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 June 30, 2019
 
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)
600 Technology Park Drive
Billerica, MA
01821
(Address of principal executive offices)
(Zip Code)
 
(781) 345-9001
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    x    No   ¨
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes   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, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and "emerging growth company," in Rule 12b-2 of the Exchange Act.

Large accelerated filer
o
Accelerated filer
x
 
 
 
 
Non-accelerated filer
o   
Smaller reporting company
x  
 
 
 
 
 
 
Emerging growth company
x  
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
x  

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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
CFMS
Nasdaq
 
As of July 31, 2019 , there were 68,678,580 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)
 
June 30, 2019
 
December 31, 2018
 
(unaudited)
 
 
Assets
 
 
 
Current Assets
 

 
 

Cash and cash equivalents
$
20,659

 
$
16,380

Investments
—

 
7,245

Accounts receivable, net
11,249

 
13,244

Royalty receivable
168

 
145

Inventories
10,638

 
9,534

Prepaid expenses and other current assets
1,531

 
1,408

Total current assets
44,245

 
47,956

Property and equipment, net
13,649

 
14,439

Operating lease right-of-use assets
6,415

 
—

Other Assets
 

 
 

Restricted cash
462

 
462

Intangible assets, net
49

 
109

Other long-term assets
218

 
17

Total assets
$
65,038

 
$
62,983

 
 
 
 
Liabilities and stockholders' equity
 

 
 

Current liabilities
 

 
 

Accounts payable
$
4,182

 
$
3,445

Accrued expenses
7,100

 
7,930

Operating lease liabilities
1,440

 
—

Total current liabilities
12,722

 
11,375

Other long-term liabilities
—

 
616

Long-term debt, less debt issuance costs
19,323

 
14,792

Operating lease liabilities
5,692

 
—

Total liabilities
37,737

 
26,783

Commitments and contingencies
—

 
—

Stockholders’ equity
 

 
 

Preferred stock, $0.00001 par value:
 

 
 

Authorized: 5,000,000 shares authorized at June 30, 2019 and December 31, 2018; no shares issued and outstanding as of June 30, 2019 and December 31, 2018
—

 
—

Common stock, $0.00001 par value:
 

 
 

Authorized: 200,000,000 shares authorized at June 30, 2019 and December 31, 2018; 68,689,192 and 65,290,879 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
1

 
1

Additional paid-in capital
518,563

 
513,336

Accumulated deficit
(490,011
)
 
(475,667
)
Accumulated other comprehensive loss
(1,252
)
 
(1,470
)
Total stockholders’ equity
27,301

 
36,200

Total liabilities and stockholders’ equity
$
65,038

 
$
62,983

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 June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenue
 

 
 

 
 

 
 

Product
$
19,337

 
$
18,908

 
$
39,806

 
$
38,391

Royalty
256

 
192

 
431

 
365

Total revenue
19,593

 
19,100

 
40,237

 
38,756

Cost of revenue
9,971

 
9,989

 
20,784

 
20,858

Gross profit
9,622

 
9,111

 
19,453

 
17,898

 
 
 
 
 
 
 
 
Operating expenses
 

 
 

 
 

 
 

Sales and marketing
6,897

 
9,809

 
15,078

 
20,220

Research and development
3,328

 
4,850

 
6,240

 
9,544

General and administrative
5,289

 
5,802

 
10,618

 
11,942

Total operating expenses
15,514

 
20,461

 
31,936

 
41,706

Loss from operations
(5,892
)
 
(11,350
)
 
(12,483
)
 
(23,808
)
 
 
 
 
 
 
 
 
Other income and expenses
 

 
 

 
 

 
 

Interest income
91

 
171

 
198

 
311

Interest expense
(1,337
)
 
(766
)
 
(1,790
)
 
(1,501
)
Foreign currency exchange transaction (loss) income
398

 
(2,098
)
 
(255
)
 
(1,013
)
Total other (expenses) income, net
(848
)
 
(2,693
)
 
(1,847
)
 
(2,203
)
Loss before income taxes
(6,740
)
 
(14,043
)
 
(14,330
)
 
(26,011
)
Income tax provision
23

 
14

 
14

 
47

 
 
 
 
 
 
 
 
Net loss
$
(6,763
)
 
$
(14,057
)
 
$
(14,344
)
 
$
(26,058
)
 
 
 
 
 
 
 
 
Net loss per share
 
 
 
 
 
 
 
Basic and diluted
$
(0.11
)
 
$
(0.24
)
 
$
(0.23
)
 
$
(0.46
)
Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic and diluted
63,333,737

 
59,763,259

 
63,092,874

 
57,208,114

 
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 June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(6,763
)
 
$
(14,057
)
 
$
(14,344
)
 
$
(26,058
)
Other comprehensive income (loss)
 

 
 

 
 
 
 
Foreign currency translation adjustments
(402
)
 
1,885

 
218

 
946

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

 
21

 
—

 
28

Comprehensive loss
$
(7,165
)
 
$
(12,151
)
 
$
(14,126
)
 
$
(25,084
)
 
The accompanying notes are an integral part of these consolidated financial statements.


3

CONFORMIS, INC. AND SUBSIDIARIES
 
Consolidated Statements of Changes in Stockholders' Equity
(unaudited)
(in thousands, except share and per share data)

 
Three Months Ended June 30, 2019
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
Shares
 
Par Value
 
 
 
 
Total
Balance, March 31, 2019
67,880,664

 
$
1

 
$
514,484

 
$
(483,248
)
 
$
(850
)
 
$
30,387

Issuance of common stock — option exercise
34,669

 
—

 
121

 
 
 
 
 
121

Issuance of common stock — restricted stock
(1,335
)
 
—

 
—

 


 


 
—

Issuance of common stock—Innovatus
775,194

 
—

 
3,000

 
 
 
 
 
3,000

Compensation expense related to issued stock options and restricted stock awards
 
 
 
 
958

 
 
 
 
 
958

Net loss
 
 
 
 
 
 
(6,763
)
 
 
 
(6,763
)
Other comprehensive income
 
 
 
 
 
 
 
 
(402
)
 
(402
)
Balance, June 30, 2019
68,689,192

 
$
1

 
$
518,563

 
$
(490,011
)
 
$
(1,252
)
 
$
27,301


 
Six Months Ended June 30, 2019
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
Shares
 
Par Value
 
 
 
 
Total
Balance, December 31, 2018
65,290,879

 
$
1

 
$
513,336

 
$
(475,667
)
 
$
(1,470
)
 
$
36,200

Issuance of common stock—option exercise
34,669

 
—

 
121

 
 
 
 
 
121

Issuance of common stock—restricted stock
2,588,450

 
—

 
—

 
 
 
 
 
—

Issuance of common stock—Innovatus
775,194

 
—

 
3,000

 
 
 
 
 
3,000

Compensation expense related to issued stock options and restricted stock awards
 
 
 
 
2,106

 
 
 
 
 
2,106

Net loss
 
 
 
 
 
 
(14,344
)
 
 
 
(14,344
)
Other comprehensive income
 
 
 
 
 
 
 
 
218

 
218

Balance, June 30, 2019
68,689,192

 
$
1

 
$
518,563

 
$
(490,011
)
 
$
(1,252
)
 
$
27,301



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


4

CONFORMIS, INC. AND SUBSIDIARIES
 
Consolidated Statements of Changes in Stockholders' Equity
(unaudited)
(in thousands, except share and per share data)

 
Three Months Ended June 30, 2018
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
Shares
 
Par Value
 
 
 
 
Total
Balance, March 31, 2018
60,838,526

 
$
1

 
$
508,767

 
$
(444,303
)
 
$
(4,168
)
 
$
60,297

Issuance of common stock — option exercise
80,000

 
—

 
112

 
 
 
 
 
112

Issuance of common stock — restricted stock
2,195,104

 
—

 
—

 
 
 
 
 
—

Compensation expense related to issued stock options and restricted stock awards
 
 
 
 
911

 
 
 
 
 
911

Net loss
 
 
 
 
 
 
(14,057
)
 
 
 
(14,057
)
Other comprehensive loss
 
 
 
 
 
 
 
 
1,906

 
1,906

Balance, June 30, 2018
63,113,630

 
$
1

 
$
509,790

 
$
(458,360
)
 
$
(2,262
)
 
$
49,169


 
Six Months Ended June 30, 2018
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
Shares
 
Par Value
 
 
 
 
Total
Balance, December 31, 2017
45,528,519

 
$
—

 
$
486,570

 
$
(436,821
)
 
$
(3,236
)
 
$
46,513

Issuance of common stock — option exercise
80,000

 
—

 
112

 
 
 
 
 
112

Issuance of common stock — restricted stock
2,171,778

 
—

 
—

 
 
 
 
 
—

Issuance of common stock — 2018 offering
15,333,333

 
1

 
21,324

 
 
 
 
 
21,325

Compensation expense related to issued stock options and restricted stock awards
 
 
 
 
1,784

 
 
 
 
 
1,784

Cumulative-effect adjustment from adoption of ASC 606
 
 
 
 
 
 
4,519

 
 
 
4,519

Net loss
 
 
 
 
 
 
(26,058
)
 
 
 
(26,058
)
Other comprehensive loss
 
 
 
 
 
 
 
 
974

 
974

Balance, June 30, 2018
63,113,630

 
$
1

 
$
509,790

 
$
(458,360
)
 
$
(2,262
)
 
$
49,169



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

5


CONFORMIS, INC. AND SUBSIDIARIES
 
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 
Six Months Ended June 30,
 
2019
 
2018
Cash flows from operating activities:
 

 
 

Net loss
$
(14,344
)
 
$
(26,058
)
 
 
 
 
Adjustments to reconcile net loss to net cash used by operating activities:
 

 
 

Depreciation and amortization expense
2,136

 
1,953

Stock-based compensation expense
2,106

 
1,784

Unrealized foreign exchange (gain)/loss, net
229

 
1,085

Non-cash lease expense
584

 
—

Provision for bad debts on trade receivables
(19
)
 
(22
)
Disposal of long term-assets
—

 
(2
)
Loss on extinguishment of debt
1,085

 
—

Non-cash interest expense
217

 
55

Amortization/accretion on investments
(4
)
 
51

Deferred tax
—

 
(17
)
Changes in operating assets and liabilities:
 

 
 

Accounts receivable
2,013

 
1,207

Royalty receivable
(23
)
 
—

Inventories
(1,104
)
 
124

Prepaid expenses and other assets
(324
)
 
207

Accounts payable, accrued expenses and other liabilities
(564
)
 
2,054

Net cash used in operating activities
(8,012
)
 
(17,579
)
 
 
 
 
Cash flows from investing activities:
 

 
 

Acquisition of property and equipment
(1,298
)
 
(2,342
)
Purchase of investments
—

 
(14,196
)
Maturity of investments
7,250

 
23,595

Net cash provided in investing activities
5,952

 
7,057

 
 
 
 
Cash flows from financing activities:
 

 
 

Proceeds from exercise of common stock options
121

 
112

Debt issuance costs
(685
)
 
—

Loss on extinguishment of debt
(1,085
)
 
—

Proceeds from issuance of debt
20,000

 
—

Payments on long-term debt
(15,000
)
 
—

Net proceeds from issuance of common stock
3,000

 
21,324

Net cash provided by financing activities
6,351

 
21,436

Foreign exchange effect on cash and cash equivalents
(12
)
 
(140
)
Increase in cash and cash equivalents
4,279

 
10,774

Cash and cash equivalents, beginning of period
16,380

 
18,348

Cash and cash equivalents, end of period
$
20,659

 
$
29,122

 
 
 
 
Supplemental information:
 

 
 

  Cash paid for interest
1,425

 
1,234

Non cash investing and financing activities:
 
 
 
Operating leases right-of-use assets obtained in exchange for lease obligations
6,988

 
—

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

6

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, its iTotal PS in 2015, and its Conformis Hip System in 2018 through a limited commercial launch. The Company has its corporate offices in Billerica, Massachusetts.

These consolidated financial statements as of June 30, 2019 and for the three and six months ended June 30, 2019 and 2018 , and related interim information contained within the notes to the Consolidated Financial Statements, have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
 
Liquidity and operations
 
Since the Company’s inception in June 2004, it has financed its operations primarily through private placements of preferred stock, its initial public offering in July 2015, bank debt and convertible debt financings, equity financings, equipment purchase loans, and product revenue beginning in 2007. The Company has not yet attained profitability and continues to incur operating losses and negative operating cash flows, which adversely impacts the Company's ability to continue as a going concern. At June 30, 2019 , the Company had an accumulated deficit of $490.0 million and cash and cash equivalents of $20.7 million , and $0.5 million in restricted cash allocated to lease deposits. 
 
In January 2017, the Company filed a shelf registration statement on Form S-3, which was declared effective by the SEC on May 9, 2017 (the "Shelf Registration Statement"). The Shelf Registration Statement allows the Company to sell from time to time up to $200 million of common stock, preferred stock, debt securities, warrants, or units comprised of any combination of these securities, for its own account in one or more offerings. On May 10, 2017, the Company filed with the SEC a prospectus supplement (the “Prospectus Supplement”), for the sale and issuance of up to $50 million of its common stock and entered into a Distribution Agreement (“Distribution Agreement”) with Canaccord Genuity Inc. ("Canaccord") pursuant to which Canaccord agreed to sell shares of the Company's common stock from time to time, as our agent, in an “at-the-market” offering ("ATM") as defined in Rule 415 promulgated under the U.S. Securities Act of 1933, as amended. The Company is not obligated to sell any shares under the Distribution Agreement. As of June 30, 2019 , the Company has sold 785,280 shares under the Distribution Agreement resulting in net proceeds of $1.5 million .

On June 25, 2019, the Company entered into a Loan and Security Agreement (the "2019 Secured Loan Agreement") with Innovatus Life Sciences Lending Fund I, LP ("Innovatus"), as collateral agent and lender, East West Bank and the other lenders party thereto from time to time (collectively, the "Lenders"), pursuant to which the Lenders agreed to make term loans and revolving credit facility to the Company to repay existing indebtedness, for working capital and general business purposes, in a principal amount of up to $30 million . The Company used the proceeds from the debt financings to pay off its senior secured loan and security agreement (the "2017 Secured Loan Agreement") with Oxford Finance LLC ("Oxford"). In addition, Innovatus purchased approximately $3 million of the Company's common stock at the previous day's closing price. For further information regarding the 2017 Secured Loan Agreement and the 2019 Secured Loan Agreement, see “Note K—Debt and Notes Payable” in the financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.


7

The Company may need to engage in additional equity or debt financings to secure additional funds. The Company may not be able to obtain additional financing on terms favorable to it, or at all. To the extent that the Company raises additional capital through the future sale of equity or debt, the ownership interests of its existing 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 the Company's existing common stockholders or involve negative covenants that restrict the Company's ability to take specific actions, such as incurring additional debt or making capital expenditures.

The Company anticipates that its principal sources of funds in the future will be revenue generated from the sale of its products, including the successful full commercial launch of the Conformis Hip System, potential future capital raises through the issuance of equity or other securities, potential debt financings including accessing the revolving credit facility, and revenue that may be generated in connection with licensing its intellectual property. Additionally, in order for the Company to meet our operating plan, gross margin improvements and operating expense reductions will be necessary to reduce cash used in operations. When the Company needs additional equity or debt financing proceeds to fund its operations, whether within the next 12 months or later, 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 revenue recognition, accounts receivable valuation, inventory reserves, intangible valuation, purchase accounting, impairment assessments, equity instruments, stock compensation, income tax reserves and related allowances, and the lives of property and equipment, and valuation of right-of-use lease assets and lease liabilities. 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, 2018 .

Unaudited Interim Financial Information

The accompanying Interim Consolidated Financial Statements as of June 30, 2019 and for the three and six months ended June 30, 2019 and 2018 , 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 June 30, 2019 , results of operations for and stockholders' equity for the three and six months ended June 30, 2019 and 2018 , and comprehensive loss, and cash flows for the six months ended June 30, 2019 and 2018 . The results for the three and six months ended June 30, 2019 are not necessarily indicative of the results expected for the full year or any interim period.


Note B—Summary of Significant Accounting Policies
 
The Company's financial results are affected by the selection and application of accounting policies and methods. Except for the adoption of ASU No. 2016-02 "Leases" ("Topic 842" or "ASC 842") described below in "Leases", there were no material changes in the six months ended June 30, 2019 to the application of significant accounting policies and estimates as described in our audited consolidated financial statements for the year ended December 31, 2018 .

Concentrations of credit risk and other risks and uncertainties
     Financial instruments that subject the Company to credit risk primarily consist of cash, cash equivalents, and accounts receivable. The Company maintains the majority of its cash with accredited financial institutions.
 
The Company and its contract manufacturers rely on sole source suppliers and service providers for certain components. There can be no assurance that a shortage or stoppage of shipments of the materials or components

8

that the Company purchases will not result in a delay in production or adversely affect the Company’s business. On an on-going basis, the Company validates alternate suppliers relative to certain key components as needed.
 
