ConforMIS
Annual Report 2018

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K (Mark One)x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2018 OR ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission file number: 001-37474 Conformis, Inc.(Exact name of registrant as specified in its charter) Delaware56-2463152(State or other jurisdiction ofincorporation or organization)(I.R.S. EmployerIdentification Number)600 Technology Park DriveBillerica, MA01821(Address of principal executive offices)(Zip Code)(781) 345-9001(Registrant’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:Title of Class Name of Exchange on Which RegisteredCommon Stock, $0.00001 par value NASDAQ Global Select MarketSecurities registered pursuant to Section 12(g) of the Act:None.Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þIndicate 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 shorterperiod that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant toRule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. oIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of“large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.Large accelerated fileroAccelerated filerx Non-accelerated filero Smaller reporting companyx Emerging growth companyx 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 newor 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 þThe aggregate market value of Common Stock held by non-affiliates of the registrant computed by reference to the price of the registrant’s Common Stock as of the last business day of the registrant’smost recently completed second fiscal quarter (based on the last reported sale price on The Nasdaq Global Select Market as of such date) was $63,366,909. As of February 28, 2019 therewere 67,916,658 shares of the registrant’s Common Stock, $0.00001 par value per share, outstanding.DOCUMENTS INCORPORATED BY REFERENCEThe registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended December 31, 2018. Portions of such definitive proxy statementare incorporated by reference into Part III of this Annual Report on Form 10-K. Conformis, Inc. INDEX Page Part I1Item 1. Business1Item 1A. Risk Factors24Item 1B. Unresolved Staff Comments64Item 2. Properties64Item 3. Legal Proceedings64Item 4. Mine Safety Disclosures65Part II66Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchase of Equity Securities67Item 6. Selected Financial Data67Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations68Item 8. Financial Statements and Supplementary Data87Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure124Item 9A. Controls and Procedures125Item 9B. Other Information126Part III127Item 10. Directors, Executive Officers and Corporate Governance127Item 11. Executive Compensation127Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters127Item 13. Certain Relationships and Related Transactions, and Director Independence127Item 14. Principal Accounting Fees and Services127Part IV129Item 15. Exhibits and Financial Statement Schedules129Item 16. Form 10-K Summary129Signatures134Exhibit Index130PART IForward-Looking StatementsThis Annual Report on Form 10-K contains forward-looking statements that involve substantial risks and uncertainties. All statements, otherthan statements of historical facts, contained in this Annual Report on Form 10-K, including statements regarding our strategy, future operations,future financial position, future revenue, projected costs, prospects, plans and objectives of management and expected market growth are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actualresults, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by theforward-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;•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 theintellectual property rights of third parties;•potential challenges relating to changes in and compliance with governmental laws and regulations affecting our U.S. and internationalbusinesses, including regulations of the U.S. Food and Drug Administration and foreign government regulators, such as more stringentrequirements for regulatory clearance of our products;•the anticipated adequacy of our capital resources to meet the needs of our business or our ability to raise any additional capital;•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 placeundue reliance on our forward-looking statements. Actual results or events could differ1materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors inthe cautionary statements included in this Annual Report on Form 10-K, particularly in the “Risk Factors” section, that could cause actual resultsor events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impactof any future acquisitions, mergers, dispositions, collaborations, joint ventures or investments that we may make or enter into.You should read this Annual Report on Form 10-K and the documents that we have filed as exhibits to this Annual Report on Form 10-K andour 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.2ITEM 1. BUSINESSOverviewWe are a medical technology company that uses our proprietary iFit Image-to-Implant technology platform to develop, manufacture andsell joint replacement implants that are individually sized and shaped, which we refer to as customized, to fit each patient's unique anatomy. Theworldwide market for joint replacement products is approximately $18.1 billion annually and growing, and we believe our iFit technology platform isapplicable 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'sknee. 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. Inmultiple clinical studies, iTotal CR, our cruciate-retaining total knee replacement implant and best-selling product, demonstrated superior clinicaloutcomes, including better function, including kinematics and objective functional measures, and greater patient satisfaction compared to thoseoff-the-shelf implants that it was tested against. In March 2016, we initiated the broad commercial launch of the iTotal PS, our posterior-stabilizedtotal knee replacement implant which addresses the largest segment of the knee replacement market. On July 31, 2018, our first Conformis HipSystems were implanted. We are in limited commercial launch with the Conformis Hip System and intend to enter full commercial launch in thesecond 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 a computed tomography, or CT, scan of the patient and to prepare a surgicalplan 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 certaincomponents of our customized knee replacement implants.•iFit Just-in-Time Delivery, our just-in-time manufacturing and delivery capabilities.We believe our iFit technology platform enables a scalable business model that greatly lowers our inventory requirements, reduces theamount of working capital required to support our operations and allows us to launch new products and product improvements more rapidly, ascompared to manufacturers of off-the-shelf implants. Manufacturers of traditional knee replacement implants offer products with a limited range ofsizes and geometries, which we refer to as off-the-shelf implants. Off-the-shelf implants are not designed to restore a particular patient's uniqueanatomy.Based on clinical data developed independently by orthopedic surgeons comparing our iTotal CR to off-the-shelf total knee replacementimplants, as well as our own research and the common approach we employ in the design and manufacture of our products, we believe that ourcustomized joint replacement implants offer significant benefits to patients, surgeons and hospitals and other medical facilities that are notafforded by off-the-shelf implants.•For the patient. We believe that our individualized approach offers better clinical outcomes when compared to off-the-shelf implants based onthe following measures:•Better fit. We design our customized joint implants to restore the patient's own native anatomy. As a result, we believe that our implants fitbetter.•Faster recovery. We believe an individual fit requires less bone and soft tissue removal by the surgeon, thereby shortening recovery times.•Better function. We design our customized implants to follow the particular shape and contour of the patient's joint. As a result, we believeour implants offer an increased potential for a knee or hip that moves more naturally and is more stable.•Greater patient satisfaction. We believe our implants offer patients greater overall satisfaction with the results of their knee or hipreplacement.A study of 63 knee replacement surgeries, utilizing our iTotal CR total knee replacement system, published in 2017 in the peer-reviewedJournal of Knee Surgery, or 2017 JOKS, indicates that 84% of patients achieved perfect neutral coronal mechanical alignment after surgery, andthat 100% of patients were within the desired alignment range after surgery. At the time the 2017 JOKS Study was conducted, one of the authorsof this study3was a paid consultant to us. Similarly, a prior retrospective study of 200 knee replacement surgeries published in 2014 in the peer-reviewedJournal of Arthroplasty, or the 2014 JOA Study, indicated that our iTotal CR implant was 1.8 times more likely to be in the desired alignment rangeafter surgery than an off-the-shelf implant. At the time the 2014 JOA Study was conducted, one of the authors of this study was a paid consultantto us. A study published in May 2018 in The Journal of Knee Surgery, a peer-reviewed orthopedic journal, entitled “In Vivo Tibial Fit and RotationalAnalysis of a Customized, Patient-Specific TKA versus Off-the-Shelf TKA,” indicated that the iTotal CR knee replacement implant provided betterrotational alignment and tibial fit compared to off-the-shelf implants (i.e., non-customized). We provided financial support for this study and theauthor is a paid consultant of ours on other matters. In addition, in a January 2019 report from Beyond Compliance, results were presentedsummarizing four year data from the England and Wales National Joint Registry (“Registry”) demonstrating high survivorship in patients treatedwith the iTotal CR knee replacement implant, specifically the data showed a low cumulative percent revision of 1.4% for Conformis patients ascompared with 1.9% for all total knee replacement patients.•For the surgeon. We believe that the combination of the use of our pre-surgical plan, or iView, and patient-specific iJigs with our customizedjoint replacement implants enables a more accurate, reproducible and simplified surgical procedure by reducing the number of required stepsand increasing the precision of the placement of the implant. With regard to our Conformis Hip System, our pre-operative surgical plan, or HipiView, provides anatomical information to surgeons in advance of surgery that is not available today through the use of standard templatingtools. In addition, surgeons have input into our hip system designs within a defined range of parameters to allow surgeons to optimize theConformis Hip System for each patient, including allowing for leg length correction. An acetabular positioning iJig is used to place theacetabular cup in the position which is intended to maximize anatomical coverage of the cup, with the goal of eliminating the need for intra-operative navigation and also reducing or eliminating surgeon exposure to fluoroscopy. Our novel acetabular reaming system interacts with theacetabular iJigs to ream only to a predetermined depth, thereby reducing inadvertent punctures of the pelvis, in a reduced number ofprocedural steps.•For the hospital, ambulatory surgical center or other medical facility. Our hip and knee replacement joint products are delivered directlyto the surgery center in a single, sterile, patient-labeled kit, eliminating the need for surgery centers to stock excess inventory for eachsurgical procedure. Unlike off-the-shelf systems for both knee and hip, our systems require little to no re-useable instrumentation due to theuse of 3D printed iJigs as well as 3D printed intra-operative sizing trials. This eliminates or reduces the quantity of re-useable instruments andtrays that must be processed through the facility to support each surgical procedure, which is especially important for ambulatory surgicalcenters, and reduces per case cost and also the potential risk for infection. Operating room set up time is also reduced due to the limitednumber of instruments needed which supports the ability to complete more surgical cases in a given day. We believe that our customized jointreplacement implants and iFit technology platform provide a better economic outcome for hospitals or other medical facilities by:•improving patient recovery times, reducing blood loss and reducing adverse event rates;•reducing the costs associated with managing and sterilizing large numbers of reusable instruments;•improving turnaround times with the potential for more procedures to be completed within the same amount of time and for the hospitalor other medical facility to generate additional revenue.•For the payor. We believe that our individualized approach offers better clinical outcomes when compared to off-the-shelf implants whichleads to faster patient recoveries and lower costs for payors.As of February 28, 2019, we own or exclusively in-license a total of approximately 358 issued patents and pending patent applications thatcover customized implants and patient-specific instrumentation, or PSI, for all major joints and other elements of our iFit technology platform. Ourintellectual property portfolio includes 157 issued United States patents, 85 patents issued in countries outside the United States, and 116 patentapplications worldwide. See Note J - "Legal Proceedings" in the financial statements and related notes appearing elsewhere in this Annual Reporton Form 10-K for information regarding our patent litigation.All of our knee replacement products have been cleared by the U. S. Food and Drug Administration, or FDA, under the premarket notificationprocess of Section 510(k) of the Federal Food, Drug, and Cosmetic Act, or the FDCA, and have received certification to CE Mark. We market ourproducts to orthopedic surgeons, hospitals, and other medical facilities, and patients. We use direct sales representatives, independent salesrepresentatives and4distributors to market and sell our products in the United States, Germany, the United Kingdom, Austria, Ireland, Switzerland, Singapore, HongKong, Malaysia, Monaco, Hungary, Spain, Australia and other markets.Industry backgroundMarket opportunityJoint replacement for treatment of osteoarthritisOsteoarthritis is the principal condition that leads to joint replacement surgery. Osteoarthritis is a degenerative joint disease characterized bythe breakdown of the cartilage that protects and cushions key joints in the body, including the knees, hips and shoulders. This causes the bonesin the affected joint to rub against each other, which can result in significant and chronic joint pain, stiffness, swelling, numbness, loss of flexibilityand loss of motor function. The pain of osteoarthritis, even during the early stages of the disease, can be overwhelming for patients and can havesignificant physical, psychological, quality of life and financial implications.An estimated 27 million people in the United States and 630 million people worldwide suffer from osteoarthritis. Compelling demographictrends, such as the growing population of aging yet active individuals and rising rates of obesity, are expected to be key drivers in the continuedgrowth of osteoarthritis occurrence. The National Institutes of Health, or NIH, projects that by 2030, approximately 70 million people in the UnitedStates will be 65 years or older and will be at high risk of developing osteoarthritis. Osteoarthritis is more common in adults over the age of 50, butthe condition and precursors of the condition can be observed much earlier. For moderate to advanced cases of osteoarthritis, a surgical proceduremay be required to replace the damaged joint. During this joint replacement, or arthroplasty, procedure, a surgeon removes the damaged bone inthe affected joint and inserts an implant as a replacement. The joint implant may replace all of the principal components of the joint, in which casethe procedure is referred to as a total joint replacement, or may replace only a portion of the joint, in which case the procedure is referred to as apartial joint replacement.Joint replacement marketAccording to the Orthopaedic Industry Annual Report for the 2017 calendar year, which was published in May 2018 by Orthoworld Inc., or the2017 Orthoworld Report, worldwide sales of joint replacement products, including replacements for knees, hips, shoulders, elbows, wrists, anklesand digits outside of trauma, exceeded $18.1 billion in 2017 and are expected to grow to approximately $21.7 billion by the end of 2022. The 2017Orthoworld Report estimated that worldwide sales of knee replacement products totaled approximately $8.8 billion and, according to Smart Track,the United States represented approximately 48% of total estimated worldwide sales of such products. In 2017, according to the 2017 OrthoworldReport, worldwide sales of hip replacement products totaled approximately $7.2 billion. According to the 2017 Orthoworld Report, 2017 estimatedsales of hip replacement products in the United States represented approximately 40% of total estimated worldwide sales of such products.According to Smart Trak, primary total hip replacement implants accounted for approximately 69% by revenue of the 2017 hip replacement marketin the United States. The market for joint replacements extends beyond knee and hip replacements. For example, the treatment of osteoarthritis inthe extremities, including the shoulder, elbow, wrist and digit, may involve the replacement of the affected joint. According to the 2017 OrthoworldReport, the worldwide extremities joint replacement market was estimated at $2.1 billion in 2017.The Conformis Solution: One Patient, One ImplantNo two joints are the same; accordingly, we believe no two implants should be the same. We believe our customized joint replacementproducts and proprietary technology create an opportunity to disrupt the large, existing market for off-the-shelf orthopedic implants. We use ourproprietary iFit Image-to-Implant technology platform to design and manufacture customized knee implants that are precisely sized and shaped tofit the unique three-dimensional curvatures of each patient's knee, as well as associated customized, single-use patient-specific instrumentation,which we refer to as iJigs. We believe our proprietary iFit technology platform is applicable to all major joints.iFit Image-to-Implant technology platformOur iFit technology platform comprises three key elements:5•iFit Design, our proprietary algorithms and computer software that we use to design customized implants and associated iJigs based on a CTscan of the patient and to prepare a surgical plan customized for the patient that we call iView.•iFit Printing, a 3D printing technology that we use to manufacture iJigs and may extend to manufacture certain components of our customizedreplacement implants.•iFit Just-in-Time Delivery our just-in-time manufacturing and delivery capabilities. We manufacture the customized replacement joint and iJigsto order and do not maintain significant inventory of finished products. We deliver the customized replacement implant and iJigs to the hospitalor other medical facility in advance of the scheduled arthroplasty procedure.We believe our iFit technology platform enables a scalable business model that greatly lowers our inventory requirements, reduces theamount of working capital required to support our operations and allows us to launch new products and product improvements more rapidly, ascompared to manufacturers of off-the-shelf implantsKey benefits of our customized productsWe use our iFit technology platform to develop customized joint replacement systems and single-use surgical instruments. Based onclinical data developed independently by orthopedic surgeons comparing our iTotal CR to off-the-shelf total knee replacement implants, as well asour own research and the common approach we employ in the design and manufacture of all of our products, we believe that our customized jointreplacement implants offer significant benefits to patients, surgeons and hospitals or other medical facilities that are not afforded by off-the-shelfimplants.•For the patient. We believe that our individualized approach offers better clinical outcomes when compared to off-the-shelf implants based onthe following measures:•Better fit. Using our proprietary algorithms and computer software, we design our customized knee and hip implants to restore thepatient's own native anatomy. As a result, we believe that our implants fit better and regain better function, which is important tominimize pain and maintain the integrity of the implant.•Faster recovery. We believe an individual fit requires less bone and soft tissue removal by the surgeon, resulting in less bleeding andswelling within the knee and shortened recovery times.•Better function. We design our customized implants to match the patient's anatomy to provide a more stable, natural feeling joint.With regard to our knee implant products, we match the patient’s natural "J" curves, corrected for deformities caused by osteoarthritis,preserve the patient's medial and lateral joint lines, and minimize up-and-down rocking and lift-off of the patient's condyles duringnormal knee movement.•Greater patient satisfaction. We believe that, as a result of our customized implants fitting and functioning better, patients havegreater overall satisfaction with the results of their knee and hip replacements.•Earlier intervention. We believe that patients who undergo knee and hip replacement with one of our products typically retain more oftheir bone during the surgical procedure, as compared to patients who undergo knee or hip replacement using an off-the-shelf implant.The more bone that is preserved, the more likely the patient will have sufficient bone available if a revision surgery is necessary. As aresult, patients may undergo knee or hip replacement surgery at an earlier age.•For the surgeon. We believe that our iFit technology platform offers an improved surgical procedure and greater efficiencies for surgeonswhen compared to knee and hip replacements with off-the-shelf implants based on the following measures:•Improved surgical procedure. We believe that the combination of the use of our iJigs with our customized knee and hip implantsenable a more accurate, reproducible and simplified surgical procedure by reducing the number of steps and increasing the precisionof implant alignment. In our6knee replacement procedure, the surgeon makes a predetermined number of cuts that are specifically tailored to each patient anddesigned to result in a precise fit without the need for repetitive cutting of bone or soft tissue. In our hip replacement procedure, thesurgeon receives our pre-operative surgical plan, or Hip iView, that provides anatomical information in advance of surgery that is notavailable today through the use of standard templating tools. In addition, surgeons have input into our hip system designs within adefined range of parameters to allow surgeons to optimize the Conformis Hip System for each patient, including allowing for leg lengthcorrection. Our novel acetabular reaming system interacts with the acetabular iJigs to ream only to a predetermined depth, therebyreducing inadvertent punctures of the pelvis, in a reduced number of procedural steps. An acetabular positioning iJig is used to placethe acetabular cup in the position which is intended to optimize anteversion, inclination and anatomical bone coverage of the cup,which we believe will eliminate the need for intra-operative navigation, and also the use of fluoroscopy during the procedure, reducingradiation exposure for both the patient and the surgical staff.•Bone preservation. We believe our knee implants result in the preservation of more bone for several reasons:•We use our iFit technology platform to design each of the bone cuts required to fit our customized implants so as to minimizebone resection and maximize bone preservation for the individual patient.•Our femoral component is fitted using six cuts of the femur as compared to the five cuts typically used with off-the-shelfimplants. We reviewed an abstract presented at the 2012 Annual Meeting of the British Association for Surgery of the Knee,which studied stress and fatigue in a six-cut femoral implant model that was thinner than a five-cut model by an average oftwo millimeters. The six-cut implant model displayed substantially lower maximum stress than a five-cut model at a knownhigh-stress location. At the time of the study, two of the authors of this study were our employees, and two of the authors ofthis study were paid consultants to us. Based in part on this data, we believe our six-cut implants can be thinner than off-the-shelf implants without sacrificing implant strength. We believe a thinner implant requires the surgeon to remove less boneduring implantation.•Our summary of a peer reviewed study of 169 implants published in Reconstructive Review in 2016 indicates that our iTotalCR showed statistically significant less bone loss resection (p≤0.05) when compared to off-the-shelf implants. At the time ofthe study, two of the authors of this study were our employees, and one of the authors of this study was a paid consultant tous.As a result, we believe our implants may appeal particularly to surgeons who treat young, active patients. The surgeonsmight otherwise recommend postponing surgery out of fear that the patient will not be eligible for a revision surgery if onebecomes necessary.•Fewer post-operative issues. We believe our customized knee implants reduce the number of post-operative issues. Our review of aretrospective study of 248 patients who had undergone a total knee replacement, published in the peer-reviewed journal ArthroplastyToday in 2017, or the 2017 AT Study, indicates that patients who received an iTotal CR had significantly lower transfusion rates(p=0.005) and adverse event rates at discharge (p=0.003) and at 90 days post-discharge (p=0.023) than patients who received an off-the-shelf total knee replacement implant. We provided financial support for this study. At the time of this study, one of the authors ofthis study was a paid consultant to us.•Greater efficiency. Because of the simplified surgical procedure used with our products, we believe total operating room time isreduced when implanting our knee or hip system as compared to off-the-shelf implants. Our summary of the results of a retrospectivestudy of 70 patients who had undergone total knee replacement presented at the 2015 ICJR World Arthroplasty Congress indicatesthat average overall operating room time was statistically significantly reduced (p=0.028) for the group of patients who received aniTotal CR in comparison with patients who received an off-the-shelf knee replacement. We believe surgeons can use these timesavings to increase their productivity. We also believe the Conformis Hip System will provide reduced operating times as compared tooff-the-shelf implants based on both the implant sizing provided to the surgeon in the Hip iView as well as our novel reaming7system. Thus far in our limited launch of the Conformis Hip System, surgeons have reported reduced operating time as compared tooff-the-shelf hip implants.•For the hospital, ambulatory surgical center or other medical facility. We believe that our customized implants and iFit technologyplatform provide a better economic outcome for hospitals or other medical facilities through:•Improved implant and instrument management and reduced sterilization costs. As a result of our just-in-time delivery model, we shipour knee and hip implants and iJigs to the hospital or other medical facility in advance of the procedure, reducing the need to storeimplants and instruments in the hospital or other medical facility. Our hip and knee replacement joint products are delivered directly tothe surgery center in a single, sterile, patient-labeled kit, eliminating the need for surgery centers to stock excess inventory for eachsurgical procedure. Unlike off-the-shelf systems for both knee and hip, our systems require little to no re-useable instrumentation dueto the use of 3D printed iJigs as well as 3D printed intra-operative sizing trials. We estimate that a total knee replacement procedureusing an off-the-shelf implant requires approximately 6 to 8 double-tiered, instrument trays and a hip replacement procedure using anoff-the-shelf implant requires approximately 5 to 7 double-tiered instrument trays, which must be cleaned, sterilized and storedbetween procedures at significant cost to the hospital or other medical facility. A knee replacement procedure using our iTotal CRproduct requires only one tray of reusable instruments and a hip replacement procedure using our Conformis Hip System uses only 2trays of reusable instruments. As a result of our just-in-time delivery approach and the reduction in the requirements for reusableinstruments in procedures using our products compared to off-the-shelf implants, we believe our products meaningfully reduce ahospital's or other medical facility’s instrument cleaning, sterilizing and storage costs.•Improved productivity in the OR. We believe that the iJigs we provide with our implants eliminate many of the intraoperative sizingsteps and reduce the number of positioning steps necessary with off-the-shelf products. In addition, our approach of delivering asingle-package with pre-sterilized, single-use instruments allows for a more streamlined and efficient operating room through quick andeasy set up and tear down. As a result, we believe that knee and hip replacements with our customized knee and hip implants canimprove turnaround times with the potential for more procedures to be completed within the same amount of time and for hospitals orother medical facilities to generate additional revenue.•Shorter stays. We believe that our customized total joint replacements may shorten hospital or other medical facility stays. Oursummary of the results of the 2017 AT Study indicates that a statistically significantly greater percentage of patients who underwenttotal knee replacement were discharged in fewer than three days following surgery (p=0.037) in the iTotal CR group (42%) than in theoff-the-shelf group (30%). Our summary of a study presented at the ICJR Pan Pacific Orthopaedic Congress in 2016, of 62 patientswith either our iTotal CR or an off-the-shelf implant in a “Fast Track” protocol, also indicates that a significantly higher (p≤0.05)proportion of iTotal CR patients (66%) were discharged in less than 1 day when compared to off-the-shelf patients (30%).•Economic Savings. We believe that our technology offers the potential of significant economic savings to hospitals or other medicalfacilities and payors. For example, the 2017 AT Study compared adverse events rates and cost of care for total knee arthroplastypatients treated with either customized individually made implants or off-the-shelf implants. In that study, the total average realhospital costs between the customized implant and off-the-shelf groups were nearly identical (customized implant $16,192 vs OTS$16,240), suggesting that patients with customized implants received improved hospital outcomes at no additional cost to thehospital. However, risk-adjusted per patient total cost of care showed a net savings of $914 per patient for the customized implantgroup for bundle of care, including the preoperative computed tomography scan, total knee arthroplasty hospitalization, and dischargedisposition. Follow-up care costs demonstrated a savings of $1,313 per patient. Additionally, a retrospective study that we funded,reviewed over 4,000 Medicare patients who had undergone total knee replacement, was published in the peer-reviewed journalOrthopaedic Proceedings in October 2018, indicated that the cost of care over a 12 month total episode of care was, on average,$1,697 lower for patients who received our customized implants compared to patients who received off-the-shelf total knee implants.8•Fewer adverse events. Many insurers and third-party payors, including Medicare, require the hospital or other medical facility to bearthe cost of treating infections and post-operative adverse events if they occur within 90 days following the implant procedure. Ifreusable instruments are not properly prepared prior to surgery, they are a potential source of costly infections. The lower number ofreusable instruments used with our knee and hip implants reduces the possibility of contaminated instruments. Our summary of theresults of the 2017 AT Study indicates that use of our iTotal CR statistically significantly reduced blood transfusion rates (p=0.005)and adverse event rates at discharge (p=0.003) as compared to an off-the-shelf knee implant. Our review of this published research,sponsored by us, also indicates that use of our iTotal CR is associated with lower adverse event rates during the 90-day periodfollowing surgery (p=0.023). The reduction in adverse events observed during the 90-day period following surgery is meaningfulbecause hospitals or other medical facilities may not be reimbursed for additional post-operative follow up care during this period.Our strategyOur objective is for our customized implants to become the standard of care for orthopedic joint replacement surgery. We believe that our iFitImage-to-Implant technology platform will enable us to offer a wide variety of customized joint replacement implants with superior performance thatoffer key clinical and economic benefits over off-the-shelf implants. Key elements of our strategy to achieve our objective are to:•Expand our sales efforts to drive adoption of our products. We systematically analyze market opportunities by considering factorssuch as the number of orthopedic surgeons, procedure volumes, pricing and reimbursement. We often seek to penetrate these markets byestablishing relationships with influential surgeons who perform a high-volume of joint replacement procedures. We work with thesesurgeons to educate other surgeons.•Leverage the clinical and economic benefits of our products and technologies. We believe our customized implant products offerimportant clinical and economic benefits to patients, surgeons and hospitals or other medical facilities. Potential benefits include betterfunction, less bone resection, less blood loss, greater patient satisfaction, reduced length of stay and lower adverse event rates. Thesepotential economic benefits for hospitals or other medical facilities also include reduced procedure times and reduced instrumentmanagement, cleaning and sterilization costs. We believe that our iFit technology platform will allow us to offer products for other jointsthat also afford important clinical and economic benefits. We have designed and sponsored studies that support these clinical andeconomic data. We will continue to establish these potential benefits through the design and sponsoring of studies to increase ouravailable clinical and economic data.•Broaden our product portfolio by launching additional customized/individualized orthopedic implants and complementary non-individualized implants. While our initial focus has been on the knee implant market, we believe our iFit technology platform isapplicable to customized implants for all major joints in the body and multiple implant subcategories within each joint. In 2017, we receivedclearance from the FDA for the Conformis Hip System, our first customized hip replacement implant, which we launched on a limited basisin the second half of 2018 and are planning a full commercial launch in the second half of 2019. We expect a limited commercial launch ofa second stem for the Conformis Hip System in the second half of 2020 with a full commercial launch in the second half of 2021. Weanticipate a limited commercial launch of our next generation iTotal CR knee replacement implant in the second half of 2019 followed by afull commercial launch for both the iTotal CR and PS knee replacement implants in the second half of 2020. We have put the developmentof the next generation of our iUni partial knee replacement system on hold in order to focus on an iTotal cementless option for our iTotalknee implant. We now anticipate a limited commercial launch of the next generation iUni in the first half of 2021. We intend to have alimited commercial launch of a femur cementless or Press Fit option for our iTotal knee implant in the first half of 2020 with a fullcommercial launch in the first half of 2021. We expect to have a limited commercial launch of a tibia cementless or Press Fit option n thefirst half of 2021. We also may seek to apply our iFit technology platform to develop additional product opportunities in the knee and hipreplacement markets and other orthopedic markets in the longer-term, including shoulder, other extremities and spine.9•Expand our just-in-time manufacturing processes. We have built state of the art manufacturing processes, including proprietarysoftware and 3D printing capabilities. We are continuing to invest in these processes, as we believe they provide us important competitiveadvantages, including:•expansion of gross margin through various initiatives, including the ongoing vertical integration of some of our manufacturingprocesses;•shorter product design and development time frames; and•continuous improvement of our products without the difficulty faced by our competitors of making obsolete a large inventory of off-the-shelf implants and instruments;•Enhance our patent portfolio and continue to exploit our patent position. As of February 28, 2019, we own or exclusively in-licensea total of approximately 358 issued patents and pending patent applications that cover customized implants and PSI for all major jointsand other elements of our iFit technology platform. See Note J - "Commitments and Contingencies" in the financial statements and relatednotes appearing elsewhere in this Annual Report on Form 10-K for information regarding our patent litigation.Our productsKnee replacement productsWe offer a broad line of primary knee replacement implants, both partial and total, that we customize to fit the individual patient. Surgeonsuse our family of customized knee implants to treat mild to severe osteoarthritis of the knee. All of our knee replacement products have beencleared by the FDA under the premarket notification process of Section 510(k) of the FDCA and have received certification to CE Mark. We deliverour customized knee replacement implants and iJigs, together with iView, to the hospital or other medical facility in a single pre-sterilized packagein advance of the scheduled arthroplasty procedure.The following is an overview of each of our knee replacement implant products:10 iTotal CR is the only cruciate-retaining, customized total knee replacement system on themarket designed to restore the natural shape of a patient's knee. We introduced the iTotalCR in 2011 and launched new generations in each of 2012, 2013 and 2015. The iTotal CRincludes a femoral implant, a tibial tray, and dual medial and lateral polyethylene tibia trayinserts, which serve as a cushion between the femoral and tibial components, all of whichare individually made for the particular patient, together with a polyethylene patella designedto work with our customized components. The iTotal PS is the only posterior cruciate ligament substituting, or posterior-stabilized,customized total knee replacement product on the market designed to restore the naturalshape of a patient's knee. We introduced the iTotal PS in 2015. The iTotal PS includes afemoral implant with a metal cam, a tibial tray, and a single polyethylene tibia tray insert,which includes a plastic spine, all of which are individually made for the particular patient,together with a polyethylene patella designed to work with our customized components. The iDuo is the only customized bicompartmental knee replacement system on the market.The iDuo is considered a bicruciate-retaining knee replacement because the surgeon mayretain both the anterior cruciate ligaments, or ACL, and posterior cruciate ligaments, orPCL. We introduced the iDuo in 2007 and launched a second generation in 2010. The iDuoincludes a femoral implant, a tibial tray and a single polyethylene tibia tray insert, all ofwhich are individually made for the particular patient, together with a polyethylene patelladesignedto work with our customized components. The iUni is a customized unicompartmental knee replacement product for treatment of themedial or lateral compartment of the knee. The iUni is considered a bicruciate-retainingknee replacement because the surgeon retains both the ACL and PCL. We introduced theiUni in 2007 and launched a second generation in 2009. The iUni includes a femoral implant,a tibial tray and a single polyethylene tibia tray insert, all of which are individually made forthe particular patient. Hip replacement productConformis Hip SystemAs with the knee, no two hips are the same. They vary in size and shape. As is the case for knee replacements, off-the-shelf hipreplacement implants are offered in a limited number of standard shapes and sizes. Also, off-the-shelf hip implants require a large number of traysof reusable instruments with the same instrument management challenges and costs of cleaning and sterilization associated with off-the-shelfknee implants. In addition, orthopedic surgery using off-the-shelf hip implants is characterized by a difficult surgical technique and can suffer froma lack of reproducibility in component placement.11On June 14, 2017, we received FDA 510(k) clearance for our Conformis Hip System product, and we launched the system on a limited basisin the second half of 2018. Similar to the design process we use for our knee implant products, we use proprietary software, to design andmanufacture our Conformis Hip System implants and iJigs. After each patient’s CT scan is converted into a 3-dimensional computer model, theunique measurements of each patient’s anatomy are transformed into a comprehensive, individualized, pre-operative surgical plan, or Hip iView,that is delivered to the surgeon in advance of the operation. The Hip iView provides anatomical information to the surgeon that is not availabletoday through the use of standard templating tools. Surgeons have input during the planning process within a defined range of parameters to allowthem to optimize the Conformis Hip System for each patient, including allowing for leg length correction. Our Conformis Hip System provides afemoral stem with a patient-specific neck and head size as well as a patient-specific acetabular cup size which, together with the Hip iView, allowsfor improved operating room efficiency and decreased inventory needs of the facility. In addition, our Conformis Hip System includes a novelacetabular reaming system that interacts with the acetabular iJigs to ream only to a predetermined depth in a reduced number of procedural steps.Our Conformis Hip System further includes an acetabular positioning iJig that is used to place the acetabular cup in the position which is intendedto optimize anteversion, inclination and anatomical coverage of the cup, with the goal of eliminating the need for intra-operative navigation,reducing surgeon, staff and patient exposure to fluoroscopy.As of February 28, 2019, over 25 surgeons have implanted over 200 Conformis Hip Systems. To date, surgeon feedback is confirming ourexpectations related to improved surgical efficiencies.We believe the introduction of the Conformis Hip System will provide synergies with our existing line of customized knee implants becausemost surgeons who perform knee replacements also perform hip replacements and knee and hip replacement implants are sold through the samedistribution channels. We also believe our surgical plan and improved surgical technique for hip arthroplasty will attract surgeons who are notcurrent customers. Thus, we believe that the Conformis Hip System complements our existing product line and will allow us to expand ourcustomer base, sales force and distribution channels.The following is an overview of our Conformis Hip System:Conformis Hip System The Conformis Hip System, introduced in July 2018, is the only primary total hipreplacement system on the market designed with 3D imaging technology to provide a stemand acetabular cup size that matches each patient’s specific anatomy. The implant system includes a single-piece stem with patient-specific neck, acetabularcup, iPoly XE® (highly crosslinked vitamin-e infused UHMWPE) polyethylene liner, and achoice of ceramic or cobalt chrome femoral head. 3D imaging technology is also used to create a pre-surgical plan, which accompanies a setof disposable patient-specific 3D printed jigs, to aid in implant positioning. Our proprietary iJigsOur iJigs are customized, single-use, patient-specific instrumentation. The iJigs we deliver with our joint replacement products include theguides and instruments the surgeon requires to remove the bone and soft tissue necessary to fit our customized implant to the patient. We believethat providing our iJigs with our customized implants enables a more accurate, reproducible and simplified surgical procedure by reducing thenumber of steps and increasing the precision of the alignment.In an off-the-shelf procedure, the surgeon must have large numbers of reusable instruments available because the surgeon does not know inadvance which bone cuts and other tissue removal will be necessary to prepare the patient to receive the off-the-shelf implant. A kneereplacement procedure performed using our customized implants and iJigs requires only one tray of reusable instruments, which we provide to thehospital or12other medical facility, as compared to a knee replacement procedure using an off-the-shelf implant, which requires approximately 6 to 8 double-tiered, reusable instrument trays, which the off-the-shelf manufacturer provides to the hospital or other medical facility. A hip replacementprocedure performed using our customized implants and iJigs requires only 2 trays of reusable instruments, which we provide to the hospital orother medical facility, as compared to a hip replacement procedure using an off-the-shelf implant, which requires approximately 5 to 7 double-tiered, reusable instrument trays, which the off-the-shelf manufacturer provides to the hospital or other medical facility. We provide our implantswith a full set of iJigs in a single package. Our iJigs arrive sterile and are discarded after use.Clinical studiesIn evaluating the clinical and economic benefits of our customized knee implants, we consider results obtained from studies sponsored byus, conducted by orthopedic surgeons who are paid consultants to us and conducted independently by orthopedic surgeons, including studies thatcompare our customized knee implants with off-the-shelf knee implants. As of February 28, 2019, there were 27 peer-reviewed journal articles andnumerous abstracts either presented or accepted for presentation at conferences reporting on the results of clinical studies of our customized kneeimplants. Of the published or presented studies known to us that compared our knee replacement product to an off-the-shelf product, mostreported either that the performance of our knee replacement product was superior to an off-the-shelf product on the reported measures or thatthere were no statistically significant differences detected between the performance of our knee replacement product and an off-the-shelf kneereplacement product on those measures.Sales and marketingWe market and sell our products in the United States, Germany, the United Kingdom, Austria, Ireland, Switzerland, Singapore, Hong Kong,Malaysia, Monaco, Hungary, Spain and Australia. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Consolidated results of operations-Revenue" in this Annual Report on Form 10-K for a summary of product revenue by geography. We market ourproducts to orthopedic surgeons, hospitals and other medical facilities, including ambulatory surgery centers, and patients. We expect to expandthe size of our sales and marketing capabilities by entering into additional independent sales and distributor representative arrangements in keyterritories.We offer technical and product focused training programs for our direct sales, independent sales and distributor representatives. We havedesigned these programs to provide the entire sales force with technical expertise and product knowledge so they may more effectively representand market our products to surgeons, hospitals and other medical facilities. We believe we offer a simplified surgical technique with the use of ourproducts that may reduce the need for our sales representatives to spend time in the operating room during a procedure when compared to thesales representatives of off-the-shelf implant manufacturers. This potentially will allow our sales representatives to spend more time on newcustomer growth opportunities.We believe surgeons appreciate the clinical and economic benefits, including increased patient satisfaction, operating room efficiencies andlower adverse event rates, that we believe our products offer. In addition, we believe surgeons will appreciate the additional patient information andimproved surgical efficiencies provided by our Conformis Hip System. We believe hospitals and other medical facilities, including ambulatorysurgical centers, focus on the economic benefits that we believe are associated with our products, such as fewer instrument trays to manage,clean and sterilize, reduced operating room time, faster operating room set up and breakdown time and lower adverse event rates. We believepatients are interested in returning to daily activities quickly and are attracted to our customized approach. We employ direct-to-consumermarketing, primarily through patient testimonials, social media, search engine marketing, and print, online, radio and television news reports.In the United States, we use a database of surgeons, hospitals and other medical facilities and procedure volumes to determine whichgeographical regions are most commercially attractive. Globally, we look for markets with a high volume of total knee replacements, favorablereimbursement characteristics and an historical openness to advanced technologies.As part of our targeted regional commercial strategy, we identify markets in the United States based on knee replacement procedure volume,surgeon density, prevailing average selling price for a knee replacement, and other factors. We work to significantly increase our sales in thesemarkets by focusing on high-volume, influential surgeons who use our products. We create a tailored direct marketing strategy to increaseconsumer awareness in these markets. We intend to use the same commercial strategy for the Conformis Hip System.13Research and developmentOur internal research and development efforts are focused on continued innovation to develop customized implants for the knee and hipand to assess the application of our iFit technology platform to other major joints.In our research and development activities, we actively work on:•new product development;•enhancements of existing products and software;•improvements in our iFit technology platform to further advance production efficiency and decrease the production time from receipt of anorder to delivery of our product; and•advancements of our iFit technology platform that will enable us to provide our customized products to a larger customer base, which werefer to as mass customization.Our team of 28 full-time research and development employees has extensive experience in biomechanical engineering, manufacturingengineering and software engineering and development. A significant portion of our research and development activities involves the developmentof proprietary algorithms and computer software that underpins our entire iFit technology platform. For the years ended December 31, 2018, 2017and 2016, company-sponsored research and development expense was $16.9 million, $17.1 million and $16.6 million, respectively.When we develop a new product or seek to improve our existing products, our team of biomechanical and software engineers typicallycollaborates closely with experienced orthopedic surgeons and other independent scientists. After we complete the development of a new productor an improvement to an existing product, we seek regulatory clearance before selling the product.ManufacturingWe conduct our manufacturing activities in state-of-the-art design and manufacturing facilities in Wilmington, Massachusetts and Wallingford,Connecticut.We produce computer-aided designs (“CAD” or “CAD designs”) in-house and through a third party in India, and we use the CAD designs todirect a majority of our product manufacturing efforts. As part of our manufacturing cost reduction efforts, in 2017 and 2018, we continuedtransitioning our in-house CAD labor force to the third party in India and, in 2018, we significantly reduced our in-house CAD labor force. Wemanufacture all of our patient-specific instruments, or iJigs, tibial trays used in our total knee implants, polyethylene tibia tray inserts for our totalknee implants, at our facility in Wilmington, Massachusetts. In August 2017, we completed the purchase of certain assets and assumed certainliabilities of Broad Peak Manufacturing, LLC or BPM in Wallingford, Connecticut. Our femoral implant components are polished and passivated atour facility in Wallingford, Connecticut. We outsource the production of the femoral and other implant components to third-party suppliers. Oursuppliers make our customized implant components using the CAD designs we supply.We have established an approved supplier base that is skilled in medical device manufacturing. Our suppliers are primarily based in theUnited States. We do not have any long-term supply arrangements and purchase our supplies on a purchase order basis. We maintain a dualsource capability for most of our purchased implant components in an effort to ensure supply reliability, flexibility and cost competitiveness. Forcertain raw materials, including the polymer powder used for 3D printing our iJigs and the polyethylene block used for CNC machining of our tibiatray inserts, we rely on sole source providers who service large portions of the markets for these materials.In the future, if and as the volume of our product sales increases, we expect to take the following steps in connection with our manufacturingactivities:•continue to increase the production of certain components of our products that we manufacture in-house, which we believe we canmanufacture at a lower unit cost than vendors we currently use;•develop new versions of our software used in the design of our customized joint replacement implants, which we believe will reduce costsassociated with the design process;14•continue to transition our in-house CAD labor force to India; and•obtain more favorable pricing of certain components of our products manufactured for us by third parties.We also plan to explore other opportunities to reduce our manufacturing costs.iFit 3D printingWe believe that 3D printing is especially suited for production of our patient-specific instruments. We focus on 3D printing as a key elementof our manufacturing because we believe it enables fast, cost-effective, and scalable processes that will deliver high quality patient-specificinstruments. As a result, 3D printing plays a key role in our manufacturing operations.We apply our iFit 3D printing technology to manufacture iJigs using computer-controlled lasers that melt polymer powders into a solid on alayer-by-layer basis until the entire part is completed. The process of melting powders into a solid is called sintering. We use selective lasersintering, or SLS, with approved polymer powders to manufacture plastic components for our iJigs.Quality assuranceWe apply a variety of automated and manual quality controls to our iJigs, implant components and other instruments we supply to ensurethat our products meet specified requirements. Members of our quality department also inspect our devices at various stages during themanufacturing cycle to ensure quality to specifications. Our quality department periodically audits our suppliers to ensure compliance toappropriate ISO standards, FDA regulations and to our specifications, policies and procedures for our devices.We and our suppliers are subject to extensive regulation by the FDA under its Quality System Regulation, or QSR. The QSR requiresmanufacturers to establish and follow quality systems consistent with the QSR framework to ensure that their products consistently meetapplicable requirements and specifications. In accordance with the QSR framework, we have validated and/or verified the processes used in themanufacturing and testing of our devices. Our Wilmington and Wallingford manufacturing facilities are FDA registered, and we believe they arecompliant with the FDA's QSR. We have also received certification from the British Standards Institution, or BSI, a Notified Body to theInternational Standards Organization of our quality system. Certification by a Notified Body is a necessary element of obtaining CE Marking in theEU. We are subject to periodic, announced and unannounced inspections by BSI, the FDA, and other governmental agencies. We continue tomonitor our quality system and management efforts in order to maintain our overall level of compliance. See "-Regulatory requirements" below.15Intellectual propertyProtection of our intellectual property is an important priority for our company. Our success depends in part on our ability to obtain andmaintain proprietary rights for our products and technology, to operate without infringing the proprietary rights of others and to prevent others frominfringing our proprietary rights. We seek to protect our intellectual property position by, among other things, filing U.S. and certain foreign patentapplications related to our products and technology where patent protection is available. We also rely on trade secrets, know-how, continuingtechnological innovation and in-licensing opportunities to develop and maintain our proprietary position.We typically seek patents on inventions relating to customized implants and iJigs, and on their methods of manufacture. We generally filepatent applications in the United States, the major markets in the EU, and in select other commercially important countries. We typically rely ontrade secret protection for our proprietary algorithms that we use to design customized implants and iJigs.Patent rightsAs of February 28, 2019, we owned or exclusively in-licensed 242 issued patents around the world, including 157 patents issued in the UnitedStates and 85 foreign patents.•With respect to the patents that we own relating primarily to our customized joint replacement implants, the first nonprovisional applicationwas filed in 2002 claiming priority to a provisional application filed in 2001 and is expected to expire in 2022 and the other patents areexpected to expire between 2022 and 2031.•With respect to the patents that we own relating primarily to our patient-specific instrumentation, the first nonprovisional application wasfiled in 2002 claiming priority to a provisional application filed in 2001 and is expected to expire in 2022 and the other patents are expectedto expire between 2022 and 2035.•With respect to the patents that we own relating primarily to our iFit technology platform, the first nonprovisional application was filed in2002 claiming priority to a provisional application filed in 2001 and is expected to expire in 2022 and the other patents are expected toexpire between 2022 and 2032.As of February 28, 2019, we owned or exclusively in-licensed 116 patent applications, including 24 patent applications pending in the UnitedStates and 92 foreign patent applications.