rendered.

For a majority of sales to medical facilities, the Company recognizes revenue upon completion of the procedure, which represents satisfaction of the required revenue recognition criteria. For the remaining sales, which are made directly through distributors and generally represent less than 1% of revenue, the Company recognizes revenue at the time of shipment of the product, which represents the point in time when the customer has taken ownership and assumed the risk of loss and the required revenue recognition criteria are satisfied. Such customers are obligated to pay within specified time periods regardless of when or if they ever sell or use the products. Once the revenue recognition criteria have been satisfied the Company does not offer rights of return or price protection and there are no post-delivery obligations.
 
Royalty

The Company has accounted for royalty agreements with Wright Medical Group, Inc. and MicroPort Orthopedics, Inc. under Accounting Standards Codification ("ASC") 605-25, Multiple-Element Arrangements and Staff Accounting Bulletin No. 104, Revenue Recognition (ASC 605). In accordance with ASC 605, the Company is required to identify and account for each of the separate units of accounting. The Company identified the relative selling price for each and then allocated the total consideration based on their relative values. In connection with these agreements, in April 2015, the Company recognized in aggregate (i) back-owed royalties of $3.4 million as royalty revenue and (ii) the value attributable to the settlements of $0.2 million as other income.  Additionally, the Company recognized an initial $5.1 million in aggregate as deferred royalty revenue, which is recognized as royalty revenue ratably through 2031.  The on-going royalty from MicroPort is recognized as royalty revenue upon receipt of payment.
 
Shipping and handling costs
 
Amounts invoiced to customers for shipping and handling are classified as revenue. Shipping and handling costs incurred are included in general and administrative expense.
 

8


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, 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, which are included in sales and marketing, are expensed as incurred. Advertising expense was $19,000 and $41,000 for the three months ended September 30, 2016 and 2015 , respectively, and was $202,000 and $192,000 for the nine months ended September 30, 2016 and 2015 , 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 customized joint replacement products and that the Company operates as one segment. See “ Note J—Segment and Geographic Data ”.
 
Comprehensive loss
 
As of September 30, 2016 and 2015 , accumulated other comprehensive loss consists of foreign currency translation adjustments and changes in unrealized gain and loss of available-for-sale securities, net of tax.
 
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 as of the balance sheet date, and income and expense items are translated at average rates of exchange prevailing during the period. Gains and losses realized from transactions denominated in foreign currencies, including intercompany balances not considered permanent investments, are included in the consolidated statements of operations.
 
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. Valuation allowance is maintained 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.

9


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 is subject to U.S. federal, state, and foreign income taxes. The Company recorded a provision for income taxes of approximately $14,000 and $8,000 for the three months ended September 30, 2016 and 2015 , respectively, and $27,000 and $29,000 for the nine months ended September 30, 2016 and 2015 , respectively.
    
The Company recognizes interest and penalties related to income taxes as a component of income tax expense. As of September 30, 2016 and December 31, 2015 , $11,000 and $6,000 of interest and penalties have been accrued, respectively.

Medical device excise tax
 
The Company is subject to the Health Care and Education Reconciliation Act of 2010 (the “Act”), which imposes a tax equal to 2.3% on the sales price of any taxable medical device by a medical device manufacturer, producer or importer of such device. Under the Act, a taxable medical device is any device defined in Section 201(h) of the Federal Food, Drug, and Cosmetic Act ("FDA"), intended for humans, which includes an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including any component, part, or accessory, which meets certain requirements. The Consolidated Appropriations Act of 2016 includes a two-year moratorium on the medical device excise tax, which moratorium suspended taxes on the sale of a taxable medical device by the manufacturer, producer, or importer of the device during the period beginning on January 1, 2016 and ending on December 31, 2017. The Company incurred medical device excise tax expense of $0 million and $0.2 million for the three months ended September 30, 2016 and 2015 , respectively, and $0 million and $0.6 million for the nine months ended September 30, 2016 and 2015 , respectively. Medical device tax is included in general and administrative expense.
 
Stock-based compensation
 
The Company accounts for stock-based compensation in accordance with ASC 718, Stock Based Compensation.  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. The exercise prices for option grants are set by the Company’s board of directors and, prior to the Company’s IPO in July 2015, were based upon guidance set forth by the American Institute of Certified Public Accountants, or AICPA, in its Technical Practice Aid, “Valuation of Privately Held Company Equity Securities Issued as Compensation”.   To that end, the board considered a number of factors in determining the option price, including: (1) past sales of the Company’s convertible preferred stock, and the rights, preferences and privileges of the Company stock, (2) obtaining FDA 510(k) clearance, and (3) achievement of budgeted results. See “ Note I—Stockholders’ Equity ” for a summary of the stock option activity under the Company’s stock-based compensation plan.
 

10


Net 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)
 
2016
 
2015
 
2016
 
2015
Numerator:
 
 

 
 

 
 

 
 

Numerator for basic and diluted loss per share:
 
 

 
 

 
 

 
 

Net loss
 
$
(12,762
)
 
$
(17,107
)
 
$
(41,848
)
 
$
(42,256
)
Denominator:
 
 

 
 

 
 

 
 

Denominator for basic loss per share:
 
 

 
 

 
 

 
 

Weighted average shares
 
41,682,244

 
37,933,069

 
41,332,958

 
15,688,686

Basic loss per share attributable to ConforMIS, Inc. stockholders
 
$
(0.31
)
 
$
(0.45
)
 
$
(1.01
)
 
$
(2.69
)
Diluted loss per share attributable to ConforMIS, Inc. stockholders
 
$
(0.31
)
 
$
(0.45
)
 
$
(1.01
)
 
$
(2.69
)
 
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,
 
 
2016
 
2015
 
2016
 
2015
Series A Preferred
 

 
129,739

 

 
1,172,282

Series B Preferred
 

 
170,029

 

 
1,536,334

Series C Preferred
 

 
186,643

 

 
1,686,450

Series D Preferred
 

 
508,895

 

 
4,576,684

Series E-1 Preferred
 

 
556,709

 

 
5,030,261

Series E-2 Preferred
 

 
390,295

 

 
3,526,593

Series C Preferred Warrants
 

 

 

 

Series D Preferred Warrants
 

 

 

 

Common stock warrants
 
18,443

 

 
42,169

 
329,348

Stock options and restricted stock awards
 
1,583,269

 
3,887,561

 
2,068,315

 
3,880,463

Total
 
1,601,712

 
5,829,871

 
2,110,484

 
21,738,415


Recent accounting pronouncements

     In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients" ("ASU 2016-12") which provides guidance for accounting of credit losses affecting the impairment model for most financial assets and certain other instruments. Entities will be required to use a new forward-looking current expected credit loss model for trade and other receivables, held-to-maturity debt securities, loans and other instruments, which will generally lead to an earlier recognition of loss allowances. Entities will recognize losses on available-for-sale debt securities as allowances rather than a reduction in amortized cost of the security while the measurement process of this loss does not change. Disclosure requirements are expanded regarding an entity’s assumptions, models and methods of estimations of the allowance. The guidance will be effective in the first quarter of 2020, with the option for early adoption. The Company is currently evaluating the impact of this pronouncement on its consolidated financial statements and expects to adopt this pronouncement commencing in the first quarter of 2020.

11



In April 2016, the FASB issued ASU 2016-10, "Identifying Performance Obligations and Licensing" ("ASU 2016-10"). This ASU clarifies two aspects of ASU 2014-09, "Revenue from Contracts with Customers (Topic 606): identifying performance obligations and the licensing implementation guidance". ASU 2016-10 will become effective for the first quarter of 2018. The Company is currently evaluating the impact of this pronouncement on its consolidated financial statements and expects to adopt this pronouncement commencing in the first quarter of 2018.

In March 2016, the FASB issued ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)" ("ASU 2016-08") which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. This guidance will be effective in the first quarter of 2018, with the option to adopt it in the first quarter of 2017. The Company is currently evaluating the impact of this pronouncement on its consolidated financial statements and expects to adopt this pronouncement commencing in the first quarter of 2018.

In March 2016, the FASB issued ASU No. 2016-09, "Compensation—Stock Compensation (Topic 718)" ("ASU 2016-09"). This standard makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. The standard is effective for interim and annual reporting periods beginning after December 15, 2016, although early adoption is permitted. The Company is currently evaluating the impact of this pronouncement on its consolidated financial statements and expects to adopt this pronouncement commencing in the first quarter of 2017.

Reclassification

During the quarter ended June 30, 2016, the Company identified that certain costs of revenue had been improperly classified as sales and marketing expense in the Consolidated Statements of Operations. The Company has concluded that the prior classification was an error and that it is immaterial to all annual and quarterly periods previously presented. However, to facilitate period-over-period comparisons, the Company has revised its prior period financial statements to reflect the corrections in the period in which the expenses were incurred. As a result, the Company reclassified $0.8 million and $2.0 million from sales and marketing to cost of revenue for the three and nine months ended September 30, 2015 , respectively. In addition, the Company reclassified $0.4 million for the three months ended March 31, 2016 from sales and marketing to cost of revenue. These reclassifications did not have any impact on loss from operations, net loss per share - basic and diluted or accumulated deficit. For year-over-year comparison, the Company incurred related expense, included in cost of revenue, of $1.3 million and $2.8 million for the three and nine months ended September 30, 2016 , respectively.

Note C—Fair Value Measurements
 
The Fair Value Measurements topic of the FASB Codification establishes a framework for measuring fair value in accordance with U.S. GAAP, clarifies the definition of fair value within that framework and expands disclosures about fair value measurements. This guidance requires disclosure regarding the manner in which fair value is determined for assets and liabilities and establishes a three-tiered value hierarchy into which these assets and liabilities must be grouped, based upon significant levels of inputs as follows:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs, other than Level 1 prices, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The Company's investment policy is consistent with the definition of available-for-sale securities. All investments have been classified within Level 1 or Level 2 of the fair value hierarchy because of the sufficient observable inputs for revaluation. The Company's Level 1 cash equivalents and investments are valued using

12


quoted prices that are readily and regularly available in an active market. The Company’s Level 2 investments are valued using third-party pricing sources based on observable inputs, such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly.
    
The following table summarizes, by major security type, the Company's assets that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy and where they are classified on the Consolidated Balance Sheets (in thousands):
 
September 30, 2016
 
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Estimated Fair Value
Cash and cash equivalents
Short-term (1) investments
Long-term (2) investments
Cash
$
14,205

$

$

$
14,205

$
14,205

$

$

Level 1 securities:
 
 
 
 
 
 

Money market funds
18,682



18,682

18,682



Level 2 securities:
 
 
 
 
 
 

Corporate bonds
12,531

1

(7
)
12,525


12,525


Commercial paper
7,297



7,297

2,099

5,198


Agency bond
23,101

10


23,111


20,614

2,497

Total
$
75,816

$
11

$
(7
)
$
75,820

$
34,986

$
38,337

$
2,497


(1) Contractual maturity due within one year.
(2) Contractual maturity greater than one year.
 
December 31, 2015
 
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Estimated Fair Value
Cash and cash equivalents
Short-term investments
Long-term investments
Cash
$
10,302

$

$

$
10,302

$
10,302

$

$

Level 1 securities:
 
 
 
 
 
 
 
Money market funds
106,883



106,883

106,883



Total
$
117,185

$

$

$
117,185

$
117,185

$

$


Realized gains or losses and other-than-temporary impairments, if any, on available-for-sale securities are reported in other income (expense), net as incurred. The Company did not have material unrealized losses at September 30, 2016 . There were no material gross realized gains or losses in the three and nine months ended September 30, 2016 .

Note D—Accounts Receivable
 
Accounts receivable consisted of the following (in thousands):
 
September 30,
2016
 
December 31,
2015
Total receivables
$
14,591

 
$
15,421

Allowance for doubtful accounts and returns
(752
)
 
(554
)
Accounts receivable, net
$
13,839

 
$
14,867

 
There were $34,000 and $88,000 write-offs related to accounts receivable for the three months ended September 30, 2016 and 2015 , respectively, and $34,000 and $88,000 for the nine months ended September 30, 2016 and 2015 , respectively.


13


Summary of allowance for doubtful accounts and returns activity was as follows (in thousands):
 
September 30,
2016
 
December 31,
2015
Beginning balance
(554
)
 
(162
)
Provision for bad debts on trade receivables
(243
)
 
(359
)
Other allowances
11

 
(121
)
Accounts receivable write offs
34

 
88

Ending balance
$
(752
)
 
$
(554
)

Note E—Inventories
 
Inventories consisted of the following (in thousands):
 
September 30,
2016
 
December 31,
2015
Raw Material
$
3,353

 
$
4,175

Work in process
2,232

 
2,683

Finished goods
6,170

 
4,662

Total Inventories
$
11,755

 
$
11,520


Note F—Accrued Expenses
 
Accrued expenses consisted of the following (in thousands):
 
September 30,
2016
 
December 31,
2015
Accrued employee compensation
$
2,587

 
$
3,585

Deferred rent
149

 
213

Accrued legal expense
1,149

 
334

Accrued consulting expense
49

 
134

Accrued vendor charges
274

 
692

Accrued revenue share expense
863

 
932

Accrued patent settlement and license costs

 
500

Accrued clinical trial expense
123

 
302

Accrued other
1,052

 
1,119

 
$
6,246

 
$
7,811


Note G—Commitments and Contingencies
 
Operating Leases - Real Estate
 
The Company maintains its corporate headquarters in a leased building located in Bedford, Massachusetts, and its manufacturing facility located in Wilmington, Massachusetts, all of which are accounted for as operating leases.

The Company leases the Bedford facility under a non-cancellable sublease that is scheduled to expire in April 2017. On September 19, 2016, the Company entered into a Lease (the “Billerica Lease”) with Technology Park X Limited Partnership, a Massachusetts limited partnership (the “Landlord”), for 45,043 square feet of office space in Billerica, Massachusetts. The term of the Billerica Lease commences on April 1, 2017 and expires on October 1, 2025, subject to extension or earlier termination as provided in the Billerica Lease. The Company expects the Billerica property will serve as the Company’s corporate headquarters beginning in April 2017.

Under the Billerica Lease, the Company will pay no monthly rent for the first six months and approximately $0.1 million per month for the following six months. After April 1, 2018, the Company’s monthly rent payments will increase annually by $ 0.50 per square foot. The Company also will be obligated to pay its pro rata share of certain

14


operating costs, including real estate taxes, under the Billerica Lease. In addition, the Company will post a customary letter of credit in the amount of approximately $0.5 million as a security deposit pursuant to the Billerica Lease, subject to three bi-annual reductions of $0.1 million each beginning on the first day of the 37th month after the Billerica Lease commences. Upon an event of default (as defined in the Billerica Lease), the Landlord may terminate the Billerica Lease and require the Company to pay the present value of the remaining rent that would have been payable during the remainder of the term of the Billerica Lease. The Billerica Lease also contains other customary default provisions, representations, warranties, and covenants.

The Company leases the Wilmington facility under a long-term, non-cancellable lease that commenced in April 2015 and will expire in July 2022 (the "Wilmington Lease"). On July 25, 2016, the Company entered into an amendment to the Wilmington Lease.  Pursuant to the amendment, the Company exercised an option in its current lease to rent an additional 18,223 square feet of space adjacent to the Company’s existing premises.  The Company is scheduled to take possession of the additional space in March 2017.  The initial term of the Wilmington Lease for the existing premises and the additional space expires on July 31, 2022, and the Company has a right to extend the term for one additional five -year period.  The initial base rental rate for the additional space is $0.2 million annually, subject to 2% annual increases until the expiration of the initial term.

Rent expense of $0.4 million and $0.5 million for the three months ended September 30, 2016 and 2015 , respectively, and $1.1 million and $1.3 million for the nine months ended September 30, 2016 and 2015 , respectively, was charged to operations. The Company’s operating lease agreements contain scheduled rent increases, which are being amortized over the terms of the agreements using the straight-line method.
 
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 its scientific advisory board and to assist with the development of the Company’s customized implant products and related intellectual property. These agreements provide that the Company will pay the advisor a specified percentage of the Company’s net revenues, 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, which the Company covered by a claim of one of its 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 revenues 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, 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.
 
Pursuant to the terms of an amended and restated revenue share agreement with Dr. Philipp Lang, the Company’s outgoing Chief Executive Officer and member of the Board of Directors, the specified percentage of the Company’s net revenues payable to Dr. Lang ranges from 0.875 % to 1.33 % and applies to all of the Company’s current and planned products, including the Company’s iUni, iDuo, iTotal Cr, iTotal PS and iTotal Hip products, as well as certain other knee, hip and shoulder replacement products and related instrumentation the Company may develop in the future. The Company’s payment obligations under this agreement expire on a product-by-product basis on the last to expire of the Company’s patents on which Dr. Lang is named an inventor that claim the applicable product. These payment obligations survive termination of Dr. Lang’s employment with the Company. The Company incurred revenue share expense paid to Dr. Lang of $230,000 and $168,000 for the three months ended September 30, 2016 , and 2015 , respectively, and $718,000 and $544,000 for the nine months ended September 30, 2016 , and 2015 , respectively.
 
The Company incurred aggregate revenue share expense including all amounts payable under the Company’s scientific advisory board and Chief Executive Officer revenue share agreements of $0.8 million during the three months ended September 30, 2016 , representing 4.4% of product revenue, $2.6 million during the nine months ended September 30, 2016 , representing 4.5% of product revenue, $0.7 million during the three months ended September 30, 2015 , representing 5.1% of product revenue, and $2.2 million during the nine months ended September 30, 2015 , representing 5.1% of product revenue. Revenue share expense is included in research and development. See “ Note H—Related Party Transactions ” for further information regarding the Company’s arrangement with its Chief Executive Officer.
 

15


Other obligations
 
In the ordinary course of business, the Company is a party to certain non-cancellable contractual obligations typically related to research and development and marketing services.  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.
 
Indemnifications
 
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 enables it to recover a portion of any amounts paid for future claims.

Note H—Related Party Transactions
 
Vertegen
 
In April 2007, the Company entered into a license agreement with Vertegen, Inc., or Vertegen, which was amended in May 2015 (the “Vertegen Agreement”). Vertegen is an entity that is wholly owned by Dr. Lang, the Company’s Chief Executive Officer. Under the Vertegen Agreement, Vertegen granted the Company an exclusive, worldwide license under specified Vertegen patent rights and related technology to make, use and sell products and services in the fields of diagnosis and treatment of articular disorders and disorders of the human spine. The company may sublicense the rights licensed to it by Vertegen. The Company is required to use commercially reasonable efforts, at its sole expense, to prosecute the patent applications licensed to the Company by Vertegen. Pursuant to the Vertegen Agreement, the Company is required to pay Vertegen a 6% royalty on net sales of products covered by the patents licensed to the Company by Vertegen, the subject matter of which is directed primarily to spinal implants, and any proceeds from the Company enforcing the patent rights licensed to the Company by Vertegen. Such 6% royalty rate will be reduced to 3% in the United States during the five -year period following the expiration of the last-to-expire applicable patent in the United States and in the rest of the world during the five -year period following the expiration of the last-to-expire patent anywhere in the world. The Company has not sold any products subject to this agreement and has paid no royalties under this agreement. The Company has cumulatively paid approximately $150,000 and $140,000 in expenses as of September 30, 2016 and September 30, 2015 , respectively, in connection with the filing and prosecution of the patent applications licensed to the Company by Vertegen. The Vertegen Agreement may be terminated by the Company at any time by providing notice to Vertegen. In addition, Vertegen may terminate the Vertegen Agreement in its entirety if the Company is in material breach of the agreement, and the Company fails to cure such breach during a specified period.
 
Revenue share agreement
 
As described in "Note G-Commitments and Contingencies", the amended and restated revenue share agreement with Dr. Philipp Lang, the Company’s outgoing Chief Executive Officer and member of the Board of Directors, provides that the Company will pay Dr. Lang a specified percentage of its net revenues, ranging from
0.875 % to 1.33 %, with respect to all of its current and planned products, including the Company’s iUni, iDuo, iTotal CR, iTotal PS and iTotal Hip products, as well as certain other knee, hip and shoulder replacement products and related instrumentation the Company may develop in the future. The specific percentage is determined by reference to product classifications set forth in the agreement and is tiered based on the level of net revenues collected by the Company on such product sales. The Company’s payment obligations expire on a product-by-product basis on the last to expire of the Company’s patents on which Dr. Lang is a named inventor that claim the applicable product. These payment obligations survive any termination of Dr. Lang’s employment with the Company. The Company incurred revenue share expense paid to Dr. Lang of $230,000 and $168,000 and for the three months ended September 30, 2016 and 2015 , respectively, and $718,000 and $544,000 for the nine months ended September 30, 2016 and 2015 , respectively.


16



Note I—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. The holder of each share of common stock is entitled to one vote.
 
Summary of common stock activity was as follows:
 
 
Shares
Outstanding December 31, 2015
 
41,110,127

Issuance of common stock - option exercises
 
883,278

Issuance of restricted common stock
 
765,288

Outstanding September 30, 2016
 
42,758,693


  Common stock warrants
 
The Company issued warrants to certain investors and consultants to purchase 1,138,424 shares of common stock at an exercise price range of $0.02 to $9.00 per share.  Additionally, certain warrants to purchase shares of preferred stock were converted upon the closing of the Company's IPO to warrants to purchase 564,188 shares of common stock.  Warrants to purchase 671,779 and 751,779 shares of common stock were outstanding as of September 30, 2016 and December 31, 2015 , respectively.
 
As of September 30, 2016 and December 31, 2015 , the weighted average warrant exercise prices per share for common stock underlying warrants and the weighted average contractual life was as follows:

 
 
Number of
Warrants
 
Weighted
Average
Exercise Price
Per Share
 
Weighted Average Remaining Contractual Life
 
Number of
Warrants
Exercisable
 
Weighted
Average Price
Per Share
 
 
 
 
 
 
 
 
 
 
 
Outstanding December 31, 2015
 
751,779

 
$
10.30

 
1.33

 
751,779

 
$
10.30

Cancelled/expired
 
(80,000
)
 
12.00

 

 
(80,000
)
 
12.00

Outstanding September 30, 2016
 
671,779

 
$
10.10

 
0.67

 
671,779

 
$
10.10


Stock option plans
 
As of September 30, 2016 , 1,500,790 shares of common stock were available for future issuance under the 2015 Stock Incentive Plan ("2015 Plan").
 
Stock option activity under all stock option plans was as follows:
 
 
Number of
Options
 
Weighted
Average
Exercise Price
per Share
Outstanding December 31, 2015
 
5,248,329

 
$
5.56

Granted
 

 

Exercised
 
(883,278
)
 
2.50

Expired
 
(52,157
)
 
9.14

Cancelled/Forfeited
 
(82,129
)
 
9.59

Outstanding September 30, 2016
 
4,230,765

 
$
6.08

Total vested and exercisable
 
3,758,959

 
$
5.53

 
The total intrinsic value of awards exercised during the three and nine months ended September 30, 2016 was $2.2 million and $5.0 million , respectively. The total fair value of awards that vested during the three and nine

17


months ended September 30, 2016 was $0.5 million and $1.5 million , respectively. The weighted average remaining contractual term for the total stock options outstanding was 5.03 years as of September 30, 2016 . The weighted average remaining contractual term for the total stock options vested and exercisable was 4.67 years as of September 30, 2016 .

Restricted common stock award activity under the plan was as follows:
 
 
Number of Shares
 
Weighted Average Fair Value
Unvested December 31, 2015
 
174,530

 
$
22.31

Granted
 
828,839

 
8.60

Vested
 
(30,750
)
 
12.86

Forfeited
 
(63,551
)
 
11.82

Unvested September 30, 2016
 
909,068

 
$
10.86


  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 the IPO 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.
 
There were no options granted for the nine months ended September 30, 2016 .

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,
 
 
2016
 
2015
 
2016
 
2015
Risk-free interest rate
 
N/A
 
1.77
 
N/A
 
1.37% - 1.77%
Expected term (in years)
 
N/A
 
6.25
 
N/A
 
5.47 - 6.45
Dividend yield
 
N/A
 
—%
 
N/A
 
—%
Expected volatility
 
N/A
 
49.00%
 
N/A
 
49.00% - 50.00%
    

Employee stock-based compensation expense recognized was $1.4 million and $0.7 million for the three months ended September 30, 2016 and 2015 , and $3.5 million and $2.6 million for the nine months ended September 30, 2016 and 2015 .  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.
 
As of September 30, 2016 , the Company had $2 million of total unrecognized compensation expense for options that will be recognized over a weighted average period of 1.63 years . As of September 30, 2016 , the Company had $8 million of total unrecognized compensation expense for restricted awards that will be recognized over a weighted average period of 2.57 years .

18



Note J—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 predominately of Europe (including the United Kingdom). In general, sales are attributable to a geographic area based upon the customer’s country of domicile. Certain customers in Europe that are located outside of Germany are serviced by the Company's German subsidiary and revenues from those customers are attributable to Germany. Net property, plant and equipment are based upon physical location of the assets.
 
Geographic information consisted of the following (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Product Revenue
 
 

 
 

 
 

 
 

United States
 
$
14,954

 
$
10,466

 
44,663

 
32,596

Germany
 
3,026

 
2,499

 
11,398

 
10,012

Rest of World
 
420

 
525

 
1,425

 
1,345

 
 
$
18,400

 
$
13,490

 
57,486

 
43,953


 
 
September 30, 2016
 
December 31, 2015
Property and equipment, net
 
 

 
 

United States
 
$
14,870

 
$
10,836

Germany
 
115

 
130

Rest of World
 

 

 
 
$
14,985

 
$
10,966

 
Note K—Subsequent Events

On October 24, 2016, the Company announced Mark A. Augusti’s appointment as President and Chief Executive Officer of the Company, effective as of the date he commences his employment on November 14, 2016 (the “Effective Date”). The Company expects that he will be appointed to the Company’s Board of Directors following the commencement of his employment. Mr. Augusti will succeed Philipp Lang, M.D. MBA, as President and Chief Executive Officer of the Company on the Effective Date, and Dr. Lang will continue to serve on the Company's Board of Directors.

In connection with Mr. Augusti’s employment, the Company entered into a letter agreement, dated October 19, 2016 (the “Employment Agreement”) which sets forth certain terms of Mr. Augusti’s employment.  Pursuant to the terms of the Employment Agreement, Mr. Augusti will receive an annual base salary of $520,000 .  In addition, he will receive a one-time signing bonus of $200,000 and will be eligible to receive an annual performance bonus targeted at up to 75% of Mr. Augusti’s annual base salary.  The actual performance bonus percentage is discretionary and will be subject to the Company's Board of Directors' assessment of Mr. Augusti’s performance as well as general business conditions at the Company. Mr. Augusti will not receive an annual performance bonus for fiscal year 2016. In addition, Mr. Augusti will be eligible to receive new hire equity grants and annual long-term incentive equity grants.  Upon the commencement of his employment, Mr. Augusti will be eligible to receive an option to purchase shares of the Company’s common stock having a value up to $600,000 under the Company’s stock incentive plan (the “Plan”), and also will be eligible to receive a performance-based grant of shares of the Company’s common stock, subject to the achievement of certain specified performance-based milestones, having a value up to $600,000 under the Plan. Beginning in the 2017 calendar year, Mr. Augusti will be eligible to receive annual long-term incentive equity awards, with the initial award having an aggregate target value of up to $800,000 under the Company’s long-term incentive program.  Mr. Augusti will be also be eligible to participate in all customary employee benefit plans or programs of the Company generally available to the Company’s full-time employees and/or executive officers.  Additionally, the Employment Agreement provides that Mr. Augusti’s employment with the Company is at will and may be terminated by either party at any time for any or no reason or cause.  In the event Mr. Augusti’s employment is terminated without cause, Mr. Augusti will be entitled to receive severance pay in the

19


form of salary continuation on the Company’s standard payroll dates following the termination date, a bonus payment, and, upon a qualifying termination within two years of a change of control, accelerated vesting of his unvested equity grants.  Mr. Augusti will also receive a continuation of group health insurance coverage through COBRA with the cost of such benefits to be shared in the same relative proportion by the Company and Mr. Augusti as in effect on the date of termination.

The description of the Employment Agreement is qualified in its entirety by reference to the text of the Employment Agreement, a copy of which will be filed with the Company’s Annual Report on Form 10-K for the year ending December 31, 2016.


20



ITEM 2.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis of our financial condition and results of operations 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, 2015 . 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 this Quarterly Report on Form 10-Q, 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, plans and objectives of management 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:

our estimates regarding the potential market opportunity and timing of estimated commercialization for our current and future products, including our iTotal CR, our iTotal PS and, if we receive required marketing clearances or approvals, our iTotal Hip;
our expectations regarding our sales, expenses, gross margins 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;
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;
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;
patent infringement claims;
the impact of our voluntary recall initiated in August 2015 on our business operations, financial results and customer relations;
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 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 U.S. and international businesses, including regulations of the U.S. Food and Drug Administration and foreign government regulators, such as more stringent requirements for regulatory clearance of our products;

21


the impact of federal legislation to reform the United States healthcare system and the reimposition of the 2.3 percent medical device excise tax if and when the current moratorium is lifted;
the anticipated adequacy of our capital resources to meet the needs of our business; and
our expectations regarding the time during which we will be an emerging growth company under the JOBS Act;
our plans and expectations related to our management transition and our new President and Chief
Executive Officer; and
our plans related to the move of our offices from Bedford, Massachusetts to Billerica, Massachusetts.
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 "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2015 and in this Quarterly Report on Form 10-Q, 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.

Overview
 
We are a medical technology company that uses our proprietary iFit Image-to-Implant technology platform to develop, manufacture and sell joint replacement implants that are individually sized and shaped, which we refer to as customized, to fit each patient’s unique anatomy. The worldwide market for joint replacement products is approximately $15 billion annually and growing, and we believe our iFit technology platform is applicable to all major joints in this market. We believe we are the only company offering a broad line of customized knee implants designed to restore the natural shape of a patient’s knee. We have sold more than 50,000 knee implants in the United States and Europe. In clinical studies, iTotal CR, our cruciate-retaining total knee replacement implant and best-selling product, demonstrated superior clinical outcomes, including better function and greater patient satisfaction compared to traditional, off-the-shelf implants. In February 2015, we initiated the limited launch of iTotal PS, our posterior-stabilized total knee replacement implant which addresses the largest segment of the knee replacement market and we initiated the broad commercial launch of the iTotal PS in March 2016.
 
Our iFit technology platform comprises three key elements:
 
iFit Design , our proprietary algorithms and computer software that we use to design customized implants and associated single-use patient-specific instrumentation, which we refer to as iJigs, based on computed tomography, or CT scans of the patient and to prepare a surgical plan customized for the patient that we call iView.

iFit Printing , a three-dimensional, or 3D, printing technology that we use to manufacture iJigs and that we may extend to the manufacture of certain components of our customized knee replacement implants.

iFit Just-in-Time Delivery , our just-in-time manufacturing and delivery capabilities.
 
We believe our iFit technology platform enables a scalable business model that greatly lowers our inventory requirements, reduces the amount of working capital required to support our operations and allows us to launch new products and product improvements more rapidly, as compared to manufacturers of traditional, off-the-shelf implants.

     All of our knee replacement products have been cleared by the FDA under the premarket notification process of Section 510(k) of the Federal Food, Drug, and Cosmetic Act, or the FDCA, and have received certification to CE Mark. We market our products 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 and other markets.

22


 
We were incorporated in Delaware and commenced operations in 2004.

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, Singapore, and Hong Kong. In order for surgeons to use our products, the medical facilities where these surgeons treat patients typically require us to enter into purchasing contracts. The process of negotiating a purchasing contract can be lengthy and time-consuming, require 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 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.
 
In April 2015, we entered into a worldwide license agreement with MicroPort Orthopedics Inc., or MicroPort, a wholly owned subsidiary of MicroPort Scientific Corporation. Under the terms of this license agreement, we granted a perpetual, irrevocable, non-exclusive license to MicroPort to use patient-specific instrument technology covered by our patents and patent applications with off-the-shelf implants in the knee. This license does not extend to patient-specific implants. This license agreement provides for the payment to us of a fixed royalty at a high single to low double digit percentage of net sales on patient-specific instruments and associated implant components in the knee, including MicroPort’s Prophecy patient-specific instruments used with its Advance and Evolution implant components. We cannot be certain as to the timing or amount of payment of any royalties under this license agreement. This license agreement also provided for a single lump-sum payment by MicroPort to us of low-single digit millions of dollars upon entering into the license agreement, which has been paid. This 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 2029.

In April 2015, we entered into a fully paid up, worldwide license agreement with Wright Medical Group, Inc., or Wright Group, and its wholly owned subsidiary Wright Medical Technology, Inc., or Wright Technology and collectively with Wright Group, Wright Medical. Under the terms of this license agreement, we granted a perpetual, irrevocable, non-exclusive license to Wright Medical to use patient-specific instrument technology covered by our patents and patent applications with off-the-shelf implants in the foot and ankle. This license does not extend to patient-specific implants. This license agreement provided for a single lump-sum payment by Wright Medical to us of mid-single digit millions of dollars upon entering into the license agreement, which has been paid. This license agreement will expire upon the expiration of the last to expire of our patents and patent applications licensed to Wright Medical, which currently is expected to occur in 2031.
  
We have accounted for the agreements with Wright Medical and MicroPort under ASC 605-25, Multiple-Element Arrangements and Staff Accounting Bulletin No. 104, Revenue Recognition (ASC 605). In accordance with ASC 605, we were required to identify and account for each of the separate units of accounting. We identified the relative selling price for each and then allocated the total consideration based on their relative values. In connection with these agreements, in April 2015, we recognized in aggregate (i) back-owed royalties of $3.4 million as royalty revenue and (ii) the value attributable to the settlements of $0.2 million as other income.  Additionally, we recognized an initial $5.1 million in aggregate as deferred royalty revenue, which is recognized as royalty revenue ratably through 2031.  The on-going royalty from MicroPort is recognized as royalty revenue upon receipt of payment.
 

23


On August 31, 2015, we announced a voluntary recall of specific serial numbers of patient-specific instrumentation for our iUni, iDuo, iTotal CR and iTotal PS knee replacement product systems. The recalled products were manufactured and distributed from our Wilmington manufacturing facility between July 18, 2015 and August 28, 2015. We isolated the root cause to a step in our ethylene oxide sterilization process conducted by a vendor. We have since completed final testing and implemented corrective actions, and we resumed normal production in October 2015. Our voluntary recall announced on August 31, 2015 has adversely affected our business and may continue to adversely affect our business in a number of ways, including through the financial impact from lost sales of the recalled products, reduction of our production capacity over the period of our investigation and resolution of the root cause of the recall, commercial disruption, slower than expected ramp in new orders and damage to our reputation with orthopedic surgeons, consumers, healthcare providers, distributors and other business partners.
 
Cost of revenue
 
We produce all of our computer aided designs, or CAD, in-house and use them to direct all of our product manufacturing efforts. Until July 2015, we manufactured all of our patient-specific instruments, or iJigs, in our facilities in Burlington and Wilmington, Massachusetts. Since August 2015, we have manufactured all of our iJigs in our Wilmington facility.  We also make in our facilities certain tibial components used in our implants. We outsource the production of the remainder of the tibial components and the manufacture of femoral and other implant components to third-party suppliers. Our suppliers make the remainder of our customized implant components using the CAD designs we supply. Cost of revenue consists primarily of cost of raw materials, manufacturing personnel, manufacturing supplies, inbound freight and manufacturing overhead and depreciation expense.
 
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, the geographic mix of sales, product sales mix, the number of cancelled sales orders and royalty revenue.
 
We expect our gross margin from the sale of our products, which excludes royalty revenue, to expand over time to the extent we are successful in reducing our manufacturing costs per unit and increasing our manufacturing efficiency as sales volume increases. We believe that areas of opportunity to expand our gross margins 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;
obtaining more favorable pricing for the materials used in the manufacture of our products;
increasing the proportion of certain components of our products that we manufacture in-house, which we believe we can manufacture at a lower unit cost than vendors we currently use;
developing new versions of our software used in the design of our customized joint replacement implants, which we believe will reduce costs associated with the design process; and
obtaining more favorable pricing of certain components of our products manufactured for us by third parties.
 
We continue to explore the application of our 3D printing technology to select metal components of our products, which we believe may be a future opportunity for reducing our manufacturing costs. We also plan 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, 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

24


independent sales representatives. Recruiting, training and retaining productive sales representatives and educating surgeons about the benefits of our products are required to generate and grow revenue. We expect sales and marketing expense to significantly increase as we build up our sales and support personnel and expand our marketing efforts. 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 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 for revenue share payments to our past and present scientific advisory board members, including our Chief Executive Officer. We expect research and development expense to increase in absolute dollars as we develop new products to expand our product pipeline, add research and development personnel and conduct clinical activities.
 
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, freight, medical device tax and facilities expense. We expect our general and administrative expense will increase in absolute dollars as we increase our headcount and expand our infrastructure to support growth in our business and our operations as a public company. We anticipate increased expenses associated with being a public company will include increases in audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, business insurance premiums and investor relations costs. As our revenue increases we also will incur additional expenses for freight. Our general and administrative expense may fluctuate from period to period due to the timing and extent of the expenses.
 
Other income (expense), net
 
Other income (expense), net consists primarily of interest expense and amortization of debt discount associated with our term loans and realized gains (losses) from foreign currency transactions. The effect of exchange rates on our foreign currency-denominated asset and liability balances are recorded in other income (expense) and 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.


25


Consolidated results of operations
 
Comparison of the three months ended September 30, 2016 and 2015
 
The following table sets forth our results of operations expressed as dollar amounts, percentage of total revenue and year-over-year change (in thousands):
 
 
 
2016
 
2015
 
2016 vs 2015
Three Months Ended September 30,
 
Amount
 
As a%
of
Total
Revenue
 
Amount
 
As a%
  of
Total
Revenue
 
$
Change
 
%
Change
Revenue
 
 

 
 

 
 

 
 

 
 

 
 

Product revenue
 
$
18,400

 
99
 %
 
$
13,490

 
97
 %
 
$
4,910

 
36
 %
Royalty
 
243

 
1

 
404

 
3

 
(161
)
 
(40
)
Total revenue
 
18,643

 
100

 
13,894

 
100

 
4,749

 
34

Cost of revenue
 
12,645

 
68

 
11,132

 
80

 
1,513

 
14

Gross profit
 
5,998

 
32

 
2,762

 
20

 
3,236

 
117

 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 

 
 

 
 

 
 

 
 

 
 

Sales and marketing
 
9,301

 
50

 
9,433

 
68

 
(132
)
 
(1
)
Research and development
 
4,099

 
22

 
3,885

 
28

 
214

 
6

General and administrative
 
5,503

 
30

 
5,656

 
41

 
(153
)
 
(3
)
Total operating expenses
 
18,903

 
101

 
18,974

 
137

 
(71
)
 

Loss from operations
 
(12,905
)
 
(69
)
 
(16,212
)
 
(117
)
 
3,307

 
20

Total other income/(expenses), net
 
157

 
1

 
(887
)
 
(6
)
 
1,044

 
118

Loss before income taxes
 
(12,748
)
 
(68
)
 
(17,099
)
 
(123
)
 
4,351

 
25

Income tax provision
 
14

 

 
8

 

 
6

 
75

Net loss
 
$
(12,762
)
 
(68
)%
 
$
(17,107
)
 
(123
)%
 
$
4,345

 
25
 %

Product revenue.     Product revenue was $18.4 million for the three months ended September 30, 2016 compared to $13.5 million for the three months ended September 30, 2015 , which was affected by our product recall, an increase of $4.9 million or 36% , due principally to increased sales of our primary total knee products, iTotal CR and iTotal PS.
 
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):
 
 
 
2016
 
2015
 
2016 vs 2015
Three Months Ended September 30,
 
Amount
 
As a % of
Product
Revenue
 
Amount
 
 
As a % of
Product
Revenue
 
$
Change
 
%
Change
United States
 
$
14,954

 
81
%
 
$
10,466

 
 
78
%
 
$
4,488

 
43
 %
Germany
 
3,026

 
16

 
2,499

 
 
19

 
$
527

 
21

Rest of world
 
420

 
3

 
525

 
 
3

 
(105
)
 
(20
)
Product revenue
 
$
18,400

 
100
%
 
$
13,490

 
 
100
%
 
$
4,910

 
36
 %
 
Product revenue in the United States was generated through our direct sales force and independent sales representatives. Product revenue outside the United States was generated through our direct sales force and distributors. The percentage of product revenue generated in the United States was 81% for the three months ended September 30, 2016 compared to 78% for the three months ended September 30, 2015 .
 
Royalty revenue.     In April 2015, we entered into a fully paid up, worldwide license agreement with Wright Medical for a single lump-sum payment by Wright Medical to us upon entering into the agreement.  At the same time we also entered into a worldwide license agreement with MicroPort for a lump-sum payment by MicroPort to us upon entering into the license agreement.  Royalty revenue related to these agreements was $0.2 million for the

26


three months ended September 30, 2016 compared to $0.4 million for the three months ended September 30, 2015 . The decrease in royalty revenue was due to the timing of payments received and recognized as royalty revenue in the three months ended September 30, 2016 compared to the three months ended September 30, 2015 .
 
Cost of revenue, gross profit and gross margin.     Cost of revenue was $12.6 million for the three months ended September 30, 2016 compared to $11.1 million for the three months ended September 30, 2015 , which was affected by our product recall, an increase of $1.5 million or 14% . The increase was due primarily to an increase in production and personnel costs associated with the increase in product revenue, partially offset by vertical integration and other cost saving initiatives. Gross profit was $6.0 million for the three months ended September 30, 2016 compared to $2.8 million for the three months ended September 30, 2015 , an increase of $3.2 million or 117% . Gross margin increased 1200 basis points to 32% for the three months ended September 30, 2016 from 20% for the three months ended September 30, 2015 . This increase in gross margin was driven primarily by higher product revenue, vertical integration, and other cost saving initiatives, offset by an increase in the cost of unused product as a result of cancelled sales orders, and a decrease in royalty revenue. The cost of unused product was $1.3 million and $0.8 million for the three months ended September 30, 2016 and 2015 , respectively.

Sales and marketing.     Sales and marketing expense was $9.3 million for the three months ended September 30, 2016 compared to $9.4 million for the three months ended September 30, 2015 , a decrease of $0.1 million or 1% . The decrease was due to a $0.5 million decrease in surgeon training related expense and a $0.2 million decrease in travel expenses, offset by a $0.6 million increase in sales commissions as a result of the increase in product revenue. Sales and marketing expense decreased as a percentage of total revenue to 50% for the three months ended September 30, 2016 from 68% for the three months ended September 30, 2015 .

Research and development.     Research and development expense was $4.1 million for the three months ended September 30, 2016 compared to $3.9 million for the three months ended September 30, 2015 , an increase of $0.2 million or 6% . The increase was due to a $0.1 million increase in revenue share as a result of higher product revenues, as well as an increase of $0.1 million in consulting fees compared to the previous three months ended September 30, 2015 . Research and development expense decreased as a percentage of total revenue to 22% for the three months ended September 30, 2016 from 28% for the three months ended September 30, 2015 .
 
General and administrative.     General and administrative expense was $5.5 million for the three months ended September 30, 2016 compared to $5.7 million for the three months ended September 30, 2015 , a decrease of $0.2 million or 3% . The decrease was due primarily to a $0.4 million decrease in facility costs, $0.3 million decrease in bank fees, a $0.2 decrease in medical device tax, and a $0.1 million decrease in freight costs, offset by a $0.6 million increase in legal expenses related to litigation and other legal expenses and an increase of $0.2 million in personnel costs. General and administrative expense decreased as a percentage of total revenue to 30% for the three months ended September 30, 2016 from 41% for the three months ended September 30, 2015 .

      Other income/(expense), net.     Other income/(expense), net was $0.2 million net other income for the three months ended September 30, 2016 compared to $(0.9) million net other expense for the three months ended September 30, 2015 , a net other income increase of $1.0 million , or 118% . The change was primarily due to an increase in interest income as a result of an increase in investments and a decrease in interest expense as a result of paying off long-term debt.

Income taxes.     Income tax provision was $14,000 and $8,000 for the three months ended September 30, 2016 and 2015 , 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.
 

27


Comparison of the nine months ended September 30, 2016 and 2015
 
The following table sets forth our results of operations expressed as dollar amounts, percentage of total revenue and year-over-year change (in thousands):
 
 
 
2016
 
2015
 
2016 vs 2015
Nine Months Ended September 30,
 
Amount
 
As a%
of
Total
Revenue
 
Amount
 
As a%
  of
Total
Revenue
 
$
Change
 
%
Change
Revenue
 
 

 
 

 
 

 
 

 
 

 
 

Product revenue
 
$
57,486

 
99
 %
 
$
43,953

 
92
 %
 
$
13,533

 
31
 %
Royalty
 
740

 
1

 
3,863

 
8

 
(3,123
)
 
(81
)
Total revenue
 
58,226

 
100

 
47,816

 
100

 
10,410

 
22

Cost of revenue
 
39,564

 
68

 
32,371

 
68

 
7,193

 
22

Gross profit
 
18,662

 
32

 
15,445

 
32

 
3,217

 
21

 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 

 
 

 
 

 
 

 
 

 
 

Sales and marketing
 
31,063

 
53

 
27,584

 
58

 
3,479

 
13

Research and development
 
12,474

 
21

 
12,218

 
26

 
256

 
2

General and administrative
 
17,285

 
30

 
16,790

 
35

 
495

 
3

Total operating expenses
 
60,822

 
104

 
56,592

 
118

 
4,230

 
7

Loss from operations
 
(42,160
)
 
(72
)
 
(41,147
)
 
(86
)
 
(1,013
)
 
(2
)
Total other income/(expenses), net
 
339

 
1

 
(1,080
)
 
(2
)
 
1,419

 
131

Loss before income taxes
 
(41,821
)
 
(72
)
 
(42,227
)
 
(88
)
 
406

 
1

Income tax provision
 
27

 

 
29

 

 
(2
)
 
(7
)
Net loss
 
$
(41,848
)
 
(72
)%
 
$
(42,256
)
 
(88
)%
 
$
408

 
1
 %

Product revenue.     Product revenue was $57.5 million for the nine months ended September 30, 2016 compared to $44.0 million for the nine months ended September 30, 2015 , which was affected by our product recall, an increase of $13.5 million or 31% , due principally to increased sales of our primary total knee products, iTotal CR and iTotal PS.
 
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):
 
 
 
2016
 
2015
 
2016 vs 2015
Nine Months Ended September 30,
 
Amount
 
As a % of
Product
Revenue
 
Amount
 
As a % of
Product
Revenue
 
$
Change
 
%
Change
United States
 
$
44,663

 
78
%
 
$
32,596

 
74
%
 
$
12,067

 
37
%
Germany
 
11,398

 
20

 
10,012

 
23

 
$
1,386

 
14

Rest of world
 
1,425

 
2

 
1,345

 
3

 
80

 
6

Product revenue
 
$
57,486

 
100
%
 
$
43,953

 
100
%
 
$
13,533

 
31
%
 
Product revenue in the United States was generated through our direct sales force and independent sales representatives. Product revenue outside the United States was generated through our direct sales force and distributors. The percentage of product revenue generated in the United States was 78% for the nine months ended September 30, 2016 compared to 74% for the nine months ended September 30, 2015 . We believe the lower level of revenue as a percentage of product revenue outside the United States in the nine months ended September 30, 2016 was due to the introduction of the iTotal PS in the United States, partially offset by the increase in exchange rate for Germany.
    
Royalty revenue.     In April 2015, we entered into a fully paid up, worldwide license agreement with Wright Medical for a single lump-sum payment by Wright Medical to us upon entering into the agreement.  At the same time we also entered into a worldwide license agreement with MicroPort for a lump-sum payment by MicroPort to us

28


upon entering into the agreement.  Royalty revenue related to these agreements was $0.7 million for the nine months ended September 30, 2016 compared to $3.9 million for the nine months ended September 30, 2015 . The decrease in royalty revenue was due to the $3.5 million of back-owed royalties recognized in the three months ended September 30, 2015 .
 
Cost of revenue, gross profit and gross margin.     Cost of revenue was $39.6 million for the nine months ended September 30, 2016 compared to $32.4 million for the nine months ended September 30, 2015 , which was affected by our product recall, an increase of $7.2 million or 22% . The increase was due primarily to an increase in production and personnel costs associated with the increase in product revenue. Gross profit increased by $3.2 million or 21% , to $18.7 million for the nine months ended September 30, 2016 compared to $15.4 million for the nine months ended September 30, 2015 , due to higher product revenue offset by the decrease in royalty revenue. Gross margin was 32% for the nine months ended September 30, 2016 and 2015 .

Sales and marketing.     Sales and marketing expense was $31.1 million for the nine months ended September 30, 2016 compared to $27.6 million for the nine months ended September 30, 2015 , an increase of $3.5 million or 13% . The increase was due primarily to a $2.7 million increase in sales commissions as a result of the increase in product revenue, an increase of $0.9 million in personnel expenses, and a $0.7 million increase in other sales and marketing related expenses, offset by a decrease of $0.4 million in surgeon training related expenses, and $0.4 million in marketing and promotional expenses. Sales and marketing expense decreased as a percentage of total revenue to 53% for the nine months ended September 30, 2016 from 58% for the nine months ended September 30, 2015 .