For the three and six months ended June 30, 2019 and 2018 , no customer represented greater than 10% of revenue. There were no customers that represented greater than 10% of the total gross receivable balance as of June 30, 2019 or December 31, 2018 .
 
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, ConforMIS Hong Kong Limited, and Conformis Cares LLC. All 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 , money market funds, and repurchase agreements on deposit with certain financial institutions, in addition to cash deposits in excess of federally insured limits. Demand deposits are carried at cost which approximates their fair value. Money market funds are carried at fair value based upon level 1 inputs. Repurchase agreements are valued using level 2 inputs. See “Note C-Fair Value Measurements” below. The associated risk of concentration is mitigated by banking with credit worthy financial institutions. The Company had $0.9 million as of June 30, 2019 and $1.1 million as of December 31, 2018 held in foreign bank accounts that are not federally insured. In addition, the Company has recorded restricted cash of $0.5 million as of June 30, 2019 and December 31, 2018 . Restricted cash consisted of security provided for lease obligations. Innovatus has a security interest in the Company's cash accounts held at multiple institutions for the ratable benefit of the Lenders.
 
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).
    
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 using 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 (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.
 
Accounts receivable and allowance for doubtful accounts
     Accounts receivable consist of billed and unbilled amounts due from medical facilities. Upon completion of a procedure, revenue is recognized and an unbilled receivable is recorded. Upon receipt of a purchase order number from a medical facility, a billed receivable is recorded and the unbilled receivable is reversed. As a result, the unbilled receivable balance fluctuates based on the timing of the Company's receipt of purchase order numbers from the medical facilities. In estimating whether accounts receivable can be collected, the Company performs evaluations of customers and continuously monitors collections and payments and estimates an allowance for doubtful accounts based on the aging of the underlying invoices, collections experience to date and any specific

9

collection issues that have been identified. The allowance for doubtful accounts is recorded in the period in which revenue is recorded or when collection risk is identified.
 
Inventories
     Inventories consist of raw materials, work-in-process components and finished goods. Inventories are stated at the lower of cost, determined using the first-in first-out method, or net realizable value. The Company regularly reviews its inventory quantities on hand and related cost and records a provision for any excess or obsolete inventory based on its estimated forecast of product demand and existing product configurations. The Company also reviews its inventory value to determine if it reflects the lower of cost or market, based on net realizable value. Appropriate consideration is given to inventory items sold at negative gross margin, purchase commitments and other factors in evaluating net realizable value. During the three and six months ended June 30, 2019 , the Company recognized provisions in cost of revenue of $0.8 million and $1.3 million , respectively, to adjust its inventory value to the lower of cost or net realizable value for estimated unused product related to known and potential cancelled cases, which is included in cost of revenue. During the three and six months ended June 30, 2018 , the Company recognized $0.4 million and $0.9 million , respectively, in cost of revenue for estimated unused product.

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 a favorable lease asset from the Company's acquisition of Broad Peak Manufacturing LLC in August 2017. 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. During the three and six months ended June 30, 2019 and 2018 , no such impairment charges were recognized.

Leases

The Company adopted ASU No. 2016-02-Leases ("Topic 842" or "ASC 842"), as of January 1, 2019, in accordance with ASU No. 2018-11-Leases (Topic 842) ("ASU 2018-11"), issued by the FASB in July 2018. ASU 2018-11 allows an entity to elect not to recast its comparative periods in the period of adoption when transitioning to ASC 842 (the “Comparatives Under 840 Option”). Effectively, an entity would be permitted to change its date of initial application to the beginning of the period of adoption of ASC 842. In doing so, the entity would apply ASC 840 in the comparative periods and provide the disclosures required by ASC 840 for all periods that continue to be presented in accordance with ASC 840. Further, the entity would recognize the effects of applying ASC 842 as a cumulative-effect adjustment to retained earnings as of the effective date. Under the Comparatives Under 840 Option, this date would represent the date of initial application. The Company is not required to restate comparative periods for the effects of applying ASC 842, provide the disclosures required by ASC 842 for the comparative periods, nor change how the transition requirements apply, only when the transition requirements apply. The Company elected to report results for periods after January 1, 2019 under ASC 842 and prior period amounts are reported in accordance with ASC 840.

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

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

10


The Company has elected the hindsight practical expedient to determine the lease term for existing leases. This practical expedient enables an entity to use hindsight in determining the lease term when considering options to extend and terminate leases as well as purchase the underlying assets.

Adoption of the new standard resulted in the recording of additional right-of-use assets and lease liabilities of $7.0 million and  $7.7 million , respectively, as of January 1, 2019. The difference between the additional lease assets and lease liabilities is related to deferred rent, which was previously recorded as deferred rent within Accrued expenses and Other long-term liabilities under ASC 840. The adoption of the standard did not impact the Company’s consolidated net earnings and had no impact on cash flows.

  Revenue Recognition

Revenue is recognized when, or as, obligations under the terms of a contract are satisfied, which occurs when control of the promised products or services is transferred to customers. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer (“transaction price”). When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying the practical expedient in paragraph 606-10-32-18, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing component as of June 30, 2019 . Payment is typically due between 30 - 60 days from invoice.

To the extent that the transaction price includes variable consideration, such as prompt-pay discounts or rebates, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the expected value to which the Company expects to be entitled. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Actual amounts of consideration ultimately received may differ from the Company's estimates. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available.
    
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines standalone selling prices based on observable prices or a cost-plus margin approach when one is not available. Revenue is recognized at the time the related performance obligation is satisfied by transferring control of a promised good or service to a customer. The Company's performance obligations are satisfied at the same time, typically upon surgery, therefore, product revenue is recognized at a point in time upon completion of the surgery. Since the Company does not have contracts that extend beyond a duration of one year, there is no transaction price related to performance obligations that have not been satisfied.

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

The Company does not have any contract assets or liabilities with customers. Unconditional rights to consideration are reported as receivables. Incidental items that are immaterial in the context of the contract are recognized as expense.

Disaggregation of Revenue
See " Note M—Segment and Geographic Data " for disaggregated product revenue by geography.


11

Variable Consideration
Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and which result from rebates that are offered within contracts between the Company and some of its customers. The amount of variable consideration which is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period.
 
The following table summarizes activity for rebate allowance reserve (in thousands):
 
 
June 30, 2019
 
December 31, 2018
Beginning Balance
 
$
96

 
$
119

Provision related to current period sales
 
70

 
129

Adjustment related to prior period sales
 
12

 
40

Payments or credits issued to customer
 
(45
)
 
(192
)
Ending Balance
 
$
133

 
$
96


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

Shipping and handling costs
     Shipping and handling activities prior to the transfer of control to the customer (e.g. when control transfers after delivery) are considered fulfillment activities, and not performance obligations. Amounts invoiced to customers for shipping and handling are classified as revenue. Shipping and handling costs incurred are included in general and administrative expense. Shipping and handling expense was $0.4 million and $0.3 million for the three months ended June 30, 2019 and 2018 , respectively, and was $1.0 million and $0.7 million for the six months ended June 30, 2019 and 2018 , respectively.

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

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

Advertising expense
     Advertising costs are expensed as incurred, which are included in sales and marketing. Advertising expense was $0.1 million for the three months ended June 30, 2019 and 2018 , and $0.2 million and $0.3 million for the six months ended June 30, 2019 and 2018 , respectively.


12

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 M—Segment and Geographic Data ”.
 
Comprehensive loss
     At June 30, 2019 and December 31, 2018 , 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. The following table summarizes accumulated beginning and ending balances for each item in Accumulated other comprehensive income (loss) (in thousands):
 
 
Foreign currency translation adjustments
 
Change in unrealized gain (loss) on available-for-sale securities, net of tax
 
Accumulated other comprehensive income (loss)
Balance December 31, 2018
 
$
(1,470
)
 
$
—

 
$
(1,470
)
Change in period
 
218

 
—

 
218

Balance June 30, 2019
 
$
(1,252
)
 
$
—

 
$
(1,252
)

Foreign currency translation and transactions
     The assets and liabilities of the Company’s foreign operations are translated into U.S. dollars at current exchange rates at the balance sheet date, and income and expense items are translated at average rates of exchange prevailing during the quarter. Net translation gains and losses are recorded in Accumulated other comprehensive (loss) income. Gains and losses from foreign currency transactions denominated in foreign currencies, including intercompany balances not of a long-term investment nature, are included in the Consolidated Statements of Operations.
 
Income taxes
     Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases, operating losses and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that includes the enactment date.

In evaluating the need for a valuation allowance, the Company considers all reasonably available positive and negative evidence, including recent earnings, expectations of future taxable income and the character of that income. In estimating future taxable income, the Company relies upon assumptions and estimates of future activity including the reversal of temporary differences. Presently, the Company believes that a full valuation allowance is required to reduce deferred tax assets to the amount expected to be realized.
 
The tax benefit from an uncertain tax position is only recognized if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from these positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The Company reviews its tax positions on an annual basis and more frequently as facts surrounding tax positions change. Based on these future events, the Company may recognize uncertain tax positions or reverse current uncertain tax positions, the impact of which would affect the consolidated financial statements.


13

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

The Company is subject to U.S. federal, state, and foreign income taxes. The Company recorded a provision for income taxes of $23,000 and $14,000 for the three months ended June 30, 2019 and 2018 , respectively and $14,000 and $47,000 for the six months ended June 30, 2019 and 2018 , respectively. The Company recognizes interest and penalties related to income taxes as a component of income tax expense. As of June 30, 2019 and 2018 , a cumulative balance of $47,000 and $30,000 of interest and penalties had been accrued, respectively.

Medical device excise tax
     The Company has been 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, 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. On January 22, 2018, legislation was passed that suspends the medical device excise tax for sales in 2018 and 2019. The tax is not scheduled to take effect again until sales on or after January 1, 2020. It is unclear at this time if the suspension will be further extended, and we are currently subject to the tax after December 31, 2019. As such, the Company did not incur medical device excise tax expense during the six months ended June 30, 2019 and 2018 .
 
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.

Net loss per share
     The Company calculates net income (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.
     

14

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 June 30,
 
Six Months Ended June 30,
(in thousands, except share and per share data)
 
2019
 
2018
 
2019
 
2018
Numerator:
 
 

 
 

 
 

 
 

Basic and diluted loss per share
 
 

 
 

 
 

 
 

Net loss
 
$
(6,763
)
 
$
(14,057
)
 
$
(14,344
)
 
$
(26,058
)
Denominator:
 
 

 
 

 
 

 
 

Basic and diluted weighted average shares
 
63,333,737

 
59,763,259

 
63,092,874

 
57,208,114

Loss per share attributable to Conformis, Inc. stockholders:
 
 
 
 
 
 
 
 
Basic and diluted
 
$
(0.11
)
 
$
(0.24
)
 
$
(0.23
)
 
$
(0.46
)
 
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 June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Stock options and restricted stock awards
 
3,641,319

 
50,158

 
3,411,545

 
110,009


Recent accounting pronouncements
In April 2019, the FASB issued ASU No. 2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments." This ASU clarifies and answers questions related to ASU No. 2018-13 and ASU No. 2016-13 and has the same effective dates of the respective pronouncements described below.

In August 2018, the FASB issued ASU No. 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract". Under the new guidance, implementation costs should be evaluated for capitalization using the same approach as implementation costs associated with internal-use software and should be expensed over the term of the hosting arrangement, including any reasonably certain renewal periods. This ASU is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in any interim period. Prospective adoption for eligible costs incurred on or after the date of adoption or retrospective adoption are permitted. The Company does not expect the adoption of ASU No. 2018-15 will have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement". This ASU modifies disclosure requirements relative to the three levels of inputs used to measure fair value in accordance with Topic 820. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods. Early adoption is permitted for any eliminated or modified disclosures. The Company does not expect the adoption of ASU No. 2018-13 will have a material impact on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, "Credit Losses (Topic 326)." ASU No. 2016-13 requires that financial assets measured at amortized cost, such as trade receivables, be represented net of expected credit losses, which may be estimated based on relevant information such as historical experience, current conditions, and future expectation for each pool of similar financial asset. The new guidance requires enhanced disclosures related to trade receivables and associated credit losses. In May 2019, the FASB issued ASU No. 2019-13, "Financial Instruments - Credit Losses (Topic 326) Targeted Transition Relief", which allows for a transition election on certain instruments. The guidance is effective beginning January 1, 2020. The Company is currently evaluating the impact of this pronouncement on its consolidated financial statements.
    
Reclassification

Certain amounts in prior periods have been reclassified to conform to the current period presentation. The Company reclassified the cash flow presentation of unrealized foreign currency transaction gains or losses resulting

15

from changes in exchange rates between the functional currency and the currency in which a foreign currency transaction is denominated to reflect such cash flows as non-cash adjustment to cash flows from operating activities.


Note C—Fair Value Measurements
 
The Fair Value Measurements topic of the FASB Codification establishes a framework for measuring fair value in accordance with US 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 and equivalents and investments are valued using quoted prices that are readily and regularly available in the 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; 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):
 
June 30, 2019
 
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Estimated Fair Value
Cash and cash equivalents
Cash
$
9,941

$
—

$
—

$
9,941

$
9,941

Level 1 securities:
 
 
 
 
 
Money market funds
10,718

—

—

10,718

10,718

Total
$
20,659

$
—

$
—

$
20,659

$
20,659

 
December 31, 2018
 
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Estimated Fair Value
Cash and cash equivalents
Short-term (1) investments
Cash
$
9,837

$
—

$
—

$
9,837

$
9,837

$
—

Level 1 securities:
 
 
 
 
 
 
Money market funds
1,046

—

—

1,046

1,046

—

U.S. treasury bonds
10,494

—

—

10,494

5,497

4,997

Level 2 securities:
 
 
 
 
 
 
Corporate bonds
1,249

—

—

1,249

—

1,249

Commercial Paper
999

—

—

999

—

999

Total
$
23,625

$
—

$
—

$
23,625

$
16,380

$
7,245

(1) Contractual maturity due within one year.



16



Note D—Accounts Receivable
 
Accounts receivable consisted of the following (in thousands):
 
June 30,
2019
 
December 31,
2018
Total receivables
$
11,608

 
$
13,634

Allowance for doubtful accounts and returns
(359
)
 
(390
)
Accounts receivable, net
$
11,249

 
$
13,244

 
Accounts receivable included unbilled receivable of $1.5 million and $2.2 million at June 30, 2019 and December 31, 2018 , respectively. Write-offs related to accounts receivable were approximately $32,000 and $39,000 for the three months ended June 30, 2019 and 2018 , respectively, and $32,000 and $65,000 for the six months ended June 30, 2019 and 2018 , respectively.

Summary of allowance for doubtful accounts and returns activity was as follows (in thousands):
 
June 30,
2019
 
December 31,
2018
Beginning balance
(390
)
 
(635
)
Provision for bad debts on trade receivables
19

 
72

Other allowances
(20
)
 
58

Accounts receivable write offs
32

 
115

Ending balance
$
(359
)
 
$
(390
)

Note E—Inventories
 
Inventories consisted of the following (in thousands):
 
June 30,
2019
 
December 31,
2018
Raw Material
$
4,849

 
$
4,498

Work in process
1,263

 
1,518

Finished goods
4,526

 
3,518

Total Inventories
$
10,638

 
$
9,534


Note F—Property and Equipment
 
Property and equipment consisted of the following (in thousands):
 
Estimated
Useful
Life
(Years)
 
June 30, 2019
 
December 31, 2018
Equipment
5-7
 
18,824

 
18,602

Furniture and fixtures
5-7
 
954

 
954

Computer and software
3
 
8,919

 
8,783

Leasehold improvements
3-7
 
1,977

 
1,978

Reusable instruments
5
 
2,453

 
1,573

Total property and equipment
 
 
33,127

 
31,890

Accumulated depreciation
 
 
(19,478
)
 
(17,451
)
Property and equipment, net
 
 
13,649

 
14,439



17

Depreciation expense related to property and equipment was $1.0 million for the three months ended June 30, 2019 and 2018 , and $2.1 million and $1.9 million for the six months ended June 30, 2019 and 2018 , respectively.


Note G—Intangible Assets
 
The components of intangible assets consisted of the following (in thousands):
 
Estimated
Useful Life
(Years)
 
June 30, 2019
 
December 31, 2018
 
 
 
 
 
 
Developed technology
10
 
$
979

 
$
979

Accumulated amortization
 
 
(930
)
 
(881
)
Developed technology, net
 
 
49

 
98

 
 
 
 
 
 
Acquired favorable lease
5
 
—

 
15

Accumulated amortization
 
 
—

 
(4
)
Acquired favorable lease, net
 
 
—

 
11

 
 
 
 
 
 
Intangible assets, net

 
$
49

 
$
109

 
The Company recognized amortization expense of $24,000 for the three months ended June 30, 2019 , and 2018 and $49,000 for the six months ended June 30, 2019 , and 2018 . The weighted-average remaining life of total amortizable intangible assets is less than one  year for the developed technology and license agreements and favorable lease asset.