•With respect to the patent applications that we own relating primarily to our customized joint replacement implants, patient-specificinstrumentation, and our iFit technology, the first were filed in 2001 and if patents issue on these applications, they would be expected toexpire in 2022 and if patents issued on the other patent applications, such patents would be expected to expire between 2023 and 2036.Our patent portfolio covers a range of subject matter, including:•customized articular implants for the knee, hip, spine, shoulder, ankle and extremities;•customized instrumentation including for joint replacement and ligament reconstruction;•imaging technology;•3D printing technology for implants and instruments;•methods of designing customized implants and instruments; and•methods of manufacturing customized implants and instruments.Licenses from othersWe are a party to several agreements under which we have licensed rights in certain patents, patent applications and other intellectualproperty. We enter into these agreements to augment our proprietary intellectual property portfolio. The licensed intellectual property covers someof the products that we are researching, developing and commercializing and some of the technologies that we use. These licenses impose certainlicense16fee, royalty payment and diligence obligations on us. We expect to continue to enter into these types of license agreements in the future. We donot believe that any of these licenses are material to our business.Patent litigationSee Part II, Item 3, Legal Proceedings of this Annual Report on Form 10-K.Licenses to othersLicense agreement with MicroPortIn April 2015, we entered into a worldwide license agreement with MicroPort. Under the terms of this license agreement, we granted aperpetual, irrevocable, non-exclusive license to MicroPort to use patient specific instrument technology covered by our patents and patentapplications with off-the-shelf implants in the knee. This license does not extend to patient-specific implants. This license agreement provides forthe payment to us of a fixed royalty at a high single to low double digit percentage of net sales on patient specific instruments and associatedimplant components in the knee, including MicroPort's Prophecy patient specific instruments used with its Advance and Evolution implantcomponents. This license agreement also provided for a single lump-sum payment by MicroPort to us of low-single digit millions of dollars uponentering into the license agreement, which has been paid. This license agreement will expire upon the expiration of the last to expire of our patentsand patent applications licensed to MicroPort, which currently is expected to occur in 2031.License agreement with Wright MedicalIn April 2015, we entered into a non-exclusive, fully paid up, worldwide license agreement with Wright Medical. Under the terms of thislicense agreement, we granted a perpetual, irrevocable, non-exclusive license to Wright Medical to use patient-specific instrument technologycovered by our patents and patent applications with off-the-shelf implants in the foot and ankle. This license does not extend to patient-specificimplants. This license agreement provided for a single lump-sum payment by Wright Medical to us of mid-single digit millions of dollars uponentering into the license agreement, which has been paid. This license agreement will expire upon the expiration of the last to expire of the patentsand patent applications licensed to Wright Medical, which currently is expected to occur in 2027.License agreement with Smith & NephewIn September 2018, we entered into a worldwide license agreement with Smith & Nephew. Under the terms of this agreement, we granteda perpetual, irrevocable, non-exclusive license to Smith & Nephew to use patient-specific instrument technology covered by our patents and patentapplications with off-the-shelf implants. With respect to knee implants, Smith & Nephew agreed to pay a single lump-sum payment of $10.5 Millionupon entering into the license agreement, which has been paid. Smith & Nephew also agreed to pay to us a fixed royalty at a high single to lowdouble digit percentage of net sales on any future sales of patient-specific instruments for use with off-the-shelf implants for joints other thanknees. Additionally, under this agreement, we granted a perpetual, irrevocable, non-exclusive license to Smith & Nephew to use certain kneeimplant technology covered by our patents and patent applications with off-the-shelf implants in the knee. Smith & Nephew granted to us aworldwide, perpetual, irrevocable, non-exclusive license to certain patents and patent applications owned by Smith and Nephew and certainpatents and patent applications exclusively licensed by Smith & Nephew from Kinamed covering knee replacement implants and instruments inconnection with the sale of patient-specific implants. No payment was due from us to Smith & Nephew. The rights granted by us to Smith &Nephew under this license do not extend to any uses associated with patient-specific implants, and the rights granted by Smith & Nephew to us donot extend to any uses associated with off-the-shelf implants.TrademarksAs of February 28, 2019, we have filed 163 trademark registrations in the United States and in other major markets worldwide, including thefollowing marks: Conformis, iFit, iTotal, iDuo, and iUni. We have 14 trademark applications pending worldwide.17CompetitionThe joint replacement industry is intensely competitive, subject to rapid change and sensitive to the introduction of new products or othermarket activities of industry participants. We face competition from many different sources, including major medical device companies.We compete with several large, well-known companies that dominate the market for orthopedic products, principally Zimmer BiometHoldings, Inc., or Zimmer Biomet, Stryker Corporation, or Stryker, DePuy Synthes, Inc., or DePuy, a Johnson & Johnson company and Smith &Nephew, Inc., or Smith & Nephew. These competitors have significantly greater financial resources, larger sales forces and networks ofdistributors, a greater number of established relationships, some of which may be exclusive, with key orthopedic surgeons, hospitals and othermedical facilities, third-party payors, and independent sales representatives and distributors, and greater experience in research and development,manufacturing, obtaining regulatory clearances and marketing approved products than we do. These companies also compete with us in acquiringtechnologies complementary to, or necessary for, the development of our products and recruiting and retaining qualified scientific, engineering andmanagement personnel.We also compete with numerous other companies that are developing and marketing competitive joint replacement products, as well ascompanies exploring alternatives to joint replacement such as biologic cartilage repair systems.We believe that the principal factors on which we compete with others in our market include:•the ability to introduce innovative products that are differentiated from competitors' offerings and represent an improvement over currentlyavailable products;•the ease of use of the products and the quality of training, services and clinical support provided to surgeons and hospitals and othermedical facilities;•the safety and efficacy of products and procedures, as demonstrated in published studies and other clinical reports;•the ability to anticipate and meet customers' needs and commercialize new products in a timely manner;•acceptance and adoption of products by patients, physicians and hospitals and other medical facilities; and•the price of products and cost effectiveness of the procedure and availability and rate of third-party reimbursement.The prices that we charge our customers for our products vary from customer to customer based on such factors as the volume of productbeing purchased, geographic region, reimbursement environment and competitive factors. We believe that our current pricing for our productsgenerally is within the same range as that of our principal competitors, with a premium of five percent on average.Regulatory requirementsOur medical device products are subject to extensive regulation by government agencies and other authorities in the United States and inother countries and jurisdictions, including the EU. These governmental authorities regulate the introduction of medical devices into theirrespective geographies within their jurisdiction. The regulations cover the entire life cycle of the product, including the research, development,testing, manufacture, quality control, packaging, storage, labeling, advertising and promotion of the devices. In addition, post-approval monitoringand reporting, as well as import and export of medical devices, are subject to regulatory requirements. The processes for obtaining regulatoryapprovals or clearances in the United States and in foreign countries and jurisdictions, along with subsequent compliance with applicable statutesand regulations, require the expenditure of substantial time and financial resources.Review, approval and clearance of medical devices in the United StatesMedical devices in the United States are strictly regulated by the FDA. Under the Code of Federal Regulation, 21 CFR Parts 800-1299, Foodand Drugs, a medical device is defined as an instrument, apparatus, implement,18machine, contrivance, implant, in vitro reagent, or other similar or related article, including a component part or accessory, which is, among otherthings: intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man orother animals; or intended to affect the structure or any function of the body of man or other animals, and which does not achieve its primaryintended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized forthe achievement of any of its primary intended purposes.Unless an exemption applies, a new medical device may not be marketed in the United States unless it has been cleared by the FDAthrough filing of a 510(k) premarket notification, or 510(k), or cleared by the FDA pursuant to a premarket approval application, or PMA. Theinformation that must be submitted to the FDA in order to obtain clearance or approval to market a new medical device varies depending on howthe medical device is classified by the FDA and the novelty of the medical device. Medical devices are classified into one of three classesdepending on the level of control necessary to assure the safety and effectiveness of the device. Class I devices have the lowest level or riskassociated with them, and are subject to general controls, including labeling, premarket notification and adherence to the QSR. Class II devicesare subject to general controls and special controls, including performance standards. Class III devices, which have the highest level of riskassociated with them, are subject to most of the aforementioned requirements as well as to premarket approval. Most Class I devices and someClass II devices are exempt from the 510(k) requirement, although manufacturers of these devices are still subject to registration, listing, labelingand QSR requirements.Even after we have obtained the proper regulatory clearance to market a product, the FDA has the power to require us to conduct post-marketing studies. For example, as a condition of clearance or approval, we could be required to conduct a post-approval study, as well as anenhanced surveillance study. Failure to conduct required studies in a timely manner could result in the revocation of the 510(k) clearance for theproduct that is subject to such a requirement and could also result in the recall or withdrawal of our product from the market in the United States,which would prevent us from generating revenue from sales of that product in the United States.To date, we have used the 510(k) premarket notification process to obtain regulatory clearance from the FDA for the marketing, sale anddistribution of our joint replacement products in the United States. All of our currently marketed products are Class II devices marketed pursuant to510(k) clearances.To date, none of our submissions to the FDA have entered the premarket approval stages or required the submission of clinical data.However, we have conducted and continue to conduct numerous post-market studies aimed at demonstrating the clinical benefits of ourcustomized knee replacement systems as compared to off-the-shelf systems.Review and approval of medical devices in the EUThe EU Medical Devices Directive (Council Directive 93/42/EEC, as amended) sets out the basic regulatory framework for medical devicesin the European Union. In the EU, our medical devices must comply with the Essential Requirements in Annex I to the EU Medical DevicesDirective, which we refer to as the Essential Requirements. Compliance with these requirements is a prerequisite to be able to affix the Certificateof Conformity mark, or CE Mark, to our medical devices, without which they cannot be marketed or sold in the European Economic Area, or EEA.To demonstrate compliance with the Essential Requirements we must undergo a conformity assessment procedure, which varies according to thetype of medical device and its classification. Except for low risk medical devices (Class I with no measuring function and which are not sterile),where the manufacturer can issue a CE Declaration of Conformity based on a self-assessment of the conformity of its products with the EssentialRequirements, a conformity assessment procedure requires the intervention of a third-party organization designated by competent authorities of anEU country to conduct conformity assessments, which is referred to as a Notified Body. The Notified Body would typically audit and examineproducts' technical file and the quality system for the manufacture, design and final inspection of the devices before issuing a CE Certificate ofConformity demonstrating compliance with the relevant Essential Requirements.To date, we have used the CE Marking process to satisfy the conformity standards required to market and sell our joint replacementproducts in the EU. The Notified Body that has conducted conformity assessments with respect to our joint replacement products is the BSI.Even after we receive a CE Certificate of Conformity enabling us to affix the CE Mark on a product and to sell our product in the EEA countries, aNotified Body or a competent authority may require post-marketing studies of our product. Failure to comply with such requirements in a timelymanner could result in the withdrawal of our CE Certificate of Conformity and the recall or withdrawal of our product from the market in the EU,which would prevent19us from generating revenue from sales of that product in the EEA. Moreover, each CE Certificate of Conformity is valid for a maximum of fiveyears, but more commonly three years. Our current CE Certificates of Conformity are valid through May 8, 2021 for our iTotal CR product,December 2, 2022 for our iUni product, June 11, 2019 for our iDuo product and March 5, 2020 for our iTotal PS product. At the end of each periodof validity we are required to apply to the Notified Body for a renewal of the CE Certificate of Conformity. We have submitted for recertification ofour iUni and iDuo products and plan to submit for recertification for our iTotal PS product through May 2024. There may be delays in the renewal ofthe CE Certificate of Conformity or the Notified Body may require modifications to our products or to the related Technical Files before it agrees toissue the new CE Certificate of Conformity.At the end of each period of validity we are required to apply to the Notified Body for a renewal of the CE Certificate of Conformity. There may bedelays in the renewal of the CE Certificate of Conformity or the Notified Body may require modifications to our products or to the related TechnicalFiles before it agrees to issue the new CE Certificate of Conformity.In addition, we must inform the Notified Body that carried out the conformity assessment of the medical devices we market or sell in theEEA of any planned substantial changes to our devices that could affect compliance with the Essential Requirements or the devices' intendedpurpose. The Notified Body will then assess the changes and verify whether they affect the products' conformity with the Essential Requirementsor the conditions for the use of the devices. If the assessment is favorable, the Notified Body will issue a new CE Certificate of Conformity or anaddendum to the existing CE Certificate of Conformity attesting compliance with the Essential Requirements. If it is not, we may not be able tocontinue to market and sell the product in the EEA.The European Union regulatory bodies finalized a new Medical Device Regulation, or MDR, in 2017, which replaces the existing Directivesand provided three years for transition and compliance. We must be compliant with the MDR by May 2020. The MDR will significantly changeseveral aspects of the existing regulatory framework, such as clinical studies and data requirements and introduce new ones, such as uniquedevice identification, post marketing clinical reports and patient identification. We and the Notified Bodies who will oversee compliance to the newMDR face uncertainties as the MDR is rolled out and enforced by the Commission and EEA Competent Authorities, creating risks in several areas,including the CE Marking process and data transparency, in the upcoming years. We expect to be compliant with the EU MDR on or before May2020.Marketing and sales considerations in the EUIn the EU, medical devices may be promoted only for the intended purpose for which the devices have been CE Marked. Failure to complywith this requirement could lead to the imposition of penalties by the competent authorities of the EU Member States. The penalties could includewarnings, orders to discontinue the promotion of the medical device, seizure of the promotional materials and fines. Promotional materials mustalso comply with various laws and codes of conduct developed by medical device industry bodies in the EU governing promotional claims,comparative advertising, advertising of medical devices reimbursed by the national health insurance systems and advertising to the general public.Product vigilance and post-approval monitoring in the EUAdditionally, all manufacturers placing medical devices into the market in the EU are legally bound to report any serious or potentially seriousincidents involving devices they produce or sell to the competent authority in whose jurisdiction the incident occurred. In the EU, manufacturersmust comply with the EU Medical Device Vigilance System. Under this system, incidents must be reported to the relevant authorities of the EUcountries, and manufacturers are required to take field safety corrective actions, or FSCAs, to reduce a risk of death or serious deterioration in thestate of health associated with the use of a medical device that is already placed on the market. See "Risk Factors-Risks related to governmentregulation-If our products, or malfunction of our products, cause or contribute to a death or a serious injury, we will be subject to medical devicereporting regulations, which can result in voluntary corrective actions or agency enforcement actions, which could harm our business."Third-party reimbursementIn the United States and most other major joint implant markets, many third-party payors, including government health programs, commercialhealth insurers and managed care organizations, reimburse hospitals and other medical facilities an aggregate amount for all elements of a jointreplacement procedure, including operating room time, patient care and the joint replacement product. As a result, our products generally are notreimbursed separately, but instead are subject to the limits imposed by third-party payors on the coverage and reimbursement of procedures thatutilize our products.20Sales of our products will depend, in part, on the extent to which the costs of such procedures involving the use of our products cleared bythe FDA and approved by other government authorities will be covered by third-party payors, including government health programs in the UnitedStates, such as Medicare and Medicaid, commercial health insurers and managed care organizations. The process for determining whether apayor will provide coverage for a particular procedure may be separate from the process for setting the price or reimbursement rate that the payorwill pay for the procedure once coverage is approved. Third party payors may limit coverage to particular procedures on an approved list, orformulary, which might not include all of the approved procedures involving the use of our products for a particular indication.In the EU, pricing and reimbursement schemes vary widely from country to country. In many foreign markets, pricing and approval of use ofmedical devices is subject to governmental control. In the United States, there have been, and we expect that there will continue to be, a numberof federal and state proposals to limit payments by governmental payors for medical devices, and the procedures in which medical devices areused. While we cannot predict whether such legislative or regulatory proposals will be adopted, the adoption of such proposals could have amaterial adverse effect on our business, financial condition and profitability.In January 2017, the rate of reimbursement for surgical procedures using our products in Germany was changed. Previously, all proceduresin which our products were used were reimbursed under the same reimbursement code, or “Sonderprothesen”, OPS code 5.822.91. BeginningJanuary 1, 2017, the reimbursement for surgical procedures using our iTotal CR and iTotal PS products increased by approximately 3.7%, whilethe reimbursement for surgical procedures using our iUni products decreased by approximately 36.3%, and the reimbursement for surgicalprocedures using our iDuo products decreased by approximately 27.0%. In addition to being affected by changes in reimbursement rates, use ofour products for each patient in Germany may also be subject to approval by the Medizinischer Dienst der Krankenkassen (translated: MedicalService of Health Insurance), or MDK. Beginning in 2016, we experienced a significant increase in the number of denials by MDK for increasedcost associated with the use of our products and, in such instances, the amount of reimbursement to the hospitals and other medical facilities waslowered to that of an off-the-shelf knee. We believe that the change in the rate of reimbursement for surgical procedures using our iTotal CR andiTotal PS products has not materially impacted sales in Germany. The decrease in the rate of reimbursement for surgical procedures using ouriUni and iDuo products and the increasing denials by MDK for approval under the higher reimbursement code has adversely impacted our sales inGermany.In January 2019, the rate of reimbursement for surgical procedures using our products in Germany was changed. Beginning January 1, 2019,the reimbursement for surgical procedures using our iTotal CR and iTotal PS products increased by approximately 1.6%, while the reimbursementfor surgical procedures using our iUni and iDuo products increased by approximately 30%. Though this increase in reimbursement is a positivechange, especially with regard to our iUni and iDuo products, we continue to experience MDK denials of the higher reimbursement code, whichcontinues to adversely impact our sales in Germany. We are working with our physicians and hospitals and other medical facilities in Germany andexperienced consultants to appeal MDK denials and demonstrate to MDK the benefits of our products, including patient satisfaction and recoveryrates. In the fourth quarter of 2018, sales in Germany represented 9% of our total product sales.Healthcare laws and regulationsHealthcare providers, physicians and third-party payors play a primary role in the recommendation and selection of medical devices forpatients. Arrangements with third-party payors and customers are subject to broadly applicable fraud and abuse and other healthcare laws andregulations. Such restrictions under applicable federal and state healthcare laws and regulations include the following:•the federal healthcare Anti-Kickback Statute prohibits, among other things, persons from knowingly and willfully soliciting, offering,receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or thepurchase, order or recommendation of, any good or service, for which payment may be made, in whole or in part, under a federalhealthcare program such as Medicare and Medicaid;•the federal False Claims Act imposes civil penalties, and provides for civil whistleblower or qui tam actions, against individuals or entitiesfor knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or makinga false statement to avoid, decrease or conceal an obligation to pay money to the federal government;21•the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for executing ascheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;•HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing regulations, alsoimposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission ofindividually identifiable health information;•the federal Physician Payments Sunshine Act requires applicable manufacturers of covered products to report payments and othertransfers of value to physicians and teaching hospitals; and•analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketingarrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including privateinsurers.State and foreign laws also govern the privacy and security of health information in some circumstances, many of which differ from eachother in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts. In particular, the General Data ProtectionRegulation, or GDPR, is a regulation in the European Union, or EU, that, among other things, unifies data protection regulation within the EU andgoverns the export of certain personal data and health information of citizens of the EU. Enforcement of these regulations began May 25, 2018.Financial information about segments and geographic areasWe operate as one reportable segment as described in Note B to the Consolidated Financial Statements included in this Annual Report onForm 10-K. The countries in which we have local revenue generating operations have been combined into the following geographic areas: theUnited States (including Puerto Rico), Germany, and the rest of the world, which consists of the United Kingdom predominately and several otherforeign countries. Sales are attributable to a geographic area based upon the customer’s country of domicile. Net property, plant and equipment arebased upon physical location of the assets. Additional financial information about geographic areas is included in Note O to the ConsolidatedFinancial Statements included in this Annual Report on Form 10-K.We are exposed to risks associated with international operations, including exchange rate fluctuations, regional and country-specificpolitical and economic conditions, foreign receivables collection concerns, trade protection measures, import or export requirements, tax risks,staffing and labor law concerns, intellectual property protection risks, differing regulatory requirements, government-managed healthcare systems,government-mandated pricing and reimbursement and health technology assessment schemes, government-mandated collection periods, patientprivacy laws and regulations, and other data privacy laws and regulations.EmployeesAs of February 28, 2019, we had 268 employees, including 262 full-time employees, 40 of whom were engaged in sales and marketing, 28 inresearch and development, 131 in manufacturing and service, 41 in regulatory, clinical affairs and quality activities and 28 in general administrativeand accounting activities. None of our employees are covered by a collective bargaining agreement. We consider our relationships with ouremployees to be good.Our corporate informationWe were incorporated under the laws of the State of Delaware in 2004. Our principal executive offices are located at 600 Technology ParkDrive, Billerica, MA 01821, and our telephone number is (781) 345-9001. Our website is http://www.conformis.com.Available informationWe make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reportson Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act. We make thesereports available through our website as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, theSEC. You can review our electronically filed reports and other information that we file with the SEC on the SEC's web site at http://www.sec.gov.We also make available, free of charge on our website www.conformis.com, the reports filed with the22SEC by our executive officers, directors and 10% stockholders pursuant to Section 16 under the Exchange Act as soon as reasonably practicableafter copies of those filings are provided to us by those persons. The information contained on, or that can be accessed through, our website is nota part of or incorporated by reference in this Annual Report on Form 10-K.23ITEM 1A. RISK FACTORS The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks anduncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presentlydeem less significant may also impair our business operations. Please see page 1 of this Annual Report on Form 10-K for a discussion of some ofthe forward-looking statements that are qualified by these risk factors. If any of the following risks actually occur, our business, financial condition,results of operations and future growth prospects could be materially and adversely affected.Risks related to our financial positionWe have incurred losses in the past, expect to continue to incur losses and may never achieve profitability.We have incurred significant net operating losses in every year since our inception and expect to continue to incur net operating losses forthe next several years. Our net loss was $43 million for the year ended December 31, 2018, $54 million for the year ended December 31, 2017 and$58 million for the year ended December 31, 2016. As of December 31, 2018, we had an accumulated deficit of $476 million. We expect tocontinue to incur significant product development, clinical and regulatory, sales and marketing, manufacturing and other expenses as our businesscontinues to grow and we expand our product offerings. Additionally, our general and administrative expense will continue to increase due to theadditional operational and reporting costs associated with our expanded operations and being a public company. We will need to generatesignificant additional revenue to achieve and maintain profitability, and even if we achieve profitability, we cannot be sure that we will remainprofitable for any substantial period of time. In addition, our growth may slow, for reasons described in these risk factors. Our failure to becomeand remain profitable would decrease the value of our Company and could impair our ability to raise capital, expand our business, maintain ourresearch and development efforts or continue our operations.We expect to incur substantial expenditures in the foreseeable future and may require additional capital to support business growth.This capital might not be available on terms favorable to us or at all.We expect to incur substantial expenditures in the foreseeable future in connection with the following:•expansion of our sales and marketing efforts, including for the expanded commercial launch of our Conformis Hip System;•expansion of our manufacturing capacity;•funding research, development and clinical activities related to our existing products and product platform, including iFit design softwareand product support;•funding research, development and clinical activities related to new products that we may develop, including new versions of our existingproducts and other joint replacement products;•pursuing and maintaining appropriate regulatory clearances and approvals for our existing products and any new products that we maydevelop; and•preparing, filing and prosecuting patent applications, and maintaining and enforcing our intellectual property rights and position.In addition, our general and administrative expense may continue to increase due to the additional operational and reporting costs associatedwith our expanded operations and being a public company.We anticipate that our principal sources of funds in the future will be revenue generated from the sale of our products, potential future capitalraises through the issuance of equity or other securities, potential debt financings and revenue that we may generate in connection with licensingour intellectual property. We will need to generate significant additional revenue to achieve and maintain profitability, and even if we achieveprofitability, we cannot be sure that we will remain profitable for any substantial period of time. Our failure to become and remain profitable couldimpair our ability to raise capital, expand our business, maintain our research and development efforts or continue to fund our operations.It is also possible that we may allocate significant amounts of capital toward products, technologies or geographies for which market demandis lower than anticipated and, as a result, we may subsequently abandon such efforts. If we are unable to obtain adequate financing or financing onterms satisfactory to us when we require it, or if we expend capital on projects that are not successful, our ability to continue to support ourbusiness growth and to respond to business challenges could be significantly limited, and we may even be required to scale back our operations.24 We expect to engage in additional equity or debt financings to secure additional funds within the next two years, and we may need to engagein additional equity or debt financings to secure additional funds after that. We may not be able to obtain additional financing on terms favorable tous, or at all. To the extent that we raise additional capital through the future sale of equity or debt, the ownership interest of our stockholders willbe diluted. The terms of these future equity or debt securities may include liquidation or other preferences that adversely affect the rights of ourexisting common stockholders or involve negative covenants that restrict our ability to take specific actions, such as incurring additional debt ormaking capital expenditures. We are a party to an Equity Distribution Agreement dated May 10, 2017, or the Distribution Agreement, with Canaccord Genuity Inc., orCanaccord, as sales agent, pursuant to which we may issue and sell shares of our common stock from time to time in “at-the-market” offerings. Additionally, we are a party to a purchase agreement dated December 17, 2018, or the Stock Purchase Agreement, with Lincoln Park CapitalFund, LLC, or LPC, pursuant to which we have the right, at our sole discretion, to sell to LPC up to $20 million worth of shares of our commonstock. We expect to further engage in additional equity or debt financings to secure additional funds within the next two years, and we may need toengage in additional equity or debt financings to secure additional funds after that. We may not be able to obtain additional financing on termsfavorable to us, or at all. To the extent that we raise additional capital through the future sale of equity or debt, including pursuant to theDistribution Agreement and the Stock Purchase Agreement, the ownership interest of our stockholders will be diluted. The terms of these futureequity or debt securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders orinvolve negative covenants that restrict our ability to take specific actions, such as incurring additional debt or making capital expenditures.Our existing and any future indebtedness could adversely affect our ability to operate our business.On January 6, 2017, we entered into the 2017 Secured Loan Agreement with Oxford, and accessed $15 million of borrowings under TermLoan A at closing and an additional $15 million of borrowings under Term Loan B on June 30, 2017. We were unable to access an additional $20million potentially available to borrow through June 2018 due to a failure to satisfy certain revenue milestones and customary drawdown conditions.Pursuant to a fifth amendment to the 2017 Secured Loan Agreement, or the Fifth Amendment, on December 13, 2018, we pre-paid $15 millionaggregate principal amount of the $30 million outstanding principal amount, as a pro rata portion of the Term A Loan and Term B Loan, togetherwith accrued and unpaid interest thereon and a pro rata prepayment fee. For further information regarding this facility, see “Note K-Debt and NotesPayable-2017 Secured Loan Agreement” in the financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K.The credit facility also includes events of default, the occurrence and continuation of which could cause interest to be charged at the ratethat is otherwise applicable plus 5.0% and would provide Oxford, as collateral agent with the right to exercise remedies against us and thecollateral securing the credit facility, including foreclosure against assets securing the credit facilities, including our cash. These events of defaultinclude, among other things, our failure to pay any amounts due under the credit facility, a breach of covenants under the credit facility, our failureto meet defined measures of financial performance, our insolvency, a material adverse change, the occurrence of any default under certain otherindebtedness in an amount greater than $500,000, one or more judgments against us in an amount greater than $500,000, a material adversechange with respect to any governmental approval and any delisting event.The Fifth Amendment also reduced the revenue milestones through December 31, 2019. New minimum revenue milestones, based onproduct revenue projections, are to be established prior to the start of 2020 and prior to the start of each fiscal year thereafter by the mutualagreement of Oxford and us. If we are not able to agree with Oxford on new minimum revenue milestones for 2020 or a fiscal year thereafter, wemust refinance the 2017 Secured Loan Agreement by March 31, 2020 or that next fiscal year, and if we fail to refinance the 2017 Secured LoanAgreement, we must notify Oxford of such default and Oxford would be permitted to exercise remedies against us and our assets in respect ofsuch event of default, including taking control of our cash and commencing foreclosure proceedings on our other assets. As of December 31,2018, we were not in breach of covenants under the credit facility.The initial principal payment on the 2017 Secured Loan Agreement is due on February 1, 2020. We intend to refinance the 2017 SecuredLoan Agreement before the interest only period ends and the principal repayments begin in January 2020. We may not be able to refinance orobtain additional financing on terms favorable to us, or at all. To the extent that we raise additional capital through the future sale of equity or debt,the ownership interest of our stockholders will be diluted. The terms of these future equity or debt securities may include liquidation or otherpreferences that adversely affect the rights of our existing common stockholders or involve negative covenants that restrict our ability to takespecific actions, such as incurring additional debt or making capital25expenditures. If we are unable to refinance the 2017 Secured Loan Agreement before the interest only period ends or shortly thereafter, then wewill be required to make principal repayments beginning in January 2020 which will require us to raise additional capital through the sale of equityand the ownership interest of our stockholders will be diluted.Our financial obligations and contractual commitments, including any additional indebtedness that we may incur, could increase ourvulnerability to adverse changes in general economic, industry and market conditions; limit our flexibility in planning for, or reacting to, changes inour business and the industry in which we compete; and place us at a competitive disadvantage compared to our competitors that have less debtor better debt servicing options. Additionally, with respect to our current indebtedness and any future debt that we may secure, our failure toperform financially according to the terms of the loan agreement or otherwise perform or satisfy the covenants of the loan agreement couldmaterially adversely affect us, for example, by causing us to pay increased interest, causing us to have to repay some or all of the principal of theloan on an accelerated basis, providing the lender with the ability to foreclose the loan, causing the lender to have recourse against some or all ofour assets used as collateral in the loan, including, without limitation, our cash, our intellectual property, any other of our assets, and triggeringother potentially adverse consequences under the terms of any loan agreement.Risks related to our business, industry and competitive positionWe have derived nearly all of our revenue from sales of a limited portfolio of knee replacement products and a limited commerciallaunch of a hip replacement product and may not be able to maintain or increase revenue from these products. A substantial portion ofour revenue is derived from a small number of customers.To date, we have derived nearly all of our revenue from sales of our knee replacement products and a limited commercial launch of ourConformis Hip System, and we expect that sales of these products will continue to account for the majority of our revenue for at least the nextseveral years. If we are unable to achieve and maintain significantly greater market acceptance of these products, including of our Conformis HipSystem upon its full commercial launch, we may be materially constrained in our ability to fund our operations and the development andcommercialization of improvements and other products. Any factors that negatively impact sales or growth in sales of our current products,including the size of the addressable markets for these products, our failure to convince surgeons to adopt our products, competitive factors andother factors described in these risk factors, could adversely affect our business, financial condition and operating results.In addition, as part of our commercial strategy we work to significantly increase our sales in targeted markets by focusing on high-volume,influential surgeons who use our products. As a result, orders from a relatively small number of surgeons provide a significant portion of our totalrevenue. The loss of, or significant curtailment of orders by, a limited number of our high-volume surgeons, including curtailments due to reducedreimbursement rates, medical policy coverage denials, adoption of our competitors’ products or the timing of orders by these surgeons, mayadversely affect our results of operations and financial condition.We may not be successful in the development of, obtaining regulatory clearance for, or commercialization of, additional products.All of the products we currently market in the United States have either received pre-market clearance under Section 510(k) of the FederalFood, Drug, and Cosmetic Act, or the FDCA, or are exempt from pre-market review. The FDA's 510(k) clearance process requires us to show thatour proposed product is "substantially equivalent" to another legally marketed product that did not require premarket approval. This process isshorter and typically requires the submission of less supporting documentation than other FDA approval processes and does not always requireclinical studies. To date, we have not been required to conduct clinical studies or obtain clinical data in order to obtain regulatory clearance in theUnited States for our products. Additionally, to date, we have not been required to complete clinical studies in connection with obtaining regulatoryclearance for the sale of our products outside the United States. If we must conduct clinical studies or obtain clinical data to obtain regulatoryclearance or approval for any of our products in the United States or elsewhere, the results of such studies may not be sufficient to supportregulatory clearance or approval. In addition, our costs of developing and the time to develop our products would increase significantly. Moreover,even if we obtain regulatory clearance or approval to market a product, the FDA, in the United States, or a Notified Body, in the EU, has the powerto require us to conduct post-marketing studies beyond those we contemplate conducting. We may need to raise additional funds to support anysuch clinical efforts, and if we are required to conduct such clinical efforts, our results of operations would be adversely affected.26We have expanded our product offerings to include a limited commercial launch of the Conformis Hip System, for which we received FDAclearance on June 14, 2017. However, we may not be able to successfully complete a full commercial launch of the Conformis Hip System on atimely basis, or at all. Any factors that delay the commercial launch of the Conformis Hip System, additional products, or result in sales ofadditional products increasing at a lower rate than expected, could adversely affect our business, financial condition and operation results. Inaddition, even if we do launch additional products, there can be no assurance that these additional products will be accepted in the market orcommercially successful or profitable.We are in a highly competitive market and face competition from large, well-established companies as well as new market entrants.The market for orthopedic replacement products generally, and for knee and hip implant products in particular, is intensely competitive,subject to rapid change and dominated by a small number of large companies. Our principal competitors are the major producers of prostheticknee and hip replacement products. We also compete with numerous smaller companies, many of whom have a significant regional marketpresence. In addition, a number of companies are developing biologic cartilage repair solutions to address osteoarthritis of the knee or hip thatcould reduce the demand for knee or hip replacement procedures and products. See "Business-Competition." Stem cell therapies and other new,emerging therapies could reduce or obviate the need for joint replacement surgery in the future.Many of our larger competitors may enjoy several competitive advantages over us, including:•greater financial resources, cash flow and other resources for product research and development, sales and marketing and litigation;•significantly greater name recognition;•established relations with, in some cases over decades, orthopedic surgeons, hospitals and other medical facilities, third-party payors andindependent sales representatives and distributors;•established products that are more widely accepted by, a greater number of orthopedic surgeons, hospitals and other medical facilities andthird-party payors;•more complete lines of products for knee, hip or other joint replacements;•larger and more well-established distribution networks with significant international presence;•products supported by long-term clinical data and long-term product survivorship data;•greater experience in obtaining and maintaining FDA and other regulatory approvals or clearances for products and product enhancements;and•more expansive portfolios of intellectual property rights and greater funds available to protect their intellectual property.As a result of these advantages, our competitors may be able to develop, obtain regulatory clearance or approval for and commercializeproducts and technologies more quickly than us, which could impair our ability to compete. If alternative treatments are, or are perceived to be,superior to our products, or if we are unable to increase market acceptance of our products, as compared to existing or competitive products,sales of our products could be negatively affected and our results of operations could suffer. Our competitors also may seek to copy our productsusing similar technologies for use in other joints or applications into which we have not yet expanded, which would have the effect of reducing themarket potential of our current or future products. In addition, based on our products’ favorable attributes, we expect our products to be offered athigher price points than some competitive products, and our pricing decisions may make our products less competitive.We are deploying a new business model in an effort to disrupt a relatively mature industry. In order to become profitable, we will need toscale this business model considerably through increased sales.Our business model, based on our iFit Image-to-Implant technology platform and our just-in-time delivery is new to the joint replacementindustry. We manufacture our customized replacement implants and iJigs to order and do not maintain significant inventory of finished product. Wedeliver the customized replacement implants and iJigs to the hospital or other medical facility days in advance of the scheduled arthroplastyprocedure. In order to deliver our product on a timely basis, we must execute our processes on a defined schedule with limited room for error. Ourcompetitors generally sell from a pre-produced inventory and can sell products and satisfy demand without being as dependent on businesscontinuity. Even minor delays or interruptions to our design, manufacturing or delivery processes or unexpected increases in the volume of orderscould result in delays in our ability to deliver products to specification, or at all, thereby resulting in delays of surgery or loss of sales if surgeonschoose to implant competitive products, significantly impacting our reputation and our ability to make commercial sales. Such delays may alsolead to increases in cost of goods and shipment to meet surgery dates. In order to become27profitable and increase our gross margin, we will need to significantly increase sales of our existing products, expand our manufacturingcapabilities, and successfully develop and commercially launch future products at a scale that we have not yet achieved. In order to increase ourgross margin we will need, among other things, to:•increase sales of our products;•negotiate more favorable prices for the materials we use to manufacture our products;•negotiate more favorable prices for the manufacture of certain components of our products that are manufactured for us by third parties;•continue to increase the production of certain components of our products that we manufacture in-house, which we believe we canmanufacture at a lower unit cost than vendors we currently use;•continue to transition our in-house CAD labor force to India;•deploy new versions of our software that reduce the costs associated with the design of our products; and•expand our internal manufacturing capabilities to manufacture certain components of our products at a lower unit cost than vendors wecurrently use.We may not be successful in achieving these objectives, and our gross margin may not increase, or could even decrease. We may not besuccessful in executing on our business model, in increasing our gross margin or in bringing our sales and production up to a scale that will beprofitable, which would have a material adverse effect on our financial condition, results of operations and cash flows.To be commercially successful, we must convince orthopedic surgeons that our joint replacement products are attractive alternatives toour competitors' products.Orthopedic surgeons play a significant role in determining the course of treatment and, ultimately, the type of product that will be used totreat a patient. Acceptance of our products depends on educating orthopedic surgeons as to the distinctive characteristics, perceived clinicalbenefits, safety and cost-effectiveness of our products as compared to our competitors' products. If we are not successful in convincingorthopedic surgeons of the merits of our products or educating them on the use of our products, they may not use our products and we will beunable to increase our sales or reach profitability.We believe orthopedic surgeons will not widely adopt our products unless they determine, based on experience, clinical data and publishedpeer-reviewed journal articles, that our products and the techniques to implant them provide benefits to patients and are attractive alternatives toour competitors' products. Surgeons may be hesitant to change their medical treatment practices for the following reasons, among others:•comfort and experience with competitive products;•perceived differences in surgical technique and the need to learn a new surgical technique;•existing relationships with competitors, competitive sales representatives and competitive distributors;•lack or perceived lack of evidence supporting additional patient benefits from use of our products compared to competitive products,especially competitive products that may claim to be "customized," "patient-specific," "personalized" or "individually-made";•perceived convenience of using products from a more complete line of products than we offer, including as a result of our lack of a jointrevision system;•perceived liability risks generally associated with the use of new products and procedures, including the lack of long-term clinical data;•risks of failure of timely delivery as a result of our "just-in-time" manufacturing and delivery model•unwillingness to wait for the implants to be delivered;•unwillingness to submit patients to or difficulty associated with scheduling and seeking reimbursement for computed tomography, or CT,scans needed to manufacture our products;•higher cost or perceived higher cost of our products compared to competitive products; and•the additional time commitment that may be required for surgeon training on our surgical technique.If clinical, functional or economic data does not demonstrate the benefits of using our products, surgeons may not use our products. Insuch circumstances, we may not achieve expected sales and may be unable to achieve profitability. To understand the clinical, functional andeconomic benefits of using our products, surgeons may refer to published studies sponsored by us, conducted by orthopedic surgeons who werepaid consultants to us or conducted independently by orthopedic surgeons comparing our customized products to off-the-shelf products. To theextent such studies do not report favorably on our products, surgeons may be less likely to use our products.28Moreover, overall patient satisfaction with our products, as observed by individual surgeons, will continue to be an important factor insurgeons' deciding to use our products for joint replacement procedures. The success of any particular joint replacement procedure, and a patient'ssatisfaction with the procedure, is dependent on the technique and execution of the procedure by the surgeon. Even if our iJigs and implants aremanufactured exactly to specification, there is a risk that the surgeon makes a mistake during a procedure, leading to patient dissatisfaction withthe procedure. In addition, following joint replacement procedures, fibrosis, scarring and other issues unrelated to the choice of implant product canlead to patient dissatisfaction. Furthermore, based on their prior experience using non-customized, off-the-shelf implant products, surgeons may beaccustomed to making modifications to the implant components during a procedure. Because our products are already individually-made to fit theunique anatomy of each patient, modifications made to the implant components or the process of fitting the implant during the surgical procedureare not recommended and may result in negative surgical outcomes. If patients do not have a good outcome following procedures conducted usingour products, surgeons' views of our products may be negatively impacted.The success of our products is dependent on our ability to demonstrate their clinical benefits.To date, we have collected only limited clinical data regarding our iTotal PS knee replacement product, and no clinical data on our ConformisHip System replacement product, which is currently in limited commercial launch. Ongoing or future clinical studies of our products may not yieldthe results that we expect to obtain and may not demonstrate that our products are superior to, or may demonstrate that our products are inferiorto, off-the-shelf products with regard to clinical, functional or economic measures or may not be considered sufficient by patients, surgeons,hospitals or other medical facilities, or payors. We are aware of three such clinical studies. The first was published in the Journal of Arthroplasty in2016, conducted by a single surgeon and involving only 21 iTotal CR patients, in which our iTotal CR product performed less well than off-the-shelfknee replacement products. This study compared our iTotal CR product to posterior-stabilized and non-cemented rotating platform CR implants,which we believe makes the comparison of questionable value. The measures on which our iTotal CR product performed less well than the off-the-shelf products were range of motion at six weeks (although our iTotal CR product performed equally well at the patient's two year follow-up),satisfaction and KSS pain scores at two years post-surgery and manipulation under anesthesia, or MUA, a procedure used post-operatively toadjust a knee replacement implant to improve its function. The second such study was published in Kansas Journal of Medicine in 2016 andinvestigated MUA rates in 21 patients with the iTotal CR and 57 patients with an off-the-shelf PS implant performed by a single surgeon. Themeasures on which our iTotal CR product performed less well than the off-the-shelf products were range of motion at six weeks and MUA rates.However, in a multi-center study of our iTotal CR product published in Reconstructive Review in 2018, involving 360 patients for which we providedfinancial support, the 3.1% rate of MUA for our iTotal CR product was substantially lower than the 28.6% rate of MUA shown in these singlesurgeon studies. Additionally, the patients who had completed their one year follow-up in the multicenter study reported a 92% satisfaction rate. Bycomparison, the rate of MUA reported in a separate study of off-the-shelf implants was 4.6%. The third such study was published in the Journal ofArthroplasty 2018 and conducted by a single surgeon involving 115 of our iUni implants. Patients in this study experienced a higher than typicalrevision rate than is typically noted in literature when reviewing comparable implants. However, in both a multi-center study and in a single-centerstudy of our iUni products, for which we provided financial support, involving 120 patients and 25 patients respectively, revision rates areconsistent with, or lower than, reported rates for other off-the-shelf unicompartmental implants.In addition, long-term device survivorship data for our products may show that the survivorship of our customized joint replacement productsis shorter than that of off-the-shelf products. In a January 2019 report from Beyond Compliance, results were presented summarizing four yeardata from the England and Wales National Joint Registry (“Registry”) demonstrating high survivorship in patients treated with the iTotal CR kneereplacement implant, specifically the data showed a low cumulative percent revision of 1.4% for our patients as compared with 1.9% for all totalknee replacement patients. However, there is no guarantee that such high survivorship rates will continue over time or that our other products willprovide high survivorship. Competitors may initiate their own clinical studies which may yield data that is inconsistent with data from our