Research and development.     Research and development expense was $12.5 million for the nine months ended September 30, 2016 compared to $12.2 million for the nine months ended September 30, 2015 , an increase of $0.3 million or 2% . The increase was due primarily to a $0.4 million increase in prototype parts expenses, a $0.3 million increase in revenue share expense, offset by $0.4 million decrease in of various other expenses. Research and development expense decreased as a percentage of total revenue to 21% for the nine months ended September 30, 2016 from 26% for the nine months ended September 30, 2015 .
 
General and administrative.     General and administrative expense was $17.3 million for the nine months ended September 30, 2016 compared to $16.8 million for the nine months ended September 30, 2015 , an increase of $0.5 million or 3% . The increase was due primarily to a $2.4 million increase in legal costs related to litigation and other legal expenses, an increase of $0.4 million in director and officers insurance, and an increase of $0.3 million in software expense, offset by a $0.7 million decrease in freight costs, a $0.7 million decrease in facility costs, a $0.6 million decrease in medical device tax, a $0.3 million decrease in bank fees, and a $0.3 million decrease in personnel costs. General and administrative expense decreased as a percentage of total revenue to 30% for the nine months ended September 30, 2016 from 35% for the nine months ended September 30, 2015 .

      Other income/(expense), net.     Other income/(expense), net was $0.3 million net other income for the nine months ended September 30, 2016 compared to $(1.1) million net other expense for the nine months ended September 30, 2015 , a net other income increase of $1.4 million , or 131% . The increase was primarily due to an increase in interest income as a result of an increase in investments and a decrease in interest expense as a result of paying off long-term debt.

Income taxes.     Income tax provision was approximately $27,000 and $29,000 for the nine months ended September 30, 2016 and 2015 , 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.



29


Liquidity, capital resources and plan of operations
 
Sources of liquidity and funding requirements
 
From our inception in June 2004 through the nine months ended September 30, 2016 , we have financed our operations through private placements of preferred stock, our initial public offering, or IPO, bank debt and convertible debt financings, equipment purchase loans and product revenue beginning in 2007. Our product revenue has continued to grow from year-to-year; however, we have not yet attained profitability and continue to incur operating losses. As of September 30, 2016 , we had an accumulated deficit of $367.2 million .
      
On July 7, 2015, we closed our IPO of our common stock and issued and sold 10,350,000 shares of our common stock, including 1,350,000 shares of common stock issued upon the exercise in full by the underwriters of their over-allotment option, at a public offering price of $15.00 per share, for aggregate offering proceeds of approximately $155 million. We received aggregate net proceeds from the offering of approximately $140 million after deducting underwriting discounts and commissions and offering expenses payable by us.  Our common stock began trading on the NASDAQ Global Select Market on July 1, 2015.

In June 2011, we entered into a $1.4 million secured term loan facility with the Massachusetts Development Financing Agency, referred to as the MDFA facility, to finance equipment purchases, of which $0.3 million was outstanding as of September 30, 2016 and $0.5 million was outstanding as of December 31, 2015 . We are scheduled to make monthly interest and principal payments for the MDFA facility through July 2017.

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.
 
In addition, our general and administrative expense will increase due to the additional operational and reporting costs associated with our expanded operations and being a public company.
 
We anticipate that our principal sources of funds in the future will be revenue generated from the sales of our products and revenues that we may generate in connection with licensing our intellectual property. 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 sale of equity or debt, the ownership interest of our stockholders will be diluted. The terms of these future or debt securities may include liquidation or other preferences that adversely affect the rights of our

30


existing common stockholders or involve negative covenants that restrict our ability to take specific actions, such as incurring additional debt or making capital expenditures.
 
As of September 30, 2016 , we had cash and cash equivalents and short-term and long-term investments of $75.8 million and $0.3 million in restricted cash allocated to lease deposits.  Based on our current operating plan, we expect that our existing cash and cash equivalents and investments as of September 30, 2016 and anticipated revenue from operations, including from projected sales of our products, will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months. We have based this expectation on assumptions that may prove to be wrong, such as the revenue that we expect to generate from the sale of our products and the gross profit we expect to generate from those revenues, and we could use our capital resources sooner than we expect.
 
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 between periods (in thousands):
 
 
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
$ Change
 
% Change
Net cash (used in) provided by:
 
 

 
 

 
 

 
 

Operating activities
 
$
(36,840
)
 
$
(33,499
)
 
$
(3,341
)
 
(10
)%
Investing activities
 
(47,048
)
 
51

 
(47,099
)
 
(92,351
)
Financing activities
 
1,989

 
134,596

 
(132,607
)
 
(99
)
Effect of exchange rate on cash
 
(300
)
 
154

 
(454
)
 
(295
)
Total
 
$
(82,199
)
 
$
101,302

 
$
(183,501
)
 
(181
)%
 
Net cash used in operating activities.     Net cash used in operating activities was $36.8 million for the nine months ended September 30, 2016 and $33.5 million for the nine months ended September 30, 2015 , an increase of $3.3 million . These amounts primarily reflect net loss of $41.8 million for the nine months ended September 30, 2016 and $42.3 million for the nine months ended September 30, 2015 . The net cash used in operating activities for the nine months ended September 30, 2016 was affected by changes in our operating assets and liabilities, including $4.1 million related to accounts payable and accrued liabilities, $5.2 million related to deferred royalty revenue, $1.2 million related to prepaid expenses, $0.1 million related to accounts receivable, $2.7 million related to inventory, as well as an increase of $0.9 million in stock compensation expense, an increase of $0.4 million in depreciation expense, an increase in amortization/accretion on investments of $0.2 million , and an increase of $0.1 million in impairment of long-term assets.
 
Net cash used in investing activities.     Net cash used in investing activities was $47.0 million for the nine months ended September 30, 2016 and $0.1 million for the nine months ended September 30, 2015 , an increase of $47.1 million . These amounts primarily reflect an increase in investments of $57.6 million as well as an increase in costs related to the acquisition of property, plant, and equipment of $2.6 million , offset by an increase in matured investments of $16.5 million and a decrease of restricted cash of $3.4 million .
 
Net cash provided by financing activities.     Net cash provided by financing activities was $2.0 million for the nine months ended September 30, 2016 and $134.6 million for the nine months ended September 30, 2015 , a decrease of $132.6 million . The decrease was due to a decrease in net proceeds from issuance of common stock of $139.8 million and a decrease in net proceeds from the exercise of preferred stock warrants of $4.5 million , offset by a decrease in debt payments of $10.0 million and an increase in net proceeds from the exercise of common stock options of $1.7 million .
      
Contractual obligations and commitments
 
We described our contractual obligations and commitments under 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, 2015 . Subsequently, on September 19, 2016, we entered into the Billerica Lease for 45,043 square feet of office space in Billerica, Massachusetts. The term of the Billerica Lease commences on April 1, 2017 and expires on October 1, 2025, subject to extension or earlier termination as provided in the Billerica Lease. The

31


Company expects the Billerica property will serve as the Company’s corporate headquarters beginning in April 2017.

Under the Billerica Lease, we will pay no monthly rent for the first six months and approximately $0.1 million per month for the following six months. After April 1, 2018, our monthly rent payments will increase annually by $ 0.50 per square foot. We also will be obligated to pay our pro rata share of certain operating costs, including real estate taxes, under the Billerica Lease. In addition, we will post a customary letter of credit in the amount of approximately $0.5 million as a security deposit pursuant to the Billerica Lease, subject to three bi-annual reductions of $0.1 million each beginning on the first day of the 37th month after the Billerica Lease commences. Upon an event of default (as defined in the Billerica Lease), the Landlord may terminate the Billerica Lease and require us to pay the present value of the remaining rent that would have been payable during the remainder of the term of the Billerica Lease. The Billerica Lease also contains other customary default provisions, representations, warranties, and covenants.

On July 25, 2016, we entered into an amendment to the Wilmington Lease.  Pursuant to the amendment, we exercised an option in our current lease to rent an additional 18,223 square feet of space adjacent to our existing premises.  We are scheduled to take possession of the additional space in March 2017.  The initial term of the Wilmington Lease for the existing premises and the additional space expires on July 31, 2022, and we have a right to extend the term for one additional five -year period.  The initial base rental rate for the additional space is $0.2 million annually, subject to 2% annual increases until the expiration of the initial term.

Off-balance sheet arrangements
 
Through September 30, 2016 , 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 significant judgments and use of estimates
 
We have prepared our consolidated financial statements in conformity with U.S. GAAP. 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 as of the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. The accounting estimates that require our most significant estimates include revenue recognition, accounts receivable valuation, inventory valuations, intangible valuation, equity instruments, impairment assessments, income tax reserves and related allowances, and the lives of property and equipment. 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 are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical accounting policies and significant judgments and use of estimates” in our Annual Report on Form 10-K for the year ended December 31, 2015 and Note B to the consolidated financial statements appearing in this Quarterly Report on Form 10-Q.

Recent accounting pronouncements
Information with respect to recent accounting developments is provided in Note B to the consolidated financial statements appearing in this Quarterly Report on Form 10-Q.
    


    

32


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We are exposed to various market risks, which may result in potential losses arising from adverse changes in market rates, such as interest rates and foreign exchange rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes and do not believe we are exposed to material market risk with respect to our cash and cash equivalents and investments.
 
Interest rate risk
 
We are exposed to limited market risk related to fluctuation in interest rates and market prices. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. As of September 30, 2016 , we had cash and cash equivalents of $35.0 million consisting of demand deposits and money market accounts on deposit with certain financial institutions and $40.8 million in investments consisting of a variety of securities of high credit quality including U.S. treasury bonds, corporate bonds, commercial paper and agency bonds. The primary objective of our investment activities is to preserve our capital to fund our operations. Our investments may be subject to interest rate risk and could fall in value. However, because our investments are primarily short-term in duration, we believe that our exposure to interest rate risk is not significant. Additionally, we had $2.5 million as of September 30, 2016 and $2.1 million as of December 31, 2015 held in foreign bank accounts that were not federally insured. A hypothetical 100 basis point change in interest rates during any of the periods presented would not have had a material impact on our consolidated financial statements.
 
Foreign currency exchange risk
 
Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies could adversely affect our financial results.  Approximately 22% of our product revenue for the nine months ended September 30, 2016 and 26% of our product revenue for the nine months ended September 30, 2015 were denominated in foreign currencies.  We expect that foreign currencies will continue to represent a similarly significant percentage of our net sales in the future. Costs of revenue related to these sales are primarily denominated in U.S. dollars; however, operating costs, including sales and marketing and general and administrative expense, related to these sales are largely denominated in the same currencies as the sales, thereby partially limiting our transaction risk exposure. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statement of operations. To date, foreign currency transaction realized gains and losses have not been material to our consolidated financial statements, and we have not engaged in any foreign currency hedging transactions. As our international operations grow, we will continue to reassess our approach to managing the risks relating to fluctuations in currency rates.  A 10% increase or decrease in foreign currency exchange rates would have resulted in additional income or expense of $0.3 million for the nine months ended September 30, 2016 and 2015 .
 
We do not believe that inflation and change in prices had a significant impact on our results of operations for any periods presented in our consolidated financial statements.


33


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 30, 2016 . 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, or 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 30, 2016 , 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 quarter ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

34


PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
In the course of our manufacture and sale of joint replacement products, we are subject to routine risk of product liability, patent infringement and other claims in the United States and in other countries where we sell our products.
On September 3, 2015, a purported securities class action lawsuit was filed against us, our Chief Executive Officer, and Chief Financial Officer in the United States District Court for the District of Massachusetts.  The complaint was brought on behalf of an alleged class of those who purchased our common stock in connection with our initial public offering or on the open market between July 1, 2015 and August 28, 2015, which we refer to as the class period. On January 11, 2016, a consolidated amended complaint was filed purporting to allege claims arising under Sections 11 and 15 of the Securities Act of 1933, as amended, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, including allegations that our stock was artificially inflated during the class period because the defendants allegedly made misrepresentations or did not make proper disclosures regarding our manufacturing process prior to our voluntary recall of specific serial numbers of patient-specific instrumentation for certain of our knee replacement product systems. The complaint sought, among other relief, certification of the class, unspecified compensatory damages, interest, attorneys’ fees, expert fees and other costs. On March 18 2016, we filed a motion to dismiss all of the claims of the consolidated amended complaint.  On August 3, 2016, the court granted our motion to dismiss in its entirety, denied the plaintiffs’ request to replead their allegations, and dismissed the lawsuit.  The plaintiffs did not file an appeal, and the time for filing an appeal has expired.
On February 29, 2016, we filed a lawsuit against Smith & Nephew, Inc. (“Smith & Nephew”) in the United States District Court for the District of Massachusetts Eastern Division, which we amended on June 13, 2016 (the "Smith & Nephew Lawsuit"). The Smith & Nephew Lawsuit alleges that Smith & Nephew’s Visionaire® patient-specific instrumentation as well as the implants systems used in conjunction with the Visionaire instrumentation infringe nine of our patents, and it requests, among other relief, monetary damages for willful infringement, enhanced damages and a permanent injunction.
On May 27, 2016, Smith & Nephew filed an Answer and Counterclaims in response to our lawsuit, which it subsequently amended on July 22, 2016. Smith & Nephew denied that its Visionaire® patient-specific instrumentation as well as the implants systems used in conjunction with the Visionaire instrumentation infringe the patents asserted by us in the lawsuit. It also alleged two affirmative defenses: that our asserted patents are invalid and that we are barred from relief under the doctrine of laches. In addition, Smith & Nephew asserted a series of counterclaims, including counterclaims seeking declaratory judgments that Smith & Nephew’s accused products do not infringe our patents and that our patents are invalid. Smith & Nephew also alleged that ConforMIS infringes ten patents owned or exclusively licensed by Smith & Nephew: two patents that Smith & Nephew alleges are infringed by our iUni and iDuo products; three patents that Smith & Nephew alleges are infringed by our iTotal products; and five patents that Smith & Nephew licenses from Kinamed, Inc. of Camarillo, California and that it alleges are infringed by our iUni, iDuo and iTotal products. Due to Smith & Nephew’s licensing arrangement with Kinamed, Kinamed has been named as a party to the lawsuit. Smith & Nephew and Kinamed have requested, among other relief, monetary damages for willful infringement, enhanced damages and a permanent injunction . An adverse outcome of this lawsuit could have a material adverse effect on our business, financial condition or results of operations. We are presently unable to predict the outcome of the lawsuit or to reasonably estimate a range of potential losses, if any, related to the lawsuit.
On September 21, 2016 and October 20, 2016, Smith & Nephew filed petitions with the United States Patent & Trademark Office (“USPTO”) requesting Inter Partes Review of our United States Patent Nos. 9,055,953 and 9,216,025, respectively. In our litigation with Smith & Nephew, we have alleged that Smith & Nephew infringes claims of these patents. In its petition, Smith & Nephew alleges that our patents are obvious in light of certain prior art.
We expect that Smith & Nephew will file additional petitions with the USPTO requesting Inter Partes Review of some or all of the patents that we have asserted in the Smith & Nephew Litigation, and we also expect that Smith & Nephew will seek a stay of the Smith & Nephew Litigation until any requested Inter Partes Reviews are resolved. We are presently unable to predict the outcome of the two existing petitions requesting Inter Partes Review of our patents, or of any other petitions requesting Inter Partes Review that Smith & Nephew or any other party may file, including whether the USPTO will institute any of the requested Inter Partes Reviews, or, if instituted, the outcome

35


of any such Inter Partes Reviews. An adverse outcome of some or all of these potential Inter Partes Review proceedings could have a material adverse effect on our business, financial condition or results of operations.
ITEM 1A. RISK FACTORS
         The following risk factors and other information included in this Quarterly Report on Form 10-Q should be carefully considered. The risks and uncertainties described below are not the only ones we face. 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 1 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 following 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
We have incurred losses in the past, expect to incur losses for at least the next several years and may never achieve profitability.
We have incurred significant net operating losses in every year since our inception and expect to incur net operating losses for the next several years. Our net loss was $42 million for the nine months ended September 30, 2016 and $42 million for the nine months ended September 30, 2015 . As of September 30, 2016 , we had an accumulated deficit of $367.2 million . We expect to continue to incur significant product development, clinical and regulatory, sales and marketing, manufacturing and other expenses as our business continues to grow and we expand our product offerings. Additionally, our general and administrative expense will continue to increase due to the additional operational and reporting costs associated with our expanded operations and being a public company. 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. In addition, our growth may slow, for reasons described in these risk factors. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts or continue our operations.
We expect to incur substantial expenditures in the foreseeable future and might require additional capital to support business growth. This capital might not be available on terms favorable to us or at all.
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.
In addition, our general and administrative expense will continue to increase due to the additional operational and reporting costs associated with our expanded operations and being a public company.
We anticipate that our principal sources of funds will be revenue generated from the sales of our products and revenues that we may generate in connection with licensing our intellectual property. In November 2014, we borrowed the first of two $10 million term loans, referred to as the SVB/Oxford Term Loan A, under a loan and security agreement with Silicon Valley Bank, or SVB, and Oxford Finance, LLC, or the 2014 Secured Loan Agreement. In September 2015, we voluntarily prepaid the SVB/Oxford Term Loan A in full and terminated our right to draw down the term loans and any security interest in favor of Oxford Finance, LLC. In December 2015, we also terminated a revolving line of credit we had from SVB.
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. Our failure to

36


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 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 sale of equity or convertible 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 agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt or making capital expenditures.
Risks related to our business, industry and competitive position
We have a limited operating history and may face difficulties encountered by early stage companies in rapidly evolving markets.
We began operations in 2004, introduced our first product commercially in 2007 and only introduced our best-selling product, our iTotal CR, in 2011. Accordingly, we have a limited operating history upon which to base an evaluation of our business and prospects. In assessing our prospects, you must consider the risks and difficulties frequently encountered by early stage companies in new and rapidly evolving markets, particularly companies engaged in the development and sales of medical devices. These risks include our ability to:
manage rapidly changing and expanding operations;
establish and increase awareness of our brand and strengthen customer loyalty;
restore and expand physician relationships after disruptions in supply or delays in delivery of our products;
transition from our current President and Chief Executive Officer to our new President and Chief Executive Officer;
grow our direct sales force and increase the number of our independent sales representatives and distributors to expand sales of our products in the United States and in targeted international markets;
implement and successfully execute our business and marketing strategy;
respond effectively to competitive pressures, responses and developments;
continue to develop and enhance our products and products in development;
obtain regulatory clearance or approval to commercialize new products and enhance our existing products;
expand our presence in international markets;
perform clinical and economic research and studies on our existing products and current and future product candidates; and
attract, retain and motivate qualified personnel.
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. We can also be negatively affected by general economic conditions. Because of our limited operating history, we may not have insight into trends that could emerge and negatively affect our business. As a result of these or other risks, our business strategy might not be successful.
We have derived nearly all of our revenues from sales of a limited portfolio of knee replacement products and may not be able to maintain or increase revenues from these products. A substantial portion of our revenues are derived from a small number of customers.
To date, we have derived nearly all of our revenues from sales of our knee replacement products, and we expect that sales of these products will continue to account for the majority of our revenues for at least the next several years. If we are unable to achieve and maintain significantly greater market acceptance of these products, we may be materially constrained in our ability to fund our operations and the development and commercialization of improvements and other products. Any factors that negatively impact sales or growth in sales of our current products, including the size of the addressable markets for these products, our failure to convince surgeons to

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adopt our products, competitive factors and other factors described in these risk factors, could adversely affect our business, financial condition and operating results.
In addition, as part of our commercial strategy we work to significantly increases our sales in targeted markets by focusing on high-volume, influential surgeons who use our products. As a result, orders from a relatively small number of surgeons provide a significant portion of our total revenue. The loss of, or significant curtailment of orders by, one or more of our high-volume doctors, including curtailments due to reduced reimbursement rates, adoption of our competitors’ products or the timing of orders by these doctors, may adversely affect our results of operations and financial condition.
We may not be successful in the development of, obtaining regulatory clearance for, or commercialization of, additional products.
We are expanding our offerings to include an additional joint replacement product for the knee, the iTotal PS, which we launched commercially, and are developing our first hip replacement product, the iTotal Hip. We initially filed for marketing clearance of the iTotal Hip in 2015 with the FDA; however, after consultation with the FDA, we elected to withdraw the application and, on September 28, 2016, we filed a new application seeking 510(k) clearance of our iTotal Hip. However, we may not be able to successfully commercialize the iTotal PS, and we may not be able to develop or obtain regulatory approval or clearance of or successfully commercialize the iTotal Hip on a timely basis or at all. Any factors that delay the commercial launch of, including the process for obtaining regulatory clearance for, our additional products, or result in sales of our additional products increasing at a lower rate than expected, could adversely affect our business, financial condition and operation results. In addition, even if we do launch these products, there can be no assurance that these products will be accepted in the market or commercially successful or profitable.
All of the products we currently market in the United States have either received pre-market clearance under Section 510(k) of the Federal Food, Drug, and Cosmetic Act, or the FDCA, or are exempt from pre-market review. The FDA's 510(k) clearance process requires us to show that our proposed product is "substantially equivalent" to another legally marketed product that did not require premarket approval. This process is shorter and typically requires the submission of less supporting documentation than other FDA approval processes and does not always require clinical studies. To date, we have not been required to conduct clinical studies or obtain clinical data in order to obtain regulatory clearance in the United States for our products. Additionally, to date, we have not been required to complete clinical studies in connection with obtaining regulatory clearance for the sale of our products outside the United States. If we must conduct clinical studies or obtain clinical data to obtain regulatory clearance or approval for any of our products in the United States or elsewhere. The results of such studies may not be sufficient to support regulatory clearance or approval. In addition, our costs of developing and the time to develop our products would increase significantly. Moreover, even if we obtain regulatory clearance or approval to market a product, the FDA, in the United States, or a Notified Body, in the EU, has the power to require us to conduct postmarketing studies beyond those we contemplate conducting. We may need to raise additional funds to support any such clinical efforts, and if we are required to conduct such clinical efforts, our results of operations would be adversely affected.
We are in a highly competitive market and face competition from large, well-established companies as well as new market entrants.
The market for orthopedic replacement products generally, and for knee and hip implant products in particular, is intensely competitive, subject to rapid change and dominated by a small number of large companies. Our principal competitors are the major producers of prosthetic knee and hip replacement products. We also compete with numerous smaller companies, many of whom have a significant regional market presence. In addition, a number of companies are developing biologic cartilage repair solutions to address osteoarthritis of the knee that could reduce the demand for knee replacement procedures and products. Stem cell therapies and other new, emerging therapies could reduce or obviate the need for joint replacement surgery in the future.
Many of our larger competitors are either publicly traded or divisions or subsidiaries of publicly traded companies, and enjoy several competitive advantages over us, including:
greater financial resources, cash flow, capital markets access and other resources for product research and development, sales and marketing and litigation;
significantly greater name recognition;

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established relations with, in some cases over decades, orthopedic surgeons, hospitals and other medical facilities and third-party payors;
established products that are more widely accepted by, a greater number of orthopedic surgeons, hospitals and other medical facilities and third-party payors;
more complete lines of products for knee or other joint replacements;
larger and more well-established distribution networks with significant international presence;
products supported by long-term clinical data and long-term product survivorship data;
greater experience in obtaining and maintaining FDA and other regulatory approvals or clearances for products and product enhancements; and
more expansive portfolios of intellectual property rights and greater funds available to engage in legal action.
As a result of these advantages, our competitors may be able to develop, obtain regulatory clearance or approval for and commercialize products and technologies more quickly than us, which could impair our ability to compete. If alternative treatments are, or are perceived to be, superior to our products, or if we are unable to increase market acceptance of our products, as compared to existing or competitive products, sales of our products could be negatively affected and our results of operations could suffer. Our competitors also may seek to copy our products using similar technologies for use in other joints or applications into which we have not yet expanded, which would have the effect of reducing the market potential of our current or future products. In addition, based on their favorable attributes, we expect our products to be offered at higher price points than some competitive products, and our pricing decisions may make our products less competitive.
We are deploying a new business model in an effort to disrupt a relatively mature industry. In order to become profitable, we will need to scale this business model considerably through increased sales.
Our business model, based on our iFit Image-to-Implant technology platform and our just-in-time delivery is new to the joint replacement industry. We manufacture our customized replacement implants and iJigs to order and do not maintain significant inventory of finished product. We deliver the customized replacement implants and iJigs to the hospital days in advance of the scheduled arthroplasty procedure. In order to deliver our product on a timely basis, we must execute our processes on a defined schedule with limited room for error. Our competitors generally sell from a pre-produced inventory and can sell products and satisfy demand without being as dependent on business continuity. Even minor delays or interruptions to our design, manufacturing or delivery processes could result in delays in our ability to deliver products to specification, or at all, thereby significantly impacting our reputation and our ability to make commercial sales. In order to become profitable, we will need to significantly increase sales of our existing products and successfully develop and commercially launch future products at a scale that we have not yet achieved. In order to increase our gross margins we will need, among other things, to:
increase sales of our products;
negotiate more favorable prices for the materials we use to manufacture our products;
negotiate more favorable prices for the manufacture of certain components of our products that are manufactured for us by third parties;
deploy new versions of our software that reduce the costs associated with the design of our products; and
expand our internal manufacturing capabilities to manufacture certain components of our products at a lower unit cost than vendors we currently use.
However, we may not be successful in achieving these objectives, and our gross margins may not increase, or could even decrease. We may not be successful in executing on our business model, in increasing our gross margins or in bringing our sales and production up to a scale that will be profitable, which would have a material adverse effect on our financial condition, results of operations and cash flows.
To be commercially successful, we must convince orthopedic surgeons that our joint replacement products are attractive alternatives to our competitors' products.
Orthopedic surgeons play a significant role in determining the course of treatment and, ultimately, the type of product that will be used to treat a patient. Acceptance of our products depends on educating orthopedic surgeons as to the distinctive characteristics, perceived clinical benefits, safety and cost-effectiveness of our products as

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compared to our competitors' products. If we are not successful in convincing orthopedic surgeons of the merits of our products or educating them on the use of our products, they may not use our products and we will be unable to increase our sales or reach profitability.
We believe orthopedic surgeons will not widely adopt our products unless they determine, based on experience, clinical data and published peer-reviewed journal articles, that our products and the techniques to implant them provide benefits to patients and are attractive alternatives to our competitors' products. Surgeons may be hesitant to change their medical treatment practices for the following reasons, among others:
comfort and experience with competitive products;
perceived differences in surgical technique;
existing relationships with competitors, competitive sales representatives and competitive distributors;
lack or perceived lack of evidence supporting additional patient benefits from use of our products compared to competitive products, especially products that may claim to be "customized," "patient-specific," "personalized" or "individually-made";
perceived convenience of using products from a more complete line of products than we offer, including as a result of our lack of a joint revision system;
perceived liability risks generally associated with the use of new products and procedures, including the lack of long-term clinical data;
perceived risks of failure of timely delivery as a result of our "just in time" manufacturing and delivery model
damage to our reputation as a result of our recent voluntary recall;
unwillingness to wait for the implants to be delivered;
unwillingness to submit patients to computed tomography, or CT, scans;
higher cost or perceived higher cost of our products compared to competitive products; and
the additional time commitment that may be required for training.
If clinical, functional or economic data does not demonstrate the benefits of using our products, surgeons may not use our products. In such circumstances, we may not achieve expected sales and may be unable to achieve profitability. To understand the clinical, functional and economic benefits of using our products, surgeons may refer to published studies sponsored by us, conducted by orthopedic surgeons who are paid consultants to us or conducted independently by orthopedic surgeons comparing our customized products to off-the-shelf products. To the extent such studies do not report favorably on our products, surgeons may be less likely to use our products. For example, one clinical study conducted by a single surgeon and involving only 21 iTotal CR patients, reported that our iTotal CR product performed less well than off-the-shelf knee replacement products. This study compared our iTotal CR product to posterior-stabilized and non-cemented rotating platform implants, which we believe makes the comparison of questionable value. The measures on which our iTotal CR product performed less well than the off-the-shelf products were range of motion at six weeks (although our iTotal CR product performed equally well at minimum one year follow-up) and manipulation under anesthesia, or MUA, a procedure used post-operatively to adjust a knee replacement implant to improve its function. In a subsequent multi-center study of our iTotal CR product involving 360 patients for which we provided financial support, the 3.1% rate of MUA for our iTotal CR product was substantially lower than the 28.6% rate of MUA shown in this earlier and much smaller single-surgeon study. By comparison, the rate of MUA reported in a separate study of off-the-shelf implants was 4.6%.
Moreover, overall patient satisfaction with our products, as observed by individual surgeons, will continue to be an important factor in surgeons' deciding to use our products for joint replacement procedures. The success of any particular joint replacement procedure, and a patient's satisfaction with the procedure, is dependent on the technique and execution of the procedure by the surgeon. Even if our iJigs and implants are manufactured exactly to specification, there is a risk that the surgeon makes a mistake during a procedure, leading to patient dissatisfaction with the procedure. In addition, following joint replacement procedures, fibrosis, scarring and other issues unrelated to the choice of implant product can lead to patient dissatisfaction. Furthermore, based on their prior experience using non-customized, off-the-shelf implant products, surgeons may be accustomed to making modifications to the implant components during a procedure. Because our products are already individually-made to fit the unique anatomy of each patient, modifications made to the implant components or the process of fitting the implant during the surgical procedure are not recommended and may result in negative surgical outcomes. If

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patients do not have a good outcome following procedures conducted using our products, surgeons' views of our products may be negatively impacted.
The first step in the process for a patient to receive one of our joint replacement products involves a CT scan of the patient's affected joint and one or two CT images of other biomechanically relevant joints. CT scans involve the use of radiation to image the bone and other tissue in the scanned joint. Surgeons may be reluctant to recommend, and patients may be reluctant to undertake, a procedure that involves this imaging modality as a result of the actual or perceived risks of exposure to radiation as part of the CT scan. The use of an off-the-shelf joint replacement product generally does not require a CT scan. As a result, surgeons and patients may view the alternative joint replacement approaches that do not require a CT scan as more attractive. Competitors may promote their products on this basis, and as a result, our sales, revenue and profitability may be adversely affected.
Surgeons, hospitals and independent sales representatives and distributors may have existing or future relationships with other medical device companies that make it difficult for us to establish new or continued relationships with them; as a result, we may not be able to sell and market our products effectively.
We believe that to sell and market our products effectively, we must establish relationships with key surgeons and hospitals and other medical facilities in the field of orthopedic surgery. Many of these key surgeons and hospitals and other medical facilities already have long-standing relationships with large, well-known companies that dominate the medical devices industry. Some of these relationships may be contractual, such as collaborative research programs or consulting relationships. Because of these existing relationships, surgeons and hospitals and other medical facilities may be reluctant or unable to adopt our products to the extent our products compete with, or have the potential to compete with, products supported by these existing relationships. Even if these surgeons and hospitals and other medical facilities purchase our products, they may be unwilling to provide us with follow up clinical and economic data important to our efforts to distinguish our products.
We also work with independent sales representatives and distributors to market, sell and support our products in the United States and international markets. If our independent sales representatives and distributors believe that a relationship with us is less beneficial than other relationships they may have with more established or well-known medical device companies, they may be unwilling to establish or continue their relationships with us, making it more difficult for us to sell and market our products effectively.
The success of our products is dependent on our ability to demonstrate their clinical benefits.
To date, we have collected only limited clinical data supporting the favorable attributes of our iUni, iDuo and iTotal CR knee replacement products and no clinical data regarding our iTotal PS knee replacement product or iTotal Hip replacement product, which is currently in development. Our ongoing or future clinical studies may not yield the results that we expect to obtain and may not demonstrate that our products are superior to, or may demonstrate that our products are inferior to, off-the-shelf products with regard to clinical, functional or economic measures. Long-term device survivorship data for our products may show that the survivorship of our customized joint replacement products is shorter than that of off-the-shelf products. Competitors may initiate their own clinical studies which may yield data that is inconsistent with data from our studies or data showing the superiority of their products over our products.
The safety and efficacy of our products is supported by limited short- and long-term clinical data, and our products might therefore prove to be less safe and effective than initially thought.
To date, we have obtained regulatory clearance for our products in the United States without conducting premarket clinical studies, and we do not believe that we will need premarket clinical data in order to obtain regulatory clearance in the United States for additional knee products or iTotal Hip. Additionally, to date, we have not been required to complete premarket clinical studies in connection with obtaining regulatory approval for the sale of our products outside the United States, and we do not believe that we will need premarket clinical data in order to obtain regulatory clearance in most jurisdictions outside the United States for additional knee products or iTotal Hip. However, to date, the regulatory agencies in the EU have required us to perform post-market clinical studies on our cleared products and may continue to do so with respect to our future products. As a result of the absence of premarket clinical studies, we currently lack the breadth of published long-term clinical data supporting the safety and efficacy of our products and the benefits they offer that might have been generated in connection with other approval processes. For these reasons, orthopedic surgeons may be slow to adopt our products, we may not have comparative data that our competitors have or are generating and we may be subject to greater regulatory and product liability risks. Further, future patient studies or clinical experience may indicate that treatment with our

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products does not improve patient outcomes. Such results would slow the adoption of our products by orthopedic surgeons, reduce our ability to achieve expected sales and could prevent us from achieving or sustaining profitability. Moreover, if future results and experience indicate that our products cause unexpected or serious complications or other unforeseen negative effects, we could be subject to mandatory product recalls, suspension or withdrawal of FDA clearance or approval, loss of our ability to CE Mark our products, significant legal liability or harm to our business reputation.
If we are unable to continue to develop new products and technologies in a timely manner, or if we develop new products and technologies that are not accepted by the market, the demand for our products may decrease or our products could become obsolete, and our revenue and profitability may decline.
We are continually engaged in product development, research and improvement efforts. Our ability to grow sales depends on our capacity to keep up with existing or new products and technologies in the joint replacement product markets. If our competitors are able to develop and introduce new products and technologies before us, they may gain a competitive advantage and render our products and technologies obsolete. The additional markets into which we plan to expand our business are subject to similar competitive pressures and our ability to successfully compete in those markets will depend on our ability to develop and market new products and technologies in a timely manner, and in particular, on our ability to successfully commercially launch our new iTotal PS knee replacement product and complete development of, obtain regulatory clearance for and successfully commercially launch our planned iTotal Hip replacement product.
We believe that offering a broad line of joint replacement products is important to convincing surgeons to use our products generally. If we do not complete development of and obtain regulatory clearance for our iTotal Hip, or if market acceptance of iTotal PS or iTotal Hip is less than we expect, the growth in sales of our existing products may slow and our financial results would be adversely affected. The success of our product development efforts will depend on many factors, including our ability to:
create innovative product designs;
accurately anticipate and meet customers' needs;
commercialize new products in a timely manner;
differentiate our offerings from competitors' offerings;
achieve positive clinical outcomes with new products;
demonstrate the safety and reliability of new products;
satisfy the increased demands by healthcare payors, providers and patients for shorter hospital stays, faster post-operative recovery and lower-cost procedures;
provide adequate medical education relating to new products; and
manufacture and deliver implants and instrumentation in sufficient volumes on time.
Moreover, research and development efforts may require a substantial investment of time and resources before we are adequately able to determine the commercial viability of a new product, technology or other innovation. Our competition may respond more quickly to new or emerging technologies, undertake more effective marketing campaigns, adopt more aggressive pricing policies, have greater financial, marketing and other resources than us or may be more successful in attracting potential customers, employees and strategic partners.
Even in the event that we are able successfully to develop new products and technologies, they may not produce revenue in excess of the costs of development and may be quickly rendered obsolete as a result of changing customer preferences, changing demographics, slowing industry growth rates, declines in the knee or other orthopedic replacement implant markets, evolving surgical philosophies, evolving industry standards or the introduction by our competitors of products embodying new technologies or features. New materials, product designs and surgical techniques that we develop may not be accepted quickly, in some or all markets, because of, among other factors, entrenched patterns of clinical practice, the need for regulatory clearance and uncertainty with respect to third-party reimbursement of procedures that utilize our products.

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If surgeons, hospitals and other medical facilities are unable to obtain favorable reimbursement rates from third-party payors for procedures involving use of our products, if third-party payors adopt policies that preclude payment for the use of our products, or if reimbursement from third-party payors for such procedures significantly declines, surgeons, hospitals and other medical facilities may be reluctant to use our products and our sales may decline.
In the United States, surgeons and hospitals and other medical facilities who purchase medical devices such as our products generally rely on third-party payors, principally federal Medicare, state Medicaid and private health insurance plans, to pay for all or a portion of the costs and fees associated with the joint replacement surgery and the products utilized in the procedure, including the cost of our products. Our customers' access to adequate coverage and reimbursement for the procedures performed using our products by government and third-party payors is central to the acceptance of our current and future products. Payors may view new products or products that have only recently been launched or with limited clinical data available, including the iTotal CR, iTotal PS and iTotal Hip, as investigational, unproven or experimental, and on that basis may deny coverage of procedures involving use of our products. For example, we are aware of certain private insurers that at this time consider the use of custom implants or patient-specific instrumentation for knee replacement surgery as investigational, unproven or experimental. In addition, the American Academy of Orthopedic Surgeons currently does not recommend using patient-specific instrumentation. We may be unable to sell our products on a profitable basis if government and third-party payors deny coverage for such procedures or set reimbursement rates at unfavorable levels for procedures involving use of our products. Further, if hospitals participating in the new Medicare CJR program do not use our products in the volumes we anticipate, it may have an adverse impact on our sales going forward.
To contain costs of new technologies, governmental healthcare programs and third-party payors are increasingly scrutinizing new and even existing treatments by requiring extensive evidence of favorable clinical outcomes and cost effectiveness. Surgeons, hospitals and other medical facilities may not purchase our products if they do not receive satisfactory reimbursement from these third-party payors for the cost of the procedures using our products. Payors continue to review their coverage policies carefully, and to implement new policies, for existing and new therapies and can, without notice, deny coverage for treatments that include the use of our products. If third-party payors refuse coverage for these procedures or if we are not able to be reimbursed at cost-effective levels, this could have a material adverse effect on our business and operations.
The first step in the process for a patient to receive one of our joint replacement products involves a CT scan of the patient's affected joint and one or two CT images of other biomechanically relevant joints. The cost of the CT scan is not always reimbursed by third-party payors. In addition, the costs of alternative imaging techniques that we could substitute for a CT scan in our iFit process, such as magnetic resonance imaging, or MRI, generally, are higher than the cost of a CT scan. If third-party payors do not reimburse the costs of the CT scan or any alternative imaging technique, we could find that we have to pay these costs ourselves, or reduce the prices of our products that we charge hospitals and other medical facilities that bear these costs, in order to maintain market acceptance of our products. In such event, our costs of sales would increase and our profitability would be adversely affected.
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 or, collectively, the PPACA, has changed how some healthcare providers are reimbursed by the Medicare program and some private third-party payors. As physicians consolidate into Accountable Care Organizations, or ACOs, these physicians, through the ACOs, are taking on the financial risk for providing care to all patients in their ACO. Medicare and some private third-party payors provide a set global, annual payment per beneficiary or member of the ACO. ACOs use these payments to provide care for their patients. When the cost of providing care is less than payments received, the ACO shares the savings with Medicare and the private third-party payors. ACOs are therefore incentivized to control and reduce the cost of patient care. Attempts to control and reduce the cost of care within an ACO could result in fewer referrals for elective surgery, or require the use of the least expensive implant available, either or both of which could cause our revenue to decline.
Outside of the United States, reimbursement systems vary significantly by country. Many foreign markets have government-managed healthcare systems that govern reimbursement for orthopedic implants and procedures. Many countries use a system of Diagnosis Related Groups to set a price for a particular medical procedure, including orthopedic implants that will be used in that procedure. In the EU, the pricing of medical devices is subject to governmental control, and pricing negotiations with governmental authorities can take considerable time after a device has been CE marked. To obtain reimbursement or pricing approval in some countries, we may be required to supply data that compares the cost-effectiveness of our products to other available therapies. Additionally, some foreign reimbursement systems provide for limited payments in a given period and therefore result in extended

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collection periods. Further, reimbursement rates for our products in other jurisdictions, including in Germany, where we have attained reimbursement rates at higher price points than some competitive products, could change negatively. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, it may not be profitable to sell our products outside of the United States, which would negatively affect the long-term growth of our business.
We are subject to cost-containment efforts of hospitals and other medical facilities and group purchasing organizations, which may have a material adverse effect on our financial condition, results of operations and cash flows.
In order for surgeons to use our products, the hospitals and other medical facilities where these surgeons treat patients typically require us to enter into purchasing contracts. The process of negotiating a purchasing contract can be lengthy and time-consuming, require extensive management time and may not be successful. In addition, many of our customers and potential customers are members of group purchasing organizations that are focused on containing costs. Group purchasing organizations negotiate pricing arrangements with medical supply and device manufacturers, and these negotiated prices are made available to a group purchasing organization's affiliated hospitals and other medical facilities. If we do not have pricing agreements with group purchasing organizations, their affiliated hospitals and other medical facilities may be less likely to purchase our products. Our failure to complete purchasing contracts with hospitals or other medical facilities or contracts with group purchasing organizations may cause us to lose market share to our competitors and could have a material adverse effect on our sales, financial condition, results of operations and cash flows. Our competitors may also elect to lower their prices in select accounts, thereby rendering our products non-competitive on the basis of price, with resulting losses in sales to these accounts.
If we are unable to train orthopedic surgeons on the safe and appropriate use of our products, we may be unable to achieve our expected growth.
An important part of our sales process includes training surgeons on the safe and appropriate use of our products. If we become unable to attract potential new surgeon customers to our training programs, or if we are unable to attract existing customers to training programs for future products, we may be unable to achieve our expected growth.
There is a learning process involved for orthopedic surgeons to become proficient in the use of our products. It is critical to the success of our commercialization efforts to train a sufficient number of orthopedic surgeons and to provide them with adequate instruction in the use of our products. This training process may take longer than expected and may therefore affect our ability to increase sales. Following completion of training, we rely on the trained surgeons to advocate the benefits of our products in the broader marketplace. Convincing surgeons to dedicate the time and energy necessary for adequate training of themselves or other surgeons is challenging, and we may not be successful in these efforts. If surgeons are not properly trained, they may misuse or ineffectively use our products. This may also result in unsatisfactory patient outcomes, patient injury, negative publicity or lawsuits against us, any of which could have an adverse effect on our business.
Although we believe our training methods for surgeons are conducted in compliance with FDA and other applicable regulations, if the FDA or other applicable government agency determines that our training constitutes promotion of an unapproved use or other inappropriate promotion, they could request that we modify our training or subject us to regulatory enforcement actions, including the issuance of a warning letter, injunction, seizure, civil fine and criminal penalty.
We rely on our direct sales force to sell our products in targeted geographic regions and any failure to maintain our direct sales force could harm our business.
We rely on our direct sales force to market and sell our products in targeted geographic regions in the United States, Germany and the United Kingdom. We do not have any long-term employment contracts with the members of our direct sales force. The members of our direct sales force are highly trained and possess substantial technical expertise, and the loss of these personnel to competitors or otherwise could materially harm our business. If we are unable to retain our direct sales force personnel or replace them with individuals of equivalent technical expertise and qualifications, or if we are unable to successfully instill such technical expertise in replacement direct sales force personnel, our revenues and results of operations could be materially harmed.