Note H—Accrued Expenses
 
Accrued expenses consisted of the following (in thousands):
 
June 30,
2019
 
December 31,
2018
Accrued employee compensation
$
2,506

 
$
3,138

Deferred rent
—

 
132

Accrued legal expense
714

 
215

Accrued consulting expense
21

 
84

Accrued vendor charges
1,430

 
1,441

Accrued revenue share expense
850

 
1,134

Accrued clinical trial expense
438

 
549

Accrued other
1,141

 
1,237

 
$
7,100

 
$
7,930


18

Note I—Leases

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

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

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

As of June 30, 2019 the Company has not entered into any leases which have not yet commenced which would entitle the Company to significant rights or create additional obligations.

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

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

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Rent expense
 
$
383

 
$
378

 
$
765

 
$
756

Variable lease cost (1)
 
100

 
—

 
203

 
—

 
 
$
483

 
$
378

 
$
968

 
$
756

(1) Variable operating lease expenses consist primarily common area maintenance and real estate taxes of for the three and six months ended June 30, 2019 .

Deferred rent was $0.7 million as of December 31, 2018 .  Deferred rent is included in accrued expenses and other long-term liabilities.
 
As of June 30, 2019 , the remaining weighted-average lease term of the operating leases was 5.5 years and the weighted-average discount rate was 6.0% . 

The future minimum rental payments under these agreements as of June 30, 2019 were as follows (in thousands):
Year
Minimum Lease Payments
2019 remainder of year
$
793

2020
1,615

2021
1,633

2022
1,399

2023
1,053

After 2023
1,885

Total lease payments
$
8,378

Present value adjustment
(1,246
)
Present value of lease liabilities
$
7,132

 

19


Note J—Commitments and Contingencies

License and revenue share agreements

Revenue share agreements
 
The Company is party to revenue share agreements with certain past and present members of its scientific advisory board under which these advisors agreed to participate on a scientific advisory board and to assist with the development of the Company’s 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 revenue, ranging from 0.1 % to 1.33% , with respect to the Company’s products on which the advisor made a technical contribution or, in some cases, products covered by one or more claims of one or more Company patents on which the advisor is a named inventor. The specific percentage is determined by reference to product classifications set forth in the agreement and is often tiered based on the level of net revenue collected by the Company on such product sales. The Company’s payment obligations under these agreements typically expire a fixed number of years after expiration or termination of the agreement or a fixed number of years after the first sale of a product, but in some cases expire on a product-by-product basis or expiration of the last to expire of the Company’s patents where the advisor is a named inventor that claims the applicable product.
      
The Company incurred aggregate revenue share expense including all amounts payable under the Company’s scientific advisory board revenue share agreements of $0.7 million during the three months ended June 30, 2019 , representing 3.5% of product revenue and $0.6 million during the six months ended June 30, 2019 , representing 1.5% of product revenue, $0.9 million during the six months ended June 30, 2018 , representing 4.7% of product revenue, and $1.8 million during the six months ended June 30, 2018 , representing 4.7% of product revenue. Revenue share expense is included in research and development.
 
Other obligations
 
In the ordinary course of business, the Company is a party to certain non-cancellable contractual obligations typically related to product royalty and research and development.  The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. There have been no contingent liabilities requiring accrual at June 30, 2019 or December 31, 2018 .
 
Legal proceedings

In the ordinary course of the Company's business, the Company is subject to routine risk of litigation, claims and administrative proceedings on a variety of matters, including patent infringement, product liability, securities-related claims, and other claims in the United States and in other countries where the Company sells its products. An estimate of the possible loss or range of loss as a result of any of these matters cannot be made; however, management does not believe that these matters, individually or in the aggregate, are material to its financial condition, results of operations or cash flows.

Legal costs associated with legal proceedings are accrued as incurred.

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


20

Note K—Debt and Notes Payable
 
Long-term debt consisted of the following (in thousands):
 
June 30, 2019
 
December 31, 2018
Oxford Finance, LLC, Term A Loan
$
—

 
$
7,500

Oxford Finance, LLC, Term B Loan
—

 
7,500

Innovatus, Term Loan
20,000

 
—

Term Loan principal
20,000

 
15,000

Innovatus, Term Loan accrued payment-in-kind interest
8

 
—

Less unamortized debt issuance costs
(685
)
 
(208
)
Long-term debt, less debt issuance costs
$
19,323

 
$
14,792

    
Principal payments, including the Term Loan Basic Interest Rate in-kind (described below), due as of June 30, 2019 consisted of the following (in thousands):
 
Principal
Payment
2019 (remainder of the year)
$
—

2020
—

2021
—

2022
—

2023
8,986

2024
12,580

Total
$
21,566


2017 Secured Loan Agreement
 
On January 6, 2017, the Company entered into the 2017 Secured Loan Agreement with Oxford. Through the 2017 Secured Loan Agreement, the Company accessed $15 million under Term Loan A at closing and an additional $15 million of borrowings under Term Loan B on June 30, 2017. On December 13, 2018, the Company entered into a fifth amendment (the "Fifth Amendment") to the 2017 Secured Loan Agreement, with Oxford, and pursuant to the Fifth Amendment, the Company pre-paid $15 million aggregate principal amount of the $30 million outstanding principal amount, as a pro rata portion of the Term A Loan and Term B Loan, together with accrued and unpaid interest thereon and a pro rata prepayment fee and final payment. Under the Fifth Amendment, the Company's cash collateral requirement was reduced to $5 million . On June 25, 2019, the Company elected to prepay the remainder of the Oxford term loan outstanding (along with accrued interest and applicable final payment and prepayment fee) using the proceeds from the 2019 Secured Loan Agreement. The prepayment of the debt was accounted for as a debt extinguishment and the Company incurred a loss on the extinguishment recognized in Interest expense of $1.1 million .

The term loans under the 2017 Secured Loan Agreement bore interest at a floating annual rate calculated at the greater of 30 day LIBOR or 0.53% , plus 6.47% . The Company was required to make monthly interest-only payments in arrears commencing on the second payment date following the funding date of each term loan, and continuing on the payment date of each successive month thereafter through and including the payment date immediately preceding the amortization date of February 1, 2020.  Commencing on the amortization date, and continuing on the payment date of each month thereafter, the Company was required to make consecutive equal monthly payments of principal of each term loan, together with accrued interest, in arrears, to Oxford.  All unpaid principal, accrued and unpaid interest with respect to each term loan, and a final payment in the amount of 5.0% of the amount of loans advanced, was due and payable in full on the term loan maturity date.  The 2017 Secured Loan Agreement had a term of five years and would have matured on January 1, 2022.

2019 Secured Loan Agreement

On June 25, 2019, the Company entered into the 2019 Secured Loan Agreement with Innovatus, as collateral agent and lender, East West Bank and the Lenders, pursuant to which the Lenders agreed to make term

21

loans and revolving credit facility to the Company to repay existing indebtedness, for working capital and general business purposes, in a principal amount of up to $30 million .

The term loan facility established under the 2019 Secured Loan Agreement is secured by substantially all of the Company's and its U.S. subsidiaries' properties, rights and assets.

The 2019 Secured Loan Agreement includes a trailing six months revenue test, a liquidity covenant and an additional liquidity covenant that is applicable if there are borrowings under the revolving credit facility. The 2019 Secured Loan Agreement also includes customary representations, affirmative and negative covenants. Additionally, the 2019 Secured Loan Agreement includes events of default, the occurrence and continuation of which could cause interest to be charged at the rate that is otherwise applicable plus 5.0% and would provide Innovatus, as collateral agent, with the right to accelerate all obligations under the 2019 Secured Loan Agreement and to exercise remedies against the Company and the collateral securing the credit facility, including foreclosure against assets securing the credit facilities, including the Company's cash.  These events of default include, among other things, the Company’s failure to pay any amounts due under the credit facility, a breach of covenants under the credit facility, the Company’s insolvency, a material adverse change, the occurrence of any default under certain other indebtedness in an amount greater than $250,000 , one or more judgments against the Company in an amount greater than $500,000 , changes with respect to governmental approvals and FDA actions.

As of June 30, 2019 , the Company was not in breach of covenants under the 2019 Secured Loan Agreement.

Term Loan - Innovatus

The term loan under the 2019 Secured Loan Agreement bears interest at a floating annual rate calculated at the greater of the variable rate of interest as most recently announced by East West Bank as prime or 5.50% , plus 3.75% ("Term Loan Basic Interest Rate"), bearing an effective interest rate of 9.25% at June 30, 2019 . The Company is required to make interest only payments in arrears on the term loan for four years ; provided that the Company has elected to pay 2.50% per annum as such Term Loan Basic Interest Rate in-kind by adding an amount equal to 2.50% per annum of the outstanding principal amount to the then outstanding principal balance on a monthly basis until the third anniversary of the 2019 Secured Loan Agreement. Commencing July 1, 2023, and continuing on the payment date of each month thereafter, the Company is required to make consecutive equal monthly payments of principal of the term loan, together with accrued interest, in arrears, to the Lenders.  All unpaid principal, accrued and unpaid interest with respect to the term loan, and a final fee in the amount of 5.0% of the term loan commitment, is due and payable in full on the term loan maturity date on June 1, 2024.

At the Company’s option, the Company may prepay all, but not less than all, of the term loans advanced by the Lenders under the term loan facility after the first year, subject to a prepayment fee and an amount equal to the sum of all outstanding principal of the term loans plus accrued and unpaid interest thereon through the prepayment date, a final fee, plus all other amounts that are due and payable, including the Lenders' expenses and interest at the default rate with respect to any past due amounts.

Revolving Credit Facility - East West Bank

Under the 2019 Secured Loan Agreement, East West Bank will make loans of up to $10 million from time to time outstanding, subject to availability based on a borrowing base equal to (i) 85.00% of eligible accounts, subject to a maximum of 2.50% dilution based upon collections, minus (ii) the Company’s foreign accounts receivable credit insurance’s outstanding co-payment and minimum annual deductible (that has not been used at the applicable time). Advances under the revolving credit facility bear interest at a rate of 0.50% above the greater of East West Bank’s prime rate or 5.50% . Interest on the revolving advances is payable monthly in arrears. The revolving credit facility terminates and the principal and all amounts are due in full on June 25, 2024, provided that if an optional or mandatory prepayment (other than regularly scheduled payments) is made under the term loan, the Company must satisfy in full the obligations under the revolving credit line. The revolving credit facility requires a lockbox arrangement, which provides for all receipts to be swept daily to reduce the borrowings outstanding under the revolving credit facility.

There were no amounts outstanding under the revolving credit facility at June 30, 2019 .



22

Note L—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.

In conjunction with the 2019 Secured Loan Agreement, on June 25, 2019, the Company entered into an investment agreement (the "Investment Agreement"), with Innovatus, Innovatus Life Science Offshore Fund I, LP and Innovatus Life Sciences Offshore Fund I-A, LP (collectively, the "Innovatus Investors"), pursuant to with the Company agreed to issue and sell to the Innovatus Investors an aggregate of 775,194 shares of the Company's common stock, par value $0.00001 per share (the "Shares"), in a private placement (the "Private Placement"). The Investors paid $3.87 per Share. The Private Placement closed on June 25, 2019. The Company received aggregate gross proceeds from the Private Placement of approximately $3.0 million , before deducting expenses associated with the transaction. The Company has granted the Investors specified indemnification rights with respect to its representations, warranties, covenants and agreements under the Investment Agreement.

  Preferred stock

The Company’s Restated Certificate of Incorporation authorizes the Company to issue 5,000,000 shares of preferred stock, $0.00001 par value, all of which is undesignated. No shares were issued and outstanding at June 30, 2019 and December 31, 2018 .

Demand registration rights

In conjunction with the IPO, the Company entered into an Amended and Restated Information and Registration Rights Agreement effective June 29, 2015 (the “Registration Rights Agreement”), which provided, among other things, registration rights to certain investors that had held the Company's preferred stock prior to the IPO. Subject to specified limitations set forth in a registration rights agreement, at any time, the holders of at least 25% of the then outstanding registrable shares may at any time demand in writing that the Company register all or a portion of the registrable shares under the Securities Act on a Form other than Form S-3 for an offering of at least 20% of the then outstanding registrable shares or a lesser percentage of the then outstanding registrable shares provided that it is reasonably anticipated that the aggregate offering price would exceed $20 million . The Company is not obligated to file a registration statement pursuant to these rights on more than two occasions. Additionally, after such time as the Company became eligible to use Form S-3, subject to specified limitations set forth in the registration rights agreement, the holders of at least 25% of the then outstanding registrable shares became able to at any time demand in writing that the Company register all or a portion of the registrable shares under the Securities Act on Form S-3 for an offering of at least 25% of the then outstanding registrable shares having an anticipated aggregate offering price to the public, net of selling expenses, of at least $5 million (a “Resale Registration Statement”). The Company is not obligated to effect a registration pursuant to a Resale Registration Statement on more than one occasion. Under the Registration Rights Agreement, the registration rights expire on July 7, 2019.

In conjunction with the Private Placement, on June 25, 2019, the Company entered into a registration rights agreement (the "2019 Registration Rights Agreement"), with the Innovatus Investors, pursuant to which the Company agreed to register for resale the Shares held by the Investors under certain circumstances. Under the Registration Rights Agreement, in the event that the Company receives a written request from the Innovatus Investors that the Company file with the U.S. Securities and Exchange Commission (the “SEC”) a registration statement covering the resale of all of the Shares, the Company shall promptly but no later than 120 days after the date of such request prepare and file with the SEC such registration statement. The Innovatus Investors have agreed to use best efforts not to make such a request, including by effecting any planned sales of Shares under Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). The Company has agreed to use commercially reasonable efforts to cause such registration statement to become effective and to keep such registration statement effective until the date the Shares covered by such registration statement have been sold or may be resold pursuant to Rule 144 without restriction. The Company has agreed to be responsible for all fees and expenses incurred in connection with the registration of the Shares. The Company has granted the Innovatus Investors customary indemnification rights in connection with the registration statement. The Innovatus Investors have also granted the Company customary indemnification rights in connection with the registration statement.

23


Warrants
 
The Company also issued warrants to certain investors and consultants to purchase shares of the Company’s preferred stock and common stock. Based on the Company’s assessment of the warrants granted in 2013 and 2014 relative to ASC 480, Distinguishing Liabilities from Equity , the warrants are classified as equity. No warrants were issued in the three and six months ended June 30, 2019 . According to ASC 480, an entity shall classify as a liability any financial instrument, other than an outstanding share, that, at inception, both a) embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such obligation and b) requires or may require the issuer to settle the obligation by transferring assets. The warrants do not contain any provision that requires the Company to repurchase the shares and are not indexed to such an obligation. The warrants also do not require the Company to settle by transferring assets. All warrants were exercisable immediately upon issuance.

Common stock warrants
 
The Company also issued warrants to certain investors and consultants to purchase shares of common stock.  Warrants to purchase 28,926 shares of common stock were outstanding as of June 30, 2019 and December 31, 2018 . Outstanding warrants are currently exercisable with varying exercise expiration dates from 2020 through 2024 . At June 30, 2019 and December 31, 2018 , the weighted average warrant exercise price 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, 2018
 
28,926

 
$
9.80

 
4.66
 
28,926

 
$
9.80

Outstanding June 30, 2019
 
28,926

 
$
9.80

 
4.16
 
28,926

 
$
9.80


Stock option plans

As of June 30, 2019 , 1,731,823 shares of common stock were available for future issuance under the 2015 Stock Incentive Plan ("2015 Plan"). The 2015 Plan provides for an annual increase, to be added on the first day of each fiscal year, beginning with the fiscal year ending December 31, 2016 and continuing until, and including, the fiscal year ending December 31, 2025, equal to the lesser of (a) 3,000,000 shares of our common stock, (b) 3% of the number of share of our common stock outstanding on the first day of such fiscal year and (c) an amount determined by the Board. Effective January 1, 2019, an additional 1,958,726 shares of our common stock were added to the 2015 Plan under the terms of this provision.
    
On April 29, 2019, the stockholders approved the Conformis, Inc. 2019 Sales Team Performance-Based Equity Incentive Plan ("2019 Sales Team Plan") for up to 3,000,000 shares of common stock available to grant to certain sales representatives or independent sales agents. The 2019 Sales Team Plan provides for the grant of performance-based equity, including incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock units and other stock-based awards. Shares covered by awards under the 2019 Sales Team Plan that expire or are terminated, surrendered, or cancelled without having been fully exercised or are forfeited in whole or in part (including as the result of shares subject to such award being repurchased by us at the original issuance price pursuant to a contractual repurchase right) or that result in any shares not being issued, will again be available for the grant of awards under the 2019 Sales Team Plan. Equity granted under the 2019 Sales Team Plan will expire ten years from the date of grant.

As of June 30, 2019 , no shares of common stock were issued or outstanding under the 2019 Sales Team Plan.
    