fundedstudies or data showing the superiority of their products over our products.The safety and efficacy of our products is supported by limited short- and long-term clinical data, and our products might thereforeprove to be less safe and effective than initially thought.To date, we have obtained regulatory clearance for our products in the United States without conducting premarket clinical studies, and wedo not believe that we will need premarket clinical data in order to obtain regulatory clearance in the United States for additional knee or hipproducts. Additionally, to date, we have not been29required to complete premarket clinical studies in connection with obtaining regulatory approval for the sale of our products outside the UnitedStates, and we do not believe that we will need premarket clinical data in order to obtain regulatory clearance in most jurisdictions outside theUnited States for additional knee products or hip products. However, to date, the regulatory agencies in the EU have required us to perform post-market clinical studies on our cleared products and may continue to do so with respect to our future products. As a result of the absence ofpremarket clinical studies, we currently lack the breadth of published long-term clinical data supporting the safety and efficacy of our products andthe benefits they offer. For these reasons, orthopedic surgeons may be slow to adopt our products and third-party payers may decide to restrictmedical policy coverage and payment for procedures involving our technology. We may not have comparative data that our competitors have orare generating and we may be subject to greater regulatory and product liability risks. Further, future patient studies or clinical experience mayindicate that treatment with our products does not improve patient outcomes. Such results would slow the adoption of our products by orthopedicsurgeons, reduce our ability to achieve expected sales and could prevent us from achieving or sustaining profitability. Moreover, if future resultsand experience indicate that our products cause unexpected or serious complications or other unforeseen negative effects, we could be subject tomandatory product recalls, suspension or withdrawal of FDA clearance, loss of our ability to CE Mark our products, significant legal liability orharm to our business reputation.If we are unable to continue to develop new products and technologies in a timely manner, or if we develop new products andtechnologies that are not accepted by the market, the demand for our products may decrease or our products could become obsolete,and our revenue and profitability may decline.We are continually engaged in product development, research and improvement efforts. Our ability to grow sales depends on our capacity tokeep up with existing or new products and technologies in the joint replacement product markets. If our competitors are able to develop andintroduce new products and technologies before us, they may gain a competitive advantage and render our products and technologies obsolete.The additional markets into which we plan to expand our business are subject to similar competitive pressures and our ability to successfullycompete in those markets will depend on our ability to develop and market new products and technologies in a timely manner.We believe that offering a broad line of joint replacement products is important to convincing surgeons to use our products generally. Ifmarket acceptance of either our iTotal PS or our Conformis Hip System is less than we expect, the growth in sales of our existing products mayslow and our financial results would be adversely affected. The success of our product development efforts will depend on many factors, includingour ability to:•create innovative product designs;•accurately anticipate and meet customers' needs;•commercialize new products in a timely manner;•differentiate our offerings from competitors' offerings;•achieve positive clinical outcomes with new products;•demonstrate the safety and reliability of new products;•provide easy adoption by and improved surgical treatment plans for surgeons;•satisfy the increased demands by healthcare payors, providers and patients for shorter hospital or other medical facility stays, faster post-operative recovery and lower-cost procedures;•provide adequate medical education relating to new products; and•manufacture and deliver implants and instrumentation in sufficient volumes on time.Moreover, research and development efforts may require a substantial investment of time and resources before we are adequately able todetermine the commercial viability of a new product, technology or other innovation. Our research and development efforts may result in productsor technologies for which market demand is lower than anticipated or for which we are otherwise unable to adequately commercialize and, as aresult, abandon, defer or modify such efforts. Our competition may respond more quickly to new or emerging technologies, undertake moreeffective marketing campaigns, adopt more aggressive pricing policies, have greater financial, marketing and other resources than us or may bemore successful in attracting potential customers, employees and strategic partners.Even in the event that we are able to successfully develop new products and technologies, they may not produce revenue in excess of thecosts of development and may be quickly rendered obsolete as a result of changing customer preferences, changing demographics, slowingindustry growth rates, declines in the knee, hip or other orthopedic replacement implant markets, evolving surgical philosophies, evolving industrystandards or the introduction by our competitors of products embodying new technologies or features. New materials, product designs and surgicaltechniques that we develop may not be accepted quickly, in some or all markets, because of,30among other factors, entrenched patterns of clinical practice, the need for regulatory clearance and uncertainty with respect to third-party medicalpolicy coverage and reimbursement of procedures that utilize our products.If surgeons, hospitals and other medical facilities are unable to obtain favorable reimbursement rates from third-party payors forprocedures involving use of our products, if third-party payors adopt policies that preclude payment for the use of our products, or ifreimbursement from third-party payors for such procedures significantly declines, surgeons, hospitals and other medical facilities maybe reluctant to use our products and our sales may decline.In the United States, surgeons and hospitals and other medical facilities who purchase medical devices such as our products generally relyon third-party payors, principally federal Medicare, state Medicaid and private health insurance plans, to pay for all or a portion of the costs andfees associated with the joint replacement surgery and the products utilized in the procedure, including the cost of our products. Our customers'access to adequate coverage and reimbursement for the procedures performed using our products by government and third-party payors is centralto the acceptance of our current and future products. To contain costs, governmental healthcare programs and third-party payors are increasinglyscrutinizing new and even existing treatments and technology by requiring extensive evidence of favorable clinical outcomes and costeffectiveness. Payors may view new products or products that have only recently been launched or with limited clinical data available, includingour iUni, iDuo, iTotal CR, and iTotal PS knee replacement systems and the Conformis Hip System, as investigational, unproven or experimental,or not medically necessary, and on that basis may deny coverage of procedures involving use of our products. Payors continue to review theircoverage policies carefully, and to implement new policies, for existing and new therapies and can, without notice, deny coverage for treatmentsthat include the use of our products.We are aware of certain private insurers that at this time are not agreeing to reimburse for our products as they consider the use of customimplants or patient-specific instrumentation for knee replacement surgery as investigational, unproven or experimental or not medically necessary.While we are actively reaching out to these private insurers to discuss their reimbursement policies, we may not be able convince these parties tochange their reimbursement policies. In addition, the American Academy of Orthopedic Surgeons currently has published clinical guidelines that donot support the widespread use of patient-specific instrumentation in total knee arthroplasty generally, at least until additional data regarding anypurported advantages can be considered. We believe that this is a similar situation directed to patient-specific instruments with off-the-shelfimplants, not use of patient-specific instruments with custom implants. Surgeons, hospitals and other medical facilities may not purchase ourproducts if government and third-party payors deny coverage for such procedures or set reimbursement rates at unfavorable levels for proceduresinvolving use of our products. This could have a material adverse effect on our business and operations.An initial step in the process for a patient to receive one of our joint replacement products involves a CT scan of the patient's affected jointand one or two CT images of other biomechanically relevant joints. The cost of the CT scan is not always reimbursed by third-party payors, andsome third-party payors may have policies against reimbursement of such scans when they have not been deemed medically necessary. Inaddition, the costs of alternative imaging techniques that we could substitute in the future for a CT scan in our iFit process, such as magneticresonance imaging, or MRI, generally, are higher than the cost of a CT scan and also not always reimbursed by third-party payors when related tojoint replacement procedures. If third-party payors do not reimburse the costs of the CT scan or, in the future, any alternative imaging technique,we could find that we have to find alternative ways to pay these costs, for example, we could pay these costs ourselves directly to the imagingfacility, or reduce the prices of our products that we charge hospitals and other medical facilities that bear these costs, in order to maintain marketacceptance of our products. In such events, our costs of sales could increase and our revenue could decrease, in each case adversely affectingour financials, including, among other things, our gross margin. If payors do not reimburse the costs of the CT scan and we are unable to find analternative way to pay these costs, we may be unable to sell our products which could have a material adverse effect on our business andoperations.The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 or, collectively,the ACA, has changed how some healthcare providers are reimbursed by the Medicare program and some private third-party payors. Asphysicians consolidate into Accountable Care Organizations, or ACOs, these physicians, through the ACOs, are taking on the financial risk forproviding care to all patients in their ACO. Medicare and some private third-party payors calculate a set payment per beneficiary or member of theACO based on the specific ACOs’ historical aggregate payments for care provided to the respective beneficiaries, or in the instance of theComprehensive Care for Joint Replacement initiative a regional per procedure payment, known as a “bundle”, would be calculated. ACOs usethese payments to provide care for their patients. When the cost of31providing care is less than payments received, the ACO is able to keep the savings. ACOs are therefore incentivized to control and reduce thecost of patient care. Attempts to control and reduce the cost of care within an ACO could result in fewer referrals for elective surgery, or requirethe use of the least expensive implant available, either or both of which could cause our revenue to decline.Since enactment of the ACA, there have been numerous legal challenges and Congressional actions to repeal and replace provisions of thelaw. For example, with enactment of the Tax Cuts and Jobs Act of 2017, which was signed by the President on December 22, 2017, Congressrepealed the “individual mandate.” The repeal of this provision, which requires most Americans to carry a minimal level of health insurance, willbecome effective in 2019. According to the Congressional Budget Office, the repeal of the individual mandate will cause 13 million fewerAmericans to be insured in 2027 and premiums in insurance markets may rise. Additionally, on January 22, 2018, President Trump signed acontinuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain ACA-mandated fees, including the so-called“Cadillac” tax on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based onmarket share, and the medical device excise tax on non-exempt medical devices. Further, the Bipartisan Budget Act of 2018, among other things,amends the ACA, effective January 1, 2019, to increase from 50 percent to 70 percent the point-of-sale discount that is owed by pharmaceuticalmanufacturers who participate in Medicare Part D and to close the coverage gap in most Medicare drug plans, commonly referred to as the “donuthole”. The Congress will likely consider other legislation to replace elements of the ACA during the next Congressional session.The Trump Administration has also taken executive actions to undermine or delay implementation of the ACA. Since January 2017,President Trump has signed two Executive Orders designed to delay the implementation of certain provisions of the ACA or otherwise circumventsome of the requirements for health insurance mandated by the ACA. One Executive Order directs federal agencies with authorities andresponsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA that would imposea fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices.The second Executive Order terminates the cost-sharing subsidies that reimburse insurers under the ACA. Several state Attorneys General filedsuit to stop the administration from terminating the subsidies, but their request for a restraining order was denied by a federal judge in California onOctober 25, 2017. In addition, CMS has recently proposed regulations that would give states greater flexibility in setting benchmarks for insurers inthe individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the ACA for planssold through such marketplaces. Further, on June 14, 2018, U.S. Court of Appeals for the Federal Circuit ruled that the federal government was notrequired to pay more than $12 billion in ACA risk corridor payments to third-party payors who argued were owed to them. The effects of this gap inreimbursement on third-party payors, the viability of the ACA marketplace, providers, and potentially our business, are not yet known.Outside of the United States, reimbursement systems vary significantly by country. Many foreign markets have government-managedhealthcare systems that govern reimbursement for orthopedic implants and procedures. Many countries use a system of Diagnosis RelatedGroups to set a price for a particular medical procedure, including orthopedic implants that will be used in that procedure. In the EU, the pricing andapproval for use of medical devices is subject to governmental control, and pricing negotiations with governmental authorities can takeconsiderable time after a device has been CE marked. To obtain reimbursement or pricing approval in some countries, we may be required tosupply data that compares the cost-effectiveness of our products to other available therapies. Additionally, some foreign reimbursement systemsprovide for limited payments in a given period and therefore result in extended collection periods. Further, reimbursement rates for our products inother jurisdictions, including in Germany, where in the past we have attained reimbursement rates at higher price points than some competitiveproducts, has changed negatively for certain of our products in 2017, changed positively for 2019 and could further change negatively in Germanyand other jurisdictions. In addition, beginning in 2016, we have seen an increase in denials of the higher reimbursement code for use of ourproducts in Germany by the Medizinischer Dienst der Krankenkassen (translated: Medical Service of Health Insurance), or MDK, and, in suchinstances, the amount of reimbursement to the hospitals and other medical facilities has been lowered to that of an off-the-shelf knee.If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, it may not beprofitable to sell our products outside of the United States, which would negatively affect the long-term growth of our business.We are subject to cost-containment efforts of hospitals and other medical facilities and group purchasing organizations, which may havea material adverse effect on our financial condition, results of operations and cash flows.32In order for surgeons to use our products, the hospitals and other medical facilities where these surgeons treat patients typically require us toenter into purchasing contracts. The process of negotiating a purchasing contract can be lengthy and time-consuming, require extensivemanagement time and may not be successful. In addition, many of our customers and potential customers are members of group purchasingorganizations that are focused on containing costs. Group purchasing organizations negotiate pricing arrangements with medical supply and devicemanufacturers, and these negotiated prices are made available to a group purchasing organization's affiliated hospitals and other medical facilities.If we do not have pricing agreements with group purchasing organizations, their affiliated hospitals and other medical facilities may be less likely topurchase our products. Our failure to complete purchasing contracts with hospitals or other medical facilities or contracts with group purchasingorganizations may cause us to lose market share to our competitors and could have a material adverse effect on our sales, financial condition,results of operations and cash flows. Our competitors may also elect to lower their prices in select accounts, thereby rendering our products non-competitive on the basis of price, with resulting losses in sales to these accounts.If we are unable to train orthopedic surgeons on the safe and appropriate use of our products or if trained surgeons do not continue touse our products, we may be unable to achieve our expected growth.An important part of our sales process includes training surgeons on the safe and appropriate use of our products. If we become unable toattract potential new surgeon customers to our training programs, or if we are unable to attract existing customers to training programs for futureproducts, we may be unable to achieve our expected growth.There is a learning process involved for orthopedic surgeons to become proficient in the use of our products. It is critical to the success ofour commercialization efforts to train a sufficient number of orthopedic surgeons and to provide them with adequate instruction in the use of ourproducts. This training process may take longer than expected and may therefore affect our ability to increase sales. Following completion oftraining, we rely on the trained surgeons to continue to use our products and advocate the benefits of our products in the broader marketplace.Convincing surgeons to dedicate the time and energy necessary for adequate training of themselves or other surgeons is challenging, and we maynot be successful in these efforts. If surgeons are not properly trained, they may misuse or ineffectively use our products. This may also result inunsatisfactory patient outcomes, patient injury, negative publicity or lawsuits against us, any of which could have an adverse effect on ourbusiness. If trained surgeons do not continue to use our products, this could cause our revenue to decline.Although we believe our training methods for surgeons are conducted in compliance with FDA and other applicable regulations, if the FDA orother applicable government agency determines that our training constitutes promotion of an unapproved use or other inappropriate promotion, theycould request that we modify our training or subject us to regulatory enforcement actions, including the issuance of a warning letter, injunction,seizure, civil fine and criminal penalty.We rely on a limited number of direct and independent sales representatives and distributors to market and sell our products. Loss ofour sales representatives and distributors could harm our business.We rely on our direct and independent sales representatives in the United States, direct sales representatives in Germany and distributors incertain other countries to market and sell our products. Our sales representatives and distributors are highly trained and possess substantialtechnical expertise as well as relationships with surgeons, hospitals and other medical facilities. The loss of these sales representatives ordistributors to competitors or otherwise could materially harm our business. If we are unable to retain our sales representatives or distributors orreplace them with individuals of equivalent technical expertise and qualifications, or if we are unable to successfully instill such technical expertisein replacement sales representatives or distributors or such replacements are unable to develop the necessary relationships, our revenue andresults of operations could be materially harmed.If our independent sales representatives and distributors are not successful in selling our products, our sales may decline.We depend on independent sales representatives and distributors for the marketing and sales of our products. Revenue generated fromthe sales of our products by independent sales representatives represented approximately 84% of our total revenue from sales of our products inthe United States for the year ended December 31, 2018, approximately 78% of our total revenue from sales of our products in the United Statesfor the year ended December 31, 2017 and approximately 71% of our total revenue from sales of our products in the United States for the yearended December 31, 2016. We do not have independent sales representatives outside33the United States and, therefore did not generate any revenue from sales of our products by independent sales representatives outside the UnitedStates in the years ended December 31, 2018, 2017 and 2016. Revenue generated from the sales of our products to distributors representedapproximately 30%, 14% and 5% of our total revenue from sales of our products outside the United States for the years ended December 31,2018, 2017, and 2016. We did not have distributors within the United Stated and, therefore, did not generate any revenue from sales of ourproducts to distributors in the United States in the years ended December 31, 2018, 2017 and 2016. We have entered into written agreements withthese independent sales representatives and distributors. Relying on independent sales representatives and distributors for our sales andmarketing could harm our business for various reasons, including:•agreements may terminate prematurely due to disagreements or may result in litigation and, if we terminate an agreement early, we maybe required to pay a fee on termination;•we may not be able to renew existing agreements on acceptable terms;•our independent sales representatives and distributors may not devote sufficient resources to the sale of products;•our independent sales representatives and distributors may be unsuccessful in marketing our products;•our existing relationships with independent sales representatives and distributors may preclude us from entering into additional futurearrangements with other independent sales representatives and distributors; and•we may not be able to negotiate future agreements with independent sales representatives and distributors on acceptable terms or at all.None of our independent sales representatives or distributors have been required to sell our products exclusively and many of them mayalso sell the products of our competitors. We cannot be certain that they will prioritize selling our products over other products they sell, includingthose of our competitors, and our competitors may enter into arrangements with our independent sales representatives and distributors that requirethem to cease distributing our products. If one or more of our independent sales representatives or distributors were to cease selling or distributingour products, our sales could be adversely affected. In such a situation, we may need to seek alternative relationships with independent salesrepresentatives and distributors or increase our reliance on our other independent sales representatives or distributors or our direct salesrepresentatives, which may not prevent our sales from being adversely affected. Additionally, to the extent that we enter into additionalarrangements with independent sales representatives or distributors to perform sales, marketing or distribution services, the terms of thearrangements could cause our operating margins to be lower than if we directly marketed and sold our products.Global economic conditions may adversely affect our results of operations.Our results of operations could be substantially affected by global economic conditions and local operating and economic conditions, whichcan vary substantially by market. Declines in employment rates or consumer confidence both in the United States and abroad could result inreduced numbers of insured patients and the deferral of some elective joint replacement procedures. Similarly, uncertainty about the stability ofglobal financial markets could adversely affect our operations. Challenges and pressures in the global economy could ultimately impact jointreplacement procedure volumes, average selling prices and reimbursement rates from third-party payors, any of which could adversely affect ourresults of operations.Unfavorable economic conditions can depress sales in a given market and may result in actions that adversely affect our margins, constrainour operating flexibility or result in charges which are unusual or non-recurring. Certain macroeconomic events could have a wide-ranging andprolonged impact on the general business environment, which could also adversely affect us. These economic developments could affect us innumerous ways, many of which we cannot predict. Among the potential effects could be:•an increase in our variable interest rates;•an inability to access credit markets should we require external financing;•a reduction in the purchasing power of our European Union customers due to a deterioration of the value of the euro;•inventory issues due to financial difficulties experienced by our suppliers and customers, including distributors; and•delays in collection.In addition, it is possible that deteriorating economic conditions, and resulting U.S. federal budgetary concerns, could prompt the U.S. federalgovernment to make significant changes in the Medicare program, which could adversely affect our results of operations. We are unable to predictthe likely duration and severity of any34disruption in financial markets and adverse economic conditions, or the effects these disruptions and conditions would have on us.The exit of the United Kingdom from membership in the European Union could adversely affect our financial results and our operationsin the United Kingdom and the European Union.On June 23, 2016, the electorate in the United Kingdom voted in favor of leaving the EU (which is commonly referred to as “Brexit”).Thereafter, on March 29, 2017, the country formally notified the EU of its intention to withdraw pursuant to Article 50 of the Lisbon Treaty. Thewithdrawal of the United Kingdom from the EU will take effect either on the effective date of the withdrawal agreement or, in the absence ofagreement, two years after the United Kingdom provides a notice of withdrawal pursuant to the EU Treaty. Since the regulatory framework formedical devices in the United Kingdom, covering quality, safety and efficacy of medical devices, clinical trials, marketing authorization,commercial sales and distribution of medical devices is derived from EU directives and regulations, Brexit could materially impact the futureregulatory regime which applies to medical devices and the approval of medical devices in the United Kingdom. It remains to be seen how, if at all,Brexit will impact regulatory requirements for medical device candidates and medical devices in the United Kingdom.The United Kingdom has a period of a maximum of two years from the date of its formal notification to negotiate the terms of itswithdrawal from, and future relationship with, the European Union. If no formal withdrawal agreement is reached between the United Kingdom andthe European Union, then it is expected the United Kingdom's membership of the European Union will automatically terminate two years after thesubmission of the notification of the United Kingdom's intention to withdraw from the European Union. Discussions between the United Kingdomand the European Union focused on finalizing withdrawal issues and transition agreements are ongoing. However, limited progress to date in thesenegotiations and ongoing uncertainty within the UK Government and Parliament sustains the possibility of the United Kingdom leaving theEuropean Union on March 29, 2019 without a withdrawal agreement and associated transition period in place, which is likely to cause significantmarket and economic disruption.We have received CE Marking for all of our products to date through the British Standards Institution, or BSI, a United Kingdom notifiedbody. In the absence of a withdrawal agreement, BSI would no longer be recognized as a notified body for the European Union and we could notuse our current CE Marks on our products when sold into the European Union. To address this concern, BSI has formed a notified body entity inthe Netherlands and we are participating in a migration of our CE Marks from BSI’s United Kingdom entity to BSI’s affiliate in the Netherlands.Such migration would allow us to sell into both the European Union and the United Kingdom, as the Medicines and Healthcare Products RegulatoryAgency, or MHRA, in the United Kingdom, has indicated that they would continue to accept CE Marking from European notified bodies. We believebut cannot be sure that we will complete this migration by March 29, 2019. If we are unsuccessful, it could materially impair our ability to sell ourproducts in the European Union.The consideration and passage of the Referendum of the United Kingdom’s, or the U.K., Membership of the European Union (E.U.), orBrexit, providing for the exit of the United Kingdom from the European Union, could adversely affect our sales in the U.K. and the E.U., as well asour existing and future customers and employees in E.U. Brexit could lead to legal uncertainty and potentially divergent national laws andregulations as the U.K. determines which E.U. laws to replace or replicate. The measures could potentially disrupt the markets we serve and thetax jurisdictions in which we operate and adversely change tax benefits or liabilities in these or other jurisdictions, and may cause us to losecustomers and employees. Furthermore, we translate sales and other results denominated in foreign currency into U.S. dollars for our financialstatements. Volatility in stock or currency markets, as well as the strengthening of the U.S. dollar relative to other currencies each could adverselyaffect our financial results.Economic uncertainty may reduce patient demand for knee or other joint replacement procedures. If there is not sufficient patientdemand for the procedures for which our products are used, customer demand for our products would likely drop, and our business,financial condition and results of operations would be harmed.The orthopedics industry in which we operate is vulnerable to economic trends. Joint replacement procedures are elective procedures, thecost of which may not be fully covered by or reimbursable through the government, including Medicare or Medicaid, or private health insurance. Intimes of economic uncertainty or recession, individuals may reduce the amount of money that they spend on deferrable medical procedures,including joint replacement procedures. Economic downturns in the United States and international markets could have an adverse effect ondemand for our products.35Our inability to maintain adequate working relationships with external research and development consultants and surgeons could have anegative impact on our ability to market and sell new products.We maintain professional working relationships with external research and development consultants and leading surgeons and medicalpersonnel in hospitals and universities who assist in product research and development and training. We continue to emphasize the developmentof proprietary products and product improvements to complement and expand our existing product line. It is possible that U.S. federal and statelaws requiring us to disclose payments or other transfers of value, such as free gifts or meals, to physicians and other healthcare providers couldhave a chilling effect on these relationships with individuals or entities that may, among other things, want to avoid public scrutiny of their financialrelationships with us. In addition, consultants, surgeons and medical personnel in hospitals and universities may be subject to conflict of interestpolicies that limit our ability to engage these individuals as our advisors and in connection with future development and training efforts. Further,there may be disagreements between us and our consultants or surgeons that could lead to termination of agreements or litigation. If we areunable to establish and maintain our relationships with consultants, surgeons and medical personnel, our ability to develop and sell new andimproved products could decrease, and our future operating results could be unfavorably affected.Fluctuations in insurance cost and availability could adversely affect our profitability or our risk management profile.We hold a number of insurance policies, including product liability insurance, directors' and officers' liability insurance, business interruptioninsurance, property insurance and workers' compensation insurance. The cost of maintaining product liability insurance on implantable medicaldevices has increased substantially over the past few years and could continue to substantially increase, due to general market trends, as part ofan evaluation of our specific loss history and other factors. If the costs of maintaining adequate insurance coverage should increase significantlyin the future, our operating results could be materially adversely affected. Likewise, if any of our current insurance coverage should becomeunavailable to us or become economically impractical, we would be required to operate our business without indemnity from commercial insuranceproviders. Similarly, if we exhaust our current insurance coverage for any given policy period, we would be required to operate our business withoutindemnity from commercial insurance providers for any claims made that are attributable to that policy period.Consolidation in the healthcare industry could lead to demands for price concessions or the exclusion of some suppliers from certain ofour markets, which could have an adverse effect on our business, financial condition or operating results.Because healthcare costs have risen significantly over the past decade, numerous initiatives and reforms initiated by legislators, regulatorsand third-party payors to curb these costs have resulted in a consolidation trend in the healthcare industry to create new companies with greatermarket power, including hospitals. As the healthcare industry consolidates, competition to provide products and services to industry participantshas become and will continue to become more intense. This in turn has resulted and likely will continue to result in greater pricing pressures andthe exclusion of certain suppliers from important market segments as group purchasing organizations, independent delivery networks and largesingle accounts continue to use their market power to consolidate purchasing decisions for some of our customers. We expect that marketdemand, government regulation, third-party reimbursement policies and societal pressures will continue to change the worldwide healthcareindustry, resulting in further business consolidations and alliances among our customers, which may reduce competition, exert further downwardpressure on the prices of our products and may adversely impact our business, financial condition or operating results.Risks related to our manufacturingWe may encounter problems or delays in the manufacturing of our products or fail to meet certain regulatory requirements that couldresult in a material adverse effect on our business and financial results.We manufacture our products at our facilities in Wilmington, Massachusetts, and Wallingford, Connecticut. Certain manufacturing processesin our facilities may require process and/or equipment validation and are subject to FDA inspections, as well as inspections and audits byinternational regulatory agencies, including Notified Bodies for the European Union. We have completed all appropriate process and/or equipmentvalidations of our manufacturing processes for implant components and instrumentation manufactured at our Wilmington and Wallingford facilities.However, delays in validation of revised or new manufacturing processes or FDA clearance of new manufacturing processes could impact ourability to grow our business in the future.36Our current and planned future products are complex and require the integration of a number of separate components and processes. Tobecome profitable, we must manufacture our products in increased quantities in compliance with regulatory requirements and at an acceptablecost. Increasing our capacity to manufacture our products on this scale may require us to introduce new manufacturing processes, verticalintegration of the manufacturing process by performing machining, polishing and other finishing services in-house, and to improve internalefficiencies. We have limited commercial manufacturing experience with respect to the Conformis Hip System and no commercial manufacturingexperience with respect to any future products that we may develop.If we are unable to satisfy commercial demand for our products due to our inability to manufacture them in compliance with applicable lawsand regulations, due to our inability to meet demand with in-house production or with outside suppliers, or due to temporary or permanent reducedmanufacturing capabilities, our business and financial results, including our ability to generate revenue, would be impaired, market acceptance ofour products could be diminished and customers may instead purchase our competitors' products.We may encounter other difficulties in increasing and expanding our manufacturing capacity, including difficulties:•acquiring raw materials for 3D printing;•deploying new manufacturing processes;•managing the transition of our in-house CAD labor force to India;•managing the oversight of the CAD labor force in India;•acquiring and maintaining manufacturing equipment;•managing production yields;•maintaining quality control and assurance;•maintaining component availability;•maintaining adequate control policies and procedures;•hiring and retaining qualified personnel; and•complying with state, federal and foreign regulations.Moreover, any significant disruption of our manufacturing operations or damage to our facilities or stores of raw materials for any reason,such as fire or other events beyond our control, including as a result of natural disasters or terrorist attacks, could adversely affect our sales andcustomer relationships and therefore adversely affect our business.We are dependent on third-party suppliers for important components included in our products, as well as for services that are essentialto our manufacturing processes. The loss of any of these suppliers, or their inability to provide us with an adequate supply ofcomponents or to complete finishing or other manufacturing services, could limit our ability to operate and grow our business.We purchase raw materials, including polymer powders, tibial tray blanks, and polyethylene blocks that currently are used in our 3D printingand manufacturing processes from a limited number of third-party suppliers. Possible shortages of, or our inability to obtain, the necessary rawmaterials that we currently use and intend to use in the future, including in our 3D printing manufacturing processes, could limit our ability tooperate and grow our business. Because we rely on these few suppliers and generally maintain a forward inventory of these materials sufficientonly for approximately three months of supply, there are a number of risks in our business, including:•potential shortages of these key raw materials;•potential delays in qualifying a new source of these key raw materials if our current suppliers are unable to supply us with materials thatmeet our specifications, pass our internal quality control requirements, and meet regulatory requirements;•discontinuation of a material or other component on which we rely;•potential insolvency or change of control transactions involving our suppliers; and•reduced control over delivery schedules, quality and costs.We currently depend on sole source suppliers for certain raw materials. These sole source suppliers may be unwilling or unable to supply usreliably, continuously and at the levels we anticipate or are required by the market. We may incur added costs or delays in identifying andqualifying replacement suppliers. In addition, because these suppliers supply large portions of the markets for these materials, there is competitionfor such supply. As a result of such competition, the prices for these supplies may increase and their availability to us may decrease.If any of our key suppliers were to decide to discontinue or limit the supply of a raw material that we use, the unanticipated change in theavailability of supplies could cause delays in, or loss of, sales, increased production or37related costs and damage to our reputation. In addition, because we use a limited number of suppliers, price increases by our suppliers may havean adverse effect on our results of operations, as we may be unable to find an alternative supplier who can supply us at a lower price. As a result,the loss of a limited source supplier could adversely affect our relationships with our customers and our results of operations and financialcondition.Similarly, we rely on other third-party suppliers to manufacture certain implant components, packaging materials, and instrumentation used inour joint replacement products that we do not currently manufacture ourselves. Currently, our in-house manufacturing includes our iJigs, the tibialtrays used in our total knee implants, polyethylene tibia tray inserts for our iTotal CR and iTotal PS, polishing of our femoral components and, withregard to the hip, the stems, cups and iJigs. We outsource the manufacture of the remainder of the implant components to third-party suppliers,including, for example, the casting of the femoral component. While we plan to establish additional internal manufacturing capabilities for ourimplant components, we also expect that we will continue to rely on third-party suppliers to manufacture and supply certain of our implantcomponents. For us to be successful, these manufacturers must be able to provide us with these components in substantial quantities, incompliance with regulatory requirements, in accordance with agreed upon specifications, at acceptable costs and, in particular, on a timely basis.Our anticipated growth could strain the ability of our suppliers to manufacture and deliver an increasingly large supply of implants and components.Manufacturers often experience difficulties in scaling up production, including problems with quality control and assurance.We generally purchase our outsourced implant components through purchase orders and do not have long-term contractual arrangementswith any of our key suppliers. As a result, our suppliers have no obligation to manufacture for us or sell to us any given quantity of implantcomponents. Without such contractual commitments, we could face difficulties in obtaining acceptance for our purchase orders, which couldimpair our ability to purchase adequate quantities of our implant components. If we are unable to obtain sufficient quantities of high-quality,individually-made components to meet demand on a timely basis, we could lose customers, our reputation may be harmed and our business wouldsuffer. In addition, we currently depend on sole source suppliers for the supply of the reusable instrument trays and related logistics associatedwith our implant products. These sole source suppliers may be unwilling or unable to supply the trays and logistics services to us reliably,continuously and at the levels we anticipate or are required by the market.We produce CAD designs, and we use the CAD designs to direct most of our product manufacturing efforts. As part of our manufacturingcost reduction efforts, in 2017 and 2018, we continued transitioning our CAD labor force through a third party CAD-designer in India and, in 2018,we significantly reduced our CAD labor force in-house. We and our suppliers, including our CAD-designer, are subject to extensive regulation bythe FDA under its Quality System Regulation, or QSR. Our quality department periodically audits our suppliers, including our CAD-designer, toensure compliance to appropriate ISO standards, FDA regulations and to our specifications, policies and procedures for our devices.Relying on a third party for our CAD designs could harm our business for various reasons, including:•agreement may terminate prematurely due to disagreements or may result in litigation;•we may not be able to renew the existing agreement on acceptable terms;•we may not be able to expand the Indian CAD labor force as necessary to meet market demand;•the third party may not devote sufficient resources to the production of our CAD designs;•the third party may fail to follow our processes, fail to provide CAD designs that meet our specifications or fail to meet regulatory or legalrequirements;•we may experience outages or other problems with our high speed network provider that may prevent or delay the third party fromaccessing the necessary CAD design software, which would prevent or delay the completion of the CAD designs;•the third party may be limited or prevented from access to our high speed network provider due to U.S. or foreign government interventionor regulation; and•the third party may be subject to labor disputes, strikes or other shutdowns, including related to severe weather.Because we rely on a foreign entity for CAD designs for just-in-time manufacturing of our products, there are a number of risks to our businessshould this entity be unable to provide CAD designs within the necessary time frames or at all, including delayed or missed surgeries which couldharm our reputation and our ability to sell products in the future. We would have difficulty and incur additional cost in quickly adding CAD designersin-house or through other third parties to address any short fall in CAD design production. As a result, our ability to manufacture our products andconduct business and our financial results, including our ability to generate revenue,38would be materially impaired, market acceptance of our products could be diminished and customers may instead purchase our competitors'products.We utilize a "just-in-time" manufacturing and delivery model, with minimal levels of inventories, which could leave us vulnerable todelays or shortages of key components or materials necessary for our products or delays in delivering our products. Any suchshortages or delays could result in our inability to satisfy consumer demand for our products in a timely manner or at all, which couldharm our reputation, future sales, profitability and financial condition.As all of our products are individually-made to fit an individual patient, we can manufacture our products only after we receive orders fromcustomers and must utilize "just-in-time" manufacturing processes. Supply lead times for components used in our products may vary significantlyand depend upon a variety of factors, such as:•the location of the supplier and proximity to our facilities in Massachusetts;•the availability of raw materials purchased by our suppliers;•workforce availability and skill required by the suppliers;•the complexity in manufacturing the component and general demand for the component;•delays and disruptions in the manufacturing processes of our vendors; and•disruptions in the supply chain due to weather conditions and natural disasters affecting suppliers, our employees, and freight carriers.We generally maintain minimal inventory levels, except for inventories of raw materials used in our 3D printing and manufacturing processes.As a result, an unexpected shortage of supply of key components used to manufacture our products, unexpected difficulties with manufacturingour products, or an unexpected and significant increase in the demand for our products, could lead to delays in shipping our products tocustomers. Any such delays could result in lost sales and harm to our relationships with surgeons, especially in the event of a missed surgery,and may also require us to seek faster, more expensive delivery methods in order to not miss surgery dates, each of which could in turn harm ourprofitability and financial condition.Moreover, our suppliers are dependent on commercial freight carriers to deliver implant components to our facilities, and we are dependent oncommercial freight carriers to deliver our finished products to hospitals and surgeons. If the operations of these carriers are disrupted for anyreason, we may be unable to deliver our products to our customers on a timely basis. If we cannot deliver our products in an efficient and timelymanner, our customers may reduce their orders from us and our revenue and operating profits could materially decline. In a rising fuel costenvironment, our and our suppliers' freight costs will increase. If freight costs materially increase and we are unable to pass that increase along toour customers for any reason or otherwise offset such increases in our cost of revenue, our gross margin and financial results could be adverselyaffected.Our proprietary iFit software is critical to our business. Any delays in fixing bugs or errors and any limitations in our ability to modifysuch software for future products or modifications of existing products could have a material adverse impact on our business andoperating results.We rely on our iFit proprietary software applications to design and manufacture our customized implants and iJigs for each patient. Thesesoftware applications require maintenance and further improvements in design automation in order to continue increasing productivity of the designprocess. If we fail to meet our goals for design automation and productivity, this may impact our ability to reduce production costs. Furthermore,bugs or errors in these complex iFit software applications could cause production delays or product defects, which may lead to customerdissatisfaction or possibly even product recalls.Our development of new products depends on our capability to adapt our iFit concepts and software applications to new requirements. It maybe more difficult than anticipated to make such adjustments, which could lead to delays or limitations in our ability to develop new, innovativeproducts.We rely on experienced software programmers to maintain and modify our iFit software applications. Loss of such employees couldmaterially harm our business.39Our information technology systems are critical to our business. System management and implementation issues and system securityrisks could disrupt our operations, which could have a material adverse impact on our business and operating results.We rely on the efficient and uninterrupted operation of complex information technology systems. All information technology systems arevulnerable to damage or interruption from a variety of sources. As our business has grown in size and complexity, the growth has placed, and willcontinue to place, significant demands on our information technology systems.Moreover, changes in privacy laws could increase the risk we are exposed to in managing patient data, and could limit some of theapplications of that data in our business.Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate our confidentialinformation or that of third parties, create system disruptions or cause shutdowns. The costs to eliminate or alleviate security problems or virusescould be significant, and the efforts to address these problems could result in interruptions that may have a material adverse impact on ouroperations, net revenue and operating results.A cyber security incident could result in a loss of confidential data, give rise to remediation and other expenses, expose us to liabilityunder HIPAA, consumer protection laws, or other common law theories, subject us to litigation and federal and state governmentalinquiries, damage our reputation, and otherwise be disruptive to our business.We collect and store sensitive information, including intellectual property and personally identifiable information, on our networks. The securemaintenance of this information is critical to our business operations. We have implemented multiple layers of security measures to protect thisconfidential data through technology, processes, and our people; we utilize current security technologies; and our defenses are monitored androutinely reviewed by internal and external parties. Despite these efforts, threats from malicious persons and groups, new vulnerabilities, andadvanced new attacks against information systems create risk of cyber security incidents. There can be no assurance that we will not be subjectto cyber security incidents that bypass our security measures, result in loss of personal health information or other data subject to privacy laws ordisrupt our information systems or business. As a result, cyber security and the continued development and enhancement of our controls,processes and practices designed to protect our information systems from attack, damage or unauthorized access remain a priority for us. Ascyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protectivemeasures or to investigate and remediate any cyber security vulnerabilities. The occurrence of any of these events could result in interruptions,delays, the loss, access, misappropriation, disclosure or corruption of data, liability under privacy, security and consumer protection laws orlitigation under these or other laws, including common law theories, and subject us to federal and state governmental inquiries, any of which couldhave a material adverse effect on our financial position and results of operations and harm our business reputation.Risks related to our international operationsWe are exposed to risks related to our international sales and operations and failure to manage these risks may adversely affect ouroperating results and financial condition.We sell our products internationally in Germany, the United Kingdom, Austria, Ireland, Switzerland, Singapore, Hong Kong, Malaysia,Monaco, Hungary, Spain and Australia. We expect that our international activities will increase over the foreseeable future as we continue topursue opportunities in additional international markets. During each of the years ended December 31, 2018, 2017 and 2016 approximately 13%,17%, and 21% of our revenue was attributable to our international customers, respectively, and as of December 31, 2018, approximately 4% of ouremployees were located outside the United States. The sale and shipment of our products across international borders, as well as the purchase ofcomponents and products from international sources, subjects us to extensive U.S. and foreign governmental trade, import and export andcustoms regulations and laws. Compliance with these regulations and laws is costly and exposes us to penalties for non-compliance. Therefore,we are subject to risks associated with having international operations. These international operations will require significant management attentionand financial resources.International operations are subject to inherent risks, and our future results could be adversely affected by a number of factors, including:40•requirements or preferences for domestic products or solutions, which could reduce demand for our products;•changes in foreign medical reimbursement policies and programs;•complex data privacy requirements and labor relations laws;•differing existing or future regulatory and certification requirements;•technology assessment requirements that we are not able to satisfactorily meet with our current published clinical and health economicoutcomes studies;•extraterritorial effects of U.S. laws such as the Foreign Corrupt Practices Act;•effects of foreign anti-corruption laws, such as the U.K. Bribery Act of 2010, or the Bribery Act;•management communication and integration problems related to entering new markets with different languages, cultures and politicalsystems;•greater difficulty in collecting accounts receivable and longer collection periods;•difficulties in enforcing contracts;•difficulties and costs of staffing and managing foreign operations;•labor force instability;•the uncertainty of protection for intellectual property rights in some countries;•potentially adverse regulatory requirements regarding our ability to repatriate profits to the United States;•tariffs and trade barriers, export regulations and other regulatory and contractual limitations on our ability to sell our products in certainforeign markets; and•political and economic instability and terrorism.Our international operations expose us to risks of fluctuations in foreign currency exchange rates.Our international operations expose us to risks of fluctuations in foreign currency exchange rates. To date, a significant portion of ourinternational sales have been denominated in euros. We do not currently hedge any of our foreign currency exposure. As a result, a decline in thevalue of the euro against the U.S. dollar could have a material adverse effect on the gross margin and profitability of our international operations. Inaddition, sales to countries that do not utilize the euro could decline as the cost of our products to our customers in those countries increases oras the local currencies decrease. In addition, because our financial statements are denominated in U.S. dollars, a decline in the euro wouldnegatively impact our overall revenue as reflected in our financial statements. To date, we have not used risk management techniques to hedgethe risks associated with these fluctuations. Even if we were to implement hedging strategies, not every exposure can be hedged and, wherehedges are put in place based on expected foreign currency exchange exposure, they are based on forecasts that may vary or that may laterprove to have been inaccurate. As a result, fluctuations in foreign currency exchange rates or our failure to successfully hedge against thesefluctuations could have a material adverse effect on our operating results and financial condition.Risks related to managing our future growthWe expect to grow our organization in accordance with a new long range business plan, and as a result, we may encounter difficulties inmanaging our growth, which could disrupt our operations.In the fourth quarter of 2018, we began the implementation of a new long range business plan, or the LRP, including a reduction in our totalwork force by approximately 10%, institution of cost reduction initiatives and a reduction of our debt facility from $30 million to $15 million. Weexpect to experience subsequent growth in the number of our employees and the scope of our operations following implementation of the LRP.Managing the business in accordance with the LRP will require significant attention by our management and we may be unable to successfullycomplete the LRP, which would require us to seek additional financing. Our management may need to adjust the LRP to increase or decreaseexpected growth based on our actual business performance.If our performance allows for an increase in the growth of the number of our employees and scope of our operations, our management mayneed to divert a disproportionate amount of its attention away from our day-to-day activities to devote time to managing these growth activities. Tomanage these growth activities, we must continue to implement and improve our managerial, operational and financial systems, expand ourfacilities and continue to recruit and train additional qualified personnel. We may have difficulties effectively managing the expansion of ouroperations or recruiting and training additional qualified personnel. Our inability to effectively manage the expansion of our operations may result inweaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivityamong remaining employees. Our expected growth could require significant capital expenditures and may divert financial resources from otherprojects, such as the development of additional products. If our management is unable to effectively manage our expected growth, our expensesmay increase more than expected, our ability to generate revenue could be41reduced, and we may not be able to implement our business strategy. In addition, we may consider further expanding our operations throughpotential acquisitions. Potential and completed acquisitions and strategic investments involve numerous risks, including diversion ofmanagement's attention from our core business, problems assimilating the purchased technologies or business operations and unanticipated costsand liabilities. Our future financial performance and our ability to commercialize products and compete effectively will depend, in part, on our abilityto effectively manage any future growth, including growth through acquisitions.If our performance requires a further decrease in the number of our employees and scope of our operations, our management would need tospend significant attention managing this reduction and the operation of the business and such reduction could have a material adverse effect onour operating results and financial condition.Our future success depends on our ability to retain our executive officers and to attract, retain and motivate qualified personnel.We are highly dependent on the managerial experience and the medical device industry expertise of principal members of our executive,scientific and development teams. We have formal employment agreements with our executive officers. These agreements do not prevent themfrom terminating their employment with us at any time. In addition, we do not carry key-man insurance on any of our executive officers oremployees and may not carry any key-man insurance in the future.If we lose one or more of our executive officers and are unable to recruit qualified talent in those positions, our ability to implement ourbusiness strategy successfully could be seriously harmed. Furthermore, replacing executive officers may be difficult and may take an extendedperiod of time because of the limited number of individuals in our industry with the breadth of skills and experience required to develop, gainmarketing approval of and commercialize products successfully. Competition to hire from this limited pool is intense, and we may be unable tohire, train, retain or motivate these additional key personnel on acceptable terms given the competition among numerous medical devicecompanies for similar personnel. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us informulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers otherthan us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us. If we areunable to continue to attract and retain high quality personnel, our ability to develop and commercialize product candidates will be limited.Risks related to our intellectual property and potential litigationIf we are unable to obtain, maintain or enforce sufficient intellectual property protection for our products and technologies, or if thescope of our intellectual property protection is not sufficiently broad, our competitive position could be harmed or we could be requiredto incur significant expenses to enforce our rights.We rely primarily on patent, copyright, trademark and trade secret laws, know-how and continuing technological innovation, as well asconfidentiality and non-disclosure agreements and other methods, to protect the intellectual property related to our technologies and products.However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitiveadvantage.We hold, or have in-licensed rights with respect to, patents and patent applications and have applied for additional patent protection relatingto certain existing and potential products and processes. While we generally apply for patents in those countries where we intend to make, havemade, use or sell patented products, we may not accurately predict all of the countries where patent protection will ultimately be desirable or maychoose not to file in certain countries to limit expenses. If we fail to timely file a patent application in any such country or fail to properly pursue anapplication through to the issuance of a patent, we may be precluded from doing so at a later date. Furthermore, our patent applications may notissue as patents such that material aspects of our products and procedures may not be protected. The rights granted to us under our patents,including prospective rights sought in our pending patent applications, may not be meaningful or provide us with any commercial advantage andthey could be opposed, contested or circumvented by our competitors or could be declared invalid or unenforceable in judicial or in a wide varietyof administrative proceedings including opposition, interference, re-examination, post-grant review, inter parties review, nullification and derivationproceedings. In such proceedings, third parties can raise objections against the grant of a patent. In the course of some such proceedings, whichmay continue for a protracted period of time, we may be compelled to limit the scope of the challenged claims, or may lose them altogether. Forexample, certain claims of certain of our issued patents were declared invalid by the U.S. Patent Office following inter parties review proceedingsbrought by Smith & Nephew. See Part II, Item 3, Legal42Proceedings of this Annual Report on Form 10-K for more information on the patent proceedings brought against us by Smith & Nephew. Theprocess of applying for patent protection itself is time consuming and expensive. The failure of our patents to protect our products andtechnologies adequately might make it easier for our competitors to offer the same or similar products or technologies. Competitors may be able todesign around our patents or develop products that provide outcomes that are comparable to ours without infringing on our intellectual propertyrights.We may be involved in lawsuits to protect or enforce our intellectual property rights, which could be expensive, time consuming andunsuccessful.If a competitor infringes or otherwise violates one of our patents, the patents of our licensors, or our other intellectual property rights,enforcing those patents, trademarks and other rights would be difficult, time consuming, expensive and unsuccessful. In addition, in aninfringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, in whole or part, or may refuse to stop the otherparty in such infringement proceeding from using the technology at issue on the grounds that our patents do not cover the technology in question.An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated, held unenforceable orinterpreted narrowly, and could put any of our patent applications at risk of not yielding an issued patent. Even if successful, litigation to defendour patents and trademarks against challenges or to enforce our intellectual property rights would be expensive and time consuming and coulddivert management's attention from managing our business. Moreover, we may not have sufficient resources to defend our patents or trademarksagainst challenges or to enforce our intellectual property rights. Moreover, bringing an infringement proceeding against a third party may result inthat third party bringing claims against us that our products infringe their patents and seeking monetary damages on the sales of those products aswell as injunctions against the future sales of our products.In particular, on February 29, 2016, we filed a lawsuit against Smith & Nephew in the United States District Court for the District ofMassachusetts Eastern Division. The lawsuit alleged that Smith & Nephew’s Visionaire® patient-specific instrumentation, as well as the implantssystems used in conjunction with the Visionaire instrumentation, infringed eight of our patents, and requested monetary damages for willfulinfringement and a permanent injunction. Smith & Nephew then counter sued filing claims alleging that our products infringed ten patents owned orexclusively licensed by Smith & Nephew. This lawsuit and our settlement of it is described in more detail in Part II, Item 3, Legal Proceedings ofthis Annual Report on Form 10-K.If we are unable to protect the confidentiality of our trade secrets, the value of our technology could be materially adversely affected, andour business would be harmed.In addition to the protection afforded by patents, we rely on confidential proprietary information, including trade secrets, and know-how todevelop and maintain our competitive position, especially with respect to our proprietary software used in the iFit design and manufacturingaspects of our technology platform. Any disclosure to or misappropriation by third parties of our confidential proprietary information could enablecompetitors to quickly duplicate or surpass our technological achievements, thus eroding our competitive position in our market. We seek toprotect our confidential proprietary information, in part, by confidentiality agreements and invention assignment agreements with our employees,consultants, scientific advisors, contractors and collaborators. Though these agreements are designed to protect our proprietary information, wecannot be certain that such agreements have been entered into with all relevant parties, and we cannot be certain that our trade secrets and otherconfidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independentlydevelop substantially equivalent information and techniques. For example, any of these parties may breach the agreements and disclose ourproprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. We also seek topreserve the integrity and confidentiality of our confidential proprietary information by maintaining physical security of our premises and physicaland electronic security of our information technology systems. However, it is possible that these security measures could be breached. If any ofour confidential proprietary information were to be lawfully obtained or independently developed by a competitor, we would have no right to preventsuch competitor from using that technology or information to compete with us, which could harm our competitive position. If we are unable toprevent material disclosure of the intellectual property related to our technologies to third parties, we may not be able to establish or maintain acompetitive advantage in our market, which could materially adversely affect our business, results of operations and financial condition.If we fail to comply with our obligations in the agreements under which we license intellectual property rights from third parties orotherwise experience disruptions to our business relationships with our43licensors, we could be required to pay monetary damages or could lose license rights that are important to our business.We have entered into license agreements with third parties providing us with rights under various third-party patents and patent applications,including the rights to prosecute patent applications and to enforce patent rights. Certain of these license agreements impose royalty andinsurance obligations on us as well as development and milestone obligations that we have met. In the future, we may enter into additionallicensing and funding arrangements with third parties that also may impose, diligence, development or commercialization timelines and milestonepayment, royalty, insurance and other obligations on us. If we fail to comply with our obligations under any of our license agreements, ourcounterparties may have the right to seek relief or to terminate these agreements, in which event we might not be able to develop, manufacture ormarket any product that is covered by the licenses provided for under these agreements or we may face claims for monetary damages or otherpenalties under these agreements. Such an occurrence could diminish the value of these products and our company. Termination of the licensesprovided for under these agreements or reduction or elimination of our rights under these agreements may result in our having to negotiate new orreinstated agreements with less favorable terms, or cause us to lose our rights under these agreements, including our rights to importantintellectual property or technology.In the future, we may not be able to license additional intellectual property rights that we need for our business. If we are unable to doso, we may be unable to develop or commercialize the affected products, which could harm our business significantly.In the future, we may need to obtain additional licenses from others to expand our product lines, advance our technology or allowcommercialization of our current or future products. It is possible that we may be unable to obtain additional licenses at a reasonable cost or onreasonable terms, if at all. In that event, we may be required to expend significant time and resources to redesign our products or the methods formanufacturing them or to develop or license replacement technology, all of which may not be feasible on a technical or commercial basis. If weare unable to do so, we may be unable to develop or commercialize the affected products, which could harm our business significantly.The medical device industry is characterized by frequent patent litigation, and we could become subject to litigation that could be costly,result in the diversion of management's time and efforts, require us to pay damages or prevent us from marketing our existing or futureproducts.Our commercial success depends in part on not infringing the patents or violating the other proprietary rights of others and we may becomeparty to, or threatened with, litigation or other adversarial proceedings regarding intellectual property rights with respect to our technology orproducts, including interference or derivation proceedings before the U.S. Patent and Trademark Office. Significant litigation regarding patent rightsoccurs in our industry. Our competitors in both the United States and abroad, many of which have substantially greater resources and have madesubstantial investments in patent portfolios and competing technologies, may have applied for or obtained or may in the future apply for andobtain, patents that may prevent, limit or otherwise interfere with our ability to make, use and sell our products. Our ability to defend ourselves orour third-party suppliers may be limited by our financial and human resources, the availability of reasonable defenses, and the ultimate acceptanceof our defenses by the courts or juries. In addition, patent applications in the United States and elsewhere can be pending for many years beforeissuance, so there may be applications of others now pending of which we are unaware that may later result in issued patents that may prevent,limit or otherwise interfere with our ability to make, use or sell our products. The large number of patents, the rapid rate of new patent applicationsand issuances, the complexities of the technology involved and the uncertainty of litigation increases the risk of business assets andmanagement's attention being diverted to patent litigation. Lawsuits resulting from allegations of infringement could, if successful, subject us tosignificant liability for damages and invalidate our proprietary rights. We have in the past settled allegations of infringement by entering into asettlement and license agreement and may need to do so again in the future. Any potential intellectual property litigation also could force us to doone or more of the following:•stop making, selling or using products or technologies that allegedly infringe the asserted intellectual property;•lose the opportunity to license our technology to others or to collect royalty payments based upon successful protection and assertion ofour intellectual property rights against others;•incur significant legal expenses;•pay substantial damages or royalties to the party whose intellectual property rights we may be found to be infringing;44•pay the attorney fees and costs of litigation to the party whose intellectual property rights we may be found to be infringing;•redesign those products that contain the allegedly infringing intellectual property, which could be costly, disruptive or infeasible; or•attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reasonable terms or at all.Further, as the number of participants in the joint replacement industry grows, the possibility of intellectual property infringement claimsagainst us increases. We cannot provide any assurances that third-party patents do not exist which might be enforced against our currentmanufacturing methods, products or future methods or products, resulting in either an injunction prohibiting our manufacture or sales, or, withrespect to our sales, an obligation on our part to pay royalties or other forms of compensation to third parties.We may not be able to adequately protect our intellectual property rights throughout the world.Filing, prosecuting and defending patents on our products in all countries throughout the world would be prohibitively expensive. Therequirements for patentability may differ in certain countries, particularly developing countries, and the breadth of patent claims allowed can beinconsistent. In addition, the laws of some foreign countries may not protect our intellectual property rights to the same extent as laws in theUnited States. Consequently, we will not be able to prevent third parties from practicing our inventions in all countries outside the United States.Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further,may export otherwise infringing products to territories in which we have patent protection that may not be sufficient to enable us to terminateinfringing activities.We do not have patent rights in certain foreign countries in which a market may exist. We have filed patent applications only in the UnitedStates and fewer than 16 other countries, many of which are in the European Union, and we therefore lack any patent protection in all othercountries. In countries where we do not have significant patent protection, we are unlikely to stop a competitor from marketing products in suchcountries that are the same as or similar to our products. Moreover, in foreign jurisdictions where we do have patent rights, proceedings to enforcesuch rights could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk ofbeing invalidated or interpreted narrowly, and our patent applications at risk of not issuing. We may not prevail in any lawsuits that we initiate andthe damages or other remedies awarded, if any, may not be commercially meaningful. Thus, we may not be able to stop a competitor frommarketing and selling in foreign countries products that are the same as or similar to our products, and our competitive position in the internationalmarket would be harmed.Product liability lawsuits have been and may continue to be brought against us which may harm our reputation, divert management’sattention, and require us to pay damages that exceed our insurance coverage, each of which may result in harm to our business.Our business exposes us to potential product liability claims that are inherent in the testing, manufacture and sale of medical devices forknee replacement procedures. Knee and hip replacement surgery, as well as other joint replacement surgery, involves significant risk of seriouscomplications, including bleeding, infection, instability, dislocation, nerve injury and death. In addition, joint replacement surgery involves productrisks, including failures over time due to polyethylene tibia tray inserts wear and aseptic loosening, which is a condition caused by wear debrisgenerated by the implant. Additionally, because we manufacture patient-specific instrumentation and patient-specific implants for individualpatients and uniquely identify each patient’s components, we have in the past and could face future product liability claims if incorrect componentsare delivered for a patient. We or our suppliers could suffer breaches to our sterilization procedures, which could cause contamination of theaffected components and products we market and ultimately could cause infections in patients. Moreover, patients may be dissatisfied with theresults of joint replacement surgery even if there is no medical complication. We have been and may continue to become the subject of productliability lawsuits alleging that component failures, malfunctions, manufacturing flaws, design defects or inadequate disclosure of product-relatedrisks or product-related information resulted in an unsafe condition or injury to patients.We have had product liability claims relating to our products asserted against us in the past, and some product liability claims currently areoutstanding. No claim to date either individually, or in the aggregate, has resulted in a material negative impact on our business. In light of thenature of our business, it is likely we will continue to be subject to product liability claims in the future, some of which could have a negativeimpact on our business.Regardless of the merit or eventual outcome, product liability claims may result in:45•decreased demand for our products;•injury to our reputation;•significant litigation costs;•substantial monetary awards to or costly settlements with patients, especially in the event of a class action lawsuit;•product recalls;•loss of revenue;•the inability to commercialize new products or product candidates; and•diversion of management attention from pursuing our business strategy and may be costly to defend.Our existing product liability insurance coverage may be inadequate to protect us from any liabilities we might incur. If a product liabilityclaim or series of claims is brought against us for uninsured liabilities or in excess of our insurance coverage, our business could suffer. Anyproduct liability claim brought against us, with or without merit, could result in the increase of our product liability insurance rates or the inability tosecure coverage in the future. In addition, a recall of some of our products, whether or not the result of a product liability claim, could result insignificant costs and loss of customers.In addition, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts or scope to protect us againstlosses. Any claims against us, regardless of their merit, could severely harm our financial condition, strain our management and other resourcesand adversely affect or eliminate the prospects for commercialization or sales of a product or product candidate that is the subject of any suchclaim.Risks related to government regulationOur medical device products are subject to extensive governmental regulation both in the United States and abroad, and our failure tocomply with applicable requirements could cause our business to suffer.Our products are classified as medical devices and are subject to extensive regulation by the FDA and other federal, state and foreigngovernmental authorities. These regulations relate to manufacturing, labeling, sale, promotion, distribution, importing and exporting and shipping ofour products.If we fail to comply with applicable laws and regulations it could jeopardize our ability to sell our products and result in enforcement actionssuch as:•untitled letters, warning letters, fines, injunctions or civil penalties;•termination of distribution authorizations;•recalls, detention and/or seizures of products;•delays in the introduction of products into the market;•total or partial suspension of production;•refusal of the FDA or other regulators to grant future clearances or approvals;•withdrawals or suspensions of current clearances or approvals, resulting in prohibitions on sales of our products;•withdrawal of the CE Certificates of Conformity, which authorize us to apply the CE Mark to our products and are necessary to sell ourproducts within the European Economic Area, or EEA, or delay in obtaining these certificates; and•in the most serious cases, criminal penalties.Any of these sanctions could result in higher than anticipated costs or lower than anticipated sales and have a material adverse effect on ourreputation, business, results of operations and financial condition.The regulations to which we are subject are complex and have tended to become more stringent over time, making obtaining clearancesand maintaining compliance increasingly difficult. If we fail to obtain and maintain necessary FDA clearances and approvals for ourproducts and indications or if clearances and approvals for future products and indications are delayed or not issued, our businesswould be harmed.Before we can place in the market or make available for sale a new regulated product or a significantly modified existing product in the UnitedStates, we must obtain either clearance from the FDA through the filing of a 510(k) premarket notification or approval from the FDA pursuant to apremarket approval application, or PMA, unless the device is specifically exempt from premarket review. The clearance or approval that is requiredwill depend upon how the product is classified by the FDA. The FDA classifies medical devices into one of three classes. Devices deemed topose low to moderate risk are placed in either Class I or II, which, absent an exemption, requires the manufacturer to submit to the FDA apremarket notification requesting permission for46commercial distribution, known as 510(k) clearance. Class III devices, such as life-sustaining or life-supporting devices or devices that are ofsubstantial importance in preventing impairment of human health or which present a potential unreasonable risk of illness or injury, require approvalof a PMA to provide reasonable assurance of safety and effectiveness.In the 510(k) clearance process, the FDA must determine that a proposed device is "substantially equivalent" to a device legally on themarket, known as a "predicate" device, with respect to intended use, technology and safety and effectiveness, in order to clear the proposeddevice for marketing. Clinical data is sometimes required to support substantial equivalence. In the PMA approval process, the FDA mustdetermine that a proposed device is safe and effective for its intended use based, in part, on extensive data, including technical, pre-clinical,clinical trial, manufacturing controls and labeling data.In order to obtain a PMA approval and, in some cases, a 510(k) clearance, a product sponsor must conduct well controlled clinical trialsdesigned to test the safety and effectiveness of the product. To date, our products have only required 510(k) clearance and we have not beenrequired to conduct clinical studies or to obtain clinical data in order to obtain 510(k) clearance in the United States for our products. We have beenrequired to complete clinical studies and/or provide clinical evaluation reports in connection with obtaining regulatory approval for the sale of ourproducts outside the United States, for example, in Australia. Conducting clinical trials generally entails a long, expensive and uncertain processthat is subject to delays and failure at any stage. The data obtained from clinical trials may be inadequate to support approval or clearance of asubmission. In addition, the occurrence of unexpected findings in connection with clinical trials may prevent or delay obtaining approval orclearance.If we conduct clinical trials, they may be delayed or halted or may be inadequate to support approval or clearance, for numerous reasons,including:•the FDA or other regulatory authorities or an institutional review board may place a clinical trial on hold or partial hold;•institutional review boards and third-party clinical investigators may delay or reject our trial protocol;•third-party clinical investigators may decline to participate in a trial or may not perform a trial on our anticipated schedule or consistent withthe clinical trial protocol, good clinical practices or other FDA requirements;•sufficient patients may not enroll in clinical study trials, or patient follow-up may not occur, at the rate we expect;•patients may not comply with trial protocols;•third-party organizations may not perform data collection and analysis in a timely or accurate manner;•regulatory inspections of our clinical trials or manufacturing facilities may, among other things, require us to undertake corrective action orsuspend, terminate or invalidate our clinical trials;•changes in governmental regulations or administrative actions;•the interim or final results of the clinical trials may be inconclusive or unfavorable as to safety or effectiveness; and•Regulatory authorities may not accept the results or validity of our clinical studies.The FDA's 510(k) clearance process for each device or modification usually takes from three to 12 months, but may last longer. The processof obtaining a PMA is more costly and uncertain than the 510(k) clearance process and generally takes from one to three years, or longer, from thetime the application is submitted to the FDA until an approval is obtained.In the United States, all of our FDA-cleared products have been cleared without the use of a PMA under the 510(k) clearance process.Additionally, we have in the past, and may in the future, determine that certain changes or modifications to our products or other cleared devicesmay not significantly affect the safety or effectiveness of the device, and, therefore, may not require a 510(k) submission. In such situations, thechanges are assessed using the FDA guidance for determining when to submit a 510(k) for a change to an existing device and a letter-to-file iswritten explaining the changes and retain by us. However, the FDA may not agree with our determination and may, instead, require that we seek510(k) clearance of such products or other cleared devices or, potentially, require us to submit a PMA.If the FDA requires us to go through a lengthier, more rigorous examination for future products or modifications to existing products than wehad expected, our product introductions or modifications could be delayed or canceled, which could cause our sales to decline. The FDA maydemand that we obtain a PMA prior to marketing certain of our future products. In addition, if the FDA disagrees with our determination that aproduct we currently market is eligible for clearance under the premarket notification process of Section 510(k) of the FDCA,47the FDA may require us to submit a PMA in order to continue marketing the product. Further, even with respect to those future products where aPMA is not required, we may not be able to obtain the 510(k) clearances with respect to those products.In addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take otheractions that may prevent or delay approval or clearance of products we are developing or impact our ability to modify any of our products for whichwe receive regulatory clearance or approval in the future on a timely basis. Any change in the laws or regulations that govern the clearance andapproval processes relating to the products we are developing could make it more difficult and costly to obtain clearance or approval for suchproducts, or to produce, market and distribute products for which we receive regulatory approval or clearance in the future.In the EU, we are required to comply with applicable medical device directives (including the Medical Devices Directive and the ActiveImplantable Medical Devices Directive, collectively “Directives”) and obtain CE Mark certification in order to market medical devices. The CE Markis applied following approval from an independent notified body or declaration of conformity. In the CE Marking process, a medical devicemanufacturer must develop a clinical plan and then carry out a clinical evaluation of its medical device to demonstrate conformity with the relevantEssential Requirements. A clinical evaluation includes an assessment of whether a medical device's performance is in accordance with itsintended use, that the known and foreseeable risks linked to the use of the device under normal conditions are minimized and acceptable whenweighed against the benefits of its intended purpose. The clinical evaluation conducted by the manufacturer must also address any clinical claims,the adequacy of the device labeling and information (particularly claims, contraindications, precautions and warnings) and the suitability of relatedinstructions for use. This assessment must be based on clinical data, which can be obtained from clinical studies conducted on the device beingassessed, scientific literature from similar devices whose equivalence with the assessed device can be demonstrated or both clinical studies andscientific literature. With respect to implantable devices or devices classified as Class III in the EU, the manufacturer must conduct clinicalstudies to obtain the required clinical data, unless reliance on existing clinical data from similar devices can be justified.As part of the conformity assessment process, depending on the type of device, an entity authorized to conduct the conformity assessment,which is referred to as a Notified Body, will review the manufacturer's clinical evaluation process, assess the clinical evaluation data of arepresentative sample of the device's subcategory or generic group, or assess all the clinical evaluation data, verify the manufacturer'sassessment of that data and assess the validity of the clinical evaluation report and the conclusions drawn by the manufacturer. We conductclinical studies to obtain clinical data as part of our clinical plan submitted to the Notified Body as part of our clinical evaluation process. Theconduct of clinical studies is to obtain clinical data that is currently required or that might be required in the future as part of the clinical evaluationprocess.Any delay in, or failure to receive or maintain, clearance or approval for our products under development could prevent us from generatingrevenue from these products or achieving profitability. Additionally, the FDA and other regulatory authorities have broad enforcement powers.Regulatory enforcement or inquiries, or other increased scrutiny on us, could dissuade some surgeons from using our products and adverselyaffect our reputation and the perceived safety and efficacy of our products.Even after we have obtained the proper regulatory clearance or approval to market a product, the FDA has the power to require us to conductpost-marketing studies. Failure to conduct required studies in a timely manner could result in the revocation of the 510(k) clearance or PMAapproval for the product that is subject to such a requirement and could also result in the recall or withdrawal of the product, which would preventus from generating sales from that product in the United States.After receiving a CE Certificate of Conformity to sell our product in the EEA, a Notified Body or a competent authority may require post-marketing studies of our product. Failure to comply with such requirements in a timely manner could result in the withdrawal of our CE Certificateof Conformity and the recall or withdrawal of our product from the market in the European Union, which would prevent us from generating revenuefrom sales of that product in the EEA. Moreover, each CE Certificate of Conformity is valid for a maximum of five years. Our current CECertificates of Conformity are valid through May 8, 2021 for our iTotal CR product, December 2, 2022 for our iUni product, June 11, 2019 for ouriDuo product and March 5, 2020 for our iTotal PS product. At the end of each period of validity we are required to apply to the Notified Body for arenewal (recertification) of the CE Certificate of Conformity. We have submitted for recertification of our iUni and iDuo products and plan to submitfor recertification for our iTotal PS product through May 2024. There may be delays in the renewal of the CE Certificate of Conformity48or the Notified Body may require modifications to our products or to the related technical files before it agrees to issue the new CE Certificate ofConformity.The European Union regulatory bodies finalized a new Medical Device Regulation, or MDR, in 2017, which replaces the existing Directivesand provided three years for transition and compliance. We must be compliant with the MDR by May 2020. The MDR will significantly changeseveral aspects of the existing regulatory framework, such as clinical studies and data requirements and introduce new ones, such as uniquedevice identification, post marketing clinical reports and patient identification. We and the Notified Bodies who will oversee compliance to the newMDR face uncertainties as the MDR is rolled out and enforced by the Commission and EEA Competent Authorities, creating risks in several areas,including the CE Marking process and data transparency, in the upcoming years. We expect to be compliant with the EU MDR on or before May2020.Additionally, the planned exit of the United Kingdom from membership of the European Union, or Brexit, could affect the requirements forselling medical devices in both the United Kingdom and the EU, which would adversely affect our business if we are unable to meet suchrequirements at all or in a timely manner.Regulatory changes could result in restrictions on our ability to carry on or expand our operations, higher than anticipated costs orlower than anticipated sales.The FDA or the EU may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take otheractions that may prevent or delay approval or clearance of our products under development or may impact our ability to modify our currentlyapproved or cleared products on a timely basis. For example, as part of the Food and Drug Administration Safety and Innovation Act of 2012, orthe FDASIA, the U.S. Congress enacted several reforms entitled the Medical Device Regulatory Improvements and additional miscellaneousprovisions which will further affect medical device regulation both pre- and post-approval. Any change in the laws or regulations that govern theclearance and approval processes relating to our current and future products could make it more difficult and costly to obtain clearance or approvalfor new products, or to produce, market and distribute existing products. In either such event, the process for attaining regulatory clearance orapproval of our products would be more difficult and costly and would take additional time compared to the regulatory clearance processes thathave been applicable to our products to date.The FDA could also reclassify some or all of our products that are currently classified as Class II to Class III requiring additional controls,clinical studies and submission of a PMA for us to continue marketing and selling those products. Under new changes instituted by the FDASIA,the FDA may now change the classification of a medical device by administrative order instead of by regulation. Although the revised process issimpler, the FDA must still publish a proposed order in the Federal Register, hold a device classification panel meeting and consider commentsfrom affected stakeholders before issuing the reclassification order. The FDA may reclassify any of our Class II devices into Class III and requireus to submit a PMA for FDA review and approval of the safety and effectiveness of our products.Modifications to our currently FDA-cleared products or the introduction of new products may require new regulatory clearances orapprovals or require us to recall or cease marketing our current products until clearances or approvals are obtained.Modifications to our products may require new regulatory approvals or clearances or require us to recall or cease marketing the modifiedproducts until these clearances or approvals are obtained. Any modification to one of our 510(k)-cleared products that would constitute a change inits intended use or any change that could significantly affect the safety or effectiveness of the device would require us to obtain a new 510(k)clearance and may even, in some circumstances, require the submission of a PMA. We may be required to submit extensive pre-clinical andclinical data depending on the nature of the changes. We may not be able to obtain additional 510(k) clearances or premarket approvals formodifications to, or additional indications for, our existing products in a timely fashion, or at all. Delays in obtaining future clearances or approvalswould adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our revenue and operatingresults.The FDA requires every manufacturer to make the determination regarding the need for a new 510(k) submission in the first instance, but theFDA may review any manufacturer's decision. We have modified some of our 510(k) cleared products, and have determined based on our reviewof the applicable FDA guidance that in certain instances the changes did not require new 510(k) clearances or PMA approval. If the FDA disagreeswith our determination and requires us to seek new 510(k) clearances or PMA approval for modifications to our previously cleared products forwhich we have concluded that new clearances or approvals are unnecessary, we49may be required to cease marketing or distribution of our products or to recall the modified product until we obtain clearance or approval, and wemay be subject to significant regulatory fines or penalties.Furthermore, potential changes to the 510(k) program may make it more difficult for us to make modifications to our previously clearedproducts, by either imposing stricter requirements on when a new 510(k) clearance for a modification to a previously cleared product must besubmitted or applying more onerous review criteria to such submissions. In July and December 2011, the FDA issued draft guidance documentsaddressing when to submit a new 510(k) clearance due to modifications to 510(k)-cleared products and the criteria for evaluating substantialequivalence. On October 25, 2017, the FDA issued “Deciding When to Submit 510(k) for a Change to an Existing Device” and “Deciding When toSubmit a 510K for a Software Change to an Existing Device” and “Guidances for Industry and Food and Drug Administration Staff”. Theseguidance documents stipulate when to submit to FDA for changes to our products and attempt to clarify and provide direction for ease of decisionmaking and supporting evidence required for changes to cleared devices. Further changes could result in a more rigorous review process andmake it more difficult to obtain clearance for device modifications.The FDA may not grant 510(k) clearance or PMA approval of our future products, and failure to obtain necessary clearances or approvalsfor our future products would adversely affect our ability to grow our business.Any future products that we develop will require a 510(k) clearance or a PMA approval by the FDA. The FDA may not approve or clear theseproducts for the indications that are necessary or desirable for successful commercialization. Indeed, the FDA may refuse our requests for 510(k)clearance or premarket approval of new products. Significant delays in receiving clearance or approval, or the failure to receive clearance orapproval for our new products would have an adverse effect on our ability to expand our business.Our cleared and approved products are, and any future products will be, subject to post-marketing restrictions, and we may be subject tosubstantial penalties if we fail to comply with all applicable regulatory requirements.The products for which we have obtained regulatory clearance or approval are, and any of our future products will be, along with themanufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for such products, subject to continualrequirements of and review by the FDA and other regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, registration and listing requirements, Quality System regulations relating to manufacturing, quality control andquality assurance and corresponding maintenance of records and documents. In addition, we must report corrections and removals to the FDAwhere the correction or removal was initiated to reduce a risk to health posed by the device or to remedy a violation of the Federal Food, Drug, andCosmetic Act caused by the device that may present a risk to health, and maintain records of other corrections or removals. If we receiveregulatory clearance or approval of additional products in the future, the clearance or approval may be subject to limitations on the indicated usesfor which the product may be marketed or to the conditions of clearance or approval, and the accompanying label may limit the approved use ofour product, which could limit sales of the product.The FDA may also impose requirements for costly post-marketing studies or clinical trials and surveillance to monitor the safety or efficacyof a product. The FDA and other agencies, including the Department of Justice, or DOJ, and state Attorneys General, closely regulate themanufacturing, marketing and promotion of medical devices. Violations of the FDCA and other statutes, including the False Claims Act, may leadto investigations alleging violations of federal and state health care fraud and abuse laws, as well as state consumer protection laws. In addition,later discovery of previously unknown safety issues or other problems with our products, manufacturers or manufacturing processes, or failure tocomply with regulatory requirements, may result in:•litigation involving patients who underwent procedures using our products;•restrictions on such products, manufacturers or manufacturing processes;•restrictions on the labeling or marketing of a product;•restrictions on product distribution or use;•requirements to conduct post-marketing studies or clinical trials;•warning letters or untitled letters;•withdrawal of the products from the market;•refusal to approve pending applications or supplements to approved applications that we submit;•repair, replacement, refunds, recalls or detention of our products;•fines, restitution or disgorgement of profits or revenue;•suspension or withdrawal of regulatory clearance or approval;50•damage to relationships with any potential collaborators;•operating restrictions or partial suspension or total shutdown of production;•unfavorable press coverage and damage to our reputation;•refusal to permit the import or export of our products;•product detention and/or seizure;•consent decrees; or•injunctions or the imposition of civil or criminal penalties.Non-compliance with European Union requirements can also result in significant financial penalties.We may fail to obtain or maintain foreign regulatory approvals to market our products in other countries, which could harm ourbusiness.To market and sell our products in countries outside the United States, we must seek and obtain regulatory approvals, certifications orregistrations and comply with the laws and regulations of those countries. These laws and regulations, including the requirements for approvals,certifications or registrations and the time required for regulatory review, vary from country to country. Obtaining and maintaining foreign regulatoryapprovals, certifications or registrations are expensive and we cannot be certain that we will maintain or receive regulatory approvals, certificationsor registrations in any foreign country in which we currently market or plan to market our products.The regulatory approval process outside the United States generally includes all of the risks associated with obtaining FDA approval. Inaddition, in many countries outside the United States, the product must be approved for reimbursement before the product can be approved forsale in that country. We may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all. Approval by theFDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside theUnited States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. If we fail to obtain or maintainregulatory approvals, certifications or registrations in any foreign country in which we currently market or plan to market our products, our ability togenerate revenue will be harmed.We may also incur significant costs in attempting to obtain and in maintaining foreign regulatory clearances, approvals or qualifications.Foreign regulatory agencies, as well as the FDA, periodically inspect manufacturing facilities both in the United States and abroad. If weexperience delays in receiving necessary qualifications, clearances or approvals to market our products outside the United States, or if we fail toreceive those qualifications, clearances or approvals, or if we fail to comply with other foreign regulatory requirements, we and our distributors maybe unable to market our products or enhancements in international markets effectively, or at all. Additionally, the imposition of new requirementsmay significantly affect our business and our products. We may not be able to adjust to such new requirements, which may adversely affect ourbusiness.If we or our suppliers fail to comply with ongoing FDA, EU or other foreign regulatory authority requirements, or if we experienceunanticipated problems with our products, these products could be subject to additional restrictions or withdrawal from the market,which would harm our business.Any product for which we obtain clearance or approval, and the manufacturing processes, reporting requirements, post-approval clinical dataand promotional activities for such product, will be subject to continued regulatory review, oversight and periodic inspections by the FDA and otherdomestic and foreign regulatory bodies. In particular, we and most of our third-party suppliers are required to comply with the FDA's QualitySystem Regulation, or QSR, and the applicable regulatory requirements in the EU on product assessments and quality system assessments. Inthe EU, compliance with harmonized standards prepared under a mandate from the European Commission and referenced in the Official Journal ofthe EU, or harmonized standards, serve as a presumption of conformity with the relevant Essential Requirements under the Medical DevicesDirective 93/42/EEC, as amended. These FDA regulations and EU standards cover the methods and documentation of the design, testing,production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our products and expected future products.Compliance with applicable regulatory requirements, including the QSR, is subject to continual review and is monitored rigorously throughperiodic announced and unannounced inspections by the FDA. Following such an inspection of our Billerica, Massachusetts facility in 2018, theFDA issued to us a Form 483 with several observations, including deviations from the QSR. Following issuance of the letter, we took and continueto take various corrective and preventative actions to help address certain of the observations and to improve our quality, production and designcontrol systems, and we have engaged with the FDA regarding these matters. We recently51received from the FDA notification that this inspection is closed. At the request of the FDA, we plan to provide the FDA with periodic progressupdates regarding these matters. Nevertheless, we cannot be certain that we will complete the various corrective and preventative measure on aschedule acceptable to the FDA, or that we will not be subject to additional inspections and/or requirements to implement additional remediationefforts.Compliance with harmonized standards in the EU is also subject to regular review through the conduct of assessments or audits by NotifiedBodies or other regulatory bodies. We must permit and allow unimpeded access for Notified Body staff to conduct unannounced audits in order tomaintain our CE Certificate of Conformity. If we, or our manufacturers, fail to adhere to QSR requirements in the United States or regulatoryrequirements in the EU, this could delay production of our products and lead to fines, difficulties in obtaining regulatory clearances or CECertificate of Conformity, recalls, enforcement actions, including injunctive relief or consent decrees, or other consequences, which could, in turn,have a material adverse effect on our financial condition or results of operations.The British Standards Institute, or BSI, an independent global notified body, conducts periodic assessments of our quality managementsystem in order to confirm that our quality management system complies with the requirements of ISO13485 in all material respects and periodicfull recertification audits of our quality management system in order to confirm that we comply with the requirements of the Medical DevicesDirective 93/42/EEC.The failure by us or one of our suppliers to comply with applicable statutes and regulations administered by the FDA, or applicable regulatoryrequirements in the EU, or the failure to timely and adequately respond to any adverse inspectional observations, nonconformances or productsafety issues, could result in any of the enforcement actions or sanctions described above under the risk factor captioned "Our medical deviceproducts are subject to extensive governmental regulation both in the United States and abroad, and our failure to comply with applicablerequirements could cause our business to suffer." Any of these sanctions could have a material adverse effect on our reputation, business, resultsof operations and financial condition. Furthermore, our key third-party manufacturers may not currently be or may not continue to be in compliancewith all applicable regulatory requirements, which could result in our failure to produce our products on a timely basis and in the required quantities,if at all.If our products, or malfunction of our products, cause or contribute to a death or a serious injury, we will be subject to medical devicereporting regulations, which can result in voluntary corrective actions or agency enforcement actions, which could harm our business.Under the FDA medical device reporting, or MDR, regulations, medical device manufacturers are required to report to the FDA informationthat a device has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause orcontribute to death or serious injury if the malfunction of the device or one of our similar devices were to recur. The decision to file an MDRinvolves a judgment by us as the manufacturer. We have made decisions that certain types of events are not reportable on an MDR; however,there can be no assurance that the FDA will agree with our decisions. If we fail to report MDRs to the FDA within the required timeframes, or at all,or if the FDA disagrees with any of our determinations regarding the reportability of certain events, the FDA could take enforcement actionsagainst us, which could have an adverse impact on our reputation and financial results.Additionally, all manufacturers placing medical devices in the market in the EU are legally bound to report any serious or potentially seriousincidents involving devices they produce or sell to the competent authority in whose jurisdiction the incident occurred. In the EU, we must complywith the EU Medical Device Vigilance System. Under this system, incidents must be reported to the relevant National Competent Authorities of theEU countries, and manufacturers are required to take Field Safety Corrective Actions, or FSCAs, to reduce a risk of death or serious deteriorationin the state of health associated with the use of a medical device that is already placed on the market. An incident is defined as any malfunctionor deterioration in the characteristics or performance of a device, as well as any inadequacy in the labeling or the instructions for use which,directly or indirectly, might lead to or might have led to the death of a patient or user or of other persons or to a serious deterioration in their stateof health. An FSCA may include the recall, modification, exchange, destruction or retrofitting of the device. FSCAs must be communicated by themanufacturer or its European Authorized Representative to its customers and to the end users of the device through Field Safety Notices.Any such adverse event involving our products could result in future voluntary corrective actions, such as recalls or customer notifications,or agency action, such as inspection or enforcement action. Adverse events involving our products have been reported to us in the past, andsimilar adverse events may occur in the future. Any52corrective action, whether voluntary or involuntary, will require the dedication of our time and capital, distract management from operating ourbusiness and may harm our reputation and financial results.We have conducted voluntary product recalls and in the future, our products may be subject to additional product recalls eithervoluntarily or at the direction of the FDA or another governmental authority that could have a significant adverse impact on us.The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event ofmaterial deficiencies or defects in design or manufacture. A recall may require the removal or correction of a marketed product to repair, modify,adjust, relabel, destroy or inspect the product. The authority to require a recall must be based on an FDA finding that there is reasonable probabilitythat the device would cause serious injury or death. In addition, foreign governmental bodies have the authority to require the recall of our productsin the event of material deficiencies or defects in design or manufacture. Manufacturers may, under their own initiative, voluntary recall a product ifany material deficiency in a device is found. The FDA requires that certain classifications of recalls be reported to the FDA within 10 working daysafter the recall is initiated.A government-mandated or voluntary recall by us could occur as a result of an unacceptable risk to health, component failures, malfunctions,manufacturing errors, design or labeling defects or other deficiencies and issues. We are also required to follow detailed recordkeepingrequirements for all company-initiated medical device corrections and removals and to report such corrective and removal actions to the FDA ifthey are carried out in response to a risk to health and have not otherwise been reported under the MDR regulations. We may initiate a marketwithdrawal or a stock recovery involving our products in the future that we determine do not require notification to the FDA. If the FDA disagreeswith our determinations, they could require us to report those actions as recalls. A future recall announcement could harm our reputation withcustomers and negatively affect