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If our relationships with independent sales representatives and distributors are not successful, our ability to market and sell our products would be harmed.
We depend on relationships with independent sales representatives and distributors of orthopedic implants and instrumentation for the marketing and sales of our products in geographic regions that are not targeted by our direct sales force, including parts of the United States, Switzerland, Hong Kong and Singapore. Revenues generated from the sales of our products by independent sales representatives represented approximately 69% of our total revenue from sales of our products in the United States for the nine months ended September 30, 2016 , and approximately 61% of our total revenue from sales of our products in the United States for the nine months ended September 30, 2015 . We did not generate any revenue from sales of our products by independent sales representatives outside the United States in the nine months ended September 30, 2016 or 2015 . Revenues generated from the sales of our products to distributors represented approximately 5% of our total revenue from sales of our products outside the United States for the nine months ended September 30, 2016 and approximately 4% for the nine months ended September 30, 2015 . We did not generate any revenue from sales of our products to distributors in the United States in the nine months ended September 30, 2016 or 2015 . We have entered into agreements with these independent sales representatives and distributors; we have a limited ability, however, to influence the efforts of these independent sales representatives and distributors. Relying on independent sales representatives and distributors for our sales and marketing could harm our business for various reasons, including:
agreements may terminate prematurely due to disagreements or may result in litigation;
we may not be able to renew existing agreements on acceptable terms;
our independent sales representatives and distributors may not devote sufficient resources to the sale of products;
our independent sales representatives and distributors may be unsuccessful in marketing our products;
our existing relationships with distributors may preclude us from entering into additional future arrangements with other distributors; and
we may not be able to negotiate future agreements on acceptable terms or at all.
None of our independent sales representatives or distributors have been required to sell our products exclusively and many of them may freely sell the products of our competitors. We cannot be certain that they will prioritize selling our products over those of our competitors, and our competitors may enter into arrangements with our independent sales representatives and distributors that require them to cease distributing our products. If one or more of our independent sales representatives or any of our key distributors were to cease selling or distributing our products, our sales could be adversely affected. In such a situation, we may need to seek alternative relationships with independent sales representatives and distributors or increase our reliance on our other independent sales representatives or distributors or our direct sales force, which may not prevent our sales from being adversely affected. Additionally, to the extent that we enter into additional arrangements with independent sales representatives or distributors to perform sales, marketing or distribution services, the terms of the arrangements could cause our product margins to be lower than if we directly marketed and sold our products.
The current global economic uncertainties may adversely affect our results of operations.
Our results of operations could be substantially affected by global economic conditions and local operating and economic conditions, which can vary substantially by market. Although the U.S. economy continues to recover from the worst recession in decades, unemployment and consumer confidence have not rebounded as quickly as in some prior recessions, resulting in reduced numbers of insured patients and the deferral of some elective joint replacement procedures. Global economic conditions remain uncertain. Much of Europe remains in recession as the credit ratings of several European countries and the possibility that certain European Union member states will default on their debt obligations have contributed to significant uncertainty about the stability of global credit and financial markets. In addition, the Chinese economy has recently showed slowing growth, and economies of oil producing regions are weakening, in some cases rapidly and significantly as a result of volatility in the supply and price of oil. Challenges and pressures in the global economy may ultimately impact joint replacement procedure volumes, average selling prices and reimbursement rates from third-party payors, any of which could adversely affect our results of operations.
Unfavorable economic conditions can depress sales in a given market and may result in actions that adversely affect our margins, constrain our operating flexibility or result in charges which are unusual or non-recurring. Certain macroeconomic events, such as the continuing adverse conditions in the global economy, the

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recent recessions in Europe, the Eurozone crisis and the softening Chinese economy could have a more wide-ranging and prolonged impact on the general business environment, which could also adversely affect us. These economic developments could affect us in numerous ways, many of which we cannot predict. Among the potential effects could be:
an increase in our variable interest rates;
an inability to access credit markets should we require external financing;
a reduction in the purchasing power of our European Union customers due to a deterioration of the value of the euro;
inventory issues due to financial difficulties experienced by our suppliers and customers, including distributors; and
delays in collection.
In addition, it is possible that further deteriorating economic conditions, and resulting U.S. federal budgetary concerns, could prompt the U.S. federal government to make significant changes in the Medicare program, which could adversely affect our results of operations. We are unable to predict the likely duration and severity of the current disruption in financial markets and adverse economic conditions, or the effects these disruptions and conditions could have on us.
If passed into law, the exit of the United Kingdom from membership in the European Union could adversely affect our financial results and our operations in the United Kingdom and the European Union.
The announcement of the Referendum of the United Kingdom’s, or the U.K., Membership of the European Union (E.U.), or Brexit, advising for the exit of the United Kingdom from the European Union, could adversely affect our sales and other business operations in the U.K., including our existing and future customers and employees in the U.K and E.U.  The Referendum is non-binding; however, if passed into law, negotiations would determine the future terms of the U.K.’s relationship with the E.U., including the terms of trade.  In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate.  The measures could potentially disrupt the markets we serve and the tax jurisdictions in which we operate and adversely change tax benefits or liabilities in these or other jurisdictions, and may cause us to lose customers and employees. Furthermore, we translate sales and other results denominated in foreign currency into U.S. dollars for our financial statements. The announcement of Brexit was followed by significant volatility in global stock markets and currency exchange rates, as well as a strengthening of the U.S. dollar against foreign currencies in which we conduct business.  Volatility in stock or currency markets, as well as the strengthening of the U.S. dollar relative to other currencies each could adversely affect our financial results.
Economic uncertainty may reduce patient demand for knee or other joint replacement procedures. If there is not sufficient patient demand for the procedures for which our products are used, customer demand for our products would likely drop, and our business, financial condition and results of operations would be harmed.
The orthopedics industry in which we operate is vulnerable to economic trends. Joint replacement procedures are elective procedures, the cost of which may not be fully covered by or reimbursable through government, including Medicare or Medicaid, or private health insurance. In times of economic uncertainty or recession, individuals may reduce the amount of money that they spend on deferrable medical procedures, including joint replacement procedures. Economic downturns in the United States and international markets could have an adverse effect on demand for our products.
Our existing and any future indebtedness could adversely affect our ability to operate our business.
As of September 30, 2016 , we had $ 257,000 of outstanding term loans under our credit facility with the Massachusetts Development Finance Agency, referred to as the MDFA facility. We anticipate paying off the remaining interest and principal under the MDFA facility by July 2017.
Our obligations under the MDFA facility will require us to dedicate a portion of our cash resources to the payment of interest and principal, reducing money available to fund working capital, capital expenditures, product development and other general corporate purposes.
Our obligations under the MDFA facility and other agreements governing our indebtedness may be subject to potential acceleration upon the occurrence of specified events of default, including payment defaults or the

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occurrence of a material adverse change in our business, operations or financial or other condition. If an event of default occurs and the lenders accelerate the amounts due, we may not be able to make payments in the amount of obligations that were accelerated, and the lenders could seek to enforce security interests in the collateral securing such indebtedness. We may not have sufficient funds, and may be unable to arrange for additional financing, to pay the amounts due under our current or future debt arrangements.
Our outstanding indebtedness combined with our other financial obligations and contractual commitments, including any additional indebtedness that we may incur, could increase our vulnerability to adverse changes in general economic, industry and market conditions; limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and place us at a competitive disadvantage compared to our competitors that have less debt or better debt servicing options.
Our inability to maintain adequate working relationships with external research and development consultants and surgeons could have a negative impact on our ability to market and sell new products.
We maintain professional working relationships with external research and development consultants and leading surgeons and medical personnel in hospitals and universities who assist in product research and development and training. We continue to emphasize the development of proprietary products and product improvements to complement and expand our existing product line. It is possible that U.S. federal and state laws requiring us to disclose payments or other transfers of value, such as free gifts or meals, to physicians and other healthcare providers could have a chilling effect on these relationships with individuals or entities that may, among other things, want to avoid public scrutiny of their financial relationships with us. In addition, consultants, surgeons and medical personnel in hospitals and universities may be subject to conflict of interest policies that limit our ability to engage these individuals as our advisors and in connection with future development and training efforts. If we are unable to establish and maintain our relationships with consultants, surgeons and medical personnel, our ability to develop and sell new and improved products could decrease, and our future operating results could be unfavorably affected.
Fluctuations in insurance cost and availability could adversely affect our profitability or our risk management profile.
We hold a number of insurance policies, including product liability insurance, directors' and officers' liability insurance, business interruption insurance, property insurance and workers' compensation insurance. The cost of maintaining product liability insurance on implantable medical devices has increased substantially over the past few years and could continue to substantially increase, due to general market trends, as part of an evaluation of our specific loss history and other factors. If the costs of maintaining adequate insurance coverage should increase significantly in the future, our operating results could be materially adversely affected. Likewise, if any of our current insurance coverage should become unavailable to us or become economically impractical, we would be required to operate our business without indemnity from commercial insurance providers. Similarly, if we exhaust our current insurance coverage for any given policy period, we would be required to operate our business without indemnity from commercial insurance providers for any claims made that are attributable to that policy period.
Consolidation in the healthcare industry could lead to demands for price concessions or the exclusion of some suppliers from certain of our markets, which could have an adverse effect on our business, financial condition or operating results.
Because healthcare costs have risen significantly over the past decade, numerous initiatives and reforms initiated by legislators, regulators and third-party payors to curb these costs have resulted in a consolidation trend in the healthcare industry to create new companies with greater market power, including hospitals. As the healthcare industry consolidates, competition to provide products and services to industry participants has become and will continue to become more intense. This in turn has resulted and likely will continue to result in greater pricing pressures and the exclusion of certain suppliers from important market segments as group purchasing organizations, independent delivery networks and large single accounts continue to use their market power to consolidate purchasing decisions for some of our customers. We expect that market demand, government regulation, third-party reimbursement policies and societal pressures will continue to change the worldwide healthcare industry, resulting in further business consolidations and alliances among our customers, which may reduce competition, exert further downward pressure on the prices of our products and may adversely impact our business, financial condition or operating results.
Risks related to our manufacturing

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We may encounter problems or delays in the manufacturing of our products or fail to meet certain regulatory requirements that could result in a material adverse effect on our business and financial results.
We historically manufactured a portion of our products at our facilities in Burlington, Bedford and Wilmington, Massachusetts. We completed the transfer of our manufacturing operations from the Burlington facility to our Wilmington facility in August 2015 and vacated the Burlington facility. We are continuing the build out of our manufacturing capabilities at our Wilmington facility. Manufacturing processes in our Bedford and Wilmington facilities require manufacturing validation and are subject to FDA inspections, as well as inspections by international regulatory agencies, including Notified Bodies for the European Union. We have completed the validation of our manufacturing processes for implant components and instrumentation manufactured at our new Wilmington facility. However, delays in validation of revised or new manufacturing processes or FDA clearance of new manufacturing processes could impact our ability to grow our business in the future.
On August 31, 2015, we announced a voluntary recall of specific serial numbers of patient-specific instrumentation for our iUni, iDuo, iTotal CR and iTotal PS knee replacement product systems. The recalled products were manufactured and distributed from our Wilmington manufacturing facility between July 18, 2015 and August 28, 2015. We isolated the root cause to a step in our ethylene oxide sterilization process conducted by a vendor. We have since completed final testing and implemented corrective actions, and we resumed normal production in October 2015. This recall and the resulting temporary reduction in capacity has adversely affected our business and may continue to adversely affect our business, including through the financial impact from lost sales of the recalled products, reduction of our production capacity over the period of our investigation and resolution of the root cause of the recall, commercial disruption, damage to our reputation with orthopedic surgeons, consumers, healthcare providers, distributors and other business partners and the filing of a putative class action complaint against us and certain of our officers alleging violations of securities laws, which has since been dismissed.
Our current and planned future products are complex and require the integration of a number of separate components and processes. To become profitable, we must manufacture our products in increased quantities in compliance with regulatory requirements and at an acceptable cost. Increasing our capacity to manufacture our products on this scale will require us to improve internal efficiencies and to introduce new manufacturing processes, including vertical integration of the manufacturing process by performing more manufacturing in-house. To date, we have not used 3D printing technology to manufacture commercially the metal implants that are used in our joint replacement systems. In addition, we have limited commercial manufacturing experience with respect to our iTotal PS knee and no commercial manufacturing experience yet with respect to our iTotal Hip replacement products.
If we are unable to satisfy commercial demand for our products due to our inability to manufacture them in compliance with applicable laws and regulations, or due to temporary or permanent reduced manufacturing capabilities, our business and financial results, including our ability to generate revenue, would be impaired, market acceptance of our products could be diminished and customers may instead purchase our competitors' products.
We may encounter other difficulties in increasing and expanding our manufacturing capacity, including difficulties:
acquiring raw materials for 3D printing;
deploying new manufacturing processes, including DMLS 3D printing;
acquiring 3D printers, especially DMLS 3D printers;
managing production yields;
maintaining quality control and assurance;
maintaining component availability;
maintaining adequate control policies and procedures;
hiring and retaining qualified personnel; and
complying with state, federal and foreign regulations.
Moreover, any significant disruption of our manufacturing operations or damage to our facilities or stores of raw materials for any reason, such as fire or other events beyond our control, including as a result of natural disasters or terrorist attacks, could adversely affect our sales and customer relationships and therefore adversely affect our business.

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Possible shortages of, or our inability to obtain, the necessary raw materials that we currently use and intend to use in the future, including in our 3D printing manufacturing processes, could limit our ability to operate and grow our business.
We purchase some raw materials for our manufacturing processes from single suppliers, including polymer powders that currently are used in our 3D printing processes. Because we rely on these few suppliers and generally maintain a forward inventory of these materials sufficient only for approximately six months of supply, there are a number of risks in our business, including:
potential shortages of these key raw materials;
potential delays in qualifying a new source of these key raw materials if our current suppliers are unable to supply us with materials that meet our specifications, pass our internal quality control requirements, and meet regulatory requirements;
discontinuation of a material or other component on which we rely;
potential insolvency or change of control transactions involving our suppliers; and
reduced control over delivery schedules, quality and costs.
We currently depend on sole source suppliers for the supply of polymer and metal powders. These sole source suppliers may be unwilling or unable to supply the powders to us reliably, continuously and at the levels we anticipate or are required by the market. We may incur added costs or delays in identifying and qualifying replacement suppliers. In addition, because these suppliers supply large portions of the markets for these materials, there is competition for such supply. As a result of such competition, the prices for these supplies may increase and their availability to us may decrease.
If any of our key suppliers were to decide to discontinue or limit the supply of a raw material that we use, the unanticipated change in the availability of supplies could cause delays in, or loss of, sales, increased production or related costs and damage to our reputation. In addition, because we use a limited number of suppliers, price increases by our suppliers may have an adverse effect on our results of operations, as we may be unable to find an alternative supplier who can supply us at a lower price. As a result, the loss of a limited source supplier could adversely affect our relationships with our customers and our results of operations and financial condition.
We are dependent on third-party suppliers for important manufactured components included in our products, as well as for services that are essential to our manufacturing processes. The loss of any of these suppliers, or their inability to provide us with an adequate supply of components or to complete finishing or other manufacturing services, could limit our ability to operate and grow our business.
We rely on third-party suppliers to manufacture all of the implant components, packaging materials, and instrumentation used in our joint replacement products that we do not currently manufacture ourselves. Currently, our in-house manufacturing is limited to our iJigs and the majority of the tibial components used in our implants. We outsource the manufacture of the remainder of the tibial components and femoral and other implant components to third-party suppliers. While we plan to establish additional internal manufacturing capabilities for our implant components, we also expect that we will continue to rely on third-party suppliers to manufacture and supply certain of our implant components. For us to be successful, these manufacturers must be able to provide us with these components in substantial quantities, in compliance with regulatory requirements, in accordance with agreed upon specifications, at acceptable costs and, in particular, on a timely basis. Our anticipated growth could strain the ability of our suppliers to manufacture and deliver an increasingly large supply of implants and components. Manufacturers often experience difficulties in scaling up production, including problems with quality control and assurance.
We generally purchase our outsourced implant components through purchase orders and do not have long-term contractual arrangements with any of our key suppliers. As a result, our suppliers have no obligation to manufacture for us or sell to us any given quantity of implant components. Without such contractual commitments, we could face difficulties in obtaining acceptance for our purchase orders, which could impair our ability to purchase adequate quantities of our implant components. If we are unable to obtain sufficient quantities of high-quality, individually-made components to meet demand on a timely basis, we could lose customers, our reputation may be harmed and our business would suffer. In addition, we currently depend on sole source suppliers for the supply of the reusable instrument trays and related logistics associated with our implant products. These sole source suppliers may be unwilling or unable to supply the trays and logistics services to us reliably, continuously and at the levels we anticipate or are required by the market.

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We utilize a "just-in-time" manufacturing and delivery model, with minimal levels of inventories, which could leave us vulnerable to delays or shortages of key components or materials necessary for our products or delays in delivering our products. Any such shortages or delays could result in our inability to satisfy consumer demand for our products in a timely manner or at all, which could harm our reputation, future sales, profitability and financial condition.
As all of our products are individually-made to fit an individual patient, we can assemble our products only after we receive orders from customers and must utilize "just-in-time" manufacturing processes. Supply lead times for components used in our products may vary significantly and depend upon a variety of factors, such as:
the location of the supplier and proximity to our facilities in Massachusetts;
the availability of raw materials purchased by our suppliers;
workforce availability and skill required by the suppliers;
the complexity in manufacturing the component and general demand for the component;
delays and disruptions in the manufacturing processes of our vendors; and
disruptions in the supply chain due to weather conditions and natural disasters affecting suppliers, our employees, and freight carriers.
We generally maintain minimal inventory levels, except for inventories of raw materials used in our 3D printing and manufacturing processes. As a result, an unexpected shortage of supply of key components used to manufacture our products, or an unexpected and significant increase in the demand for our products, could lead to inadequate inventory and delays in shipping our products to customers. Any such delays could result in lost sales and harm to our relationships with surgeons, especially in the event of a missed surgery, which could in turn harm our profitability and financial condition.
Moreover, our suppliers are dependent on commercial freight carriers to deliver implant components to our facilities, and we are dependent on commercial freight carriers to deliver our finished products to hospitals and surgeons. If the operations of these carriers are disrupted for any reason, we may be unable to deliver our products to our customers on a timely basis. If we cannot deliver our products in an efficient and timely manner, our customers may reduce their orders from us and our revenues and operating profits could materially decline. In a rising fuel cost environment, our and our suppliers' freight costs will increase. If freight costs materially increase and we are unable to pass that increase along to our customers for any reason or otherwise offset such increases in our cost of revenues, our gross margin and financial results could be adversely affected.
Our information technology systems are critical to our business. System management and implementation issues and system security risks could disrupt our operations, which could have a material adverse impact on our business and operating results.
We rely on the efficient and uninterrupted operation of complex information technology systems. All information technology systems are vulnerable to damage or interruption from a variety of sources. As our business has grown in size and complexity, the growth has placed, and will continue to place, significant demands on our information technology systems.
The iFit software applications we have developed for our existing products are critical for efficiently and correctly designing customized implants and iJigs. These applications require maintenance and further improvements in design automation in order to continue increasing productivity of the design process. If we fail to meet our goals for design automation and productivity, this may impact our ability to reduce production costs. Furthermore, bugs or errors in these complex iFit software applications could cause production delays or product defects, which may lead to customer dissatisfaction or possibly even product recalls.
Our development of new products depends on our capability to adapt our iFit concepts and applications to new requirements. It may be more difficult than anticipated to make such adjustments, which could lead to delays or limitations in our ability to develop new, innovative products. Moreover, changes in privacy laws could increase the risk we are exposed to in managing patient data, and could limit some of the applications of that data in our business.
In addition, experienced computer programmers and hackers may be able to penetrate our network security and misappropriate our confidential information or that of third parties, create system disruptions or cause shutdowns. The costs to eliminate or alleviate security problems or viruses could be significant, and the efforts to

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address these problems could result in interruptions that may have a material adverse impact on our operations, net revenues and operating results.
Risks related to our international operations
We are exposed to risks related to our international operations and failure to manage these risks may adversely affect our operating results and financial condition.
We sell our products internationally in Germany, the United Kingdom, Austria, Ireland, Switzerland, Singapore, and Hong Kong. We expect that our international activities will increase over the foreseeable future as we continue to pursue opportunities in international markets. During each of the nine months ended September 30, 2016 and 2015 , approximately 22% and 26% of our revenue was attributable to our international customers, respectively, and as of September 30, 2016 , approximately 5% of our employees were located outside the United States. The sale and shipment of our products across international borders, as well as the purchase of components and products from international sources, subjects us to extensive U.S., EU and other foreign governmental trade, import and export and customs regulations and laws. Compliance with these regulations and laws is costly and exposes us to penalties for non-compliance. Therefore, we are subject to risks associated with having international operations. These international operations will require significant management attention and financial resources.
International operations are subject to inherent risks, and our future results could be adversely affected by a number of factors, including:
requirements or preferences for domestic products or solutions, which could reduce demand for our products;
differing existing or future regulatory and certification requirements;
extraterritorial effects of U.S. laws such as the Foreign Corrupt Practices Act;
effects of foreign anti-corruption laws, such as the U.K. Bribery Act 2010, or the Bribery Act;
changes in foreign medical reimbursement policies and programs;
management communication and integration problems related to entering new markets with different languages, cultures and political systems;
complex data privacy requirements and labor relations laws;
greater difficulty in collecting accounts receivable and longer collection periods;
difficulties in enforcing contracts;
difficulties and costs of staffing and managing foreign operations;
labor force instability;
the uncertainty of protection for intellectual property rights in some countries;
potentially adverse regulatory requirements regarding our ability to repatriate profits to the United States;
potentially adverse tax consequences, including on the repatriation profits to the United States;
tariffs and trade barriers, export regulations and other regulatory and contractual limitations on our ability to sell our products in certain foreign markets; and
political and economic instability and terrorism.
Our international operations expose us to risks of fluctuations in foreign currency exchange rates.
Our international operations expose us to risks of fluctuations in foreign currency exchange rates. To date, a significant portion of our international sales have been denominated in euros. We do not currently hedge any of our foreign currency exposure. As a result, a decline in the value of the euro against the U.S. dollar could have a material adverse effect on the gross margins and profitability of our international operations. In addition, sales to countries that do not utilize the euro could decline as the cost of our products to our customers in those countries increases or as the local currencies decrease. In addition, because our financial statements are denominated in U.S. dollars, a decline in the euro would negatively impact our overall revenue as reflected in our financial statements. To date, we have not used risk management techniques to hedge the risks associated with these fluctuations. Even if we were to implement hedging strategies, not every exposure can be hedged and, where

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hedges are put in place based on expected foreign currency exchange exposure, they are based on forecasts that may vary or that may later prove to have been inaccurate. As a result, fluctuations in foreign currency exchange rates or our failure to successfully hedge against these fluctuations could have a material adverse effect on our operating results and financial condition.
Risks related to managing our future growth
We expect to grow our organization, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.
We expect to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of research and development, manufacturing, manufacturing engineering, regulatory affairs, sales, marketing and distribution and general administration, some of whom we will require to have specific technical skills that are in high demand. Our management may need to divert a disproportionate amount of its attention away from our day-to-day activities to devote time to managing these growth activities. To manage these growth activities, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limited financial resources and the limited experience of our management team in managing a company with such anticipated growth, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. Our inability to effectively manage the expansion of our operations may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Our expected growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of additional products. If our management is unable to effectively manage our expected growth, our expenses may increase more than expected, our ability to generate revenues could be reduced, and we may not be able to implement our business strategy. In addition, we may consider further expanding our operations through potential acquisitions. Potential and completed acquisitions and strategic investments involve numerous risks, including diversion of management's attention from our core business, problems assimilating the purchased technologies or business operations and unanticipated costs and liabilities. Our future financial performance and our ability to commercialize products and compete effectively will depend, in part, on our ability to effectively manage any future growth, including growth through acquisitions.
Our future success depends on our ability to retain our Chief Executive Officer, Chief Technology Officer and other key executives and to attract, retain and motivate qualified personnel.
We are highly dependent on the medical device industry expertise of principal members of our management, scientific and development teams, including Daniel Steines, our Chief Technology Officer. We have formal employment agreements with our executive officers. These agreements do not prevent our executive officers from terminating their employment with us at any time. In addition, we do not carry key-man insurance on any of our executive officers or employees and may not carry any key-man insurance in the future.
If we lose one or more of our executive officers, our ability to implement our business strategy successfully could be seriously harmed. Furthermore, replacing executive officers may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to develop, gain marketing approval of and commercialize products successfully. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these additional key personnel on acceptable terms given the competition among numerous medical device companies for similar personnel. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us. If we are unable to continue to attract and retain high quality personnel, our ability to develop and commercialize product candidates will be limited.
Our transition from our current President and Chief Executive Officer to our new President and Chief Executive Officer could affect our performance and could result in an alteration of our strategy moving forward.
Our Board of Directors recently completed a search for a new Chief Executive Officer, and named Mark A. Augusti as our new President and Chief Executive Officer effective as of the commencement of his employment with us on November 14, 2016. Our continued success will depend on our ability to successfully transition from our current President and Chief Executive Officer, Dr. Lang, to our new President and Chief Executive Officer, Mr.

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Augusti. The transition from Dr. Lang to Mr. Augusti may cause disruption in our business, strategic and employee relationships, which may delay or prevent the achievement of our business objectives. Additionally, the transition could result in a change in business strategy or priorities. Any such changes could have a negative effect on our business and financial performance. During the transition of our President and Chief Executive Officer, there may be uncertainty among investors, employees, creditors and others concerning our future direction and performance. Any disruption, uncertainty, change in strategy or alteration of business priorities could have a material adverse effect on our results of operations and financial condition and the market price of our common stock.
Our management could have interests that conflict with our interests and the interests of our shareholders.
We are party to revenue share agreements with certain past and present members of our scientific advisory board and our Chief Executive Officer that relate to these individuals' participation in the design and development of our products and related intellectual property. Compensation under these agreements for services rendered by these individuals includes a product revenue share. The existence of the revenue share arrangement may create a conflict of interest. For example, these advisors and our Chief Executive Officer may favor decisions that result in our making expenditures and allocating resources that increase revenue but do not result in profits or do not result in profits as great as other expenditures and allocations of resources would. Our Chief Executive Officer's equity interest, through his common stock and option ownership may, depending on the level of his equity interest and the level of our revenues, reduce this conflict. If any such decisions were made, however, our business could be harmed.
Risks related to our intellectual property and potential litigation
If we are unable to obtain, maintain or enforce sufficient intellectual property protection for our products and technologies, or if the scope of our intellectual property protection is not sufficiently broad, our competitive position could be harmed or we could be required to incur significant expenses to enforce our rights.
We rely primarily on patent, copyright, trademark and trade secret laws, know-how and continuing technological innovation, as well as confidentiality and non-disclosure agreements and other methods, to protect the intellectual property related to our technologies and products. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage.
We hold, or have in-licensed rights with respect to, patents and patent applications and have applied for additional patent protection relating to certain existing and proposed products and processes. While we generally apply for patents in those countries where we intend to make, have made, use or sell patented products, we may not accurately predict all of the countries where patent protection will ultimately be desirable. If we fail to timely file a patent application in any such country or fail to properly pursue an application through to the issuance of a patent, we may be precluded from doing so at a later date. Furthermore, our patent applications may not issue as patents. The rights granted to us under our patents, including prospective rights sought in our pending patent applications, may not be meaningful or provide us with any commercial advantage and they could be opposed, contested or circumvented by our competitors or could be declared invalid or unenforceable in judicial or in a wide variety of administrative proceedings including opposition, interference, re-examination, post-grant review, inter parties review, nullification and derivation proceedings. In such proceedings, third parties can raise objections against the initial grant of the patent. In the course of some such proceedings, which may continue for a protracted period of time, we may be compelled to limit the scope of the challenged claims, or may lose them altogether. In addition, our pending patent applications include claims to material aspects of our products and procedures that are not currently protected by issued patents. The process of applying for patent protection itself is time consuming and expensive. The failure of our patents to protect our products and technologies adequately might make it easier for our competitors to offer the same or similar products or technologies. Competitors may be able to design around our patents or develop products that provide outcomes that are comparable to ours without infringing on our intellectual property rights.
We may be involved in lawsuits to protect or enforce our intellectual property rights, which could be expensive, time consuming and unsuccessful.
If a competitor infringes or otherwise violates one of our patents, the patents of our licensors, or our other intellectual property rights, enforcing those patents, trademarks and other rights may be difficult, time consuming or unsuccessful. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, in whole or part, or may refuse to stop the other party in such infringement proceeding from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result

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in any litigation or defense proceedings, including any proceedings before the United States Patent & Trademark Office, could put one or more of our patents at risk of being invalidated, held unenforceable or interpreted narrowly, and could put any of our patent applications at risk of not yielding an issued patent. Even if successful, litigation to defend our patents and trademarks against challenges or to enforce our intellectual property rights could be expensive and time consuming and could divert management's attention from managing our business. Moreover, we may not have sufficient resources or desire to defend our patents or trademarks against challenges or to enforce our intellectual property rights.
In particular, on February 29, 2016, we filed a lawsuit against Smith & Nephew, Inc. (“Smith & Nephew”) in the United States District Court for the District of Massachusetts Eastern Division. The lawsuit alleges that Smith & Nephew’s Visionaire® patient-specific instrumentation, as well as the implants systems used in conjunction with the Visionaire instrumentation, infringe eight of our patents, and requests monetary damages for willful infringement and a permanent injunction. This lawsuit and the related requests for Inter Partes Review are described in more detail in Part II, Item 1, Legal Proceedings of this Quarterly Report on Form 10-Q. While we believe we have a meritorious case, we cannot predict the outcome of this lawsuit.
If we are unable to protect the confidentiality of our trade secrets, the value of our technology could be materially adversely affected, and our business would be harmed.
In addition to the protection afforded by patents, we rely on confidential proprietary information, including trade secrets, and know-how to develop and maintain our competitive position, especially with respect to our proprietary software used in the iFit Design and iFit Printing aspects of our technology platform. Any disclosure to or misappropriation by third parties of our confidential proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, thus eroding our competitive position in our market. We seek to protect our confidential proprietary information, in part, by confidentiality agreements and invention assignment agreements with our employees, consultants, scientific advisors, contractors and collaborators. These agreements are designed to protect our proprietary information, however, we cannot be certain that such agreements have been entered into with all relevant parties, and we cannot be certain that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. For example, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. We also seek to preserve the integrity and confidentiality of our confidential proprietary information by maintaining physical security of our premises and physical and electronic security of our information technology systems, but it is possible that these security measures could be breached. If any of our confidential proprietary information were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent such competitor from using that technology or information to compete with us, which could harm our competitive position. Further, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United States and abroad. If we are unable to prevent material disclosure of the intellectual property related to our technologies to third parties, we will not be able to establish or maintain a competitive advantage in our market, which could materially adversely affect our business, results of operations and financial condition.
If we fail to comply with our obligations in the agreements under which we license intellectual property rights from third parties or otherwise experience disruptions to our business relationships with our licensors, we could be required to pay monetary damages or could lose license rights that are important to our business.
We have entered into license agreements with third parties providing us with rights under various third-party patents and patent applications, including the rights to prosecute patent applications and to enforce patents. Certain of these license agreements impose and, for a variety of purposes, we may enter into additional licensing and funding arrangements with third parties that also may impose, diligence, development or commercialization timelines and milestone payment, royalty, insurance and other obligations on us. Under certain of our existing licensing agreements, we are obligated to pay royalties on net product sales of our products, pay a percentage of sublicensing revenues, make other specified payments relating to our products or pay license maintenance and other fees. We also have diligence and development obligations under certain of these agreements that we are required to satisfy. If we fail to comply with our obligations under our current or future license agreements, our counterparties may have the right to terminate these agreements, in which event we might not be able to develop, manufacture or market any product that is covered by the licenses provided for under these agreements or we may face claims for monetary damages or other penalties under these agreements. Such an occurrence could diminish

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the value of these products and our company. Termination of the licenses provided for under these agreements or reduction or elimination of our rights under these agreements may result in our having to negotiate new or reinstated agreements with less favorable terms, or cause us to lose our rights under these agreements, including our rights to important intellectual property or technology.
In the future, we may not be able to license additional intellectual property rights that we need for our business. If we are unable to do so, we may be unable to develop or commercialize the affected products, which could harm our business significantly.
In the future, we may need to obtain additional licenses from others to expand our product lines, advance our technology or allow commercialization of our current or future products. It is possible that we may be unable to obtain additional licenses at a reasonable cost or on reasonable terms, if at all. In that event, we may be required to expend significant time and resources to redesign our products or the methods for manufacturing them or to develop or license replacement technology, all of which may not be feasible on a technical or commercial basis. If we are unable to do so, we may be unable to develop or commercialize the affected products, which could harm our business significantly. We cannot provide any assurances that third-party patents do not exist which might be enforced against our current manufacturing methods, products or future methods or products, resulting in either an injunction prohibiting our manufacture or sales, or, with respect to our sales, an obligation on our part to pay royalties or other forms of compensation to third parties.
The medical device industry is characterized by frequent patent litigation, and we could become subject to litigation that could be costly, result in the diversion of management's time and efforts, require us to pay damages or prevent us from marketing our existing or future products.
Our commercial success depends in part on not infringing the patents or violating the other proprietary rights of others and we may become party to, or threatened with, litigation or other adversarial proceedings regarding intellectual property rights with respect to our technology or products, including interference or derivation proceedings before the U.S. Patent and Trademark Office. Significant litigation regarding patent rights occurs in our industry. Our competitors in both the United States and abroad, many of which have substantially greater resources and have made substantial investments in patent portfolios and competing technologies, may have applied for or obtained or may in the future apply for and obtain, patents that may prevent, limit or otherwise interfere with our ability to make, use and sell our products. Our ability to defend ourselves or our third-party suppliers may be limited by our financial and human resources, the availability of reasonable defenses, and the ultimate acceptance of our defenses by the courts or juries. In addition, patent applications in the United States and elsewhere can be pending for many years before issuance, so there may be applications of others now pending of which we are unaware that may later result in issued patents that may prevent, limit or otherwise interfere with our ability to make, use or sell our products. The large number of patents, the rapid rate of new patent applications and issuances, the complexities of the technology involved and the uncertainty of litigation increase the risk of business assets and management's attention being diverted to patent litigation.
We have received in the past, and may receive in the future, particularly as a public company, communications from various industry participants and patent holders alleging our infringement of their patents, trade secrets or other intellectual property rights or offering licenses to such intellectual property. We are aware of non-practicing entities that are seeking to exploit patents in the orthopedic area. In particular, in October 2015 we were sued for patent infringement by one such non-practicing entity, Orthopedic Innovations, Inc., alleging that our iUni G2 and iDuo G2 partial knee replacement surgical techniques infringe an existing patent. Among other relief, the plaintiff sought damages for willful infringement, attorney’s fees, costs and a permanent injunction. On March 28, 2016, the plaintiff voluntarily dismissed the action. Because the action was dismissed without prejudice, the plaintiff could sue us again on the same patent.
Lawsuits resulting from allegations of infringement could, if successful, subject us to significant liability for damages and invalidate our proprietary rights. We have in the past settled allegations of infringement by entering into a settlement and license agreement and may need to do so again in the future. Any potential intellectual property litigation also could force us to do one or more of the following:
stop making, selling or using products or technologies that allegedly infringe the asserted intellectual property;
lose the opportunity to license our technology to others or to collect royalty payments based upon successful protection and assertion of our intellectual property rights against others;
incur significant legal expenses;

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pay substantial damages or royalties to the party whose intellectual property rights we may be found to be infringing;
pay the attorney fees and costs of litigation to the party whose intellectual property rights we may be found to be infringing;
redesign those products that contain the allegedly infringing intellectual property, which could be costly, disruptive or infeasible; or
attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reasonable terms or at all.
Any litigation or claim against us, even those without merit, may cause us to incur substantial costs, and could place a significant strain on our financial resources, divert the attention of management from our core business and harm our reputation. Further, as the number of participants in the joint replacement industry grows, the possibility of intellectual property infringement claims against us increases. If we are found to infringe the intellectual property rights of third parties, we could be required to pay substantial damages, which may be increased up to three times of awarded damages, or substantial royalties and could be prevented from selling our products unless we obtain a license or are able to redesign our products to avoid infringement. Any such license may not be available on reasonable terms, if at all, and there can be no assurance that we would be able to redesign our products in a way that would not infringe the intellectual property rights of others. If we fail to obtain any required licenses or make any necessary changes to our products or technologies, we may have to withdraw existing products from the market or may be unable to commercialize one or more of our products, all of which could have a material adverse effect on our business, results of operations and financial condition.
In addition, any claims that we assert against perceived infringers could provoke these parties to assert counterclaims against us alleging that we infringe their intellectual property rights. As part of our intellectual property strategy, we plan to continue pursuing opportunities to assert our patents and intellectual property portfolio to secure agreements from other companies to pay royalties or make other payments to us with respect to their products that incorporate our technology. This activity could potentially bring unwanted attention to or scrutiny of our patent and intellectual property portfolio.
We may not be able to adequately protect our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on our products in all countries throughout the world would be prohibitively expensive. The requirements for patentability may differ in certain countries, particularly developing countries, and the breadth of patent claims allowed can be inconsistent. In addition, the laws of some foreign countries may not protect our intellectual property rights to the same extent as laws in the United States. Consequently, we will not be able to prevent third parties from practicing our inventions in all countries outside the United States. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories in which we have patent protection that may not be sufficient to enable us to terminate infringing activities.
We do not have patent rights in certain foreign countries in which a market may exist. We have filed patent applications only in the United States and fewer than 18 other countries, many of which are in the European Union, and we therefore lack any patent protection in all other countries. In countries where we do not have significant patent protection, we are unlikely to stop a competitor from marketing products in such countries that are the same as or similar to our products. Moreover, in foreign jurisdictions where we do have patent rights, proceedings to enforce such rights could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, and our patent applications at risk of not issuing. Additionally, such proceedings could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Thus, we may not be able to stop a competitor from marketing and selling in foreign countries products that are the same as or similar to our products, and our competitive position in the international market would be harmed.
Changes in patent law could diminish the value of patents in general, thereby impairing our ability to protect our existing and future products.
Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of

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significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted, redefine prior art, may affect patent litigation, and switched the United States patent system from a "first-to-invent" system to a "first-to-file" system. Under a "first-to-file" system, assuming the other requirements for patentability are met, the first inventor to file a patent application generally will be entitled to the patent on an invention regardless of whether another inventor had made the invention earlier. The United States Patent and Trademark Office recently developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, in particular, the first-to-file provisions, only became effective on March 16, 2013. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. The Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.
In addition, patent reform legislation may pass in the future that could lead to additional uncertainties and increased costs surrounding the prosecution, enforcement and defense of our patents and applications. Furthermore, the U.S. Supreme Court and the U.S. Court of Appeals for the Federal Circuit have made, and will likely continue to make, changes in how the patent laws of the United States are interpreted. Similarly, foreign courts have made, and will likely continue to make, changes in how the patent laws in their respective jurisdictions are interpreted. We cannot predict future changes in the interpretation of patent laws or changes to patent laws that might be enacted into law by United States and foreign legislative bodies. Those changes may materially affect our patents or patent applications and our ability to obtain additional patent protection in the future.
If product liability lawsuits are brought against us, our business may be harmed, and we may be required to pay damages that exceed our insurance coverage.
Our business exposes us to potential product liability claims that are inherent in the testing, manufacture and sale of medical devices for knee and hip replacement procedures. Knee replacement surgery involves significant risk of serious complications, including bleeding, infection, instability, dislocation, nerve injury and death. Hip replacement surgery involves significant risk of serious complications including bleeding, infection, dislocation, leg length discrepancy, nerve injury and death. In addition, joint replacement surgery involves product risks, including failures over time due to polyethylene wear and aseptic loosening, which is a condition caused by wear debris generated by the implant. We or our suppliers could suffer breaches to our sterilization procedures, which could cause contamination of the affected components and products we market and ultimately could cause infections in patients. Moreover, patients may be dissatisfied with the results of joint replacement surgery even if there is no medical complication. Furthermore, if orthopedic surgeons are not sufficiently trained in the use of our products, they may misuse or ineffectively use our products, which may result in unsatisfactory patient outcomes or patient injury. We could become the subject of product liability lawsuits alleging that component failures, malfunctions, manufacturing flaws, design defects or inadequate disclosure of product-related risks or product-related information resulted in an unsafe condition or injury to patients.
We have had product liability claims relating to our products asserted against us in the past, and some product liability claims currently are outstanding. No claim to date either individually, or in the aggregate, has resulted, in a material negative impact on our business. In light of the nature of our business, it is likely we will continue to be subject to product liability claims in the future, some of which could have a negative impact on our business.
Regardless of the merit or eventual outcome, product liability claims may result in:
decreased demand for our products;
injury to our reputation;
significant litigation costs;
substantial monetary awards to or costly settlements with patients, especially in the event of a class action lawsuit;
product recalls;
loss of revenue;
the inability to commercialize new products or product candidates; and
diversion of management attention from pursuing our business strategy and may be costly to defend.

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Our existing product liability insurance coverage may be inadequate to protect us from any liabilities we might incur. If a product liability claim or series of claims is brought against us for uninsured liabilities or in excess of our insurance coverage, our business could suffer. Any product liability claim brought against us, with or without merit, could result in the increase of our product liability insurance rates or the inability to secure coverage in the future. In addition, a recall of some of our products, whether or not the result of a product liability claim, could result in significant costs and loss of customers.
In addition, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts or scope to protect us against losses. Any claims against us, regardless of their merit, could severely harm our financial condition, strain our management and other resources and adversely affect or eliminate the prospects for commercialization or sales of a product or product candidate that is the subject of any such claim.

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Risks related to government regulation
Our medical device products are subject to extensive governmental regulation both in the United States and abroad, and our failure to comply with applicable requirements could cause our business to suffer.
Our products are classified as medical devices and are subject to extensive regulation by the FDA and other federal, state and foreign governmental authorities. These regulations relate to manufacturing, labeling, sale, promotion, distribution, importing and exporting and shipping of our products. If we fail to comply with applicable laws and regulations it could jeopardize our ability to sell our products and result in enforcement actions such as:
untitled letters, warning letters, fines, injunctions or civil penalties;
termination of distribution authorizations;
recalls or seizures of products;
delays in the introduction of products into the market;
total or partial suspension of production;
refusal of the FDA or other regulators to grant future clearances or approvals;
withdrawals or suspensions of current clearances or approvals, resulting in prohibitions on sales of our products;
withdrawal of the CE Certificates of Conformity, which authorize us to apply the CE Mark to our products and are necessary to sell our products within the European Economic Area, or EEA, or delay in obtaining these certificates; or
in the most serious cases, criminal penalties.
Any of these sanctions could result in higher than anticipated costs or lower than anticipated sales and have a material adverse effect on our reputation, business, results of operations and financial condition.
The regulations to which we are subject are complex and have tended to become more stringent over time, making obtaining clearances and maintaining compliance increasingly difficult. If we fail to obtain and maintain necessary FDA clearances and approvals for our products and indications or if clearances and approvals for future products and indications are delayed or not issued, our business would be harmed.
Before we can market or sell a new regulated product or a significant modification to an existing product in the United States, we must obtain either clearance from the FDA through the filing of a 510(k) premarket notification or approval from the FDA pursuant to a premarket approval application, or PMA, unless the device is specifically exempt from premarket review. The clearance or approval that is required will depend upon how the product is classified by the FDA. The FDA classifies medical devices into one of three classes. Devices deemed to pose low to moderate risk are placed in either Class I or II, which, absent an exemption, requires the manufacturer to submit to the FDA a premarket notification requesting permission for commercial distribution, which is known as 510(k) clearance. Class III devices, such as life-sustaining or life-supporting devices or devices that are of substantial importance in preventing impairment of human health or which present a potential unreasonable risk of illness or injury, require approval of a PMA to provide reasonable assurance of safety and effectiveness.
In the 510(k) clearance process, the FDA must determine that a proposed device is "substantially equivalent" to a device legally on the market, known as a "predicate" device, with respect to intended use, technology and safety and effectiveness, in order to clear the proposed device for marketing. Clinical data is sometimes required to support substantial equivalence. In the PMA approval process, the FDA must determine that a proposed device is safe and effective for its intended use based, in part, on extensive data, including technical, pre-clinical, clinical trial, manufacturing and labeling data.
In order to obtain a PMA and, in some cases, a 510(k) clearance, a product sponsor must conduct well controlled clinical trials designed to test the safety and effectiveness of the product. To date, we have not been required to conduct clinical studies or to obtain clinical data in order to obtain 510(k) clearance in the United States for our products. Additionally, to date, we have not been required to complete clinical studies in connection with obtaining regulatory approval for the sale of our products outside the United States. Conducting clinical trials generally entails a long, expensive and uncertain process that is subject to delays and failure at any stage. The data obtained from clinical trials may be inadequate to support approval or clearance of a submission. In addition, the occurrence of unexpected findings in connection with clinical trials may prevent or delay obtaining approval or

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clearance. If we conduct clinical trials, they may be delayed or halted or may be inadequate to support approval or clearance, for numerous reasons, including:
the FDA , other regulatory authorities or an institutional review board may place a clinical trial on hold or partial hold;
institutional review boards and third-party clinical investigators may delay or reject our trial protocol;
third-party clinical investigators may decline to participate in a trial or may not perform a trial on our anticipated schedule or consistent with the clinical trial protocol, good clinical practices, or other FDA requirements;
patients may not enroll in clinical trials, or patient follow-up may not occur, at the rate we expect;
patients may not comply with trial protocols;
••
third-party organizations may not perform data collection and analysis in a timely or accurate manner;
regulatory inspections of our clinical trials or manufacturing facilities may, among other things, require us to undertake corrective action or suspend, terminate or invalidate our clinical trials;
changes in governmental regulations or administrative actions; and
the interim or final results of the clinical trials may be inconclusive or unfavorable as to safety or effectiveness.
The FDA's 510(k) clearance process for each device or modification usually takes from three to 12 months, but may last longer. The process of obtaining a PMA is much more costly and uncertain than the 510(k) clearance process and generally takes from one to three years, or even longer, from the time the application is submitted to the FDA until an approval is obtained.
In the United States, all of our FDA-cleared products have been cleared without the use of a PMA under the 510(k) clearance process. Additionally, we have in the past, and may in the future, determine that certain changes or modifications to our products or other cleared devices may not significantly affect the safety or effectiveness of the device, and, therefore, may not require a 510(k) submission. In such situations, the changes are assessed using the FDA guidance for determining when to submit a 510(k) for a change to an existing device. However, the FDA may not agree with our determination and may, instead, require that we seek 510(k) clearance of such products or other cleared devices or, potentially, require us to submit a PMA.
If the FDA requires us to go through a lengthier, more rigorous examination for future products or modifications to existing products than we had expected, our product introductions or modifications could be delayed or canceled, which could cause our sales to decline. The FDA may demand that we obtain a PMA prior to marketing certain of our future products. In addition, if the FDA disagrees with our determination that a product we currently market is eligible for clearance under the premarket notification process of Section 510(k) of the FDCA, the FDA may require us to submit a PMA in order to continue marketing the product. Further, even with respect to those future products where a PMA is not required, we may not be able to obtain the 510(k) clearances with respect to those products.
In addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions that may prevent or delay approval or clearance of products we are developing or impact our ability to modify any of our products for which we receive regulatory clearance or approval in the future on a timely basis. Any change in the laws or regulations that govern the clearance and approval processes relating to the products we are developing could make it more difficult and costly to obtain clearance or approval for such products, or to produce, market and distribute products for which we receive regulatory approval or clearance in the future.
To date, we have used the CE Marking process to satisfy the conformity standards required to market and sell our joint replacement products in the EU. In the CE Marking process, a medical device manufacturer must carry out a clinical evaluation of its medical device to demonstrate conformity with the relevant Essential Requirements. This clinical evaluation is part of the product's technical file. A clinical evaluation includes an assessment of whether a medical device's performance is in accordance with its intended use, that the known and foreseeable risks linked to the use of the device under normal conditions are minimized and acceptable when weighed against the benefits of its intended purpose. The clinical evaluation conducted by the manufacturer must also address any clinical claims, the adequacy of the device labeling and information (particularly claims, contraindications, precautions and

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warnings) and the suitability of related instructions for use. This assessment must be based on clinical data, which can be obtained from clinical studies conducted on the device being assessed, scientific literature from similar devices whose equivalence with the assessed device can be demonstrated or both clinical studies and scientific literature. With respect to implantable devices or devices classified as Class III in the EU, the manufacturer must conduct clinical studies to obtain the required clinical data, unless reliance on existing clinical data from similar devices can be justified.
As part of the conformity assessment process, depending on the type of device, an entity authorized to conduct the conformity assessment, which is referred to as a Notified Body, will review the manufacturer's clinical evaluation process, assess the clinical evaluation data of a representative sample of the device's subcategory or generic group, or assess all the clinical evaluation data, verify the manufacturer's assessment of that data and assess the validity of the clinical evaluation report and the conclusions drawn by the manufacturer. We conduct clinical studies to obtain clinical data as part of the clinical evaluation process. The conduct of clinical studies to obtain clinical data as part of the described clinical evaluation process can be expensive and time-consuming.
Any delay in, or failure to receive or maintain, clearance or approval for our products under development could prevent us from generating revenue from these products or achieving profitability. Additionally, the FDA and other regulatory authorities have broad enforcement powers. Regulatory enforcement or inquiries, or other increased scrutiny on us, could dissuade some surgeons from using our products and adversely affect our reputation and the perceived safety and efficacy of our products.
Even after we have obtained the proper regulatory clearance or approval to market a product, the FDA has the power to require us to conduct post-marketing studies. For example, as a condition of approval, we could be required to conduct a post-approval study, as well as an enhanced surveillance study. Failure to conduct required studies in a timely manner could result in the revocation of the 510(k) clearance or PMA approval for the product that is subject to such a requirement and could also result in the recall or withdrawal of the product, which would prevent us from generating sales from that product in the United States.
Even after we receive a CE Design Examination Certificate ("CE Certificate") enabling us to affix the CE Mark to a product and to sell our product in the EEA and Switzerland, a Notified Body or a competent authority may require post-marketing studies of our product. Failure to comply with such requirements in a timely manner could result in the withdrawal of our CE Certificate and the recall or withdrawal of our product from the market in the European Union, which would prevent us from generating revenue from sales of that product in the EEA and Switzerland. Moreover, each CE Certificate is valid for a maximum of five years. Our CE Certificates are valid through May 8, 2021 for our iTotal CR product, December 2, 2017 for our iUni product, June 11, 2019 for our iDuo product and March 5, 2020 for our iTotal PS product. At the end of each period of validity we are required to apply to the Notified Body for a renewal of the CE Certificate. There may be delays in the renewal of the CE Certificate or the Notified Body may require modifications to our products or to the related technical files before it agrees to issue the new CE Certificate.
Regulatory changes could result in restrictions on our ability to carry on or expand our operations, higher than anticipated costs or lower than anticipated sales.
The FDA or the EU may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions that may prevent or delay approval or clearance of our products under development or may impact our ability to modify our currently approved or cleared products on a timely basis. For example, as part of the Food and Drug Administration Safety and Innovation Act of 2012, or the FDASIA, the U.S. Congress enacted several reforms entitled the Medical Device Regulatory Improvements and additional miscellaneous provisions which will further affect medical device regulation both pre- and post-approval. Any change in the laws or regulations that govern the clearance and approval processes relating to our current and future products could make it more difficult and costly to obtain clearance or approval for new products, or to produce, market and distribute existing products. Similarly, the EU may reclassify any of our Class IIa products as Class IIb or Class III in the EU. In either such event, the process for attaining regulatory approval of our products would be more difficult and costly and would take additional time compared to the regulatory clearance processes that have been applicable to our products to date.
The FDA could also reclassify some or all of our products that are currently classified as Class II to Class III requiring additional controls, clinical studies and submission of a PMA for us to continue marketing and selling those products. Under new changes instituted by the FDASIA, the FDA may now change the classification of a medical device by administrative order instead of by regulation. Although the revised process is simpler, the FDA must still publish a proposed order in the Federal Register, hold a device classification panel meeting and consider

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comments from affected stakeholders before issuing the reclassification order. The FDA may reclassify any of our Class II devices into Class III and require us to submit a PMA for FDA review and approval of the safety and effectiveness of our products.
Modifications to our currently FDA-cleared products or the introduction of new products may require new regulatory clearances or approvals or require us to recall or cease marketing our current products until clearances or approvals are obtained .
Modifications to our products may require new regulatory approvals or clearances or require us to recall or cease marketing the modified products until these clearances or approvals are obtained. Any modification to one of our 510(k)-cleared products that would constitute a major change in its intended use or any change that could significantly affect the safety or effectiveness of the device would require us to obtain a new 510(k) marketing clearance and may even, in some circumstances, require the submission of a PMA if the change raises complex or novel scientific issues or the product has a new intended use. We may be required to submit extensive pre-clinical and clinical data depending on the nature of the changes. We may not be able to obtain additional 510(k) clearances or premarket approvals for modifications to, or additional indications for, our existing products in a timely fashion, or at all. Delays in obtaining future clearances or approvals would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our revenue and operating results.
The FDA requires every manufacturer to make the determination regarding the need for a new 510(k) submission in the first instance, but the FDA may review any manufacturer's decision. We have modified some of our 510(k) cleared products, and have determined based on our review of the applicable FDA guidance that in certain instances the changes did not require new 510(k) clearances or PMA approval. If the FDA disagrees with our determination and requires us to seek new 510(k) clearances or PMA approval for modifications to our previously cleared products for which we have concluded that new clearances or approvals are unnecessary, we may be required to cease marketing or distribution of our products or to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties.
Furthermore, potential changes to the 510(k) program may make it more difficult for us to make modifications to our previously cleared products, by either imposing more strict requirements on when a new 510(k) clearance for a modification to a previously cleared product must be submitted or applying more burdensome review criteria to such submissions. In July and December 2011, the FDA issued draft guidance documents addressing when to submit a new 510(k) clearance due to modifications to 510(k)-cleared products and the criteria for evaluating substantial equivalence. The July 2011 draft guidance document was ultimately withdrawn as the result of the passage of the FDASIA. As a result, the FDA's original guidance document regarding 510(k) modifications, which dates back to 1997, remains in place. It is uncertain when the FDA will seek to issue new guidance on product modifications. Any efforts to do so could result in a more rigorous review process and make it more difficult to obtain clearance for device modifications.
The FDA may not grant 510(k) clearance or PMA approval of our future products, and failure to obtain necessary clearances or approvals for our future products would adversely affect our ability to grow our business.
Any future products that we develop, including our iTotal Hip replacement products, will require FDA clearance of a 510(k) or FDA approval of a PMA. The FDA may not approve or clear these products for the indications that are necessary or desirable for successful commercialization. Indeed, the FDA may refuse our requests for 510(k) clearance or premarket approval of new products.
In December 2012 the FDA issued guidance documents intended to explain the procedures and criteria the FDA will use in assessing whether a 510(k) submission meets a minimum threshold of acceptability and should be accepted for substantive review. Under the "Refuse to Accept" guidance, the FDA conducts an early review against specific acceptance criteria to inform 510(k) and PMA submitters if the submission is administratively complete, or if not, to identify the missing element(s). Submitters are given the opportunity to provide the FDA with the identified information. If the information is not provided within a defined time, the submission will not be accepted for FDA review. Significant delays in receiving clearance or approval, or the failure to receive clearance or approval for our new products would have an adverse effect on our ability to expand our business.
In 2015 we submitted an application for 510(k) clearance of iTotal Hip with the FDA. In the course of its review of that application, the FDA raised a number of questions, and we were not able to address all of those questions within the allowed review timeline. Therefore, after consultation with the FDA, we elected to withdraw the application. On September 28, 2016, we filed a new application seeking 510(k) clearance of our iTotal Hip.