24

Activity under all stock option plans was as follows:
 
 
Number of
Options
 
Weighted
Average
Exercise Price
per Share
 
Aggregate Intrinsic Value (in Thousands)
Outstanding December 31, 2018
 
2,876,199

 
$
6.57

 
 
Exercised
 
(34,669
)
 
3.50

 
$
21

Expired
 
(774,372
)
 
7.33

 
 
Cancelled/Forfeited
 
(14,347
)
 
2.82

 
 
Outstanding June 30, 2019
 
2,052,811

 
$
6.36

 
$
496

Total vested and exercisable
 
1,647,614

 
$
6.77

 
$
155

     
The total fair value of stock options that vested during the three and six months ended June 30, 2019 was $0.1 million and $0.3 million , respectively. The weighted average remaining contractual term for the total stock options outstanding was 5.19 years as of June 30, 2019 . The weighted average remaining contractual term for the total stock options vested and exercisable was 4.49 years as of June 30, 2019 .

Restricted common stock award activity under the plan was as follows:
 
 
Number of Shares
 
Weighted Average Fair Value
Unvested December 31, 2018
 
2,473,372

 
$
2.45

Granted
 
2,938,663

 
0.59

Vested
 
(728,140
)
 
2.54

Forfeited
 
(350,213
)
 
1.32

Unvested June 30, 2019
 
4,333,682

 
$
1.27


The total fair value of restricted common stock awards that vested during the three and six months ended June 30, 2019 was $1.5 million and $1.9 million , respectively.

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.
    
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 June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Risk-free interest rate
 
N/A
 
2.75%
 
N/A
 
2.75%-2.90%
Expected term (in years)
 
N/A
 
6.25
 
N/A
 
6.25
Dividend yield
 
N/A
 
—%
 
N/A
 
—%
Expected volatility
 
N/A
 
52.81%
 
N/A
 
52.81%-56.44%

Risk-free interest rate .    The risk-free interest rate is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options.
Expected term.     The expected term of stock options represents the period the stock options are expected to remain outstanding and is based on the “SEC Shortcut Approach” as defined in “Share-Based Payment” (SAB 107)

25

ASC 718-10-S99, “Compensation-Stock Compensation-Overall-SEC Materials,” which is the midpoint between the vesting date and the end of the contractual term. With certain stock option grants, the exercise price may exceed the fair value of the common stock. In these instances, the Company adjusts the expected term accordingly.
Dividend yield.     The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.
Expected volatility.     Expected volatility measures the amount that a stock price has fluctuated or is expected to fluctuate during a period. The Company does not have sufficient history of market prices of its common stock as it is a newly public company. Therefore, the Company estimates volatility using historical volatilities of similar public entities.
Forfeitures.     The Company recognizes forfeitures as they occur.
Stock-based compensation expense was $1.0 million and $0.9 million for the three months ended June 30, 2019 and 2018 , respectively, and $2.1 million and $1.8 million for the six months ended June 30, 2019 and 2018 , respectively.  Stock-based compensation expense was calculated based on awards ultimately expected to vest. To date, the amount of stock-based compensation capitalized as part of inventory was not material.
 
The following is a summary of stock-based compensation expense (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Cost of revenues
 
$
133

 
$
47

 
$
299

 
$
85

Sales and marketing
 
49

 
157

 
130

 
282

Research and development
 
201

 
274

 
458

 
564

General and administrative
 
575

 
434

 
1,219

 
853

 
 
$
958

 
$
912

 
$
2,106

 
$
1,784


As of June 30, 2019 , the Company had $0.9 million of total unrecognized compensation expense for options that will be recognized over a weighted average period of 1.99 years . As of June 30, 2019 , the Company had $4.0 million of total unrecognized compensation expense for restricted awards that will be recognized over a weighted average period of 2.02 years.

Note M—Segment and Geographic Data
 
The Company operates as one reportable segment as described in Note B to the Consolidated Financial Statements. The countries in which the Company has local revenue generating operations have been combined into the following geographic areas: the United States (including Puerto Rico), Germany and the rest of world, which consists of Europe predominately (including the United Kingdom) and other foreign countries. Sales are attributable to a geographic area based upon the customer’s country of domicile. Net property, plant and equipment are based upon physical location of the assets.
 
Geographic information consisted of the following (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Product revenue
 
 

 
 

 
 

 
 

United States
 
$
17,194

 
$
16,355

 
34,793

 
32,382

Germany
 
1,673

 
2,186

 
4,137

 
5,273

Rest of world
 
470

 
367

 
876

 
736

 
 
$
19,337

 
$
18,908

 
39,806

 
38,391


 
 
June 30, 2019
 
December 31, 2018
Property and equipment, net
 
 

 
 

United States
 
$
13,587

 
$
14,367

Germany
 
62

 
72

 
 
$
13,649

 
$
14,439


26


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, 2018 . Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the ‘‘Risk Factors’’ section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 , our actual results could differ materially from the results described, in or implied, by these forward-looking statements.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, our ability to raise additional funds, plans and objectives of management 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 iUni, iDuo, iTotal CR, iTotal PS and Conformis Hip System;
•
our expectations regarding our sales, expenses, gross margin and other results of operations;
•
our strategies for growth and sources of new sales;
•
maintaining and expanding our customer base and our relationships with our independent sales representatives and distributors;
•
our current and future products and plans to promote them;
•
the anticipated trends and challenges in our business and in the markets in which we operate;
•
the implementation of our business model, strategic plans for our business, products, product candidates and technology;
•
the anticipated timing of our product launches;
•
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;
•
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;

27

•
the anticipated adequacy of our capital resources to meet the needs of our business or our ability to raise any additional capital;
•
our ability to continue as a going concern; and
•
our expectations regarding the time during which we will be an emerging growth company under the JOBS Act.
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section, that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, collaborations, joint ventures or investments that we may make or enter into.
You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q and our other filings with the SEC completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.


28

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 $18.1 billion annually and growing, and we believe our iFit technology platform is applicable to all major joints in this market. We offer a broad line of customized knee implants designed to restore the natural shape of a patient’s knee. We have sold a total of more than 90,000 knee implants, including more than 70,000 total knee implants and 20,000 partial knee implants. 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 off-the-shelf implants. In March 2016, we initiated the broad commercial launch of the iTotal PS, our posterior-stabilized total knee replacement implant which addresses the largest segment of the knee replacement market. On July 31, 2018, our first Conformis Hip Systems were implanted. We are in limited commercial launch with the Conformis Hip System and intend to enter full commercial launch in the second half of 2019.
 
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 manufacture certain components of our customized hip and 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 off-the-shelf implants.

     All of our joint 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 all of our knee replacement products 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.

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, Hong Kong, Malaysia, Monaco, Hungary, Spain, Australia, Oman, Italy, and the Netherlands. In order for surgeons to use our products, the medical facilities where these surgeons treat patients typically require us to enter into pricing agreements. The process of negotiating a pricing agreement can be lengthy and time-consuming, require extensive management time and may not be successful.
 

29

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.

On-going royalty revenue is generated from our agreement with MicroPort Orthopedics Inc., a wholly owned subsidiary of MicroPort Scientific Corporation, and was generated through December 31, 2017 with Wright Medical Group, Inc. and its wholly owned subsidiary Wright Medical Technology, Inc. Both agreements were entered into in April 2015.

Cost of revenue
 
We produce our computer aided designs, or CAD, in-house and in India and use them to direct most of our product manufacturing efforts. We manufacture all of our patient-specific instruments, or iJigs, tibial trays used in our total knee implants, and polyethylene tibia tray inserts for our iTotal CR and our iTotal PS product, in our facility in Wilmington, Massachusetts. We polish our femoral implants used in our total and partial knee products in our facility in Wallingford, Connecticut. Starting in July 2018, we manufacture our patient specific Conformis Hip System implants in our facility in Wilmington, Massachusetts. We outsource the production of the remainder of the partial knee tibial components, the manufacture of femoral castings and other knee and hip implant components to third-party suppliers. Our suppliers make our customized implant components using the CAD designs we supply. Cost of revenue consists primarily of costs of raw materials, manufacturing personnel, manufacturing supplies, outside supplier processes, 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 resulting in wasted implants, 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 continuing to reduce our manufacturing costs per unit and increasing our manufacturing efficiency as sales volume increases. We believe that areas of opportunity to expand our gross margin in the future, if and as the volume of our product sales increases, include the following:
 
•
absorbing overhead costs across a larger volume of product sales;
•
obtaining more favorable pricing for the materials used in the manufacture of our products;
•
obtaining more favorable pricing of certain components of our products manufactured for us by third parties;
•
increasing the proportion of 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
•
continuing to transition our in-house CAD labor force to India, which we believe will reduce labor costs required to design our products.
     
We also continue to explore other opportunities to reduce our manufacturing costs. However, these and the above opportunities may not be realized. In addition, our gross margin may fluctuate from period to period.
 
Operating expenses
 
Our operating expenses consist of sales and marketing, research and development and general and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, stock-based compensation, and sales commissions.
 

30

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 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 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. 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, 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 our revenue increases, we also 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.
 
Total other income (expenses), net
 
Total other income (expenses), net consists primarily of interest expense and amortization of debt discount associated with our term loans outstanding during the year, debt extinguishment loss, and gains (losses) from foreign currency transactions. The effect of exchange rates on our foreign currency-denominated asset and liability balances are recorded as foreign currency transaction 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.


31

Consolidated results of operations
 
Comparison of the three months ended June 30, 2019 and 2018
 
The following table sets forth our results of operations expressed as dollar amounts, percentage of total revenue and year-over-year change (in thousands):
 
 
2019
 
2018
 
2019 vs 2018
Three Months Ended June 30,
 
Amount
 
As a% of
Total
Revenue
 
Amount
 
As a% of
Total
Revenue
 
$
Change
 
%
Change
Revenue
 
 

 
 

 
 

 
 

 
 

 
 

Product revenue
 
$
19,337

 
99
 %
 
$
18,908

 
99
 %
 
$
429

 
2
 %
Royalty
 
256

 
1

 
192

 
1

 
64

 
33

Total revenue
 
19,593

 
100

 
19,100

 
100

 
493

 
3

Cost of revenue
 
9,971

 
51

 
9,989

 
52

 
(18
)
 
—

Gross profit
 
9,622

 
49

 
9,111

 
48

 
511

 
6

 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 

 
 

 
 

 
 

 
 

 
 

Sales and marketing
 
$
6,897

 
35
 %
 
$
9,809

 
51
 %
 
$
(2,912
)
 
(30
)%
Research and development
 
3,328

 
17

 
4,850

 
25

 
(1,522
)
 
(31
)
General and administrative
 
5,289

 
27

 
5,802

 
30

 
(513
)
 
(9
)
Total operating expenses
 
15,514

 
79

 
20,461

 
107

 
(4,947
)
 
(24
)
Loss from operations
 
(5,892
)
 
(30
)
 
(11,350
)
 
(59
)
 
5,458

 
48

Total other income (expenses), net
 
(848
)
 
(4
)
 
(2,693
)
 
(14
)
 
1,845

 
69

Loss before income taxes
 
(6,740
)
 
(34
)
 
(14,043
)
 
(74
)
 
7,303

 
52

Income tax provision
 
23

 
—

 
14

 
—

 
9

 
64

Net loss
 
$
(6,763
)
 
(35
)%
 
$
(14,057
)
 
(74
)%
 
$
7,294

 
52
 %

Product revenue.     Product revenue was $19.3 million for the three months ended June 30, 2019 compared to $18.9 million for the three months ended June 30, 2018 , an increase of $0.4 million or 2% , due principally to increased sales of our iTotal PS and Hip System, partially offset by decreased sales of our partial knee products and iTotal CR.
 
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):
 
 
2019
 
2018
 
2019 vs 2018
Three Months Ended June 30,
 
Amount
 
As a % of
Product
Revenue
 
Amount
 
As a % of
Product
Revenue
 
$
Change
 
%
Change
United States
 
$
17,194

 
89
%
 
$
16,355

 
86
%
 
$
839

 
5
 %
Germany
 
1,673

 
9

 
2,186

 
12

 
(513
)
 
(23
)
Rest of world
 
470

 
2

 
367

 
2

 
103

 
28

Product revenue
 
$
19,337

 
100
%
 
$
18,908

 
100
%
 
$
429

 
2
 %
 
Product revenue in the United States was generated through our direct sales force and independent sales representatives. The percentage of product revenue generated in the United States was 89% for the three months ended June 30, 2019 compared to 86% for the three months ended June 30, 2018 . We believe the higher level of revenue as a percentage of product revenue inside the United States in the three months ended June 30, 2019 was due to growth of the iTotal PS and the introduction of the Hip System in the United States. Sales of iTotal CR declined in the United States as a result of the declining cemented cruciate retained total knee replacement market. Product revenue declined in Germany due to continued reimbursement challenges.

Royalty revenue. Royalty revenue was $0.3 million for the three months ended June 30, 2019 compared to $0.2 million for the three months ended June 30, 2018 , an increase of $0.1 million or 33% . Royalty revenue consists of royalties from MicroPort Orthopedics Inc.


32

     Cost of revenue, gross profit and gross margin.     Cost of revenue was consistent at $10.0 million for the three months ended June 30, 2019 and June 30, 2018 . Gross profit was $9.6 million for the three months ended June 30, 2019 compared to $9.1 million for the three months ended June 30, 2018 , an increase of $0.5 million or 6% . Gross margin increased 100 basis points to 49% for the three months ended June 30, 2019 from 48% for the three months ended June 30, 2018 . This increase in gross margin was driven primarily by savings from vertical integration efforts and other cost saving initiatives .

Sales and marketing.     Sales and marketing expense was $6.9 million for the three months ended June 30, 2019 compared to $9.8 million for the three months ended June 30, 2018 , a decrease of $2.9 million or 30% . The decrease was due primarily to a $1.6 million decrease in sales and marketing salaries and benefits, a $0.7 million decrease in program spending, a $0.2 million decrease in instrumentation and bioskill lab expenses, a $0.2 million decrease in commissions, and a decrease of $0.2 million in travel. Sales and marketing expense decreased as a percentage of total revenue to 35% for the three months ended June 30, 2019 compared to 51% for the three months ended June 30, 2018 .

Research and development.     Research and development expense was $3.3 million for the three months ended June 30, 2019 compared to $4.9 million for the three months ended June 30, 2018 , a decrease of $1.5 million or 31% . The decrease was due primarily to a decrease in personnel costs of $0.7 million, a decrease in revenue share expense of $0.2 million, a decrease in prototype supplies and professional services related to projects of $0.5 million due to timing, and $0.1 million decrease in other costs. Research and development expense decreased as a percentage of total revenue to 17% for the three months ended June 30, 2019 from 25% for the three months ended June 30, 2018 .
 
General and administrative.     General and administrative expense was $5.3 million for the three months ended June 30, 2019 compared to $5.8 million for the three months ended June 30, 2018 , a decrease of $0.5 million or 9% . The decrease was primarily due to a decrease in personnel costs of $0.3 million, a reduction in legal fees of $0.3 million, and a reduction of $0.1 million in other costs partially offset by an increase in professional consulting fees of $0.2 million. General and administrative expense decreased as a percentage of total revenue to 27% for the three months ended June 30, 2019 from 30% for the three months ended June 30, 2018 .

Total other income (expenses), net.     Other income (expenses), net was $(0.8) million for the three months ended June 30, 2019 compared to $(2.7) million for the three months ended June 30, 2018 , a change of $1.8 million . The change was primarily due to a $2.5 million increase in foreign currency exchange transaction income partially offset by a $0.6 million increase in interest as a result of the incremental interest and prepayment fees incurred in conjunction with the extinguishment of the 2017 Secured Loan Agreement.

Income taxes.     Income tax provision was $23,000 and $14,000 for the three months ended June 30, 2019 and 2018 , 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.
 