our sales. In addition, the FDA could take enforcement action for failing to report the recalls when they wereconducted.In addition, in October 2014, the FDA issued guidance intended to assist the FDA and medical device industry in distinguishing medicaldevice recalls from device enhancements. Per the guidance, if any change or group of changes to a device addresses a violation of the FDCA,that change would generally constitute a medical device recall and not simply a product enhancement and would require submission of a recallreport to the FDA.Recalls of any of our products would divert managerial and financial resources and have an adverse effect on our reputation, results ofoperations and financial condition, which could impair our ability to produce our products in a cost-effective and timely manner in order to meet ourcustomers' demands. We may also be subject to liability claims or may be required to bear other costs or to take other actions that may have anegative impact on our future sales and our ability to generate profits.In particular, we initiated a voluntary recall in August 2015 for approximately 950 iJigs manufactured between July 18, 2015 and August 28,2015. We initiated this action in response to 3 complaints of moisture on the patient-specific instrumentation. We were concerned that theseinstruments might contain small amounts of ethylene glycol residue, a by-product of a chemical commonly used in sterilization processes. Testingat an independent laboratory determined that no ethylene glycol residue was present on the implants tested. Thus, there was no patient safetyconcern with the implants. The independent testing laboratory further determined that the risk of ethylene glycol induced toxicity from exposure tothe patient-specific instruments was low, because, in part, ethylene glycol does not represent a practical health hazard from exposure to medicaldevices for exposures less than 24 hours in duration. It was determined that no additional monitoring of patients was necessary. Though therewas no impact to patient safety, this voluntary recall adversely affected our business and may continue to adversely affect our business in anumber of ways, including through the financial impact from lost sales of the recalled products, reduction of our production capacity over the periodof our investigation and resolution of the root cause of the recall, commercial disruption, damage to our reputation with orthopedic surgeons,consumers, healthcare providers, distributors and other business partners, and the filing of a putative class action complaint against us and certainof our officers alleging violations of securities laws.We may be subject to enforcement action if we engage in improper marketing or promotion of our products for which we have receivedregulatory clearance or approval. Any such enforcement action could result in significant fines, costs and penalties and could result indamage to our reputation.Our promotional materials and training methods must comply with FDA and other applicable laws and regulations, including the prohibitionagainst the promotion of unapproved, or off-label, use of a device. Use of a device outside its cleared or approved indications is known as "off-label" use. We believe that the specific surgical53procedures for which our products are marketed fall within the scope of the surgical applications that have been cleared by the FDA. However,physicians may use our products off-label, as the FDA does not restrict or regulate a physician's choice of treatment within the practice ofmedicine. If the FDA determines that our promotional materials or other product labeling or activities constitute promotion of an unapproved, or off-label use, it could request that we modify our materials or activities or subject us to regulatory or enforcement actions, including the issuance of anuntitled letter, a warning letter, injunction, seizure, civil fine or criminal penalties.Other federal, state and foreign regulatory agencies, including the U.S. Federal Trade Commission, have issued guidelines and regulationsthat govern how we promote our products, including how we use endorsements and testimonials. If our promotional materials are inconsistent withthese guidelines or regulations, we could be subject to enforcement actions, which could result in significant fines, costs and penalties. Ourreputation could also be damaged and the adoption of our products could be impaired. In addition, the off-label use of our products may increasethe risk of product liability claims. Product liability claims are expensive to defend and could divert our management's attention, result insubstantial damage awards against us and harm our reputation.In the EU, our medical devices may be promoted only for the intended purpose for which the devices have been CE Marked. Failure tocomply with this requirement could lead to the imposition of penalties by the competent authorities of the EU Member States. The penalties couldinclude warnings, orders to discontinue the promotion of the medical device, seizure of the promotional materials and fines. Our promotionalmaterials must also comply with various laws and codes of conduct developed by medical device industry bodies in the EU governing promotionalclaims, comparative advertising, advertising of medical devices reimbursed by the national health insurance systems and advertising to thegeneral public. If our promotional materials do not comply with these laws and industry codes we could be subject to penalties that could includesignificant fines. Our reputation could also be damaged and the adoption of our products could be impaired.Legislative or regulatory healthcare reforms and other changes to laws, regulations or guidance from regulatory entities may make itmore difficult and costly for us to obtain regulatory clearance or approval of our products and to produce, market and distribute ourproducts after clearance or approval is obtained.Recent political, economic and regulatory influences are subjecting the healthcare industry to fundamental changes. The sales of ourproducts depend in part on the availability of coverage and reimbursement from third-party payors such as government health programs, privatehealth insurers, health maintenance organizations and other healthcare-related organizations. Both the federal and state governments in the UnitedStates and foreign governments continue to propose and pass new legislation and regulations designed to contain or reduce the cost of healthcare.Such legislation and regulations may result in decreased reimbursement for medical devices or the procedures in which they are used, which mayfurther exacerbate industry-wide pressure to reduce the prices charged for medical devices. This could harm our ability to market our products,generate sales and become or remain profitable.In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our businessand our products. The FDA has recently adopted new guidance related to issues associated with Bio-Compatibility Testing, which may adverselyaffect regulatory clearances that we are currently seeking or the timing of those regulatory clearances, and may adversely affect regulatoryclearances or approvals that we seek in the future. Any new regulations or guidance or revisions or reinterpretations of existing regulations orguidance may impose additional costs or lengthen review times of our products or affect our ability to obtain clearance or approval of our newproducts. Delays in receipt of, or failure to receive, regulatory clearances or approvals for our new products would have a material adverse effecton our business, results of operations and financial condition.If Congress repeals, replaces or changes the Patient Protection and Affordable Care Act, as amended by the Health Care and EducationReconciliation Act of 2010 or, collectively, the ACA or Affordable Care Act, the Affordable Care Act or otherwise implements certain health carereforms that have been proposed, we could be subject to a regulatory and reimbursement scheme that has a material impact on our business. TheAffordable Care Act changed how some healthcare providers are reimbursed by the Medicare program and some private third-party payors. Upontaking office, President Trump signed an executive order directing federal agencies to avoid enforcement of any provision of the ACA. An initialversion of proposed legislation designed to repeal the ACA, and replace it with a system of tax credits and dissolve an expansion of the Medicaidprogram was not adopted by Congress. Spending bills passed by Congress have made some changes to the ACA. Although the previouslyproposed legislation intended to repeal or significantly restructure the ACA has not had sufficient support to pass Congress, there is a continuedfocus on and uncertainty regarding the future of the current ACA framework.54Since January 2017, President Trump has signed two Executive Orders designed to delay the implementation of certain provisions of theACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. One Executive Order directs federal agencieswith authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACAthat would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals ormedical devices. The second Executive Order terminates the cost-sharing subsidies that reimburse insurers under the ACA. Several stateAttorneys General filed suit to stop the administration from terminating the subsidies, but their request for a restraining order was denied by afederal judge in California on October 25, 2017. The loss of the cost share reduction payments is expected to increase premiums on certainpolicies issued by qualified health plans under the ACA. Further, on June 14, 2018, U.S. Court of Appeals for the Federal Circuit ruled that thefederal government was not required to pay more than $12 billion in ACA risk corridor payments to third-party payors who argued were owed tothem. The effects of this gap in reimbursement on third-party payors, the viability of the ACA marketplace, providers, and potentially our business,are not yet known.In addition, the Centers for Medicare & Medicaid Services, or CMS, has recently proposed regulations that would give states greaterflexibility in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essentialhealth benefits required under the ACA for plans sold through such marketplaces. And, on December 14, 2018, a U.S. District Court judge in theNorthern District of Texas ruled that the individual mandate portion of the ACA is an essential and inseverable feature of the ACA, and thereforebecause the mandate was repealed as part of the Tax Cuts and Jobs Act, the remaining provisions of the ACA are invalid as well. The Trumpadministration and CMS have both stated that the ruling will have no immediate effect, and on December 30, 2018 the same judge issued an orderstaying the judgment pending appeal. It is unclear how this decision and any subsequent appeals and other efforts to repeal and replace the ACAwill impact the ACA and our business. Litigation and legislation over the ACA are likely to continue, with unpredictable and uncertain results.Changes to the ACA, adoption of the American Health Care Act or other legislative and regulatory changes in the health care field couldadversely affect our business, including by decreasing the number of patients in the United States with health insurance, reducing the amount offunds currently available to patients as a result of repeal of significant portions of the ACA, eliminating and/or reducing programs (such as theComprehensive Care for Joint Replacement program) that are potentially beneficial to us, reducing the amount of funds available for proceduresperformed in outpatient and ambulatory care facilities, or the adoption of other changes in health care regulation and reimbursement that have beenproposed or that may be proposed.The recent presidential and congressional elections may lead to amendments or repeals of all or portions of existing health care reformlegislation, including the Patient Protection and Affordable Care Act. We expect that additional state and federal healthcare reform measures willbe adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services,which could result in reduced demand for our products or additional pricing pressure. Changes in existing health care reform measures may resultin uncertainty with respect to legislation, regulation and government policy that could significantly impact our business and the medical deviceindustry.We will continue to evaluate the effect that the ACA and its possible repeal and replacement could have on our business. It is possible thatrepeal and replacement initiatives, if enacted into law, could ultimately result in fewer individuals having health insurance coverage or in individualshaving insurance coverage with less generous benefits. While the timing and scope of any potential future legislation to repeal and replace ACAprovisions is highly uncertain in many respects, it is also possible that some of the ACA provisions that generally are favorable for the research-based medical device industry could also be repealed along with ACA coverage expansion provisions. Accordingly, such reforms, if enacted, couldhave an adverse effect on anticipated revenue from product candidates that we may successfully develop and for which we may obtain marketingapproval and may affect our overall financial condition and ability to develop or commercialize product candidates.Risks related to other legal and compliance mattersWe have been subject to securities class action litigation and may be subject to similar or other litigation in the future, which may divertmanagement’s attention and have a material adverse effect on our business, financial condition and results of operations.We have been subject to securities class actions in the past related to our voluntary recall of specific serial numbers of patient-specificinstrumentation for our iUni, iDuo, iTotal CR and iTotal PS knee replacement product systems. We may be subject to additional securities classaction suits or proceedings in the future. Monitoring and55defending against legal actions, whether or not meritorious, is time-consuming for our management and detracts from our ability to fully focus ourinternal resources on our business activities, and we cannot predict how long it may take to resolve such matters. In addition, we may incursubstantial legal fees and costs in connection with litigation. Although we have insurance, coverage could be denied or prove to be insufficient.The substantial costs and diversion of management's attention in any such litigation could harm our business and a decision adverse to ourinterests in any such lawsuit could result in the payment of substantial damages and could have a material adverse effect on our business, resultsof operations and financial condition.We may have disagreements with past and present members of our scientific advisory board and our previous Chief Executive Officerand director, Dr. Lang, over the interpretation of the terms of revenue share agreements and use of resources.We are party to revenue share agreements with certain past and present members of our scientific advisory board and our former ChiefExecutive Officer and former director, Dr. Lang, that relate to these individuals' participation in the design and development of our products andrelated intellectual property. Compensation under these agreements for services rendered by these individuals includes a product revenue share.The interpretation of the terms of these agreements may lead to disputes with our advisors and such disputes may result in termination of theagreements, which may harm our ability to develop future products, and potentially litigation. In 2018, in connection with an accounting review, weidentified overpayments made to our advisors. We have adjusted payments made in 2018 and are working with advisors to address overpaymentswe have made under these agreements through the provision of additional unpaid services to us by those advisors.Beginning in June 2018, we raised concerns with Dr. Lang relating to his revenue share agreement and have been seeking to enter intodiscussions with Dr. Lang concerning the scope of this agreement. In October 2018, we requested that Dr. Lang provide consulting services aspermitted under Dr. Lang’s revenue share agreement. However, he failed to respond to such request and, as a result, beginning in the fourthquarter of 2018, the revenue share percentage rate owed to Dr. Lang has been reduced by 50% within the scope of his agreement. Dr. Lang mayagree in the future to provide consulting services under his revenue share agreement and, in such case, the revenue share percentage rate wouldbe increased back to the original rate. In addition, we have notified Dr. Lang of overpayments we made in years prior to 2018 and the credits thatwe will make against future payments owed to him, including a full credit of the amount owed to him for sales made in 2018, to reimburse us forsuch overpayments. Dr. Lang may disagree with our interpretation of the terms of his revenue share agreement which may lead to a dispute,including potential litigation.In addition, the existence of the revenue share arrangement may create a conflict of interest. For example, these advisors and Dr. Lang mayfavor decisions that result in our making expenditures and allocating resources that increase revenue but do not result in profits or do not result inprofits as great as other expenditures and allocations of resources would. If any such decisions were made, however, our business could beharmed.Our financial performance may be adversely affected by medical device tax provisions in the healthcare reform laws.The PPACA imposes, among other things, an excise tax of 2.3% on any entity that manufactures or imports medical devices offered for salein the United States as of 2013, although this tax has been suspended through 2019. Under these provisions, the Congressional Research Servicepredicts that the total cost to the medical device industry may be up to $20 billion over the next decade. The Internal Revenue Service issued finalregulations implementing the tax in December of 2012 that require, among other things, bi-monthly payments if the tax liability exceeds $2,500 forthe quarter and quarterly reporting. We are subject to this excise tax and during the years ending December 31, 2015, December 31, 2014 andDecember 31, 2013, we incurred $0.8 million, $0.7 million and $0.4 million, respectively, in tax expense associated with the medical device tax inthe United States, which is included in general and administrative expense. The Consolidated Appropriations Act, 2016 (Pub. L. 114-113), signedinto law on December 18, 2015, includes a two year moratorium on the medical device excise tax imposed by Internal Revenue Code section4191. Thus, the medical device excise tax does not apply to the sale of a taxable medical device by the manufacturer, producer, or importer of thedevice during the period beginning on January 1, 2016 and ending on December 31, 2017. On January 22, 2018, legislation was passed thatsuspends 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.Additionally, Congress could terminate the moratorium or further change the law related to the medical device tax, in a manner that couldadversely affect us.56Our relationships with healthcare providers, physicians and third party payors will be subject, directly or indirectly, to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which, in the event of a violation, could expose us to criminalsanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.Healthcare providers, physicians and third party payors will play a primary role in the recommendation and prescription and use of ourproducts and any other product candidates for which we obtain marketing clearance. Our future arrangements with healthcare providers, physiciansand third party payors may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain thebusiness or financial arrangements and relationships through which we market, sell and distribute any products for which we obtain marketingapproval. Restrictions under applicable federal and state healthcare laws and regulations include the following:•the federal Anti-Kickback Statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving orproviding remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, orthe purchase, order or recommendation or arranging of, any good or service, for which payment may be made under a federal healthcareprogram such as Medicare and Medicaid;•the federal False Claims Act imposes criminal and civil penalties, including through civil whistleblower or qui tam actions, againstindividuals or entities for, among other things, knowingly presenting, or causing to be presented, false or fraudulent claims for payment bya federal healthcare program or making a false statement or record material to payment of a false claim or avoiding, decreasing orconcealing an obligation to pay money to the federal government, with potential liability including mandatory treble damages andsignificant per-claim penalties, currently set at $5,500 to $11,000 per false claim;•the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for executing ascheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;•HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing regulations, alsoimposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission ofindividually identifiable health information;•the federal Physician Payments Sunshine Act requires applicable manufacturers of covered products to report payments and othertransfers of value to physicians and teaching hospitals; and•analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws and transparency statutes, includingthe General Data Protection Regulation in the EU, may apply to sales or marketing arrangements and claims involving healthcare items orservices reimbursed by non-governmental third party payors, including private insurers.Some state laws require device companies to comply with the industry’s voluntary compliance guidelines and the relevant complianceguidance promulgated by the federal government and may require product manufacturers to report information related to payments and othertransfers of value to physicians and other healthcare providers or marketing expenditures. State and foreign laws also govern the privacy andsecurity of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted byHIPAA, thus complicating compliance efforts.If our operations are found to be in violation of any of the laws described above or any governmental regulations that apply to us, we may besubject to penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations. Any penalties,damages, fines, curtailment or restructuring of our operations could adversely affect our financial results. If any such actions are instituted againstus and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business,including the imposition of significant fines or other sanctions.Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involvesubstantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or futurestatutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be inviolation of any of these57laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties,damages, fines, imprisonment, exclusion of products from government funded healthcare programs, such as Medicare and Medicaid, and thecurtailment or restructuring of our operations. If any of the physicians or other healthcare providers or entities with whom we expect to do businessis found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions fromgovernment funded healthcare programs.Laws and regulations governing any international operations we may have in the future may preclude us from developing,manufacturing and selling certain products outside of the United States and require us to develop and implement costly complianceprograms.We are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the FCPA, the U.S. domestic bribery statute contained in18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, and possibly other state and national anti-bribery and anti-money laundering laws incountries in which we conduct activities. Anti-corruption laws are interpreted broadly and prohibit companies and their employees, agents, third-party intermediaries, joint venture partners and collaborators from authorizing, promising, offering, or providing, directly or indirectly, improperpayments or benefits to recipients in the public or private sector. We may have direct or indirect interactions with officials and employees ofgovernment agencies or government-affiliated hospitals, universities, and other organizations. In addition, we may engage third partyintermediaries to promote our clinical research activities abroad and/or to obtain necessary permits, licenses, and other regulatory approvals. Wecan be held liable for the corrupt or other illegal activities of these third-party intermediaries, our employees, representatives, contractors, partners,and agents, even if we do not explicitly authorize or have actual knowledge of such activities.Noncompliance with anti-corruption and anti-money laundering laws could subject us to whistleblower complaints, investigations, sanctions,settlements, prosecution, other enforcement actions, disgorgement of profits, significant fines, damages, other civil and criminal penalties orinjunctions, suspension and/or debarment from contracting with certain persons, the loss of export privileges, reputational harm, adverse mediacoverage, and other collateral consequences. If any subpoenas, investigations, or other enforcement actions are launched, or governmental orother sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, results of operations and financialcondition could be materially harmed. In addition, responding to any action will likely result in a materially significant diversion of management’sattention and resources and significant defense and compliance costs and other professional fees. In certain cases, enforcement authorities mayeven cause us to appoint an independent compliance monitor which can result in added costs and administrative burdens.If we are found to have violated laws protecting the privacy or security of patient health information or other personal data, we could besubject to civil or criminal penalties, litigation or regulatory investigations, which could increase our liabilities and harm our reputationor our business.There are a number of federal and state laws in the United States and foreign countries protecting the privacy and security of personal data,including patient health information and patient records, and restricting the collection, use, disclosure and transfer of that protected information. Inparticular, Health Insurance Portability and Accountability Act, HIPAA, privacy, security and breach notification rules protect medical records andother personal health information by limiting their use and disclosure, giving individuals the right to access, amend and seek accounting of theirown health information, limiting most use and disclosure of health information to the minimum amount reasonably necessary to accomplish theintended purpose, requiring appropriate data security measures, and requiring data breach notification in certain circumstances. Similarly, theGeneral Data Protection Regulation, or GDPR, came into force in the European Union, or EU, on May 25, 2018 and applies to the products andservices that we offer to EU patients, our reach and development activities in the EU, our online or other tracking individuals in the EU and our EUemployees. The GDPR created a range of new compliance obligations, including requirements relating to processing health and other sensitivedata, obtaining consent of the individuals to whom the personal data relates, providing information to individuals regarding data processingactivities, implementing safeguards to protect the security and confidentiality of personal data, providing notification of data breaches, and takingcertain measures when engaging third-party processors. The GDPR also imposes strict rules on the transfer of personal data to countries outsidethe EU, including the United States, and significantly increased financial penalties for noncompliance (including possible fines of up to 4% ofglobal annual revenues for the preceding financial year or €20 million (whichever is higher) for the most serious infringements). The GDPR alsoconferred a private right of action on data subjects and consumer associations to lodge complaints with supervisory authorities,58seek judicial remedies, and obtain compensation for damages resulting from violations of the GDPR. If we or any of our service providers arefound to be in violation of HIPAA rules, the GDPR, or other data protection laws, we could be subject to civil or criminal penalties, litigation, orregulatory investigations, which could increase our liabilities, harm our reputation, and have a material adverse effect on our business, financialcondition, and operating results.Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards andrequirements and insider trading.We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to complywith FDA regulations, to provide accurate information to the FDA, to comply with manufacturing standards we have established, to comply withfederal and state health-care fraud and abuse laws and regulations, to report financial information or data accurately or to disclose unauthorizedactivities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulationsintended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range ofpricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employeemisconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctionsand serious harm to our reputation. We have adopted a code of business conduct and ethics, but it is not always possible to identify and deteremployee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanagedrisks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance withsuch laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights,those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.Risks related to our common stockIf we fail to maintain compliance with the requirements for continued listing on the Nasdaq Global Select Market, our common stockcould be delisted from trading, which would adversely affect the ability to sell our stock in the public market, the liquidity of ourcommon stock and our ability to raise additional capital.Our common stock is currently listed for quotation on the Nasdaq Global Select Market. We are required to meet specified financialrequirements in order to maintain our listing on the Nasdaq Global Select Market. On November 13, 2018, we received a deficiency letter from theListing Qualifications Department, or the Staff, of The Nasdaq Stock Market notifying us that, for the last 30 consecutive business days, the bidprice for our common stock had closed below the minimum $1.00 per share requirement for continued inclusion on the Nasdaq Global SelectMarket. We were provided an initial period of 180 calendar days, or until May 12, 2019, to regain compliance with the listing requirements. As ofFebruary 28, 2019, the bid price for our common stock had closed at $1.00 or more for a minimum of 10 consecutive business days making useligible to regain compliance with the minimum bid requirement. On March 1, 2019, we confirmed with the Listing Qualifications Analyst of Nasdaqthat we had regained compliance with the listing requirements. Under certain circumstances, Nasdaq could have required that the minimum bidprice exceed $1.00 for more than ten consecutive days before determining that we comply with Nasdaq's continued listing standards. If we had notregained compliance with the listing requirements, a second 180 calendar day compliance period may have been available if the Company metcertain continued listing requirements, and the Company would also be required to provide notice to Nasdaq of its intent to regain complianceduring the second 180 calendar day period, by effecting a reverse stock split if necessary. If in the future we fail to satisfy the Nasdaq GlobalSelect Market's continued listing requirements, we may transfer to the OTC Bulletin Board. Any potential delisting of our common stock from theNasdaq Global Select Market would make it more difficult for stockholders to sell our stock in the public market and would likely result indecreased liquidity, limited availability of market quotations for shares of our common stock, limited availability of news and analyst coverageregarding our Company, a decreased ability to issue additional securities and increased volatility in the price of our common stock.The price of our common stock is likely to be volatile and fluctuate substantially, which could result in substantial losses for purchasersof our common stock.Our stock price has been and is likely to continue to be volatile. The stock market in general and the market for medical device companies inparticular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result ofthis volatility, you may not be able to sell your59common stock at or above your original purchase price. The market price for our common stock may be influenced by many factors, including therisk factors as described in this Annual Report on Form 10-K and:•a slowdown in the medical device industry or the general economy;•actual or anticipated quarterly or annual variations in our results of operations or those of our competitors;•changes in accounting principles or changes in interpretations of existing principles, which could affect our financial results;•actual or anticipated changes in our growth rate relative to our competitors;•changes in earnings estimates or recommendations by securities analysts;•fluctuations in the values of companies perceived by investors to be comparable to us;•announcements by us or our competitors of new products or services, significant contracts, commercial relationships, capitalcommitments or acquisitions;•competition from existing technologies and products or new technologies and products that may emerge;•the entry into or modification or termination of agreements with our distributors;•developments with respect to intellectual property rights;•sales, or the anticipation of sales, of our common stock by us, our insiders or our other stockholders, including upon the expiration ofcontractual lock-up agreements;•issuance of additional shares of our common stock related to raising capital for the Company;•actual or perceived need of the Company to raise additional capital and the actual or perceived inability to raise such capital on favorableterms;•actual or perceive inability of the Company to satisfy the financial and other requirements of our 2017 Secured Loan Agreement;•our ability to develop, obtain regulatory approval for and market new and enhanced products on a timely basis;•changes in coverage and reimbursement policies by insurance companies and other third-party payors;•our commencement of, or involvement in, litigation;•additions or departures of key management or technical personnel; and•changes in laws or governmental regulations applicable to us.Our quarterly operating results are subject to substantial fluctuations, and you should not rely on them as an indication of our futureresults.Our quarterly operating results have historically varied and may in the future vary significantly due to a combination of factors, many of whichare beyond our control. These factors include:•seasonality in demand for our products, with reduced orders during the summer months and around year-end, followed by reduced sales ofour products during the first and third quarters as a result;•our ability to meet the demand for our products;•increased competition;•the number, timing and significance of new products and product introductions and enhancements by us and our competitors;•our ability to develop, introduce and market new and enhanced versions of our products on a timely basis;•changes in pricing policies by us and our competitors;•changes in the number of cancelled sales orders and surgical cases using our implants that occur in a quarter or during other reportingperiods, which may adversely affect our product margins, revenue and other aspects of our business;•changes in the treatment practices of orthopedic surgeons;•changes in distributor relationships and sales force size and composition;•the timing of material expense- or income-generating events and the related recognition of their associated financial impact;•fluctuations in foreign currency rates;•ability to obtain reimbursement for our products;•availability of raw materials;•work stoppages or strikes in the healthcare industry;•changes in FDA and foreign governmental regulatory policies, requirements and enforcement practices;•import and export inspections, which could impact the timing of delivery for either supplies or finished goods;•changes in accounting policies, estimates and treatments; and•general economic factors.60We believe our quarterly sales and operating results may vary significantly in the future and period-to-period comparisons of our results ofoperations are not necessarily meaningful and should not be relied upon as indications of future performance. We may not be able to increase oursales, sustain our sales in future periods or achieve or maintain profitability in any future period. Any shortfalls in sales or earnings from levelsexpected by securities or orthopedic industry analysts could have an immediate and significant adverse effect on the trading price of our commonstock in any given period.Sale of a substantial number of our shares of common stock in the public market could cause the market price of our common stock todecline significantly, even if our business is doing well.Some persons who were our stockholders prior to our initial public offering continue to hold a substantial number of shares of our commonstock, and sales of a substantial number of shares of our common stock in the public market could occur at any time. These and other substantialsales, or the perception in the market that the holders of a large number of shares of common stock intend to sell shares, could reduce the marketprice of our common stock.Moreover, certain holders of our common stock and holders of warrants to purchase our common stock have rights to require us to registertheir shares under the Securities Act, and to participate in future registrations of securities by us, subject to certain conditions.In addition, shares of common stock that are either subject to outstanding options or reserved for future issuance under our stock incentiveplans will become eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules and Rule 144 andRule 701 under the Securities Act of 1933, as amended, and, in any event, we have filed a registration statement permitting shares of commonstock issued on exercise of options to be freely sold in the public market. If these additional shares of common stock are sold, or if it is perceivedthat they will be sold, in the public market, the trading price of our common stock could decline.Certain of our employees, executive officers and directors have entered or may enter into Rule 10b5-1 plans providing for sales of shares ofour common stock from time to time. Under a Rule 10b5-1 plan, a broker executes trades pursuant to parameters established by the employee,director or officer when entering into the plan, without further direction from the employee, officer or director. A Rule 10b5-1 plan may be amendedor terminated in some circumstances. Our employees, executive officers and directors also may buy or sell additional shares outside of a Rule10b5-1 plan when they are not in possession of material, nonpublic information.Our executive officers, directors and principal stockholders, if they choose to act together, have the ability to significantly influence allmatters submitted to stockholders for approval.Our executive officers, directors and principal stockholders and their affiliates beneficially own in the aggregate, shares representingapproximately 25.36% of our capital stock as of December 31, 2018. As a result, if these stockholders were to choose to act together, they wouldbe able to significantly influence all matters submitted to our stockholders for approval, as well as our management and affairs. For example,these persons, if they choose to act together, would significantly influence the election of directors and approval of any merger, consolidation orsale of all or substantially all of our assets.This concentration of ownership control may:•delay, defer or prevent a change in control transaction that you may otherwise perceive to be beneficial;•entrench our management or the board of directors; or•impede a merger, consolidation, takeover or other business combination involving us that other stockholders may desire.Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.As of December 31, 2018, we had federal net operating loss, or NOL, carryforwards of $404 million and state NOL carryforwards of $219million. These federal and state NOL carryforwards will expire in future years if not utilized. Utilization of these NOL carryforwards may be subjectto a substantial limitation under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, and comparable provisionsof state, local and foreign tax laws due to changes in ownership of our company that have occurred previously or that could occur in the future. Wehave completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since ourformation. The results of this study indicate that we experienced ownership changes, as defined by Section 382 of the Code, on September 16,2004, March 10, 2009, January 11, 2012 and January 29, 2018. As a result of this ownership changes, our use of NOL carryforwards generatedprior to January 28, 2018 is subject to an annual limitation of approximately $1.4 million per year. We may also experience61ownership changes in the future as a result of subsequent shifts in our stock ownership. As a result, if we generate taxable income, our ability touse our pre-change NOL and tax credits carryforwards to reduce U.S. federal and state taxable income may be subject to further limitations, whichcould result in increased future tax liability to us. Moreover, our federal NOLs from years prior to 2018 can be carried forward for a maximum of 20years from the year in which the NOL was incurred, and our state NOLs are subject to carryforward limitations that vary from state to state; as aresult, all or a portion of those carryforwards could expire before being available to reduce future income tax liabilities. Assuming no futureownership change occurs at a time when our market capitalization is lower than it was on our last ownership change on January 29, 2018, theCompany is projected to lose $346 million of the total federal NOL carryforwards currently subject to IRC Section 382 to the 20-year carryforwardexpiration rules.Provisions in our corporate charter documents and under Delaware law could make an acquisition of us, which may be beneficial to ourstockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.Provisions in our restated certificate of incorporation and our bylaws may discourage, delay or prevent a merger, acquisition or other changein control of us that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares.These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressingthe market price of our common stock. In addition, because our board of directors is responsible for appointing the members of our managementteam, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it moredifficult for stockholders to replace members of our board of directors. Among other things, these provisions:•establish a classified board of directors such that all members of the board are not elected at one time;•allow the authorized number of our directors to be changed only by resolution of our board of directors;•limit the manner in which stockholders can remove directors from the board;•establish advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted onat stockholder meetings;•require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders by writtenconsent;•limit who may call a special meeting of stockholders;•authorize our board of directors to issue preferred stock, without stockholder approval, that could be used to institute a shareholder rightsplan, or so called "poison pill," that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventingacquisitions that have not been approved by our board of directors; and•require the approval of the holders of at least 75% of the votes that all our stockholders would be entitled to cast to amend or repealcertain provisions of our certificate of incorporation or bylaws.Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General CorporationLaw, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of threeyears after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger orcombination is approved in a prescribed manner. This could discourage, delay or prevent someone from acquiring us or merging with us, whetheror not it is desired by, or beneficial to, our stockholders.Our restated certificate of incorporation designates the state courts in the State of Delaware or, if no state court located within the Stateof Delaware has jurisdiction, the federal court for the District of Delaware, as the sole and exclusive forum for certain types of actionsand proceedings that may be initiated by our stockholders, which could discourage lawsuits against our company and our directors andofficers.Our restated certificate of incorporation provides that, unless our board of directors otherwise determines, the state courts in the State ofDelaware or, if no state court located within the State of Delaware has jurisdiction, the federal court for the District of Delaware, will be the sole andexclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a claim of breach of a fiduciary duty owed byany of our directors or officers to our company or our stockholders, any action asserting a claim against us or any of our directors or officersarising pursuant to any provision of the General Corporation Law of the State of Delaware, or any action asserting a claim against us or any of ourdirectors or officers governed by the internal affairs doctrine. This exclusive forum provision may limit the ability of our stockholders to bring aclaim in a judicial forum that such stockholders find favorable for disputes with us or our directors or officers, which may discourage such lawsuitsagainst us and our directors and officers.62Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, stockholders must rely on capitalappreciation, if any, for any return on their investment.We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to financethe operation, development and growth of our business. Furthermore, our current debt facility does and any future debt agreements may alsopreclude us from paying or place restrictions on our ability to pay dividends. As a result, capital appreciation, if any, of our common stock will beyour sole source of gain with respect to your investment for the foreseeable future.We are an "emerging growth company," and the reduced disclosure requirements applicable to emerging growth companies may makeour common stock less attractive to investors.We are an "emerging growth company," or EGC, as defined in the JOBS Act, and may remain an EGC until the earlier of: (1) the last day ofthe fiscal year in which we have total annual gross revenue of $1.07 billion or more; (2) December 31, 2020; (3) the date on which we have issuedmore than $1 billion in nonconvertible debt during the previous three years; or (4) the date on which we are deemed to be a large accelerated filerunder the rules of the SEC, which means the first day of the year following the first year in which the market value of our common stock that isheld by non-affiliates exceeds $700 million as of June 30. For so long as we remain an EGC, we have and plan to continue to rely on exemptionsfrom certain disclosure requirements that are applicable to other public companies that are not EGCs. These exemptions include not being requiredto comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or SOX Section 404, not being required tocomply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or asupplement to the auditor's report providing additional information about the audit and the financial statements, reduced disclosure obligationsregarding executive compensation and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation andshareholder approval of any golden parachute payments not previously approved. We cannot predict whether investors will find our common stockless attractive if we rely on certain or all of these exemptions. If some investors find our common stock less attractive as a result, there may be aless active trading market for our common stock and our stock price may be more volatile.In addition, the JOBS Act provides that an EGC can take advantage of an extended transition period for complying with new or revisedaccounting standards. This allows an EGC to delay the adoption of certain accounting standards until those standards would otherwise apply toprivate companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore,we will be subject to the same new or revised accounting standards as other public companies that are not EGCs.We have incurred and will continue to incur increased costs as a result of operating as a public company, and our management will berequired to devote substantial time to new compliance initiatives and corporate governance practices.Our common stock began trading on the NASDAQ Global Select Market on July 1, 2015. As a public company, and particularly after we areno longer an EGC, we will incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-OxleyAct of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the NASDAQ Global Market and otherapplicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance ofeffective disclosure and financial controls and corporate governance practices. These requirements may result in significant legal and financialcompliance costs and make some activities more time-consuming and costly. These rules and regulations are often subject to varyinginterpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidanceis provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costsnecessitated by ongoing revisions to disclosure and governance practices.Pursuant to SOX Section 404 we are required to furnish a report by our management on our internal control over financial reporting in ourAnnual Reports on Form 10-K with the SEC after we become a public company, including an attestation report on internal control over financialreporting issued by our independent registered public accounting firm. However, while we remain an EGC, we will not be required to include anattestation report on internal control over financial reporting issued by our independent registered public accounting firm. To comply with SOXSection 404, we document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we haveand will need to continue to dedicate internal resources, engage outside consultants and adopt a detailed work plan to assess and document theadequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing thatcontrols are63functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite ourefforts, we may identify one or more material weaknesses, which could result in an adverse reaction in the financial markets due to a loss ofconfidence in the reliability of our financial statements.ITEM 1B. UNRESOLVED STAFF COMMENTSNone.ITEM 2. PROPERTIESOur principal facilities consist of office space and manufacturing facilities in Billerica and Wilmington Massachusetts and WallingfordConnecticut. We occupy approximately 45,000 square feet of office space in Billerica, Massachusetts under a lease that expires in October 2025with the option to extend for two successive five year terms beyond the term of the lease. We occupy approximately 59,000 square feet ofmanufacturing space in Wilmington, Massachusetts under a lease that expires in July 2022 with the option to extend for one additional five-yearperiod beyond the term of the lease. We occupy approximately 4,099 square feet of space in Wallingford, Connecticut under a five year lease thatexpires in August 2022 with options to extend for two additional years beyond the original term and an additional three years past the firstextension term.ITEM 3. LEGAL PROCEEDINGSIn the ordinary course of our business, we are subject to routine risk of litigation, claims and administrative proceedings on a variety ofmatters, including patent infringement, product liability, securities-related claims, and other claims in the United States and in other countrieswhere we sell our products.On February 29, 2016, we filed a lawsuit against Smith & Nephew, Inc. (“Smith & Nephew”) in the United States District Court for the Districtof Massachusetts Eastern Division, and we amended our complaint on June 13, 2016 (the "Smith & Nephew Lawsuit"). The Smith & NephewLawsuit alleged that Smith & Nephew’s Visionaire® patient-specific instrumentation as well as the implant systems used in conjunction with theVisionaire instrumentation infringe nine of our patents, and it requested, among other relief, monetary damages for willful infringement, enhanceddamages and a permanent injunction.On May 27, 2016, Smith & Nephew filed its answer and counterclaims in response to our lawsuit, which it subsequently amended on July22, 2016. Smith & Nephew denied that its Visionaire® patient-specific instrumentation as well as the implant systems used in conjunction with theVisionaire instrumentation infringe the patents asserted by us in the lawsuit. It also alleged two affirmative defenses: that our asserted patents areinvalid and that we are barred from relief under the doctrine of laches. In addition, Smith & Nephew asserted a series of counterclaims, includingcounterclaims seeking declaratory judgments that Smith & Nephew’s accused products do not infringe our patents and that our patents are invalid.Smith & Nephew also alleged that we infringed ten patents owned or exclusively licensed by Smith & Nephew: two of those patents Smith &Nephew alleged are infringed by our iUni and iDuo products; three of those patents Smith & Nephew alleged are infringed by our iTotal products;and five of those patents Smith & Nephew licenses from Kinamed, Inc. of Camarillo, California and alleged are infringed by our iUni, iDuo andiTotal products. Due to Smith & Nephew’s licensing arrangement with Kinamed, Kinamed was named as a party to the lawsuit. Smith & Nephewand Kinamed requested, among other relief, monetary damages for willful infringement, enhanced damages and a permanent injunction. On March9, 2017, the Court entered a stipulation of dismissal by the parties that dismissed from the lawsuit eight patents asserted by Smith & Nephew,including the patents involving Kinamed, and two patents asserted by us. With the dismissal of all claims involving Kinamed's patents, Kinamedwas no longer a party to the lawsuit.On January 27, 2017, Smith & Nephew filed a motion seeking a stay of the Smith & Nephew Lawsuit until any requested IPRs (defined anddescribed below) were resolved. On April 27, 2017, the Court stayed certain aspects of the proceedings and indicated that it would make a finaldecision on the motion to stay after the USPTO has decided more of the petitions for Inter Partes Review (“IPR”).64Between September 21, 2016 and March 1, 2017, Smith & Nephew filed sixteen petitions with the United States Patent & Trademark Office(“USPTO”) requesting IPRs of the nine patents that we asserted against Smith & Nephew in the lawsuit. In its petitions, Smith & Nephew allegedthat our patents were obvious in light of certain prior art. As of October 31, 2017, the USPTO decided to institute IPR proceedings with respect toseven of the petitions; decided to deny the requests for IPR with respect to seven of the petitions; and, with respect to the remaining two petitions,decided to institute IPR proceedings for some of the subject patent claims and to deny the requests for the remaining subject patent claims(“Subject Patent Claims”). On April 24, 2018, the Supreme Court of the United States issued its ruling in SAS Institute, Inc. v. Iancu (the “SASDecision”) which held that the IPR proceedings cannot be instituted in part and denied in part. In response to the SAS Decision and guidance fromthe USPTO, the Patent Trial and Appeal Board (“PTAB”) issued an order on April 27, 2018 including the Subject Patent Claims within the priorinstituted IPR proceedings. In total, the USPTO instituted IPR proceedings for claims in six of the patents in the Smith & Nephew lawsuit (fivepatents that were currently asserted, and one of the patents that was voluntarily dismissed from the lawsuit), and denied the petitions for claims inthree of the patents (two patents that were currently asserted and one of the patents that was voluntarily dismissed from the lawsuit). Smith &Nephew filed requests for rehearing of three of the petitions that were denied and the PTAB denied those requests. Smith & Nephew filed requestswith the USPTO for reexamination of two of the patents for which IPR proceedings were not instituted and the USPTO granted those requests forreexamination. On August 7, 2018 and October 2, 2018, the USPTO ruled in our favor on both reexamination proceedings finding the claimspatentable in both patents.Between December 18, 2017 and April 18, 2018, IPR hearings were held for the six patents for which IPR proceedings were instituted. OnMarch 26, 2018, the USPTO issued its first ruling holding that our U.S. Patent No. 9,055,953 (the “’953 Patent”) is invalid over prior art. On April19, 2018, the USPTO issued its second ruling holding that our U.S. Patent No. 9,216,025 (the “‘025 Patent”) is invalid over prior art. Following agrant by the U.S. Court of Appeals for the Federal Circuit (the “Federal Circuit”) of our request for consolidation, we filed an opening brief onOctober 1, 2018, appealing the PTAB’s rulings on the ‘953 Patent and the ‘025 patent. On June 11, 2018, the USPTO issued its third ruling holdingthat a subset of claims in our U.S. Patent No. 7,981,158 (the “‘158 Patent”) are invalid over prior art. On June 12, 2018, the USPTO issued itsfourth ruling holding that a subset of claims in our U.S. Patent No. 8,551,169 (the “‘169 Patent”) are invalid over prior art. The ’953 Patent is notpart of the lawsuit having been voluntarily dismissed on March 9, 2017. The ‘025, ‘169 and ‘158 Patents were part of the lawsuit. On September26, 2018, the PTAB terminated the remaining IPR proceedings in response to a joint motion to terminate filed by us and Smith & Nephew pursuantto the Settlement and License Agreement (defined and described below).On September 14, 2018, the Company and Smith & Nephew entered into a Settlement and License Agreement (the “Settlement and LicenseAgreement”) including terms for resolving all of the parties’ existing patent disputes. The Settlement and License Agreement includes terms fordismissal of all outstanding litigation, prohibitions against commencement of litigation with respect to existing product lines, and Smith & Nephewagreed to cease their opposition to certain of our patents currently in IPR proceedings.Pursuant to the Settlement and License Agreement, we granted to Smith & Nephew (i) a fully paid-up, non-exclusive, worldwide license tocertain patents for the exploitation of patient-specific instrumentation for use with off-the-shelf knee implants, (ii) a royalty-bearing, non-exclusive,worldwide license to certain patents in the event Smith &Nephew commercializes patient-specific instrumentation for use with off-the-shelfimplants other than knee implants, and (iii) a fully paid-up, non-exclusive, worldwide license to certain other patents for exploitation of off-the-shelfimplants. Also pursuant to the Settlement and License Agreement, Smith & Nephew granted to us a fully paid-up, non-exclusive, worldwide licenseto certain patents for the exploitation of patient-specific implants and paid us $10.5 million. We are not required to make a payment to Smith &Nephew.The foregoing description is qualified in its entirety by reference to the text of the Settlement and License Agreement filed as exhibit 10.1 toour quarterly report on Form 10-Q for the period ended September 30, 2018.For further information regarding such legal proceedings, see the section entitled “Legal Proceedings” of “Note J-Commitments andContingencies” in this Annual Report on Form 10 -K.ITEM 4. MINE SAFETY DISCLOSURESNone.65PART II66ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIESCertain Information Regarding the Trading of Our Common StockOur common stock trades under the symbol “CFMS” on the NASDAQ Global Select Market and has been publicly traded since July 1,2015. Prior to this time, there was no public market for our common stock. The following table sets forth the high and low sales price of ourcommon stock as reported on the NASDAQ Global Market for the periods indicated: High Low Year ended December 31, 2017: First Quarter $8.72 $4.35 Second Quarter $5.98 $3.79 Third Quarter $5.73 $3.22 Fourth Quarter $4.17 $2.22 Year ended December 31, 2018: First Quarter $2.62 $1.20 Second Quarter $1.79 $1.22 Third Quarter $1.28 $0.89 Fourth Quarter $1.00 $0.36 Holders of Our Common StockAs of February 28, 2019, there were approximately 345 holders of record of shares of our common stock. This number does not includestockholders for whom shares are held in “nominee” or “street” name.DividendsWe have never declared or paid any cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, tofinance the growth and development of our business. We do not intend to pay any cash dividends to the holders of our common stock in theforeseeable future.ITEM 6. SELECTED FINANCIAL DATAThe following selected consolidated financial data should be read together with our consolidated financial statements and the related notesappearing elsewhere in this Annual Report on Form 10-K and the "Management’s Discussion and Analysis of Financial Condition and Results ofOperations" section of this Annual Report on Form 10-K. We have derived the statements of operations data for the years ended December 31,2018 and 2017 from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We have derived thebalance sheet data for the years ended December 31, 2016, 2015, and 2014 respectively from our audited financial statements not included in thisAnnual Report on Form 10-K. Our historical results for any period are not necessarily indicative of results to be expected in any future period.67 Years ended December 31,(in thousands, except share and pershare data) 2018 2017 2016 2015 2014 Consolidated statements ofoperations data: Revenue Product $78,627 $77,100 $78,921 $62,791 $48,186Royalty 11,162 1,015 978 4,096 —Total revenue 89,789 78,115 79,899 66,887 48,186Cost of revenue 41,304 49,301 53,192 45,102 32,374Gross profit 48,485 28,814 26,707 21,785 15,812Operating expenses: Sales and marketing 38,955 38,788 41,086 37,558 29,367Research and development 16,869 17,136 16,608 16,997 15,107General and administrative 24,622 28,737 25,157 23,191 16,763Goodwill impairment 6,731 — — — —Total operating expenses 87,177 84,661 82,851 77,746 61,237Loss from operations (38,692) (55,847) (56,144) (55,961) (45,425)Other income and expenses Interest income 659 491 487 138 104Interest expense (3,356) (2,119) (138) (1,385) (360)Loss on extinguishment of debt — — — (205) —Foreign currency transactionincome (loss) (1,915) 4,057 (1,607) — —Other income (expense), net — — (123) 208 —Total other income/(expenses), net (4,612) 2,429 (1,381) (1,244) (256)Loss before income taxes (43,304) (53,418) (57,525) (57,205) (45,681)Income tax provision 61 162 63 41 41Net loss $(43,365) $(53,580) $(57,588) $(57,246) $(45,722)Net loss per share applicable tocommon stockholders—basic anddiluted $(0.74) $(1.24) $(1.39) $(2.60) $(10.78)Weighted-average number ofcommon shares used in net loss pershare applicable to commonstockholders—basic and diluted 58,886,333 43,343,459 41,521,629 21,993,066 4,239,564 December 31,(in thousands) 2018 2017 2016 2015 2014 Consolidated balance sheet data: Cash and cash equivalents $16,380 $18,348 $37,257 $117,185 $37,900Investments 7,245 26,880 28,242 — —Working capital 36,581 56,942 81,577 132,894 45,036Total assets 62,983 93,798 112,810 157,099 71,278Long term debt, including current portion 14,792 29,667 — 478 10,620Total stockholders' equity 36,200 46,513 94,055 141,212 49,82768ITEM 7. 