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However, if we are not able to address the questions raised or satisfy the requirements imposed by the FDA in our new application for 510(k) clearance, or if the FDA raises additional questions or imposes additional requirements, we may be further delayed in receiving clearance of the iTotal Hip or may ultimately be unable to receive clearance, which would have an adverse effect on our ability to expand our business.
Our cleared and approved products are, and any future products will be, subject to post-marketing restrictions, and we may be subject to substantial penalties if we fail to comply with all applicable regulatory requirements.
The products for which we have obtained regulatory clearance or approval are, and any of our future products will be, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for such products, subject to continual requirements of and review by the FDA and other regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, registration and listing requirements, Quality System regulations relating to manufacturing, quality control and quality assurance and corresponding maintenance of records and documents. In addition, we must report corrections and removals to the FDA where the correction or removal was initiated to reduce a risk to health posed by the device or to remedy a violation of the Federal Food, Drug, and Cosmetic Act caused by the device that may present a risk to health, and maintain records of other corrections or removals. If we receive regulatory clearance or approval of additional products in the future, the clearance or approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of clearance or approval, and the accompanying label may limit the approved use of our product, which could limit sales of the product.
The FDA may also impose requirements for costly post-marketing studies or clinical trials and surveillance to monitor the safety or efficacy of a product. The FDA and other agencies, including the Department of Justice, or DOJ, and state Attorneys General, closely regulate the manufacturing, marketing and promotion of medical devices. Violations of the FDCA and other statutes, including the False Claims Act, may lead to investigations alleging violations of federal and state health care fraud and abuse laws, as well as state consumer protection laws. In addition, later discovery of previously unknown safety issues or other problems with our products, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in:
litigation involving patients who underwent procedures using our products;
restrictions on such products, manufacturers or manufacturing processes;
restrictions on the labeling or marketing of a product;
restrictions on product distribution or use;
requirements to conduct post-marketing studies or clinical trials;
warning letters or untitled letters;
withdrawal of the products from the market;
refusal to approve pending applications or supplements to approved applications that we submit;
recall of products;
repair, replacement, refunds, recalls or detention of our products;
fines, restitution or disgorgement of profits or revenues;
suspension or withdrawal of regulatory clearance or approval;
damage to relationships with any potential collaborators;
operating restrictions or partial suspension or total shutdown of production;
unfavorable press coverage and damage to our reputation;
refusal to permit the import or export of our products;
product seizure;
consent decrees; or
injunctions or the imposition of civil or criminal penalties.

Non-compliance with European Union requirements can also result in significant financial penalties.

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We may fail to obtain or maintain foreign regulatory approvals to market our products in other countries, which could harm our business.
To market and sell our products in countries outside the United States, we must seek and obtain regulatory approvals, certifications or registrations and comply with the laws and regulations of those countries. These laws and regulations, including the requirements for approvals, certifications or registrations and the time required for regulatory review, vary from country to country. Obtaining and maintaining foreign regulatory approvals, certifications or registrations are expensive and we cannot be certain that we will maintain or receive regulatory approvals, certifications or registrations in any foreign country in which we currently market or plan to market our products.
The regulatory approval process outside the United States generally includes all of the risks associated with obtaining FDA approval. In addition, in many countries outside the United States, the product must be approved for reimbursement before the product can be approved for sale in that country. We may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. If we fail to obtain or maintain regulatory approvals, certifications or registrations in any foreign country in which we currently market or plan to market our products, our ability to generate revenue will be harmed.
We may also incur significant costs in attempting to obtain and in maintaining foreign regulatory clearances, approvals or qualifications. Foreign regulatory agencies, as well as the FDA, periodically inspect manufacturing facilities both in the United States and abroad. If we experience delays in receiving necessary qualifications, clearances or approvals to market our products outside the United States, or if we fail to receive those qualifications, clearances or approvals, or if we fail to comply with other foreign regulatory requirements, we and our distributors may be unable to market our products or enhancements in international markets effectively, or at all. Additionally, the imposition of new requirements may significantly affect our business and our products. We may not be able to adjust to such new requirements, which may adversely affect our business.
If we or our suppliers fail to comply with ongoing FDA, EU or other foreign regulatory authority requirements, or if we experience unanticipated problems with our products, these products could be subject to additional restrictions or withdrawal from the market, which would harm our business.
Any product for which we obtain clearance or approval, and the manufacturing processes, reporting requirements, post-approval clinical data and promotional activities for such product, will be subject to continued regulatory review, oversight and periodic inspections by the FDA and other domestic and foreign regulatory bodies. In particular, we and our third-party suppliers are required to comply with the FDA's Quality System Regulation, or QSR, and the applicable regulatory requirements in the EU on product assessments and quality system assessments. In the EU, compliance with harmonized standards prepared under a mandate from the European Commission and referenced in the Official Journal of the EU, or harmonized standards, serve as a presumption of conformity with the relevant Essential Requirements under the Medical Devices Directive 93/42/EEC, as amended. These FDA regulations and EU standards cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our products and expected future products.
Compliance with applicable regulatory requirements is subject to continual review and is monitored rigorously through periodic inspections by the FDA. Compliance with harmonized standards in the EU is also subject to regular review through the conduct of inspection by Notified Bodies or other regulatory bodies. In September 2013, the European Commission issued a new recommendation on audits and assessments performed by Notified Bodies in the field of medical devices. According to this recommendation, Notified Bodies have to perform unannounced audits to verify continuous compliance with applicable legal obligations under Directive 93/42/EEC. We must permit and allow unimpeded access for Notified Body staff to conduct unannounced audits in order to maintain our CE Certificate. If we, or our manufacturers, fail to adhere to QSR requirements in the United States or regulatory requirements in the EU, this could delay production of our products and lead to fines, difficulties in obtaining regulatory clearances or CE Certificate, recalls, enforcement actions, including injunctive relief or consent decrees, or other consequences, which could, in turn, have a material adverse effect on our financial condition or results of operations.
The FDA audits compliance with the QSR through periodic announced and unannounced inspections of manufacturing and other facilities. The FDA inspected our Bedford, Massachusetts facility and quality system in June 2015 and our Wilmington facility in September 2015. While none of these inspections have resulted in any

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significant observations or warning letters, we cannot provide assurance that we can maintain a comparable level of regulatory compliance in the future at our facilities or that future inspections will have the same result.
The British Standards Institute, or BSI, an independent global notified body, conducts annual assessments of our quality management system in order to confirm that our quality management system complies with the requirements of ISO13485 in all material respects and periodic full recertification audits of our quality management system in order to confirm that we comply with the requirements of the Medical Devices Directive 93/42/EEC. Our last full recertification audit was completed in December 2015. The BSI completed an unannounced inspection in May 2016 of all applicable EU requirements. We expect that BSI will continue to conduct annual audits, or unannounced audits, to assess our compliance with the applicable EU requirements.
The failure by us or one of our suppliers to comply with applicable statutes and regulations administered by the FDA, or applicable regulatory requirements in the EU, or the failure to timely and adequately respond to any adverse inspectional observations, nonconformances or product safety issues, could result in any of the enforcement actions or sanctions described above under the risk factor captioned "-Our medical device products are subject to extensive governmental regulation both in the United States and abroad, and our failure to comply with applicable requirements could cause our business to suffer." Any of these sanctions could have a material adverse effect on our reputation, business, results of operations and financial condition. Furthermore, our key third-party manufacturers may not currently be or may not continue to be in compliance with all applicable regulatory requirements, which could result in our failure to produce our products on a timely basis and in the required quantities, if at all.
If our products, or malfunction of our products, cause or contribute to a death or a serious injury, we will be subject to medical device reporting regulations, which can result in voluntary corrective actions or agency enforcement actions, which could harm our business.
Under the FDA medical device reporting, or MDR, regulations, medical device manufacturers are required to report to the FDA information that a device has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to death or serious injury if the malfunction of the device or one of our similar devices were to recur. The decision to file an MDR involves a judgment by us as the manufacturer. We have made decisions that certain types of events are not reportable on an MDR; however, there can be no assurance that the FDA will agree with our decisions. If we fail to report MDRs to the FDA within the required timeframes, or at all, or if the FDA disagrees with any of our determinations regarding the reportability of certain events, the FDA could take enforcement actions against us, which could have an adverse impact on our reputation and financial results.
Additionally, all manufacturers placing medical devices in the market in the EU are legally bound to report any serious or potentially serious incidents involving devices they produce or sell to the competent authority in whose jurisdiction the incident occurred. In the EU, we must comply with the EU Medical Device Vigilance System. Under this system, incidents must be reported to the relevant National Competent Authorities of the EU countries.
Manufacturers are required to take Field Safety Corrective Actions, or FSCAs, to reduce a risk of death or serious deterioration in the state of health associated with the use of a medical device that is already placed on the market. An incident is defined as any malfunction or deterioration in the characteristics or performance of a device, as well as any inadequacy in the labeling or the instructions for use which, directly or indirectly, might lead to or might have led to the death of a patient or user or of other persons or to a serious deterioration in their state of health. An FSCA may include the recall, modification, exchange, destruction or retrofitting of the device. FSCAs must be communicated by the manufacturer or its European Authorized Representative to its customers and to the end users of the device through Field Safety Notices.
Any such adverse event involving our products could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection or enforcement action. Adverse events involving our products have been reported to us in the past, and similar adverse events may occur in the future. Any corrective action, whether voluntary or involuntary, will require the dedication of our time and capital, distract management from operating our business and may harm our reputation and financial results.
We have conducted a voluntary product recall and in the future, our products may be subject to additional product recalls either voluntarily or at the direction of the FDA or another governmental authority that could have a significant adverse impact on us.
The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture. The authority to

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require a recall must be based on an FDA finding that there is reasonable probability that the device would cause serious injury or death. In addition, foreign governmental bodies have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. The FDA requires that certain classifications of recalls be reported to the FDA within 10 working days after the recall is initiated.
On August 31, 2015, we announced a voluntary recall of specific serial numbers of patient-specific instrumentation for our iUni, iDuo, iTotal CR and iTotal PS knee replacement product systems. The recalled products were manufactured and distributed from our Wilmington manufacturing facility between July 18, 2015 and August 28, 2015. We isolated the root cause to a step in our ethylene oxide sterilization process conducted by a vendor. We have since completed final testing and implemented corrective actions, and we resumed normal production in October 2015. This recall and the resulting temporary reduction in capacity has adversely affected our business and may continue to adversely affect our business, including by potentially damaging our reputations with consumers, healthcare providers, distributors and other business partners. We have also experienced other limited recalls in the past related to manufacturing defects, labeling updates and packaging inconsistencies.
A government-mandated or voluntary recall by us could occur as a result of an unacceptable risk to health, component failures, malfunctions, manufacturing errors, design or labeling defects or other deficiencies and issues. We are also required to follow detailed recordkeeping requirements for all company-initiated medical device corrections and removals and to report such corrective and removal actions to the FDA if they are carried out in response to a risk to health and have not otherwise been reported under the MDR regulations. We may initiate a market withdrawal or a stock recovery involving our products in the future that we determine do not require notification to the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted.
In addition, in October 2014, the FDA issued guidance intended to assist the FDA and medical device industry in distinguishing medical device recalls from device enhancements. Per the guidance, if any change or group of changes to a device addresses a violation of the FDCA, that change would generally constitute a medical device recall and not simply a product enhancement and would require submission of a recall report to the FDA.
Recalls of any of our products would divert managerial and financial resources and have an adverse effect on our reputation, results of operations and financial condition, which could impair our ability to produce our products in a cost-effective and timely manner in order to meet our customers' demands. We may also be subject to liability claims or may be required to bear other costs or to take other actions that may have a negative impact on our future sales and our ability to generate profits.
In particular, our voluntary recall announced on August 31, 2015 has adversely affected our business and may continue to adversely affect our business in a number of ways, including through the financial impact from lost sales of the recalled products, reduction of our production capacity over the period of our investigation and resolution of the root cause of the recall, commercial disruption, damage to our reputation with orthopedic surgeons, consumers, healthcare providers, distributors and other business partners, and the filing of a putative class action complaint against us and certain of our officers alleging violations of securities laws, which has since been dismissed.
We may be subject to enforcement action if we engage in improper marketing or promotion of our products for which we have received regulatory clearance or approval. Any such enforcement action could result in significant fines, costs and penalties and could result in damage to our reputation.
Our promotional materials and training methods must comply with FDA and other applicable laws and regulations, including the prohibition of the promotion of unapproved, or off-label, use. Use of a device outside its cleared or approved indications is known as "off-label" use. We believe that the specific surgical procedures for which our products are marketed fall within the scope of the surgical applications that have been cleared by the FDA. However, physicians may use our products off-label, as the FDA does not restrict or regulate a physician's choice of treatment within the practice of medicine. If the FDA determines that our promotional materials or other product labeling constitute promotion of an unapproved, or off-label use, it could request that we modify our materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine or criminal penalties.
Other federal, state and foreign regulatory agencies, including the U.S. Federal Trade Commission, have issued guidelines and regulations that govern how we promote our products, including how we use endorsements and testimonials. If our promotional materials are inconsistent with these guidelines or regulations, we could be

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subject to enforcement actions, which could result in significant fines, costs and penalties. Our reputation could also be damaged and the adoption of our products could be impaired. In addition, the off-label use of our products may increase the risk of product liability claims. Product liability claims are expensive to defend and could divert our management's attention, result in substantial damage awards against us and harm our reputation.
In the EU, our medical devices may be promoted only for the intended purpose for which the devices have been CE Marked. Failure to comply with this requirement could lead to the imposition of penalties by the competent authorities of the EU Member States. The penalties could include warnings, orders to discontinue the promotion of the medical device, seizure of the promotional materials and fines. Our promotional materials must also comply with various laws and codes of conduct developed by medical device industry bodies in the EU governing promotional claims, comparative advertising, advertising of medical devices reimbursed by the national health insurance systems and advertising to the general public. If our promotional materials do not comply with these laws and industry codes we could be subject to penalties that could include significant fines. Our reputation could also be damaged and the adoption of our products could be impaired.
Legislative or regulatory healthcare reforms and other changes to laws, regulations or guidance from regulatory entities may make it more difficult and costly for us to obtain regulatory clearance or approval of our products and to produce, market and distribute our products after clearance or approval is obtained.
Recent political, economic and regulatory influences are subjecting the healthcare industry to fundamental changes. The sales of our products depend in part on the availability of coverage and reimbursement from third-party payors such as government health programs, private health insurers, health maintenance organizations and other healthcare-related organizations. Both the federal and state governments in the United States and foreign governments continue to propose and pass new legislation and regulations designed to contain or reduce the cost of healthcare. Such legislation and regulations may result in decreased reimbursement for medical devices or the procedures in which they are used, which may further exacerbate industry-wide pressure to reduce the prices charged for medical devices. This could harm our ability to market our products, generate sales and become or remain profitable.
In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. The FDA has recently adopted new guidance related to issues associated with product development, such as sterilization and packaging of products, that may adversely affect regulatory clearances that we are currently seeking or the timing of those regulatory clearances, and may adversely affect regulatory clearances or approvals that we seek in the future. Any new regulations or guidance or revisions or reinterpretations of existing regulations or guidance may impose additional costs or lengthen review times of our products or affect our ability to obtain clearance or approval of our new products at all. Delays in receipt of, or failure to receive, regulatory clearances or approvals for our new products would have a material adverse effect on our business, results of operations and financial condition.
Federal and state governments in the United States have recently enacted legislation to overhaul the nation's healthcare system. While the goal of healthcare reform is to expand coverage to more individuals, it also involves increased governmental price controls, additional regulatory mandates and other measures designed to constrain medical costs. The Patient Protection and Affordable Care Act significantly impacts the medical device industry. Among other things, the PPACA:
imposes an annual excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in the United States, although this tax has been suspended for 2016 and 2017;
establishes a new Patient-Centered Outcomes Research Institute to oversee and identify priorities in comparative clinical effectiveness research in an effort to coordinate and develop such research;
implements payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models; and
creates an independent payment advisory board that will submit recommendations to reduce Medicare spending if projected Medicare spending exceeds a specified growth rate.

In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. On August 2, 2011, President Obama signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to the U.S. Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation's automatic reduction to several government programs. This includes reductions to Medicare payments to providers of 2% per year through 2024, unless additional

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congressional action is taken. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, or the ATRA which, among other things, reduced Medicare payments to several providers, including hospitals and imaging centers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products or additional pricing pressure.
Risks related to other legal and compliance matters
We may be subject to class action litigation and similar or other litigation in the future, which may divert management’s attention and have a material adverse effect on our business, financial condition and results of operations.
On September 3, 2015, a purported securities class action lawsuit was filed against us, our chief executive officer and chief financial officer in the United States District Court for the District of Massachusetts, alleging, among other things, that the defendants violated federal securities laws by allegedly making misrepresentations or failing to make proper disclosures regarding our manufacturing process prior to our voluntary recall of specific serial numbers of patient-specific instrumentation for our iUni, iDuo, iTotal CR and iTotal PS knee replacement product systems. Among other relief, the plaintiff seeks certification of the class, unspecified compensatory damages, interest, attorneys’ fees, expert fees and other costs. On August 3, 2016, the court granted our motion to dismiss in it its entirety, denied the plaintiffs’ request to replead their allegations and dismissed the lawsuit.  The plaintiffs did not appeal within the allowed timeframe. The class action lawsuit is described in more detail in Part II, Item 1, Legal Proceedings, of this Quarterly Report on Form 10-Q.
There may be additional suits or proceedings brought in the future related to our voluntary recall of specific serial numbers of patient-specific instrumentation for our iUni, iDuo, iTotal CR and iTotal PS knee replacement product systems. Monitoring and defending against legal actions, whether or not meritorious, is time-consuming for our management and detracts from our ability to fully focus our internal resources on our business activities, and we cannot predict how long it may take to resolve such matters. In addition, we may incur substantial legal fees and costs in connection with litigation. Although we have insurance, coverage could be denied or prove to be insufficient. The substantial costs and diversion of management's attention in any such litigation could harm our business and a decision adverse to our interests in any such lawsuit could result in the payment of substantial damages and could have a material adverse effect on our business, results of operations and financial condition.
Our financial performance may be adversely affected by medical device tax provisions in the healthcare reform laws.
The PPACA imposes, among other things, an excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in the United States as of 2013, although this tax has been suspended for 2016 and 2017. Under these provisions, the Congressional Research Service predicts that the total cost to the medical device industry may be up to $20 billion over the next decade. The Internal Revenue Service issued final regulations implementing the tax in December of 2012 that require, among other things, bi-monthly payments if the tax liability exceeds $2,500 for the quarter and quarterly reporting. The Consolidated Appropriations Act, 2016 (Pub. L. 114-113), signed into law on December 18, 2015, includes a two year moratorium on the medical device excise tax imposed by Internal Revenue Code section 4191. Thus, the medical device excise tax does not apply to the sale of a taxable medical device by the manufacturer, producer, or importer of the device during the period beginning on January 1, 2016 and ending on December 31, 2017. It is unclear at this time if the moratorium will be extended, and we are currently subject to the tax after December 31, 2017. Additionally, Congress could terminate the moratorium or further change the law related to the medical device tax, in a manner that could adversely affect us. During the nine months ended September 30, 2016 and September 30, 2015 , we incurred $0 and $0.6 million , respectively, in tax expense associated with the medical device tax in the United States, which is included in general and administrative expense.
Our relationships with healthcare providers, physicians and third party payors will be subject, directly or indirectly, to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which, in the event of a violation, could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

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Healthcare providers, physicians and third party payors will play a primary role in the recommendation and prescription and use of our products and any other product candidates for which we obtain marketing approval. Our future arrangements with healthcare providers, physicians and third party payors may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute any products for which we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations include the following:
the federal Anti-Kickback Statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or recommendation or arranging of, any good or service, for which payment may be made under a federal healthcare program such as Medicare and Medicaid;
the federal False Claims Act imposes criminal and civil penalties, including through civil whistleblower or qui tam actions, against individuals or entities for, among other things, knowingly presenting, or causing to be presented, false or fraudulent claims for payment by a federal healthcare program or making a false statement or record material to payment of a false claim or avoiding, decreasing or concealing an obligation to pay money to the federal government, with potential liability including mandatory treble damages and significant per-claim penalties, currently set at $5,500 to $11,000 per false claim;
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing regulations, also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;
the federal Physician Payments Sunshine Act requires applicable manufacturers of covered products to report payments and other transfers of value to physicians and teaching hospitals, with data collection beginning in August 2013; and
analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws and transparency statutes, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third party payors, including private insurers.
Some state laws require device companies to comply with the industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government and may require product manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures. State and foreign laws also govern the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
If our operations are found to be in violation of any of the laws described above or any governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our financial results. If any such actions are instituted against us and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.
Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion of products from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any of the physicians or other healthcare providers or entities with whom we expect to do business is found to be not in

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compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.
Laws and regulations governing any international operations we may have in the future may preclude us from developing, manufacturing and selling certain products outside of the United States and require us to develop and implement costly compliance programs.
If we expand our operations outside of the United States, we must dedicate additional resources to comply with numerous laws and regulations in each jurisdiction in which we plan to operate. The Foreign Corrupt Practices Act, or FCPA, prohibits any U.S. individual or business from paying, offering, authorizing payment or offering of anything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the United States to comply with certain accounting provisions requiring the company to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations.
Compliance with the FCPA is expensive and difficult, particularly in countries in which corruption is a recognized problem. In addition, the FCPA presents particular challenges in the pharmaceutical industry, because, in many countries, hospitals are operated by the government, and doctors and other hospital employees are considered foreign officials. Certain payments to hospitals in connection with clinical trials and other work have been deemed to be improper payments to government officials and have led to FCPA enforcement actions.
If we are found to have violated laws protecting the confidentiality of patient health information, we could be subject to civil or criminal penalties, which could increase our liabilities and harm our reputation or our business.
There are a number of federal and state laws protecting the confidentiality of certain patient health information, including patient records, and restricting the use and disclosure of that protected information. In particular, the U.S. Department of Health and Human Services, or HHS, promulgated patient privacy rules under the Health Insurance Portability and Accountability Act of 1996, or HIPAA. These privacy rules protect medical records and other personal health information by limiting their use and disclosure, giving individuals the right to access, amend and seek accounting of their own health information and limiting most use and disclosures of health information to the minimum amount reasonably necessary to accomplish the intended purpose. If we or any of our service providers are found to be in violation of the promulgated patient privacy rules under HIPAA, we could be subject to civil or criminal penalties, which could increase our liabilities, harm our reputation and have a material adverse effect on our business, financial condition and operating results. Similarly, failure to comply with the European Union’s requirements regarding the protection of personal information can also lead to significant penalties and sanctions.

Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider trading.
We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with FDA regulations, to provide accurate information to the FDA, to comply with manufacturing standards we have established, to comply with federal and state health-care fraud and abuse laws and regulations, to report financial information or data accurately or to disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. We have adopted a code of business conduct and ethics, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

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Risks related to our common stock
An active trading market for our common stock may not be maintained.
Our common stock began trading on the NASDAQ Global Select Market on July 1, 2015. Prior to July 1, 2015, there was not a public market for our common stock. Given the limited trading history of our common stock, there is a risk that an active trading market for our shares may not be maintained. If an active market for our common stock is not maintained, it may be difficult for you to sell your shares without depressing the market price for the shares or at all. An inactive trading market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.
The price of our common stock is likely to be volatile and fluctuate substantially, which could result in substantial losses for purchasers of our common stock.
Our stock price is likely to be volatile. The stock market in general and the market for medical device companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, you may not be able to sell your common stock at or above your original purchase price. The market price for our common stock may be influenced by many factors, including:
a slowdown in the medical device industry or the general economy;
actual or anticipated quarterly or annual variations in our results of operations or those of our competitors;
changes in accounting principles or changes in interpretations of existing principles, which could affect our financial results;
actual or anticipated changes in our growth rate relative to our competitors;
changes in earnings estimates or recommendations by securities analysts;
fluctuations in the values of companies perceived by investors to be comparable to us;
announcements by us or our competitors of new products or services, significant contracts, commercial relationships, capital commitments or acquisitions;
competition from existing technologies and products or new technologies and products that may emerge;
the entry into or modification or termination of agreements with our distributors;
developments with respect to intellectual property rights;
sales, or the anticipation of sales, of our common stock by us, our insiders or our other stockholders, including upon the expiration of contractual lock-up agreements;
our ability to develop, obtain regulatory approval for and market new and enhanced products on a timely basis;
changes in coverage and reimbursement policies by insurance companies and other third-party payors;
our commencement of, or involvement in, litigation;
additions or departures of key management or technical personnel; and
changes in laws or governmental regulations applicable to us.
Persons who were our stockholders prior to our initial public offering continue to hold a substantial number of shares of our common stock; the actual or potential sales of some or all of those shares could reduce the market price of our common stock.
Our quarterly operating results are subject to substantial fluctuations, and you should not rely on them as an indication of our future results.
Our quarterly operating results have historically varied and may in the future vary significantly due to a combination of factors, many of which are beyond our control. These factors include:
seasonality in demand for our products, with reduced orders during the summer months and around year-end, followed by reduced sales of our products during the first and third quarters as a result;
our ability to meet the demand for our products;

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increased competition;
the number, timing and significance of new products and product introductions and enhancements by us and our competitors;
our ability to develop, introduce and market new and enhanced versions of our products on a timely basis;
changes in pricing policies by us and our competitors;
changes in the number of cancelled sales orders that occur in a quarter or during other reporting periods, which may adversely affect our product margins;
changes in the treatment practices of orthopedic surgeons;
changes in distributor relationships and sales force size and composition;
the timing of material expense- or income-generating events and the related recognition of their associated financial impact;
fluctuations in foreign currency rates;
ability to obtain reimbursement for our products;
availability of raw materials;
work stoppages or strikes in the healthcare industry;
changes in FDA and foreign governmental regulatory policies, requirements and enforcement practices;
import and export inspections, which could impact the timing of delivery for either supplies or finished goods;
changes in accounting policies, estimates and treatments; and
general economic factors.
We believe our quarterly sales and operating results may vary significantly in the future and period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. We may not be able to increase our sales, sustain our sales in future periods or achieve or maintain profitability in any future period. Any shortfalls in sales or earnings from levels expected by securities or orthopedic industry analysts could have an immediate and significant adverse effect on the trading price of our common stock in any given period.
Sale of a substantial number of our shares of common stock in the public market could cause the market price of our common stock to decline significantly, even if our business is doing well.
Persons who were our stockholders prior to our initial public offering continue to hold a substantial number of shares of our common stock, and sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares of common stock intend to sell shares, could reduce the market price of our common stock.
Moreover, certain holders of our common stock and holders of warrants to purchase our common stock have rights to require us to register their shares under the Securities Act, and to participate in future registrations of securities by us, subject to certain conditions.
In addition, shares of common stock that are either subject to outstanding options or reserved for future issuance under our stock incentive plans will become eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules and Rule 144 and Rule 701 under the Securities Act of 1933, as amended, and, in any event, we have filed a registration statement permitting shares of common stock issued on exercise of options to be freely sold in the public market. If these additional shares of common stock are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.
Certain of our employees, executive officers and directors have entered or may enter into Rule 10b5-1 plans providing for sales of shares of our common stock from time to time. Under a Rule 10b5-1 plan, a broker executes trades pursuant to parameters established by the employee, director or officer when entering into the plan, without further direction from the employee, officer or director. A Rule 10b5-1 plan may be amended or terminated in some circumstances. Our employees, executive officers and directors also may buy or sell additional shares outside of a Rule 10b5-1 plan when they are not in possession of material, nonpublic information.

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Our executive officers, directors and principal stockholders, if they choose to act together, have the ability to significantly influence all matters submitted to stockholders for approval.
Our executive officers, directors and principal stockholders and their affiliates beneficially own in the aggregate, a substantial portion of our capital stock. As a result, if these stockholders were to choose to act together, they would be able to significantly influence all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together, would significantly influence the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets.
This concentration of ownership control may:
delay, defer or prevent a change in control transaction that you may otherwise perceive to be beneficial;
entrench our management or the board of directors; or
impede a merger, consolidation, takeover or other business combination involving us that other stockholders may desire.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2015 , we had federal net operating loss, or NOL, carryforwards of $278 million and state NOL carryforwards of $138 million available to reduce future taxable income. These federal and state NOL carryforwards will begin to expire in 2020 , if not utilized. Utilization of these NOL and tax credit carryforwards may be subject to a substantial limitation under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, and comparable provisions of state, local and foreign tax laws due to changes in ownership of our company that have occurred previously or that could occur in the future. We have completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since our formation. The results of this study indicate that we experienced ownership changes, as defined by Section 382 of the Code. We have not identified NOLs that, as a result of these limitations, will expire unused. We may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership. As a result, if we generate taxable income, our ability to use our pre-change NOL and tax credits carryforwards to reduce U.S. federal and state taxable income may be subject to further limitations, which could result in increased future tax liability to us. All or a portion of the carryforwards could expire before being available to reduce future income tax liabilities.
Provisions in our corporate charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our restated certificate of incorporation and our bylaws may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things, these provisions:
establish a classified board of directors such that all members of the board are not elected at one time;
allow the authorized number of our directors to be changed only by resolution of our board of directors;
limit the manner in which stockholders can remove directors from the board;
establish advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on at stockholder meetings;
require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders by written consent;
limit who may call a special meeting of stockholders;
authorize our board of directors to issue preferred stock, without stockholder approval, that could be used to institute a shareholder rights plan, or so called "poison pill," that would work to dilute the stock ownership

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of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors; and
require the approval of the holders of at least 75% of the votes that all our stockholders would be entitled to cast to amend or repeal certain provisions of our certificate of incorporation or bylaws.
Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. This could discourage, delay or prevent someone from acquiring us or merging with us, whether or not it is desired by, or beneficial to, our stockholders.
Our restated certificate of incorporation designates the state courts in the State of Delaware or, if no state court located within the State of Delaware has jurisdiction, the federal court for the District of Delaware, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could discourage lawsuits against our company and our directors and officers.
Our restated certificate of incorporation provides that, unless our board of directors otherwise determines, the state courts in the State of Delaware or, if no state court located within the State of Delaware has jurisdiction, the federal court for the District of Delaware, will be the sole and exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a claim of breach of a fiduciary duty owed by any of our directors or officers to our company or our stockholders, any action asserting a claim against us or any of our directors or officers arising pursuant to any provision of the General Corporation Law of the State of Delaware, or any action asserting a claim against us or any of our directors or officers governed by the internal affairs doctrine. This exclusive forum provision may limit the ability of our stockholders to bring a claim in a judicial forum that such stockholders find favorable for disputes with us or our directors or officers, which may discourage such lawsuits against us and our directors and officers.
Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, stockholders must rely on capital appreciation, if any, for any return on their investment.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the operation, development and growth of our business. Furthermore, any future debt agreements may also preclude us from paying or place restrictions on our ability to pay dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain with respect to your investment for the foreseeable future.
We are an "emerging growth company," and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.
We are an "emerging growth company," or EGC, as defined in the JOBS Act, and may remain an EGC until the earlier of: (1) the last day of the year in which we have total annual gross revenues of $1 billion or more; (2) December 31, 2020; (3) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (4) the date on which we are deemed to be a large accelerated filer under the rules of the SEC, which means the first day of the year following the first year in which the market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30. For so long as we remain an EGC, we have and plan to continue to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not EGCs. These exemptions include not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or SOX Section 404, not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We cannot predict whether investors will find our common stock less attractive if we rely on certain or all of these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
In addition, the JOBS Act provides that an EGC can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an EGC to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably

74


elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not EGCs.
We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives and corporate governance practices.
Our common stock began trading on the NASDAQ Global Select Market on July 1, 2015. As a public company, and particularly after we are no longer an EGC, we will incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the NASDAQ Global Market and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. We expect that we will need to hire additional accounting, finance and other personnel in connection with our becoming, and our efforts to comply with the requirements of being, a public company and our management and other personnel will need to devote a substantial amount of time towards maintaining compliance with these requirements. These requirements will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect that the rules and regulations applicable to us as a public company may make it more difficult and more expensive for us to obtain director and officer liability insurance, which could make it more difficult for us to attract and retain qualified members of our board of directors. We are currently evaluating these rules and regulations, and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
Pursuant to SOX Section 404 we will be required to furnish a report by our management on our internal control over financial reporting beginning with our second filing of an Annual Report on Form 10-K with the SEC after we become a public company, including an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. However, while we remain an EGC, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with SOX Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that neither we nor our independent registered public accounting firm will be able to conclude, within the prescribed timeframe or at all, that our internal control over financial reporting is effective as required by SOX Section 404. If we identify one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.
ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS
Use of proceeds from registered securities

On July 7, 2015, we closed our initial public offering, or IPO, of our common stock and issued and sold 10,350,000 shares of our common stock, including 1,350,000 shares of common stock issued upon the exercise in full by the underwriters, J.P. Morgan Securities LLC and Deutsche Bank Securities Inc., of their overallotment option, at a public offering price of $15.00 per share, for aggregate offering proceeds of approximately $155 million.

The offer and sale of all of the shares in the offering was registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-204384), which was declared effective by the SEC on June 30, 2015.

We received aggregate net proceeds from the offering of approximately $140 million after deducting underwriting discounts and commissions and offering expenses payable by us. None of the underwriting discounts and commissions or offering expenses were incurred or paid to any director or officer of ours, to any of their associates, to persons owning 10% or more of our common stock or to any affiliates of ours.


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As of September 30, 2016 , we have used approximately $105.6 million of the net proceeds from the offering as follows: $8.0 million to purchase and install capital equipment to expand our manufacturing capacity, approximately $50.5 million to expand and support our sales and marketing efforts, and approximately $20.0 million to fund research, development and clinical activities and approximately $27.0 million for other general corporate purposes. We have not used any of the net proceeds from our IPO to make payments, directly or indirectly, to any director or officer of ours, to any of their associates, to persons owning 10% or more of our common stock or to any affiliates of ours. We have invested the remaining net proceeds from the offering in a variety of capital preservation investments, including short-term, investment grade, interest bearing instruments and U.S. government securities. There has been no material change in our planned use of the net proceeds from the initial public offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act on July 1, 2015.

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.

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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: November 10, 2016
 
 
 
 
 
 
 
CONFORMIS, INC.
 
 
By:
 
/s/ Paul Weiner
 
 
 
 
Paul Weiner
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)


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EXHIBIT INDEX
 
Exhibit
Number
 
Description of Exhibit
 
 
 
 
 
 
10.1*
 
Lease dated September 19, 2016 between Technology Park X Limited Partnership and ConforMIS, Inc. for 600 Technology Park Drive, Billerica, Massachusetts
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 Principal 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 Principal 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
 

Indicates management contract or other compensatory plan, contract or arrangement.
*
Furnished herewith.





78
8833492.3 Exhibit 10.1 LEASE Between Technology Park X Limited Partnership and ConforMIS, Inc. for 45,043 Rentable Square Feet at 600 Technology Park Drive Billerica, Massachusetts


 
i 8833492.3 Table of Contents Page Article 1 REFERENCE DATA ...................................................................................................... 1  1.1 SUBJECTS REFERRED TO:............................................................................................. 1  1.2 EXHIBITS .......................................................................................................................... 3  Article 2 PREMISES AND TERM................................................................................................. 4  2.1 PREMISES ......................................................................................................................... 4  2.2 TERM ................................................................................................................................. 5  Article 3 CONSTRUCTION........................................................................................................... 5  3.1 LANDLORD’S WORK ...................................................................................................... 5  3.2 PREPARATION OF PREMISES FOR OCCUPANCY .................................................... 7  3.3 GENERAL PROVISIONS APPLICABLE TO CONSTRUCTION .................................. 9  3.4 REPRESENTATIVES ........................................................................................................ 9  3.5 ARBITRATION BY ARCHITECTS ................................................................................. 9  3.6 WARRANTY OF LANDLORD’S WORK...................................................................... 10  3.7 INSURANCE – ................................................................................................................ 11  Article 4 RENT ............................................................................................................................. 12  4.1 RENT ................................................................................................................................ 12  4.2 OPERATING COST ESCALATION............................................................................... 12  4.3 PAYMENTS ..................................................................................................................... 21  Article 5 LANDLORD’S COVENANTS ..................................................................................... 21  5.1 LANDLORD’S COVENANTS DURING THE TERM .................................................. 21  5.2 INTERRUPTIONS ........................................................................................................... 24  Article 6 TENANT’S COVENANTS ........................................................................................... 26  6.1 TENANT’S COVENANTS DURING THE TERM ........................................................ 26 


 
ii 8833492.3 Article 7 CASUALTY AND TAKING ........................................................................................ 34  7.1 CASUALTY AND TAKING ........................................................................................... 34  7.2 RESERVATION OF AWARD......................................................................................... 35  7.3 ADDITIONAL CASUALTY PROVISIONS ................................................................... 35  Article 8 RIGHTS OF MORTGAGEE ......................................................................................... 36  8.1 PRIORITY OF LEASE..................................................................................................... 36  8.2 LIMITATION ON MORTGAGEE’S LIABILITY .......................................................... 37  8.3 INTENTIONALLY OMITTED ....................................................................................... 37  8.4 NO PREPAYMENT OR MODIFICATION, ETC. .......................................................... 37  8.5 NO RELEASE OR TERMINATION ............................................................................... 37  8.6 CONTINUING OFFER .................................................................................................... 38  Article 9 DEFAULT ..................................................................................................................... 38  9.1 EVENTS OF DEFAULT .................................................................................................. 38  9.2 TENANT’S OBLIGATIONS AFTER TERMINATION ................................................. 38  Article 10 MISCELLANEOUS .................................................................................................... 41  10.1  TITLES ....................................................................................................................... 41  10.2  NOTICE OF LEASE .................................................................................................. 41  10.3  CONSENT .................................................................................................................. 41  10.4  NOTICES FROM ONE PARTY TO THE OTHER................................................... 41  10.5  BIND AND INURE .................................................................................................... 41  10.6  NO SURRENDER ...................................................................................................... 42  10.7  NO WAIVER, ETC. ................................................................................................... 42  10.8  NO ACCORD AND SATISFACTION ...................................................................... 42  10.9  CUMULATIVE REMEDIES ..................................................................................... 42  10.10  PARTIAL INVALIDITY ..................................................................................... 42 


 
iii 8833492.3 10.11  LANDLORD’S RIGHT TO CURE ...................................................................... 43  10.12  ESTOPPEL CERTIFICATE ................................................................................. 43  10.13  WAIVER OF SUBROGATION AND CLAIMS ................................................. 43  10.14  BROKERAGE ...................................................................................................... 43  10.15  COVENANTS INDEPENDENT.......................................................................... 44  10.16  ACCESS ............................................................................................................... 44  10.17  ENTIRE AGREEMENT ....................................................................................... 44  10.18  GOVERNING LAW ............................................................................................. 44  10.19  ADDITIONAL REPRESENTATIONS ............................................................... 44  Article 11 SECURITY .................................................................................................................. 45 


 
1 8833492.3 Date of Lease Execution: September 19, 2016 ARTICLE 1 REFERENCE DATA 1.1 SUBJECTS REFERRED TO: Each reference in this Lease to any of the following subjects shall incorporate the data stated for that subject in this Section 1.1. Landlord: Technology Park X Limited Partnership Managing Agent: The Gutierrez Company Landlord’s and Managing Agent’s Address: 200 Wheeler Road Burlington, Massachusetts 01803 Landlord’s Representatives: Arthur J. Gutierrez, Jr., President Douglas L. Fainelli, Vice President of Operations Tenant: ConforMIS, Inc., a Delaware corporation Tenant’s Address (for Notice & Billing): Prior to Lease occupancy: 28 Crosby Drive, Bedford, MA 01730 Following occupancy: at the Premises Tenant’s Representative: Paul Weiner, Chief Financial Officer Building: 600 Technology Park Drive, Billerica, MA Floor(s): Fourth Floor Tenant’s Space: 45,043 Rentable Square Feet (RSF) located on the fourth floor of the Building in the location shown on the plan attached to this Lease as Exhibit A and made a part hereof. Total Rentable Floor Area of the Building: 449,055 Rentable Square Feet Scheduled Term Commencement Date: April 1, 2017


 
2 8833492.3 Outside Delivery Date: July 31, 2017, as extended on a day-for-day basis for each day of Tenant Delay and each day of Force Majeure Delay, except that the Outside Delivery Date may not be extended by more than thirty (30) days for Force Majeure Delay. Term Expiration Date: Eight (8) years and six (6) months following the Commencement Date determined in accordance with Section 2.2, subject to extension in accordance with Exhibit “F” or subject to earlier termination in accordance with the applicable provisions of this Lease. Fixed Rent (Exclusive of Tenant Electricity): Initial six (6) months: $0 Months 7-12: $923,381.50/Year $ 76,948.46/Month $ 20.50/RSF Months 13-24: $945,903.00/Year $ 78,825.25/Month $ 21.00/RSF Months 25-36: $968,424.50/Year $ 80,702.04/Month $ 21.50/RSF Months 37-48: $990,946.00/Year $ 82,578.83/Month $ 22.00/RSF Months 49-60: $1,013,467.502/Year $ 84,455.62/Month $ 22.50/RSF Months 61-72: $1,035,989.00/Year $ 86,332.42/Month $ 23.00/RSF Months 73-84: $1,058,510.50/Year $ 88,209.21/Month $ 23.50/RSF Months 85-102: $1,081,032.00/Year $ 90,086.00/Month $ 24.00/RSF Base Operating Costs (for the Building): Landlord’s Operating Costs (as defined in Section 4.2) for the Calendar Year ending December 31, 2017 (except that


 
3 8833492.3 the real estate taxes component of Base Operating Costs shall be equal to the real estate taxes for the entire fiscal tax year ending June 30, 2018) calculated as though the Building was fully occupied and fully assessed. Estimated Cost of Electrical Service to Tenant’s Space (Excluded from Fixed Rent): Payable by Tenant pursuant to Exhibit “D”, Paragraph IX First Fiscal Year for Tenant’s Paying Operating Costs Escalation: Calendar Year Ending December 31, 2018 Security: See Article 11 Guarantor: Not Applicable Permitted Uses: General Office Use and other lawful uses that are ancillary and accessory thereto. Real Estate Broker(s): Cushman & Wakefield Public Liability Insurance - Bodily Injury and Property Damage: Each Occurrence: $1,000,000 Aggregate: $2,000,000 Listed Mortgagee: Any mortgagee holding a mortgage on the Lot, the Building, or both, of which Landlord has provided written notice to Tenant setting forth the name and notice address of the mortgagee and the recording information for the applicable mortgage. As of the date of this Lease, the Listed Mortgagee is Bank of America, N.A. (See Exhibit “J”). Special Provisions: Rental Abatement – See Section 1.1; Option to Extend (per Exhibit “F”); Right of First Refusal (Per Exhibit “I”) 1.2 EXHIBITS The Exhibits listed below in this Section are incorporated in this Lease by reference and are to be construed as part of this Lease: EXHIBIT A Plan Showing Tenant’s Space EXHIBIT B Plan Showing the Park EXHIBIT C Approved Plans EXHIBIT D Landlord’s Services


 
4 8833492.3 EXHIBIT E Rules and Regulations EXHIBIT F Option to Extend EXHIBIT G Form of Notice of Lease EXHIBIT H Definition of Market Rent EXHIBIT I Right of First Refusal EXHIBIT J Form of SNDA EXHIBIT K Form of Estoppel Certificate EXHIBIT L Form of Letter of Credit EXHIBIT M Schedule ARTICLE 2 PREMISES AND TERM 2.1 PREMISES Subject to and with the benefit of the provisions of this Lease, Landlord hereby leases to Tenant and Tenant leases from Landlord, Tenant’s Space in the Building, excluding without limitation the floor slab, demising walls and perimeter walls and exterior windows (except the inner surfaces of each thereof), the common facilities area, common stairwells, shafts, ducts and conduits passing through the Premises and building systems and building service fixtures and equipment serving exclusively or in common other parts of the Building. Tenant’s Space with such exclusions, but with such appurtenances as hereinafter provided, is hereinafter collectively referred to as the “Premises”. Tenant shall have, as appurtenant to the Premises, the right to use in common with others entitled thereto, subject to reasonable rules of general applicability to tenants of the Building from time to time made by Landlord of which Tenant is given notice: (a) the common areas and facilities included in the Building or on the parcel of land on which the Building is located (“the Lot”), including, without limitation, a fitness center, locker rooms and a café located within the Building, (b) the common areas and facilities included within Technology Park (the “Park”), (c) all means of access to and from the Premises and the Building to the common areas and facilities of the Building and the Park (including, without limitation, all lobbies and elevators in the Building), (d) the service, loading and parking areas allocable to the Building (i.e., Tenant shall be entitled to up to 3.0 per 1,000 RSF non-reserved parking spaces, all without additional compensation from Tenant), (e) all sidewalks, roads, driveways and the like, (f) the Building service fixtures and equipment and the common mechanical or electrical closets and shafts, ducts and conduits serving the Premises; and (g) if the Premises include less than the entire rentable area of the fourth (4th) floor, the common toilets (if any) and other common facilities of such floor. Landlord reserves the right from time to time, without unreasonable interference with Tenant’s use and/or access to the Premises or the Building (a) to install, repair, replace, use, maintain and relocate for service to the Premises and to other parts of the Building or either, building service fixtures and equipment wherever located in the Building, and (b) to alter or relocate any other common area or facility, provided that substitutions are substantially equivalent or better. Landlord’s exercise of the foregoing rights shall not materially increase


 
5 8833492.3 Tenant’s obligations or diminish Tenant’s rights hereunder, or materially interfere with Tenant’s parking rights. Landlord shall at all times during the Term (defined below) maintain a full-service cafeteria and fitness center (including showers) within the Building in a first class condition and in size and scope comparable to the existing cafeteria and fitness center (including showers) existing as of the Commencement Date, so long as Tenant is leasing the Premises. 2.2 TERM To have and to hold for a period (the “Term”) commencing on the date (the “Commencement Date”) that is the later of (i) April 1, 2017, and (ii) the date on which the Premises are Ready for Occupancy as provided in Section 3.2, and continuing until the Term Expiration Date, unless sooner terminated pursuant to the terms of this Lease or extended as provided in Exhibit “F”. ARTICLE 3 CONSTRUCTION 3.1 LANDLORD’S WORK Landlord shall construct at its sole cost and expense the leasehold improvements to the Premises that are described in the final approved plans and specifications attached hereto as Exhibit “C” and made a part hereof (the “Approved Plans”), in accordance with (i) the Approved Plans, (ii) the terms of this Article 3, (iii) all applicable Codes, and (iv) all covenants, conditions and restrictions that affect or relating to the Premises, the Building, the Lot or the Park. All of the work shall utilize the materials and finishes described or referenced in the Approved Plans and, to the extent not described or referenced in Approved Plans, standard building materials and finishes for the Building, which are consistent with industry standard for a Class A building in the Boston northwest suburban area and consistent with the level of materials used in the spaces currently occupied by other tenants in the Building, specifically consistent with Insulet Corporation’s finishes and specifications on the second (2nd) floor of the Building. For the purposes of clarity, finishes and specifications will include items such as, but not limited to, lighting, ceiling tiles, millwork, lobby and restroom upgrades, doors, sidelights, flooring, etc. Lighting fixtures shall be upgraded to LED throughout Premises per the specifications comprising part of the Approved Plans. Prior to commencing Landlord’s Work, Landlord shall obtain all federal, state and local licenses, permits and approvals (whether governmental or non- governmental) required to perform Landlord’s Work and occupy and use the Premises for the Permitted Uses. Promptly after execution and delivery of this Lease, Landlord shall commence and exercise all reasonable efforts to complete Landlord’s Work and deliver the Premises Ready for Occupancy (as hereinafter defined) on or before the Scheduled Term Commencement Date set forth in Section 1.1 hereof. Attached hereto as Exhibit M is Landlord’s detailed construction schedule letter setting forth the projected completion dates for each component of the Landlord’s Work and showing the deadlines for any actions required to be taken by Tenant during such construction, and Landlord’s schedule for the completion of all components of the Landlord’s