33

Comparison of the six months ended June 30, 2019 and 2018
 
The following table sets forth our results of operations expressed as dollar amounts, percentage of total revenue and year-over-year change (in thousands):
 
 
 
2019
 
2018
 
2019 vs 2018
Six Months Ended June 30,
 
Amount
 
As a%
of
Total
Revenue
 
Amount
 
As a%
  of
Total
Revenue
 
$
Change
 
%
Change
Revenue
 
 

 
 

 
 

 
 

 
 

 
 

Product revenue
 
$
39,806

 
99
 %
 
$
38,391

 
99
 %
 
$
1,415

 
4
 %
Royalty
 
431

 
1

 
365

 
1

 
66

 
18
 %
Total revenue
 
40,237

 
100

 
38,756

 
100

 
1,481

 
4
 %
Cost of revenue
 
20,784

 
52

 
20,858

 
54

 
(74
)
 
—
 %
Gross profit
 
19,453

 
48

 
17,898

 
46

 
1,555

 
9
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 

 
 

 
 

 
 

 
 

 
 

Sales and marketing
 
$
15,078

 
37
 %
 
$
20,220

 
52
 %
 
$
(5,142
)
 
(25
)%
Research and development
 
6,240

 
16

 
9,544

 
25

 
(3,304
)
 
(35
)
General and administrative
 
10,618

 
26

 
11,942

 
31

 
(1,324
)
 
(11
)
Total operating expenses
 
31,936

 
79

 
41,706

 
108

 
(9,770
)
 
(23
)
Loss from operations
 
(12,483
)
 
(31
)
 
(23,808
)
 
(61
)
 
11,325

 
48

Total other income (expenses), net
 
(1,847
)
 
(5
)
 
(2,203
)
 
(6
)
 
356

 
16

Loss before income taxes
 
(14,330
)
 
(36
)
 
(26,011
)
 
(67
)
 
11,681

 
45

Income tax provision
 
14

 
—

 
47

 
—

 
(33
)
 
(70
)
Net loss
 
$
(14,344
)
 
(36
)%
 
$
(26,058
)
 
(67
)%
 
$
11,714

 
45
 %

Product revenue.     Product revenue was $39.8 million for the six months ended June 30, 2019 , compared to $38.4 million for the six months ended June 30, 2018 , an increase of $1.4 million or 4% . Increased sales of our iTotal PS and Hip system were partially offset by decreased sales of our partial knee products and iTotal CR.
 
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):
 
 
 
2019
 
2018
 
2019 vs 2018
Six Months Ended June 30,
 
Amount
 
As a % of
Product
Revenue
 
Amount
 
As a % of
Product
Revenue
 
$
Change
 
%
Change
United States
 
$
34,793

 
87
%
 
$
32,382

 
84
%
 
$
2,411

 
7
 %
Germany
 
4,137

 
10

 
5,273

 
14

 
$
(1,136
)
 
(22
)
Rest of world
 
876

 
3

 
736

 
2

 
140

 
19

Product revenue
 
$
39,806

 
100
%
 
$
38,391

 
100
%
 
$
1,415

 
4
 %
 
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 87% for the six months ended June 30, 2019 compared to 84% for the six months ended June 30, 2018 . We believe the higher level of revenue as a percentage of product revenue inside the United States in the six months ended June 30, 2019 was due to the growth of the iTotal PS and introduction of the Hip system in the United States, coupled with negative impact in Germany due to continued reimbursement challenges of our iTotal CR and PS business.
    
Royalty revenue. Royalty revenue was $0.4 million for the six months ended June 30, 2019 and 2018 . Royalty revenue consists of royalties from MicroPort Orthopedics Inc.
 

34

Cost of revenue, gross profit and gross margin.     Cost of revenue was $20.8 million for the six months ended June 30, 2019 compared to $20.9 million for the six months ended June 30, 2018 , a decrease of $0.1 million or 0% . Gross profit was $19.5 million for the six months ended June 30, 2019 compared to $17.9 million for the six months ended June 30, 2018 , an increase of $1.6 million or 9% . Gross margin increased 200 basis points to 48% for the six months ended June 30, 2019 from 46% for the six months ended June 30, 2018 .

Sales and marketing.     Sales and marketing expense was $15.1 million for the six months ended June 30, 2019 compared to $20.2 million for the six months ended June 30, 2018 , a decrease of $5.1 million or 25% . The decrease was due primarily to decreases in personnel costs of $3.2 million and marketing program and PR spending of $1.9 million. Sales and marketing expense decreased as a percentage of total revenue to 37% for the six months ended June 30, 2019 compared to 52% the six months ended June 30, 2018 .

Research and development.     Research and development expense was $6.2 million for the six months ended June 30, 2019 compared to $9.5 million for the six months ended June 30, 2018 , a decrease of $3.3 million or 35% . The decrease was due to decreases of $1.6 million in personnel costs, $1.2 million in revenue share expense, and $0.6 million in professional consulting and prototyping expense, partially offset by an increase in other expenses of $0.1 million. Research and development expense decreased as a percentage of total revenue to 16% for the six months ended June 30, 2019 from 25% for the six months ended June 30, 2018 .
 
General and administrative.     General and administrative expense was $10.6 million for the six months ended June 30, 2019 compared to $11.9 million for the six months ended June 30, 2018 , a decrease of $1.3 million or 11% . The decrease in expenses was due a $1.1 million decrease in legal expenses and a $0.6 million decrease in personnel costs, partially offset by an increase in outbound freight costs of $0.3 million and an increase in other general and administration expenses of $0.1 million. General and administrative expense decreased as a percentage of total revenue to 26% for the six months ended June 30, 2019 from 31% for the six months ended June 30, 2018 .

      Total other income (expenses), net.     Other income (expenses), net was $(1.8) million for the six months ended June 30, 2019 compared to $(2.2) million for the six months ended June 30, 2018 , a change of $0.4 million , or 16% . The change was primarily due to a $0.8 million decrease in foreign currency exchange transaction expense, partially offset by an increase of $0.3 million in interest expense associated with long-term debt and additional fees incurred to extinguish the 2017 Secured Loan Agreement as well as reduction of $0.1 million in interest income.

Income taxes.     Income tax provision was approximately $14,000 for the six months ended June 30, 2019 and $47,000 for the six months ended June 30, 2018 . 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.


35

Liquidity, capital resources and plan of operations
 
Sources of liquidity and funding requirements
 
From our inception in June 2004 through the six months ended June 30, 2019 , we have financed our operations primarily through private placements of preferred stock, our initial public offering, or IPO, equity offerings, bank and other debt and product revenue. We have not yet attained profitability and continue to incur operating losses. As of June 30, 2019 , we have an accumulated deficit of $490.0 million .
      
In January 2017, we filed a shelf registration statement on Form S-3, which was declared effective by the SEC on May 9, 2017, or the "Shelf Registration Statement". The Shelf Registration Statement allows us to sell from time-to-time up to $200 million of common stock, preferred stock, debt securities, warrants, or units comprised of any combination of these securities, for our own account in one or more offerings. On May 10, 2017, we filed with the SEC a prospectus supplement, pursuant to which we may issue and sell up to $50 million of our common stock and entered into the Distribution Agreement with Canaccord Genuity, pursuant to which Canaccord has agreed to sell shares of our common stock from time to time, as our agent in an “at-the-market” offering ("ATM") as defined in Rule 415 promulgated under the U.S. Securities Act of 1933, as amended. We are not obligated to sell any number of shares under the Distribution Agreement. As of June 30, 2019 , we have sold 785,280 shares under the Distribution Agreement resulting in net proceeds of $1.5 million .

On December 17, 2018, we entered into a stock purchase agreement, or the "Stock Purchase Agreement", with Lincoln Park Capital, or "LPC". Upon entering into the Stock Purchase Agreement, we sold 1,921,968 shares of common stock for $1.0 million to LPC, representing a premium of 110% to the previous day's closing price. As consideration for LPC’s commitment to purchase shares of common stock under the Stock Purchase Agreement, we issued 354,430 shares to LPC.  We have the right at our sole discretion to sell to LPC up to $20.0 million worth of shares over a 36-month period subject to the terms of the Stock Purchase Agreement. We will control the timing of any sales to LPC and LPC will be obligated to make purchases of our common stock upon receipt of requests from us in accordance with the terms of the Stock Purchase Agreement. There are no upper limits to the price per share LPC may pay to purchase the up to $20.0 million worth of common stock subject to the Stock Purchase Agreement, and the purchase price of the shares will be based on the then prevailing market prices of our shares at the time of each sale to LPC as described in the Stock Purchase Agreement, provided that LPC will not be obligated to make purchases of our common stock pursuant to receipt of a request from us on any business day on which the last closing trade price of our common stock on the Nasdaq Capital Market (or alternative national exchange in accordance with the Stock Purchase Agreement) is below a floor price of $0.25 per share .  No warrants, derivatives, financial or business covenants are associated with the Stock Purchase Agreement and LPC has agreed not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of shares of our common stock.  The Stock Purchase Agreement may be terminated by us at any time, at our sole discretion, without any cost or penalty.
    
On June 25, 2019, we entered into a Loan and Security Agreement (the "2019 Secured Loan Agreement") with Innovatus Life Sciences Lending Fund I, LP ("Innovatus"), as collateral agent and lender, East West Bank and the other lenders party thereto from time to time (collectively, the "Lenders"), pursuant to which the Lenders agreed to make term loans and a revolving credit facility to the Company to repay existing indebtedness, for working capital and general business purposes, in a principal amount of up to $30 million. We used the proceeds from the 2019 Secured Loan Agreement to pay off the $15 million term loan from Oxford Finance LLC. In addition, Innovatus purchased approximately $3 million of our common stock at the previous day's closing price. For further information regarding the 2019 Secured Loan Agreement, see " Note K—Debt and Notes Payable " in the financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.

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;

36

•
pursuing and maintaining appropriate regulatory clearances and approvals for our existing products and any new products that we may develop; and
•
preparing, filing and prosecuting patent applications, and maintaining and enforcing our intellectual property rights and position.

We anticipate that our principal sources of funds in the future will be revenue generated from the sales of our products, including the successful full commercial launch of the Conformis Hip System, potential future capital raises through the issuance of equity or other securities, debt financings, and revenues that we may generate in connection with licensing our intellectual property. Additionally, in order for us to meet our operating plan, gross margin improvements and operating expense reductions will be necessary to reduce cash used in operations. We will need to generate significant additional revenue to achieve and maintain profitability, and even if we achieve profitability, we cannot be sure that we will remain profitable for any substantial period of time. It is also possible that we may allocate significant amounts of capital toward products or technologies for which market demand is lower than anticipated and, as a result, abandon such efforts. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, or if we expend capital on projects that are not successful, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, and we may even have to scale back our operations. Our failure to become and remain profitable could impair our ability to raise capital, expand our business, maintain our research and development efforts or continue to fund our operations.
 
We may need to engage in additional equity or debt financings to secure additional funds. We may not be able to obtain additional financing on terms favorable to us, or at all. To the extent that we raise additional capital through the future sales 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 existing common stockholders or involve negative covenants that restrict our ability to take specific actions, such as incurring additional debt or making capital expenditures.
  
At June 30, 2019 , we had cash and cash equivalents of $20.7 million and $0.5 million in restricted cash allocated to lease deposits. Based on our current operating plan, we expect that our existing cash and cash equivalents as of June 30, 2019 , anticipated revenue from operations, and the ability to draw down the revolving credit facility, and issue equity to LPC will enable us to fund our operating expenses and capital expenditure requirements and pay our debt service as it becomes due for at least the next 12 months from the date of filing. 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, the gross profit we expect to generate from those revenue, the reduction in operating expenses in 2019, 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 (in thousands):
 
 
 
Six Months Ended June 30,
 
 
2019
 
2018
 
$ Change
 
% Change
Net cash (used in) provided by:
 
 

 
 

 
 

 
 

Operating activities
 
$
(8,012
)
 
$
(17,579
)
 
$
9,567

 
54
 %
Investing activities
 
5,952

 
7,057

 
(1,105
)
 
(16
)
Financing activities
 
6,351

 
21,436

 
(15,085
)
 
(70
)
Effect of exchange rate on cash
 
(12
)
 
(140
)
 
128

 
91

Total
 
$
4,279

 
$
10,774

 
$
(6,495
)
 
(60
)%
 
Net cash (used in) provided by operating activities.     Net cash used in operating activities was $8.0 million for the six months ended June 30, 2019 and $17.6 million for the six months ended June 30, 2018 , a decrease of $9.6 million . These amounts primarily reflect net loss of $14.3 million for the six months ended June 30, 2019 and $26.1 million for the six months ended June 30, 2018 . The net cash used in operating activities for the six months ended June 30, 2019 was affected by an increase from inventory of $1.2 million , an increase from accounts payable, accrued expenses and other liabilities of $2.6 million , an increase from prepaid expenses and other assets of $0.5 million , and a decrease from accounts receivable of $0.8 million . Non-cash reconciling items include an

37

increase due to loss from debt extinguishment of $1.1 million , a decrease from stock compensation expense of $0.3 million , an increase in unrealized foreign exchange gain/loss of $(0.9) million , and a decrease of $0.6 million due to lease expense.
 
Net cash provided by investing activities.     Net cash provided by investing activities was $6.0 million for the six months ended June 30, 2019 , and for the six months ended June 30, 2018 was $7.1 million , a change of $1.1 million . These amounts primarily reflect a decrease in cash used to purchase investments of $14.2 million , a decrease in cash provided from matured investments of $16.3 million , and a decrease in costs related to the acquisition of property, plant, and equipment of $1.0 million .
 
Net cash provided by financing activities.     Net cash provided by financing activities was $6.4 million for the six months ended June 30, 2019 , and for the six months ended June 30, 2018 was $21.4 million , a decrease of $15.1 million . These amounts primarily reflect a decrease in net proceeds from the issuance of common stock of $18.3 million , a decrease due to payment on extinguishment of debt of $1.1 million and payment of debt principal of $15 million , and a decrease of $0.7 million related to debt issuance costs, partially offset by an increase of $20.0 million from debt proceeds.
      
Contractual obligations and commitments
 
There have not been any material changes to our contractual obligations and commitments disclosed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report filed on Form 10-K for the year ended December 31, 2018 other than changes in our debt facilities as disclosed in Note K—Debt and Notes Payable in the financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.

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

The aggregate revenue share percentage of net revenue from our currently marketed knee replacement products, including percentages under revenue share agreements with all of our scientific advisory board members, ranges, depending on the particular product, from 3.4% to 5.8%. We incurred aggregate revenue share expense including all amounts payable under our scientific advisory board revenue share agreements of $0.7 million during the three months ended June 30, 2019 , representing 3.5% of product revenue, and $0.9 million during the three months ended June 30, 2018 , representing 4.7% of product revenue. Revenue share expense is included in research and development. For further information, see “ Note J—Commitments and Contingencies ” to the consolidated financial statements appearing in this Quarterly Report on Form 10-Q.

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

Off-balance sheet arrangements
 
Through June 30, 2019 , 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
 

38

We have prepared our consolidated financial statements in conformity with accounting principles generally accepted in the United States. Our preparation of these financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. The accounting estimates that require our most significant estimates include revenue recognition, accounts receivable valuation, inventory valuations, intangible valuation, purchase accounting, impairment assessments, equity instruments, stock compensation, income tax reserves and related allowances, the lives of property and equipment, and valuation of right-of-use lease assets and liabilities. 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 more fully 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, 2018 , with the exception of the critical accounting policy related to valuation methodology for goodwill impairment assessment. We updated our critical accounting policy to determine of the reporting unit using the combination of the market and income approaches which is more fully described in 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.

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ITEM 4. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2019 . 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 June 30, 2019 , our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting
 
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended June 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

40

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the ordinary course of our business, we are subject to routine risk of litigation, claims and administrative proceedings on a variety of matters, including patent infringement, product liability, securities-related claims, and other claims in the United States and in other countries where we sell our products.


ITEM 1A. RISK FACTORS
We operate in a rapidly changing environment that involves a number of risks that may have a material adverse effect on our business, financial condition and results of operations. The following description of risk factors consists of updates to the risk factors previously disclosed in Part 1, Item 1A in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the “Form 10-K”). For a detailed discussion of the other risks that affect our business, please refer to the entire section entitled “Risk Factors” in our Form 10-K. There have been no material changes to our risk factors as previously disclosed in our Form 10-K. Risk factors and other information included in our Form 10-Q should be carefully considered. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. Please see page 26 of this Quarterly Report on Form 10-Q for a discussion of some of the forward-looking statements that are qualified by these risk factors. If any of the risks actually occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected.


ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Securities

On June 25, 2019, we entered into an investment agreement (the “Investment Agreement”) with Innovatus, Innovatus Life Sciences Offshore Fund I, LP and Innovatus Life Sciences Offshore Fund I-A, LP (collectively, the “Investors”), pursuant to which we agreed to issue and sell to the Investors an aggregate of 775,194 shares of our common stock, par value $0.00001 per share (the “Shares”), in a private placement (the “Private Placement”). The Investors paid $3.87 per Share.

The Private Placement closed on June 25, 2019. We received aggregate gross proceeds from the Private Placement of approximately $3.0 million, before deducting expenses associated with the transaction. The Private Placement was not registered with the U.S. Securities and Exchange Commission in reliance upon the exemption from securities registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended.


ITEM 5. OTHER INFORMATION

On July 29, 2019, we entered into an employment agreement with J. Brent Alldredge, our Chief Legal Officer and Corporate Secretary (the "Alldredge Employment Agreement"). The Alldredge Employment Agreement provides that his employment will continue until either we or Mr. Alldredge provides written notice of termination in accordance with the terms of the agreement. In addition, the Alldredge Employment Agreement provides for the assignment of intellectual property rights to us and prohibits the executive from disclosing confidential information and, where permitted under applicable law, competing with us during the term of his employment and for a specified time thereafter.