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 consolidatedfinancial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in thisdiscussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy forour business, includes forward looking statements that involve risks and uncertainties. As a result of many factors, including those factors setforth in the ‘‘Risk Factors’’ section of this Annual Report on Form10-K, our actual results could differ materially from the results described, in orimplied, by these forward-looking statements. Overview We are a medical technology company that uses our proprietary iFit Image-to-Implant technology platform to develop, manufacture andsell joint replacement implants that are individually sized and shaped, which we refer to as customized, to fit each patient’s unique anatomy. Theworldwide market for joint replacement products is approximately $18.1 billion annually and growing, and we believe our iFit technology platform isapplicable 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'sknee. We have sold a total of more than 90,000 knee implants, more than 70,000 total knee implants and 20,000 partial knee implants. In clinicalstudies, 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 commerciallaunch of the iTotal PS, our posterior-stabilized total knee replacement implant which addresses the largest segment of the knee replacementmarket. On July 31, 2018, our first Conformis Hip Systems were implanted. We are in limited commercial launch with the Conformis Hip Systemand 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-usepatient-specific instrumentation, which we refer to as iJigs, based on computed tomography, or CT scans of the patient and toprepare 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 manufacturecertain components of our customized knee replacement implants.•iFit Just-in-Time Delivery, our just-in-time manufacturing and delivery capabilities. We believe our iFit technology platform enables a scalable business model that greatly lowers our inventory requirements, reduces theamount of working capital required to support our operations and allows us to launch new products and product improvements more rapidly, ascompared 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 theFederal Food, Drug, and Cosmetic Act, or the FDCA, and have received certification to CE Mark. We market our products to orthopedic surgeons,hospitals and other medical facilities and patients. We use direct sales representatives, independent sales representatives and distributors tomarket 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 webelieve 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 served69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 and Australia. In order for surgeons to use our products, themedical facilities where these surgeons treat patients typically require us to enter into pricing agreements. The process of negotiating a pricingagreement can be lengthy and time-consuming, require extensive management time and may not be successful. Revenue from sales of our products fluctuates principally based on the selling price of the joint replacement product, as the sales price ofour products varies among hospitals and other medical facilities as well as health insurance coverage and reimbursement rates. In addition, ourproduct revenue may fluctuate based on the product sales mix and mix of sales by geography. Our product revenue from international sales canbe significantly impacted by fluctuations in foreign currency exchange rates, as our sales are denominated in the local currency in the countries inwhich we sell our products. We expect our product revenue to fluctuate from quarter-to-quarter due to a variety of factors, including seasonality, aswe have historically experienced lower sales in the summer months, the timing of the introduction of our new products, if any, and the impact ofthe buying patterns and implant volumes of medical facilities. On-going royalty revenue is generated from our agreement with MicroPort Orthopedics Inc., a whollyowned subsidiary of MicroPort Scientific Corporation, or collectively, MicroPort. The license agreement with MicroPort and our license agreementwith Wright Medical Group, Inc., its wholly owned subsidiary, also generated additional revenue, which was recognized through December 31,2017. Both agreements were entered into in April 2015. Historically, we have accounted for the agreements with Wright Medical and MicroPortunder ASC 605-25, Multiple-Element Arrangements and Staff Accounting Bulletin No. 104, Revenue Recognition (ASC 605). In accordance withASC 605, we were required to identify and account for each of the separate units of accounting. We identified the relative selling price for each andthen allocated the total consideration based on their relative values. In connection with these agreements, in April 2015, we recognized inaggregate (i) back-owed royalties of $3.4 million as royalty revenue and (ii) the value attributable to the settlements of $0.2 million as other income.Additionally, we recognized an initial $5.1 million in aggregate as deferred royalty revenue, to be recognized as royalty revenue ratably through theexpiration of the last to expire of our patents and patent applications licensed to Wright Medical, which currently is expected to occur in 2027. OnJanuary 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers. Our analysis of these contracts under ASC 606 indicated thatthe licenses are functional and thus revenue should have been recognized in full upon the license execution date, which resulted in a $4.3 millionadjustment to our opening balance of accumulated deficit. In addition, the on-going royalty from MicroPort, which was previously recognized asroyalty revenue upon receipt of payment, is now recognized in the period the sale occurred, resulting in a $0.2 million adjustment to our openingbalance of accumulated deficit. The license agreement with MicroPort will expire upon the expiration of the last to expire of our patents and patentapplications licensed to MicroPort, which currently is expected to occur in 2031.Royalty revenue for the year ended December 31, 2018, includes revenue of $10.5 million generated from our settlement with Smith &Nephew for a fully paid-up, non-exclusive, worldwide license to certain patents for the exploitation of patient-specific instruments with off-the-shelfimplants. Under ASC 606, the licenses are functional and thus revenue is recognized in full upon the license execution date, resulting inrecognition of $10.5 million as royalty revenue.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 forour iTotal CR, and starting in December 2017, for our iTotal PS product, in our facilities in Wilmington, Massachusetts. Starting in August 2017, wepolish our femoral implants used in our total and partial knee products in our facility in Wallingford, Connecticut. Also starting in July 2018, wemanufacture our patient-specific Conformis Hip System implants in our facility in Wilmington, Massachusetts. We outsource the production of theremainder of the partial knee tibial components, femoral castings, and other knee and hip components to third-party suppliers. Our suppliers makeour customized implant components using the CAD designs we supply. Cost of revenue consists primarily of costs of raw materials,manufacturing personnel, outsourced CAD labor, manufacturing supplies, inbound freight, manufacturing overhead, and depreciation expense.We calculate gross margin as revenue less cost of revenue divided by revenue. Our gross margin has been and will continue to beaffected by a variety of factors, including primarily volume of units produced, mix of product70components manufactured by us versus sourced from third parties, our average selling price, the geographic mix of sales, product sales mix, thenumber 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 aresuccessful in reducing our manufacturing costs per unit and increasing our manufacturing efficiency as sales volume increases. We believe thatareas 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 canmanufacture 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 willreduce costs associated with the design process; and•continue 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 notbe 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. Personnelcosts are the most significant component of operating expenses and consist of salaries, benefits, stock-based compensation and salescommissions. Sales and marketing. Sales and marketing expense consists primarily of personnel costs, including salary, employee benefits andstock-based compensation for personnel employed in sales, marketing, customer service, medical education and training, as well as investmentsin surgeon training programs, industry events and other promotional activities. In addition, our sales and marketing expense includes salescommissions and bonuses, generally based on a percentage of sales, to our sales managers, direct sales representatives and independent salesrepresentatives. Recruiting, training and retaining productive sales representatives and educating surgeons about the benefits of our products arerequired to generate and grow revenue. We expect sales and marketing expense to increase as we build up our sales and support personnel andexpand our marketing efforts. Our sales and marketing expense may fluctuate from period to period due to the seasonality of our revenue and thetiming and extent of our expenses.Research and development. Research and development expense consists primarily of personnel costs, including salary, employeebenefits and stock-based compensation for personnel employed in research and development, regulatory and clinical areas. Research anddevelopment expense also includes costs associated with product design, product refinement and improvement efforts before and after receipt ofregulatory clearance, development of prototypes, testing, clinical study programs and regulatory activities, contractors and consultants, andequipment and software to support our development. As our revenue increases, we will also incur additional expense for revenue share paymentsto our past and present scientific advisory board members, including one of our past directors. We expect research and development expense toincrease in absolute dollars as we develop new products to expand our product pipeline, add research and development personnel and conductclinical activities. General and administrative. General and administrative expense consists primarily of personnel costs, including salary, employeebenefits 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 administrativeexpense also includes outside legal costs associated with intellectual property and general legal matters, financial audit fees, insurance, fees forother consulting services, depreciation expense, long-lived asset impairment charges, freight, facilities expense, and severance expense. Weexpect our general and administrative expense will increase in71absolute dollars as we increase our headcount and expand our infrastructure to support growth in our business and our operations as a publiccompany. As our revenue increases we also will incur additional expenses for freight. Our general and administrative expense may fluctuate fromperiod to period due to the timing and extent of the expenses.Goodwill impairment. Goodwill impairment expense consists of non-cash impairment charges incurred during the third-quarter endedSeptember 30, 2018 related to the full impairment of goodwill derived from the acquisition of ImaTx, Inc. in 2009 and the acquisition of Broad PeakManufacturing, LLC in August 2017. Total other income (expense), net Total other income (expense), net consists primarily of interest expense and amortization of debt discount associated with our term loansoutstanding during the year and realized gains (losses) from foreign currency transactions. The effect of exchange rates on our foreign currency-denominated asset and liability balances are recorded as foreign currency translation adjustments in the consolidated statements ofcomprehensive loss. Income tax provision Income tax provision consists primarily of a provision for income taxes in foreign jurisdictions in which we conduct business. We maintaina full valuation allowance for deferred tax assets including net operating loss carryforwards and research and development credits and other taxcredits.72Consolidated results of operations Comparison of the years ended December 31, 2018 and 2017 The following table sets forth our results of operations expressed as dollar amounts, percentage of total revenue and year-over-yearchange (in thousands): 2018 2017 2018 vs 2017Years Ended December 31, Amount As a%ofTotalRevenue Amount As a% ofTotalRevenue $Change %ChangeRevenue Product revenue $78,627 88 % $77,100 99 % $1,527 2 %Royalty 11,162 12 1,015 1 10,147 1,000Total revenue 89,789 100 78,115 100 11,674 15Cost of revenue 41,304 46 49,301 63 (7,997) (16)Gross profit 48,485 54 28,814 37 19,671 68 Operating expenses: Sales and marketing 38,955 43 38,788 50 167 —Research and development 16,869 19 17,136 22 (267) (2)General and administrative 24,622 27 28,737 37 (4,115) (14)Goodwill impairment 6,731 7 — — 6,731 100Total operating expenses 87,177 97 84,661 108 2,516 3Loss from operations (38,692) (43) (55,847) (71) 17,155 31Total other income/(expenses), net (4,612) (5) 2,429 3 (7,041) (290)Loss before income taxes (43,304) (48) (53,418) (68) 10,114 19Income tax provision 61 — 162 — (101) (62)Net loss $(43,365) (48)% $(53,580) (69)% $10,215 19 %Product revenue. Product revenue was $78.6 million for the year ended December 31, 2018 compared to $77.1 million for the yearended December 31, 2017, an increase of $1.5 million or 2%, due principally to increased sales of our iTotal PS and Hip, partially offset bydecreased sales of our iTotal CR and partial knee products. The following table sets forth, for the periods indicated, our product revenue by geography expressed as U.S. dollar amounts, percentageof product revenue and year-over-year change (in thousands): 2018 2017 2018 vs 2017Years Ended December 31, Amount As a % ofProductRevenue Amount As a % ofProductRevenue $Change %ChangeUnited States $68,057 87% $64,307 83% $3,750 6 %Germany 9,007 11 11,296 15 (2,289) (20)Rest of world 1,563 2 1,497 2 66 4Product revenue $78,627 100% $77,100 100% $1,527 2 % Product revenue in the United States was generated through our direct sales force and independent sales representatives. Productrevenue outside the United States was generated through our direct sales force and distributors. The percentage of product revenue generated inthe United States was 87% for the year ended December 31, 2018 compared to 83% for the year ended December 31, 2017. We believe the higherlevel of revenue as a percentage of product revenue inside the United States in 2018 was due to the growth of the iTotal PS and Hip in the UnitedStates, coupled with the continued weakness primarily due to reimbursement challenges in our iTotal CR and partial knee product in Germany .73Royalty revenue. Royalty revenue was $11.2 million for the year ended December 31, 2018compared to $1.0 million for the year ended December 31, 2017, an increase of $10.1 million or 999.7%. The increase was driven by the $10.5million royalty payment under the Settlement and License Agreement with Smith and Nephew partially offset by lower ongoing royalty revenue fromMicroPort Orthopedics Inc. of $0.4 million. Cost of revenue, gross profit and gross margin. Cost of revenue was $41.3 million for the year ended December 31, 2018 comparedto $49.3 million for the year ended December 31, 2017, a decrease of $8.0 million or 16%. The decrease was due primarily to cost reductions fromour vertical integration efforts and other cost saving initiatives. Gross profit was $48.5 million for the year ended December 31, 2018 compared to$28.8 million for the year ended December 31, 2017, an increase of $19.7 million or 68%. Gross margin was 54% for the year ended December 31,2018 compared to 37% for the year ended December 31, 2017, an increase of 1,700 basis points. The increase in gross margin was drivenprimarily by cost reductions as a result of vertical integration efforts and other cost saving initiatives and the $10.5 million royalty received underthe Settlement and License Agreement with Smith & Nephew, which contributed 600 basis points of the increase. Sales and marketing. Sales and marketing expense was $39.0 million for the year ended December 31, 2018 compared to $38.8 millionfor the year ended December 31, 2017, an increase of $0.2 million or 0%. The increase was due primarily to an increase of $0.3 million marketingand promotional expenses, an increase in depreciation expense of $0.2 million driven by capitalization of reusable instrument trays, and a$1.0 million increase in commissions partially offset by a decrease in salaries and benefits of $1.0 million due to employee conversion todistributor agents and decrease in other sales and marketing expenses of $0.3 million. Research and development. Research and development expense was $16.9 million for the year ended December 31, 2018 comparedto $17.1 million for the year ended December 31, 2017, a decrease of $0.3 million or 2%. The decrease was due to a decrease of $1.0 million insalaries and benefits and a $0.5 million decrease in revenue share expense, partially offset by an increase of $0.9 million in prototype andvalidation testing expense for the hip system limited launch and other development projects, and an increase of $0.3 million in other research anddevelopment expenses. General and administrative. General and administrative expense was $24.6 million for the year ended December 31, 2018 compared to$28.7 million for the year ended December 31, 2017, a decrease of $4.1 million or 14%. The decrease is primarily due to decreases of $3.4 millionin litigation and other legal costs, $2.0 million in salaries and benefits, $0.7 million in business insurance, and $0.6 million in facility relatedexpenses. The decrease was partially offset by increases in long-lived asset impairment of $1.3 million, a $0.6 million refund in 2017 of previouslypaid medical device excise tax, $0.5 million in consulting services expense, and $0.2 million in other expenses. Goodwill impairment. Goodwill impairment was $6.7 million for the year ended December 31, 2018 compared to no impairment for theyear ended December 31, 2017. The decrease in our market capitalization prior to filing the Form 10-Q for the period ended September 30, 2018and cash flow position were indicators of impairment and our analysis determined goodwill was fully impaired. Total other income (expenses), net. Total other income (expenses), net was a net expense of $4.6 million for the year ended December 31,2018 compared to a net income of $2.4 million for the year ended December 31, 2017, a change of $7.0 million, or 290%. The change wasprimarily due to $1.9 million in foreign exchange transaction loss in 2018 compared to $4.1 million foreign exchange transaction gain in 2017, whichwas attributable to the effect of exchange rate change on intercompany debt with our foreign subsidiaries, and an increase of $1.2 million ininterest expense associated with our term debt partially offset by an increase in interest income from investments of $0.2 million.Income taxes. Income tax provision was $61,000 for the year ended December 31, 2018 and $162,000 for the year ended December 31,2017. We continue to generate losses for U.S. federal and state tax purposes and have net operating loss carryforwards creating a deferred taxasset. We maintain a full valuation allowance for deferred tax assets. On December 22, 2017, H.R. 1 (“the 2017 Act”) became law. The 2017 Act includes a broad range of topics affecting corporations –including corporate tax rates, business deductions and international provisions. The effect of the tax law changes has been recognized in theCompany's December 31, 2018 financial statements.7475Comparison of the years ended December 31, 2017 and 2016The following table sets forth our results of operations expressed as dollar amounts, percentage of total revenue and year-over-year change (inthousands): 2017 2016 2017 vs 2016Years Ended December 31, Amount As a%ofTotalRevenue Amount As a% ofTotalRevenue $Change %ChangeRevenue Product revenue $77,100 99 % $78,921 99 % $(1,821) (2)%Royalty 1,015 1 978 1 37 4Total revenue 78,115 100 79,899 100 (1,784) (2)Cost of revenue 49,301 63 53,192 67 (3,891) (7)Gross profit 28,814 37 26,707 33 2,107 8 Operating expenses: Sales and marketing 38,788 50 41,086 51 (2,298) (6)Research and development 17,136 22 16,608 21 528 3General and administrative 28,737 37 25,157 31 3,580 14Total operating expenses 84,661 108 82,851 104 1,810 2Loss from operations (55,847) (71) (56,144) (70) 297 1Total other income/(expenses), net 2,429 3 (1,381) (2) 3,810 276Loss before income taxes (53,418) (68) (57,525) (72) 4,107 7Income tax provision 162 — 63 — 99 157Net loss $(53,580) (69)% $(57,588) (72)% $4,008 7 %Product revenue. Revenue was $77.1 million for the year ended December 31, 2017 compared to $78.9 million for the year endedDecember 31, 2016, a decrease of $1.8 million, or 2%, due principally to decreased sales of our iTotal CR in Germany, offset by increased salesof our iTotal PS.The following table sets forth, for the periods indicated, our product revenue by geography expressed as U.S. dollar amounts, percentage ofproduct revenue and year-over-year change (in thousands): 2017 2016 2017 vs 2016Years Ended December 31, Amount As a % ofProductRevenue Amount As a % ofProductRevenue $Change %ChangeUnited States $64,307 83% $62,366 79% $1,941 3 %Germany 11,296 15 14,701 19 (3,405) (23)Rest of world 1,497 2 1,854 2 (357) (19)Product revenue $77,100 100% $78,921 100% $(1,821) (2)%Product revenue in the United States was generated through our direct sales force and independent sales representatives. Product revenueoutside of the United States was generated through our direct sales force and distributors. The percentage of product revenue generated in theUnited States was 83% for the year ended December 31, 2017 compared to 79% for the year ended December 31, 2016. We believe the higherlevel of revenue as a percentage of product revenue inside the United States in 2017 was due to the introduction of the iTotal PS in the UnitedStates, coupled with the change in the reimbursement of our iUni and iDuo partial implants and continued weakness in our iTotal CR business inGermany.Cost of revenue, gross profit and gross margin. Cost of revenue was $49.3 million for the year ended December 31, 2017 comparedto $53.2 million for the year ended December 31, 2016, a decrease of $3.9 million or 7%. The decrease was due primarily to cost reductions fromour vertical integration efforts and a decrease in76production and personnel costs associated with the decrease in product revenue. Gross profit was $28.8 million for the year ended December 31,2017 compared to $26.7 million for the year ended December 31, 2016, an increase of $2.1 million or 8%. Gross margin was 37% for the yearended December 31, 2017 compared to 33% for the year ended December 31, 2016, an increase of 400 basis points.Sales and marketing. Sales and marketing expense was $38.8 million for the year ended December 31, 2017 compared to $41.1 millionfor the year ended December 31, 2016, a decrease of $2.3 million or 6%. The decrease was due primarily to a $2.4 million decrease in sales andmarketing salaries and benefits, a $0.6 million decrease in travel and a $0.4 million decrease in instrumentation costs, offset by an increase of$0.6 million in sales commissions and an increase of $0.4 million in consulting fees and other expenses.Research and development. Research and development expense was $17.1 million for the year ended December 31, 2017 compared to$16.6 million for the year ended December 31, 2016, an increase of $0.5 million or 3%. The increase was due to an increase of $0.7 million insalaries and benefits and an increase of $0.2 million in revenue share expense, offset by a decrease of $0.4 million in consulting fees.General and administrative. General and administrative expense was $28.7 million for the year ended December 31, 2017 compared to$25.2 million for the year ended December 31, 2016, an increase of $3.6 million or 14%. The increase was due primarily to a $1.6 million increasein litigation and general legal costs, an increase of $1.5 million in salaries and benefits, asset impairment charges of $1.1 million, an increase of$0.7 million in facility costs, an increase of $0.4 million in insurance costs, and an increase of $0.2 million in software expense, offset by a $0.8million decrease in consulting services expense, a $0.6 million refund of previously paid medical device excise tax, a decrease of $0.2 million infreight costs and a decrease of $0.2 million in bad debt expense.Total other income/(expenses), net. Total other income/(expenses), net was a net income of $2.4 million for the year endedDecember 31, 2017 compared to a net expense of $1.4 million for the year ended December 31, 2016, a change of $3.8 million, or 276%. Thechange was primarily due to $4.1 million in foreign exchange transaction gain in 2017 compared to $1.7 million foreign exchange transaction loss in2016, which was attributable to the effect of exchange rate change on intercompany debt with our foreign subsidiaries no longer consideredpermanent investments, offset by an increase of $2.0 million in interest expense associated with our term debt.Income taxes. Income tax provision was $162,000 for the year ended December 31, 2017 and $63,000 for the year ended December 31,2016. We continue to generate losses for U.S. federal and state tax purposes and have net operating loss carryforwards creating a deferred taxasset. We maintained a full valuation allowance for deferred tax assets.On December 22, 2017, H.R.1., known as the Tax Cuts and Jobs Act, was signed into law and, as a result, the U.S. federal statutorycorporate tax rate was lowered from 35% to 21%. The Company has remeasured its deferred tax positions as of December 31, 2017 at the newenacted tax rate, resulting in a decrease to deferred tax assets in 2017 in the amount of $48.5 million. Since the Company has a valuationallowance on its deferred tax assets, there is no impact on current tax expense and for deferred taxes purposes results in a benefit ofapproximately $19,000 due to the revaluation of the deferred tax liability hanging credit. The Company recorded no other material items as a resultof the Tax Act. U.S. Treasury regulations and administrative guidance have not been finalized as of the date of this Form 10-K. As a result, thisamount may be subject to material changes in future reporting periods. The Company will continue to review the impact of these limitations asregulatory guidance is issued.77Liquidity, capital resources and plan of operations Sources of liquidity and funding requirements Since our inception in June 2004, we have financed its operations primarily through private placements of preferred stock, its initial publicoffering in July 2015 and secondary public offering in January 2018, patent licenses, debt and convertible debt financings, equipment purchaseloans, and product revenue beginning in 2007. We have not yet attained profitability and continue to incur operating losses and negative operatingcash flows, which adversely impacts our ability to continue as a going concern. At December 31, 2018, we had an accumulated deficit of $475.7million. On July 7, 2015, we closed our initial public offering of our common stock and issued and sold 10,350,000 shares of our common stock,including 1,350,000 shares of common stock issued upon the exercise in full by the underwriters of their over-allotment option, at a public offeringprice of $15.00 per share, for aggregate offering proceeds of approximately $155 million. We received aggregate net proceeds from the offering ofapproximately $140 million after deducting underwriting discounts and commissions and offering expenses payable by us. Our common stockbegan trading on the NASDAQ Global Select Market on July 1, 2015.On January 6, 2017, we entered into the 2017 Secured Loan Agreement with Oxford. Through the Secured Loan Agreement with Oxford,the Company accessed $15 million of borrowings on January 6, 2017 and a second $15 million of borrowings on June 30, 2017. On December 13,2018, we pre-paid $15 million principal amount of the $30 million outstanding principal amount using short-term investment maturities and cash andcash equivalents. New minimum revenue milestones, based on product revenue projections, are to be established prior to the start of 2020 andprior to the start of each fiscal year thereafter by the mutual agreement of Oxford and the Company. If the Company is not able to agree withOxford on new minimum revenue milestones for 2020 or a fiscal year thereafter, the Company must refinance the 2017 Secured Loan Agreementby March 31, 2020 or that next fiscal year, and if the Company fails to refinance the 2017 Secured Loan Agreement, the Company must notifyOxford of such default and Oxford would be permitted to exercise remedies against us and its assets in respect of such event of default, includingtaking control of our cash and commencing foreclosure proceedings on our other assets. For further information regarding this facility, see “Note K—Debt and Notes Payable —2017 Secured Loan Agreement” in the financial statements and related notes appearing elsewhere in this AnnualReport on Form 10-K.In January 2017, we filed a shelf registration statement on Form S-3, which was declared effective by the SEC on May 9, 2017 (the "ShelfRegistration Statement"). The Shelf Registration Statement allows us to sell from time to time up to $200 million of common stock, preferredstock, debt securities, warrants, or units comprised of any combination of these securities, for our own account in one or more offerings. On May10, 2017, we filed with the SEC a prospectus supplement (the “Prospectus Supplement”), for the sale and issuance of up to $50 million of ourcommon stock and entered into a Distribution Agreement with Canaccord Genuity, pursuant to which Canaccord has agreed to sell shares of ourcommon 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. SecuritiesAct of 1933, as amended. We are not obligated to sell any shares of our common stock under the Distribution Agreement. As of December 31,2018, we sold 785,280 Shares under the Distribution Agreement resulting in net proceeds of $1.5 million.On January 29, 2018, we closed an offering of our common stock off of the Shelf Registration Statement and issued and sold 15,333,333shares of our common stock (including 2,000,000 shares of common stock issued in connection with the exercise in full by the underwriters oftheir over-allotment option) at a public offering price of $1.50 per share, for aggregate net proceeds of approximately $21.3 million. In addition, the Smith & Nephew settlement and license agreement, discussed in Note J-Commitments and Contingencies, Legalproceedings, provided the Company with $10.5 million of royalty revenue for the year ended December 31, 2018.On December 17, 2018, we entered into a stock purchase agreement with Lincoln Park Capital ("LPC" and the "LPC Agreements"). Uponentering into the LPC Agreements, we sold 1,921,968 shares of common stock for $1.0 million to LPC, representing a premium of 110% to theprevious day's closing price. As consideration for LPC’s commitment to purchase shares of common stock under the LPC Agreements, we issued354,430 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 subjectto the terms of the LPC Agreements. We will control the timing of any sales to LPC and LPC will be obligated to make purchases of our commonstock upon receipt of requests from us in accordance with the terms of78the LPC Agreements. There are no upper limits to the price per share LPC may pay to purchase the up to $20.0 million worth of common stocksubject to the LPC Agreements, and the purchase price of the shares will be based on the then prevailing market prices of our shares at the timeof each sale to LPC as described in the LPC Agreements, provided that LPC will not be obligated to make purchases of our common stockpursuant 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 CapitalMarket (or alternative national exchange in accordance with the LPC Agreements) is below a floor price of $0.25 per share. No warrants,derivatives, financial or business covenants are associated with the LPC Agreements and LPC has agreed not to cause or engage in any mannerwhatsoever, any direct or indirect short selling or hedging of shares of our common stock. The LPC Agreements may be terminated by us at anytime, at our sole discretion, without any cost or penalty.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 designsoftware and product support;•funding research, development and clinical activities related to new products that we may develop, including other joint replacementproducts;•pursuing and maintaining appropriate regulatory clearances and approvals for our existing products and any new products that wemay 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 sale of our products, potential futurecapital raises through the issuance of equity or other securities, debt financings, and revenue that we may generate in connection with licensingour intellectual property. We will need to generate significant additional revenue to achieve and maintain profitability, and even if we achieveprofitability, we cannot be sure that we will remain profitable for any substantial period of time. It is also possible that we may allocate significantamounts of capital toward products or technologies for which market demand is lower than anticipated and, as a result, abandon such efforts. If weare 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 notsuccessful, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, and we mayeven 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 anticipate needing to engage in additional equity or debt financings to secure additional funds. We may not be able to obtain additionalfinancing on terms favorable to us, or at all. To the extent that we raise additional capital through the future sale of equity or debt, the ownershipinterest of our stockholders will be diluted. The terms of these future equity or debt securities may include liquidation or other preferences thatadversely 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 December 31, 2018, we had cash and cash equivalents and investments of $23.6 million and $0.5 million in restricted cash allocated tolease deposits. Based on our current operating plan, we expect that our existing cash and cash equivalents and investments as of December 31,2018, anticipated revenue from operations, and the ability to issue equity to LPC will enable us to fund our operating expenses and capitalexpenditure 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 thisexpectation on assumptions that may prove to be wrong, such as the revenue that we expect to generate from the sale of our products, the grossprofit we expect to generate from those revenue, the reduction in operating expenses beginning in 2019, and we could use our capital resourcessooner than we expect. 79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): Years Ended December 31, 2018 2017 $ Change % ChangeNet cash (used in) provided by: Operating activities $(26,982) $(37,856) $10,874 29 %Investing activities 15,626 (10,041) 25,667 256Financing activities 7,655 32,697 (25,042) (77)Effect of exchange rate on cash 1,733 (3,709) 5,442 147Total $(1,968) $(18,909) $16,941 90 % Net cash used in operating activities. Net cash used in operating activities was $27.0 million for the year ended December 31, 2018and $37.9 million for the year ended December 31, 2017, a decrease of $10.9 million. These amounts primarily reflect net losses of $43.4 millionfor the year ended December 31, 2018 and $53.6 million for the year ended December 31, 2017. Non-cash reconciling items between Net loss andcash used in operations for the year ended December 31, 2018 includes a decrease in goodwill impairment of $6.7 million and $1.5 million in othernon-cash items partially offset by an increase in stock-based compensation expense of $2.2 million. The remaining change is related to ouroperating assets and liabilities, including an increase from prepaid and other assets of $1.2 million, an increase from inventory of $2.9 million, anincrease from accounts receivable of $1.5 million and an increase from other long-term liabilities of $0.5 million, offset by a decrease of $0.4million from accounts payable and accrued liabilities. Net cash provided by (used in) investing activities. Net cash provided by investing activities was $15.6 million for the year endedDecember 31, 2018 compared to $10.0 million cash used in investing activities for the year ended December 31, 2017, an increase of $25.7million. These amounts primarily reflect an increase of $18.6 million from the purchase and maturity of investment securities classified asavailable-for-sale, an increase of $1.2 million from cash used for purchases of property and equipment, an increase of $5.8 million from ouracquisition of BPM, and an increase of $0.2 million from restricted cash balance. Net cash provided by financing activities. Net cash provided by financing activities was $7.7 million for the year ended December 31,2018 and $32.7 million for the year ended December 31, 2017, a decrease of $25.0 million. The decrease was due to a decrease of $30.0 millionfrom proceeds from the issuance of debt, a decrease of $15.0 million from payments on notes payable, and a decrease of $2.0 million fromproceeds from exercise of common stock options, partially offset by an increase of $21.7 million net proceeds from the issuance of commonstock. 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): Years Ended December 31, 2017 2016 $ Change % ChangeNet cash (used in) provided by: Operating activities $(37,856) $(49,132) $11,276 23 %Investing activities (10,041) (35,425) 25,384 72Financing activities 32,697 3,602 29,095 808Effect of exchange rate on cash (3,709) 1,027 (4,736) (461)Total $(18,909) $(79,928) $61,019 76 %Net cash used in operating activities. Net cash used in operating activities was $37.9 million for the year ended December 31, 2017and $49.1 million for the year ended December 31, 2016, a decrease of $11.3 million. These amounts primarily reflect net losses of $53.6 millionfor the year ended December 31, 2017 and $57.6 million for the year ended December 31, 2016. The net cash used in operating activities for theyear ended December 31, 2017 was primarily affected by changes in our operating assets and liabilities, including a decrease from prepaid andother assets of $3.3 million, a decrease from inventory of $2.7 million, a decrease from accounts receivable of $1.5 million and a decrease fromother long-term liabilities of $0.5 million, as well as a decrease from80non-cash expenses totaling $2.0 million, offset by an increase of $2.8 million from accounts payable and accrued liabilities.Net cash used in investing activities. Net cash used in investing activities was $10.0 million for the year ended December 31, 2017and $35.4 million for the year ended December 31, 2016, a decrease of $25.4 million. These amounts primarily reflect a decrease of $34.6 millionfrom the purchase of investment securities classified as available-for-sale, a decrease of $1.9 million from cash used for purchases of propertyand equipment, offset by an increase of $4.9 million from maturity of investments, an increase of $5.8 million from our acquisition of BPM, and anincrease of $0.5 million from restricted cash balance. We anticipate that the amount of cash used in investing activities will decrease in 2018 aswe have purchased most of the property and equipment to manufacture the planned components in our own facility. Net cash provided by financing activities. Net cash provided by financing activities was $32.7 million for the year endedDecember 31, 2017 and $3.6 million for the year ended December 31, 2016, an increase of $29.1 million. The increase was due to an increase of$30.0 million from proceeds from the issuance of debt, an increase of $1.0 million net proceeds from the issuance of common stock and anincrease of $0.5 million from payments on notes payable, offset by a decrease of $2.0 million from proceeds from exercise of common stockoptions.Contractual obligations and commitments The following table summarizes our contractual obligations as of the year ended December 31, 2018 (in thousands): Payment Due by PeriodContractual ObligationsTotal Less than 1year Years 1 to 3 Years 3 to 5 After 5 yearsSenior secured debt (1)$15,000 $— $14,375 $625 $—Operating lease obligations - real estate (2)9,122 1,558 3,228 2,450 1,886Other (3)1,355 526 650 179 —Total (4)$25,477 $2,084 $18,253 $3,254 $1,886(1) Represents amounts payable under the 2017 Secured Loan Agreement with Oxford. (2) Represents operating lease commitments for office and manufacturing space in Wilmington and Billerica, Massachusetts, and Wallingford, Connecticut.(3) Represents amounts payable under our product royalty agreement, operating leases for office equipment, automobile leases, and a softwaredevelopment collaboration project with a remaining term in excess of one year.(4) This table does not include: (a) revenue share obligations to past and present members of our scientific advisory board and one of our past directors, asthe amounts of such payments are not known with certainty; and (b) contracts that are entered into in the ordinary course of business that are not material inthe aggregate in any period presented above. See "—Revenue share agreements" for a description of our revenue share arrangements.Revenue share agreements We are party to revenue share agreements with certain past and present members of our scientific advisory boards under which theseadvisors agreed to participate on our scientific advisory board and to assist with the development of our customized implant products and relatedintellectual property. These agreements provide that we will pay the advisor a specified percentage of our net revenue, ranging from 0.1% to1.33%, with respect to our products on which the advisor made a technical contribution or, in some cases, which are covered by a claim of one ofour patents on which the advisor is a named inventor. The specific percentage is determined by reference to product classifications set forth in theagreement and may be tiered based on the level of net revenue collected by us on such product sales. Our payment obligations under theseagreements 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 for which the advisor is a named inventor that has claims covering the applicableproduct. 81Philipp Lang, M.D., our former Chief Executive Officer and former director, joined our scientific advisory board in 2004 prior to becomingan employee. We entered into a revenue share agreement with Dr. Lang in 2008 when he became our Chief Executive Officer. In 2011, we enteredinto an amended and restated revenue share agreement with Dr. Lang. Under this agreement, the specified percentage of our net revenue payableto Dr. Lang ranges from 0.875% to 1.33% and applies to all of our current products, including our iUni, iDuo, iTotal Cr, iTotal PS products, andConformis Hip System products, as well as certain other knee, hip and shoulder replacement products and related instrumentation we may developin the future. Our payment obligations under this agreement expire on a product-by-product basis on the last to expire of our patents on whichDr. Lang is named as an inventor that has a claim covering the applicable product. These payment obligations survived termination of Dr. Lang’semployment with us. We have raised concerns with Dr. Lang relating to this revenue share agreement and have been seeking to enter intodiscussion with Dr. Lang concerning the scope of this agreement. In October of 2018, we requested that Dr. Lang provide consulting services aspermitted under Dr. Lang's revenue share agreement. However, he failed to respond to such request and, as a result, beginning in the fourthquarter of 2018, the revenue share percentage rate owed to Dr. Lang has been reduced by 50% within the scope of his agreement. We incurredrevenue share expense for Dr. Lang of $0.7 million, $1.0 million, and $1.0 million for the years ended December 31, 2018, 2017 and 2016,respectively. The aggregate revenue share percentage of net revenue from our currently marketed knee replacement products, including percentagesunder revenue share agreements with all of our scientific advisory board members and Dr. Lang, ranges, depending on the particular product, from3.4% to 5.19%. We incurred aggregate revenue share expense, included in research and development, including all amounts payable under ourscientific advisory board and Dr. Lang revenue share agreements of $3.1 million during the year ended December 31, 2018, representing 4.0% ofproduct revenue, $3.7 million during the year ended December 31, 2017, representing 4.8% of product revenue, and $3.5 million during the yearended December 31, 2016, representing 4.4% of product revenue. For further information, see “Note J—Commitments and Contingencies —Revenue Share Agreements” or “Note L—Related Party Transactions —Revenue Share Agreement” in the financial statements and related notesappearing elsewhere in this Annual Report on Form 10-K.Segment information We have one primary business activity and operate as one reportable segment.Off-balance sheet arrangements Through December 31, 2018, we did not have any relationships with unconsolidated organizations or financial partnerships, such asstructured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements orother contractually narrow or limited purposes. Critical accounting policies and significant judgments and use of estimates We have prepared our consolidated financial statements in conformity with 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 reportedamounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reportedamounts of revenue and expenses during the reporting periods. The accounting estimates that require our most significant estimates includerevenue recognition, accounts receivable valuation, inventory valuations, goodwill valuation, intangible valuation, purchase accounting, impairmentassessments, equity instruments, stock compensation, income tax reserves and related allowances, and the lives of property and equipment. Weevaluate our estimates and judgments on an ongoing basis. Actual results may differ from these estimates under different assumptions orconditions. Our critical accounting policies are more fully described in "Note B-Summary of Significant Accounting Policies" to the consolidatedfinancial statements appearing in this Annual Report on Form 10-K. 82Revenue recognition 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 and Australia. In order for surgeons to use our products, the medical facilities where thesesurgeons treat patients typically require us to enter into pricing agreements. The process of negotiating a pricing agreement can be lengthy andtime-consuming, require extensive management time and may not be successful. Revenue from sales of our products fluctuates principally based on the selling price of the joint replacement product, as the sales price ofour products varies among hospitals and other medical facilities. In addition, our product revenue may fluctuate based on the product sales mixand mix of sales by geography. Our product revenue from international sales can be significantly impacted by fluctuations in foreign currencyexchange rates, as our sales are denominated in the local currency in the countries in which we sell our products. We expect our product revenueto fluctuate from quarter-to-quarter due to a variety of factors, including seasonality, as we have historically experienced lower sales in the summermonths, the timing of the introduction of our new products, if any, and the impact of the buying patterns and implant volumes of medical facilities.Product revenue is recognized when, or as, obligations under the terms of a contract are satisfied, which occurs when control of thepromised products or services is transferred to customers. Revenue is measured as the amount of consideration the Company expects to receivein exchange for transferring products or services to a customer (“transaction price”). When determining the transaction price of a contract, anadjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significantfinancing component. Applying the practical expedient in paragraph 606-10-32-18, the Company does not assess whether a significant financingcomponent exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year orless. None of the Company’s contracts contained a significant financing component as of December 31, 2018. Payment is typically due between30 - 60 days from invoice.To the extent that the transaction price includes variable consideration, such as prompt-pay discounts or rebates, the Company estimatesthe amount of variable consideration that should be included in the transaction price utilizing the expected value to which the Company expects tobe entitled. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversalof cumulative revenue under the contract will not occur. Actual amounts of consideration ultimately received may differ from the Company'sestimates. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are basedlargely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonablyavailable.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 standaloneselling prices of the promised products or services underlying each performance obligation. The Company determines standalone selling pricesbased on observable prices or a cost-plus margin approach when one is not available. Revenue is recognized at the time the related performanceobligation is satisfied by transferring control of a promised good or service to a customer. The Company's performance obligations are satisfied atthe same time, typically upon surgery, therefore, product revenue is recognized at a point in time upon completion of the surgery. Since theCompany does not have contracts that extend beyond a duration of one year, there is no transaction price related to performance obligations thathave not been satisfied.Certain customer contracts include terms that allow the Company to bill for orders that are cancelled after the product is manufactured andcould result in revenue recognition over time. However, the impact of applying over time revenue recognition was deemed immaterial.83On-going royalty revenue is generated from our agreement with MicroPort Orthopedics Inc., a wholly owned subsidiary of MicroPortScientific Corporation, or collectively, MicroPort. The license agreement with MicroPort and our license agreement with Wright Medical Group, Inc.and its wholly owned subsidiary Wright Medical Technology, Inc. also generated additional revenue, which was recognized through December 31,2017. Both agreements entered into in April 2015. On January 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers. Ouranalysis of these contracts under ASC 606 indicated that the licenses are functional and thus revenue should have been recognized in full uponthe license execution date, which resulted in a $4.3 million adjustment to our opening balance of accumulated deficit. In addition, the on-goingroyalty from MicroPort, which was previously recognized as royalty revenue upon receipt of payment, is now recognized in the period the saleoccurred, resulting in a $0.2 million adjustment to our opening balance of accumulated deficit.84Accounts receivable and allowance for doubtful accounts Accounts receivable consist of billed and unbilled amounts due from medical facilities. Upon completion of a procedure, we recognizerevenue and an unbilled receivable is recorded. Upon receipt of a purchase order number from a medical facility, we record a billed receivable andreverse the unbilled receivable. As a result, the unbilled receivable balance fluctuates based on the timing of our receipt of purchase ordernumbers from the medical facilities. In estimating whether accounts receivable can be collected, we perform evaluations of customers andcontinuously monitor collections and payments and estimate an allowance for doubtful accounts based on the aging of the underlying invoices,collections experience to date and any specific collection issues that have been identified. The allowance for doubtful accounts is recorded in theperiod in which revenue is recorded or at the time potential collection risk is identified.Inventories Inventories consist of raw materials, work-in-process components and finished goods. Inventories are stated at the lower of cost,determined using the first-in first-out method, or market value. We regularly review our inventory quantities on hand and related cost and record aprovision for any excess or obsolete inventory based on its estimated forecast of product demand and existing product configurations. We alsoreview our inventory value to determine if it reflects the lower of cost or market, with market determined based on net realizable value. Appropriateconsideration is given to inventory items sold at negative gross margin, purchase commitments and other factors in evaluating net realizablevalue. During the years ended December 31, 2018, 2017 and 2016, we recognized provisions of $1.9 million, $2.6 million and $3.5 million,respectively, to adjust our inventory value to the lower of cost or net realizable value for estimated unused product related to known and potentialcancelled cases, which is included in cost of revenue.Business combinations and purchase accountingWe record our results of operations from our business acquisitions as of the applicable acquisition date. The purchase price of theacquisition is allocated to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price overthe fair values of these identifiable assets and liabilities is recorded as goodwill. Acquisition-related expenses are recognized separately from thebusiness combination and are expensed as incurred.GoodwillGoodwill relates to amounts that arose in connection with the acquisition of ImaTx, Inc. in 2009 and the acquisition of BPM in August2017. We test goodwill at least annually for impairment, or more frequently when events or changes in circumstances indicate that the assets maybe impaired. This impairment test is performed annually during the fourth quarter at the reporting unit level. Goodwill may be considered impaired ifthe carrying value of the reporting unit, including goodwill, exceeds the reporting unit’s fair value. We are comprised of one reporting unit. Whentesting goodwill for impairment, we first assess the qualitative factors to determine whether it is more likely than not that the fair value of thereporting unit is less than its carrying amount. This qualitative analysis is used as a basis for determining whether it is necessary to perform theone-step goodwill impairment analysis. If we determine that it is more likely than not that its fair value is less than its carrying amount, then theone-step goodwill impairment test will be performed. During the three months ended September 30, 2018, the Company's qualitative analysisindicated a triggering event required a step one analysis to determine the fair value of the reporting unit for the period ended September 30, 2018.Our drop in market capitalization and decrease in cash flow position were indicators of impairment. We have one reporting unit and therefore theanalysis is based on the Company as a whole. We determined the fair value of our Company using the combination of its market capitalization,income approach, and the merger and acquisition method concluding that the fair value of the Company is less than the carrying amount in excessof Goodwill, therefore fully impairing Goodwill. During the year ended December 31, 2017, there were no triggering events which required a goodwillimpairment assessment.Intangibles and other long-lived assets Intangible assets consist of developed technology acquired as part of the ImaTx spin-out transaction in 2004. Intangible assets are carriedat cost less accumulated amortization. We test impairment of long-lived assets when events or changes in circumstances indicate that the assetsmight be impaired. For assets with determinable85useful lives, amortization is computed using the straight-line method over the estimated economic lives of the respective intangible assets. Furthermore, periodically we assess whether long-lived assets, including intangible assets, should be tested for recoverability wheneverevents or circumstances indicate that their carrying value may not be recoverable. To evaluate for impairment, we compare the undiscounted cashflows to be generated from such assets or groups of assets to the carrying value. If the undiscounted cash flows are less than the carrying value,the amount of impairment is measured based on fair value. If the cash flow estimates or the significant operating assumptions upon which they arebased change in the future, we may be required to record impairment charges. In 2018, we recognized $2.4 million in impairment charges,comprised of $1.9 million related to unused manufacturing equipment abandoned in July 2018, $0.3 million related to the expiration of a credittowards a purchase of certain manufacturing equipment, and the remaining $0.2 million impairment charges related primarily to the discontinuanceof software applications. In 2017, we recognized $1.1 million in impairment charges of which $0.8 million related to the discontinuance of asoftware capital project and $0.3 million related to intellectual property rights licensed as part of the ImaTx spin-out transaction in 2004. In 2016, a$0.1 million impairment charge was recognized in connection with certain manufacturing equipment previously purchased that will be returned tothe seller in exchange for credit toward a future purchase, which value is less than the book value of the equipment. Impairment charges areincluded in General and administrative expense.Stock-based compensation We account for stock-based compensation in accordance with ASC 718, Stock Based Compensation. ASC 718 requires all stock-basedpayments to employees and consultants, including grants of stock options, to be recognized in the consolidated statements of operations basedon their fair values. We use the Black-Scholes option pricing model to determine the weighted-average fair value of options granted and recognizethe 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 thestock price, exercise price, and a number of assumptions, including expected volatility of the stock, expected life of the option, risk-free interestrate and expected dividends on the stock. We evaluate the assumptions used to value the awards at each grant date and if factors change anddifferent assumptions are utilized, stock-based compensation expense may differ significantly from what has been recorded in the past. If thereare any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remainingunearned stock-based compensation expense. JOBS Act accounting electionThe Jumpstart our Business Startups Act of 2012, or the JOBS Act, permits an "emerging growth company" such as us to takeadvantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We chose to "optout" of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decisionto opt out of the extended transition period under the JOBS Act is irrevocable.Recent accounting pronouncementsSee “Note B —Summary of Significant Accounting Policies” to the financial statements in this Annual Report on Form 10-K for a fulldescription of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations andfinancial condition.86ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAIndex to Consolidated Financial Statements PageReport of Independent Registered Public Accounting Firm88Consolidated Balance Sheets89Consolidated Statements of Operations90Consolidated Statements of Comprehensive Loss91Consolidated Statements of Changes in Stockholders' Equity92Consolidated Statements of Cash Flows93Notes to Consolidated Financial Statements9487REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and StockholdersConformis, Inc.Opinion on the financial statementsWe have audited the accompanying consolidated balance sheets of Conformis, Inc. (a Delaware corporation) and subsidiaries (the“Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive loss, changes instockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes(collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, thefinancial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of thethree years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States ofAmerica.Basis for opinionThese financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on theCompany’s financial statements based on our audits. We are a public accounting firm registered with the Public Company AccountingOversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. TheCompany is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part ofour audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressingan opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to erroror fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles usedand significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believethat our audits provide a reasonable basis for our opinion./s/ GRANT THORNTON LLPWe have served as the Company’s auditor since 2008.Boston, MassachusettsMarch 12, 201988CONFORMIS, INC. AND SUBSIDIARIES Consolidated Balance Sheets(in thousands, except share and per share data) December 31, 2018 December 31, 2017 Assets Current Assets Cash and cash equivalents$16,380 $18,348Investments7,245 26,880Accounts receivable, net13,244 13,200Royalty receivable145 —Inventories9,534 9,184Prepaid expenses and other current assets1,408 2,246Total current assets47,956 69,858Property and equipment, net14,439 16,514Other Assets Restricted cash462 462Intangible assets, net109 210Goodwill— 6,731Other long-term assets17 23Total assets$62,983 $93,798 Liabilities and stockholders' equity Current liabilities Accounts payable$3,445 $4,891Accrued expenses7,930 7,720Deferred revenue— 305Total current liabilities11,375 12,916Other long-term liabilities616 651Deferred tax liabilities— 37Deferred revenue— 4,014Long-term debt, less debt issuance costs14,792 29,667Total liabilities26,783 47,285Commitments and contingencies— —Stockholders’ equity Preferred stock, $0.00001 par value: Authorized: 5,000,000 shares authorized at December 31, 2018 and December 31, 2017; no shares issued andoutstanding as of December 31, 2018 and December 31, 2017— —Common stock, $0.00001 par value: Authorized: 200,000,000 shares authorized at December 31, 2018 and December 31, 2017; 65,290,879 and45,528,519 shares issued and outstanding at December 31, 2018 and December 31, 2017, respectively1 —Additional paid-in capital513,336 486,570Accumulated deficit(475,667) (436,821)Accumulated other comprehensive loss(1,470) (3,236)Total stockholders’ equity36,200 46,513Total liabilities and stockholders’ equity$62,983 $93,798The accompanying notes are an integral part of these consolidated financial statements.89CONFORMIS, INC. AND SUBSIDIARIES Consolidated Statements of Operations(in thousands, except share and per share data) Years Ended December 31,2018 2017 2016Revenue Product$78,627 $77,100 $78,921Royalty11,162 1,015 978Total revenue89,789 78,115 79,899Cost of revenue41,304 49,301 53,192Gross profit48,485 28,814 26,707 Operating expenses Sales and marketing38,955 38,788 41,086Research and development16,869 17,136 16,608General and administrative24,622 28,737 25,157Goodwill impairment6,731 — —Total operating expenses87,177 84,661 82,851Loss from operations(38,692) (55,847) (56,144) Other income and expenses Interest income659 491 487Interest expense(3,356) (2,119) (138)Foreign currency transaction income (loss)(1,915) 4,057 (1,607)Other income (expense)— — (123)Total other income (expenses), net(4,612) 2,429 (1,381)Loss before income taxes(43,304) (53,418) (57,525)Income tax provision61 162 63 Net loss$(43,365) $(53,580) $(57,588) Net loss per share - basic and diluted$(0.74) $(1.24) $(1.39) Weighted average common shares outstanding - basic and diluted58,886,333 43,343,459 41,521,629 The accompanying notes are an integral part of these consolidated financial statements.90CONFORMIS, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Loss(in thousands) Years Ended December 31, 2018 2017 2016Net loss $(43,365) $(53,580) $(57,588)Other comprehensive income (loss) Foreign currency translation adjustments 1,733 (3,709) 1,027Change in unrealized gain (loss) on available-for-sale securities, net of tax 33 (26) (7)Comprehensive loss $(41,599) $(57,315) $(56,568) The accompanying notes are an integral part of these consolidated financial statements.91CONFORMIS, INC. AND SUBSIDIARIESConsolidated Statements of Changes in Stockholders' Equity(in thousands, except share and per share data) Common Stock AccumulatedOtherComprehensiveIncome (Loss) AdditionalPaid-InCapital AccumulatedDeficit Shares Par Value TotalBalance, December 31, 2015 41,110,127 — 467,075 (325,342) (521) 141,212Issuance of common stock—option exercise 1,467,692 — 4,087 4,087Issuance of common stock—restricted stock 804,019 — — —Issuance of common stock —warrant exercise 17,709 — — —Compensation expense related to issued stock options andrestricted stock awards 5,324 5,324Net loss (57,588) (57,588)Other comprehensive income 1,020 1,020Balance, December 31, 2016 43,399,547 $— $476,486 $(382,930) $499 $94,055Issuance of common stock—option exercise 535,734 — 2,108 2,108Issuance of common stock—restricted stock 1,195,196 — — —Issuance of common stock—ATM offering 228,946 — 1,023 1,023Issuance of common stock— Broad Peak Manufacturing,LLC acquisition 169,096 — 594 594Compensation expense related to issued stock options andrestricted stock awards 6,048 6,048Cumulative-effect adjustment from adoption of ASU 2016-09 311 (311) —Net loss (53,580) (53,580)Other comprehensive income (3,735) (3,735)Balance, December 31, 2017 45,528,519 $— $486,570 $(436,821) $(3,236) $46,513Issuance of common stock—option exercise 80,000 — 112 112Issuance of common stock—restricted stock 1,516,295 — — —Issuance of common stock—2018 offering 15,333,333 1 21,324 21,325Issuance of common stock— ATM offering 556,334 — 456 456Issuance of common stock - Lincoln Park Capital Fund,LLC 2,276,398 — 988 988Compensation expense related to issued stock options andrestricted stock awards 3,886 3,886Cumulative-effect adjustment from adoption of ASC 606 4,519 4,519Net loss (43,365) (43,365)Other comprehensive income 1,766 1,766Balance, December 31, 2018 65,290,879 $1 $513,336 $(475,667) $(1,470) $36,200The accompanying notes are an integral part of these consolidated financial statements.92CONFORMIS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows(in thousands)Years Ended December 31,2018 2017 2016Cash flows from operating activities Net loss$(43,365) $(53,580) $(57,588) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization expense4,122 3,669 3,153Amortization of debt discount— — 7Stock-based compensation expense3,886 6,048 5,324Provision for bad debts on trade receivables(72) (15) 188Impairment of goodwill6,731 — —Impairment of long term assets2,433 1,113 123Disposal of long term assets(4) — 16Non-cash interest expense125 100 —Amortization/accretion on investments(18) 202 315Deferred tax(37) 37 —Changes in operating assets and liabilities: Accounts receivable28 1,490 4Royalty receivable55 — —Inventories(350) 2,535 (200)Prepaid expenses and other assets529 1,770 (1,550)Accounts payable and accrued liabilities(1,011) (1,406) 1,437Deferred royalty revenue— (306) (305)Other long-term liabilities(34) 487 (56)Net cash used in operating activities(26,982) (37,856) (49,132) Cash flows from investing activities: Acquisition of property and equipment(4,059) (5,233) (7,161)Business acquisition, net of cash acquired— (5,780) —(Increase) decrease in restricted cash— (162) 300Purchase of investments(27,430) (30,991) (65,614)Maturity of investments47,115 32,125 37,050Net cash provided/(used) in investing activities15,626 (10,041) (35,425) Cash flows from financing activities: Proceeds from exercise of common stock options112 2,108 4,087Debt issuance costs— (434) —Proceeds from issuance of debt— 30,000 —Payments on long-term debt(15,000) — (485)Debt prepayment fee(225) — —Net proceeds from issuance of common stock22,768 1,023 —Net cash provided by financing activities7,655 32,697 3,602Foreign exchange effect on cash and cash equivalents1,733 (3,709) 1,027Decrease in cash and cash equivalents(1,968) (18,909) (79,928)Cash and cash equivalents, beginning of period18,348 37,257 117,185Cash and cash equivalents, end of period$16,380 $18,348 $37,257 Supplemental information: Cash paid for interest2,837 1,449 48Non cash investing and financing activities Issuance of common stock for business acquisition— 594 —Issuance of common stock for equity financing77 — — The accompanying notes are an integral part of these consolidated financial statements.93CONFORMIS, INC. AND SUBSIDIARIES Notes to Consolidated Financial StatementsNote 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-Implanttechnology platform to develop, manufacture and sell joint replacement implants that are individually sized and shaped, which the Company refersto as customized, to fit each patient’s unique anatomy. The Company’s proprietary iFit® technology platform is potentially applicable to all majorjoints. 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, itsiTotal CR in 2011, its iTotal PS in 2015, and its Conformis Hip System in 2018 through a limited commercial launch. The Company has itscorporate offices in Billerica, Massachusetts. These consolidated financial statements and related notes have been prepared assuming that the Company will continue as a goingconcern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Liquidity and operationsSince the Company’s inception in June 2004, it has financed its operations primarily through private placements of preferred stock, itsinitial public offering in July 2015 and secondary public offering in January 2018, patent licenses, debt and convertible debt financings, equipmentpurchase loans, and product revenue beginning in 2007. The Company has not yet attained profitability and continues to incur operating losses andnegative operating cash flows, which adversely impacts the Company's ability to continue as a going concern. At December 31, 2018, theCompany had an accumulated deficit of $475.7 million. At December 31, 2018, the Company had cash and cash equivalents and investments of $23.6 million and $0.5 million in restricted cashallocated to a lease deposit. On January 6, 2017, the Company entered into the 2017 Secured Loan Agreement with Oxford, and accessed $15 million of borrowingsunder Term Loan A at closing and an additional $15 million of borrowings under Term Loan B on June 30, 2017. The Company was unable toaccess an additional $20 million potentially available to borrow through June 2018 due to a failure to satisfy certain revenue milestones andcustomary drawdown conditions. Pursuant to a fifth amendment to the 2017 Secured Loan Agreement, or the Fifth Amendment, on December 13,2018, the Company pre-paid $15 million aggregate principal amount of the $30 million outstanding principal amount, as a pro rata portion of theTerm A Loan and Term B Loan, together with accrued and unpaid interest thereon and a pro rata prepayment fee. The Company used short-terminvestment maturities and cash and cash equivalents to fund this prepayment.The Fifth Amendment also reduced the revenue milestones through December 31, 2019. New minimum revenue milestones, based onproduct revenue projections, are to be established prior to the start of 2020 and prior to the start of each fiscal year thereafter by the mutualagreement of Oxford and the Company. If the Company is not able to agree with Oxford on new minimum revenue milestones for 2020 or a fiscalyear thereafter, the Company must refinance the 2017 Secured Loan Agreement by March 31, 2020 or that next fiscal year, and if the Companyfails to refinance the 2017 Secured Loan Agreement, the Company must notify Oxford of such default and Oxford would be permitted to exerciseremedies against us and its assets in respect of such event of default, including taking control of our cash and commencing foreclosureproceedings on our other assets.The initial principal payment on the 2017 Secured Loan Agreement is due on February 1, 2020. We intend to refinance the 2017 Secured LoanAgreement before the interest only period ends and the principal repayments begin in January 2020. We may not be able to refinance or obtainadditional financing on terms favorable to us, or at all. To the extent that we raise additional capital through the future sale of equity or debt, theownership interest of our stockholders will be diluted. The terms of these future equity or debt securities may include liquidation or otherpreferences that adversely affect the rights of our existing common stockholders or involve negative covenants that restrict our ability to takespecific actions, such as incurring additional debt or making capital expenditures. If we are unable to refinance the 2017 Secured Loan Agreementbefore the interest only period ends94or shortly thereafter, then we will be required to make principal repayments beginning in January 2020 which will require us to raise additionalcapital through the sale of equity and the ownership interest of our stockholders will be diluted. For further information regarding this facility, see“Note K-Debt and Notes Payable-2017 Secured Loan Agreement” in the financial statements and related notes appearing elsewhere in this AnnualReport on Form 10-K.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 commonstock, preferred stock, debt securities, warrants, or units comprised of any combination of these securities, for its own account in one or moreofferings. On May 10, 2017, the Company filed with the SEC a prospectus supplement (the “Prospectus Supplement”) for the sale and issuance ofup to $50 million of its common stock and entered into a Distribution Agreement ("Distribution Agreement") with Canaccord Genuity, Inc. , orCanaccord, 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 tosell any shares under the Distribution Agreement. As of December 31, 2018, the Company has sold 785,280 Shares under the DistributionAgreement resulting in net proceeds of $1.5 million.On January 29, 2018, the Company closed an offering of its common stock off of its shelf registration statement and issued and sold15,333,333 shares of its common stock (including 2,000,000 shares of common stock issued in connection with the exercise in full by theunderwriters of their over-allotment option) at a public offering price of $1.50 per share, for aggregate net proceeds of approximately $21.3 million.The Company used the net proceeds of the offering of the shares for general corporate purposes, which included research and development costs,sales and marketing costs, clinical studies, manufacturing development, the acquisition or licensing of other businesses or technologies,repayment and refinancing of debt, including the Company's secured term loan facility, working capital and capital expenditures.In addition, the Smith & Nephew settlement and license agreement, discussed in Note J-Commitments and Contingencies, Legalproceedings, provided the Company with $10.5 million of royalty revenue for the year ended December 31, 2018.On December 17, 2018, the Company entered into a stock purchase agreement with Lincoln Park Capital ("LPC" and the "LPCAgreements"). Upon entering the LPC Agreements, the Company sold 1,921,968 shares of common stock for $1.0 million to LPC, representing apremium of 110% to the previous day's closing price. As consideration for LPC’s commitment to purchase shares of common stock under the LPCAgreements, Conformis has issued 354,430 shares to LPC. The Company has the right at its sole discretion to sell to LPC up to $20.0 millionworth of shares over a 36-month period subject to the terms of the LPC Agreements. Conformis will control the timing of any sales to LPC andLPC will be obligated to make purchases to Conformis common stock upon receipt of requests from Conformis in accordance with the terms of theagreements. 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 tothe Agreements, and the purchase price of the shares will be based on the then prevailing market prices of the Company’s shares at the time ofeach sale to LPC as described in the LPC Agreements, provided that LPC will not be obligated to make purchases of our common stock pursuantto 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 (oralternative national exchange in accordance with the LPC Agreements) is below a floor price of $0.25 per share. No warrants, derivatives, financialor business covenants are associated with the LPC Agreements and LPC has agreed not to cause or engage in any manner whatsoever, anydirect or indirect short selling or hedging of shares of the Company’s common stock. The LPC Agreements may be terminated by the Company atany time, at its sole discretion, without any cost or penalty.The Company expects that its existing cash and cash equivalents and investments as of December 31, 2018, anticipated revenue fromoperations, and the ability to issue equity to LPC will enable the Company to fund its operating expenses and capital expenditure requirements andfor at least the next 12 months from the date of filing. Management has based this expectation on assumptions that may prove to be wrong, suchas the revenue that it expects to generate from the sale of its products, the gross profit the Company expects to generate from that revenue, thereduction in operating expenses beginning in 2019, and it could use its capital resources sooner than we expect.The Company anticipates that its principal sources of funds in the future will be revenue generated from the sales of its products, potentialfuture capital raises through the issuance of equity or other securities, potential debt95financings, and revenue that may be generated in connection with licensing its intellectual property. When the Company needs additional equity ordebt financing proceeds to fund its operations, whether within the next 12 months or later, the Company may not be able to obtain additionalfinancing 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 Statesrequires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reportingperiods. The most significant estimates used in these consolidated financial statements include revenue recognition, accounts receivablevaluation, inventory reserves, goodwill valuation, intangible valuation, purchase accounting, impairment assessments, equity instruments, stockcompensation, income tax reserves and related allowances, and the lives of property and equipment. Actual results may differ from thoseestimates.Note B—Summary of Significant Accounting Policies Concentrations of credit risk and other risks and uncertainties Financial instruments that subject the Company to credit risk primarily consist of cash, cash equivalents and accounts receivable. TheCompany 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 noassurance that a shortage or stoppage of shipments of the materials or components that the Company purchases will not result in a delay inproduction or adversely affect the Company’s business. On an on-going basis, the Company validates alternate suppliers relative to certain keycomponents as needed. For the years ended December 31, 2018, 2017 and 2016, no customer represented greater than 10% of revenue. There were no customers thatrepresented greater than 10% of total gross receivable balance at December 31, 2018 and 2017. Principles of consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries including ImaTx, Inc., orImaTx, ConforMIS Europe GmbH, ConforMIS UK Limited, ConforMIS Hong Kong Limited, and Conformis Cares LLC. All intercompany balancesand 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 cashequivalents. The Company’s cash equivalents consist of demand deposits, money market accounts and repurchase agreements on deposit withcertain financial institutions, in addition to cash deposits in excess of federally insured limits. Demand deposits are carried at cost whichapproximates their fair value. Money market accounts are carried at fair value based upon level 1 inputs. Repurchase agreements are valued usinglevel 2 inputs. See “Note C — Fair Value Measurements” below. The associated risk of concentration is mitigated by banking with credit worthyfinancial institutions. The Company had $1.1 million as of December 31, 2018 and $2.2 million as of December 31, 2017 held in foreign bank accounts, that wasnot federally insured. In addition, the Company has recorded restricted cash of $0.5 million as of December 31, 2018 and 2017. Restricted cashconsisted of security provided for lease obligations. Investment securitiesThe Company classifies its investment securities as available-for-sale. Those investments with maturities less than 12 months at the dateof purchase are considered short-term investments. Those investments with maturities greater than 12 months at the date of purchase areconsidered long-term investments. The Company’s96investment securities classified as available-for-sale are recorded at fair value based upon quoted market prices at period end. Unrealized gainsand 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 thecorresponding establishment of a new cost basis for the security. Premiums (discounts) are amortized (accreted) over the life of the relatedsecurity using the constant yield method. Dividend and interest income are recognized when earned and reported in other income. Realized gainsand 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), accountsreceivable, accounts payable, accrued expenses and other liabilities are carried at cost, which approximates their fair value because of the short-term maturity. The carrying value of the debt approximates fair value because the interest rate under the obligation approximates market rates ofinterest available to the Company for similar instruments. Accounts receivable and allowance for doubtful accounts Accounts receivable consist of billed and unbilled amounts due from medical facilities. Upon completion of a procedure and revenue isrecognized and an unbilled receivable is recorded. Under ASC 606, an enforceable contract is met either at or prior to the procedure beingperformed. 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 medicalfacilities. In estimating whether accounts receivable can be collected, the Company performs evaluations of customers and continuously monitorscollections and payments and estimates an allowance for doubtful accounts based on the aging of the underlying invoices, collections experienceto date and any specific collection issues that have been identified. The allowance for doubtful accounts is recorded in the period in which revenueis 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 relatedcost and records a provision for any excess or obsolete inventory based on its estimated forecast of product demand and existing productconfigurations. 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 netrealizable value. During the years ended December 31, 2018, 2017 and 2016, the Company recognized provisions of $1.9 million, $2.6 million and$3.5 million, respectively, to adjust its inventory value to the lower of cost or net realizable value for estimated unused product related to knownand potential cancelled cases, which is included in cost of revenue.Property and equipment Property and equipment is stated at cost less accumulated depreciation and is depreciated using the straight-line method over theestimated useful lives of the respective assets. Leasehold improvements are amortized over their useful life or the life of the lease, whichever isshorter. Assets capitalized under capital leases are amortized in accordance with the respective class of assets and the amortization is includedwith depreciation expense. Maintenance and repair costs are expensed as incurred.Business combinations and purchase accountingThe Company includes the results of operations of the businesses that it acquires as of the applicable acquisition date. The purchaseprice of the acquisition is allocated to the assets acquired and liabilities assumed based on their estimated fair values. The excess of thepurchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill. Acquisition-related expenses are recognizedseparately from the business combination and are expensed as incurred.9798Goodwill Goodwill relates to amounts that arose in connection with the acquisition of ImaTx, Inc. in 2009 and the acquisition of BPM in August2017. The Company tests goodwill at least annually for impairment, or more frequently when events or changes in circumstances indicate that theassets may be impaired. This impairment test is performed annually during the fourth quarter at the reporting unit level. Goodwill may beconsidered impaired if the carrying value of the reporting unit, including goodwill, exceeds the reporting unit’s fair value. The Company iscomprised of one reporting unit. When testing goodwill for impairment, the Company first assesses the qualitative factors to determine whether it ismore likely than not that the fair value of its reporting unit is less than its carrying amount. This qualitative analysis is used as a basis fordetermining whether it is necessary to perform the one-step goodwill impairment analysis. If the Company determines that it is more likely than notthat its fair value is less than its carrying amount, then the one-step goodwill impairment test will be performed. During the three months endedSeptember 30, 2018, the Company's qualitative analysis indicated a triggering event required a step one analysis to determine the fair value of thereporting unit for the period ended September 30, 2018. The Company's drop in market capitalization and decrease in cash flow position wereindicators of impairment. The Company determined the fair value of the reporting unit using the combination of its market capitalization, incomeapproach, and the merger and acquisition method concluding that the fair value of the reporting unit is less than the carrying amount in excess ofGoodwill, therefore fully impairing Goodwill. During the year ended December 31, 2017, there were no triggering events which would require goodwillimpairment assessment. The changes in the carrying amount of goodwill are as follows: December 31, 2018 December 31, 2017Beginning Balance 6,731 753Acquired — 5,978Impairment (6,731) —Ending Balance — 6,731Intangibles and other long-lived assets Intangible assets consist of developed technology acquired as part of the ImaTx spin-out transaction in 2004 and a favorable lease assetfrom the Broad Peak Manufacturing, LLC, or BPM, acquisition in August 2017. Intangible assets are carried at cost less accumulatedamortization. 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 therespective intangible assets. Furthermore, periodically the Company assesses whether long-lived assets, including intangible assets, should be tested for recoverabilitywhenever events or circumstances indicate that their carrying value may not be recoverable. To evaluate for impairment, the Company comparesthe undiscounted cash flows to be generated from such assets or groups of assets to the carrying value. If the undiscounted cash flows are lessthan the carrying value, the amount of impairment is measured based on fair value. If the cash flow estimates or the significant operatingassumptions upon which they are based change in the future, the Company may be required to record impairment charges. In 2018, the Companyrecognized $2.4 million in impairment charges, comprised of $1.9 million related to unused manufacturing equipment abandoned in July, $0.3million related to the expiration of a credit towards a purchase of certain manufacturing equipment, and the remaining $0.2 million impairmentcharges relate primarily to the discontinuance of software applications. In 2017, the Company recognized $1.1 million in impairment charges ofwhich $0.8 million related to the discontinuance of a software capital project and $0.3 million related to intellectual property rights licensed as partof the ImaTx spin-out transaction in 2004. In 2016, a $0.1 million impairment charge was recognized in connection with certain manufacturingequipment previously purchased that will be returned to the seller in exchange for credit toward a future purchase, which value is less than thebook value of the equipment. Impairment charges are included in General and administrative expense.99Revenue recognitionThe Company adopted ASU No. 2014-9, “Revenue from Contracts with Customers (ASC 606)” as of January 1, 2018. Based on theCompany's assessment, generally revenue recognition from the sale of its products to customers effectively remains unaffected by the adoption ofASC 606. The assessment of the royalty revenue associated with the Company's 2015 license agreements previously entered into with WrightMedical Group Inc. and MicroPort Orthopedics, Inc. was affected by the adoption of ASC 606. Previously, under ASC 605, the Companyrecognized an initial $5.1 million, in aggregate, as deferred royalty revenue under these agreements, to be recognized ratably through 2027 and2031 for Wright Medical Group Inc. and MicroPort Orthopedics, Inc., respectively. The Company's analysis of these contracts indicated that underASC 606 the licenses are functional and thus revenue would have been recognized in full on the execution date. Further the ongoing royalty fromMicroPort was previously recognized as royalty revenue upon receipt of payment. Under ASC 606, royalty is recognized in the period the saleoccurred. The Company elected to apply the adoption of ASC 606 using the modified retrospective method for contracts that were not complete asof December 31, 2017, resulting in an adjustment to the 2018 opening balance of accumulated deficit to recognize the deferred royalty revenueimmediately. Comparative information has not been restated and continues to be reported under the accounting policy in effect for those periods,including ASC 605, Revenue Recognition.The following table summarizes the balance sheet adjustments upon adoption of ASC 606 (in thousands): As ReportedDecember 31,2017 Balance atJanuary 1, 2018 ASC 606Adjustment Current Assets Royalty receivable $— $200 $200(1) Current liabilities Deferred revenue 305 — (305)(2) Long-term liabilities Deferred revenue 4,014 — (4,014)(2) Stockholders' equity Accumulated deficit (436,821) (432,302) (4,519)(1),(2) (1) MicroPort sales-based royalty recognized in period earned under Topic 606, previously recognized when cash receivedand amortization of deferred royalty revenue.(2) Wright Medical and MicroPort royalty deferred and recognized ratably through 2027 and 2031, respectively, underTopic 605, recognized in full at contract inception date under Topic 606.100The following table summarizes the effect of ASC 606 on the Company's consolidated financial statements as of December 31, 2018 (inthousands, except per share amounts):Balance Sheet As Reported Pro-forma (1) Effect Current Assets Royalty receivable $145 $— $145(2) Current liabilities Deferred revenue — 305 (305)(3) Long-term liabilities Deferred revenue — 3,709 (3,709)(3) Stockholders' equity Accumulated deficit (475,667) (471,507) 4,160(2),(3) Statement of Operations As Reported Pro-forma (1) Effect Revenue Royalty $11,162 $11,521 $(359)(2),(3) Net Loss (43,365) (43,006) (359)(2),(3) Net loss per share - basic and diluted $(0.74) $(0.73) $(0.01) Statement of Cash Flows As Reported Pro-forma (1) Effect Cash flows form operating activities: Net loss $(43,365) $(43,006) $(359)(2),(3) Changes in operating assets and liabilities (26,982) (27,341) 359(2),(3) (1) Pro-forma balances without adoption of ASC 606.(2) Effect relates to MicroPort sales-based royalty recognized in period earned under Topic 606, previously recognized whencash received and amortization of deferred royalty revenue.(3) Effect relates to Wright Medical and MicroPort royalty deferred and recognized ratably through 2027 and 2031,respectively, under Topic 605, recognized in full at contract inception date under Topic 606.Revenue RecognitionRevenue is recognized when, or as, obligations under the terms of a contract are satisfied, which occurs when control of the promisedproducts or services is transferred to customers. Revenue is measured as the amount of consideration the Company expects to receive inexchange for transferring products or services to a customer (“transaction price”). When determining the transaction price of a contract, anadjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significantfinancing component. Applying the practical expedient in paragraph 606-10-32-18, the Company does not assess whether a significant financingcomponent exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year orless. None of the Company’s contracts contained a significant financing component as of December 31, 2018. Payment is typically due between30 - 60 days from invoice.To the extent that the transaction price includes variable consideration, such as prompt-pay discounts or rebates, the Company estimatesthe amount of variable consideration that should be included in the transaction price utilizing the expected value to which the Company expects tobe entitled. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversalof cumulative revenue under the contract will not occur. Actual amounts of consideration ultimately received may differ from the Company'sestimates. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are basedlargely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonablyavailable.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 the101transaction price based on the estimated relative standalone selling prices of the promised products or services underlying each performanceobligation. The Company determines standalone selling prices based on observable prices or a cost-plus margin approach when one is notavailable. Revenue is recognized at the time the related performance obligation is satisfied by transferring control of a promised good or service toa customer. The Company's performance obligations are satisfied at the same time, typically upon surgery, therefore, product revenue isrecognized at a point in time upon completion of the surgery. Since the Company does not have contracts that extend beyond a duration of oneyear, 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 andcould result in revenue recognition over time. However, the impact of applying 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 asreceivables. Incidental items that are immaterial in the context of the contract are recognized as expense.Disaggregation of RevenueSee "Note O—Segment and Geographic Data" for disaggregated product revenue by geography.Variable ConsiderationRevenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration forwhich 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 tothe 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 for the year ended December 31, 2018 (in thousands): December 31, 2018Beginning Balance $119Provision related to current period sales 129Adjustment related to prior period sales 40Payments or credits issued to customer (192)Ending Balance $96Costs to Obtain and Fulfill a ContractThe Company currently expenses commissions paid for obtaining product sales. Sales commissions are paid following the manufactureand implementation of the implant. Due to the period being less than one year, the Company will apply the practical expedient, whereby theCompany recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that theCompany otherwise would have recognized is one year or less. These costs are included in sales and marketing expense. Further, the Companyincurs costs to buy, build, replenish, restock, sterilize and replace the reusable instrumentation trays associated with the sale of its products andservices. The reusable instrument trays are not contract specific and are used for multiple contracts and customers, therefore does not meet thecriteria to capitalize.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 consideredfulfillment activities, and not performance obligations. Amounts invoiced to customers for shipping and handling are classified as revenue.Shipping and handling costs incurred are included in102general and administrative expense. Shipping and handling expense was $1.6 million, $1.4 million and $1.6 million for the years endedDecember 31, 2018, 2017 and 2016, 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 toinclude tax amounts in revenue.Research and development expense The Company’s research and development costs consist of engineering, product development, quality assurance, clinical and regulatoryexpense. These costs primarily relate to employee compensation, including salary, benefits and stock-based compensation. The Company alsoincurs costs related to consulting fees, materials and supplies, and marketing studies, including data management and associated travel expense.Research and development costs are expensed as incurred. Advertising expense Advertising costs are expensed as incurred, which are included in sales and marketing. Advertising expense was $0.7 million for the yearended December 31, 2018, $0.4 million for the year ended December 31, 2017 and $0.3 million for the year ended December 31, 2016.Segment reporting Operating segments are defined as components of an enterprise about which separate financial information is available and is evaluatedon a regular basis by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources to an individual segmentand in assessing performance of the segment. The Company’s chief operating decision-maker is its chief executive officer. The Company’s chiefexecutive officer reviews financial information presented on an aggregate basis for purposes of allocating resources and evaluating financialperformance. The Company has one business segment and there are no segment managers who are held accountable for operations, operatingresults 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 replacementproducts and that the Company operates as one segment. See “Note O—Segment and Geographic Data”. Comprehensive loss At December 31, 2018 and 2017, accumulated other comprehensive loss consists of foreign currency translation adjustments andchanges in unrealized gain and loss of available-for-sale securities, net of tax. The following table summarizes accumulated beginning and endingbalances for each item in Accumulated other comprehensive income (loss) (in thousands): Foreign currencytranslationadjustments Change in unrealized gain(loss) on available-for-salesecurities, net of tax Accumulated othercomprehensiveincome (loss)Balance December 31, 2017 $(3,203) $(33) $(3,236)Change in period 1,733 33 1,766Balance December 31, 2018 $(1,470) $— $(1,470)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 balancesheet date, and income and expense items are translated at average rates of exchange prevailing during the year. Net translation gains and lossesare recorded in Accumulated other comprehensive (loss) income. Gains and losses realized from transactions denominated in foreign currencies,including intercompany balances not of a long-term investment nature, are included in the consolidated statements of operations.103Income taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and theirrespective tax bases, operating losses and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect ondeferred 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, includingrecent earnings, expectations of future taxable income and the character of that income. In estimating future taxable income, the Company reliesupon assumptions and estimates of future activity including the reversal of temporary differences. Presently, the Company believes that a fullvaluation 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 onexamination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financialstatements from these positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized uponultimate 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 whichwould affect the consolidated financial statements.The Company has operations in Germany and, until July 1,2017, the United Kingdom. The operating results of these operations will bepermanently reinvested in those jurisdictions. As a result, the Company has only provided for income taxes at local rates when required.Accounting Standard Update ("ASU") No. 2016-09, "Compensation - Stock Compensation", was issued and adopted in January 2017. ASU2016-09 eliminates additional paid in capital ("APIC") pools and requires excess tax benefits and tax deficiencies to be recorded in the incomestatement when the awards vest or are settled. In addition, modified retrospective adoption of ASU 2016-09 eliminates the requirement that excesstax benefits be realized (i.e., through a reduction in income taxes payable) before the Company can recognize them and therefore, it hasaccounted for a cumulative-effect adjustment of $7.7 million during the year ended December 31, 2018 to record excess tax benefits. Since theCompany has a full valuation allowance on all deferred taxes, this has no impact on retained earnings or the tax position of the Company.On December 22, 2017, H.R. 1, known as the Tax Cuts and Jobs Act, was signed into law, which includes a broad range of topicsaffecting corporations – including corporate tax rates, business deductions and international provisions. The effect of the tax law changes hasbeen recognized in the Company's December 31, 2018 financial statements. 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 to2.3% on the sales price of any taxable medical device by a medical device manufacturer, producer or importer of such device. Under the Act, ataxable medical device is any device defined in Section 201(h) of the Federal Food, Drug, and Cosmetic Act, intended for humans, which includesan 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 medicaldevice excise tax, which moratorium suspended taxes on the sale of a taxable medical device by the manufacturer, producer, or importer of thedevice during the period beginning on January 1, 2016 and ending on December 31, 2017. As such, the Company did not incur medical deviceexcise tax expense for the years ended December 31, 2018, 2017, and 2016.On January 22, 2018, legislation was passed that suspends the medical device excise tax for sales in 2018 and 2019. The tax is notscheduled 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 weare currently subject to the tax after December 31, 2019.104Stock-based compensation The Company accounts for stock-based compensation in accordance with ASC 718, Stock Based Compensation. ASC 718 requires allstock-based payments to employees and consultants, including grants of stock options, to be recognized in the consolidated statements ofoperations based on their fair values. The Company uses the Black-Scholes option pricing model to determine the weighted-average fair value ofoptions 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 thestock price, exercise price, and a number of assumptions, including expected volatility of the stock, expected life of the option, risk-free interestrate and expected dividends on the stock. The Company evaluates the assumptions used to value the awards at each grant date and if factorschange and different assumptions are utilized, stock-based compensation expense may differ significantly from what has been recorded in thepast. If there are any modifications or cancellations of the underlying unvested securities, the Company may be required to accelerate, increase orcancel any remaining unearned stock-based compensation expense. Forfeitures are accounted for as they occur. Net loss per share The Company calculates net loss per share in accordance with ASC 260, "Earnings per Share". Basic earnings per share (“EPS”) iscalculated by dividing the net income or loss for the period by the weighted average number of common shares outstanding for the period, withoutconsideration for common stock equivalents. Diluted EPS is computed by dividing the net income or loss for the period by the weighted averagenumber of common shares outstanding for the period and the weighted average number of dilutive common stock equivalents outstanding for theperiod determined using the treasury stock method. The following table sets forth the computation of basic and diluted earnings per share attributable to stockholders (in thousands, exceptshare and per share data): Years Ended December 31,(in thousands, except share and per share data) 2018 2017 2016Numerator: Numerator for basic and diluted loss per share: Net loss $(43,365) $(53,580) $(57,588)Denominator: Denominator for basic loss per share: Weighted average shares 58,886,333 43,343,459 41,521,629Basic loss per share attributable to Conformis, Inc. stockholders $(0.74) $(1.24) $(1.39)Diluted loss per share attributable to Conformis, Inc. stockholders $(0.74) $(1.24) $(1.39) The following table sets forth potential shares of common stock equivalents that are not included in the calculation of diluted net loss pershare because to do so would be anti-dilutive as of the end of each period presented: Years Ended December 31, 2018 2017 2016Common stock warrants — — 34,709Stock options 55,346 365,105 1,959,030Total 55,346 365,105 1,993,739105Recent accounting pronouncements 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 newguidance, 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 iseffective for fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in any interim period. Prospectiveadoption for eligible costs incurred on or after the date of adoption or retrospective adoption are permitted. The Company does not expect theadoption of ASU 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 theDisclosure Requirements for Fair Value Measurement". This ASU modifies disclosure requirements relative to the three levels of inputs used tomeasure fair value in accordance with Topic 820. This ASU is effective for fiscal years beginning after December 15, 2019, including interimperiods. Early adoption is permitted for any eliminated or modified disclosures. The Company does not expect the adoption of ASU 2018-13 willhave a material impact on its consolidated financial statements.In July 2018, the FASB issued ASU No. 2018-09, "Codification Improvements". This ASU makes amendments to multiple codificationTopics and the transition and effective date is based on the facts and circumstances of each amendment. Many of the amendments in this ASUhave transition guidance with effective dates for annual periods beginning after December 15, 2018. The Company is currently evaluating theimpact of the pronouncement on its consolidated financial statements.In June 2018, the FASB issued ASU No. 2018-07, "Improvements to Nonemployee Share-Based Payment Accounting." This ASUsupersedes Subtopic 505-50, "Equity - Equity-Based Payments to Non-Employees" and expands on the scope of Topic 718, "Compensation -Stock Compensation", to include share-based payments issued to nonemployees for goods or services. This ASU is effective for fiscal yearsbeginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted. The Company does not expect theadoption of ASU 2018-07 will have a material impact on its consolidated financial statements.In June 2016, the FASB issued ASU 2016-13, "Credit Losses (Topic 326)." ASU 2016-13 requires that financial assets measured atamortized cost, such as trade receivables, be represented net of expected credit losses, which may be estimated based on relevant informationsuch as historical experience, current conditions, and future expectation for each pool of similar financial asset. The new guidance requiresenhanced disclosures related to trade receivables and associated credit losses. The guidance is effective beginning January 1, 2020. TheCompany is currently evaluating the impact of this pronouncement on its consolidated financial statements. In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." This ASU amends various aspects of existing guidance forleases and requires additional disclosures about leasing arrangements. It will require companies to recognize lease assets and lease liabilities bylessees for those leases classified as operating leases under GAAP. Topic 842 retains a distinction between finance leases and operating leases.The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria fordistinguishing between capital leases and operating leases in the previous leases guidance. This ASU is effective for annual periods beginningafter December 15, 2018, including interim periods within those fiscal years; earlier adoption is permitted. In the financial statements in which theASU is first applied, leases shall be measured and recognized at the beginning of the earliest comparative period presented with an adjustment toequity. Practical expedients are available for election as a package and if applied consistently to all leases. In July 2018, the FASB issued ASUNo. 