 
6 8833492.3 Work, which schedule includes a completion date that is not later than the Scheduled Term Commencement Date set forth in Section 1.1 hereof. Landlord may from time to time during construction of Landlord’s Work reasonably modify such schedule provided that any such modification (a) shall maintain a completion date that is not later than the Scheduled Term Commencement Date set forth in Section 1.1 hereof, and (b) shall not adversely affect Tenant’s right to access the Premises prior to the Commencement Date, as set forth below in this Section 3.1. In no event shall Landlord’s failure to meet any of the deadlines on the construction schedule letter constitute a default by Landlord hereunder or give rise to any rights or remedies of Tenant, except as set forth in Section 3.2 of this Lease. Landlord shall cause the Premises to be completed in accordance with the Approved Plans. Landlord shall not make or allow any substitutions or changes in the Approved Plans nor allow the Landlord’s Work to deviate in any material respect from the work shown on the Approved Plans without Tenant’s prior written consent, in each instance. Notwithstanding anything to the contrary, no objection to or comments on Approved Plans or requested change with respect to any aspect of Landlord’s Work shown thereon shall constitute a Change Order by Tenant, nor shall Tenant be required to pay to Landlord the cost of or any contractor’s fee with respect to any such changes, if they specifically relate to any failure of the Approved Plans to comply with all applicable Codes (as hereinafter defined) and all other requirements of this Lease, or if the changes are minor and substituted with equal or better replacement items. Tenant may request, in writing, changes to the Approved Plans, subject to Landlord’s prior approval thereof, which shall not be unreasonably withheld, provided that (a) the changes shall meet or exceed Landlord’s standard specifications for tenant improvements for the Building; (b) the changes conform to applicable governmental regulations and necessary governmental permits and approvals can be secured; (c) the changes do not require building service beyond the levels normally provided to other comparable tenants in the Building; (d) the changes do not have any material adverse effect on the structural integrity or systems of the Building; and (e) the changes will not, in Landlord’s reasonable opinion, unreasonably delay Landlord’s Work. Landlord may condition its approval of a change request by Tenant on Tenant’s agreement to pay to Landlord upon substantial completion of the Landlord’s Work any reasonable, increased cost actually attributable to such change, as reasonably determined by Landlord. Landlord shall provide Tenant with a detailed cost estimate for the work contemplated in the Change Order and inform Tenant as to whether the Change Order will result in a delay in completion of Landlord’s Work. Tenant shall have three (3) business days to accept such Change Order and the resulting cost and timing changes as set forth in Landlord’s notice (an “Approved Change Order”) or to withdraw the requested Change Order. Failure by Tenant to respond within such three (3) business days shall be deemed a rejection of the Change Order. In addition, Landlord agrees to provide Tenant, upon Tenant’s request, with sufficient itemization and back-up documentation to facilitate analysis and to confirm the cost of said Change Order. Tenant shall pay to Landlord the actual cost of Approved Change Orders, less credits for any Landlord’s Work deleted, and plus a contractor’s fee of five percent (5%) of the net change costs, within fourteen (14) business days of receipt of Landlord’s invoice therefore. Upon execution of this Lease, Tenant (including its contractors, agents or employees) shall have access to the Premises, from time to time prior to the Commencement Date, so as to review the Premises and prepare for occupancy by Tenant (including for telephone/data, security


 
7 8833492.3 and furniture installations), provided that (i) Tenant’s contractors, agents or employees work in a harmonious labor relationship with Landlord’s general contractor; (ii) reasonable prior notice is given to Landlord specifying the work to be done, and (iii) no work, as reasonably determined by Landlord, shall be done or fixtures or equipment installed by Tenant in such manner as to materially interfere with the completion of the Landlord’s Work being done by or for Landlord in the Premises or the Building. During any such early access period, no Fixed Rent or additional rent or other charges shall accrue or be payable, but otherwise the performance of any such work by Tenant shall be subject to all the terms, covenants and conditions contained in this Lease. In addition, Landlord agrees to provide Tenant with a move allowance equal to $2.00 per rentable square foot of the Premises, or $90,086.00, to be used towards Tenant’s physical relocation costs and the installation of its furniture and telecommunications cabling at the Premises. Landlord agrees to pay Tenant such allowance or any portion thereof within twenty (20) days upon Landlord’s receipt of reasonable documentation evidencing the foregoing. Landlord and Tenant agree to resolve any disputes under this Article 3 pursuant to the provisions of Article 3.5 hereof, unless the parties agree otherwise. 3.2 PREPARATION OF PREMISES FOR OCCUPANCY Landlord shall have the Premises Ready for Occupancy (as hereinafter defined) on or before the Scheduled Term Commencement Date, which such date shall be extended on a day- for-day basis if and to the extent that Landlord is actually delayed in having the Premises Ready for Occupancy as the result of any Force Majeure Delay or any Tenant Delay, provided that such extension shall only be available to the extent that Landlord promptly notifies Tenant in writing of the occurrence of any Force Majeure Delay or Tenant Delay within five (5) business days after the commencement of such delay. For purposes of this Lease, (1) a “Force Majeure Delay” shall mean any actual delay in completion of Landlord’s Work resulting from any of the following: a change in governmental regulations first enacted after the date of this Lease (excluding typical periods for obtaining permits and approvals for the Landlord’s Work), unusual scarcity of or inability to obtain labor or materials that is beyond Landlord’s reasonable control (which shall not include lack of funds), labor difficulties not specifically related to Landlord or any contractor engaged by Landlord to perform any or all of Landlord’s Work (each, a “Contractor”), casualty, or other causes reasonably beyond Landlord’s reasonable control (which shall not include lack of funds), and (2) a “Tenant Delay” shall mean any actual delay in the completion of Landlord’s Work resulting from any of the following: (i) Tenant’s failure to supply information as reasonably requested by Landlord within the time periods specified herein (or if no time period is specified, within five (5) business days of request) in order to complete construction in a timely manner, (ii) Tenant’s changes to the Approved Plans evidenced by an Approved Change Order, and/or (iii) Tenant’s written request to stop work. The Premises shall be ready for occupancy (“Ready for Occupancy”) on the date on which all of the following have occurred: (a) the Landlord’s Work is completed in compliance with the terms of this Article 3, as certified in good faith by Landlord’s architect, except for insubstantial details of construction and mechanical adjustments that do not interfere with Tenant’s use of the Premises for its operations (“Punch List Items”), (b) Landlord has obtained


 
8 8833492.3 all approvals and permits from the appropriate governmental authorities required for the legal occupancy of the Premises, including without limitation a Certificate of Occupancy (which, if temporary, shall be only subject to agreed upon Punch List Items and any items of work for which Tenant is responsible hereunder or does not impact Tenant’s use of the Premises) for the Premises and has provided Tenant with a copy thereof, (c) Landlord shall have delivered to Tenant actual possession of the Premises free and clear of all other tenancies, occupancies, or use rights of other persons or parties, (d) all base building systems (e.g., HVAC, plumbing, electrical, life safety, elevators, etc.) are in good working order and repair, and (e) the Premises is free of all asbestos and other hazardous materials. If Landlord believes that the completion of Landlord’s Work was delayed due to Tenant Delay, then within fourteen (14) days after the Commencement Date, Landlord may give notice of such claim to Tenant. If Landlord fails to provide such notice within said fourteen (14) day period, Landlord shall be deemed to have irrevocably waived its right to claim any Fixed Rent with respect to any period of Tenant Delay. Such notice shall state the number of days by which Tenant Delay postponed the Commencement Date. If Tenant does not dispute the number of days by which Tenant Delay postponed the Commencement Date, then Tenant shall within thirty (30) days after the Rent Commencement Date, pay Landlord an amount (a “Tenant Delay Payment”) equal to the product of (i) the agreed number of days by which Tenant Delay postponed the Commencement Date, multiplied by (ii) the per diem rate of Fixed Rent. If Tenant does dispute the number of days by which Tenant Delay postponed the Commencement Date, then the dispute shall be resolved pursuant to Section 3.5 and if it is determined that the completion of Landlord’s Work was delayed due to Tenant Delay, then Tenant shall be obligated to make a Tenant Delay Payment in accordance with the above terms based on the architects’ determination of the number of days by which Tenant Delay postponed the Commencement Date. Subject to Force Majeure Delay and Tenant Delay, Landlord shall complete all Punch List Items within sixty (60) days of the date the Premises are Ready for Occupancy. If Landlord shall not complete all required Punch List Items within such sixty (60) day period, Tenant shall have the right, but not the obligation, to complete, at Landlord’s expense, the Punch List Items and Landlord shall reimburse Tenant for any actual reasonable costs incurred within twenty (20) days of written demand, containing reasonable backup documentation evidencing such costs. If Landlord fails to reimburse Tenant for any actual reasonable costs within twenty (20) days of written demand, Tenant may offset such costs (but in no event shall the monthly offset exceed twenty-five percent (25%) of the monthly Fixed Rent, and any costs that are not offset against monthly Fixed Rent as the result of such limitation shall be carried-forward and applied to subsequent payments of monthly Fixed Rent until Tenant has fully recovered all such costs) against the next due payment of Fixed Rent until fully reimbursed. If the Premises are not Ready for Occupancy on or before the Outside Delivery Date for whatever reason, Tenant may (i) cancel this Lease at any time thereafter while the Premises are not Ready for Occupancy by giving written notice to Landlord of such cancellation which shall be effective ten (10) days after such notice, unless within such ten (10) day period Landlord delivers the Premises Ready for Occupancy as defined herein, in which event such notice of cancellation shall be rendered null and void and of no further force or effect, or (ii) to enforce Landlord’s covenants to perform Landlord’s Work in accordance with the terms of this Lease. In addition, if the Premises are not Ready for Occupancy on the Scheduled Term Commencement Date (as such date may be extended as aforesaid) for whatever reason, then Tenant shall receive a credit of one (1) day of Fixed Rent for each day after the Scheduled Term Commencement


 
9 8833492.3 Date until the Premises are Ready for Occupancy, but if such period exceeds thirty (30) days, then such credit shall increase to two (2) days of Fixed Rent for each day thereafter until the Premises are Ready for Occupancy, such credits to be applied when the Fixed Rent commences hereunder. The foregoing rights shall be the Tenant’s sole remedy at law or in equity for Landlord’s failure to have the Premises ready for occupancy as required hereunder. 3.3 GENERAL PROVISIONS APPLICABLE TO CONSTRUCTION All construction work required or permitted by this Lease, whether by Landlord or by Tenant, shall be done in a good and workmanlike manner and in compliance with all applicable laws and all lawful ordinances, regulations and orders of governmental authorities (hereafter collectively referred to as the “Codes”), and the requirements of all insurers of the Building. Further, Landlord agrees to ensure that, as of the Commencement Date, all base building systems (i.e., HVAC, plumbing, electrical, life safety, elevators, etc.) shall be in good order and repair. Either party may inspect the work of the other at reasonable times and shall promptly give written notice of observed defects, provided that any inspection or right to inspect is solely for the benefit of the party having such right, and shall not constitute a representation or warranty to the other party or create any liability with respect to the party performing the inspection or having such right. Landlord’s obligations under Section 3.1 shall be deemed to have been performed when the Premises are Ready for Occupancy except for Punch List Items. 3.4 REPRESENTATIVES Each party authorizes the other to rely in connection with their respective rights and obligations under this Article 3 upon approval and other actions on the party’s behalf by Landlord’s Representative(s) in the case of Landlord or Tenant’s Representative in the case of Tenant or by any person designated in substitution or addition by written notice to the party relying. 3.5 ARBITRATION BY ARCHITECTS Whenever there is a disagreement between the parties with respect to construction by Landlord of Landlord’s Work, such disagreement shall be definitively determined by the following procedure: Landlord and Tenant shall each appoint one (1) architect, and such two (2) architects will then (within five (5) business days of their appointment) appoint a third architect licensed in the Commonwealth of Massachusetts with not less than ten (10) years of experience. Each architect shall establish within ten (10) days of their appointment the matter in dispute. In case of any dispute with respect to dollar amounts or lengths of time or dates such as the date of Substantial Completion, the dollar amount or length of time or date shall be the average of the two (2) closest determinations by the three (3) architects, with the determination of the architect which was not closest to another architects’ determination excluded from such calculation. In case of any dispute not involving dollar amounts or lengths of time or dates (i.e. the approval of plans) the determination by at least two (2) of the three (3) architects shall be required in order to resolve the matter in dispute. Landlord and Tenant shall each bear the cost of the architect selected by them respectively and shall share equally the cost of the third architect. During such arbitration period, the parties agree to cooperate with one another so as to proceed with


 
10 8833492.3 construction and with their respective obligations hereunder in a timely manner. Each determination under this Section 3.5 shall be binding upon Landlord and Tenant. 3.6 WARRANTY OF LANDLORD’S WORK Landlord represents, warrants and covenants that, as of the Commencement Date, (a) all materials and equipment incorporated within the Landlord’s Work will be of good quality, new and of recent manufacture unless the Approved Plans and this Lease otherwise specify; (b) no asbestos or other material currently considered to be hazardous shall be included in the Landlord’s Work; and (c) all Landlord’s Work shall conform to the requirements of the Approved Plans and this Lease and shall be of good quality and free from faults and defects, and shall be in compliance with all Codes (including, without limitation, applicable laws, codes, ordinances, rules and regulations, including without limitation, the Americans with Disabilities Act and the Rules and Regulations of the Massachusetts Architectural Access Board) as interpreted and applied by governmental officials with jurisdiction over the Landlord’s Work. Notwithstanding anything to the contrary contained in this Lease, Landlord hereby warrants and guarantees that the Landlord’s Work shall be free from defects in workmanship and materials. As of the first anniversary of the Commencement Date, Landlord shall assign to Tenant any and all warranties and guarantees with respect to Landlord’s Work and, to the extent that any such warranties and guarantees are not assignable, Landlord agrees to enforce the same for the benefit of Tenant, at Tenant’s sole cost and expense, except that Tenant shall not be responsible to pay for any such warranties or enforcement by Landlord against its own employees or against Gutierrez Construction Co., Inc. (“GCCI”), or against any of its other affiliates (including their respective employees). Landlord agrees to repair, at its sole cost and expense (and not as a cost or expense that may be passed-through to Tenant), any defective or nonconforming Landlord’s Work, promptly after receipt of notice therefrom from Tenant, provided that such notice from Tenant is received by Landlord (i) within one (1) year of the Commencement Date for patent defects and nonconformities, and (ii) within five (5) years of the Commencement Date for latent defects and nonconformities. In connection therewith, Tenant shall notify Landlord promptly after it becomes aware of any defects. If Landlord fails to correct any defective or nonconforming Landlord’s Work, or to commence such correction and proceed diligently thereafter within a reasonable time following notice thereof from Tenant (but not later than ten (10) business days after receiving such notice from Tenant, except in the event of an emergency, in which case Landlord shall commence to correct any such defective or nonconforming Landlord’s Work immediately), Tenant may correct such defective or non-conforming Landlord’s Work at Landlord’s expenses. Landlord shall pay Tenant upon demand for any costs reasonably incurred by Tenant and properly documented in so correcting defective or non-conforming Landlord’s Work. Any repairs or replacements or alterations to Landlord’s Work after said initial one (1) year period (or five (5) year period as to latent defects) may be included in Landlord’s Operating Costs in accordance with and subject to the provisions of Section 4.2 hereof. Notwithstanding the foregoing, (i) as of the first anniversary of the Commencement Date, Tenant shall be deemed to have waived any claim under this Section 3.6 with respect to any patent defective or nonconforming Landlord’s Work, except for any patent defective or


 
11 8833492.3 nonconforming Landlord’s Work of which Tenant advises Landlord in writing prior to the first anniversary of the Commencement Date, and (ii) as of the fifth (5th) anniversary of the Commencement Date, Tenant shall be deemed to have waived any claim under this Section 3.6 with respect to any latent defective or nonconforming Landlord’s Work, except for any latent defective or nonconforming Landlord’s Work of which Tenant advises Landlord in writing prior to the fifth anniversary of the Commencement Date; provided, however, that the foregoing shall not be construed to release or discharge Landlord from any of its other obligations or liabilities under this Lease. 3.7 INSURANCE. Landlord shall carry and maintain at all times during the design and construction of the Landlord’s Work, and shall cause the Contractor to maintain at all times during the design and construction of the Landlord’s Work and for such longer periods as may be require below, the following types of insurance and minimum coverage amounts written by insurers rated by A.M. Best & Co., with a minimum rating of (or equivalent to) A-V111 and qualified to do business in the Commonwealth of Massachusetts: (a) Workers’ compensation insurance in statutory amounts and employer’s liability insurance in the amount of $500,000,000; (b) Motor vehicle insurance covering owned, non-owned and hired vehicles for personal injury in the amount of $1,000,000 combined single limit for bodily injury and for property damage; (c) Commercial general liability coverage for bodily injury, personal injury and property damage in the amount of $1,000,000 per occurrence and 2,000,000 aggregate limit; (d) Property insurance written on a builder’s risk “all-risk” or equivalent policy form in the total value for the entire Project at the site on a replacement cost basis without optional deductibles; and (e) Umbrella Liability Coverage over Commercial General Liability and Motor Vehicle Insurance in the amount of $25,000,000. The liability policies required by this Article shall include a contractual liability endorsement covering the indemnification obligations under the Lease. The “other insurance” clause shall be deleted from each policy of insurance carried by the Landlord and Contractor so as to make it clear that the coverage of such policy is primary and any coverage under any policy or policies of insurance held by the Tenant or any other additional insured is secondary. All of the insurance required shall be written on an occurrence basis, except that professional liability and umbrella liability can be written on a claims made basis provided that such coverages are maintained for six years following final payment. Tenant, any lender(s) of Tenant and such other persons designated by Tenant from time to time shall be named as additional insureds on all insurance policies required hereunder except workers’ compensation and professional liability policies. Landlord shall, upon demand, provide Tenant with proof that the insurance requirements have been met, which shall be in the form of certificates of insurance (or, at


 
12 8833492.3 Tenant’s request, insurance policies) reasonably acceptable to the Tenant. Renewal certificates for all policies that expire during the period of time Landlord’s Work is being performed must also be provided at least thirty (30) days prior to each policy’s respective expiration. Nothing in this clause, or any failure of Landlord to secure required coverages, shall modify or limit the Landlord’s liability or other obligations hereunder. ARTICLE 4 RENT 4.1 RENT Tenant agrees to pay, without any offset or reduction whatever (except as expressly set forth herein), Fixed Rent equal to 1/12th of the annual Fixed Rent (i.e. the Monthly rent) set forth in Section 1.1 hereof in equal installments in advance on or before the first day of each calendar month included in the Term; and for any portion of a calendar month at the beginning or end of the Term, at the rate payable for such portion in advance prorated based on the number of days of the Term falling within such calendar month. The term “Rent” shall at all times be used herein to mean Fixed Rent plus additional rent or other sums of money payable under this Lease (including, without limitation, Section 4.2 hereof and electricity to the Premises pursuant to Exhibit “D”, Paragraph IX of Exhibit “D”). The term “Rent Commencement Date” shall at all times be used herein to mean such date on which Tenant commences to pay Fixed Rent pursuant to the terms and provisions of this Lease. 4.2 OPERATING COST ESCALATION With respect to the First Fiscal Year for Tenant’s Paying Operating Cost Escalation, or fraction thereof, and any Fiscal Year or fraction thereafter, Tenant shall pay to Landlord, as additional rent, Tenant’s share of the Operating Cost Escalation (as defined below), if any, on or before the thirtieth (30th) day following receipt by Tenant of Landlord’s Statement (as defined below). Within one hundred twenty (120) days after the end of each Fiscal Year ending during the Term and after Lease termination, Landlord shall render a statement (“Landlord’s Statement”) in reasonable line-item detail, consistently applied throughout the Term and according to usual accounting practices certified by Landlord and showing for the preceding Fiscal Year or fraction thereof, as the case may be, Landlord’s Operating Costs (as defined herein). Subject to the exclusions and other limitations set forth in this Lease, Landlord’s Operating Costs shall mean the commercially reasonable costs incurred by Landlord in operating, cleaning, maintaining, managing, and repairing the Building and the Lot, including, without limitation: real estate taxes on the Building and Lot; installments on assessments for public betterments or public improvements but only to the extent of the installment required to be paid in such Fiscal Year, Landlord hereby agreeing to pay such amounts over the longest period available under applicable law (except for site lighting); reasonable expenses of any proceedings for abatement of taxes and assessments with respect to any Fiscal Year or fraction of a Fiscal Year provided that Landlord shall reimburse Tenant its share of the proceeds of any abatement or return; reasonable premiums for insurance; reasonable compensation and all reasonable fringe benefits for full-time employees of Landlord (or the Managing Agent) at the


 
13 8833492.3 Building, workmen’s compensation, insurance premiums and payroll taxes paid by Landlord to, for or with respect to all persons engaged in the operating, maintaining, managing or cleaning of the Building, parking garage, and Lot; water, sewer, gas, telephone and the electricity to operate the base building heating, ventilating, air conditioning systems, elevators and parking lot lighting, and other utility charges not billed directly to tenants by Landlord or the utility companies; measurable and market costs of building and cleaning supplies and equipment (including rental); reasonable cost of maintenance, cleaning and repairs, including without limitation the services provided in Exhibit “D” hereof; cost of snow plowing or removal, or both (including snow removal of the rooftop, if necessary), and care of landscaping; payments to independent contractors under service contracts for cleaning, operating, managing, maintaining and repairing the Building and Lot (which payments may be to affiliates of Landlord provided the same are at reasonable rates consistent with the type of occupancy and the services rendered); the Building’s pro rata share of the Park-related costs (as defined below, including, but not limited to, snow plowing, sanding, sand removal, lot sweeping, landscaping, and common area and street lighting); and all other reasonable and necessary expenses paid in connection with the operation, cleaning, maintenance, management, and repair of the Building (including reasonable operation, cleaning, maintenance, repair and management costs and any subsidy (if applicable) associated with the cafeteria and fitness center in the Building to the extent that such costs exceed any and all revenue received by Landlord or its affiliates with respect to the cafeteria or fitness center) and Lot, or either, and properly chargeable against income. If Landlord (i) installs a new or replacement capital item (i) for the purposes of reducing Landlord’s Operating Costs (in Landlord’s reasonable opinion based on its extensive managing experience), or (ii) is required to perform capital repairs or replacements or to install capital items in order to comply with changes in applicable law that are first effective from and after the Commencement Date, the costs thereof as reasonably amortized by Landlord over their useful life in accordance with generally accepted accounting principles, with legal interest (not to exceed the then “Prime Rate” published in the Wall Street Journal plus two percent (2%) per annum) on the unamortized amount, shall be included in “Landlord’s Operating Costs”; provided, however, that in the case of any new or replacement capital item that reduces Landlord’s Operating Costs, the annual amount included in Landlord’s Operating Expenses shall not exceed the annual amount by which such capital item has reduced Landlord’s Operating Expenses (which such calculation shall be based on Landlord’s reasonable determination made at the time of Landlord’s decision to install any new or replacement capital item). In such event, Tenant shall pay Tenant’s share of such amortization payment for each month after such improvement is completed until the first to occur of the expiration of the Term or the end of the term over which such costs are required to be amortized. Landlord agrees that all of such services to be included in Landlord’s Operating Costs shall be obtained by Landlord at commercially reasonable, competitive market rates consistent with the operation and management of comparable Class A office buildings in the northwest suburban Boston area. Landlord’s Operating Expenses shall be calculated in accordance with Generally Accepted Accounting Principles (GAAP). Landlord represents that the Base Operating Costs shall include a property management fee equal to five percent (5%) of gross rents (subject to gross-up in accordance with the terms of this Section 4.2). Notwithstanding the foregoing, in no event shall “controllable operating expenses” included within Landlord’s Operating Costs increase by more than five percent (5%) per Lease Year, on a cumulative basis. For purposes hereof, the term “controllable operating expenses” shall mean those Operating Costs within Landlord’s control, specifically including without


 
14 8833492.3 limitation any property management fees, exercising prudent business practices, but shall exclude the following: (i) insurance premiums; (ii) snow-plowing and expenses incurred as a result of acts of God or varying weather conditions; (iii) the cost of utilities and real estate taxes; (iv) costs incurred because of changes in applicable Codes after the Commencement Date; (v) wages and benefits mandated by applicable Codes or by union contracts; and (vi) reasonable pest control costs. Notwithstanding anything to the contrary contained herein, in no event shall Landlord’s Operating Costs include (nor shall Tenant have any obligation to pay any Operating Cost Escalation on account of) the following: (a) Costs, expenses and fees relating to solicitation of, advertising for and entering into leases and other occupancy arrangements for space in the Park, including but not limited to legal fees, space planners’ fees, real estate brokers’ leasing commissions and advertising and marketing expenses. (b) Costs of defending any lawsuits with any mortgagee (except as the actions of Tenant may be in issue), costs of selling, syndicating, financing, mortgaging or hypothecating any of Landlord’s interest in the Park (or any part thereof), costs of any disputes between Landlord and its employees, disputes of Landlord with building management, or outside fees paid in connection with disputes with other tenants, invitees or adjacent property owners. (c) Costs of correcting defects in the Building, on the Lot or elsewhere in the Park or the Building equipment or replacing defective equipment (except that with respect to defects in the Landlord’s Work, this exclusion shall be subject to the time limitations set forth in Section 3.6 above, as applicable). (d) Costs of installations paid by or constructed for specific tenants or other occupants. (e) Interest, fees, points, other finance charges and principal payments on mortgages, and other costs of indebtedness, if any. (f) All amounts which are specifically charged to or otherwise paid by any other tenant or other occupant of the Building or the Park, or for items or services which Landlord provides selectively to one or more tenants (other than Tenant) without reimbursement. (g) Any bad debt loss, rent loss or reserves for bad debts or rent loss or other future expenses. (h) The salary and indirect compensation (including, without limitation, all fringe benefits, workmen’s compensation, insurance premiums and payroll taxes) of any employee above the trade of property manager, and the wages and indirect compensation of any employee to the extent such employee devotes his or her time to property other than the Building. (i) Amounts, if any, paid as ground rental by Landlord.


 
15 8833492.3 (j) Expenses related to third-party landlord-tenant disputes. (k) Any cost of any service or items sold or provided to tenants of the Building or Park or other occupants which has been or is entitled to be reimbursed by insurance or otherwise compensated by parties (e.g. easement holders) other than tenants of the Building and for which Landlord receives reimbursement. (l) The costs of repair, replacement, or restoration work occasioned by any casualty or condemnation above any commercially reasonable deductible amount on the insurance policy. (m) Any depreciation allowance or expense, expense reserve and other non- cash items. (n) Interest or penalties due to the late payment of taxes, utility bills or other such costs, unless caused by Tenant, in which event Tenant shall be responsible for same. (o) Any amount payable by Landlord by way of indemnity or for damages or which constitute a fine or penalty, including interest or penalties for late payment, unless caused by Tenant, in which event Tenant shall be responsible for same. (p) Costs incurred to maintain the structural integrity of the Building, except if caused by the Tenant as set forth in Section 5.1.3 hereof. (q) Costs incurred in connection with the making of repairs or replacements which are the obligation of another tenant or occupant of the Building. (r) Federal and state income taxes, excess profits taxes, franchise taxes, gift taxes, capital stock tax, inheritance and succession taxes, profit, use, occupancy, gross receipts, rental, capital gains, capital stocks income and transfer taxes imposed upon Landlord or the Park, estate taxes, and any other taxes to the extent applicable to Landlord’s general or net income. (s) Costs of any utility or other service used or consumed in the premises leased or leasable to any tenant or occupant, if Tenant’s use or consumption of such utility or other services is separately metered or sub-metered at the Premises. (t) Costs of any additions to or expansions of the Park or the Building. (u) Expenditures for capital improvements or replacements, except for the annual amortization amount of certain capital improvements or replacements as expressly permitted above in this Section 4.2. (v) Special assessments levied against the Park for any public improvements required to be undertaken by a governmental authority which would normally have been constructed by Landlord as part of the initial construction of the Park;


 
16 8833492.3 (w) The cost to make improvements, alterations and additions to the Building or the Lot which are required in order to render the same in compliance with laws, rules, orders regulations and/or directives existing as of the date of this Lease. (x) The cost of environmental monitoring, compliance, testing and remediation performed in, on, about and around the Building or the Lot, or elsewhere in the Park to the extent that such costs are caused by the negligent actions of Landlord or its employees or contractors. (y) Any costs or expense related to vacant space. (z) Amounts paid to subsidiaries or affiliates of Landlord for services rendered to the Property to the extent such amounts exceed the competitive costs for delivery of such services were they not provided by such related parties. (aa) Any and all management fees, other than a property management fee not to exceed five percent (5%) of gross rents. (bb) Any cost arising from Landlord’s charitable or political contributions. (cc) Any other expenses which, in accordance with generally accepted accounting principles, consistently applied, would not customarily be treated as Operating Costs by lessors of comparable buildings. (dd) Cost of initial cleaning and rubbish removal from the Building or the Site to be performed before final completion of the Building or Premises. (ee) Cost of initial landscaping to the Building. (ff) Lease payments for rental equipment (other than equipment for which depreciation is properly charged as an expense) that would constitute a capital expenditure if the equipment were purchased. (gg) Cost of acquiring, securing, cleaning or maintaining sculptures, paintings and other works of art. (hh) Wages, bonuses, and other compensation of employees above the grade of Building Manager. (ii) Any liabilities, costs or expenses associated with or incurred in connection with the removal enclosure, encapsulation or other handling of the Hazardous Materials and the cost of defending against claims in regard to the existence or release of Hazardous Materials at the Building or the Lot or elsewhere within the Park (except with respect to those costs for which Tenant is otherwise responsible pursuant to the express terms of this Lease). (jj) Increased insurance or Real Estate Taxes assessed specifically to any tenant of the Building or the Park for which Landlord is entitled to reimbursement from any other tenant.


 
17 8833492.3 (kk) The cost of installing, operating and maintaining any specialty service, observatory, broadcasting facilities, child or daycare; Cafeteria facilities being excluded from specialty service. (ll) Cost of any work or services performed for any facility other than the Building or the Park. (mm) Cost of the initial stock of tools and equipment for operation, repair and maintenance of the Building or the Park. (nn) Any cost associated with operating as an on or off-site management office for the Building, except to the extent included in the management fee permitted hereby. (oo) Landlord’s general overhead and any other expenses not directly attributable to the operation and management of the Building and the Park (e.g., the activities of Landlord’s officers and executives or professional development expenditures), except to the extent included in the management fee permitted hereby. (pp) Costs of mitigation or impact fees or subsidies (however characterized), imposed or incurred prior to the date of the Lease or imposed or incurred solely as a result of another tenant’s or tenants’ use of the Park or their respective premises. (qq) Costs related to public transportation, transit or vanpools, except to the extent that Tenant shall elect to participate in the service to which such costs relate. (rr) All other items for which another party compensates or pays to Landlord so that Landlord shall not recover any item of cost more than once. (ss) Costs incurred by Landlord due to the negligence or misconduct (including any violation of law) of Landlord or its agents, contractors, licensees and employees or the violation by Landlord or any tenants or other occupants of the terms and conditions of any lease of space or other agreements including this Lease. In the event that the average occupancy rate for the Building is less than one hundred (100%) percent for any Fiscal Year (including the applicable base year used for determining each component of Base Operating Costs), then for purposes of calculating Operating Costs, the Operating Costs for such Fiscal Year shall be increased by the additional costs and expenses that Landlord reasonably and in good faith estimates would have been incurred if the average occupancy rate had been one hundred (100%) percent for such Fiscal Year. It is not the intent of this provision to permit Landlord to charge Tenant for any Operating Costs attributable to unoccupied space, or to seek reimbursement from Tenant for costs Landlord never incurred. Rather, the intent of this provision is to allow Landlord to recover only those increases in Operating Costs properly attributable to occupied space in the Building and this provision is designed to calculate the actual cost of providing a variable operating expense service to the portions of the Building receiving such service. This “gross-up” treatment shall be applied only with respect to Operating Costs which vary based on level of occupancy.


 
18 8833492.3 In case of services which are not rendered to all areas of the Building on a comparable basis, the proportion allocable to the Premises shall be re-allocated by Landlord on a reasonable basis taking into consideration such factors as usage of a particular tenant in the Park and/or such other pertinent factors as reasonably determined by Landlord. Landlord shall not collect in excess of one hundred percent (100%) of Landlord’s Operating Costs or any item of cost more than once. Tenant shall be responsible to pay its share of the Operating Cost Escalation based upon the proportion that the Rentable Floor Area of Tenant’s Space bears to the Total Rentable Floor Area of the Building (i.e. 10.02%), but any elements of Operating Costs which relate to elements of the Park other than the Building and the Lot (“Park-related costs”), shall be allocated to the Building by Landlord in a commercially reasonable, consistent manner based upon the ratio of the square footage of the Building to the aggregate square footage of all completed buildings in the Park, as such buildings are completed from time to time, unless such allocation would result in a disproportionate charge based upon relative usage of the amenity or service on which such cost is based, in which case such allocation shall be based upon such relative usage. In no event shall Park-related costs include (i) costs which do not relate to a service or amenity that has a benefit to the Building, or (ii) costs that relate exclusively to another Building or Lot in the Park. All Landlord’s Operating Costs (including, without limitation, real estate taxes for land and improvements) attributable to surface and structured parking facilities located on the Lot that serve the Building and one or more other buildings in the Park shall be equitably allocated based on the relative rights to use such facilities. “Operating Cost Escalation” shall be equal to the difference for each Fiscal Year, if any, between: (a) the product of Landlord’s Operating Costs per rentable square foot as indicated in Landlord’s Statement times the Rentable Floor Area of Tenant’s Space; and (b) the product of the Base Operating Costs per rentable square foot times the Rentable Floor Area of Tenant’s Space. If, with respect to any Fiscal Year or fraction thereof during the Term, Tenant is obligated to pay Operating Cost Escalation, then Tenant shall pay, as additional rent, on the first day of each month of each ensuing Fiscal Year thereafter, until Landlord’s Statement for an ensuing Fiscal Year reflects that Tenant is not obligated to pay Operating Cost Escalation, “Estimated Monthly Escalation Payments” equal to 1/12th of the annualized Operating Cost Escalation for the immediately preceding Fiscal Year. Estimated Monthly Escalation Payments for each ensuing Fiscal Year shall be made retroactively from the first day of such Fiscal Year and on account of the payment to be made pursuant to the first sentence of this Section 4.2 for such Fiscal Year, with an appropriate additional payment or refund to be made at the time such payment is due for the previous year. The term “Fiscal Year” as used in this Article shall mean the period of twelve (12) consecutive months commencing on January 1st and ending on December 31st.


 
19 8833492.3 The term “real estate taxes” as used above shall mean all taxes of every kind and nature assessed by any governmental authority on the Lot, the Building and improvements, or both, and in the common areas of the Park, which the Landlord shall pay during a Fiscal Year because of or in connection with the ownership, leasing and operation of the Lot, the Building and improvements, or both, and the Park, subject to the following: there shall be excluded for such taxes all income taxes, excess profits taxes, excise taxes, franchise taxes, gift, estate, succession, inheritance, transfer taxes, and any real estate taxes allocable to any additions made to the Building, the Lot, or elsewhere in the Park after the Commencement Date, provided, however, that if at any time during the Term the present system of ad valorem taxation of real property shall be changed so that in lieu of the whole or any part of the ad valorem tax on real property, there shall be assessed on Landlord a capital levy or other tax on the gross rents received with respect to the Lot, the Building and improvements, or both, a federal, state, county, municipal, or other local income, franchise, excise or similar tax, assessment, levy or charge (distinct from any now in effect) measured by or based, in whole or in part, upon any such gross rents, then any and all of such taxes, assessments, levies or charges, to the extent so measured or based, shall be deemed to be included within the term “real estate taxes”. Notwithstanding any provision of this Lease, real estate taxes shall not include any fines or penalties, nor shall real estate taxes include any amounts attributable to any alterations or additions to the Building after the Commencement Date. If the total of the monthly payments paid by Tenant with respect to any Fiscal Year exceeds the actual Operating Cost Escalation for such Fiscal Year, then, such excess shall be refunded by Landlord to Tenant no later than thirty (30) days after the end of the Fiscal Year in question. Tenant shall have the right, but not the obligation, to contest (or request that Landlord so contest on behalf of all tenants of the Building) in good faith by appropriate proceedings diligently pursued the imposition or amount of any real estate taxes assessed against the Lot or the Building or such personal property taxes payable by it hereunder, including the right on behalf of, and in the name of the Landlord, to seek abatements thereto. The Landlord shall reasonably cooperate with Tenant, at Tenant’s sole expense, in any such contest or abatement proceedings. In the event that Tenant determines not to contest such taxes and Landlord desires to file such contest (or Tenant requests that Landlord file such contest), Landlord shall give written notice of that fact to all affected tenants, including Tenant, and shall have the sole right as to such tax bill to contest in good faith by appropriate proceedings diligently pursued the imposition or amount of any real estate taxes assessed against the Lot or the Building or such other taxes payable by Tenant hereunder, including the right to seek abatements thereto. In such event, the Tenant shall reasonably cooperate with Landlord, at no cost to Tenant, in any such contest or abatement proceedings. Landlord shall also reasonably cooperate and assist Tenant, at no cost to Landlord, in procuring any applicable tax credits or incentives. Landlord shall engage experts to challenge any unreasonable real estate tax assessments, if necessary. If Landlord shall receive on behalf of the Lot or the Building a rebate or abatement on any tax with respect to which a payment is made by Tenant, then after deducting therefrom any reasonable costs incurred by Landlord in obtaining such rebate or abatement (unless previously included in Operating Costs for such year), all of such net rebate or abatement relating to the Lot or the Building shall be returned to Tenant to the extent that such rebate or


 
20 8833492.3 abatement relates to payment made by the Tenant and not reimbursed by Landlord. If Tenant shall receive on behalf of the Lot or the Building a rebate or abatement on any tax with respect to which a payment is made by Tenant, then after deducting therefrom any costs reasonably incurred by Tenant in obtaining such rebate or abatement, all of such net rebate or abatement related to the Lot, the Building or to personal property taxes assessed against the Tenant’s property shall be retained by Tenant, as its sole property, to the extent such rebate or abatement relates to a payment made by Tenant and not reimbursed by Landlord. The remaining portion of such net rebate or abatement shall promptly be returned to Landlord. In the event that Landlord receives a refund on account of real estate taxes after the expiration of the Term, which refund relates to a Fiscal Year during the Term, the amount of such refund fairly allocable to Tenant shall be refunded to Tenant by Landlord within thirty (30) days of its receipt of such refund. All references to real estate taxes “for” a particular Fiscal Year shall be deemed to refer to real estate taxes due and payable during such Fiscal Year without regard to when such impositions are assessed or levied. All records pertaining to Landlord’s Operating Costs hereunder shall be maintained by the Landlord for a period of three (3) years following the expiration of the Fiscal Year to which such records relate. Tenant shall have the right, through its representatives, to examine, copy and audit such records at reasonable times, but no more than once per Fiscal Year, upon not less than thirty (30) days prior written notice to Landlord given within one hundred and eighty (180) days of receipt of Landlord’s Statement, otherwise Tenant’s right to dispute such charges shall be waived unless Tenant’s examination of any subsequent Fiscal Year establishes that the actual Operating Cost Escalation for the Fiscal Year in question is less than the Landlord’s final determination of the Operating Cost Escalation as set forth in the Landlord’s Statement submitted to Tenant by at least five percent (5%), in which case Tenant shall also have the right to dispute charges in either or both of the two (2) prior Landlord’s Statements. Such records shall be maintained at Landlord’s Address set forth in Section 1.1, or such other place within the Commonwealth of Massachusetts as Landlord shall designate from time to time for the keeping of such records. The costs of such audits shall be borne by Tenant; provided, however, that if such audit establishes that the actual Operating Cost Escalation for the Fiscal Year in question is less than the Landlord’s final determination of the Operating Cost Escalation as set forth in the Landlord’s Statement submitted to Tenant by at least five percent (5%) (and, so long as the discrepancy amount exceeds $5,000.00), then Landlord shall pay the reasonable cost of such audit (not to exceed $5,000). If, as a result of such audit, it is determined that Tenant must pay additional amounts to Landlord on account of the Operating Cost Escalation, or that Tenant has overpaid Landlord on account of the Operating Cost Escalation, then the undercharged or overpaid party shall reimburse the other party for the payment due within thirty (30) days of the final determination. Notwithstanding anything contained in this Lease to the contrary, the responsibility for the payment of all real estate taxes with respect to the Building and the Park shall be upon the Landlord and the Landlord agrees to pay the same as required by law. Landlord shall provide Tenant with copies of all tax bills and a computation of Tenant’s pro rata share thereof, as aforesaid. In the event that any special assessments are assessed and payable, Tenant’s pro rata share of the same shall be calculated as if such assessments were being paid by Landlord over the longest period of time permitted by applicable law.


 
21 8833492.3 Landlord shall have the right from time to time to change the periods of accounting under this Section 4.2 to any annual period other than the Fiscal Year and upon any such change all items referred to in this Section shall be appropriately apportioned and no such change may result in Tenant paying any more hereunder that would have been due from Tenant in the absence of such change. In all Landlord’s Statements, rendered under this Section, amounts for periods partially within and partially without the accounting periods shall be appropriately apportioned, and any items which are not determinable at the time of a Landlord’s Statement shall be included therein on the basis of Landlord’s best good faith estimate, and with respect thereto Landlord shall render promptly after determination a supplemental Landlord’s Statement, and appropriate adjustment shall be made according thereto. All Landlord’s Statements shall be prepared on an accrual basis of accounting. Notwithstanding any other provision of this Section 4.2, if the Term expires or is terminated as of a date other than the last day of a Fiscal Year at the end of the Term, Tenant’s last payment to Landlord under this Section 4.2 shall be made on the basis of Landlord’s best good faith estimate of the items otherwise includable in Landlord’s Statement and shall be made on or before the later of (a) twenty (20) business days after Landlord delivers such estimate to Tenant, or (b) the last day of the Term, with an appropriate payment or refund to be made upon submission of Landlord’s Statement. Without limitation, the obligation of Tenant to pay the Operating Cost Escalation with respect to any Fiscal Year during the Term (or portion thereof) or the Landlord’s obligation to make a refund therefore, as applicable, shall survive the expiration or earlier termination of the Term for a period of one year. 4.3 PAYMENTS All payments of Fixed Rent and additional rent shall be made to Managing Agent, or to such other person as Landlord may from time to time designate by written notice to Tenant. If any installment of rent, fixed or additional, or on account of leasehold improvements is paid after the due date thereof, at Landlord’s election, it shall bear interest at the rate equal to ten percent (10%) per annum from such due date, which interest shall be immediately due and payable as further additional rent; provided, however, Landlord hereby acknowledges and agrees that (i) Tenant shall have two (2) grace periods of an additional five (5) days per each calendar year of the Term before which such interest shall be charged by Landlord, and (ii) interest shall not accrue for more than ten (10) business days unless Landlord has provided a Tenant with notice stating that interest is accruing and the amounts on which interest is accruing. ARTICLE 5 LANDLORD’S COVENANTS 5.1 LANDLORD’S COVENANTS DURING THE TERM Landlord covenants throughout the Term: 5.1.1 Building Services – During the Term, Landlord shall furnish, through Landlord’s employees or independent contractors, the services listed in Exhibit “D” (which are common services provided to all tenants of the Building).


 
22 8833492.3 5.1.2 Additional Building Services – During the Term, Landlord shall furnish, through Landlord’s employees or independent contractors, reasonable additional Building operation services upon reasonable advance request of Tenant at reasonable and competitive rates from time to time established by Landlord to be paid by Tenant. 5.1.3 Repairs - Except as otherwise provided in Article 7, Landlord shall maintain, repair and replace the structural elements of the Building, including, without limitation, the roof, structural walls (if any), ceiling slabs (if any), floors, footings and foundation (collectively, the “Structural Elements”) as necessary to keep such elements in good condition and repair. Landlord shall also be responsible for (or shall cause such appropriate party in connection with Park areas beyond the Lot to be responsible for) (i) all exterior maintenance, repairs and replacements necessary to keep in good condition and working order all common areas of the Park, and the trees, shrubs, plants, landscaping, parking areas, driveways and walkways on the Lot or elsewhere in the Park, including but not limited to, all lighting and other fixtures and equipment serving such parking areas, driveways and walkways, (ii) providing the services and performing the maintenance work set forth in Section 4.2 and Article 7 hereof, and in Exhibit “D” attached hereto, and (iii) performing necessary repairs and replacements to maintain the watertight integrity of the Building, including but not limited to the roof, exterior wall, windows and skylights. Landlord shall also maintain, repair and replace the HVAC, life/safety, plumbing, electrical and mechanical equipment in the Building, such that it shall be in good operating condition throughout the Term. Landlord shall make all of such repairs and replacements necessary to maintain the foregoing in good working order comparable other first class buildings in the Boston northwest suburban area and in compliance with all laws and this Lease and all costs and expenses under this Section 5.1.3 shall constitute Landlord’s Operating Costs to the extent included therein pursuant to the provisions of Section 4.2, except that Landlord shall be responsible at its sole cost and expense without pass-through to the Tenant (except if caused by the negligence or willful misconduct of Tenant, in which case the same shall be at Tenant’s cost and expense, subject to Section 10.13), to repair, maintain and replace throughout the Term the Structural Elements (other than the roof membrane, for which the costs of repair, maintenance and replacement may be included in Landlord’s Operating Costs to the extent permitted under Section 4.2). All other routine and ordinary repairs and maintenance reasonably required within the Premises, except as specifically otherwise provided for herein, shall be the responsibility of Tenant. In the event that Tenant gives notice to Landlord of a condition which Tenant believes requires Landlord’s repairs or a condition which, if left uncorrected, will necessitate Landlord’s repair (provided that Landlord’s repair and maintenance obligations shall not be subject to receipt of notice from Tenant thereof), then, in accordance with the terms of this Section 5.1.3, Landlord shall respond promptly to investigate such condition, and, if such repairs are Landlord’s obligation hereunder, Landlord shall commence promptly to repair same and to diligently complete said repair. Tenant agrees during the Term to provide Landlord notice as soon as reasonably possible of any condition within the Premises, of which Tenant has actual knowledge, which might require, or if left uncorrected will necessitate, Landlord’s repair pursuant to this Section 5.1.3. Tenant shall have the right to require, at reasonable times and with reasonable advance notice, a representative of Landlord to inspect the Premises for repairs which may be the responsibility of Landlord.


 
23 8833492.3 If the Landlord is required to make any maintenance or repairs and should fail so to do, and so long as such maintenance or repairs relate solely to the Premises and not any common areas or common systems of the Building and/or Lot, then Tenant shall have the right to perform such maintenance or repairs (i) immediately after oral or written notice in the event of an emergency, and (ii) within thirty (30) days following written notice if the same is not an emergency (unless Landlord has commenced cure within said thirty (30) days and is proceeding diligently to complete such cure to completion). If Tenant does such work or performs such obligation, Landlord agrees that it will pay to Tenant the reasonable cost thereof upon receipt of reasonable documentation from Tenant evidencing such performance, and if Landlord shall fail to make such payment within thirty (30) days after notice thereof, then Tenant shall have the right to deduct (up to twenty-five percent (25%) of the Fixed Rent each month, and any costs that are not deducted against monthly Fixed Rent as the result of such limitation shall be carried- forward and deducted to subsequent payments of monthly Fixed Rent until Tenant has fully recovered all applicable costs) the reasonable cost thereof from the date such payment was due, until paid, from the rent and other charges thereafter accruing hereunder. 5.1.4 Quiet Enjoyment – Landlord covenants and warrants that Landlord has the right to make this Lease and that Tenant, provided there is then no uncured Event of Default hereunder, shall peacefully and quietly have, hold and enjoy the Premises throughout the Term without any manner of hindrance, interruption, disturbance or molestation, subject, however, to all the terms and provisions hereof. 5.1.5 Landlord’s Insurance - Beginning on the date of this Lease and continuing through the Term Expiration Date or, if later, the date on which Tenant vacates the entire Premises, Landlord shall purchase and keep in force, (i) broad-form commercial general liability insurance, or the equivalent then-customary form providing comparable coverages, written out on an occurrence basis containing provisions adequate to protect the Landlord from and against claims for bodily injury, including death and personal injury and claims for property damage occurring within the Park and/or the Building and/or common areas, such insurance having bodily injury and property damage combined limits of not less than five million dollars ($5,000,000) per occurrence increased as necessary so as to be at least comparable with other Class A buildings in the area that are equivalent to the Building and customarily carried by other landlords similarly situated as Landlord, and (ii) fire and extended coverage insurance, including vandalism, sprinkler leakage and malicious mischief, upon the Building on a full replacement cost basis, agreed cost value endorsement with agreed values for the Building and tenant improvements initially installed by Landlord (i.e. Landlord’s Work), as determined annually by the Landlord’s insurer. Landlord shall also procure and continue in force during the Term, as the same may be extended hereunder, rental interruption insurance for twelve (12) months or the maximum amounts permitted. Copies of certificates of insurance evidencing the foregoing shall be furnished to Tenant prior to Commencement Date. All insurance required of Landlord pursuant to this Section shall be effected under policies issued by insurers or recognized responsibility (which are rated A or A+ by Best’s Rating Service or a comparable rating by an equivalent service). The coverages required by this Section 5.1.5 may be provided by a single “package policy” or by a combination of “package policy” and umbrella.