Pursuant to the Alldredge Employment Agreement, Mr. Alldredge is entitled to receive an annual base salary of $355,000.08. Mr. Alldredge is also eligible, in the sole discretion of the compensation committee of our board of directors, to receive an annual bonus of at least forty percent (40%) of his annual base salary.

Mr. Alldredge will be entitled to severance payments if his employment is terminated under specified circumstances. If, during a change of control period, we terminate his employment other than for cause or if Mr. Alldredge terminates his employment with us for good reason, as described below, we are obligated to continue to pay his base salary for a period of twelve months; to the extent allowed by applicable law and the terms of the

41

applicable policies, continue to provide Mr. Alldredge and certain of his dependents with group health insurance for a period of twelve months; pay to him any bonus earned by him and approved by the board for the year prior to such termination, unless already paid; and provide that any outstanding equity awards held by Mr. Alldredge will become fully vested and exercisable or free from forfeiture or transfer restrictions. A change of control period is the period beginning three months immediately preceding and ending twelve months immediately following a change of control. The terms "termination for cause," "termination for good reason" and "change of control" are defined in the Alldredge Employment Agreement.

If, outside of a change of control period, we terminate his employment other than for cause or if Mr. Alldredge terminates his employment with us for good reason,we are obligated to continue to pay his base salary for a period of six months; to the extent allowed by applicable law and the terms of the applicable policies, continue to provide Mr. Alldredge and certain of his dependents with group health insurance for a period of six months;and pay to him any bonus earned by him and approved by the board prior to such termination, unless already paid.

In the event that Mr. Alldredge’s employment terminates as a result of his death, we are obligated to: pay to Mr. Alldredge (or his estate) an amount equal to six months (or twelve months if his death occurs during a change of control period) of his base salary; and pay to Mr.  Alldredge (or his estate) any bonus that has been approved by the board prior to the date of his death but not yet paid.

In the event that Mr. Alldredge’s employment terminates as a result of his disability, as defined in the Alldredge Employment Agreement, we are obligated to pay to Mr. Alldredge (or his estate) any bonus that has been approved by the board prior to the date of his termination for disability but not yet paid.

Mr. Alldredge is required to execute a release of claims as a condition precedent to receipt of the severance payments described above.

The Alldredge Employment Agreement further provides that the board will grant Mr. Alldredge an incentive stock option to purchase shares of the Company’s common stock having a value up to $125,000 (the “Option Grant”) under the Company’s stock incentive plan (the “Plan”). The Alldredge Employment Agreement also provides that the board will grant to Mr. Alldredge a restricted stock award for shares of the Company’s common stock having a value up to $125,000 (the “RS Award”) under the Plan. The Option Grant will vest and become exercisable with respect to 33.34% of the total number of shares purchasable upon exercise thereof one year after his first day of employment and ratably on a monthly basis thereafter over an additional two years. The RS Award will vest in equal annual installments over a three-year period beginning on the first anniversary of his first day of employment.  In addition, Mr. Alldredge is eligible to receive additional incentive equity awards under the Company’s long-term incentive program.  Mr. Alldredge is also 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.




42

ITEM 6. EXHIBITS

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

EXHIBIT INDEX

Exhibit
Number
 
Description of Exhibit
 

 
 

 


 
 
 
 
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Database
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document

 
*
Filed herewith.
†

Indicates management contract or plan.

#
This certification will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent specifically incorporated by reference into such filing.

43

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: 8/2/2019

 
 
CONFORMIS, INC.
 
 
 
 
 
By:
 
/s/ Mark A. Augusti
 
 
 
 
Mark A. Augusti
President and Chief Executive Officer

 Date: 8/2/2019
 
 
 
 
 
 
 
CONFORMIS, INC.
 
 
By:
 
/s/ Paul Weiner
 
 
 
 
Paul Weiner
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)


44

CONFORMIS, INC.
EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the “ Agreement ”) is made and entered into as of July 29, 2019 (the “ Effective Date ”) by and between Conformis, Inc., a Delaware corporation (the “ Company ”), and Brent Alldredge, an individual residing at 972 Shaddock Park Lane, Allen, TX, 75013 (the “ Executive ”).
BACKGROUND
A. The Company desires to retain the services of the Executive as a member of the senior management of the Company from the Start Date (defined below). The Company also desires to provide employment security to the Executive, thereby inducing the Executive to continue employment with the Company and enhancing the Executive’s ability to perform effectively.
B. The Executive desires to be employed by the Company on the terms and subject to the conditions set forth in this Agreement.
THE PARTIES AGREE AS FOLLOWS:

1. Title, Duties and Responsibilities .
1.1      Title . The Company will employ the Executive as Chief Legal Officer & Corporate Secretary.
1.2      Duties . The Executive will devote all of the Executive’s business time, energy, and skill to the affairs of the Company; provided, however, that reasonable time for personal business as well as charitable and professional activities will be permitted, including, with the prior written approval of the Company, serving as a board member of non-competing companies and charitable organizations, so long as such activities do not materially interfere with the Executive’s performance of services under this Agreement. The Executive will perform services at the head offices of the Company, which are currently located in Billerica, Massachusetts, unless otherwise agreed by the Company and the Executive in writing. However, the Executive will travel as may be reasonably necessary to fulfill the responsibilities of Executive’s role.
1.3      Performance of Duties . The Executive will discharge the duties described herein in a diligent and professional manner. The Executive will observe and comply at all times with the lawful directives of the Company’s Board of Directors (and its designees, including without limitation the Company’s President and Chief Executive Officer) (the “ Board ”) regarding the Executive’s performance of the Executive’s duties and with the Company’s business policies, rules and regulations as adopted from time to time by the Company. The Executive will carry




out and perform any and all reasonable and lawful orders, directions, and policies as may be stated by Company from time to time, either orally or in writing.
1.4      Start Date . The Executive’s first day of employment shall be July 29, 2019 (the “ Start Date ”.)

2.      Terms of Employment .
2.1      Definitions . For purposes of this Agreement, the following terms have the following meanings:
(a)      “ Accrued Compensation ” means any accrued Base Salary, any commissions or similar payments earned by the Executive prior to the date of termination, any Bonus earned by the Executive and approved by the Board prior to the date of termination, any accrued PTO (defined below), and any amounts for reimbursement of any appropriate business expenses incurred by the Executive in connection with the performance of the Executive’s duties hereunder, all to the extent unpaid on the date of termination. The Executive’s entitlement to any other compensation or benefit under any plan of the Company shall be governed by and determined in accordance with the terms of such plans, except as otherwise specified in this Agreement.
(b)      “ Base Salary ” has the meaning set forth in Section 3.1 hereof.
(c)      “ Change of Control ” means the occurrence of any one of the following: (i) any “person”, as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”) (other than the Company, a subsidiary, an affiliate, or a Company employee benefit plan, including any trustee of such plan acting as trustee) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities; or (ii) a sale of assets involving 75% or more of the fair market value of the assets of the Company as determined in good faith by the Board; or (iii) any merger, reorganization or other transaction of the Company whether or not another entity is the survivor, pursuant to which holders of all the shares of capital stock of the Company outstanding prior to the transaction hold, as a group, less than 50% of the shares of capital stock of the Company outstanding after the transaction; provided, however, that neither (A) a merger effected exclusively for the purpose of changing the domicile of the Company in which the holders of all the shares of capital stock of the Company immediately prior to the merger hold the voting power of the surviving entity following the merger in the same relative amounts with substantially the same rights, preferences and privileges, nor (B) a transaction the primary purpose of which is to raise capital for the Company, will constitute a Change of Control. Notwithstanding the foregoing, for any payments or benefits hereunder or pursuant to any other

2     



agreement between the Company and the Executive, in either case that are subject to Section 409A of the Internal Revenue Code of 1986, as amended (the “ Code ”), the Change of Control must constitute a “change in control event” within the meaning of Treasury Regulation Section 1.409A-3(i)(5)(i).
(d)      “ Change of Control Period ” means the period of time beginning three (3) months immediately preceding any Change of Control and ending twelve (12) months immediately following such Change of Control.
(e)      “ Death Termination ” means termination of the Executive’s employment because of the death of the Executive.
(f)      “ Disability Termination ” means termination by the Company of the Executive’s employment by reason of the Executive’s incapacitation due to disability. The Executive will be deemed to be incapacitated due to disability if at the end of any month the Executive is unable to perform substantially all of the Executive’s duties under this Agreement in the normal and regular manner due to illness, injury or mental or physical incapacity, and has been unable so to perform for either (i) three consecutive full calendar months then ending, or (ii) 90 or more of the normal working days during the 12 consecutive full calendar months then ending. Nothing in this paragraph alters the Company’s obligations under applicable law, which may, in certain circumstances, result in the suspension or alteration of the foregoing time periods.
(g)      “ Qualifying Termination ” means a termination that: (i) is a Termination for Good Reason by the Executive and/or a Termination Other Than for Cause by the Company; and (ii) occurs at least ninety (90) days following the Effective Date.
(h)      “ Severance Period ” means the period following the date of a Qualifying Termination, Death Termination, or Disability Termination, as the case may be, that is equal to: (i) one year, in the event of a Qualifying Termination that occurs during a Change of Control Period; and (ii) six months, in all other cases.
(i)      “ Termination for Cause ” means termination by the Company of the Executive’s employment, pursuant to a reasonable good faith determination by the Company, by reason of (i) the Executive’s dishonesty or fraud, gross negligence in the performance of the Executive’s duties and responsibilities, deliberate violation of a Company policy, or refusal to comply in any material respect with the legal directives of the Board or Chief Executive Officer so long as such directives are not inconsistent with the Executive’s position and duties as described herein; (ii) conduct by the Executive that materially discredits the Company, intentional engagement by the Executive in acts materially detrimental to the Company’s operations or business, persistent or habitual negligence in the performance of the Executive’s duties and responsibilities, or the Executive’s conviction of a felony involving moral turpitude; (iii) the Executive’s incurable material breach of the terms of this Agreement, the Employee Confidential Information, Inventions and Non-Competition Agreement or any other material

3     



agreement between the Executive and the Company; or (iv) unauthorized use or disclosure by the Executive of any proprietary information or trade secrets of the Company or any other party to whom the Executive owes an obligation of nondisclosure as a result of the Executive’s position with the Company.
(j)      “ Termination for Good Reason ” means a Voluntary Termination by the Executive following the occurrence of any of the following events: (i) a material reduction or alteration in the Executive’s job responsibilities or title without the consent of the Executive, provided that, following a Change of Control, neither a change in job title nor a reassignment to a new position will constitute a material reduction in job responsibilities, provided further that the new position is substantially similar in scope and substance to the position held prior to the Change of Control and the new job title reasonably reflects such scope and substance; (ii) relocation by the Company or a subsidiary, parent or affiliate, as appropriate, of the Executive’s work site to a facility or location more than 40 miles from Boston, Massachusetts without the Executive’s consent; (iii) a material reduction in Executive’s then-current base salary without the Executive’s consent, provided that an across-the-board reduction in the salary level of all other employees or consultants in positions similar to the Executive’s by the same percentage amount as part of a general salary level reduction will not constitute such a salary reduction; or (iv) a material breach by the Company of this Agreement (each event a “Good Reason”); provided, however, that no such event or condition shall constitute Good Reason unless (x) the Executive gives the Company a written notice of Termination for Good Reason not more than 30 days after the initial existence of the condition, (y) the grounds for termination (if susceptible to correction) are not corrected by the Company within 60 days of its receipt of such notice and (z) the Executive’s Voluntary Termination occurs within the earlier of (i) ninety (90) days following the Company’s receipt of such notice or (ii) thirty (30) days following Executive’s receipt from Company of a notice indicating that it does not intend to correct the grounds for termination and/or that the Company disputes that the grounds for terminations constitute a Qualifying Termination.
(k)      “ Termination Other Than For Cause ” means termination of the Executive’s employment for any reason other than as specified in Sections 2.1(e), (f), (i) or (l) hereof.
(l)      “ Voluntary Termination ” means termination of the Executive’s employment by the voluntary action of the Executive other than by reason of a Disability Termination or a Death Termination.
2.2      Employee at Will . The Executive is an “at will” employee of the Company, and the Executive’s employment may be terminated at any time upon a Termination for Cause or a Termination Other than for Cause by the giving of written notice thereof to the Executive, subject to the terms and conditions of this Agreement.

4     



2.3      Termination for Cause . Upon Termination for Cause, the Company will pay the Executive all Accrued Compensation, if any.
2.4      Terminations for Good Reason or Other than for Cause . Upon a Qualifying Termination, the Company will pay the Executive all Accrued Compensation , if any, and for the duration of the Severance Period, the Company will: (1) continue to pay the Executive’s Base Salary at the rate in effect at the time of such Qualifying Termination, payable on the Company’s normal payroll schedule, beginning on the Company’s first regular payroll date that occurs on or after the 30 th day following the date of the Qualifying Termination, provided that the Release (as defined below) has been executed and any applicable revocation period has expired as of such date; and (2) provide Executive with continuation of the Executive’s health insurance coverage in effect at the time of such Qualifying Termination under the Company’s group health insurance plans (to the extent allowed under, and subject to the conditions of, the Consolidated Omnibus Budget Reconciliation Act (COBRA)), provided that the Release (as defined below) has been executed and any applicable revocation period has expired as of such date. The Executive’s rights to any compensations or other benefits following a Qualifying Termination, other than Accrued Compensation, are subject to: (1) the execution by Executive of a separation and release agreement in a form to be provided by the Company (the “ Release ”), including a release of any and all claims against the Company (including, without limitation, its subsidiaries, other affiliates, directors, officers, employees, agents and representatives) related in any way to the Executive’s employment with the Company, such Release to be executed following the Executive’s separation from service with the Company; (2) the expiration of any revocation period provided pursuant to any applicable laws; and (3) Executive’s continued compliance with the ongoing terms of Executive’s Confidentiality, Inventions Assignment and Non-Competition Agreement.
2.5      Disability Termination . The Company may effect a Disability Termination by giving written notice thereof to the Executive. Upon Disability Termination, the Company will pay the Executive all Accrued Compensation, if any.
2.6      Death Termination . Upon a Death Termination, the Executive’s employment will be deemed to have terminated as of the last day of the month during which his death occurs, and the Company will promptly pay to the Executive’s estate Accrued Compensation, if any, and a lump sum amount equal to the Executive’s Base Salary otherwise payable for the Severance Period at the rate in effect at the time of Death Termination.
2.7      Voluntary Termination . The Executive may effect a Voluntary Termination by giving at least 30 days advance written notice to the Company. During such period, the Executive will continue to receive regularly scheduled Base Salary payments and coverage under the Company’s benefit plans in which the Executive is a participant (to the extent allowed under any applicable benefit plans), provided, however, that the Company shall have the right to accelerate the effective date of the Voluntary Termination to any earlier date during such period

5     



and pay to the Executive any regularly scheduled Base Salary payments for such period in a lump sum on the date of termination. Following the effective date of a Voluntary Termination, the Company will pay the Executive all Accrued Compensation, if any.
3.      Compensation and Benefits .
3.1      Base Salary . As payment for the services to be rendered by the Executive as provided in Section 1 and subject to the provisions of Section 2 of this Agreement, the Company will pay the Executive a “Base Salary” at the rate of $355,000.08 per year, payable on the Company’s normal payroll schedule. The Executive’s “Base Salary” may be increased in accordance with the provisions hereof or as otherwise determined from time to time by the Board.
3.2      Additional Benefits .
(a)      Benefit Plans . The Executive will be eligible to participate in such of the Company’s benefit plans as are now generally available or later made generally available to senior officers of the Company, including, without limitation, medical, dental, life, and disability insurance plans.
(b)      Expense Reimbursement . The Company agrees to reimburse the Executive for all reasonable, ordinary and necessary travel and entertainment expenses incurred by the Executive in conjunction with the Executive’s services to the Company consistent with the Company’s standard reimbursement policies, subject to Section 6.11(c). The Company will pay travel costs incurred by the Executive in conjunction with the Executive’s services to the Company consistent with the Company’s standard travel policies.
(c)      Paid Time Off . The Executive will be entitled, without loss of compensation, to the amount of Paid Time Off (“PTO”) per year generally available or later made generally available to senior officers of the Company, but in any event not less than five (5) weeks (200 hours) during each calendar year, prorated from the Effective Date. Unused PTO may be accrued by the Executive pursuant to the Company’s standard PTO policies.
(d)      Incentive Compensation . Commencing as of the Effective Date, the Executive will be eligible annually to receive a discretionary year-end bonus of 40% percent of the Executive’s Base Salary, payable in the following calendar year in the form of cash, restricted stock, an option to purchase common stock of the Company, or other form determined by the Board (the “ Bonus ”). The Bonus will be awarded at the discretion of the Board and may be subject to terms (including, without limitation, incentive targets, goals and/or milestones) as set by the Board and/or Chief Executive Officer, and the bonus will be pro-rated for the 2019 calendar year based on the percentage of the year the Executive is employed by the Company. Any Bonus in the form of an option to purchase Company’s Common Stock will be granted at the then fair market value of such shares pursuant to the Company’s standard form of notice of