 
24 8833492.3 5.1.6 Tenant’s Workmen’s Compensation Insurance – Landlord shall keep all Landlord’s employees working in the Premises covered by workmen’s compensation insurance in statutory amounts. 5.1.7 Landlord’s Indemnity - Landlord covenants and agrees to defend, with counsel reasonably acceptable to Tenant, save harmless and indemnify Tenant from any liability for injury, loss, accident or damage to any person or property on the Premises, in the Building or the Lot, or elsewhere in the Park, and from any claims, actions, proceedings and expenses and costs in connection therewith (including, without implied limitation, reasonable counsel fees), to the extent arising from the negligence and/or or willful acts of Landlord, its agents, employees or contractors , to the extent not caused by the negligence and/or willful acts of Tenant, its agents, employees, or contractors. In no event shall Landlord be obligated to indemnify Tenant to the extent any liability, claim, action, proceeding, expense or cost arises out of or relates to any willful or negligent act or omission of Tenant or of any of its employees, agents or contractors. Notwithstanding anything to the contrary contained in this Lease, in no event shall Landlord be liable to Tenant for any indirect, consequential, special, exemplary, incidental or punitive damages arising from or relating to this Lease. The covenants and indemnifications set forth in this Section 5.1.7 shall survive the expiration or earlier termination of this Lease. 5.1.8 Hazardous Materials - Landlord represents and warrants that, to the best of Landlord’s knowledge, after due inquiry as of the date of this Lease and as of the Commencement Date, that the Premises and rest of the Building do not contain any Hazardous Materials (as defined herein), except as may be contained in customary cleaning supplies or in such other related construction supplies (e.g. paint). 5.1.9 Tenant’s Costs - In case Tenant shall, without any fault on its part, be made party to any litigation commenced by or against Landlord or by or against any parties in possession of the Building or any part thereof claiming under Landlord, to pay all reasonable costs including, without implied limitation, reasonable counsel fees, incurred by or imposed upon Tenant in connection with such litigation and as additional rent, also to pay all such costs and fees incurred by Tenant in connection with the successful enforcement by Tenant of any obligations of Landlord under this Lease. 5.1.10 Compliance with Law. Landlord shall cause the Premises and common areas to comply with all Codes applicable thereto, including without limitation all life safety laws. See also Section 10.19 of this Lease. 5.1.11 Tenant’s Signage. Landlord shall place Tenant’s name on the Building directory, on the Technology Park Drive entrance at Concord Road, and on the monument sign at the 600 entrance and Technology Park Drive, all at Landlord’s cost and expense and not as an expense that may be passed-through to Tenant. 5.2 INTERRUPTIONS Except to the extent caused by, or arising out of, the negligence or willful misconduct of Landlord, its agents, employees or contractors, and subject to the terms of this Section 5.2 and Section 10.13, Landlord shall not be liable to Tenant for any compensation or reduction of rent


 
25 8833492.3 by reason of inconvenience or annoyance or for loss of business arising from power losses or shortages or from the necessity of Landlord’s entering the Premises for any of the purposes in this Lease authorized, or for repairing the Premises or any portion of the Building or Lot; provided that (i) in connection with any entry into the Premises by Landlord or anyone on Landlord’s behalf, Landlord shall comply with the terms of Section 6.1.10, and (ii) Landlord shall use reasonable efforts to minimize the effect of any such interruption of services and to eliminate the same at the earliest practicable time. In case Landlord is prevented or delayed from making any repairs, alterations or improvements, or furnishing any service or performing any other covenant or duty to be performed on Landlord’s part, by reason of any cause reasonably beyond Landlord’s reasonable control (which shall not include lack of funds), Landlord shall not be liable to Tenant therefore, nor, except as expressly otherwise provided below or in Article 7, shall Tenant be entitled to any abatement or reduction of rent by reason thereof; provided that Landlord shall use reasonable efforts to minimize the adverse effects of any such inability to perform and to eliminate the causes of such inability to perform at the earliest practicable time. Notwithstanding any terms of this Lease to the contrary, if any Building service is interrupted for a period of five (5) consecutive business days due to the negligence or willful acts of Landlord, its agents, servants, employees, contractors or subcontractors (and not due to the negligence or willful acts by Tenant, its agents, servants, employees, contractors or subcontractors), and such interruption adversely and materially affects Tenant’s use of the Premises for Tenant’s normal business operations, then there shall be an abatement on a square footage pro-rata basis of Fixed Rent and additional rent from and after said time period, until such services or occupancy, as applicable, are restored. Landlord agrees to use its commercially reasonable efforts to restore such services and to restore Tenant’s occupancy, as applicable, as soon as reasonably possible. Further, if any failure to furnish such Building service is not caused by Landlord as aforesaid (and not due to the negligence or willful misconduct of Tenant, its agents, servants, employees, contractors or subcontractors), and continues for a period in excess of five (5) consecutive business days, and such interruption adversely and materially affects Tenant’s use of the Premises for Tenant’s normal business operations, then there shall be an abatement on a square footage pro-rata basis of Fixed Rent and additional rent from and after said time period, until such services or occupancy, as applicable, are restored but only if and to the extent that the same is a covered loss under Landlord’s rental interruption insurance. Landlord agrees to use its commercially reasonable efforts to restore such services and to restore Tenant’s occupancy, as applicable, as soon as reasonably possible. In no event shall Tenant have any abatement or termination right if any such interruption is due to the negligence or willful acts of Tenant or its employees or agents or any breach of this Lease by Tenant. Landlord reserves the right to stop any service or utility system when necessary by reason of accident or emergency or until necessary repairs have been completed. Except in case of emergency repairs, Landlord will give Tenant at least thirty (30) days (if possible) advance notice of any contemplated stoppage and will use reasonable efforts to avoid inconvenience to Tenant by reason thereof such as conducting the same outside the regular business hours of Tenant. Except as expressly set forth in this Lease, the foregoing rights shall be Tenant’s sole remedy at law or in equity for the interruptions described in this Section 5.2, except that Tenant


 
26 8833492.3 retains any rights and remedies provided elsewhere in this Lease, including without limitation Section 10.15 hereof, for any breach of this Lease by Landlord. ARTICLE 6 TENANT’S COVENANTS 6.1 TENANT’S COVENANTS DURING THE TERM Tenant covenants throughout the Term and such further time as Tenant occupies any part of the Premises: 6.1.1 Tenant’s Payments - Except during Tenant’s early entry pursuant to Section 3.1 above, to pay when due (a) all Fixed Rent and additional rent, (b) all taxes which may be imposed on Tenant’s personal property in the Premises (including, without limitation, Tenant’s furniture, fixtures and equipment) regardless to whomever assessed, unless there is an uncured, continuing Event of Default of this Lease, at which time Landlord shall be responsible for the payment of any taxes associated therewith, (c) all charges by public utility for telephone and other utility services (including service inspections therefore and the charges as may be imposed pursuant to Exhibit “D” hereof) rendered to the Premises not otherwise required hereunder to be furnished by Landlord without charge and not consumed in connection with any services required to be furnished by Landlord. 6.1.2 Repairs and Yielding Up - Except as otherwise provided in Article 7 and Section 5.1.3, Tenant shall keep the Premises in substantially the same order, repair and condition as exists on the Commencement Date, except for (i) reasonable wear and tear, (ii) damage by fire, casualty or act of God, (iii) the effect of eminent domain and Hazardous Materials not introduced by Tenant, its agents, employees, contractors or invitees, and (iv) damage caused by Landlord or its agents, employees or contractors, and at the expiration or termination of this Lease peaceably to yield up the Premises and all changes and additions therein, other than changes or alterations that Tenant is obligated to remove pursuant to Section 6.1.15 (which shall be removed on termination in such order, repair and condition as required hereunder and repairing all damage caused by such removal) and changes or alterations that Tenant elects to remove in accordance with Section 6.1.15, and leaving the Premises clean and neat. Any property that Tenant is required to remove and that is not so removed by Tenant shall be deemed abandoned and may, upon ten (10) business days’ prior written notice to Tenant, be removed and disposed of by Landlord, in such manner as Landlord shall determine, and Tenant shall pay Landlord the entire cost and expense incurred by it by effecting such removal and disposition; it being agreed that the acceptance of reasonable use and wear shall not apply so as to permit Tenant to keep the Premises in anything less than suitable, tenantable and usable condition, considering the nature of the Premises and the use reasonably made thereof, or in less than good and tenantable repair. For avoidance of doubt, all improvements, changes and additions comprising the Landlord’s Work shall become part of the Premises and shall remain therein at the end of the Term, and Tenant shall have no obligation to remove the Landlord’s Work or to restore the Premises to its original condition at the end of the Term or earlier expiration thereof, except Tenant’s moveable trade fixtures, equipment and personal property, all of which fixtures, equipment, furniture and personal property shall remain the property of the Tenant and shall be removed at the expiration of the Term. Tenant agrees to repair, at its sole


 
27 8833492.3 cost and expense, any damage to the Premises caused by any such removal by Tenant in accordance with this Section 6.1.2 hereof, subject to Section 10.13. 6.1.3 Occupancy and Use - To use the Premises only for the Permitted Uses; and not to injure or deface the Premises, Building or Lot or Park; and not to permit in the Premises any auction sale, nuisance, or the emission from the Premises of any reasonably objectionable noise or odor; nor any use thereof which is contrary to law or ordinances, or invalidates or increases the premiums for any insurance on the Building or its contents or liable to render necessary any alteration or addition to the Building unless Tenant agrees to pay the cost of the increased premiums or required alteration or addition (it being agreed that use for the Permitted Uses does not violate the foregoing). 6.1.4 Rules and Regulations - To comply with the Rules and Regulations set forth in Exhibit “E” and all other reasonable Rules and Regulations hereafter made by Landlord, of which Tenant has been given notice, for the use of the Building, Lot and Park and their facilities and approaches, it being understood that Landlord shall not be liable to Tenant for the failure of other tenants of the Building or Park to conform to such Rules and Regulations, provided that Landlord enforces such rules against all tenants of the Building in a non- discriminatory fashion. Any rules and regulations promulgated by the Landlord under any provision of this Lease (including its exhibits) (i) shall be reasonable and uniformly enforced against all tenants and occupants of the Building, (ii) shall neither increase the obligations nor diminish the rights of Tenant under this Lease, and (iii) shall be instituted in writing and with at least thirty (30) days prior notice. In the event of a conflict between such rules and regulations and this Lease, the terms and provisions of this Lease shall prevail. 6.1.5 Compliance with Laws and Safety Appliances - To keep the Premises equipped with all safety appliances required by law or ordinance or any other regulation of any public authority because of any particular manner of use made by Tenant other than Tenant’s Permitted Use and to procure all licenses and permits so required because of such use, and at all times Tenant shall use the Premises in compliance with all of the foregoing, it being understood that the foregoing provisions shall not be construed to broaden in any way Tenant’s Permitted Uses. Tenant shall have the right, upon giving notice to the Landlord, to contest any obligation imposed upon it pursuant to the provisions of this Section 6.1.5, and provided the enforcement of such requirement or law is stayed during such contest and such contest will not subject the Landlord to penalty or jeopardize the title to the Premises or otherwise affect the Premises in any adverse way. Landlord shall cooperate with Tenant in such contest and shall execute any documents reasonably required in the furtherance of such purpose. 6.1.6 Assignment and Subletting – Tenant shall have the right, subject to the requirement of obtaining Landlord’s prior written consent, such consent not to be unreasonably withheld, conditioned or delayed by Landlord, to assign this Lease or sublet the whole or any portion of the Premises, which assignment or sublease shall be only for the Permitted Uses, its being understood that Tenant shall, as additional rent, reimburse Landlord promptly for reasonable legal and other reasonable expenses incurred by Landlord’s mortgagee (not to exceed $1,000.00 per request) in connection with any request by Tenant for consent to assignment or subletting. No assignment or subletting shall affect the continuing primary liability of Tenant (which, following assignment, shall be joint and several with the assignee). Such consent by


 
28 8833492.3 Landlord to any of the foregoing in a specific instance shall be reasonable and subject to the provisions hereinafter provided. Landlord’s consent shall not be treated as having been withheld unreasonably if, in connection with any such proposed assignment or subletting: (i) the terms of the proposed assignment or subletting do not prohibit further assignments of the Lease or subletting of the Premises without the written consent of Landlord, the granting of which consent shall be subject to the terms and conditions hereof, and in any event shall not be unreasonably withheld, conditioned or delayed; and (ii) in connection with an assignment of this Lease, the assignee does not agree directly with Landlord, by written instrument in form reasonably satisfactory to Landlord, to be bound by all the obligations of Tenant thereafter arising hereunder including, without limitation, the covenant against further assignment and subletting without the written consent of Landlord, subject to the terms and conditions of this Section. Tenant hereby acknowledges and agrees that the foregoing is not intended to be an exclusive list of the reasons for which Landlord may reasonably withhold consent to a proposed request by Tenant for consent to assignment or subletting. No consent to any of the foregoing in a specific instance shall operate as waiver in any subsequent instance. If an assignment or subletting is proposed to be made and Landlord’s consent is required as hereinabove provided, Tenant shall give Landlord prior notice of such proposal. Thereafter, Tenant shall provide Landlord with such information (including creditworthiness information) as Landlord may reasonably request relative to facts which would bear upon the factors entering into the determination whether Landlord’s approval is to be granted, provided Landlord requests such information within five (5) business days of receipt of such notice from Tenant. Landlord shall respond to a request for consent within ten (10) business days of Tenant’s request for consent. Notwithstanding any provision contained in this Lease to the contrary, no consent of Landlord (or Landlord’s mortgagee) shall be required for A) the occupancy (including any assignment or subletting as hereinafter provided) of the Premises by any entity controlling, controlled by or under common control with Tenant from time to time (an “Affiliate”) or B) the assignment of this Lease or the subletting of any portion (or the whole) of the Premises, (i) to an Affiliate of Tenant, (ii) to a corporation or other entity into or with which Tenant has merged, been reorganized or been consolidated or to which substantially all of Tenant’s assets are transferred, (iii) to any corporation or other entity with which Tenant is otherwise affiliated (all of the foregoing hereinafter sometimes collectively shall be referred to as “Permitted Transfers”, and any person to whom any Permitted Transfer is made hereinafter sometimes shall be referred to as a “Permitted Transferee”). In any event, the following conditions shall apply: (x) the Security posted pursuant to Article 11 hereof shall remain in place; (y) such Permitted Transferee agrees directly with Landlord by written instrument to be bound by all of the obligations of Tenant thereafter arising hereunder; and (z) such Permitted Transferee under subsection (ii) shall have a net worth of at least equal to or greater than that of Tenant as of the date of this Lease (i.e. $125,000,000.00); and in the event of any such assignment or subletting for which no consent by Landlord is required hereunder, Tenant’s continuing primary liability shall remain unaffected, and Tenant shall not be obligated to share Rent Differential as hereinafter set forth. If this Lease shall be assigned, or if the Premises or any part hereof shall be sublet or occupied by any person other than Tenant, Landlord may, at any time and from time to time, following an uncured, continuing Event of Default, collect rent (or any amounts due to Landlord hereunder) from the assignee, subtenant or occupant (other than an Affiliate) and apply the amount collected, net of reasonable third party out-of-pocket costs of collection, to the annual


 
29 8833492.3 Fixed Rent, additional rent and all other charges herein reserved, but no such assignment, subletting, occupancy or collection shall be deemed a waiver of the provisions of this Section 6.1.6, or acceptance of the assignee, subtenant or occupant as tenant, or a release of Tenant from the further performance of the terms, covenants and conditions of this Lease on the part of Tenant to be performed. In such event, after deducting Landlord’s share of the Rent Differential, equitably determined on a monthly basis, if applicable as hereinafter provided, Landlord agrees to remit to Tenant any excess on a month to month basis. If Landlord’s approval of a sublease or assignment is necessary and Landlord approves a sublease or assignment, and said sublease or assignment is for a total rental amount which on an annualized basis is greater than the Fixed Rent and additional rent due from Tenant to Landlord under this Lease, Tenant shall pay to Landlord, forthwith upon Tenant’s receipt of each installment of such excess rent, during the term of any approved sublease or assignment, as additional rent hereunder, in addition to the Fixed Rent and other payments due under this Lease, an amount equal to fifty percent (50%) of the positive excess between all Fixed Rent and additional rent received by Tenant under the sublease or assignment and the Fixed Rent and the additional rent due hereunder after Tenant has recouped, in full, its reasonable out-of-pocket expenses with respect to such sublease or assignment, including without limitation, reasonable real estate brokerage commissions, utilities expenses, reasonable legal fees, reasonable free rent, reasonable marketing costs and the reasonable costs of refurbishment of the Premises for such sublease or assignment (the “Rent Differential”). The Rent Differential shall not include the sales or rental proceeds received by Tenant in connection with the sale or lease of its personal property to a proposed transferee. In the event the sublease is for less than the full Premises hereunder, the rent payable by Tenant shall be proportionately adjusted in determining the excess (but all expenses to be recouped will be deducted) pro-rated on a square foot basis. Anything contained in the foregoing provisions of this section to the contrary notwithstanding, neither Tenant nor any other person having interest in the possession, use, occupancy or utilization of the Premises shall enter into any lease, sublease, license, concession or other agreement for use, occupancy or utilization of space in the Premises which provides for rental or other payment for such use, occupancy or utilization based, in whole or primarily on the net income or profits derived by any person from the Premises leased, used, occupied or utilized (other than an amount based on a fixed percentage or percentages of receipts or sales), and any such purported lease, sublease, license, concession or other agreement shall be absolutely void and ineffective as a conveyance of any right or interest in the possession use, occupancy or utilization of any part of the Premises. 6.1.7 Indemnity - To defend, with counsel reasonably acceptable to Landlord, save harmless, and indemnify Landlord from and against any liability, claims, actions, proceedings and expenses and costs in connection therewith (including, without implied limitation, reasonable counsel fees) with respect to injury, loss, accident or damage to any person or property occurring on the Premises, in the Building or the Lot, or elsewhere in the Park, (i) to the extent arising from the negligence and/or willful misconduct of Tenant or any of Tenant’s employees, agents, contractors, subtenants, assignees, licensees or invitees, to the extent not caused by the negligence and/or willful acts of Landlord, its agents, employees or contractors or (ii) resulting from the failure of Tenant to perform and discharge its covenants and obligations under this Lease. In no event shall Tenant be obligated to indemnify Landlord to the extent any liability, claim, action, proceeding, expense or cost arises out of or relates to any willful or


 
30 8833492.3 negligent act or omission of Landlord or of any of Landlord’s employees, agents, or contractors. Notwithstanding anything to the contrary contained in this Lease, and except as provided in Section 6.1.16, in no event shall Tenant be liable to Landlord for any indirect, consequential, special, exemplary, incidental or punitive damages arising from or relating to this Lease. The covenants and indemnifications set forth in this Section 6.1.7 shall survive the expiration or earlier termination of this Lease. 6.1.8 Tenant’s Liability Insurance – To maintain public liability insurance in the Premises in amounts which shall, at the beginning of the Term, be at least equal to the limits set forth in Section 1.1 and, not more than two times during the Term, shall be for such higher limits, if any, as are customarily carried in the area in which the Premises are located on property similar to the Premises and used for similar purposes and to furnish Landlord (and/or its mortgagees) with the certificates thereof, prior to occupancy hereunder, evidencing such coverage and providing that the insurance indicated therein shall not be cancelled without at least ten (10) days’ prior written notice to Landlord. Landlord and its Listed Mortgagee shall be named as additional insureds on any such policies. 6.1.9 Tenant’s Workmen’s Compensation Insurance - To keep all Tenant’s employees working in the Premises covered by workmen’s compensation insurance in statutory amounts. 6.1.10 Landlord’s Right of Entry – Upon not less than twenty four (24) hours’ notice or other reasonable notice and during regular business hours (except in the event of an emergency), to permit Landlord and Landlord’s agents entry to (i) examine the Premises at reasonable times and, if Landlord shall so elect and is otherwise permitted hereunder, to make repairs or replacements and (ii) to remove, at Tenant’s expense, any changes, additions, signs, curtains, blinds, shades, awnings, aerials, flagpoles, or the like not consented to in writing, if consent was required pursuant to Section 6.1.15 or Section 6.1.20; and to show the Premises to prospective tenants during the twelve (12) months preceding expiration of the Term and to prospective purchasers and mortgagees at all reasonable times. Notwithstanding anything to the contrary contained in this Lease, any entry by Landlord and Landlord’s agents shall not interfere with Tenant’s daily operations and shall comply with Tenant’s reasonable security procedures, and Tenant shall have the right to have an employee accompany Landlord and/or its agents at all times that Landlord and/or its agents are present on the Premises. 6.1.11 Loading – Except with Landlord’s prior written consent, not to place a load upon the Premises exceeding an average rate of one hundred (100) pounds of live load per square foot of floor area; and not to move any safe, vault or other heavy equipment in, about or out of the Premises except in such a manner and at such times as Landlord reasonably shall in each instance approve; Tenant’s business machines and mechanical equipment which cause vibration or noise that may be transmitted to the Building structure or to any other leased space in the Building shall be placed and maintained by Tenant in settings of cork, rubber, spring, or other types of vibration eliminators sufficient to eliminate such vibration or noise. 6.1.12 Landlord’s Costs - In case Landlord shall, without any fault on its part, be made party to any litigation commenced by or against Tenant or by or against any parties in possession of the Premises or any part thereof claiming under Tenant, to pay, as additional rent,


 
31 8833492.3 all reasonable costs including, without implied limitation, reasonable counsel fees incurred by or imposed upon Landlord in connection with such litigation and as additional rent, also to pay all such costs and fees incurred by Landlord in connection with the successful enforcement by Landlord of any obligations of Tenant under this Lease. 6.1.13 Tenant’s Property - All the furnishings, fixtures, equipment, effects and property of every kind, nature and description of Tenant and of all persons claiming by, through or under Tenant which, during the continuance of this Lease or any occupancy of the Premises by Tenant or anyone claiming under Tenant, may be on the Premises or elsewhere in the Building or on the Lot or elsewhere in the Park shall be at the sole risk and hazard of Tenant, and if the whole or any part thereof shall be destroyed or damaged by fire, water or otherwise, or by the leakage or bursting of water pipes, steam pipes, or other pipes, by theft, or from any other cause, no part of said loss or damage is to be charged to or to be borne by Landlord, except to the extent arising from Landlord’s willful act or negligence, or that of its agents, employees or contractors, as required by law, or from any breach of this Lease by Landlord. 6.1.14 Labor or Materialmen’s Liens - To pay promptly when due the entire cost of any work done on the Premises by Tenant, its agents, employees, or independent contractors; and immediately to discharge or bond-off any such liens which may so attach within twenty (20) business days after receipt of written notice of such attachment. 6.1.15 Changes or Additions – Except in connection with the construction of Landlord’s Work hereunder, not to make any material changes or additions to the Premises without Landlord’s prior written consent, which such consent shall not be unreasonably withheld, conditioned or delayed. Notwithstanding the foregoing, Tenant may, from time to time, at its own cost and expense and without the consent of Landlord, make non-structural alterations, additions or improvements to the Premises, so long as they do not materially adversely affect any of the mechanical, electrical or plumbing systems or life safety systems of the Building or otherwise require Landlord to incur unusual expense to readjust the Premises to normal office use on the Term Expiration Date (collectively herein called “Non-Structural Alterations”), provided that Tenant first notifies Landlord in writing of any such Non-Structural Alterations and satisfies any reasonable requirements of Landlord’s with respect to insurance. If Tenant desires to make any Non-Structural Alterations costing in excess of One Hundred Twenty-Five Thousand Dollars ($125,000.00) in the aggregate during any twelve month period, or any other alteration, including any structural alteration or alteration affecting any of the mechanical, electrical or plumbing systems of the Building or life safety systems, Tenant must first obtain the consent of Landlord thereto, which consent shall not be unreasonably withheld, conditioned or delayed. If Landlord reasonably concludes that the alterations (including Non- Structural Alterations) involve any construction, alterations or additions requiring unusual expense to readapt the Premises to normal office use on the Term Expiration Date, Landlord shall notify Tenant in writing at the time of approval that such re-adaptation will be required to be made by Tenant prior to such Term Expiration Date without expense to Landlord. Landlord shall not unreasonably require removal in the event an alteration is substantially similar (functionally and quality wise) of the item so being replaced. Notwithstanding any provision of this Lease to the contrary, Tenant shall have no obligation to remove any of the following at the expiration or earlier termination of the Term: (i) any of Landlord’s Work, (ii) any Non-Structural Alterations, and (iii) any other alterations, additions or improvements, unless Landlord notifies


 
32 8833492.3 Tenant it will require removal of the same at the end of the Term at the time of its consent thereto. For so long as the Lot and the Building are owned by an affiliate of The Gutierrez Company, any and all alterations, including but not limited to Non-Structural Alterations (but excluding Non-Structural Alterations not requiring Landlord consent), shall be performed by GCCI at cost plus a contractor’s fee not to exceed five percent (5%) of the aggregate cost of any and all alterations so long as the aggregate cost is comparable to the then market cost consistent with other similarly situated first-class buildings in the area of the Boston northwest suburban market, unless Landlord elects not to so perform the same in which event such alterations shall be done by any contractor chosen by Tenant provided any such contractor is reputable, bondable by reputable bonding companies, carries the kind of insurance and in the amounts set forth herein, and will work in harmony with Landlord’s contractors and laborers in the Building. Landlord agrees to employ an “open book” policy with respect to bidding all work requested by Tenant hereunder, including Tenant’s right to review all of such bids. Notwithstanding the foregoing, no such bonding is required for interior, non-structural, non-roof, non-mechanical alterations. Tenant in making any alterations, including Non-Structural Alterations if applicable (i.e. GCCI does not elect to perform the same as aforesaid), shall cause all work to be done in a good and workmanlike manner using all new materials substantially equal to or better than those used in the construction of the Premises and shall comply with or cause compliance with all laws and with any direction given by any public officer pursuant to law and Landlord’s standard consistent with other similarly situated Class A buildings in the area in which the Building is located. Tenant shall obtain or cause to be obtained and maintain in effect, as necessary, all building permits, licenses, temporary and permanent certificates of occupancy and other governmental approvals which may be required in connection with the making of the alterations, including the Non-Structural Alterations. Landlord shall cooperate with Tenant in the obtaining thereof and shall execute any documents reasonably required in furtherance of such purpose, provided any such cooperation shall be without expense and/or liability to Landlord, unless Landlord elects to have GCCI perform the same (subject to the foregoing requirement that the cost be consistent with the then market cost and that Landlord provide Tenant with an “open book” review of all bidding) in which event it agrees to cause GCCI to comply with the foregoing provisions, including the obligation of GCCI to use all new materials in connection with any construction hereunder, and other provisions set forth herein applicable to Tenant’s contractor. At least annually if such Non-Structural Alterations or any other alterations hereunder have occurred during the past calendar year (other than cosmetic alterations), Tenant shall furnish to Landlord as-built plans for any significant projects and, if applicable, operating manuals, or, at Landlord’s option and only if Tenant’s computer system is compatible with that of Landlord’s, computer disk specifications compatible with Landlord’s computer system of the work done by Tenant during such past year and copies of all permits issued in connection therewith. Tenant shall have its contractor(s) procure and maintain in effect during the term of such alterations, including Non-Structural Alterations, reasonably satisfactory insurance coverages (including without limitation OCP coverage, if applicable) with an insurance company or


 
33 8833492.3 companies authorized to do business in the Commonwealth of Massachusetts, and shall, upon Landlord’s request, furnish Landlord with certificates thereof. 6.1.16 Holdover - To pay to Landlord an amount equal to one hundred and twenty five percent (125%) of the Rent in effect during the last month of the Term for the first thirty (30) days of holdover by Tenant and for the next thirty (30) days of holdover, rent shall be equal to one hundred fifty percent (150%) of the Rent, and thereafter twice (i.e. 200%) of the Rent then applicable for each month or portion thereof if Tenant shall retain possession of the Premises or any part thereof after the termination of this Lease, whether by lapse of time or otherwise. For any holdover lasting in excess of sixty (60) days, Tenant shall also pay all damages sustained by Landlord on account thereof, so long as Tenant gives Landlord at least thirty (30) days prior written notice that damages shall result due to any holdover by Tenant. The provisions of this subsection shall not operate as a waiver by Landlord of any right of re- entry provided in this Lease. 6.1.17 Hazardous Materials - Tenant shall not (either with or without negligence) cause or authorize the escape, disposal or release of any Hazardous Materials onto, in or under the Premises, the Lot or Park, except in accordance with the requirements of applicable laws and regulations. Tenant shall not allow the storage or use of such substances or materials in any manner not sanctioned by law or by the reasonable standards prevailing in the industry for the storage and use of such substances or materials, nor allow to be brought into the Premises any such materials or substances except to use in the ordinary course of Tenant’s business. Landlord hereby consents to Tenant’s use of ordinary office and cleaning products in amounts reasonably necessary for Tenant’s Permitted Use of the Premises. Without limitation, “Hazardous Materials” shall include those hazardous materials and substances described in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et seq., the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Section 6901 et seq., the Massachusetts Hazardous Waste Management Act, as amended, M.G.L. c.21C, the Massachusetts Oil and Hazardous Material Release Prevention and Response Act, as amended, M.G.L. c.21E, any applicable local ordinance or bylaw, and the regulations adopted under these acts, (collectively, the “Hazardous Waste Laws”). If any lender or governmental agency shall ever require testing to ascertain whether or not there has been any release of any Hazardous Materials by Tenant, then the reasonable costs thereof shall be reimbursed by Tenant to Landlord within twenty (20) days after receipt of demand as additional charges if and only if the following conditions are satisfied: (i) if such requirement applies to the Premises, and (ii) if an independent, reputable third party engineer employed by Landlord or persons acting under Landlord conclusively determines that a release has occurred and such release has been or is likely to have been solely and exclusively caused by Tenant or persons acting under Tenant’s control. If Tenant receives from any federal, state or local governmental agency any notice of violation or alleged violation of any Hazardous Waste Law by Tenant, or if Tenant is obligated to give any notice under any Hazardous Waste Law, Tenant agrees to forward to Landlord a copy of any such notice within three (3) business days of Tenant’s receipt or transmittal thereof (except if immediate response is required of Landlord in which event reasonable immediate notice to be given to Landlord). In addition, Tenant shall execute reasonable affidavits, representations and the like from time to time at Landlord’s reasonable request concerning Tenant’s actual knowledge regarding the presence of Hazardous Materials on the Premises introduced or released by Tenant or persons acting under Tenant’s control. In all


 
34 8833492.3 events, Tenant shall indemnify Landlord from any release of hazardous materials on the Premises or elsewhere in the Park in breach of this Lease occurring while Tenant is in possession of the Premises if caused by Tenant or persons acting under Tenant’s control. Landlord retains the right to inspect the Premises at all reasonable times, upon reasonable notice to Tenant and compliance with Section 6.1.10, to ensure compliance with this paragraph. Notwithstanding any other provision of this Lease, Tenant shall not be liable for any losses, costs, claims, liabilities or damages (including attorneys’ and consultants’ fees) of any type or nature, directly or indirectly arising out of or in connection with any Hazardous Materials present at any time on or about the Premises, Building, Lot or Park, or the violation of any environmental Laws, except to the extent that any of the foregoing actually results from the release or disposal of Hazardous Materials by Tenant or its agents, employees, contractors, sublessees or assignees. The within covenants shall survive the expiration or earlier termination of the Term. 6.1.18 Tenant’s Authority - Tenant has the power and authority to enter into this Lease and perform the obligations of Tenant hereunder. This Lease and all other documents executed and delivered by Tenant in connection herewith constitute legal, valid, binding and enforceable obligations of Tenant. 6.1.19 Confidentiality - This Lease is a confidential document by and between Landlord and Tenant and each party agrees that this Lease shall not be copied and distributed or circulated to any person(s) other than to such parties, and their respective mortgagees, successors or assigns, their legal counsel, accountants and brokers or to any prospective sublessees and assignees or affiliates of Tenant, or to any prospective acquirers, investors, or lenders of Tenant, or to regulatory authorities, or to the directors, shareholders or officers of Tenant, unless required by law (including rules and regulations of the Securities and Exchange Commission) or court order, without the prior written consent of Landlord. All public announcements regarding this Lease prior to Tenant’s occupancy hereunder must be approved by Landlord and Tenant in advance. Nothing in this Section 6.1.19 shall be construed to affect the rights and obligations of Landlord and Tenant under Section 10.2. 6.1.20 Signs and Advertising - Except as expressly provided in this Lease, Tenant will not place or suffer to be placed or maintained on the exterior of the Premises, Building, or Lot, or elsewhere in the Park, or on the roof of the Building, any sign, decoration, lettering or advertising matter or any other thing of any kind. Tenant will, at its sole cost and expense, maintain such sign, decoration, lettering, advertising matter, or other thing as may be permitted hereunder in good condition and repair at all times. ARTICLE 7 CASUALTY AND TAKING 7.1 CASUALTY AND TAKING In case during the Term any substantial part of the Premises, or all or any substantial part of the Building, or any one or more of them, are, in the reasonable judgment of Landlord’s architect, damaged materially by fire or any other cause, or by action of public or other authority in consequence thereof or are taken by eminent domain, and this Lease is not otherwise terminated pursuant to Sections 7.3(c) or (d) below, then this Lease shall terminate at Landlord’s


 
35 8833492.3 election, which may be made, notwithstanding Landlord’s entire interest may have been divested, by notice given to the Tenant within thirty (30) days after the occurrence of the event giving rise to the election to terminate, which notice shall specify the effective date of termination which shall be not less than thirty (30) nor more than sixty (60) days after the date of notice of such termination. Such termination right may not be exercised by Landlord if the Premises are not damaged by such casualty or taking unless the leases of all other tenants of the Building are also terminated. If in any such case the Lease is not so terminated, Landlord shall use due diligence to put the Premises and/or the Building, as applicable, or in case of taking, what may remain thereof into substantially the condition immediately prior to the casualty, subject to applicable law, if the net award of insurance or damages are adequate (but such limitation shall not apply if the Landlord failed to maintain the insurance required hereunder). A just proportion of the Fixed Rent and additional rent according to the nature and extent of the injury from and after the date of such casualty or taking shall be abated until the Premises and the common areas of the Building serving the Premises, all systems and access thereto, or such remainder shall have been put by Landlord in such condition; and in case of a taking which permanently reduces the area of the Premises, a just proportion of the Fixed Rent and additional rent shall be abated for the remainder of the Term and an appropriate adjustment shall be made to the Landlord’s Operating Costs. 7.2 RESERVATION OF AWARD Landlord reserves to itself any and all rights to receive awards made for damages to the Premises, Building or Lot and the leasehold hereby created, or any one or more of them, accruing by reason of exercise of eminent domain or by reason of anything lawfully done in pursuance of public or other authority. Tenant hereby releases and assigns to Landlord all Tenant’s rights to such awards, and covenants to deliver such further assignments and assurances thereof as Landlord may from time to time request, hereby irrevocably designating and appointing Landlord as its attorney-in-fact to execute and deliver in Tenant’s name and behalf all such further assignments thereof. It is agreed and understood, however, that Landlord does not reserve to itself, and Tenant does not assign to Landlord, any damages payable for (i) movable trade fixtures installed by Tenant or anybody claiming under Tenant, at its own expense, (ii) equipment, furniture, personal property or other items of Tenant located in the Premises or on the Lot, or (iii) relocation and moving expenses recoverable by Tenant from such authority in a separate action. 7.3 ADDITIONAL CASUALTY PROVISIONS (a) Landlord shall not be required to repair or replace any of Tenant’s business machinery, equipment, furniture, personal property or other installations not originally installed by Landlord. (b) In the event of any termination of this Lease pursuant to this Article 7, the Term of this Lease shall expire as of the effective termination date as fully and completely as if such date were the date herein originally scheduled as the Term Expiration Date. Tenant shall have access to the Premises at Tenant’s sole risk for a period of sixty (60) days after the date of termination in order to remove Tenant’s personal property except as prohibited by any applicable governmental agency or official.


 
36 8833492.3 (c) Notwithstanding any language to the contrary contained in this Article 7, if all or any substantial part of the Premises and/or the Building or Lot or any part of the Lot (as hereinabove defined), shall be damaged by fire or other casualty or taken by eminent domain during the last twelve (12) months of the Term, as the Lease may have theretofore been extended, then either Landlord or Tenant may terminate this Lease effective as of the date of such fire or other casualty or taking upon notice to the other as aforesaid. Also, notwithstanding anything to the contrary contained in this Article 7, Tenant may render any notice of Landlord’s termination null and void by exercising early an option to extend the initial Term or then Extended Term of this Lease in accordance with Exhibit “F”. In the event of such early exercise, Landlord and Tenant agree to determine the Fixed Rent for the applicable Extended Term at least twelve (12) months prior to the commencement date of the Extended Term in accordance with and in the manner set forth in said Exhibits “F” and “H”. (d) Notwithstanding anything to the contrary contained in this Lease if the Premises are damaged by any peril and Landlord does not elect to terminate this Lease or is not entitled to terminate this Lease pursuant to its terms, then within sixty (60) days after the casualty or notice of taking, Landlord shall furnish Tenant with a written opinion of Landlord’s architect or construction consultant as to when the restoration work required of Landlord may be completed. Tenant shall have the option to terminate this Lease in the event any of the following occurs, which option may be exercised by delivery to Landlord of a written notice of election to terminate within thirty (30) days after Tenant receives from Landlord the estimate of the time needed to complete such restoration the Premises, with reasonable diligence, cannot be fully repaired by Landlord within fourteen (14) months after the damage or destruction. In addition, if Tenant does not terminate under this subsection (d) within thirty (30) days of receipt of Landlord’s notice, and Landlord does not complete the repair within the time period stated in Landlord’s notice (subject to extension due to Tenant Delays, as applicable), Tenant shall again have the right to terminate this Lease by written notice given within thirty (30) days of the expiration of the repair period stated in Landlord’s notice (subject to extension as aforesaid). ARTICLE 8 RIGHTS OF MORTGAGEE 8.1 PRIORITY OF LEASE Landlord shall have the option to subordinate this Lease to the lien of any future mortgagee or deed of trust of the Lot or Building, or both (“the mortgaged premises”), provided that the holder thereof enters into an agreement with Tenant by the terms of which the holder will agree to recognize the rights of Tenant under this Lease, assume the obligations of Landlord under this Lease and to accept Tenant as tenant of the Premises under the terms and conditions of this Lease in the event of acquisition of title by such holder through foreclosure proceedings or otherwise and Tenant will agree to recognize the holder of such mortgage as Landlord in such event, which agreement shall be made to expressly bind and inure to the benefit of the successors and assigns of Tenant and of the holder and upon anyone purchasing the mortgaged premises at any foreclosure sale or pursuant to a deed-in-lieu of foreclosure. Any such mortgage to which this Lease shall be subordinated may contain such commercially reasonable and customary terms, substantially similar to the provisions contained in the SNDA attached to this Lease. Further and as a condition to Tenant’s obligations under this Lease, Landlord agrees to obtain


 
37 8833492.3 and deliver to Tenant within thirty (30) days of this Lease, a Subordination, Non-Disturbance and Attornment Agreement (“SNDA”) from its current lender, Bank of America, N.A. (“Lender”), substantially in accordance with Exhibit “J” attached hereto. In the event an SNDA is not obtained from the Lender for the benefit of Tenant within thirty (30) days from the date of this Lease, Tenant shall have the right to terminate this Lease. Landlord represents and warrants that (i) there is no default under the mortgage or related loan documents with the Lender, and (ii) no other mortgage, ground lease or superior lease encumbers the Lot or the Building. 8.2 LIMITATION ON MORTGAGEE’S LIABILITY Upon entry and taking possession of the mortgaged premises for any purpose other than foreclosure, the holder of a mortgage shall have all rights of Landlord, and during the period of such possession, shall also have the duty to perform all Landlord’s obligations hereunder. Except during such period of possession, no such holder shall be liable, either as mortgagee or as holder of a collateral assignment of this Lease, to perform, or be liable in damages for failure to perform any of the obligations of Landlord unless and until such holder shall enter and take possession of the mortgaged premises pursuant to the exercise of rights under or relating to a mortgage. Upon entry for the purpose of foreclosing a mortgage, such holder shall be liable to perform all of the obligations of Landlord accruing after said entry (including performance of obligations arising prior to said entry), provided that a discontinuance of any foreclosure proceeding shall terminate the liability of the holder as Landlord. 8.3 INTENTIONALLY OMITTED 8.4 NO PREPAYMENT OR MODIFICATION, ETC. No Fixed Rent, additional rent, or any other charge shall be paid more than thirty (30) days prior to the due dates thereof, and payments made in violation of this provision shall (except to the extent that such payments are actually received by a mortgagee in possession or in the process of foreclosing its mortgage) be a nullity as against such mortgagee, and Tenant shall be liable for the amount of such payments to such mortgagee. 8.5 NO RELEASE OR TERMINATION No act or failure to act on the part of Landlord which would entitle Tenant under the terms of this Lease, or by law, to be relieved of Tenant’s obligations hereunder or to terminate this Lease, shall result in a release or termination of such obligations or a termination of this Lease unless (i) Tenant shall have first given written notice of Landlord’s act or failure to act to each Listed Mortgagee, if any, specifying the act or failure to act on the part of Landlord which could or would give basis to Tenant’s rights, and (ii) each Listed Mortgagee, after receipt of such notice, has failed or refused to correct or cure the condition complained of within a cure period of equal duration to the cure period afforded to Landlord under this Lease, but nothing contained in this Section 8.5 shall be deemed to impose any obligation on any such mortgagee to correct or cure any such condition. The foregoing shall not apply to any rights to Tenant to terminate in the event of a casualty or taking.


 
38 8833492.3 8.6 CONTINUING OFFER The covenants and agreements contained in this Lease with respect to the rights, powers and benefits of a mortgagee (particularly, without limitation thereby, the covenants and agreements contained in this Article 8) constitute a continuing offer to any person, corporation or other entity, which by accepting or requiring an assignment of this Lease or by entry or foreclosure assumes the obligations herein set forth with respect to such mortgagee, and such mortgagee shall be entitled to enforce such provisions in its own name. Tenant agrees on request of Landlord to execute and deliver from time to time any agreement which may reasonably be deemed necessary to implement the provisions of this Article 8. ARTICLE 9 DEFAULT 9.1 EVENTS OF DEFAULT It shall be an “Event of Default” under this Lease, if (i) Tenant fails to pay Fixed Rent or additional rent for more than seven (7) days after notice thereof specifying such failure and that such failure may be an Event of Default hereunder; (ii) Tenant fails to perform its other non- monetary obligations hereunder for more than thirty (30) days after notice thereof from Landlord, together with such additional time, if any, as is reasonably required to cure the default if the default is of such a nature that it cannot reasonably be cured in thirty (30) days, provided that Tenant commences such cure within said thirty (30) day period; or (iii) if Tenant makes any assignment for the benefit of creditors, or files a petition under any bankruptcy or insolvency law; or (iv) if such a petition is filed against Tenant and is not dismissed within one hundred and twenty (120) days; or (v) if a receiver becomes entitled to Tenant’s leasehold hereunder and it is not returned to Tenant within one hundred and twenty (120) days; or (vi) such leasehold is taken on execution or other process of law in any action against Tenant; Landlord and the agents and servants of Landlord may, in addition to and not in derogation of any remedies for any preceding breach of covenant, immediately or at any time thereafter while such default continues and without further notice except as required by applicable law enter into and upon the Premises or any part thereof in the name of the whole and repossess the same as of Landlord’s former estate and expel Tenant and those claiming through or under Tenant and remove its and their effects without being deemed guilty of any manner of trespass and without prejudice to any remedies which might otherwise be used for arrears of rent or prior breach of covenant, and upon such entry or mailing as aforesaid, this Lease shall terminate, but Tenant shall remain liable as hereinafter provided. After the occurrence of an Event of Default as aforesaid, Tenant hereby waives all statutory rights of redemption, if any to the extent such rights may be lawfully waived, and Landlord, without notice to Tenant, may store Tenant’s effects and those of any person claiming through or under Tenant at the expense and risk of Tenant and, if Landlord so elects, may sell such effects at public auction or private sale and apply the net proceeds to the payment of all sums due to Landlord from Tenant, if any, and pay over the balance, if any, to Tenant. 9.2 TENANT’S OBLIGATIONS AFTER TERMINATION In the event that this Lease is terminated under any of the provisions contained in Section 9.1, Tenant covenants as follows:


 
39 8833492.3 (a) to pay forthwith to Landlord, as compensation, a lump sum equal to the present value total rent reserved for the residue of the Term discounted at a rate equal to six percent (6%) per annum. In calculating the rent reserved, there shall be included, in addition to the Fixed Rent and all additional rent, the value of all other consideration agreed to be paid or performed by Tenant for said residue, less the net proceeds of any rents obtained by Landlord in re-letting the Premises as provided in (b)(ii) below; and (for the purposes of computing damages payable pursuant to this Section 9.2(a), the annual additional rent with respect to Landlord’s Operating Costs for the remainder of the Term will be assumed to be such additional rent for the most recently ended Fiscal Year). If Landlord elects to recover damages pursuant to this subparagraph (a) and re-lets all or any portion of the Premises following the termination of this Lease, then promptly upon such re-letting, Landlord shall pay Tenant, as reimbursement of amounts paid by Tenant under this subparagraph (a), the Clawback Amount (as defined below), except that for purposes of calculating the Clawback Amount under this Section 9.2(a), the “Clawback Period” shall mean the period commencing as of the commencement date of the applicable lease for such re-letting (the “New Lease”) and ending on the earlier of (i) the expiration date of the term of the New Lease, and (ii) the Term Expiration Date of this Lease. If the tenant under the New Lease exercises any option to extend the term of the New Lease, then promptly upon the commencement of such extension term, Landlord shall pay Tenant, as reimbursement of amounts paid by Tenant under this subparagraph (a), the Clawback Amount (as defined below), except that for purposes of calculating the Clawback amount under this Section 9.2(a), the “Clawback Period” shall mean the period commencing as of the commencement date of such extension term and ending on the earlier of (i) the expiration date of such extension term, and (ii) the Term Expiration Date of this Lease; (b) and, to the extent not received in (a) above or the extent Landlord elects, in its sole discretion, to proceed under this subparagraph (b) rather than subparagraph (a), as an additional and cumulative obligation, to pay punctually to Landlord all of the sums and perform all of the obligations which Tenant covenants in this Lease to pay and to perform in the same manner and to the same extent and at the same time as if this Lease had not been terminated. In calculating the amounts to be paid by Tenant under this subclause (b), Tenant shall be credited with: (i) any amounts paid to Landlord as compensation as provided in subclause (a) of this Section 9.2 (if Landlord elects to proceed pursuant to subclause (a)); and (ii) the net proceeds of any rents obtained by Landlord by re-letting the Premises, after deducting all of Landlord’s reasonable expenses in connection with such re-letting, including, without implied limitation, all reasonable: repossession costs, brokerage commissions, tenant improvements costs paid or tenant improvement allowances granted, fees for legal services, and any other expenses of re-letting the Premises or preparing the Premises for the new tenant or tenants. In no event shall Landlord receive total rent pursuant to Subparagraphs (a) and (b) above (i.e. from Tenant and/or from any future tenant upon any reletting of the Premises, or a portion thereof) in excess of the actual damages due and payable by Tenant under said Subparagraphs. Landlord agrees to use commercially reasonable efforts to re-let the Premises following any such termination herein provided, however, that Landlord: (x) may re-let the Premises or any part or parts thereof for a term or terms which may, at Landlord’s option, be equal to or less than or exceed the period which would otherwise have constituted the balance of the Term, and may grant such concessions and free rent as Landlord in its sole judgment considers advisable or


 
40 8833492.3 necessary to re-let same; (y) may make such alterations, repairs and decorations in the Premises as Landlord, in its reasonable judgment, considers advisable or necessary to re-let the same, and no action of Landlord in accordance with the foregoing sub clauses (x) and/or (y), or Landlord’s failure to re-let or to collect the rent through re-letting, shall operate or be construed to release or reduce Tenant’s liability as aforesaid; and (z) shall have no duty to re-let the Premises to a prospective tenant who is also interested in leasing other space that Landlord (or its affiliate(s)) then has available. In the event that Landlord collects all of the rent reserved pursuant to Subparagraph (a) above, and re-lets all or any portion of the Premises following the termination of this Lease, then Landlord agrees to reimburse Tenant for its pro rata share of any rent reserved paid by Tenant to Landlord hereunder in accordance with Subparagraph b(ii) above. So long as at least twelve (12) months of the Term remain unexpired at the time of such termination, in lieu of any other damages and in lieu of full recovery by Landlord of all sums payable under all the foregoing provisions of this Section 9.2, Landlord may, by written notice to Tenant, at any time within 30 days after this Lease is terminated under any of the provisions contained in Section 9.1 and before such full recovery, elect to recover, and Tenant shall thereupon pay, as liquidated damages and as Landlord’s sole and exclusive remedy at law or in equity for Tenant’s breach of this Lease, an amount equal to the aggregate of the Fixed Rent and additional rent accrued under Article 4 in the twelve (12) months ended next prior to such termination (or if the Term has not yet commenced, the Fixed Rent and additional rent that would be due for said time period) plus the amount of Fixed Rent and additional rent of any kind accrued and unpaid at the time of termination. If Landlord elects to recover liquidated damages pursuant to this paragraph and re-lets all or any portion of the Premises following the termination of this Lease, then promptly upon such re-letting, Landlord shall pay Tenant, as reimbursement of amounts paid by Tenant under this paragraph, the Clawback Amount. The “Clawback Amount” shall be an amount equal to (i) the average monthly rent payable by the tenant under the applicable re-letting less the average monthly cost of the applicable re-letting, multiplied by (ii) the number of months (or partial months) remaining in the Clawback Period at the time of such re-letting (without regard to any free rent period provided to the new tenant). The “Clawback Period” means the twelve month period that immediately follows the date on which this Lease was terminated. For purposes of calculating the Clawback Amount: (a) the average monthly rent payable by the tenant under the applicable re-letting shall be determined by dividing the sum of all base rent and additional rent (using reasonable projections of the amount of additional rent that will be payable under the applicable lease based on the operating history of the Building) payable under such lease divided by the number of months in the term of such lease, and (b) the average monthly cost of the applicable re-letting shall be determined by dividing the sum of the Landlord’s reasonable expenses in connection with such re-letting divided by the number of months in the term of such lease. Nothing contained in this Lease shall, however, limit or prejudice the right of Landlord to prove and obtain in proceedings for bankruptcy or insolvency by reason of the termination of this Lease, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, the damages are to be proved, whether or not the amount be greater, equal to, or less than the amount of the loss or damages referred to above.