6     



stock option grant under the Company’s 2015 Stock Option/Stock Issuance Plan or any successor plan(s). The Executive acknowledges that the Company may pay Bonuses in the form of stock, stock options or other non-cash compensation in lieu of cash, and that entitlement to Bonuses and the form thereof (i.e., cash or otherwise) is in the sole discretion of the Board. The Executive must be employed by the Company on the date the Bonus is approved by the Board in order to be eligible to receive such Bonus. For purposes of clarity, a grant of equity or other compensation expressly provided as a long-term incentive or for another expressly stated purpose, or that is not expressly provided as a bonus to Executive, is not a bonus for purposes of this Agreement.
3.3      Options to Purchase Common Stock .
(a)      Option to Purchase Common Stock. The senior management of the Company will recommend that the Board grant you an option to purchase such number of shares of the Company’s common stock, $0.00001 par value per share (the “Common Stock”) as is equal to $125,000.00 divided by the Black Scholes value of an option to purchase a single share of the Company’s Common Stock using, as the exercise price for purposes of calculating the Black Scholes value, the per share average closing price of the Common Stock for the 60 calendar days immediately prior to July 29 th 2019 (the “Vesting Start Date”) as reported by the Nasdaq Global Select Market (but no less than $4.00 per share); having an exercise price equal to the fair market value of the Company's common stock as of the grant date and that such stock option shall have a term of ten years (the " Option ").
(b)      Vesting. The Option will vest with respect to 33.34% of the total number of shares purchasable upon exercise thereof one year after the Effective Date and ratably on a monthly basis thereafter over an additional two years, and will cease to vest if the Executive’s service as an employee of the Company is terminated for any reason, except as described in Sections 2.4-2.6 and 3.6.
(c)      Form of Option. The Option will be issued pursuant to the Company's standard form of notice of stock option grant under the Company's 2015 Stock Option/Stock Issuance Plan or any successor plan(s) (the " Equity Plan "), and will have such other terms as are set forth in the Company's annual long-term incentive program. The Option will be issued as an “incentive stock option” ( “ISO ”) to the maximum extent allowed by law, and otherwise, as a “non-statutory option” ( “NSO ”).
3.4      Grant of Restricted Stock .
(a)      Restricted Stock Award. The senior management of the Company will recommend that the Board award you the right to receive such number of restricted shares of Common Stock, as is equal to $125,000.00 divided by the average per share closing price of the Common Stock for the 60 calendar days immediately prior to the Vesting Start Date as reported

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by the Nasdaq Global Select Market, (but no less than $4.00 per share) (the " Restricted Stock Award " or “ RSA ").
(b)      Form of Restricted Stock Agreement. The RSA shall be granted pursuant to the Company’s restricted stock award agreement and pursuant to the Equity Plan, and will have such other terms as are set forth in the restricted stock award agreement and the annual long-term incentive program.
3.5      Vesting. The RSA will vest in equal annual installments over a three (3) year period beginning on the first anniversary of the Effective Date of the Agreement, and will cease to vest if the Executive’s service as an employee of the Company is terminated for any reason, except as described in Sections 2.4-2.5 and 3.6.
3.6      Acceleration of Vesting upon a Change of Control . Upon the occurrence of Qualifying Termination during any Change of Control Period, any outstanding equity awards held by the Executive will become fully vested and exercisable or free from forfeiture or transfer restrictions as of the effective date of the Qualifying Termination (provided that if such Qualifying Termination precedes the Change of Control, such accelerated vesting shall occur on the effective date of the Change of Control).
4.      Proprietary Information . The Executive will as of the Effective Date execute and deliver to the Company the Employee Confidential Information, Inventions and Non-Competition Agreement attached as Exhibit A hereto.
5.      Indemnification . The Company will indemnify and hold harmless the Executive in respect of any liability, damage, amount paid in settlement, cost or expense (including reasonable attorneys’ fees) incurred in connection with any threatened, pending or completed claim, action, suit, proceeding or investigation (whether civil, criminal or administrative) to which the Executive is or was a party, or threatened to be made a party, by reason of the Executive being or having been an officer, director, employee or consultant of the Company or serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, limited liability company, joint venture, trust or other enterprise to the full extent required by the Company’s Articles of Incorporation or Bylaws of the Company and not prohibited by applicable law. This Section 5 will survive the termination or expiration of this Agreement.
6.      Miscellaneous .
6.1      Waiver . The waiver of the breach of any provision of this Agreement will not operate or be construed as a waiver of any subsequent breach of the same or other provision hereof.
6.2      Notices . All notices and other communications under this Agreement must be in writing and must be given by personal or courier delivery, facsimile or first class mail, certified

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or registered with return receipt requested, and will be deemed to have been duly given upon receipt if personally delivered or delivered by courier, on the date of transmission if transmitted by facsimile, or three business days after mailing if mailed, to the addresses of the Company and the Executive contained in the records of the Company at the time of such notice. Any party may change such party’s address for notices by notice duly given pursuant to this Section 6.2.
6.3      Headings . The section headings used in this Agreement are intended for convenience of reference and will not by themselves determine the construction or interpretation of any provision of this Agreement.
6.4      Governing Law . This Agreement is governed by and, to the extent a dispute arises hereunder, will be construed in accordance with the laws of the Commonwealth of Massachusetts, excluding those laws that direct the application of the laws of another jurisdiction.
6.5      Arbitration . Any controversy or claim arising out of, or relating to, the Executive’s employment with the Company, this Agreement, or the breach of this Agreement (except any controversy or claim arising out of, or relating to, Exhibit A or the breach of Exhibit A) will be settled by arbitration by, and in accordance with the applicable National Rules for the Resolution of Employment Disputes, of the American Arbitration Association and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction; provided, however, that nothing in this Section requires the arbitration of disputes or claims for a temporary restraining order or preliminary injunction in cases in which such temporary equitable relief would be otherwise authorized by law. For clarification, but not limitation, the Executive agrees to arbitrate: (i) any claims of unlawful discrimination, harassment, or retaliation under federal, state, or local laws or regulations; (ii) any claim for unpaid or late payment of wages, reimbursement of expenses, or any violation of federal, state, or local wage and hour laws or regulations; (iii) any whistleblower claim or claim alleging unfair business practices under any federal, state or local law; and (iv) any claim arising out of any and all common law claims, including, but not limited to, actions in contract, express or implied (including any claim relating to the interpretation, existence, validity, scope or enforceability of this arbitration provision), estoppel, tort, emotional distress, invasion of privacy, or defamation. The Company shall pay any filing fee and the fees and costs of the Arbitrator(s); provided, however, that if the Executive is the party initiating the arbitration, the Executive will pay an amount equivalent to the filing fee that the Executive would have paid to file a civil action or initiate a claim in the court of general jurisdiction in the state in which the Executive performed services for the Company. Each party shall pay for its own costs and attorneys’ fees, if any; provided, however, that if either party prevails on a statutory claim which affords the prevailing party attorneys’ fees and costs, the Arbitrator(s) may award reasonable attorneys' fees and/or costs to such prevailing party, applying the same standards a court would apply under the law applicable to the claim(s). Arbitration hearings will be held in Middlesex County, Massachusetts. Both parties expressly waive any right that any party either has or may have to a jury trial of any dispute subject to arbitration

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under this provision. Except as otherwise required under applicable law, (1) both parties agree that neither will assert class action or representative action claims against the other, whether in arbitration or otherwise, which actions are hereby waived; and (2) each party shall only submit their own, individual claims in arbitration and will not seek to represent the interests of any other person.
6.6      Survival of Obligations . This Agreement will be binding upon and inure to the benefit of the executors, administrators, heirs, successors, and assigns of the parties; provided, however, that except as herein expressly provided, this Agreement will not be assignable either by the Company (except to an affiliate or successor of the Company) or by the Executive without the prior written consent of the other party.
6.7      Counterparts and Facsimile Signatures . This Amendment may be executed in one or more counterparts, and by facsimile or scanned and electronically mailed or otherwise electronically transferred signatures, each of which shall be an original document, and all of which together will constitute one and the same instrument.
6.8      Withholding . All sums payable to the Executive hereunder will be reduced by all federal, state, local, and other withholdings and similar taxes and payments required by applicable law.
6.9      Enforcement . If any portion of this Agreement is determined to be invalid or unenforceable, such portion will be adjusted, rather than voided, to achieve the intent of the parties to the extent possible, and the remainder will be enforced to the maximum extent possible.
6.10      Entire Agreement; Modifications . Except as otherwise provided herein or in the exhibits hereto, this Agreement represents the entire understanding among the parties with respect to the subject matter of this Agreement, and this Agreement supersedes any and all prior and contemporaneous understandings, agreements, plans, and negotiations, whether written or oral, with respect to the subject matter hereof, including, without limitation, any understandings, agreements, or obligations respecting any past or future compensation, bonuses, reimbursements, or other payments to the Executive from the Company. For clarity, this Agreement does not affect, alter, terminate or supersede any prior agreements related to grants of equity in Company, including grants of stock in Company and options to purchase stock in Company, except as, and to the extent, expressly provided herein. All modifications to the Agreement must be in writing and signed by each of the parties hereto.
6.11      Compliance with Section 409A .
(a)      Subject to this Section 6.11, any severance payments that may be due under this Agreement shall begin only upon the date of the Executive’s “separation from service” (determined as set forth below) which occurs on or after the termination of the

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Executive’s employment. The following rules shall apply with respect to distribution of the severance payments, if any, to be provided to the Executive under this Agreement, as applicable:
(1)      It is intended that each installment of the severance payments under this Agreement shall be treated as a separate “payment” for purposes of Section 409A of the Code and the guidance issued thereunder (“ Section 409A ”) . Neither the Company nor the Executive shall have the right to accelerate or defer the delivery of any such payments except to the extent specifically permitted or required by Section 409A.
(2)      If, as of the date of the Executive’s “separation from service” from the Company, the Executive is not a “specified employee” (within the meaning of Section 409A), then each installment of the severance payments shall be made on the dates and terms set forth in this Agreement.
(3)      If, as of the date of the Executive’s “separation from service” from the Company, the Executive is a “specified employee” (within the meaning of Section 409A”), then, except as otherwise permitted under Section 409A, any payments that would, absent this subsection, be paid within the six-month period following the Executive’s “separation from service” from the Company shall not be paid until the date that is six months and one day after such separation from service (or, if earlier, the Executive’s death), with any such installments that are required to be delayed being accumulated during the six-month period and paid in a lump sum on the date that is six months and one day following the Executive’s separation from service and any subsequent installments, if any, being paid in accordance with the date and terms set forth herein.
(b)      The determination of whether and when the Executive’s “separation from service” from the Company has occurred shall be made in a manner consistent with, and based on the presumptions set forth in, Treasury Regulation Section 1.409A-1(h). Solely for purposes of this Section 6.11(b), “Company” shall include all persons with whom the Company would be considered a single employer under Section 414(b) and 414(c) of the Code.
(c)      All reimbursements and in-kind benefits provided under this Agreement shall be made or provided in accordance with the requirements of Section 409A to the extent such reimbursements or in-kind benefits are subject to Section 409A, including, where applicable, the requirements that (i) any reimbursement is for expenses incurred during the Executive’s lifetime (or during a shorter period of time specified in this Agreement), (ii) the amount of expenses eligible for reimbursement during a calendar year may not affect the expenses eligible for reimbursement in any other calendar year, (iii) the reimbursement of an eligible expense will be made on or before the last day of the calendar year following the year in which the expense is incurred, and (iv) the right to reimbursement is not subject to set off or liquidation or exchange for any other benefit.

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(d)      The Company makes no representation or warranty and shall have no liability to the Executive or to any other person if any of the provisions of this Agreement are determined to constitute deferred compensation subject to Section 409A but do not satisfy an exemption from, or the conditions of, that section.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date.

Company:    
/s/ Mark Augusti         Date: 7/29/2019
Mark Augusti
Chief Executive Officer
Conformis, Inc.
600 Technology Park Drive
Billerica, MA 01821


Executive:    
/s/ Brent Alldredge         Date: 7/29/2019
Brent Alldredge


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EXHIBIT A

EMPLOYEE CONFIDENTIAL INFORMATION, INVENTIONS AND NON-COMPETITION AGREEMENT

THIS EMPLOYEE CONFIDENTIAL INFORMATION, INVENTIONS AND NON-COMPETITION AGREEMENT (this “ Agreement ”) confirms the agreement between the undersigned individual (“ Employee ”) and Conformis, Inc., a Delaware corporation (“ Conformis ”). This Agreement is effective as of __________, 20___ and is a material part of the consideration for Employee’s employment and promotion by Conformis.
7.      Proprietary Information . Employee understands that Conformis possesses and will possess Proprietary Information which is important to its business. For purposes of this Agreement, “ Proprietary Information ” means all forms and types of business, financial, marketing, operations, research and development, scientific, technical, economic, manufacturing and engineering information, whether tangible or intangible, that relates to the present or potential businesses, products or services of Conformis (including any person or entity directly or indirectly controlled by or controlling Conformis, or in which any of the aforesaid have at least a 50% beneficial interest), including without limitation, inventions and ideas (whether or not patentable, copyrightable, or subject to protection as trademark or trade name), trade secrets, original works, disclosures, processes, systems, methods, techniques, improvements, formulas, procedures, concepts, compositions, drawings, models, designs, prototypes, diagrams, flow charts, research, data, devices, machinery, instruments, materials, products, patterns, plans, compilations, programs, sequences, specifications, documentation, algorithms, software, computer programs, source code, object code, know-how, databases, trade names, intellectual property, clinical data and clinical observations, costs of production, price policy and price lists and similar financial data, marketing and sales data, promotional methods, business, financial and marketing plans, technology and product roadmaps, product integration plans, information on strategic partnership and alliances, licenses, customer lists and relationship information, supplier lists and relationship information, employee and consulting relationship information, accounting and financial data, any and all other proprietary information or information which is received in confidence by or for Conformis from any other person irrespective of the medium in which such information is memorialized or communicated.
8.      Conformis Materials . Employee understands that Conformis possesses or will possess “Conformis Materials” which are important to its business. For purposes of this Agreement, “ Conformis Materials ” are documents or other media or tangible items that contain or embody Proprietary Information or any other information concerning the business, operations or future/strategic plans of Conformis, whether such documents have been prepared by Employee or by others. “Conformis Materials” also include, but are not limited to, laptops, cell phones, personal digital assistants (PDAs), blueprints, drawings, photographs, charts, graphs,

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notebooks, customer lists, computer files, disks, drives, tapes or printouts, sound recordings and other printed, typewritten or handwritten documents, as well as samples, prototypes, models, products and the like. Any property situated on Conformis’ premises and owned by Conformis, including laptops, notebooks, cell phones, PDAs, computer files, emails, disks, drives, and other storage media, filing cabinets or other work areas, are subject to inspection by Conformis personnel at any time with or without notice.
9.      Treatment of Proprietary Information and Conformis Property .
9.1      Relationship . Employee understands that Employee’s employment creates a relationship of confidence and trust between Employee and Conformis with respect to Proprietary Information. Employee further understands that the unauthorized taking of Conformis’ Proprietary Information may result in a civil and/or criminal liability under applicable state or federal law, including without limitation an award for double the amount of Conformis’ damages and attorneys’ fees in the event of willful action.
9.2      Obligations Regarding Proprietary Information . All Proprietary Information and all title, patents, patent rights, copyrights, mask work rights, trade secret rights, and other intellectual property and rights (collectively “ Rights ”) in connection therewith are and will be the sole property of Conformis. Employee hereby assigns to Conformis any Rights Employee may have or acquire in such Proprietary Information. At all times, both during Employee’s employment by Conformis and after his/her termination by Employee or by Conformis for any or no reason, Employee will keep in confidence and trust and will not use or disclose, lecture upon, or publish any Proprietary Information without the prior written consent of an officer of Conformis except as may be necessary and appropriate in the ordinary course of performing Employee’s duties to Conformis. Employee will obtain Conformis’ written approval before publishing or submitting for publication any material (written, verbal, or otherwise) that relates to Conformis and/or incorporates any Proprietary Information. Proprietary Information may be considered technical data that is subject to compliance with the export control laws and regulations of the United States or other countries, and Employee will comply with such laws. Notwithstanding the foregoing, it is understood that, at all such times, Employee is free to use information which is generally known in the trade or industry and which is rightfully received free of a confidentiality obligation, and nothing contained in this Agreement will prohibit Employee from disclosing to anyone the amount of Employee’s own compensation.
9.3      Obligations Regarding Conformis Materials . All Conformis Materials are and will remain the sole property of Conformis. During Employee’s employment by Conformis, Employee will not remove any Conformis Materials from the business premises of Conformis or deliver any Conformis Materials to any person or entity outside Conformis, except as Employee is required to do in connection with performing the Employee’s duties to Conformis. Immediately upon the termination of Employee’s employment by Employee or by Conformis for any or no reason, or during Employee’s employment if so requested by Conformis, Employee

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will return all Conformis Materials, apparatus, equipment and other physical property, or any reproduction of such property, excepting only (i) Employee’s personal copies of records relating to Employee’s compensation; (ii) Employee’s personal copies of any materials previously distributed generally to shareholders or stockholders of Conformis; and (iii) Employee’s copy of this Agreement.
9.4      Third Party Information . Employee recognizes that Conformis has received and in the future will receive from third parties their confidential or proprietary information, including but not limited to personally identifiable or health information, subject to a duty on Conformis’ part to maintain the confidentiality of such information and, in some cases, to use it only for certain limited purposes. Employee owes Conformis and such third parties, both during the term of Employee’s employment and thereafter, a duty to hold all such confidential or proprietary information in the strictest confidence and not to disclose it to any person, firm or corporation (except in a manner that is consistent with Conformis’ agreement with the third party or as otherwise required by law) or use it for the benefit of anyone other than Conformis or such third party (consistent with Conformis’ agreement with the third party).
10.      Employee Inventions and Works of Authorship .
10.1      Ownership and Assignment . All Inventions (as defined below) will be the sole property of Conformis unless the Invention: (a) was developed entirely on Employee’s own time without using any of Conformis’ equipment, supplies, facilities, or trade secret information; (b) does not relate at the time of conception or reduction to practice of the Invention to Conformis’ business, including, without limitation, patient-specific, patient-matched and patient-engineered orthopedic implants, instruments and surgical procedures, or its actual or reasonably anticipated research or development; and (c) does not result from any work performed by the Employee for Conformis. All such Inventions shall be immediately assignable to Conformis, and, notwithstanding any other documents evidencing assignment that may be executed, this Agreement shall operate to automatically and immediately assign any and all such Inventions. Employee hereby immediately assigns such Inventions and all Rights in them to Conformis. Such assignment shall be to the maximum extent allowed under applicable law.
For purposes of this Agreement, “ Inventions ” includes all improvements, inventions, designs, formulas, works of authorship, trade secrets, technology, computer programs, compositions, ideas, processes, techniques, know-how and data, whether or not patentable, made or conceived or reduced to practice or developed by Employee, either alone or jointly with others, during the term of Employee’s employment, including during any period prior to the date of this Agreement. Employee hereby waives and quitclaims to Conformis any and all claims of any nature whatsoever which Employee now or may hereafter have for infringement of any proprietary rights assigned to Conformis. Employee acknowledges that all original works of authorship which are made by Employee (solely or jointly with others) within the scope of

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employment and which are protectable by copyright are “works made for hire,” pursuant to United States Copyright Act (17 U.S.C., Section 101).
10.2      Disclosure of Inventions . Employee promptly will disclose in writing to Employee’s immediate supervisor, with a copy to the President of Conformis, or to any other persons designated by Conformis, all Inventions. Employee also will disclose to the President of Conformis all things that would be Inventions if made during the term of Employee’s employment, but which were conceived, reduced to practice, or developed by Employee within six months after the termination of Employee’s employment with Conformis, unless Employee can demonstrate that the Invention had been conceived and first reduced to practice by Employee following the termination of Employee’s employment with Conformis and without use of any Proprietary Information or Conformis Materials. Such disclosures will be received by Conformis in confidence (to the extent they are not assigned in this Section 4 and do not extend the assignment made in this Section 4). Employee will not disclose Inventions to any person outside Conformis unless requested to do so by an officer of Conformis. Employee will keep and maintain adequate and current records (in the form of notes, sketches, drawings and in any other form that may be required by Conformis) of all Proprietary Information developed by Employee and all Inventions made by Employee during the period of Employee’s employment at Conformis, which records will be available to and remain the sole property of Conformis at all times.
10.3      Further Assurances . Employee will perform, during and after Employee’s employment, all acts deemed necessary or desirable by Conformis to permit and assist it, at Conformis’ expense, in obtaining, maintaining, defending and enforcing Rights with respect to such Inventions and improvements in any and all countries. Such acts may include, but are not limited to, execution of documents and assistance or cooperation in legal proceedings. Employee will execute such declarations, assignments, or other documents as may be necessary in the course of Invention evaluation, patent prosecution, or protection of patent or analogous property rights, to assure that title in such Inventions will be held by Conformis or by such other parties designated by Conformis as may be appropriate under the circumstances. Employee irrevocably designates and appoints Conformis and its duly authorized officers and agents, as Employee’s agents and attorneys-in-fact to act for and on Employee’s behalf and instead of Employee, to execute and file any documents and to do all other lawfully permitted acts to further the above purposes with the same legal force and effect as if executed by Employee.
10.4      Moral Rights . Any assignment of copyright pursuant to this Agreement includes all rights of paternity, integrity, disclosure and withdrawal and any other rights that may be known as or referred to as “moral rights” (collectively, “ Moral Rights ”). To the extent such Moral Rights cannot be assigned under applicable law and to the extent the following is allowed by the laws in the various countries where Moral Rights exist, Employee hereby waives such Moral Rights and consents to any such action of Conformis that would violate such Moral Rights in the

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absence of such consent. Employee will confirm any such waivers and consents from time to time as requested by Conformis.
10.5      Pre-Existing Inventions . Employee has attached to this Agreement as Attachment A a complete list of all existing inventions or improvements to which Employee claims ownership as of the date of this Agreement and that Employee desires to specifically clarify are not subject to this Agreement, and Employee acknowledges and agrees that such list is complete. If disclosure of an item on Attachment A would cause Employee to violate any prior confidentiality agreement, Employee understands that Employee is not to list such in Attachment A but is to inform Conformis that all items have not been listed for that reason. A space is provided on Attachment A for such purpose. If no such list is attached to this Agreement, Employee represents that Employee has no such inventions and improvements at the time of signing this Agreement. Employee will not improperly use or disclose any proprietary information or trade secrets of any former employers or other third parties, if any, and Employee will not bring onto the premises of Conformis any unpublished documents or any property belonging to any former employers or other third parties unless consented to in writing by such employers or such other third parties. If, in the course of Employee’s employment with Conformis, Employee incorporates a prior Employee-owned invention into a Conformis product, process or machine, Conformis is hereby granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license (with rights to sublicense through multiple tiers of sublicensees) to make, have made, modify, use and sell such prior invention for any and all purposes as Conformis determines in its sole discretion. Notwithstanding the foregoing, Employee agrees that Employee will not incorporate, or permit to be incorporated, prior inventions in any Inventions without Conformis’ prior written consent.
11.      Non-Competition and Non-Solicitation .
11.1      Non-Competition During Employment . Employee agrees that during the term of Employee’s employment with Conformis, Employee shall not engage in any employment, business, or activity that is in any way competitive with the business or proposed business of Conformis, and Employee will not assist any other person or organization in competing with Conformis or in preparing to engage in competition with the business or proposed business of Conformis. The provisions of this section will apply both during normal working hours and at all other times including, but not limited to, nights, weekends and vacation time, while Employee is employed by Conformis.
11.2      Non-Competition After Employment . Employee agrees that during the Non-competition Period (hereinafter defined), Employee shall not directly or indirectly, without the prior written consent of Conformis, either on Employee’s own behalf or on behalf of any third party, compete with Conformis in the development, engineering, marketing, management, production, sale or distribution of Competitive Products (hereinafter defined) in the Territory (hereinafter defined). “ Non-competition Period ” shall mean the twelve (12) month period commencing upon

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termination of Employee’s employment with Conformis ; provided that the period shall be extended for so long as Employee violates the non-competition obligation set forth herein and for any period(s) of time required for litigation to enforce its provisions. “ Competitive Products ” shall mean (a) any replacement or resurfacing implants for a knee joint or a hip joint and (b) patient-specific orthopedic products and services that are manufactured using, or that employ, a medical image for the purpose of performing medical or surgical procedures on a knee joint or a hip joint and (c) other products that fall within the research and development activities of Conformis at the time of Employee’s termination. “ Territory ” shall mean anywhere in the world. Conformis and I mutually agree that the following consideration supports my promises, undertakings, and obligations under this Section 11.2 regarding post-employment non-competition: the Option to purchase common stock and the Restricted Stock Award set forth in my offer letter at Sections 6 and 7, which consideration I acknowledge and agree is adequate, fair, reasonable, and mutually agreed upon.]
11.3      Non-solicitation; Non-interference . Employee agrees that during the term of Employee’s employment with Conformis and the Non-competition Period, Employee will not directly or indirectly, without the prior written consent of Conformis, either on Employee’s own behalf or on behalf of any third party, (i) disrupt, damage, impair or interfere with the business of Conformis whether by way of interfering with or raiding Conformis’ directors, officers, employees, agents, consultants, vendors, suppliers, and partners with which Conformis does business, or in any manner attempting to persuade, solicit, recruit, encourage or induce any such persons to discontinue their relationship with Conformis, or (ii) solicit, service, accept orders from, or otherwise have business contact with any customer or potential customer of Conformis with whom Employee had any contact during the one year period preceding Employee’s termination of employment, if such contact could directly or indirectly divert business from or adversely affect the business of Conformis. However, this obligation will not affect any responsibility Employee may have as an employee of Conformis with respect to the bona fide hiring and firing of Conformis personnel.
11.4      Acknowledgement. Employee understands and recognizes that (i) during and as a result of Employee’s employment by Conformis, Employee will acquire experience, skills and knowledge related to Conformis’ business and will become familiar with Conformis’ Proprietary Information; (ii) his/her working for a competitor of Conformis would lead to the inevitable disclosure of Conformis’ Proprietary Information; (iii) the goodwill to which Employee may be exposed in the course of employment belongs exclusively to Conformis; (iv) in the course of Employee’s employment with Conformis, customers and others may come to recognize and associate Employee with Conformis, its products and services, and that Employee will thereby benefit from Conformis’ goodwill; and (v) if Employee were to engage in competition with Conformis, directly or indirectly, Employee would thereby usurp Conformis’ goodwill.
11.5      Reasonableness. Employee acknowledges and agrees that because of the nature of Conformis’ products, services and customers, because of Employee’s position with Conformis

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and because of the scope of Conformis’ business, the restrictions contained in this Section 5 are reasonable and necessary for the protection of the business and goodwill of Conformis. If at any time the provisions of this Section 5 shall be deemed invalid or unenforceable or are prohibited by the laws of the jurisdiction where they are to be performed or enforced, by reason of being vague or overbroad in any manner, or for any other reason, such provisions shall be considered divisible and shall become and be immediately amended to include only such restrictions and to such extent as shall be deemed to be reasonable and enforceable by the court or other body having jurisdiction over this Agreement; and Conformis and Employee agree that the provisions of this Section 5, as so amended, shall be valid and binding as though any invalid or unenforceable provision had not been included herein.
12.      No Conflict With Other Agreements . Employee represents and warrants that (a) the performance of Employee’s employment with Conformis and all the terms of this Agreement will not breach or conflict with any other agreement to which Employee is a party, including without limitation, any confidentiality agreement, nondisclosure agreement, non-competition and/or non-solicitation agreement, employment agreement, proprietary rights agreement or the like, (b) Employee will abide by all such agreements to the extent required by law, (c) Employee has delivered to Conformis a copy of all such agreements that may bear on Employee’s employment with Conformis, and (d) Employee has not entered into, and will not enter into, any agreement either written or oral in conflict herewith or in conflict with Employee’s employment with Conformis. If Employee is requested to perform any task on behalf of Conformis that would violate any outstanding obligations of any kind that Employee has to any of Employee’s prior employers or third parties, Employee shall contact Conformis’ human resources or legal departments as soon as possible to resolve the issue.
13.      At Will Employment . This Agreement is not a contract guaranteeing employment of a specified length, and each of Employee and Conformis has the right to terminate Employee’s employment at any time, for any or no reason, with or without cause.
14.      Termination Certificate . Upon termination of Employee’s employment by Employee or by Conformis for any or no reason, Employee will execute and deliver to Conformis a termination certificate substantially in the form attached to this Agreement as Attachment B .
15.      Limitation of Application; Independent Agreement . Employee acknowledges that (a) this Agreement does not purport to set forth all of the terms and conditions of Employee’s employment and, as an employee of Conformis, Employee has obligations to Conformis which are not set forth in this Agreement, (b) this Agreement is a separate binding obligation independent of Employee’s employment or continued employment by Conformis and (c) any breach or alleged breach by Conformis of any obligation to Employee of any nature shall not affect in any manner the binding nature of Employee’s obligations under this Agreement and Employee WAIVES any defense based on any alleged material breach by Conformis of any of its

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obligations to Employee in regard to any claim against Employee alleging breach of this Agreement.
16.      Survival; Forwarding of Agreement . This Agreement shall survive any and all changes in terms and conditions of Employee’s employment with Conformis and any break in Employee’s service or employment with Conformis. All of the provisions of this Agreement will continue in effect after termination of Employee’s employment, regardless of the reason or reasons for termination, and whether such termination is voluntary or involuntary on Employee’s part. Employee will notify any future client, employer or potential employer or client of Employee’s obligations under this Agreement. Conformis is entitled to communicate Employee’s obligations under this Agreement to any future employer or potential employer.
17.      Equitable Relief . Conformis has expended substantial efforts to maintain the confidentiality and proprietary nature of the information described in this Agreement and would be materially and irreparably injured by an unauthorized disclosure of any of that information. Any breach of this Agreement will result in irreparable and continuing damage to Conformis for which there can be no adequate remedy at law, and in the event of any such breach, Conformis will be entitled to immediate injunctive relief and other equitable remedies (without any need to post any bond or other security) in addition to such other and further relief as may be proper.
18.      Disputes . Any dispute in the meaning, effect or validity of this Agreement will be resolved in accordance with the laws of the Commonwealth of Massachusetts, without regard to its conflict of laws provisions. The exclusive venue for any disputes relating to this Agreement will be in Middlesex County, Massachusetts. The non-prevailing party in any dispute will pay the prevailing party’s attorneys’ fees and costs relating to such dispute.
19.      Severability . If one or more provisions of this Agreement are held to be illegal or unenforceable under applicable law, such illegal or unenforceable portion(s) will be revised to make them legal and enforceable. The remainder of this Agreement will otherwise remain in full force and effect and enforceable in accordance with its terms.
20.      Assignment; Binding Nature . Conformis may assign this Agreement, or any rights or obligations herein, in connection with the transfer or sale of all or substantially all of its assets or stock, without any consent of, or notice to, Employee to be effective. This Agreement will be binding upon Employee, Employee’s heirs, executors, assigns, and administrators and will inure to the benefit of Conformis, its subsidiaries, successors and assigns.
21.      Entire Agreement; Modification in Writing . This Agreement contains the entire agreement and understanding between the parties hereto, and supersedes all prior and contemporaneous agreements, terms and conditions, whether written or oral, made by the parties hereto concerning the specific subject matter of this Agreement. This Agreement can only be modified by a subsequent written agreement executed by the Employee and an executive officer of Conformis.

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22.      Acknowledgement . Employee acknowledges that this Agreement is a condition of Employee’s employment with Conformis, and that Employee has had a full and adequate opportunity to read, understand and discuss with Employee’s advisors, including legal counsel, the terms and conditions contained in this Agreement prior to signing hereunder.
[Remainder of Page Intentionally Left Blank]

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I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND AND ACCEPT THE OBLIGATIONS WHICH IT IMPOSES UPON ME WITHOUT RESERVATION. NO PROMISES OR REPRESENTATIONS HAVE BEEN MADE TO ME TO INDUCE ME TO SIGN THIS AGREEMENT. I SIGN THIS AGREEMENT VOLUNTARILY AND FREELY, IN DUPLICATE, WITH THE UNDERSTANDING THAT ONE ORIGINAL COUNTERPART WILL BE RETAINED BY CONFORMIS AND THE OTHER ORIGINAL COUNTERPART WILL BE RETAINED BY ME.

IN WITNESS WHEREOF, CONFORMIS AND I HAVE EXECUTED THIS EMPLOYEE CONFIDENTIAL INFORMATION, INVENTIONS AND NON-COMPETITION AGREEMENT AS OF __________________, 20__.


    
Employee’s Signature

    
Type/Print Employee’s Name

Address:         

         

         

Fax Number:         

E-mail:         

                    

AGREED TO:

CONFORMIS, INC.


By:                          

Name:                         
Title:                          

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Exhibit 31.1
 
CERTIFICATIONS
 
I, Mark A. Augusti, 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c) 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
 
d) 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:
8/2/2019
 
By:
/s/Mark A. Augusti
 
 
 
 
Mark A. Augusti
 
 
 
 
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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c) 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
 
d) 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:
8/2/2019
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 June 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Mark A. Augusti, 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:
8/2/2019
 
By:
/s/Mark A. Augusti
 
 
 
 
Mark A. Augusti
 
 
 
 
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 June 30, 2019 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:
8/2/2019
By:
/s/Paul Weiner
 
 
 
Paul Weiner
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial and Accounting Officer)