 
41 8833492.3 ARTICLE 10 MISCELLANEOUS 10.1 TITLES The titles of the Articles are for convenience and are not to be considered in construing this Lease. 10.2 NOTICE OF LEASE Concurrently with the execution of this Lease, both parties shall execute and deliver, a recordable notice of lease in the form attached hereto as Exhibit “G” and Tenant may record such notice of lease with the applicable land records for the Lot and the Building. If this Lease is terminated before the Term expires, the parties will execute an instrument acknowledging the date of termination. 10.3 CONSENT In all cases when a party’s consent or approval is required pursuant to this Lease, consent shall not be unreasonably withheld, conditioned or delayed. 10.4 NOTICES FROM ONE PARTY TO THE OTHER No notice, approval, consent requested or election required or permitted to be given or made pursuant to this Lease shall be effective unless the same is in writing. Communications shall be addressed, if to Landlord, at Landlord’s Address, with a copy to Gloria M. Gutierrez, Esq., The Gutierrez Company, 200 Wheeler Road, Burlington, MA 01803, or at such other address as may have been specified by prior notice to Tenant and, if to Tenant, at Tenant’s Address, with a copy to Goulston & Storrs, 400 Atlantic Avenue, Boston, MA 02110, Attention: Jason Dunn, Esq., or at such other place as may have been specified by prior notice to Landlord. Any communication so addressed shall be deemed duly served if mailed by registered or certified mail, return receipt requested, delivered by hand, or by overnight express service by a carrier providing a receipt of delivery. 10.5 BIND AND INURE The obligations of this Lease shall run with the land, and this Lease shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, except that the Landlord named herein and each successive owner of the Premises shall be released from all obligations hereunder arising following termination of such ownership and passing to the successor in ownership, and its successor shall be liable for all obligations of Landlord hereunder. Neither the Landlord named herein nor any successive owner of the Premises whether an individual, trust, a corporation or otherwise shall have any personal liability beyond their interest in the Building and the Lot, and the income, insurance and condemnation proceeds derived therefrom. Neither party shall be liable to the other party for consequential or punitive damages for a breach of any covenant of this Lease or otherwise, except as may apply with respect to holdover damages described in Section 6.1.16 of this Lease.


 
42 8833492.3 10.6 NO SURRENDER The delivery of keys to any employees of Landlord or to Landlord’s agent or any employee thereof shall not operate as a termination of this Lease or a surrender of the Premises. 10.7 NO WAIVER, ETC. The failure of Landlord or of Tenant to seek redress for violation of, or to insist upon the strict performance of any covenant or condition of this Lease or, with respect to such failure of Landlord, any of the Rules and Regulations referred to in Section 6.1.4, whether heretofore or hereafter adopted by Landlord, shall not be deemed a waiver of such violation nor prevent a subsequent act, which would have originally constituted a violation, from having all the force and effect of an original violation. The receipt by Landlord of Fixed Rent or additional rent with knowledge of the breach of any covenant of this Lease shall not be deemed a waiver of such breach by Landlord, unless such waiver be in writing signed by Landlord. No consent or waiver, express or implied, by Landlord or Tenant to or of any breach of any agreement or duty shall be construed as a waiver or consent to or of any other breach of the same or any other agreement or duty. 10.8 NO ACCORD AND SATISFACTION No acceptance by Landlord of a lesser sum than the Fixed Rent and additional rent then due shall be deemed to be other than on account of the earliest installment of such rent due, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed as accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord’s right to recover the balance of such installment or pursue any other remedy in this Lease provided. 10.9 CUMULATIVE REMEDIES The specific remedies to which either party may resort under the terms of this Lease are cumulative and are not intended to be exclusive of any other remedies or means of redress to which it may be lawfully entitled in case of any breach or threatened breach by the other party of any provisions of this Lease. In addition to the other remedies provided in this Lease, each party shall be entitled to the restraint by injunction of the violation or attempted or threatened violation of any of the covenants, conditions or provisions of this Lease or to a decree compelling specific performance of any such covenants, conditions or provisions. 10.10 PARTIAL INVALIDITY If any term, clause, provision, covenant or condition contained in this Lease is adjudicated to be illegal or unenforceable, all other terms, clauses, provisions, covenants or conditions of this Lease shall remain in force and effect, and the term, clause, provision, covenant or condition held illegal or unenforceable shall remain in effect as far as possible in accordance with the intention of the parties.


 
43 8833492.3 10.11 LANDLORD’S RIGHT TO CURE If Tenant shall at any time default, beyond applicable notice and cure periods, in the performance of any material obligation under this Lease, Landlord shall have the right, but shall not be obligated, upon ten (10) days prior written notice to Tenant and for non-material obligations upon thirty (30) days’ notice to Tenant (except in the event of an emergency where at least verbal notice will be given as soon as reasonably possible), to enter upon the Premises and to perform such obligation, notwithstanding the fact that no specific provision for such substituted performance by Landlord is made in this Lease with respect to such default. In performing such obligation, Landlord may make any payment of money or perform any other act. All reasonable sums so paid by Landlord (together with interest at the rate set forth in Section 4.3 hereof), and all necessary incidental costs and expenses in connection with the performance of any such acts by Landlord, shall be deemed to be additional rent under this Lease and shall be payable to Landlord immediately on demand. Landlord may exercise the foregoing rights without waiving any other of its rights or releasing Tenant from any of its obligations under this Lease. 10.12 ESTOPPEL CERTIFICATE Tenant agrees on the Commencement Date, and from time to time thereafter, upon not less than twenty (20) days prior written request by Landlord, to execute, acknowledge and deliver to Landlord a statement in writing in substantially the form attached hereto as Exhibit “K” with such adjustments as are necessary to make the same accurate. Landlord agrees on the Commencement Date, and from time to time thereafter, upon not less than twenty (20) days prior written request by Tenant, to execute, acknowledge and deliver to Tenant a statement in writing in substantially the form attached hereto as Exhibit “K”. 10.13 WAIVER OF SUBROGATION AND CLAIMS Any insurance carried by either party with respect to the Premises and property therein or occurrences thereon shall include a clause or endorsement denying to the insurer rights of subrogation against the other party to the extent rights have been waived by the insured prior to the occurrence of injury or loss. Each party, notwithstanding any provisions of this Lease to the contrary, hereby waives any rights of recovery against the other for injury, loss or damage due to hazards covered by insurance maintained by the waiving party that contains such clause or endorsement or that would have been covered by insurance had the waiving party carried the insurance that it was required to carry under this Lease. No provision in any insurance policy required under this Lease shall invalidate or restrict the waivers and releases of rights of recovery by Landlord and Tenant in this Section 10.13. No insurer shall hold any right of subrogation against either Landlord or Tenant by reason of its insurance policy or otherwise. 10.14 BROKERAGE Landlord and Tenant each represent to the other that they have dealt with no real estate brokers, finders, agents or salesmen in connection with this Lease, except Cushman & Wakefield (collectively, the “Broker”). Each party agrees to hold the other party harmless from and against all claims for brokerage commissions, finder’s fees, or other compensation made by any other


 
44 8833492.3 agent, broker, salesman or finder as a consequence of said party’s actions or dealings with any such agent, broker, salesman, or finder. Landlord agrees to pay a fee to the Broker pursuant to a separate agreement. 10.15 COVENANTS INDEPENDENT Each provision in this Lease constitutes an independent covenant, enforceable separately from each other covenant set forth herein. To the extent any provision hereof or any application of any provision hereof may be declared unenforceable, such provision or application shall not affect any other provision hereof or other application of such provision. Tenant acknowledges and agrees that Tenant’s obligation to pay Fixed Rent and additional rent is independent of any and all obligations of Landlord hereunder, with the result that Tenant’s sole remedy for any alleged breach by Landlord of its obligation hereunder shall be to commence a judicial proceeding against Landlord seeking specific performance and/or damages. 10.16 ACCESS Subject to the terms and provisions of this Lease and all laws applicable to the Premises, Tenant shall have twenty-four (24) hours, seven (7) days per week, fifty-two (52) weeks per year, access to the Premises, common areas of the Building and the Park, and all parking areas. 10.17 ENTIRE AGREEMENT This Lease contains the entire and only agreement between the parties as to the Premises, and no oral statements or representations or prior written matter not contained in this instrument shall have any force or effect. This Lease shall not be modified in any way except by a writing signed by both parties. 10.18 GOVERNING LAW This Lease shall be governed by and construed and enforced in accordance with the laws and the Courts of the Commonwealth of Massachusetts. 10.19 ADDITIONAL REPRESENTATIONS Landlord represents and warrants to Tenant as follows: (a) that Landlord has the right, power and authority to enter into this Lease and grant Tenant quiet possession of the Premises and other rights set forth herein; (b) that Landlord is the fee simple owner of the Lot and Building located thereon; (c) that the Building (including the Landlord’s Work and the Premises) and the Lot (including all common areas) will, upon substantial completion of Landlord’s Work and issuance of all necessary permits and approvals required to be obtained from any and all necessary governmental agencies prior to occupancy of the Premises by Tenant, if necessary, including without limitation, a certificate of occupancy from the Town of Billerica, which allows


 
45 8833492.3 Tenant to use and occupy the Premises as herein provided, comply with all dimensional, use, parking, loading and other zoning requirements of the Town of Billerica, and all applicable building codes and governmental requirements, including, without limitation, all ADA, local and state requirements and regulations promulgated thereunder and other applicable laws and rules governing access to and use of facilities by people with disabilities, including the Massachusetts Architectural Access Board regulations and all environmental laws; and (d) that the Premises and common areas and all equipment and systems servicing such areas, including without limitation, the roof and all structural elements of the Building, shall be in good working order and repair as of the Commencement Date; ARTICLE 11 SECURITY A security deposit in the amount of Four Hundred Sixty-One Thousand Six Hundred Ninety and 75/100 ($461,690.75) Dollars shall be delivered by Tenant to Landlord on or prior to the Commencement Date (the “Security”). Such Security shall be in the form of a Letter of Credit in substantially the form attached hereto as Exhibit “L”, and such Letter of Credit shall (a) name the Landlord as its beneficiary, (b) expire not less than one (1) year after the issuance thereof, and (c) be drawn on an FDIC-insured financial institution reasonably satisfactory to Landlord. Landlord agrees that Silicon Valley Bank is an acceptable institution. Tenant shall, from time to time, as necessary, renew or replace or amend the Letter of Credit no fewer than twenty-five (25) banking days prior to the expiration date of the Letter of Credit then held by Landlord, and if Tenant fails to renew or replace or amend said Letter of Credit in the applicable amount by not later than twenty-five (25) banking days prior to expiry date of the Letter of Credit, Landlord may draw upon such Letter of Credit and hold the proceeds thereof in an account as Security, without interest, until Tenant provides to Landlord a replacement letter of credit complying with the requirements for the original Letter of Credit as set forth above. So long as there does not then exist an Event of Default, the amount of the required Security shall be reduced in accordance with the following schedule: (i) by $100,000.00 on the 1st day of month thirty-seven (37) of the Term, (ii) by an additional $100,000.00 on the 1st day of month sixty- one (61) of the Term; and (iii) by an additional $100,000.00 on the 1st day of month eighty-four (84). Landlord agrees to promptly return any existing Letter of Credit to Tenant upon Landlord’s receipt of a replacement Letter of Credit in such reduced amount required hereunder or to otherwise cooperate (at no cost to Landlord) with Tenant in connection with any amendment of the Letter of Credit to reflect any reduction in accordance with this Article 11. In the event that Landlord fails to release any cash proceeds drawn from a Letter of Credit (if applicable) within five (5) business days following the required date (or its receipt of a replacement Letter of Credit conforming to the requirements hereunder), then Landlord shall be obligated to pay Tenant interest on any such amount at the interest rate set forth in Section 4.3 hereof, calculated on a daily basis. Landlord may, from time to time, without prejudice to any other remedy, use all or a portion of the Security to cure any continuing Event of Default, including any uncured default in connection with any arrearages of Rent, costs incurred by Landlord to repair damage to the Premises caused by Tenant, and any costs incurred by Landlord to repair (other than normal wear and tear or damage caused by Landlord, its agents or employees) the Premises upon termination


 
46 8833492.3 of this Lease. Following any such application of the Security, Tenant shall, within ten (10) business days after receipt of written demand, restore the Letter of Credit to the then applicable full amount (or post a cash Security, at Tenant’s option). Tenant shall not have the right to call upon Landlord to apply all or any part of the Security to cure any continuing Event of Default, but such use shall be solely in the discretion of Landlord. At the later of the termination of this Lease and the date Tenant surrenders the Premises to Landlord in accordance with this Lease, the balance of the Security, either cash or the Letter of Credit, as applicable, shall be returned to Tenant within thirty (30) business days of expiration of the Term and surrender of the Premises, whichever may be later. If Landlord transfers its interest in the Premises during the Term, Landlord shall assign the Security to the transferee, Landlord shall promptly notify Tenant of the assignment in advance and thereafter have no further liability for the return of the Security provided such transferee acknowledges receipt of the same in writing. If the Security is in the form of a Letter of Credit, Landlord shall have no further liability for the return of such Letter of Credit once the Letter of Credit has been appropriately assigned to the assignee, the assignee has assumed all of Landlord’s obligations under this Lease, and Landlord has notified Tenant, in writing, of both. Landlord shall be solely responsible for any and all costs and fees payable in connection with any assignment of the Letter of Credit in connection with a sale or other transfer of the Building. Upon any such delivery and assignment, Tenant hereby releases the then existing Landlord of any and all liability with respect to the Letter of Credit, its application and return, and Tenant agrees to look solely to such assignee or transferee. It is further understood that this provision shall also apply to subsequent assignees or transferees. Upon request by Tenant, Landlord shall provide Tenant with a copy of the assignment and assumption or other written documentation that was entered into to effectuate the transfer of the Letter of Credit and this Lease. Landlord shall not be required to segregate the Security from its other accounts or, except as otherwise specified herein, to pay interest thereon, as aforesaid. In the event the Lease is assigned by Tenant, Tenant’s assignee may provide a replacement Letter of Credit and the original Letter of Credit held by Landlord shall be promptly returned to Tenant, provided that such Letter of Credit shall remain subject to all of the terms and conditions of this Article 11. Landlord shall deliver the original prior Letter of Credit to the prior tenant simultaneously upon the delivery of the replacement Letter of Credit by Tenant’s assignee or as soon as possible thereafter. Remainder of Page Intentionally Left Blank Signature Page to Follow


 
47 8833492.3 EXECUTED as a sealed instrument in two or more counterparts on the day and year first above written. LANDLORD: TECHNOLOGY PARK X LIMITED PARTNERSHIP By: The Gutierrez Company, its General Partner By: /s/ Arthur J. Gutierrez, Jr. Arthur J. Gutierrez, Jr. President TENANT: CONFORMIS, INC. By: /s/ Paul S. Weiner Name: Paul S. Weiner Title: CFO


 
A-1 8833492.3 EXHIBIT “A” Plan Showing Tenant’s Space


 
B-1 8833492.3 EXHIBIT “B” Plan Showing the Park


 
B-1 8833492.3


 
C-1 8833492.3 EXHIBIT “C” APPROVED PLANS


 
C-2 8833492.3 ConforMIS Fit-Up Specifications September 13, 2016 600 Technology Park Drive, Billerica, MA – 4th Floor TENANT FIT-UP NARRATIVE Landlord shall provide turnkey build-out of the Tenant interior according to the specifications below and AHP Scheme 5 drawing dated 9/9/16. SECTION 6B - MILLWORK 6B-01 Lunch Room - One (1) Location Included  Solid surface (stone or engineered stone) counter w/ splash and closed upper and lower plastic laminate cabinets included at each location.  Built-in solid surface top island with closed lower plastic laminate cabinets included as shown.  Includes two trash pullouts at each location.  Tables to be furniture by others. 6B-02 Coffee - One (1) Location Included  Solid surface (stone or engineered stone) counter w/ splash and lower plastic laminate cabinets included at each location.  Includes one trash pullout at each location. 6B-05 Coat Closet – Two (2) Locations Included  Built-in plastic laminate closet shelf and coat pole included at each location. 6B-06 Copy / Fax – Three (3) Locations Included  Built-in plastic laminate counter w/splash and upper surface mounted adjustable shelving included at each location. 6B-07 Any item not expressly indicated above is assumed to be furniture by others. Existing window sills are to remain. Excludes mailboxes, Reception Storage millwork / furniture, Boardroom millwork / furniture, and Reception desk millwork / furniture. Millwork / furniture shown in Marketing Trade Storage and Medium Conference Room is assumed to be existing to remain millwork or furniture by others. SECTION 8 - DOORS, WINDOWS AND GLASS 8-01 Typical door and frames to be new 3’ x 8’ anodized aluminum frame with sidelite and prefinished, solid core, wood door at all locations within new partitions. Existing hollow metal frames and doors are to be reused at existing partitions. Hardware to include hinges, stainless steel lockset (with removable core at office and secure storage locations), floor stop, and door silencer at each location. Each office door will receive an


 
C-3 8833492.3 interior coat hook. Nine (9) perimeter offices, four (4) executive offices and five (5) perimeter conference rooms are to receive new full-front 3’ x 8’ anodized aluminum sidelite frames. Includes touch-ups to reused door finish as required. 8-02 Includes two (2) new 3’ x 8’ glass doors with building standard stainless steel hardware to be installed where indicated. 8-03 Excludes any and all borrowed lites or additional glass not expressly indicated above. SECTION 9 – FINISHES – Limits Further Defined in Attached EXHIBIT A 9-01 Floor – Carpet  Typical floor finish is to be carpet unless otherwise noted.  Carpet tile allowance is $25.00 per square yard for a standard 24” x 24” tile furnished and installed.  An upgraded carpet tile allowance of $30.00 per square yard for a standard 24” x 24” tile furnished and installed is included at the nine (9) entrance meeting rooms / executive offices (3,500 SF maximum combined area). 9-02 Floor – VCT  VCT allowance is $1.70 per square foot for a standard 12” x 12” vinyl tile furnished and installed.  Included at storage room off lobby, data room, date closet, UPS closet, IT storage / help desk, and engineering lab locations (1,250 SF maximum combined area). 9-03 Floor – Resilient Plank  Resilient plank allowance is $7.50 per square foot furnished and installed.  Included at reception, lunch room and break room locations (2,100 SF maximum combined area). 9-04 Wall Base – 4” High Vinyl Base  Typical throughout space. 9-05 Wall – Paint  Typical wall finish to be one (1) coat primer and two (2) coats paint in eggshell finish.  Includes three (3) accent colors.  Excludes any specialty wall finishes, coverings and/or panels.  Hollow metal frames to receive two (2) coats of semi-gloss paint to match the abutting wall. 9-06 Ceiling  Includes new 2’ x 2’ acoustic tiles with new 9/16” grid.


 
C-4 8833492.3 SECTION 9D – GYPSUM DRYWALL 9D-01 All new partitions to be constructed to 6” above the ceiling using metal studs at 16” on center with one layer 5/8” gypsum board on each side. Exterior demising, conference, lab, data room, and executive walls are to be full height. 9D-02 All new partitions to include 3” thick fiber glass rolled sound insulation. 9D-03 Excludes any level 5 finish and drywall ceilings and/or soffits. Includes patching / repair of existing-to-remain partitions as required. SECTION 12A – BLINDS 12A-01 Existing manual perimeter blinds to remain; includes cleaning and repairing as needed. 12A-02 No new blinds and/or shades are included for added interior glass. SECTION 15A – PLUMBING 15A-01 Includes two (2) new ADA compliant stainless steel sinks with a single lever faucet and grid strainer. Includes replacement of one (1) existing sink with new ADA compliant stainless steel sinks with a single lever faucet and grid strainer. 15A-02 Includes a spare valve at the sink location for tenant appliances. 15A-03 Any appliance or fixture not expressly indicated above is assumed to be furnished by others. SECTION 15B – HEATING, VENTILATING AND AIR CONDITIONING 15B-01 Existing HVAC system to remain. Includes minor relocation of existing registers, diffusers or equipment to coordinate with new, relocated or removed partitions and proposed occupant load. Interior partitioned offices shall have at least one temperature zone per ten offices Perimeter partitioned offices shall have at least one temperature zone per five offices (depending on exposure) Corner offices shall be provided with their own temperature control zone Conference rooms and boardroom shall be provided with their own temperature control zone


 
C-5 8833492.3 15B-02 Includes an allowance of $30,000 to furnish and install a single supplemental split cooling system in a single room. SECTION 15C – SPRINKLERS 15C-01 Existing fire protection system to remain. Includes modifications required to coordinate with new, relocated or removed partitions. 15C-02 Includes new fire extinguishers, signage and stainless steel semi-recessed cabinets as required by code. SECTION 16A – ELECTRICAL WORK 16A-01 Existing electrical, lighting and fire alarm system to remain. Includes modifications required to coordinate with new, relocated or removed partitions and proposed furniture layout. 16A-02 Includes two (2) recessed multi-circuit 120-volt duplex receptacles in each room less than 200 SF and four (4) recessed multi-circuit 120-volt duplex receptacles in each room greater than 200 SF. Includes an allowance of fifteen (15) 20-amp 120-volt dedicated-circuit duplex receptacles for the engineering lab / data center. 16A-03 Lighting controls to include wall mounted occupancy sensors in rooms and existing zoned switching in open areas. Meeting rooms (12 noted) and Marketing / Trade storage room are to receive dimmers. 16A-04 Includes one (1) 20-amp 120-volt circuit for every four (4) workstations. Workstations are to be fed off of walls and/or columns when possible. 16A-05 Includes two (2) empty conduits from floor to ceiling with a wall mounted junction box and duplex receptacle located at 5’ AFF and a building standard floor core or poke-thru at twelve (12) locations. 16A-06 Lighting package includes new LED fixtures. Standard room lighting to be 2’x2’ recessed LED fixtures. Standard open office area (i.e. workstations) lighting to be linear LED pendants or recessed LED fixtures. Average lighting density to be 42.5 lumens per square foot of usable area. 16A-07 Includes an allowance of $10,000.00 for accent lighting in the reception and coffee break area. SECTION 17A – EXCLUSIONS  A/V (rings/strings for wiring by others to be provided by Contractor where indicated)  Tel / Data (rings/strings for wiring by others to be provided by Contractor where indicated)


 
C-6 8833492.3  Back-up Power, UPS, Generators, and Interface, Wiring or Connection of Same  Security / Access Controls  Furniture, Furnishings & Equipment  Tenant Signage  Dry / Chemical Fire Suppression  Supplemental Cooling (beyond included allowance)  Added Steel / Structural Modifications  Inertia Bases / Vibration Isolation  Raised Equipment Pads  Acoustical Treatments  Electrical Upgrades (includes using existing, available standard circuits; excludes added panels, transformers, etc.)  Appliances


 
C-7 8833492.3


 
D-1 8833492.3 EXHIBIT “D” LANDLORD’S SERVICES I. CLEANING A. Building Lobbies and Common Areas 1. Entrance doors and partition glass to be cleaned nightly. Wipe down frames and fixtures as needed. 2. Remove entrance mats and clean sand and dirt from pits and floors, clean and replace mats nightly. 3. Floors to be swept and washed nightly. Maintain a high luster yet slip free finish following manufacturer’s specifications. 4. Walls to be dusted and spot cleaned as necessary, thoroughly washed twice a year. 5. Empty and wipe clean trash receptacles nightly including exterior smoker’s stations. 6. Dust, with treated cloth, security desks, window sills, directory frames, planters, etc. nightly. 7. Clean reception desk nightly. 8. Vacuum all carpeted areas nightly, treat and spot clean stains, clean fully as needed. 9. Non-carpeted floors to be dry mopped nightly, spot washed with clean water as needed and spray buffed weekly. 10. Sweep all stairwells in building nightly and keep in clean condition, washing same as necessary. 11. Do all high dusting (not reached in nightly cleaning) quarterly, which includes the following: A. Dust all pictures, frames, charts, graphs and similar wall hangings. B. Dust exposed pipes, ventilation and air conditioning grilles, louvers, ducts and high moldings, as needed. 12. Clean and maintain luster on ornamental metal work as needed within arm’s reach.


 
D-2 8833492.3 13. Dust all drapes and blinds as needed. 14. Wash and disinfect drinking fountains using a non-scented disinfectant nightly. Polish all metal surfaces on the unit nightly. 15. Strip and wax all vinyl tile floors yearly. 16. Shampoo all common area carpets at additional contract price at least once per year. B. Lavatories - Nightly 1. Empty paper towel receptacles, bag and transport waste paper to designated area, disinfect receptacle and add new liner. 2. Empty sanitary napkin disposal receptacles, bag and transport waste, disinfect receptacle and add new liner. 3. Refill toilet tissue, hand towel dispensers, and sanitary napkin dispensers. Refill soap dispensers. 4. Scour, wash and disinfect all basins, bowls and urinals using non-scented disinfectants. 5. Wash, disinfect and wipe dry both sides of toilet seat using non-scented disinfectants. 6. Wash and polish all mirrors, counters, faucets, flushometers, bright work and enameled surfaces. 7. Spot clean toilet partitions, doors, door frames, walls, lights and light switches. 8. Remove all cobwebs from walls and ceilings. 9. Sweep and wash all floors, using proper non-scented disinfectants. 10. Add water to floor drains weekly, disinfect monthly. 11. Turn off lights. C. Elevators - Nightly 1. Thoroughly clean walls. 2. Wipe clean control panels, door frames and mirrors. 3. Vacuum cab and floor door tracks. 4. Vacuum floors, shampoo as needed, wash stone floors.


 
D-3 8833492.3 5. Dust ceilings. D. General Cleaning (Monday through Friday, Holidays excluded) Tenant areas nightly - unless noted. 1. Empty and clean all waste receptacles nightly and remove waste paper and waste materials, including folded paper boxes and cartons, to designated area. Replace liners as needed. Check and wash waste baskets if soiled. 2. Weekly hand dust with treated cloth and wipe clean or feather duster all accessible areas on furniture, desks, files, telephones, fixtures and window sills. 3. Clean all glass table tops and tenant entrance glass. Spot clean glass partitions. 4. Spot clean all walls, door frames and light switches. 5. Wipe clean and polish all bright metal work as needed within arm’s reach. 6. All stone, ceramic, tile, marble, terrazzo and other un-waxed flooring to be swept, using approved dust-down preparation. 7. All wood, linoleum, rubber asphalt, vinyl and other similar type of floors to be swept, using approved dust-down preparation and mopped or cleaned with dry system cleaner nightly. 8. Reception areas, halls, high traffic areas to be vacuumed nightly. 9. Offices and cubicles to be spot vacuumed nightly. All areas to receive a complete vacuum weekly. 10. Spot clean carpet stains. 11. Wash and clean all water fountains and coolers nightly. Sinks and floors adjacent to sinks to be washed nightly. 12. Dust blinds as needed. 13. Vinyl tile floors to be dry mopped nightly, spot washed with clean water as needed and spray buffed every two weeks. The VCT is to be stripped and waxed one time annually. 14. Turn off coffee pots each night and empty filters. E. Showers 1. Wash shower walls and floors nightly, using proper non-scented disinfectants. 2. Clean and disinfect shower curtains weekly.


 
D-4 8833492.3 3. Scrub showers with bleach weekly. 4. Wash tile walls with proper grout cleaning compound as needed. 5. Add water to floor drains weekly, disinfect monthly. 6. Turn off lights. 7. Restock soap, daily. F. Fitness Center Nightly 1. Thoroughly clean all exercise equipment. 2. Clean mirrors. 3. Vacuum carpet. 4. Wash rubber floor. 5. Restock paper towel dispenser nightly. G. Cafeteria Dining Area / Kitchenettes Nightly 1. Clean all areas outside the cafeteria servery which shall include, the dining tables, chairs, tray return areas. 2. Wash flooring. 3. Empty and clean inside and outside all waste receptacles nightly and remove waste paper and waste materials, including folded paper boxes and cartons, to designated area. Replace liners as needed. Check and wash waste receptacles if soiled. 4. Wash all cafeteria / kitchenette tabletops and counters. 5. Arrange all tables and chairs according to floor plan. H. Day Porter to police and clean as required in the following areas: 1. Reception and lobby seating 2. Entrances and lobbies 3. Cafeteria and kitchenettes 4. Fitness center 5. All toilets, showers and locker rooms


 
D-5 8833492.3 6. Outside entrances 7. Smokers Gazebo I. Cleaning Products Paper products such as toilet paper, paper towels, and vinyl trash liners will be supplied to the cleaning company. The cleaning company is to supply all solid and liquid cleaning products. The cleaning company is to supply all mops, buckets, vacuums, dusters, cloths etc. II. HEATING, VENTILATING AND AIR CONDITIONING 1. The Building is served by a variable air volume system with rooftop package units and 3,000 tons of cooling. 2. Base building heating, ventilation and air conditioning as required to provide reasonably comfortable temperatures for normal business day occupancy (except national holidays), Monday through Friday, from 7:00 AM to 6:00 PM, and Saturday from 8:00 AM to 1:00 PM, if so requested by Tenant, by providing at least 24 hours’ notice. HVAC services beyond the aforesaid hours of operation can be made available to Tenant, if so requested by Tenant, by providing at least 24 hours prior written notice and at a cost of $50.00 per hour per unit, subject to customary increases. 3. Maintenance on any additional or special air conditioning equipment installed by Tenant, and the associated operating cost thereof, shall be at Tenant’s expense; provided, however, any maintenance of business-critical supplemental air conditioning should be handled directly by Tenant and its service provider. III. WATER Hot water for lavatory and kitchen purposes and cold water for drinking, kitchen, lavatory and toilet purposes. IV. ELEVATORS Elevators for the use of all tenants and the general public for access to and from all floors of the Building, programming of elevators (including, but not limited to, service elevators), shall be as Landlord from time to time determines best for the Building as a whole. Elevators which provide access to the interior of the Premises shall be restricted from opening on the first floor and second floor of the Premises without a valid access card. V. SECURITY/ACCESS Twenty-four (24) hour entry to the Building is available to Tenant and Tenant’s employees, after normal Building hours of operation. Tenant shall have unrestricted access to its Premises at all times, and not just during normal building hours and operation. All security


 
D-6 8833492.3 within the Premises shall be the responsibility of the Tenant and Tenant shall have the right to control its space, including the right to install additional security measures. Landlord shall provide or cause to be provided all necessary snow plowing and snow removal services for the Park. VI. BUILDING HOURS Normal building hours of operation are Monday through Friday from 7:00 AM to 6:00 PM. The Building operates on Saturday from 8:00 AM to 1:00 PM, with access to the Building subject to the provisions as outlined in Item V contained herein. Except for the heating, ventilating and air conditioning system, which operates in accordance with the schedule as described in Item II contained herein, all Building systems, including but not limited to electrical, mechanical, elevator, fire safety and sprinkler, and water, operates 24 hours per day, 7 days per week. VII. CAFETERIA, VENDING AND PLUMBING INSTALLATIONS/INTERIOR LAVATORIES AND SHOWERS 1. Except as expressly set forth in this Exhibit, any space within the Premises to be used primarily for lunchroom or Tenant controlled cafeteria operation shall be Tenant’s responsibility to keep clean and sanitary. Cafeteria, vending machines or refreshment service installations by Tenant must be approved by Landlord in writing, which approval shall not be unreasonably withheld, conditioned or delayed. Except as expressly set forth in this Exhibit, all maintenance, repairs and additional cleaning necessitated by such installations shall be at Tenant’s expense. 2. Tenant is responsible for the maintenance and repair of plumbing fixtures and related equipment installed in the Premises for its exclusive use (such as in any coffee room), but excluding lavatory and shower space. VIII. SIGNAGE Tenant shall be entitled to the Building’s standard signage at Tenant’s main entry, all relevant monument signs and on the Building’s lobby directories, at Landlord’s cost. See also Section 6.1.20 regarding Tenant’s signage. IX. ELECTRICITY Tenant shall, in addition to paying Fixed Rent, pay for all electricity for lights, plugs and supplemental HVAC consumed in the Premises pursuant to a Landlord installed electric sub- meter or check meter to measure Tenant’s actual usage consumed within the Premises. Tenant shall reimburse Landlord for all costs of such electricity based upon the rate charged by the utility company (or provider) to the Landlord without mark-up on a monthly basis, specifically within thirty (30) days upon receipt of Landlord’s invoice therefore. Common area electricity and common area Building HVAC electric charges are included in the common area maintenance charges set forth in Section 4.2 of this Lease.


 
D-7 8833492.3 The Building is powered by 18,000 amps at 480 volts, 3 phase, 4 wire. Tenant’s use of electrical service in the Premises shall not at any time exceed the capacity of any of the electrical conductors or other equipment in or otherwise serving the Premises or the Building standard. To ensure that such capacity is not exceeded and to avert possible adverse effects upon the Building’s electrical system, Tenant shall not, without at least thirty (30) days prior written notice to and consent of Landlord in each instance, connect to the Building electric distribution system any fixtures, appliances or equipment which operates on a voltage of 277/480 volts nominal, or make any alteration or addition to the electric system of the Premises. In the event Tenant shall use (or request that it be allowed to use) electrical service in excess of that reasonably deemed by Landlord to be standard for the Building, Landlord may refuse to provide such excess usage or refuse to consent to such usage or may consent upon such conditions as Landlord reasonably elects (including, but not limited to, the installation of utility service upgrades, sub-meters, air handlers or cooling units), and all such additional usage (except to the extent prohibited by law), installation and maintenance thereof shall be paid for by Tenant, as additional rent, upon Landlord’s demand, so long as no other tenants are receiving excess usage. It is understood that the electrical generated service to the Premises may be furnished by one or more generators of electrical power and that the cost of electricity may be billed as a single charge or divided into and billed in a variety of categories, such as distribution charges, transmission charges, generation charges, congestion charges, capacity charges, public good charges, and other similar categories, and may also include a fee, commission or other charge by an unaffiliated broker, aggregator or other intermediary for obtaining or arranging the supply of generated electricity. Landlord shall have the right to select the generator of electricity to the Premises and to purchase generated electricity for the Premises through a broker, aggregator or other intermediary and/or buyers group or other group and to change the generator of electricity and/or manner of purchasing electricity from time to time provided; provided that such services are competitively bid prior to selection. As used herein, the term “generator of electricity” shall mean one or more companies (including, but not limited to, an electric utility, generator, independent or non-regulated company) that provides generated power to the Premises or to the Landlord to be provided to the Premises, as the case may be. X. OTHER UTILITIES Tenant shall be responsible for the payment of all other utilities consumed by Tenant in the Premises, including telephone, cable, other communications and gas (if applicable). Tenant shall pay for such consumption directly to the provider of such utilities. XI. LIGHTING Landlord shall maintain all existing lighting systems in the Premises, including the replacing of light bulbs, plugs, as needed, and costs related thereto shall be billed to Tenant.


 
E-1 8833492.3 EXHIBIT “E” RULES AND REGULATIONS 1. The entrance, lobbies, passages, corridors, elevators and stairways shall not be encumbered or obstructed by Tenant, Tenant’s agents, servants, employees, licensees, and visitors, or be used by them for any purpose other than for ingress and egress to and from the Premises. The moving in or out of all safes, freight, furniture, or bulky matter of any description must take place during the hours which Landlord may reasonably determine from time to time. Landlord reserves the right to inspect all freight and bulky matter to be brought into the Building and to exclude from the Building all freight and bulky matter which violates any of these Rules and Regulations or the Lease of which these Rules and Regulations are a part. 2. No curtains, blinds, shades, screens, advertisements, or signs, or the like other than those furnished by Landlord, shall be attached to, hung in, affixed to, or used in connection with any window or door of the Premises or to any other area of the Premises (including without limitation on interior windows, walls and doors) that is visible from the outside of the Building or visible from any common area of the Building without the prior written consent of the Landlord (taking into account such factors such as size, color and style and compatibility with the Building). If Tenant is not the sole Building tenant, interior signs on doors on the common areas of the Building shall be painted or affixed for Tenant by Landlord, or by sign painters first approved by Landlord, at the expense of Tenant and shall be of a size, color and style acceptable to Landlord and shall be compatible to the Building. In no event shall Tenant have the right to place any signage elsewhere on the Lot or Park without Landlord’s prior written approval. 3. Tenant shall furnish Landlord with master keys or access devices for any security (door access) system provided and installed by Tenant, so long as the same has been approved by Landlord. Tenant shall be allowed to place additional locks or bolts upon doors and windows within the Premises, as long as Tenant provides master keys to Landlord as aforesaid as these additional locks and bolts could prove to be a hindrance to Landlord providing building services, such as cleaning and maintenance. Tenant must, upon the termination of its tenancy, remove all additional locks and bolts and restore all original door hardware and provide Landlord all Building keys either furnished to or otherwise procured by Tenant; and in the event of the loss of any keys so furnished, Tenant shall pay to Landlord the reasonable replacement cost thereof. 4. Canvassing, soliciting and peddling in the Building, or on the Lot or in the Park if applicable, are prohibited, and Tenant shall cooperate to prevent the same. 5. Tenant shall comply with all reasonably necessary security measures from time to time established by Landlord for the Building or Park, if any; however, the parties acknowledge that Landlord has no obligation to provide any security. 6. Tenant agrees that there shall be no smoking allowed anywhere in the Premises or Building or within 50’ of any entrance to the Building.


 
E-2 8833492.3 7. No animals, with the exception of “assistance animals” (e.g., seeing eye dogs), shall be brought into the Building by Tenant, Tenant’s agents, servants, employees, invitees, subtenants and assigns. 8. a) If the Building has a common fitness center, Tenant shall execute Landlord’s standard Release and Waiver Agreement prior to any use by Tenant. b) Users of any common fitness room or shower facilities within the Building (if applicable) shall only place a lock on a locker only during the time they are using the fitness, locker room and/or shower facilities. No overnight use of lockers and no locks on lockers except during workout. Also, no overnight storage of gym bags or like shall be permitted. Tenant shall inform all employees that the lockers and locker room features such as coat hooks, and closet rods are there for the benefit of all building tenants. Towels and clothing are not to be left in the locker room for any length of time greater than that period that the employee is using the facility. The Tenant shall provide its employees with an area within their Premises for their employees to hang personal belongings to dry. 9. Bicycles shall be parked at the specific bicycle locations provided and shall not be permitted inside the Building. 10. No Onsite Mobile Oil Change Companies, Food Service Trucks, etc. are allowed to provide services on the property. 11. No portable electric heaters shall be allowed anywhere in the Premises. 12. Tenant shall notify Landlord in advance of any move-in and move-out activities involving multi-tenant buildings (and their common areas). All moves shall be performed by Tenant (and its contractors) outside of normal weekday business hours of operation (as set forth on Exhibit “D”) and/or weekends.


 
F-3 8833492.3 EXHIBIT “F” OPTION TO EXTEND The Tenant has the option to extend this Lease for two (2) successive five (5) year terms each (each an “Extended Term” or collectively, the “Extended Terms”), the exercise of which shall automatically extend the Term of the Lease without the necessity of additional documentation. So long as there does not exist any continuing, uncured material default under the Lease beyond notice and cure periods at the time of exercise, the option to extend shall be deemed to have been exercised by Tenant’s written notification to Landlord that it elects to exercise its option to extend at least twelve (12) months but not more than eighteen (18) months prior to the end of the initial Term hereunder, or first Extended Term, as applicable. The Extended Terms shall be upon the same terms and conditions as are set forth in this Lease, including, without limitation, the Tenant’s obligations to pay Operating Cost Escalation as set forth in Section 4.2, except that, without the mutual agreement of the parties (i) there shall be no additional option to extend after the termination of the second Extended Term or the failure to exercise the first or second option, whichever shall first occur, and (ii) the annual Fixed Rent for the Extended Terms shall be equal to the then Fair Market Rent (as defined in and determined in accordance with Exhibit “H”).


 
G-1 8833492.3 EXHIBIT “G” NOTICE OF LEASE In accordance with the provisions of Massachusetts General Laws (Ter. Ed.) Chapter 183, Section 4, as amended, notice is hereby given of a certain lease (hereinafter referred to as the “Lease”) dated as of September __, 2016 by and between Technology Park X Limited Partnership (hereinafter referred to as “Landlord”) and ConforMIS, Inc., a Delaware corporation (hereinafter referred to as “Tenant”). W I T N E S S E T H: 1. The address of the Landlord is c/o The Gutierrez Company, 200 Wheeler Road, Burlington, Massachusetts 01803. 2. The address of the Tenant is 28 Crosby Drive, Bedford, MA 01730. 3. The Lease was executed on September __, 2016. 4. The Term of the Lease is a period of approximately eight (8) years and six (6) months beginning on the Commencement Date determined in accordance with Section 2.2 of the Lease, currently scheduled for April 1, 2017. 5. Subject to the provisions of the Lease, the Tenant has the option to extend the Term of the Lease for two (2) additional five (5) year periods pursuant to Exhibit “F” of the Lease. 6. The demised premises is approximately 45,043 rentable square feet on the fourth floor of the building located at 600 Technology Park Drive, Billerica, Massachusetts 01821 (the “Building”), and the areas of which are the subject of all appurtenant rights and easements set forth in Section 2.1 of the Lease. The demised premises is depicted on the plan attached hereto as Exhibit “B”. 7. Tenant shall have a right of first refusal to expand the demised premises to include additional space on the fourth floor of the Building, subject to the terms and conditions of Exhibit “I” of the Lease. 8. The lot upon which the Building is located is described in Exhibit “A” attached hereto. This Notice of Lease has been executed merely to give notice of the Lease, and all of the terms, conditions and covenants of which are incorporated herein by reference. The parties hereto do not intend this Notice of Lease to modify or amend the terms, conditions and covenants of the Lease which are incorporated herein by reference.


 
G-2 8833492.3 IN WITNESS WHEREOF, the parties hereto have duly executed this Notice of Lease as of this ____ day of September, 2016. LANDLORD: TECHNOLOGY PARK X LIMITED PARTNERSHIP By: The Gutierrez Company, General Partner By: Arthur J. Gutierrez, Jr. President COMMONWEALTH OF MASSACHUSETTS MIDDLESEX, SS On this ____ day of September, 2016 before me, the undersigned notary public, personally appeared Arthur J. Gutierrez, Jr., President of The Gutierrez Company, General Partner of Technology Park X Limited Partnership, proved to me through satisfactory evidence of identification, which was personal knowledge of the undersigned, to be the person whose name is signed on the preceding or attached document(s), and acknowledged to me that he signed it voluntarily for its stated purpose. (official seal) Notary Public


 
G-3 8833492.3 TENANT: CONFORMIS, INC. By: Name: Title: COMMONWEALTH OF MASSACHUSETTS ______________ COUNTY On this ____ day of September, 2016, before me, the undersigned notary public, personally appeared________________, the _________________ of ConforMIS, Inc., proved to me through satisfactory evidence of identification, which was photographic identification with signature issued by a federal or state governmental agency, oath or affirmation of a credible witness, personal knowledge of the undersigned, to be the person whose name is signed on the preceding or attached document(s), and acknowledged to me that he/she signed it voluntarily for its stated purpose. (official seal) Notary Public


 
G-4 8833492.3 EXHIBIT “A” TO EXHIBIT “G” (600 Technology Park Drive) The land in Billerica, Middlesex County, Massachusetts being shown as “Lot 10A, 889,134± SF, 20.41± AC” on a plan entitled “Approval Not Required Plan of Lands of Technology Park Realty Trust I and Technology Park X Limited Partnership, Billerica, MA, Middlesex County (North Registry District), Prepared for The Gutierrez Company,” dated April 23, 1998, revised May 1, 1998 and May 14, 1998, prepared by SMC, and recorded with the Middlesex North Registry of Deeds in Plan Book 197, Plan 35.


 
G-5 8833492.3 EXHIBIT “B” TO EXHIBIT “G” Plan Depicting Location of the Premises


 
H-1 8833492.3 EXHIBIT “H” MARKET RENT As used in this Lease, the term “Fair Market Rent” shall mean the then current annual rental charges, including provisions for subsequent increases and other adjustments, for existing office leases then currently being negotiated or those recently executed in comparable space and buildings located in the Route 3 market area. In determining Fair Market Rent, all relevant factors shall be taking into account, including, without limitation: condition of the premises, size of the premises, escalation charges then payable under the lease, location of the premises, location of the building, tenant improvement allowances, fit-up of the premises and lease term. The Fair Market Rent for the Premises shall be determined as determined as follows: (a) If Tenant exercises an Extension Option provided in Exhibit F, then Landlord and Tenant shall first negotiate in good faith in an attempt to determine the Fair Market Rent, subject to the terms of paragraph (f) below. If Landlord and Tenant are able to agree upon the Fair Market Rent within thirty (30) days after Landlord’s receipt of Tenant’s Extension Notice (the “Negotiation Deadline”), then such agreement shall constitute the determination of the Fair Market Rent for the applicable Extended Term for purposes of this paragraph (a). If Landlord and Tenant are unable to agree upon the Fair Market Rent prior to the Negotiation Deadline, then within fifteen (15) days after the Negotiation Deadline, Landlord and Tenant shall each appoint one (1) arbitrator (each, an “Advocate Arbitrator”) who shall be a real estate broker who shall have been active over the ten (10) year period ending on the date of such appointment in the arms-length leasing of office space in comparable Class-A multi-tenanted commercial office buildings (with and without ground floor retail) of comparable use and quality of construction located in the Boston northwest suburban area, taking into account all relevant factors. Within two (2) business days following appointment of their respective Advocate Arbitrators, each party shall notify the other of such appointment, which notice shall include the name and address of the appointed Advocate Arbitrator and a brief description of such Advocate Arbitrator’s experience and qualifications. Landlord and Tenant may consult with prospective brokers prior to appointing an Advocate Arbitrator. Each Advocate Arbitrator shall make his or her own independent determination of the Fair Market Rent for the applicable Extended Term, subject to the terms of paragraph (f) below. Within thirty (30) days after the date of appointment of the last appointed Advocate Arbitrator, each Advocate Arbitrator shall prepare and deliver to Landlord and Tenant his or her determination of the Fair Market Rent. If the higher of the two determinations of the Fair Market Rent by the Advocate Arbitrators is not more than one hundred five percent (105%) of the lower of such determinations, then the Fair Market Rent shall be the average of the two (2) determinations. If the higher determination is more than one hundred five percent (105%) of the lower determination, then the two (2) Advocate Arbitrators shall then appoint a third arbitrator (the “Neutral Arbitrator”) who shall be a broker meeting the qualifications above and who shall not have been engaged by either party during the three (3) year period immediately prior to his or her appointment. Neither Landlord nor Tenant nor their respective Advocate Arbitrators may, directly or indirectly, consult with the Neutral Arbitrator prior to or after his or her appointment, except in the presence of the other party. If the two Advocate Arbitrators cannot agree upon the appointment of the Neutral Arbitrator within ten (10) business days following delivery of the last determination by an Advocate Arbitrator, either


 
H-2 8833492.3 Landlord or Tenant, or both, shall apply to the local office of the American Arbitration Association (“AAA”) to provide a list of three (3) brokers meeting the foregoing qualifications and who have relatively equal experience representing tenants and landlords. Within five (5) business days after receipt of the AAA list, each party may, by written notice to the other, reject one (1) of the appraisers on the AAA list. If, after such procedure, names of more than one (1) appraiser shall remain, then the Neutral Arbitrator shall be chosen by Landlord and Tenant from the remaining names, by lot. The Neutral Arbitrator shall be retained pursuant to an engagement letter jointly prepared by Landlord’s counsel and Tenant’s counsel. (b) The Neutral Arbitrator shall decide whether the determination of the Fair Market Rent by Landlord’s Advocate Arbitrator or Tenant’s Advocate Arbitrator more closely reflects the Fair Market Rent. The Neutral Arbitrator may elect to meet with Landlord’s Advocate Arbitrator and Tenant’s Advocate Arbitrator to discuss the market rent analysis and conclusions of the two (2) Advocate Arbitrators. The Neutral Arbitrator must select either the determination by Landlord’s Advocate Arbitrator or Tenant’s Advocate Arbitrator as the Fair Market Rent, and shall have no right to propose a middle ground or to modify either of the two (2) determinations or the provisions of this Lease. The Neutral Arbitrator shall render a decision within forty-five (45) days after appointment. The decision of the Neutral Arbitrator shall be final and binding upon the parties, and may be enforced in accordance with the provisions of applicable law for the jurisdiction within which the Property is located. (c) In the event of the failure, refusal or inability of any Advocate Arbitrator or the Neutral Arbitrator to act, a successor shall be appointed in the manner that applies to the selection of the person being replaced. Each party shall pay the fees and expenses of the Advocate Arbitrator designated by such party, and one-half of the fees and expenses of the Neutral Arbitrator. (d) If the Fair Market Rent has not been determined as of the commencement of the applicable Extended Term, Tenant shall continue to pay as monthly Basic Rent, pending such determination, the Fixed Rent in effect immediately before commencement of the applicable Extended Term. Within thirty (30) days following the determination of the Fair Market Rent, Tenant shall pay to Landlord, or Landlord shall pay to Tenant, the amount of any deficiency or excess, as the case may be, in the monthly Fixed Rent previously paid by Tenant. (e) If Tenant exercises an Extended Term, Landlord and Tenant shall promptly enter into an amendment to this Lease documenting the terms of the applicable Extended Term (each an “Extension Amendment”); provided, however, an otherwise valid exercise of an Extended Term shall be fully effective whether or not an Extended Amendment is executed. (f) On or after the date that is 24 months before the end of the then-current Term, and prior to the date that is 12 months before the end of the then-current Term, Tenant may give Landlord notice (“Tenant’s Rent Request Notice”) requesting Landlord’s good faith determination of the Fair Market Rent for any Extended Term. Tenant’s Rent Request Notice shall not constitute Tenant’s exercise of any option to extend the Term for an Extended Term. Within 10 business days after receipt of a Tenant’s Rent Request Notice, Landlord shall provide Tenant with written notice of Landlord’s good faith determination of the Fair Market Rent for the applicable Extended Term (the “Landlord’s FMR Determination”).


 
I-1 8833492.3 EXHIBIT “I” RIGHT OF FIRST REFUSAL In no event shall Landlord, during the Term of this Lease, lease or decide to lease, agree to lease, or accept any offer to lease space that from time to time becomes available during the Term on floor 4 of the Building (each and collectively, the “ROFR Space”), unless Landlord first affords Tenant an opportunity to lease such area in accordance with the provisions of this Exhibit “I” and only after written notice to Tenant, provided that there does not then exist an uncured, continuing material Event Default under this Lease. Such notice shall contain Landlord’s summary of the essential terms and conditions of any bona fide third party offer which Landlord anticipates accepting (i.e., description of such rentable area, the term and any options to extend or cancel the term, the annual fixed rent amounts, the basic operating cost provisions, and the allowances and other monetary concessions, if any) with respect to such rentable area (such summary shall herein in this Exhibit “I” be referred to as the “Offer”). Upon receipt of such notice and the Offer from Landlord, and as aforesaid, provided further that there does not then exist an uncured, continuing material Event of Default under this Lease, Tenant shall have a right to lease all of such space described in the Offer on the terms set forth in the Offer (except that if such Offer is received by Tenant within the first twelve (12) months of the Term), then the lease term applicable to such space shall be coterminous with the Term of this Lease, including, without limitation, all rights to extend the Term in accordance with this Lease) by giving notice to Landlord to such effect within ten (10) business days after Tenant’s receipt of Landlord’s notice of such Offer. If such notice is not so timely given by Tenant, then Landlord shall be free to lease the subject space, or portion thereof, on the terms and conditions contained in the Offer, or substantially similar thereto (which for the purposes hereof, Landlord agrees shall not be more than a five percent (5%) decrease in the net effective rent thereunder; otherwise, Landlord shall re-offer the space to Tenant, in accordance with the terms of this Exhibit “I”). The non-exercise by Tenant of its rights under this Exhibit “I” as to any particular ROFR Space described in a particular Offer by Landlord shall be deemed to waive any of Tenant’s rights of first refusal as to the Offer, but not as to the remainder of ROFR Space that was not part of the Offer, if any, as this right of first refusal shall be considered a one-time first refusal as to the ROFR Space; provided however if, following the non-exercise by Tenant of its rights under this Exhibit “I” to any particular ROFO Space described in a particular Offer by Landlord, Landlord fails to lease, agree to lease, or accept an offer to lease the premises in such particular Offer within nine (9) months of Tenant’s non-exercise, Landlord shall be obligated to again afford Tenant an opportunity to lease the area described in such Offer in accordance with the provisions of this Exhibit “I”. In the event that Tenant accepts Landlord’s offer to lease such ROFR Space described in the Offer, then Landlord and Tenant hereby agree that they shall enter into a mutually acceptable amendment to this Lease, specifying that such rentable area is a part of the Premises under this Lease and demising said premises to Tenant on the terms of the Offer with respect to such rentable space (except that if such Offer is received by Tenant within the first twelve (12) months of the Term), then the lease term applicable to such space shall be coterminous with the Term of this Lease, including, without limitation, all rights to extend the Term in accordance with this Lease). Such amendment shall also contain other appropriate terms and provisions relating to the addition of such rentable space to this Lease or the leasing of such rentable space, as


 
I-2 8833492.3 applicable, and as mutually agreed upon by the parties. The amendment shall be signed by Tenant within twenty (20) business days of receipt of the proposed agreement from the Landlord in the form as hereinabove required, Landlord and Tenant hereby agreeing to use good faith efforts to finalize the form of amendment as quickly as possible and within said twenty (20) business day period. In no event shall the foregoing affect the Tenant’s obligation to lease such space once Tenant provides Landlord with its notice exercising its option hereunder as aforesaid, as the parties hereby agree that Tenant’s notice shall serve as Tenant’s acceptance of Landlord’s offer to lease such space and that the amendment merely serves as confirmation that the parties shall enter into a written amendment to memorialize the previously accepted terms. Notwithstanding the foregoing, Tenant’s rights of first refusal pursuant to this Exhibit “I” shall be subject and subordinate to Insulet Corporation’s right of first refusal with respect to floor 4 of the Building. Landlord shall not offer any space to Tenant subject to the existing rights of Insulet Corporation unless any such space has first been offered to and rejected by Insulet Corporation in accordance with its existing rights. If Landlord provides an Offer to Tenant at any time during the last two years of the Term and Tenant gives Landlord a written request for a determination of the Fair Market Rent for the Premises pursuant to paragraph (f) of Exhibit H within five (5) business days after receipt of Landlord’s Offer, the date by which Tenant must accept Landlord’s Offer shall be extended to the date that is ten (10) business days after the date on which Landlord provides Landlord’s FMR Determination to Tenant.


 
J-1 8833492.3 EXHIBIT “J” SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT SUBORDINATION, NONDISTURBANCE, AND ATTORNMENT AGREEMENT This SUBORDINATION, NONDISTURBANCE, AND ATTORNMENT AGREEMENT (this “Agreement”) is entered into as of _______________, 20____ (the “Effective Date”), between BANK OF AMERICA, N.A., a national banking association, whose address is ___________________________________________________________, Attention: Commercial Real Estate Banking (“Lender”), and ______________________, a ___________________________, whose address is ____________________________ (“Tenant”), with reference to the following facts: A. Technology Park X Limited Partnership, a ___________________, whose address is _______________________________ (“Landlord”), owns the real property located at 600 Technology Park Drive, Billerica, Massachusetts (such real property, including all buildings, improvements, structures and fixtures located thereon, “Landlord’s Premises”), as more particularly described in Schedule A. B. Lender has made a loan to Landlord in the original principal amount of $_________________, which amount is subject to possible increase to a maximum principal amount of $__________________ (the “Loan”), all as provided in and subject to the terms and conditions set forth in the Loan Documents (as hereinafter defined). C. To secure the Loan, Landlord has encumbered Landlord’s Premises by entering into that certain Mortgage, Assignment of Rents, Security Agreement and Fixture Filing dated _________________, 20___, for the benefit of Lender (as amended, increased, renewed, extended, spread, consolidated, severed, restated, or otherwise changed from time to time, the “Mortgage”) [to be] recorded [on ____________________, in Book __________, Page ___________,] in the Records of ______________________ County, _________________ (the “Official Records”). D. Pursuant to a Lease dated as of _________________, 2016, as amended on _________________, 20___ and ____________, 20___, and as may be amended, extended or renewed, from time to time (collectively, the “Lease”); Landlord demised to Tenant a portion of Landlord’s Premises comprised of approximately 45,053 rentable square feet, as more particularly described in the Lease (“Tenant’s Premises”). [E. A memorandum or short form of the Lease] [was recorded in the Official Records on _____________________, at Book ______, Page _____.] F. Tenant and Lender desire to agree upon the relative priorities of their interests in Landlord’s Premises and their rights and obligations if certain events occur.


 
J-2 8833492.3 NOW, THEREFORE, for good and sufficient consideration and intending to be legally bound hereby, Tenant and Lender agree: 1. Definitions. The following terms shall have the following meanings for purposes of this Agreement. 1.1 “Civil Asset Forfeiture Reform Act” means the Civil Asset Forfeiture Reform Act of 2000 (18 U.S.C. Sections 983 et seq.), as amended from time to time, and any successor statute. 1.2 “Construction-Related Obligation(s)” means any obligation of Landlord under the Lease to make, pay for, or reimburse Tenant for any alterations, demolition, or other improvements or work at Landlord’s Premises, including Tenant’s Premises. Construction- Related Obligations shall not include: (a) reconstruction or repair following fire, casualty or condemnation; or (b) day-to-day maintenance and repairs. 1.3 “Controlled Substances Act” means the Controlled Substances Act (21 U.S.C. Sections 801 et seq.), as amended from time to time, and any successor statute. 1.4 “Foreclosure Event” means: (a) foreclosure under the Mortgage, whether by judicial action or pursuant to nonjudicial proceedings; (b) any other exercise by Lender of rights and remedies (whether under the Mortgage or under applicable law, including bankruptcy law) as holder of the Loan and/or the Mortgage, as a result of which any Successor Landlord becomes owner of Landlord’s Premises; or (c) delivery by Landlord to Lender (or its designee or nominee) of a deed or other conveyance of Landlord’s interest in Landlord’s Premises in lieu of any of the foregoing. 1.5 “Former Landlord” means Landlord and any other party that was landlord under the Lease at any time before the occurrence of any attornment under this Agreement. 1.6 “Loan Documents” mean the Mortgage and any other document now or hereafter evidencing, governing, securing or otherwise executed in connection with the Loan, including any promissory note and/or loan agreement, pertaining to the repayment or use of the Loan proceeds or to any of the real or personal property, or interests therein, securing the Loan, as such documents or any of them may have been or may be from time to time hereafter renewed, extended, supplemented, increased or modified. This Agreement is a Loan Document. 1.7 “Offset Right” means any right or alleged right of Tenant to any offset, defense (other than one arising from actual payment and performance, which payment and performance would bind a Successor Landlord pursuant to this Agreement), claim, counterclaim, reduction, deduction, or abatement against Tenant’s payment of Rent or performance of Tenant’s other obligations under the Lease, arising (whether under the Lease or other applicable law) from Landlord’s breach or default under the Lease. 1.8 “Rent” means any fixed rent, base rent or additional rent under the Lease. 1.9 “Successor Landlord” means any party that becomes owner of Landlord’s Premises as the result of a Foreclosure Event.


 
J-3 8833492.3 1.10 “Termination Right” means any right of Tenant to cancel or terminate the Lease or to claim a partial or total eviction arising (whether under the Lease or under applicable law) from Landlord’s breach or default under the Lease. 2. Subordination. The Lease, including all rights of first refusal, purchase options and other rights of purchase, shall be, and shall at all times remain, subject and subordinate to the lien and security interest imposed by the Mortgage and the right to enforce such lien or security interest, and all advances made under or secured by the Loan Documents. Tenant hereby intentionally subordinates the Lease and all of Tenant’s right, title and interest thereunder and in and to Landlord’s Premises (including Tenant’s right, title and interest in connection with any insurance proceeds or eminent domain awards or compensation relating to Landlord’s Premises and Tenant’s right to receive and retain any rentals or payments made under any sublease or concession agreement of or relating to any portion of Tenant’s Premises), to the lien of the Mortgage and all of Lender’s rights and remedies thereunder, and agrees that the Mortgage shall be and shall at all times remain a lien on Landlord’s Premises prior and superior to the Lease. 3. Nondisturbance; Recognition; and Attornment. a. No Exercise of Mortgage Remedies Against Tenant. So long as the Lease has not been terminated on account of Tenant’s default that has continued beyond applicable cure periods (an “Event of Default”), Lender shall not name or join Tenant as a defendant in any judicial action, proceeding for foreclosure, receivership, trustee’s sale, or other proceeding that is commenced pursuant to the exercise of Lender’s rights and remedies arising upon a default by Landlord under the Mortgage unless (a) applicable law requires Tenant to be made a party thereto as a condition to proceeding against Landlord or in order to prosecute or otherwise fully enforce such rights and remedies; or (b) such joinder of Tenant is required for the recovery by Lender of any Rent at any time owing by Tenant under the Lease, whether pursuant to the assignment of rents set forth in the Mortgage or otherwise; or (c) such joinder is required in order to enforce any right of Lender to enter Landlord’s Premises for the purpose of making any inspection or assessment, or in order to protect the value of Lender’s security provided by the Mortgage. In any instance in which Lender is permitted to join Tenant as a defendant as provided above, Lender agrees not to terminate the Lease or otherwise disturb, interfere with or adversely affect Tenant’s rights under the Lease, or this Agreement in or pursuant to such action or proceeding, unless an Event of Default by Tenant has occurred and is continuing. The foregoing provisions of this Section shall not be construed in any manner that would prevent Lender from (i) carrying out any nonjudicial foreclosure proceeding under the Mortgage, or (ii) obtaining the appointment of a receiver for the Landlord’s Premises as and when permitted under applicable law. b. Nondisturbance and Attornment. If the Lease has not been terminated on account of an Event of Default by Tenant, then, when Successor Landlord takes title to Landlord’s Premises: (a) Successor Landlord shall not terminate or disturb or interfere with Tenant’s possession of Tenant’s Premises under the Lease, except in accordance with the terms of the Lease; (b) Successor Landlord shall be bound


 
J-4 8833492.3 to Tenant under all the terms and conditions of the Lease (except as provided in this Agreement); (c) Tenant shall recognize and attorn to Successor Landlord as Tenant’s direct landlord under the Lease as affected by this Agreement; and (d) the Lease shall continue in full force and effect as a direct lease, in accordance with its terms (except as provided in this Agreement), between Successor Landlord and Tenant. c. Use of Proceeds. Lender, in making any advances of the Loan pursuant to any of the Loan Documents, shall be under no obligation or duty to, nor has Lender represented to Tenant that it will, see to the application of such proceeds by the person or persons to whom Lender disburses such advances, and any application or use of such proceeds for purposes other than those provided for in any Loan Document shall not defeat Tenant’s agreement to subordinate the Lease in whole or in part as set forth in this Agreement. d. Further Documentation. The provisions of this Article shall be effective and self- operative without any need for Successor Landlord or Tenant to execute any further documents. Tenant and Successor Landlord shall, however, confirm the provisions of this Article in a commercially reasonable writing upon request by either of them. e. Default Under Mortgage. In the event that Lender notifies Tenant in writing of a Landlord default under the Mortgage and demands that Tenant pay its rent and all other sums due under the Lease directly to Lender, Tenant shall honor such demand and pay the full amount of its rent and all other sums due under the Lease directly to Lender, without offset (except as expressly provided in the Lease), or as otherwise required pursuant to such notice beginning with the payment next due after such notice of default, without inquiry as to whether a default actually exists under the Mortgage and notwithstanding any contrary instructions of or demands from Landlord. The consent and approval of Landlord to this Agreement shall constitute an express authorization for Tenant to make such payments to Lender and a release and discharge of all liability of Tenant to Landlord for any such payments made to Lender in compliance with Lender’s written demand. 4. Protection of Successor Landlord. Notwithstanding anything to the contrary in the Lease or the Mortgage, Successor Landlord shall not be liable for or bound by any of the following matters: a. Claims Against Former Landlord. Any Offset Right that Tenant may have against any Former Landlord relating to any event or occurrence before the date of attornment, including any claim for damages of any kind whatsoever as the result of any breach by Former Landlord that occurred before the date of attornment. (The foregoing shall not limit either (a) Tenant’s right to exercise against Successor Landlord any Offset Right otherwise available to Tenant because of events occurring after the date of attornment, or (b) Successor Landlord’s


 
J-5 8833492.3 obligation to correct any conditions that existed as of the date of attornment and violate Successor Landlord’s obligations as landlord under the Lease). b. Acts or Omissions of Former Landlord. Any act, omission, default, misrepresentation, or breach of warranty, of any previous landlord (including Former Landlord) or obligations accruing prior to Successor Landlord’s actual ownership of Landlord’s Premises; provided, however, that nothing contained in this subsection shall be deemed to release Successor Landlord from (i) Successor Landlord’s obligation to correct any conditions that existed as of the date of attornment and violate Successor Landlord’s obligations as landlord under the Lease, or (ii) any obligation accruing during Successor Landlord’s actual ownership of Landlord’s Premises which is capable of being cured by Successor Landlord and which continues after Successor Landlord’s acquisition of Landlord’s Premises. c. Prepayments. Any payment of Rent that Tenant may have made to Former Landlord more than thirty (30) days before the date such Rent was first due and payable under the Lease with respect to any period after the date of attornment other than, and only to the extent that, the Lease expressly required such a prepayment. d. Payment; Security Deposit. Any obligation (a) to pay Tenant any sum(s) that any Former Landlord owed to Tenant, or (b) with respect to any security deposited with Former Landlord, unless such security was actually delivered to Lender. This Section is not intended to apply to Landlord’s obligation to make any payment that constitutes a Construction-Related Obligation. e. Modification; Amendment; or Waiver. Any material modification or amendment of the Lease, or any material waiver of any terms of the Lease, made without Lender’s written consent. For purposes hereof, a “material” amendment, modification or waiver means one that reduces the rent, term, size of Tenant’s Premises or Tenant’s obligation to pay operating expense reimbursements or common area charges; transfers to Landlord costs or expenses previously paid by Tenant; adds options on the part of the Tenant to expand Tenant’s Premises or to purchase Landlord’s Premises; or otherwise materially increases Landlord’s obligations or decreases Tenant’s obligations under the Lease. f. Surrender; Etc. Any consensual or negotiated surrender, cancellation, or termination of the Lease, in whole or in part, agreed upon between Landlord and Tenant, unless effected unilaterally by Tenant pursuant to the express terms of the Lease. g. Construction-Related Obligations. Any Construction-Related Obligation of Landlord under the Lease. 5. Exculpation of Successor Landlord. Notwithstanding anything to the contrary in this Agreement or the Lease, upon any attornment pursuant to this Agreement the Lease shall be


 
J-6 8833492.3 deemed to have been automatically amended to provide that Successor Landlord’s obligations and liability under the Lease shall never extend beyond Successor Landlord’s (or its successors’ or assigns’) interest, if any, in Landlord’s Premises from time to time, including insurance and condemnation proceeds, Successor Landlord’s interest in the Lease, and the proceeds from any sale or other disposition of Landlord’s Premises by Successor Landlord (collectively, “Successor Landlord’s Interest”). Tenant shall look exclusively to Successor Landlord’s Interest (or that of its successors and assigns) for payment or discharge of any obligations of Successor Landlord under the Lease as affected by this Agreement. If Tenant obtains any money judgment against Successor Landlord with respect to the Lease or the relationship between Successor Landlord and Tenant, then Tenant shall look solely to Successor Landlord’s Interest (or that of its successors and assigns) to collect such judgment. Tenant shall not collect or attempt to collect any such judgment out of any other assets of Successor Landlord. In addition to any limitation of liability set forth in this Agreement, Lender and/or its successors and assigns shall under no circumstances be liable for any incidental, consequential, punitive, or exemplary damages. Any limitation of liability of Tenant for any incidental, consequential, punitive, or exemplary damages shall be as set forth in the Lease. 6. Lender’s Right to Cure. a. Notice to Lender. Notwithstanding anything to the contrary in the Lease or this Agreement, before exercising any Termination Right, Tenant shall simultaneously provide Lender with notice of the breach or default by Landlord giving rise to same (the “Default Notice”) and, thereafter, the opportunity to cure such breach or default as provided for below. b. Lender’s Cure Period. After Lender receives a Default Notice, Lender shall have a period of fifteen (15) days beyond the time available to Landlord under the Lease in which to cure the breach or default by Landlord. Lender shall have no obligation to cure (and shall have no liability or obligation for not curing) any breach or default by Landlord, except to the extent that Lender agrees or undertakes otherwise in writing or as expressly set forth herein. c. Extended Cure Period. In addition, as to any breach or default by Landlord the cure of which requires possession and control of Landlord’s Premises, provided only that Lender undertakes to Tenant by written notice to Tenant within fifteen (15) days after receipt of the Default Notice to exercise reasonable efforts to cure or cause to be cured by a receiver such breach or default within the period permitted by this Section, Lender’s cure period shall continue for such additional time (the “Extended Cure Period”) as Lender may reasonably require to either (a) obtain possession and control of Landlord’s Premises and thereafter cure the breach or default with reasonable diligence and continuity, or (b) obtain the appointment of a receiver and give such receiver a reasonable period of time in which to cure the default; provided, however, (i) the Extended Cure Period shall not exceed thirty (30) days, and (ii) Lender shall not be entitled to the Extended Cure Period with respect to the appointment of a receiver unless it commences an action to appoint a receiver within the initial fifteen (15) day cure period referred to in Section 6.b.


 
J-7 8833492.3 7. Confirmation of Facts. Tenant represents to Lender and to any Successor Landlord, in each case as of the Effective Date: a. Effectiveness of Lease. The Lease is in full force and effect, has not been modified, and constitutes the entire agreement between Landlord and Tenant relating to Tenant’s Premises. Tenant has no interest in Landlord’s Premises except pursuant to the Lease. b. Rent. Tenant has not paid any Rent that is first due and payable under the Lease after the Effective Date except in accordance with the Lease. c. No Landlord Default. To the best of Tenant’s knowledge, no breach or default by Landlord exists and no event has occurred that, with the giving of notice, the passage of time or both, would constitute such a breach or default. d. No Tenant Default. Tenant has not received any uncured notice of any default by Tenant under the Lease and, to the best of Tenant’s knowledge, Tenant is not in default under the Lease. e. No Termination. Tenant has not commenced any action nor sent or received any notice to terminate the Lease. Tenant has no presently exercisable Termination Right(s) or Offset Right(s). f. Commencement Date. The “Commencement Date” of the Lease has not occurred and will be determined in accordance with Section 2.2 of the Lease. g. Acceptance. Tenant has accepted possession of Tenant’s Premises. h. No Transfer. Tenant has not transferred, encumbered, mortgaged, assigned, subleased, conveyed or otherwise disposed of the Lease or any interest therein. i. Due Authorization. Tenant has full authority to enter into this Agreement, which has been duly authorized by all necessary actions. j. No Violations of Laws. Tenant has not violated, and shall not violate, any laws affecting Tenant’s Premises, including the Controlled Substances Act, or which could otherwise result in the commencement of a judicial or nonjudicial forfeiture or seizure proceeding by a governmental authority (including the commencement of any proceedings under the Civil Asset Forfeiture Reform Act) on the grounds that Tenant’s Premises or any part thereof has been used to commit or facilitate the commission of a criminal offense by any person, including Tenant, pursuant to any law, including the Controlled Substances Act, regardless of whether or not Tenant’s Premises is or shall become subject to forfeiture or seizure in connection therewith. 8. Miscellaneous.


 
J-8 8833492.3 a. Notices. All notices or other communications required or permitted under this Agreement shall be in writing and given by certified mail (return receipt requested) or by nationally recognized overnight courier service that regularly maintains records of items delivered. Each party’s address is as set forth in the opening paragraph of this Agreement, subject to change by prior written notice under this Section. Notices shall be effective the next business day after being sent by overnight courier service, and five (5) business days after being sent by certified mail (return receipt requested). b. Successors and Assigns. This Agreement shall bind and benefit the parties, their successors and assigns, any Successor Landlord, and its successors and assigns. If Lender assigns the Mortgage, then upon delivery to Tenant of written notice thereof accompanied by the assignee’s written assumption of all obligations under this Agreement, all liability of the assignor shall terminate and thereupon all such obligations and liabilities shall be the responsibility of the party to whom Lender’s interest is assigned or transferred. c. Entire Agreement. This Agreement constitutes the entire agreement between Lender and Tenant regarding the subordination of the Lease to the Mortgage and the rights and obligations of Tenant and Lender as to the subject matter of this Agreement. d. Interaction with Lease and with Mortgage; Severability. If this Agreement conflicts with the Lease, then this Agreement shall govern as between the parties and any Successor Landlord, including upon any attornment pursuant to this Agreement. This Agreement supersedes, and constitutes full compliance with, any provisions in the Lease that provide for subordination of the Lease to, or for delivery of nondisturbance agreements by the holder of, the Mortgage. Lender confirms that Lender has consented to Landlord’s entering into the Lease. If any provision of this Agreement is determined to be invalid, illegal or unenforceable, such provision shall be considered severed from the rest of this Agreement and the remaining provisions shall continue in full force and effect as if such provision had not been included. e. Lender’s Rights and Obligations. Except as expressly provided for in this Agreement, Lender shall have no obligations to Tenant with respect to the Lease. If an attornment occurs pursuant to this Agreement by Tenant to a Successor Landlord, then all rights and obligations of Lender under this Agreement shall terminate, without thereby affecting in any way the rights and obligations of Successor Landlord provided for in this Agreement. f. Interpretation; Governing Law. The interpretation, validity and enforcement of this Agreement shall be governed by and construed under the internal laws of the Commonwealth of Massachusetts, excluding its principles of conflict of laws.


 
J-9 8833492.3 g. Amendments. This Agreement may be amended, discharged or terminated, or any of its provisions waived, only by a written instrument executed by the party to be charged. h. Execution. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. i. Lender’s Representation. Lender represents that Lender has full authority to enter into this Agreement, and Lender’s entry into this Agreement has been duly authorized by all necessary actions. j. Reliance by Lender. Tenant acknowledges the right of Lender (as well as any Successor Landlord) to rely upon the certifications and agreements in this Agreement in making the Loan to Landlord. [Signatures on following page]


 
J-10 8833492.3 IN WITNESS WHEREOF, this Agreement has been duly executed and delivered under seal by Lender and Tenant as of the Effective Date. LENDER: BANK OF AMERICA, N.A., a national banking association By: Name: Title: TENANT: , a _____________________________ By: Name: Title: STATE/COMMONWEALTH OF __________ County, ss. On this _____ day of ______________, 20______ before me, the undersigned notary public, personally appeared __________________________________, proved to me through satisfactory evidence of identification, being (check whichever applies): □ driver’s license or other state or federal governmental document bearing a photographic image, □ oath or affirmation of a credible witness known to me who knows the above signatory, or □ my own personal knowledge of the identity of the signatory, to be the person whose name is signed above, and acknowledged the foregoing to be signed by him/her voluntarily for its stated purpose, as the duly authorized _____________________ of _________________________. __________________________________________ Notary Public My commission expires: ______________________ Print Notary Public’s Name: Qualified in the Commonwealth of Massachusetts [Notary Seal]


 
J-11 8833492.3 STATE/COMMONWEALTH OF __________ County, ss. On this _____ day of ______________, 20______ before me, the undersigned notary public, personally appeared __________________________________, proved to me through satisfactory evidence of identification, being (check whichever applies): □ driver’s license or other state or federal governmental document bearing a photographic image, □ oath or affirmation of a credible witness known to me who knows the above signatory, or □ my own personal knowledge of the identity of the signatory, to be the person whose name is signed above, and acknowledged the foregoing to be signed by him/her voluntarily for its stated purpose, as the duly authorized _____________________ of _________________________. __________________________________________ Notary Public My commission expires: ______________________ Print Notary Public’s Name: Qualified in the Commonwealth of Massachusetts [Notary Seal]


 
J-12 8833492.3 LANDLORD’S CONSENT Landlord consents and agrees to the foregoing Agreement, which was entered into at Landlord’s request. The foregoing Agreement shall not alter, waive or diminish any of Landlord’s obligations under the Mortgage or the Lease. The above Agreement discharges any obligations of Lender under the Mortgage and related loan documents to enter into a nondisturbance agreement with Tenant. Tenant is hereby authorized to pay its rent and all other sums due under the Lease directly to Lender upon receipt of a notice as set forth in Section 3.5 above from Lender and Tenant is not obligated to inquire as to whether a default actually exists under the Mortgage. Landlord is not a party to the above Agreement. LANDLORD: , a _______________________________ By: Name: Title: Dated: ____________________, 20_______ STATE/COMMONWEALTH OF __________ County, ss. On this _____ day of ______________, 20______ before me, the undersigned notary public, personally appeared __________________________________, proved to me through satisfactory evidence of identification, being (check whichever applies): □ driver’s license or other state or federal governmental document bearing a photographic image, □ oath or affirmation of a credible witness known to me who knows the above signatory, or □ my own personal knowledge of the identity of the signatory, to be the person whose name is signed above, and acknowledged the foregoing to be signed by him/her voluntarily for its stated purpose, as the duly authorized _____________________ of _________________________. __________________________________________ Notary Public My commission expires: ______________________ Print Notary Public’s Name: Qualified in the Commonwealth of Massachusetts [Notary Seal]


 
J-13 8833492.3 GUARANTOR’S CONSENT Each of the undersigned, a guarantor of Tenant’s obligations under the Lease (a “Guarantor”), consents to Tenant’s execution, delivery and performance of the foregoing Agreement. From and after any attornment pursuant to the foregoing Agreement, that certain Guaranty dated ________________, 20_______ (the “Guaranty”) executed by Guarantor in favor of ______________________ shall automatically benefit and be enforceable by Successor Landlord with respect to Tenant’s obligations under the Lease as affected by the foregoing Agreement. Successor Landlord’s rights under the Guaranty shall not be subject to any defense, offset, claim, counterclaim, reduction or abatement of any kind resulting from any act, omission or waiver by any Former Landlord for which Successor Landlord would, pursuant to the foregoing Agreement, not be liable or answerable after an attornment. The foregoing does not limit any waivers or other provisions contained in the Guaranty. Guarantor confirms that the Guaranty is in full force and effect and Guarantor presently has no offset, defense (other than any arising from actual payment or performance by Tenant. which payment or performance would bind a Successor Landlord under the foregoing Agreement), claim, counterclaim, reduction, deduction or abatement against Guarantor’s obligations under the Guaranty. GUARANTOR: , a __________________________ By: Name: Title: Dated: ____________________, 20______ STATE/COMMONWEALTH OF __________ County, ss. On this _____ day of ______________, 20______ before me, the undersigned notary public, personally appeared __________________________________, proved to me through satisfactory evidence of identification, being (check whichever applies): □ driver’s license or other state or federal governmental document bearing a photographic image, □ oath or affirmation of a credible witness known to me who knows the above signatory, or □ my own personal knowledge of the identity of the signatory, to be the person whose name is signed above, and acknowledged the foregoing to be signed by him/her voluntarily for its stated purpose, as the duly authorized _____________________ of _________________________. __________________________________________ Notary Public My commission expires: ______________________ Print Notary Public’s Name: Qualified in the Commonwealth of Massachusetts [Notary Seal]


 
J-14 8833492.3 SCHEDULE A Description of Landlord’s Premises 600 Technology Park Drive The land in Billerica, Middlesex County, Massachusetts being shown as “Lot 10A, 889,134± SF, 20.41± AC” on a plan entitled “Approval Not Required Plan of Lands of Technology Park Realty Trust I and Technology Park X Limited Partnership, Billerica, MA, Middlesex County (North Registry District), Prepared for The Gutierrez Company,” dated April 23, 1998, revised May 1, 1998 and May 14, 1998, prepared by SMC, and recorded with the Middlesex North Registry of Deeds in Plan Book 197, Plan 35.


 
K-1 8833492.3 EXHIBIT “K” Tenant Estoppel Certificate To: Bank of America, N.A. 225 Franklin Street MA1-225-0204 Boston, MA 02110 Attention: Relationship Administration Commercial Real Estate Banking Re: _______________________________ _______________________________ 1. The undersigned, as Tenant of approximately [45,000] square feet of space (the “Premises”) under that certain Lease dated ____________________, 2016 (the “Lease”) made with Technology Park X Limited Partnership , a Massachusetts limited partnership (the “Landlord”), covering space in Landlord’s building (the “Building”) in Billerica, Middlesex County, Commonwealth of Massachusetts, known as 600 Technology Park Drive, hereby certifies as follows: (a) That attached hereto as Exhibit “A” is a true, correct and complete copy of the Lease, together with all amendments thereto; (b) That the Lease is in full force and effect and has not been modified, supplemented or amended in any way except as set forth in Exhibit “A.” The interest of the undersigned in the Lease has not been assigned or encumbered except as follows: _________________; (c) That the Lease, as amended as indicated in Exhibit “A,” represents the entire agreement between the parties as to said leasing of the Premises, and that there are no other agreements, written or oral, which affect the occupancy of the Premises by the undersigned; (d) That all insurance required of the undersigned under the Lease has been provided by the undersigned and all premiums have been paid; (e) That the commencement date of the term of the Lease was _____________________; (f) That the expiration date of the term of the Lease is _______________________, including any presently exercised option or renewal term, and that the undersigned has no rights to renew, extend or cancel the Lease or to lease additional space in the Premises or the Building, except as expressly set forth in the Lease; (g) That in addition to the Premises, the undersigned has the right to use _______ parking spaces in or near the Building and _________ square feet of storage area during the term of the Lease; (h) That the undersigned has no option or preferential right to purchase all or any part of the Premises (or the land or Building of which the Premises are a part), and has no right or interest with respect to the Premises or the Building other than as Tenant under the Lease (except as specified in ____________, a copy of which is attached hereto);


 
K-2 8833492.3 (i) That on this date there are no existing defenses, offsets, claims or credits which the undersigned has against the enforcement of the Lease except for prepaid rent through ____________ (not to exceed one (1) month); (j) That all contributions required by the Lease to be paid by Landlord to date for improvements to the Premises have been paid in full. The undersigned has accepted the Premises, subject to no conditions other than those set forth in the Lease. The undersigned has entered into occupancy of the Premises; (k) That the annual minimum rent currently payable under the Lease is $________________ and such rent has been paid through _______________________; (l) That except as otherwise set forth in the Lease, the undersigned has made no agreement with Landlord or any agent, representative or employee of Landlord concerning free rent, partial rent, rebate of rental payments or any other similar rent concession. No rents have been prepaid more than one (1) month in advance and full rental, including basic minimum rent, if any, has commenced to accrue; (m) That to Tenant’s knowledge (i) there are no defaults by the undersigned or Landlord under the Lease, and (ii) no event has occurred or situation exists that would, with the passage of time or with notice, constitute a default under the Lease; [(n) That the undersigned has delivered a letter of credit in the amount of $_________________________;] (o) That as of the date hereof the undersigned has all governmental permits, licenses and consents required for the activities and operations being conducted by it in the Building; and (p) That as of this date there are no actions, whether voluntary or otherwise, pending against the undersigned or any guarantor of the Lease under the bankruptcy or insolvency laws of the United States or any state thereof. 3. The undersigned acknowledges the right of Lender to rely upon the certifications and agreements in this Certificate in making a loan to Landlord. The undersigned hereby agrees to furnish Lender with such other and further estoppel certificates as Lender may reasonably request. The undersigned understands that in connection with such loan, Landlord’s interest in the rentals due under the Lease will be assigned to Lender pursuant to an assignment of leases by Landlord in favor of Lender. The undersigned agrees that if Lender shall notify the undersigned that a default has occurred under the documents evidencing such loan and shall demand that the undersigned pay rentals and other amounts due under the Lease to Lender, the undersigned will honor such demand notwithstanding any contrary instructions from Landlord. EXECUTED this _____ day of ______________________. CONFORMIS, INC., a __________ corporation By: Name: Title:


 
L-1 8833492.3 EXHIBIT “L” FORM LETTER OF CREDIT (THE ACTUAL FORM WILL DEPEND ON THE ISSUING BANK) IRREVOCABLE STANDBY LETTER OF CREDIT NUMBER: DATE: DELIVERY BY COURIER SERVICE BENEFICIARY: APPLICANT: Technology Park X Limited Partnership c/o The Gutierrez Company One Wall Street, Burlington, MA 01803 AMOUNT: USD $____________ EXPIRY DATE: AT OUR COUNTERS IN SANTA CLARA, CALIFORNIA___________ LADIES AND GENTLEMEN: WE HEREBY ESTABLISH OUR IRREVOCABLE STANDBY LETTER OF CREDIT NO. __________ IN YOUR FAVOR EFFECTIVE IMMEDIATELY, BY ORDER AND FOR THE ACCOUNT OF __________ FOR A SUM OR SUMS NOT EXCEEDING A TOTAL OF ________________________________________________ (USD ________) AVAILABLE BY YOUR DRAFT(S) AT SIGHT DRAWN ON US AND ACCOMPANIED BY THE FOLLOWING DOCUMENTS: 1. THE ORIGINAL OF THIS LETTER OF CREDIT AND ALL AMENDMENTS THERETO, IF ANY. 2. A DATED STATEMENT FROM THE BENEFICIARY SIGNED BY AN AUTHORIZED OFFICER OR REPRESENTATIVE, FOLLOWED BY HIS/HER DESIGNATED TITLE, STATING THE FOLLOWING: “REFERENCE IS HEREBY MADE TO THAT CERTAIN LEASE (THE “LEASE”) DATED _____________, 2016 [INSERT LEASE DATE] BETWEEN BENEFICIARY AS LANDLORD (THE “LANDLORD”) AND CONFORMIS, INC. AS TENANT (THE “TENANT”). I HEREBY CERTIFY THAT I AM AN AUTHORIZED REPRESENTATIVE OF LANDLORD AND FURTHER CERTIFY THAT: (I) EITHER (A) AN EVENT OF DEFAULT (AS DEFINED IN THE LEASE) HAS OCCURRED AND REMAINS UNCURED BEYOND THE APPLICABLE CURE PERIOD, OR (B) APPLICANT HAS NOT RENEWED, REPLACED OR AMENDED THE LETTER OF CREDIT BY NOT LATER THAN TWENTY-FIVE (25) BANKING DAYS PRIOR TO THE EXPIRATION THEREOF OR PROVIDED A CASH DEPOSIT, IN ACCORDANCE WITH THE REQUIREMENTS OF ARTICLE 11 OF THE LEASE; AND


 
L-2 8833492.3 (II) THIS DRAWING IN THE AMOUNT OF USD ___________ (INSERT AMOUNT, NOT TO EXCEED AVAILABLE CREDIT) REPRESENTS FUNDS DUE TO LANDLORD UNDER AND PURSUANT TO THE LEASE.” THIS LETTER OF CREDIT IS TRANSFERABLE BY THE ISSUING BANK ONE OR MORE TIMES BUT IN EACH INSTANCE TO A SINGLE BENEFICIARY AND ONLY IN ITS ENTIRETY UP TO THE THEN AVAILABLE AMOUNT IN FAVOR OF ANY NOMINATED TRANSFEREE ASSUMING SUCH TRANSFER TO SUCH TRANSFEREE WOULD BE IN COMPLIANCE WITH THEN APPLICABLE LAW AND REGULATIONS, INCLUDING BUT NOT LIMITED TO THE REGULATIONS OF THE U.S. DEPARTMENT OF TREASURY AND U.S. DEPARTMENT OF COMMERCE. AT THE TIME OF TRANSFER, THE ORIGINAL LETTER OF CREDIT AND ORIGINAL AMENDMENT(S), IF ANY, MUST BE SURRENDERED TO US TOGETHER WITH OUR LETTER OF TRANSFER DOCUMENTATION (IN THE FORM OF EXHIBIT “A” ATTACHED HERETO) AND OUR TRANSFER FEE OF ¼ OF 1% OF THE TRANSFER AMOUNT (MINIMUM $250.00). ANY TRANSFER OF THIS LETTER OF CREDIT MAY NOT CHANGE THE PLACE OF EXPIRATION OF THE LETTER OF CREDIT FROM OUR ABOVE-SPECIFIED OFFICE. EACH TRANSFER SHALL BE EVIDENCED BY OUR ENDORSEMENT ON THE REVERSE OF THE ORIGINAL LETTER OF CREDIT AND WE SHALL FORWARD THE ORIGINAL LETTER OF CREDIT TO THE TRANSFEREE. PARTIAL DRAWINGS ARE ALLOWED. THIS LETTER OF CREDIT MUST ACCOMPANY ANY DRAWINGS HEREUNDER FOR ENDORSEMENT OF THE DRAWING AMOUNT AND WILL BE RETURNED TO THE BENEFICIARY UNLESS IT IS FULLY UTILIZED. ALL DOCUMENTS INCLUDING DRAFT(S) MUST INDICATE THE NUMBER AND DATE OF THIS CREDIT. THE LEASE AGREEMENT MENTIONED ABOVE IS FOR IDENTIFICATION PURPOSES ONLY AND IT IS NOT INTENDED THAT SAID LEASE AGREEMENT BE INCORPORATED HEREIN OR FORM PART OF THIS CREDIT. ALL DEMANDS FOR PAYMENT SHALL BE MADE BY PRESENTATION OF THE ORIGINAL APPROPRIATE DOCUMENTS TO US ON A BUSINESS DAY BY OVERNIGHT COURIER MAIL AT OUR OFFICE (THE “BANK’S OFFICE”) AT: SILICON VALLEY BANK, 3003 TASMAN DRIVE, SANTA CLARA, CA 95054, ATTENTION: STANDBY LETTER OF CREDIT NEGOTIATION SECTION. _____________________________________ WE HEREBY AGREE WITH THE DRAWERS, ENDORSERS AND BONAFIDE HOLDERS THAT THE DRAFTS DRAWN UNDER AND IN ACCORDANCE WITH THE TERMS AND CONDITIONS OF THIS LETTER OF CREDIT SHALL BE DULY HONORED UPON PRESENTATION TO THE DRAWEE, IF NEGOTIATED ON OR BEFORE THE EXPIRATION DATE OF THIS CREDIT. IF ANY INSTRUCTIONS ACCOMPANYING A DRAWING UNDER THIS LETTER OF CREDIT REQUEST THAT PAYMENT IS TO BE MADE BY TRANSFER TO YOUR ACCOUNT WITH ANOTHER BANK, WE WILL ONLY EFFECT SUCH PAYMENT BY FED WIRE TO A U.S. REGULATED BANK, AND WE AND/OR SUCH OTHER BANK MAY RELY ON AN ACCOUNT NUMBER SPECIFIED IN SUCH INSTRUCTIONS EVEN IF THE NUMBER IDENTIFIES A PERSON OR ENTITY DIFFERENT FROM THE INTENDED PAYEE. THIS LETTER OF CREDIT IS SUBJECT TO THE INTERNATIONAL STANDBY PRACTICES ISP98, INTERNATIONAL CHAMBER OF COMMERCE, PUBLICATION NO. 590 (“ISP98”).


 
L-3 8833492.3 VERY TRULY YOURS, AUTHORIZED OFFICIAL


 
L-4 8833492.3 Exhibit “A” TO: BANK DATE: RE: LETTER OF CREDIT ISSUED BY: ATTN: LETTER OF CREDIT NO. AVAILABLE AMOUNT GENTLEMEN: FOR VALUE RECEIVED, THE UNDERSIGNED BENEFICIARY HEREBY IRREVOCABLY TRANSFERS TO: _________________________ (NAME OF TRANSFEREE) _________________________ (ADDRESS) ALL RIGHTS OF THE UNDERSIGNED BENEFICIARY TO DRAW UNDER THE ABOVE LETTER OF CREDIT UP TO ITS AVAILABLE AMOUNT AS SHOWN ABOVE AS OF THE DATE OF THIS TRANSFER. BY THIS TRANSFER, ALL RIGHTS OF THE UNDERSIGNED BENEFICIARY IN SUCH LETTER OF CREDIT ARE TRANSFERRED TO THE TRANSFEREE. TRANSFEREE SHALL HAVE THE SOLE RIGHTS AS BENEFICIARY THEREOF, INCLUDING SOLE RIGHTS RELATING TO ANY AMENDMENTS, WHETHER INCREASES OR EXTENSIONS OR OTHER AMENDMENTS, AND WHETHER NOW EXISTING OR HEREAFTER MADE. ALL AMENDMENTS ARE TO BE ADVISED DIRECT TO THE TRANSFEREE WITHOUT NECESSITY OF ANY CONSENT OF OR NOTICE TO THE UNDERSIGNED BENEFICIARY. THE ORIGINAL OF SUCH LETTER OF CREDIT IS RETURNED HEREWITH, AND WE ASK YOU TO ENDORSE THE TRANSFER ON THE REVERSE THEREOF, AND FORWARD IT DIRECT TO THE TRANSFEREE WITH YOUR CUSTOMARY NOTICE OF TRANSFER. YOURS VERY TRULY, (BANK) SIGNATURE OF BENEFICIARY AUTHORIZED SIGNATURE


 
M-1 8833492.3 EXHIBIT “M” SCHEDULE COMPLETION DATE CONSTRUCTION DRAWINGS TEN WEEKS FROM LEASE EXECUTION BUILDING PERMIT FOUR WEEKS FROM RECEIPT OF CONSTRUCTION DRAWINGS DEMOLITION OF EXISTING IMPROVEMENTS TWELVE WEEKS FROM LEASE EXECUTION CONSTRUCTION OF LANDLORD WORK TWELVE WEEKS FROM RECEIPT OF BUILDING PERMIT SCHEDULED TERM COMMENCEMENT DATE APRIL 1, 2017


 


Exhibit 31.1
 
CERTIFICATIONS
 
I, Philipp Lang, certify that:
 
1. I have reviewed this Quarterly Report on Form 10-Q of ConforMIS, Inc.;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
 
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
Date:
November 10, 2016
 
By:
/s/Philipp Lang, M.D.
 
 
 
 
Philipp Lang, M.D.
 
 
 
 
President and Chief Executive Officer
 
 
 
 
(Principal Executive Officer)





Exhibit 31.2
 
CERTIFICATIONS
 
I, Paul Weiner, certify that:
 
1. I have reviewed this Quarterly Report on Form 10-Q of ConforMIS, Inc.;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
 
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
Date:
November 10, 2016
By:
/s/Paul Weiner
 
 
 
Paul Weiner
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial and Accounting Officer)





Exhibit 32.1
 
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
 
AS ADOPTED PURSUANT TO
 
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report on Form 10-Q of ConforMIS, Inc. (the “Company”) for the period ended September 30, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Philipp Lang, President and Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:
 
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
Date:
November 10, 2016
 
By:
/s/Philipp Lang, M.D.
 
 
 
 
Philipp Lang, M.D.
 
 
 
 
President and Chief Executive Officer
 
 
 
 
(Principal Executive Officer)





Exhibit 32.2
 
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
 
AS ADOPTED PURSUANT TO
 
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report on Form 10-Q of ConforMIS, Inc. (the “Company”) for the period ended September 30, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Paul Weiner, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:
 
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
Date:
November 10, 2016
By:
/s/Paul Weiner
 
 
 
Paul Weiner
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial and Accounting Officer)