2018-11, "Leases (Topic 842): Targeted Improvements" which allows entities the option not to recast the comparative periods presented whentransitioning to Topic 842. The Company has completed its assessment to evaluate the impact on its consolidated financial statements. TheCompany will adopt this pronouncement and related disclosures commencing in the first quarter of 2019. The Company will elect the 'package ofpractical expedients' and carry over our prior conclusions about lease identification, lease classification and initial direct costs. The Companyexpects that, based on its assessment, the most significant effect will relate to the recognition of new right of use assets and lease liabilities in arange of approximately $7 million to $8 million related to the Company's real estate operating leases on the Balance Sheet. The Company has alsocompleted its evaluation of changes to its processes and internal controls, as necessary, to meet the requirements.106Note C—Fair Value Measurements The Fair Value Measurements topic of the FASB Codification establishes a framework for measuring fair value in accordance withUS GAAP, clarifies the definition of fair value within that framework and expands disclosures about fair value measurements. This guidancerequires disclosure regarding the manner in which fair value is determined for assets and liabilities and establishes a three-tiered value hierarchyinto 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, quotedprices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroboratedby 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 orliabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significantunobservable inputs. The Company's investment policy is consistent with the definition of available-for-sale securities. All investments have been classifiedwithin Level 1 or Level 2 of the fair value hierarchy because of the sufficient observable inputs for revaluation. The Company's Level 1 cash andequivalents and investments are valued using quoted prices that are readily and regularly available in the active market. The Company's Level 2investments are valued using third-party pricing sources based on observable inputs, such as quoted prices for similar assets at the measurementdate; 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 andare categorized using the fair value hierarchy and where they are classified on the Consolidated Balance Sheets (in thousands):December 31, 2018AmortizedCostGross UnrealizedGainsGross UnrealizedLossesEstimatedFair ValueCash and cashequivalentsShort-term (1)investmentsCash$9,837$—$—$9,837$9,837$—Level 1 securities: Money market funds1,046——1,0461,046—U.S. treasury bonds10,494——10,4945,4974,997Level 2 securities: Corporate bonds1,249——1,249—1,249Commercial paper999——999—999Total$23,625$—$—$23,625$16,380$7,245December 31, 2017AmortizedCostGross UnrealizedGainsGross UnrealizedLossesEstimatedFair ValueCash and cashequivalentsShort-term (1)investmentsCash$9,849$—$—$9,849$9,849$—Level 1 securities: Money market funds3,499——3,4993,499—U.S. treasury bonds9,243—(4)9,239—9,239Level 2 securities: Corporate bonds4,935—(6)4,929—4,929Commercial paper—————12,712Agency bonds12,734—(22)12,712——Repurchase agreement$5,000$—$—$5,000$5,000 Total$45,260$—$(32)$45,228$18,348$26,880(1) Contractual maturity due within one year.107Note D—Accounts Receivable Accounts receivable consisted of the following (in thousands): December 31, 2018 December 31, 2017Total receivables$13,634 $13,835Allowance for doubtful accounts and returns(390) (635)Accounts receivable, net$13,244 $13,200 Accounts receivable included unbilled receivable of $2.2 million and $1.4 million for the years ended December 31, 2018 and 2017. Write-offs related to accounts receivable were approximately $115,000, $92,000, and $41,000 for the years ended December 31, 2018, 2017, and 2016,respectively. Summary of allowance for doubtful accounts and returns activity was as follows (in thousands): December 31, 2018 December 31, 2017Beginning balance$(635) $(681)Provision for bad debts on trade receivables72 15Other allowances58 (61)Accounts receivable write offs115 92Ending balance$(390) $(635)Note E—Inventories Inventories consisted of the following (in thousands): December 31, 2018 December 31, 2017Raw Material$4,498 $2,905Work in process1,518 1,718Finished goods3,518 4,561Total Inventories$9,534 $9,184 Note F—AcquisitionOn August 9, 2017, the Company completed the purchase of certain assets and assumed certain liabilities of Broad Peak Manufacturing,LLC, or BPM, for approximately $6.4 million. Of the total purchase price paid, $5.8 million was in cash and $0.6 million of unregistered shares ofcommon stock. The purchase was treated as a business combination as it met certain criteria stipulated in ASC 805 - Business Combinations.Prior to the acquisition, BPM provided substantially all of the polishing services for the Company’s femoral implant component. The Companyexpects the acquisition of the BPM assets will reduce the cost of polishing and improve overall gross margin.The Company completed the BPM purchase price allocation. Of the total purchase price, approximately $2.2 million related to earn outprovisions tied to certain employee retention by the Company and achieving certain cost targets that was paid into an escrow account. Anadditional $0.7 million could be earned by BPM if the actual cost targets are exceeded. Alternatively, the earn out provisions could be paid back tothe Company if the employee retention and cost targets are not achieved. On August 16, 2018, $910,000 related to employee retention wasreleased from the escrow account, and on September 21, 2018, $1.3 million related to the earn out was released from the escrow account whichsatisfied the earn out provisions.Of the total purchase price of $6.4 million, $0.4 million was attributed to property and equipment, $6.0 million was attributed to goodwill andless than $0.1 million to other net assets acquired. Goodwill is primarily attributable to the future cost savings expected to arise after theacquisition and is deductible for tax purposes. During the quarter ended September 30, 2018, the Company fully impaired goodwill recognized inthe BPM108acquisition. Refer to "Note B—Summary of Significant Accounting Policies" for more information on Goodwill impairment. The acquisition of BPM is strategically significant in reducing the manufacturing costs for the Company, however at the time of theacquisition and on December 31, 2017, the Company concluded that historical results of the BPM both individually and in the aggregate, wereimmaterial to the Company’s consolidated financial results and therefore additional pro-forma disclosures are not presented.Note G—Property and Equipment Property and equipment consisted of the following (in thousands): Estimated Useful Life(Years) December 31, 2018 December 31, 2017Equipment5-7 $18,602 $19,331Furniture and fixtures5-7 954 955Computer and software3 8,783 7,877Leasehold improvements3-7 1,978 1,830Reusable instruments5 1,573 —Total property and equipment 31,890 29,993Accumulated depreciation (17,451) (13,479)Property and equipment, net $14,439 $16,514During the first quarter of 2018, the Company substantially completed the reusable instrumentation tray design and commenced capitalization.Depreciation expense related to property and equipment was $4.0 million, $3.4 million and $2.9 million for the years ended December 31,2018, 2017 and 2016, respectively. In 2018, the Company recognized $2.4 million in impairment charges, comprised of $1.9 million related tounused manufacturing equipment abandoned in July, $0.3 million related to the expiration of a credit towards a purchase of certain manufacturingequipment, and the remaining $0.2 million impairment charges relate primarily to the discontinuance of software applications. In 2017, theCompany recognized $1.1 million in impairment charges of which $0.8 million related to the discontinuance of a software capital project and $0.3million related to intellectual property rights licensed as part of the ImaTx spin-out transaction in 2004. In 2016, a $0.1 million impairment chargewas recognized in connection with certain manufacturing equipment previously purchased that will be returned to the seller in exchange for credittoward a future purchase, which value is less than the book value of the equipment.Note H—Intangible AssetsThe components of intangible assets consisted of the following (in thousands): Estimated Useful Life (Years) December 31, 2018 December 31, 2017Developed technology10 $979 $979Accumulated amortization (881) (783)Developed technology, net 98 196 Acquired favorable lease5 15 15Accumulated amortization (4) (1)Acquired favorable lease, net 11 14 Intangible assets, net $109 $210 The Company recognized amortization expense of $0.1 million, $0.2 million, and $0.2 million in the years ended December 31, 2018, 2017 and2016. The weighted-average remaining life of total amortizable intangible assets is 1.3 years for the developed technology and favorable leaseasset. In the year ended December 31, 2017, the Company recorded an impairment charge of $0.3 million in general and administration expense inconnection with the termination of the license agreements. See “Note B—Summary of Significant Accounting Policies ” to the109financial statements in this Annual Report on Form 10-K for a full description of the impairment charges related to intellectual property rightslicensed as part of the ImaTx spin-out transaction in 2004. The estimated future aggregated amortization expense for intangible assets owned as of December 31, 2018 consisted of the following (inthousands):Amortization expense2019$101202032021320222$109Note I—Accrued Expenses Accrued expenses consisted of the following (in thousands): December 31, 2018 December 31, 2017Accrued employee compensation$3,138 $2,989Deferred rent132 115Accrued legal expense215 1,231Accrued consulting expense84 115Accrued vendor charges1,441 912Accrued revenue share expense1,134 968Accrued clinical trial expense549 196Accrued other1,237 1,194$7,930 $7,720Note J—Commitments and Contingencies Operating Leases - Real Estate The Company maintains its corporate headquarters in a leased building located in Billerica, Massachusetts. The Company moved itscorporate headquarters from Bedford, Massachusetts in April 2017. The Company maintains its manufacturing facilities in leased buildings locatedin Wilmington, Massachusetts and Wallingford, Connecticut. The Billerica facility is leased under a long-term, non-cancellable lease that is scheduled to expire in October 2025. The Company has aright to extend the term for two successive five year terms following the termination of the lease.The Company leases its Wilmington, Massachusetts facility under a long-term, non-cancellable lease that commenced in April 2015 andwill expire in July 2022 (the "Wilmington Lease"). The Company also rents a satellite facility under short-term non-cancellable operating lease. OnJuly 25, 2016, the Company entered into an amendment to the Wilmington Lease. Pursuant to the amendment, the Company exercised an optionin its current lease to rent an additional 18,223 square feet of space adjacent to the Company’s existing premises. The Company took possessionof the additional space in April 2017. The Company has a right to extend the term for one additional five-year period following termination of thelease in July 2022. The initial base rental rate for the additional space is $0.2 million annually, subject to 2% annual increases until the expirationof the initial term.On August 9, 2017, the Company entered into a lease for 4,099 square feet of space in Wallingford, Connecticut which houses thepolishing and passivation processes. The lease term is five years with the option to extend for two additional years beyond the original term and anadditional three years past the first extension term. The future minimum rental payments under the Company’s non-cancellable operating leases for real estate as of December 31, 2018 wereas follows (in thousands):110YearMinimum lease Payments2019$1,55820201,59520211,63320221,3972023-20252,939$9,122 Rent expense of $1.5 million, $1.7 million, and $1.5 million for the years ended December 31, 2018, 2017, and 2016, respectively, and wascharged to operations. The Company’s real estate operating lease agreements contain scheduled rent increases, which are being amortized overthe terms of the agreements using the straight-line method. Deferred rent was $0.7 million, $0.8 million, and $0.3 million as of December 31, 2018,2017, and 2016, respectively. Deferred rent is included in accrued expenses and other long-term liabilities. 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 whichthese advisors agreed to participate on its scientific advisory board and to assist with the development of the Company’s customized implantproducts and related intellectual property. These agreements provide that the Company will pay the advisor a specified percentage of theCompany’s net revenue, ranging from 0.1% to 1.33%, with respect to the Company’s products on which the advisor made a technical contributionor, in some cases, which the Company covered by a claim of one of its patents on which the advisor is a named inventor. The specific percentageis determined by reference to product classifications set forth in the agreement and may be tiered based on the level of net revenue collected bythe Company on such product sales. The Company’s payment obligations under these agreements typically expire a fixed number of years afterexpiration or termination of the agreement, but in some cases expire on a product-by-product basis or expiration of the last to expire of theCompany’s patents where the advisor is a named inventor that has claims covering the applicable product. Philipp Lang, M.D., our former Chief Executive Officer and former director, joined the Company’s scientific advisory board in 2004 prior tobecoming an employee. The Company first entered into a revenue share agreement with Dr. Lang in 2008 when he became the Company’s ChiefExecutive Officer. In 2011, the Company entered into an amended and restated revenue share agreement with Dr. Lang. Under this agreement, thespecified percentage of the Company’s net revenue payable to Dr. Lang ranges from 0.875% to 1.33% and applies to all of the Company’s currentproducts, including the Company’s iUni, iDuo, iTotal CR, iTotal PS, and Conformis Hip System products, as well as certain other knee, hip andshoulder replacement products and related instrumentation the Company may develop in the future. The Company’s payment obligations underthis agreement expire on a product-by-product basis on the last to expire of the Company’s patents on which Dr. Lang is named an inventor thathas a claim covering the applicable product. These payment obligations survived the termination of Dr. Lang’s employment with the Company. Wehave raised concerns with Dr. Lang relating to this revenue share agreement and have been seeking to enter into discussion with Dr. Langconcerning the scope of this agreement. In October of 2018, we requested that Dr. Lang provide consulting services as permitted under Dr. Lang’srevenue share agreement. However, he failed to respond to such request and, as a result, beginning in the fourth quarter of 2018, the revenueshare percentage rate owed to Dr. Lang has been reduced by 50% within the scope of his agreement. The Company incurred revenue shareexpense for Dr. Lang of $0.7 million, $1.0 million and $1.0 million for the years ended December 31, 2018, 2017 and 2016, respectively. The Company incurred aggregate revenue share expense including all amounts payable under the Company’s scientific advisory boardand Dr. Lang revenue share agreements of $3.1 million during the year ended December 31, 2018, representing 4.0% of product revenue, $3.7million during the year ended December 31, 2017, representing 4.8% of product revenue, and $3.5 million during the year ended December 31,2016, representing 4.4% of product revenue. Revenue share expense is included in research and development. See “Note L—Related PartyTransactions” for further information regarding the Company’s arrangement with Dr. Lang. 111Other obligations In the ordinary course of business, the Company is a party to certain non-cancellable contractual obligations typically related to productroyalty and research and development. The Company accrues a liability for such matters when it is probable that future expenditures will be madeand such expenditures can be reasonably estimated. The following table summarizes the Company's contractual obligations as of the year ended December 31, 2018 (in thousands): Payment Due by Period Total Less than 1 year Years 1 to 3 Years 3 to 5 After 5 yearsContractual Obligations (1)(2)$1,355 $526 $650 $179 $—(1) Represents amounts payable under our product royalty agreement, operating leases for office equipment, automobile leases, and a software development collaboration project with a remaining term in excess of one year.(2) This table does not include: (a) revenue share obligations to past and present members of our scientific advisory board and one of our directors, as the amounts of such payments are not known with certainty; and (b) contracts that are entered into in theordinary course of business that are not material in the aggregate in any period presented above. See "—Revenue share agreements" for a description of our revenue share arrangements.There have been no contingent liabilities requiring accrual at December 31, 2018 or December 31, 2017.Legal proceedings In the ordinary course of the Company's business, the Company is subject to routine risk of litigation, claims and administrativeproceedings on a variety of matters, including patent infringement, product liability, securities-related claims, and other claims in the United Statesand in other countries where the Company sells its products. On February 29, 2016, the Company filed a lawsuit against Smith & Nephew, Inc. (“Smith & Nephew”) in the United States District Courtfor the District of Massachusetts Eastern Division, and the Company amended its complaint on June 13, 2016 (the "Smith & Nephew Lawsuit").The Smith & Nephew Lawsuit alleges that Smith & Nephew’s Visionaire® patient-specific instrumentation as well as the implant systems used inconjunction with the Visionaire instrumentation infringe nine of the Company's patents, and it requested, among other relief, monetary damages forwillful infringement, enhanced damages and a permanent injunction.On May 27, 2016, Smith & Nephew filed its answer and counterclaims in response to the Company's lawsuit, which it subsequently amendedon July 22, 2016. Smith & Nephew denied that its Visionaire® patient-specific instrumentation as well as the implant systems used in conjunctionwith the Visionaire instrumentation infringe the patents asserted by the Company in the lawsuit. It also alleged two affirmative defenses: that theCompany's asserted patents are invalid and that the Company is barred from relief under the doctrine of laches. In addition, Smith & Nephewasserted a series of counterclaims, including counterclaims seeking declaratory judgments that Smith & Nephew’s accused products do notinfringe the Company's patents and that the Company's patents are invalid. Smith & Nephew also alleged that the Company infringed ten patentsowned or exclusively licensed by Smith & Nephew: two of those patents Smith & Nephew alleges are infringed by the Company's iUni and iDuoproducts; three of those patents Smith & Nephew alleges are infringed by the Company's iTotal products; and five of those patents Smith &Nephew licenses from Kinamed, Inc. of Camarillo, California and alleged are infringed by the Company's iUni, iDuo and iTotal products. Due toSmith & Nephew’s licensing arrangement with Kinamed, Kinamed was named as a party to the lawsuit. Smith & Nephew and Kinamed requested,among other relief, monetary damages for willful infringement, enhanced damages and a permanent injunction. On March 9, 2017, the Courtentered a stipulation of dismissal by the parties that dismissed from the lawsuit eight patents asserted by Smith & Nephew, including the patentsinvolving Kinamed, and two patents asserted by the Company. With the dismissal of all claims involving Kinamed's patents, Kinamed was nolonger a party to the lawsuit.On January 27, 2017, Smith & Nephew filed a motion seeking a stay of the Smith & Nephew Lawsuit until any requested IPRs (definedand described below) were resolved. On April 27, 2017, the Court stayed certain aspects of the proceedings and indicated that it would make afinal decision on the motion to stay after the USPTO has decided more of the petitions for Inter Partes Review (“IPR”).112Between September 21, 2016 and March 1, 2017, Smith & Nephew filed sixteen petitions with the United States Patent & Trademark Office(“USPTO”) requesting IPRs of the nine patents that the Company asserted against Smith & Nephew in the lawsuit. In its petitions, Smith &Nephew alleged that the Company's patents were obvious in light of certain prior art. As of October 31, 2017, the USPTO decided to institute IPRproceedings with respect to seven of the petitions; decided to deny the requests for IPR with respect to seven of the petitions; and, with respect tothe remaining two petitions, decided to institute IPR proceedings for some of the subject patent claims and to deny the requests for the remainingsubject patent claims ("Subject Patent Claims"). On April 24, 2018, the Supreme Court of the United States issued its ruling in SAS Institute, Inc.v. Iancu (the “SAS Decision”) which held that the IPR proceedings cannot be instituted in part and denied in part. In response to the SAS Decisionand guidance from the USPTO, the Patent Trial and Appeal Board (“PTAB”) issued an order on April 27, 2018 including the Subject Patent Claimswithin the prior instituted IPR proceedings. In total, the USPTO instituted IPR proceedings for claims in six of the patents in the Smith & Nephewlawsuit (five patents that were currently asserted, and one of the patents that was voluntarily dismissed from the lawsuit), and denied the petitionsfor claims in three of the patents (two patents that were currently asserted and one of the patents that was voluntarily dismissed from the lawsuit). Smith & Nephew filed requests for rehearing of three of the petitions that were denied and the PTAB denied those requests. Smith & Nephew filedrequests with the USPTO for reexamination of two of the patents for which IPR proceedings were not instituted and the USPTO granted thoserequests for reexamination. On August 7, 2018 and October 2, 2018, the USPTO ruled in the Company's favor on both reexamination proceedingsfinding the claims patentable in both patents.Between December 18, 2017 and April 18, 2018, IPR hearings were held for the six patents for which IPR proceedings were instituted. OnMarch 26, 2018, the USPTO issued its first ruling holding that the Company's U.S. Patent No. 9,055,953 (the “’953 Patent”) is invalid over prior art.On April 19, 2018, the USPTO issued its second ruling holding that the Company's U.S. Patent No. 9,216,025 (the “‘025 Patent”) is invalid overprior art. Following a grant by the U.S. Court of Appeals for the Federal Circuit (the “Federal Circuit”) of the Company's request for consolidation,the Company filed an opening brief on October 1, 2018, appealing the PTAB’s rulings on the ‘953 Patent and the ‘025 patent. On June 11, 2018,the USPTO issued its third ruling holding that a subset of claims in the Company's U.S. Patent No. 7,981,158 (the “‘158 Patent”) are invalid overprior art. On June 12, 2018, the USPTO issued its fourth ruling holding that a subset of claims in the Company's U.S. Patent No. 8,551,169 (the“‘169 Patent”) are invalid over prior art. The ’953 Patent is not part of the lawsuit having been voluntarily dismissed on March 9, 2017. The ‘025,‘169 and ‘158 Patents were part of the lawsuit. On September 26, 2018, the PTAB terminated the remaining IPR proceedings in response to a jointmotion to terminate filed by the Company and Smith & Nephew pursuant to the Settlement and License Agreement (defined and described below).On September 14, 2018, the Company and Smith & Nephew entered into a Settlement and License Agreement (the “Settlement andLicense Agreement”) including terms for resolving all of the parties’ existing patent disputes. The Settlement and License Agreement includesterms for dismissal of all outstanding litigation, prohibitions against commencement of litigation with respect to existing product lines, and Smith &Nephew agreed to cease their opposition to certain of the Company's patents currently in IPR proceedings.Pursuant to the Settlement and License Agreement, the Company granted to Smith & Nephew (i) a fully paid-up, non-exclusive, worldwidelicense to certain patents for the exploitation of patient-specific instrumentation for use with off-the-shelf knee implants, (ii) a royalty-bearing, non-exclusive, worldwide license to certain patents in the event Smith & Nephew commercializes patient-specific instrumentation for use with off-the-shelf implants other than knee implants, and (iii) a fully paid-up, non-exclusive, worldwide license to certain other patents for exploitation of off-the-shelf implants. Also pursuant to the Settlement and License Agreement, Smith & Nephew granted to the Company a fully paid-up, non-exclusive,worldwide license to certain patents for the exploitation of patient-specific implants and paid the Company $10.5 million. The Company is notrequired to make a payment to Smith & Nephew.The foregoing description is qualified in its entirety by reference to the text of the Settlement and License Agreement filed as exhibit 10.1 tothe Company's quarterly report on Form 10-Q for the period ended September 30, 2018. 113Indemnifications In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations andwarranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims thatmay 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 todefend any action related to its indemnification obligations. However, the Company may record charges in the future as a result of theseindemnification obligations. In accordance with its bylaws, the Company has indemnification obligations to its officers and directors for certainevents or occurrences, subject to certain limits, while they are serving at the Company’s request in such capacity. There have been no claims todate and the Company has a director and officer insurance policy that enables it to recover a portion of any amounts paid for future claims.Note K—Debt and Notes Payable Long-term debt consisted of the following (in thousands): December 31, 2018 December 31, 2017Term A Loan$7,500 $15,000Term B Loan7,500 15,000 15,000 30,000Less unamortized debt issuance costs(208) (333)Long-term debt, less debt issuance costs$14,792 $29,667Principal payments due as of December 31, 2018 consisted of the following (in thousands): PrincipalPayment2019$—20206,87520217,5002022625Total$15,0002017 Secured Loan AgreementOn January 6, 2017, the Company entered into the 2017 Secured Loan Agreement with Oxford and accessed $15 million under Term LoanA at closing and an additional $15 million of borrowings under the Term B Loan on June 30, 2017. On July 31, 2018, the Company and Oxfordentered into a fourth amendment to the 2017 Secured Loan Agreement, or the Fourth Amendment, with Oxford. The Fourth Amendment added therequirement that the Company maintain at least $10 million in cash collateral and required liens on the Company's copyrights, trademarks andpatents. Pursuant to the Fourth Amendment, the Company also agreed to pay Oxford a fee of $1 million within 30 days of consummation of a saleof the Company, if such sale occurs prior to the first anniversary of the Company's full repayment of obligations under the 2017 Secured LoanAgreement. In addition, the Fourth Amendment amended the Company's financial covenants, including increasing of the revenue covenantbeginning in January 2019. On December 13, 2018, the Company entered into a fifth amendment to the 2017 Secured Loan Agreement, or the FifthAmendment, with Oxford, and pursuant to the Fifth Amendment, the Company pre-paid $15 million aggregate principal amount of the $30 millionoutstanding principal amount, as a pro rata portion of the Term A Loan and Term B Loan, together with accrued and unpaid interest thereon and apro rata prepayment fee. Under the Fifth Amendment, the Company's cash collateral requirements was reduced to $5 million.The Fifth Amendment also reduced the revenue milestones through December 31, 2019. New minimum revenue milestones, based onproduct revenue projections, are to be established prior to the start of 2020 and prior to the start of each fiscal year thereafter by the mutualagreement of Oxford and the Company. If the Company is not able to agree with Oxford on new minimum revenue milestones for 2020 or a fiscalyear thereafter, the Company will have to refinance the 2017 Secured Loan Agreement by March 31, 2020 or that next fiscal year, and if theCompany fails to refinance the 2017 Secured Loan Agreement, the Company must notify Oxford of such114default and Oxford would be permitted to exercise remedies against the Company and our assets in respect of such event of default, includingtaking control of our cash and commencing foreclosure proceedings on our other assets. As of December 31, 2018, the Company was not inbreach of covenants under the credit facility.The 2017 Secured Loan Agreement is secured by substantially all of the Company’s personal property other than the Company’sintellectual property. Under the terms of the 2017 Secured Loan Agreement, the Company cannot grant a security interest in its intellectualproperty to any other party.The term loans under the 2017 Secured Loan Agreement bears interest at a floating annual rate calculated at the greater of 30 day LIBORor 0.53%, plus 6.47%. The Company is required to make monthly interest only payments in arrears commencing on the second payment datefollowing the funding date of each term loan, and continuing on the payment date of each successive month thereafter through and including thepayment date immediately preceding the amortization date of February 1, 2020. Commencing on the amortization date, and continuing on thepayment date of each month thereafter, the Company is 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 finalpayment in the amount of 5.0% of the amount of loans advanced, is due and payable in full on the term loan maturity date. The 2017 SecuredLoan Agreement has a term of five years and matures on January 1, 2022.At the Company’s option, the Company may prepay all, but not less than all, of the term loans advanced by Oxford under the 2017Secured Loan Agreement, subject to a prepayment fee and an amount equal to the sum of all outstanding principal of the term loans plus accruedand unpaid interest thereon through the prepayment date, a final payment, plus all other amounts that are due and payable, including Oxford'sexpenses and interest at the default rate with respect to any past due amounts.The Company intends to refinance the 2017 Secured Loan Agreement before the interest only period ends and the principal repaymentsbegin in January 2020. The Company may not be able to refinance or obtain additional financing on terms favorable to the Company, or at all. Tothe extent that we raise additional capital through the future sale of equity or debt, the ownership interest of our stockholders will be diluted. Theterms of these future equity or debt securities may include liquidation or other preferences that adversely affect the rights of our existing commonstockholders or involve negative covenants that restrict the Company's ability to take specific actions, such as incurring additional debt or makingcapital expenditures. If the Company is unable to refinance the 2017 Secured Loan Agreement before the interest only period ends or shortlythereafter, then the Company will be required to make principal repayments beginning in January 2020 which will require the Company to raiseadditional capital through the sale of equity and the ownership interest of our stockholders will be diluted.The 2017 Secured Loan Agreement also includes events of default, the occurrence and continuation of which could cause interest to becharged at the rate that is otherwise applicable plus 5.0% and would provide Oxford, as collateral agent with the right to exercise remedies againstus and the collateral securing the Secured Loan Agreement, including foreclosure against assets securing the 2017 Secured Loan Agreement,including the Company’s cash. These events of default include, among other things, the Company’s failure to pay any amounts due under the2017 Secured Loan Agreement, a breach of covenants under the 2017 Secured Loan Agreement, including, among other customary debtcovenants, achieving certain revenue levels and limiting the amount of cash and cash equivalents held by the Company's foreign subsidiaries, theCompany’s insolvency, a material adverse change, the occurrence of any default under certain other indebtedness in an amount greater than$500,000, one or more judgments against the Company in an amount greater than $500,000, a material adverse change with respect to anygovernmental approval and any delisting event.As of December 31, 2018, the Company was not in breach of covenants under the Amended 2017 Secured Loan Agreement.Note L—Related Party Transactions Vertegen In April 2007, the Company entered into a license agreement with Vertegen, Inc., or Vertegen, which was amended in May 2015 (the“Vertegen Agreement”). Vertegen is an entity that is wholly owned by Dr. Lang, the Company’s former Chief Executive Officer. Under the VertegenAgreement, Vertegen granted the Company an exclusive, worldwide license under specified Vertegen patent rights and related technology tomake, use and sell115products and services in the fields of diagnosis and treatment of articular disorders and disorders of the human spine. The Company maysublicense the rights licensed to it by Vertegen. The Company is required to use commercially reasonable efforts, at its sole expense, toprosecute the patent applications licensed to the Company by Vertegen. Pursuant to the Vertegen Agreement, the Company is required to payVertegen a 6% royalty on net sales of products covered by the patents licensed to the Company by Vertegen, the subject matter of which isdirected primarily to spinal implants, and any proceeds from the Company enforcing the patent rights licensed to the Company by Vertegen. Such6% royalty rate will be reduced to 3% in the United States during the five-year period following the expiration of the last-to-expire applicable patentin the United States and in the rest of the world during the five-year period following the expiration of the last-to-expire patent anywhere in theworld. The Company has not sold any products subject to this agreement and has paid no royalties under this agreement. The Company hascumulatively paid approximately $175,000, $150,000, and $150,000 in expenses in connection with the filing and prosecution of the patentapplications licensed to the Company by Vertegen for the years ended December 31, 2018, 2017, and 2016 respectively.The Vertegen Agreement may be terminated by the Company at any time by providing notice to Vertegen. In addition, Vertegen mayterminate the Vertegen Agreement in its entirety if the Company is in material breach of the agreement, and the Company fails to cure such breachduring a specified period.Revenue share agreements As described in "Note J—Commitments and Contingencies", the Company is a party to certain agreements with advisors to participate asa member of the Company’s scientific advisory board. In September 2011, the Company entered into an amended and restated revenue shareagreement with Philipp Lang, M.D., former Chief Executive Officer and director, which amended and restated a similar agreement entered into in2008 when Dr. Lang stepped down as chair of the Company’s scientific advisory board and became the Company’s Chief Executive Officer. Thisagreement provides that the Company will pay Dr. Lang a specified percentage of our net revenue, ranging from 0.875% to 1.33%, with respect toall of our current and planned products, including the Company’s iUni, iDuo, iTotal CR, iTotal PS, and Conformis Hip System products, as well ascertain other knee, hip and shoulder replacement products and related instrumentation the Company may develop in the future. The specificpercentage is determined by reference to product classifications set forth in the agreement and is tiered based on the level of net revenuecollected by the Company on such product sales. The Company’s payment obligations expire on a product-by-product basis on the last to expireof the Company’s patents on which Dr. Lang is a named inventor that include a claim covering the applicable product. These payment obligationssurvived the termination of Dr. Lang’s employment with the Company. We have raised concerns with Dr. Lang relating to this revenue shareagreement and have been seeking to enter into discussions with Dr. Lang concerning the scope of this agreement. In October of 2018, theCompany requested that Dr. Lang provide consulting services as permitted under Dr. Lang’s revenue share agreement. However, he failed torespond to such request and, as a result, beginning in the fourth quarter of 2018, the revenue share percentage rate owed to Dr. Lang has beenreduced by 50% within the scope of his agreement. The Company incurred revenue share expense for Dr. Lang of $0.7 million, $1.0 million and$1.0 million for the years ended December 31, 2018, 2017 and 2016, respectively.Note M—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 allclasses of stock outstanding having priority rights as to dividends. There have been no dividends declared to date. 116Summary of common stock activity was as follows: SharesOutstanding December 31, 2016 43,399,547Issuance of common stock - option & warrant exercises 535,734Issuance of restricted common stock 1,195,196Issuance of common stock - ATM offering 228,946Issuance of common stock - BPM acquisition 169,096Outstanding December 31, 2017 45,528,519Issuance of common stock - option exercises 80,000Issuance of restricted common stock 1,516,295Issuance of common stock - ATM offering 556,334Issuance of common stock - LPC offering 2,276,398Issuance of common stock - 2018 offering 15,333,333Outstanding December 31, 2018 65,290,879Preferred stock The Company’s Restated Certificate of Incorporation authorizes the Company to issue 5,000,000 shares of preferred stock, $0.00001 parvalue, all of which is undesignated. No shares were issued and outstanding at December 31, 2018 and December 31, 2017. Demand registration rights In conjunction with the IPO, the Company entered into an Amended and Restated Information and Registration Rights Agreement effectiveJune 29, 2015 (the “Registration Rights Agreement”), which provided, among other things, registration rights to certain investors that had held theCompany's preferred stock prior to the IPO. Subject to specified limitations set forth in a registration rights agreement, at any time, the holders ofat least 25% of the then outstanding registrable shares may at any time demand in writing that the Company register all or a portion of theregistrable 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 sharesor a lesser percentage of the then outstanding registrable shares provided that it is reasonably anticipated that the aggregate offering price wouldexceed $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 rightsagreement, the holders of at least 25% of the then outstanding registrable shares became able to at any time demand in writing that the Companyregister 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 outstandingregistrable shares having an anticipated aggregate offering price to the public, net of selling expenses, of at least $5 million (a “Resale RegistrationStatement”). The Company is not obligated to effect a registration pursuant to a Resale Registration Statement on more than one occasion. Incidental registration rights If, the Company proposes to file a registration statement in connection with a public offering of its common stock, subject to certainexceptions, the holders of registrable shares are entitled to notice of registration and, subject to specified exceptions, including market conditions,the Company will be required, upon the holder’s request, to register their then held registrable shares. Warrants The Company also issued warrants to certain investors and consultants to purchase shares of the Company’s preferred stock andcommon stock. Based on the Company’s assessment of the warrants granted in 2013 and 2014 relative to ASC 480, Distinguishing Liabilities fromEquity, the warrants are classified as equity. No warrants were issued in the years ended December 31, 2018 and 2017. All warrants wereexercisable immediately upon issuance.117Common stock warrants The Company also issued warrants to certain investors and consultants to purchase shares of common stock. Warrants to purchase28,926 shares of common stock were outstanding as of December 31, 2018 and December 31, 2017. Outstanding warrants are currentlyexercisable with varying exercise expiration dates from 2020 through 2024. Summary of common stock warrant activity was as follows: Number ofWarrants Weighted AverageExercise PricePer Share Number ofWarrantsExercisable WeightedAverage PricePer Share WeightedAverage ContractualLifeOutstanding December 31, 2016 171,783 $7.47 171,783 $7.47 1.62Cancelled/expired (142,857) 7.00 (142,857) 7.00 —Outstanding December 31, 2017 28,926 $9.80 28,926 $9.80 5.66Outstanding December 31, 2018 28,926 $9.80 28,926 $9.80 4.66Stock option plans In June 2004, the Company authorized the adoption of the 2004 Stock Option and Incentive Plan (the “2004 Plan”). Under the 2004 Plan,options were granted to persons who were, at the time of grant, employees, officers, or directors of, or consultants or advisors to, the Company.The 2004 Plan provided for the granting of non-statutory options, incentive options, stock bonuses, and rights to acquire restricted stock. The option price at the date of grant was determined by the Board of Directors and, in the case of incentive options, could not be less thanthe fair market value of the common stock at the date of grant, as determined by the Board of Directors. Options granted under the 2004 Plangenerally vest over a period of four years and are set to expire ten years from the date of grant. In February 2011, the Company terminated the2004 Plan and all options outstanding under it were transferred to the 2011 Stock Option/Stock Issuance Plan (the “2011 Plan”).In February 2011, the Company authorized the adoption of the 2011 Plan. The 2011 Plan is divided into two separate equity programs,Option Grant Program and Stock Issuance Program. Per the 2011 Plan, options can be granted to persons who are, at the time, employees,officers, or directors of, or consultants or advisors to, the Company. The 2011 Plan provides for the granting of non-statutory options, incentiveoptions and common stock. The price at the date of grant is determined by the Board of Directors and, in the case of incentive options andcommon stock, cannot be less than the fair market value of the common stock at the date of grant, as determined by the Board of Directors.Options granted under the 2011 Plan generally vest over a period of four years and expire ten years from the date of grant. In June 2015, the Company terminated the 2011 Plan and all options outstanding under it were transferred to the 2015 Stock IncentivePlan (the “2015 Plan”). The 2015 Plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stockawards, restricted stock units and other stock-based awards. The number of shares of our common stock that will be reserved for issuance underthe 2015 Plan is the sum of: (1) 2,000,000; plus (2) the number of shares equal to the sum of the number of shares of our common stock thenavailable for issuance under the 2011 Plan and the number of shares of our common stock subject to outstanding awards under the 2011 Plan orunder the 2004 Plan that expire, terminate or are otherwise surrendered, canceled, forfeited or repurchased by us at their original issuance pricepursuant to a contractual repurchase right; plus (3) an annual increase, to be added on the first day of each fiscal year, beginning with the fiscalyear ending December 31, 2016 and continuing until, and including, the fiscal year ending December 31, 2025, equal to the least of (a) 3,000,000shares of our common stock, (b) 3% of the number of shares of our common stock outstanding on the first day of such fiscal year and (c) anamount determined by the Board. Our employees, officers, directors, consultants and advisors will be eligible to receive awards under the 2015Plan. Incentive stock options, however, may only be granted to our employees. Options and restricted stock awards granted under the 2015 Plangenerally vest over a period of four years and expire ten years from the date of grant. As of December 31, 2018, 1,572,828 shares of commonstock were available for future issuance under the 2015 Plan. 118Activity under all stock option plans was as follows: Number ofOptions Weighted AverageExercise Priceper Share Aggregate IntrinsicValue (InThousands)Outstanding December 31, 2015 5,248,329 $5.56 $61,741Granted 179,178 8.78 Exercised (1,467,692) 2.78 $8,219Expired (81,251) 9.70 Cancelled/Forfeited (88,524) 9.93 Outstanding December 31, 2016 3,790,040 $6.60 $8,547Granted 963,350 4.95 Exercised (535,734) 3.94 1,688Expired (466,210) 7.17 Cancelled/Forfeited (123,451) 6.54 Outstanding December 31, 2017 3,627,995 $6.48 $96Granted 165,219 1.36 Exercised (80,000) 1.40 1,688Expired (589,051) 5.91 Cancelled/Forfeited (247,964) 5.10 Outstanding December 31, 2018 2,876,199 $6.57 $— Total vested and exercisable 2,320,263 $7.05 $— The total fair value of stock options that vested during the year ended December 31, 2018 was $1.1 million. The weighted averageremaining contractual term for the total stock options outstanding was 4.68 years at December 31, 2018. The weighted average remainingcontractual term for the total stock options vested and exercisable was 3.75 years at December 31, 2018.Restricted common stock award activity under the plan was as follows: Number ofShares WeightedAverage FairValueUnvested December 31, 2015 174,530 $22.31Granted 873,589 8.61Vested (66,839) 17.72Forfeited (69,570) 11.83Unvested December 31, 2016 911,710 10.32Granted 1,421,364 4.20Vested (767,785) 7.11Forfeited (226,168) 7.36Unvested December 31, 2017 1,339,121 $6.06Granted 2,485,565 1.34Vested (382,044) 6.49Forfeited (969,270) 3.00Unvested December 31, 2018 2,473,372 $2.45The total fair value of restricted common stock awards that vested during the year ended December 31, 2018 was $2.5 million.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 valueof 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 asassumptions regarding a number of complex and subjective variables. As the valuations included unobservable inputs that were primarily based onthe Company’s own assumptions, the inputs were considered level 3 inputs within the fair value hierarchy.119 The weighted average fair value of options granted was $0.73 for the year ended December 31, 2018, $2.49 for the year endedDecember 31, 2017 and $4.46 for the year ended December 31, 2016. The fair value of options at date of grant was estimated using the Black-Scholes option pricing model, based on the followingassumptions: Years Ended December 31, 2018 2017 2016Risk-free interest rate 2.75% - 2.90% 2.10% - 2.30% 1.98%Expected term (in years) 6.25 6.02 - 6.25 6.25Dividend yield —% —% —%Expected volatility 53.00% - 56.00% 51.00% - 53.00% 51.00%Risk-free interest rate. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expectedterm 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 onthe “SEC Shortcut Approach” as defined in “Share-Based Payment” (SAB 107) ASC 718-10-S99, “Compensation—Stock Compensation—Overall—SEC Materials,” which is the midpoint between the vesting date and the end of the contractual term. With certain stock option grants, theexercise 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. TheCompany does not have sufficient history of market prices of its common stock as it is a newly public company. Therefore, the Companyestimates volatility using historical volatilities of similar public entities.Forfeitures. Effective January 1, 2017, the Company elected to change its accounting policy to recognize forfeitures as they occur inaccordance with ASU 2016-09, "Compensation - Stock Compensation". Prior to this election, the Company recognized share-based compensationnet of estimated forfeitures over the vesting period of the respective grant. Stock-based compensation expense was $3.9 million, $6.0 million and $5.3 million for the years ended December 31, 2018, 2017 and 2016,respectively. Stock-based compensation expense was recognized ratably over the period with forfeitures accounted for in the period in which theyoccurred. To date, the amount of stock-based compensation capitalized as part of inventory was not material. The following is a summary ofstock-based compensation expense (in thousands): Years Ended December 31, 2018 2017 2016Cost of revenue $333 $441 $333Sales and marketing 501 919 1,197Research and development 1,029 1,920 1,466General and administrative 2,023 2,768 2,328 $3,886 $6,048 $5,324 At December 31, 2018, the Company had $1.2 million of total unrecognized compensation expense for options that will be recognized over aweighted average period of 2.51 years. At December 31, 2018, the Company had $4.5 million of total unrecognized compensation expense forrestricted awards recognized over a weighted average period of 2.65 years.Note N—Income Taxes The Company files U.S. federal and state tax returns as well as foreign income tax returns. The Company has accumulated significantlosses since its inception in 2004. For financial reporting purposes, loss before income taxes for the years ended December 31, 2018, 2017 and2016 includes the following components (in thousands):120 Years ended December 31, 2018 2017 2016Loss before income taxes: U.S.$(38,219) $(53,274) $(51,576)Non‑U.S.(5,085) (144) (5,949) $(43,304) $(53,418) $(57,525)Significant components of the provision for income taxes for the years ended December 31, 2018, 2017 and 2016 were as follows (inthousands): Years ended December 31, 2018 2017 2016Current: Federal$— $— $—State— — —Foreign98 125 63 98 125 63Deferred: Federal(37) 37 —State— — —Foreign— — — (37) 37 —Total$61 $162 $63The Company accounts for income taxes under FASB ASC 740 Accounting for Income Taxes. Deferred tax assets and liabilities aredetermined based upon differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted taxrates and laws that will be in effect when the differences are expected to reverse. A reconciliation of the income tax benefit at the statutory federalincome tax rate as reflected in the financial statements was as follows: Years ended December 31, 2018 2017 2016Tax at U.S. statutory rate(21.00)% (34.00)% (34.00)%State taxes, net of federal benefits(3.48) (3.12) (2.70)Permanent items1.03 1.96 0.42Tax credit(2.27) (1.35) (1.06)Change in valuation allowance(198.36) (54.85) 33.95Foreign rate differential(1.21) (0.17) 1.04Rate change(0.09) 90.78 (0.06)Uncertain tax positions0.22 0.41 2.06NQ Stock option expirations & forfeitures1.29 — —Federal NOL limitation196.32 — —State NOL limitation25.72 — —Deferred revenue - ASC 606 implementation adjustment2.49 — —Other(0.52) 0.64 0.46 0.14 % 0.30 % 0.11 %Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities forfinancial reporting purposes and the amounts used for income tax purposesSignificant components of the Company’s deferred tax assets (liabilities) consisted of the following (in thousands):121 Years ended December 31, 2018 2017Deferred tax assets: Federal and state net operating loss carryforwards$644 $90,437Foreign net operating loss carryforwards2,687 2,561Accrued expenses99 157Credits7,038 6,055Deferred revenue— 1,068Intangibles1,350 —Stock compensation expense1,917 1,805Other3,151 2,111Total deferred tax assets16,886 104,194Valuation allowance(16,064) (103,430)Net deferred tax assets822 764Deferred tax liabilities: Fixed assets(822) (664)Intangibles— (134)Other— (3)Net deferred tax liabilities(822) (801)Net deferred tax liabilities$— $(37)A valuation allowance is required to reduce the deferred tax assets reported if, based on weight of evidence, it is more likely than not thatsome portion or all of the deferred tax assets will not be realized. After consideration of all of the evidence, both positive and negative, theCompany determined that a $16.1 million valuation allowance at December 31, 2018 was necessary to reduce the deferred tax assets to theamount that will more likely than not be realized. The change in the valuation allowance for the current year was $87.4 million.The Company provided a valuation allowance for the full amount of its net deferred tax asset for all periods because realization of anyfuture tax benefit cannot be sufficiently assured as the Company does not expect income in the near term.At December 31, 2018, the Company had approximately $403.6 million of federal net operating loss carryforwards and approximately$219.2 million of state net operating loss carryforwards that if not utilized, will begin to expire in 2020 for federal tax purposes and continue toexpire at various dates starting for state tax purposes. The utilization of such net operating loss carryforwards and realization of tax benefits infuture years depends predominantly upon having taxable income. The limitations under Section 382 for Federal and State are $345.8 million and$11.1 million as of December 31, 2018. The limitations may reduce the amount of federal and state NOLs and credits of $403.6 million and $219.2million, respectively, that can be utilized to offset future taxable income and tax.Utilization of the NOLs and credits may be subject to a substantial annual limitation due to ownership change limitations that haveoccurred or that could occur in the future, as required by Section 382 and Section 383 of the Code. In general, an “ownership change” as definedby Section 382 of the Code results from a transaction or series of transactions over a three‑year period resulting in an ownership change of morethan 50 percentage points of the outstanding stock of a company by certain stockholders. The Company underwent an ownership change inJanuary 2018 and as a result the Company is subject to an annual limitation of approximately $1.4 million.The Company also had foreign net operating losses of approximately $30.5 million as of December 31, 2018, which may be available tooffset future income recognized in the Federal Republic of Germany and the United Kingdom. The net operating losses in Germany and the UnitedKingdom have indefinite carryforward periods.The Company has adopted the accounting guidance related to uncertainty in income taxes. The total liability for unrecognized income taxbenefits was approximately $6.8 million as of December 31, 2018, $5.1 million as of December 31, 2017 and $4.9 million of December 31, 2016.Of the total liability at December 31, 2018 and1222017, $6.4 million and $4.9 million, respectively, were netted against deferred tax assets. The Company recognizes interest accrued and penalties,if applicable, related to unrecognized tax benefits in income tax expense. The Company does not expect any significant changes in the next12 months.The reconciliation below summarizes the Company's unrecognized tax benefits for the respective periods. These amounts primarily relateto transactions between the Company and its foreign subsidiaries, including accrued interest. Years ended December 31, 2018 2017 2016Unrecognized tax benefits beginning of year$5,136 $4,918 $3,730Gross change for current year positions1,628 219 1,187Unrecognized tax benefits end of the year$6,764 $5,136 $4,918As of December 31, 2018, the Company was open to examination in the U.S. federal and certain state jurisdictions for all of theCompany’s tax years since the net operating losses may potentially be utilized in future years to reduce taxable income. The Company has beenaudited in Germany through 2015. The net operating loss carryforward from periods prior to 2015 may be utilized against taxable income in futureperiods and the net operating loss carryforward can be challenged at that time.At December 31, 2018, foreign earnings, which were not significant, have been retained indefinitely by foreign subsidiary companies forreinvestment; therefore, no provision has been made for income taxes that would be payable upon the distribution of such earnings, and it wouldnot be practicable to determine the amount of the related unrecognized deferred income tax liability. Upon repatriation of those earnings, in theform of dividends or otherwise, the Company could be subject to immaterial withholding taxes payable to the various foreign countries.ASU No. 2016-09, "Compensation - Stock Compensation", was issued and adopted in January 2017. ASU 2016-09 eliminates APIC poolsand requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. In addition,modified retrospective adoption of ASU 2016-09 eliminates the requirement that excess tax benefits be realized (i.e., through a reduction in incometaxes payable) before the Company can recognize them and therefore, it has accounted for a cumulative-effect adjustment of $7.7 million duringthe twelve months ended December 31, 2017 to record excess tax benefits. Since the Company has a full valuation allowance on all deferredtaxes, this has no impact on retained earnings or the tax position of the Company.On December 22, 2017, H.R.1., known as the Tax Cuts and Jobs Act, was signed into law. The new law did not have a significant impacton the Company’s consolidated financial statements for the year ended December 31, 2017. However, the reduction of the U.S. federal corporatetax rate from 35% to 21% resulted in increases to the amounts reflected in “(Benefit from) provision for income taxes attributable to valuationallowances” and “Rate change” in the Company’s tax reconciliation table above for the year ended December 31, 2017 compared to the year endedDecember 31, 2016. The change in the U.S. federal corporate tax rate, which was effective January 1, 2018, is also reflected in the Company’sdeferred tax table above.On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118's ("SAB 118") to address the application of GAAP insituations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detailto complete the accounting for certain income tax effects of H.R.1. The Company recognized the provisional tax impacts related to deemedrepatriated earnings and the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statementsfor the year ended December 31, 2017. The Company did not record any adjustments in the year ended December 31, 2018 to these provisionalamounts that were material to its financial statements. As of December 31, 2018, the Company’s accounting treatment is complete.Note O—Segment and Geographic Data 123The Company operates as one reportable segment as described in "Note B—Summary of Significant Accounting Policies" to theConsolidated Financial Statements. The countries in which the Company has local revenue generating operations have been combined into thefollowing geographic areas: the United States (including Puerto Rico), Germany and the rest of the 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 ofdomicile. Net property, plant and equipment are based upon physical location of the assets. Geographic information consisted of the following (in thousands): Years Ended December 31, 2018 2017 2016Product Revenue United States $68,057 $64,307 $62,366Germany 9,007 11,296 14,701Rest of World 1,563 1,497 1,854 $78,627 $77,100 $78,921 December 31, 2018 2017Property and equipment, net United States $14,367 $16,424Rest of World 72 90 $14,439 $16,514Note P —Employee Savings PlanWe have established an employee savings plan pursuant to Section 401(k) of the Internal Revenue Code. The plan allows participatingemployees to deposit into tax deferred investment accounts up to 80% of eligible earnings, subject to annual limits. We make contributions to theplan in an amount equal to 50% of elective deferrals on up to 5% of the participant’s eligible earnings. We contributed approximately $561,000,$457,000 and $478,000 to the plan during the years ended December 31, 2018, 2017 and 2016, respectively.Note Q —Selected Quarterly Financial Information (Unaudited) Three Months Ended December 31, 2018 September 30, 2018 June 30, 2018 March 31, 2018Total revenue $22,049 $28,984 $19,100 $19,656Gross profit 10,868 19,719 9,111 8,787Net loss (9,870) (7,437) (14,057) (12,001)Net loss per share - basic and diluted $(0.16) $(0.12) $(0.24) $(0.22) Three Months Ended December 31, 2017 September 30, 2017 June 30, 2017 March 31, 2017Total revenue $20,751 $18,425 $18,484 $20,455Gross profit 8,757 7,314 6,248 6,494Net loss (11,858) (12,472) (12,090) (17,160)Net loss per share - basic and diluted $(0.27) $(0.29) $(0.28) $(0.4)124ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.ITEM 9A. 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 andprincipal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2018. 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 theExchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by acompany in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periodsspecified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensurethat information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated andcommunicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timelydecisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefitrelationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2018, ourChief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at thereasonable assurance level.Management's Annual Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples. Our internal controls over financial reporting include those policies and procedures that: (1)pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions anddispositions of our assets; (2)provide reasonable assurance that transactions are recorded as necessary to permit preparation of financialstatements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only inaccordance with the authorization of our management; and (3)provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use ordisposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections ofany evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, orthat the degree of compliance with the policies or procedures may deteriorate.Management assessed the effectiveness of the Company's internal controls and procedures over financial reporting as of December 31,2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the TreadwayCommission in Internal Control-Integrated Framework. Management's assessment included an evaluation of the design of our internal control overfinancial reporting and testing of the operational effectiveness of these controls. Based on this assessment, management has concluded that as of December 31, 2018, our internal control over financial reporting waseffective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with U.S. generally accepted accounting principles.125Attestation Report of the Independent Public Accounting Firm This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control overfinancial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to applicablerules of the SEC that permit the Company to provide only management's report in this annual report. 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) occurredduring the year ended December 31, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financialreporting.ITEM 9B. OTHER INFORMATIONOn March 8, 2019, we entered into a third amendment to the amended and restated employment agreement with Mark Augusti, our ChiefExecutive Officer, (the “Augusti Amendment”). The Augusti Amendment provides that, as of March 31, 2019, the currently provided reimbursementof up to $25,000 per calendar quarter for Residency and Travel Expenses (as defined in the Augusti Amendment) will cease. In recognition that thereimbursement of Residency and Travel Expenses is and has been taxable compensation to Mr. Augusti, under the Augusti Amendment, we haveagreed to pay Mr. Augusti $100,000 as an amount intended to cover taxes paid and to be paid by him resulting from receipt of Residency andTravel Expense payments from August 2, 2017 through March 31, 2019. Beginning April 1, 2019, the Augusti Amendment provides that we willpay Mr. Augusti a fixed amount of $41,666.50 per quarter with the intention that he will receive a net amount of approximately $25,000 on an after-tax basis to use for his travel and residency expenses, until the earlier of: (i) the establishment of Mr. Augusti’s principal residence inMassachusetts or (ii) a determination by the Board of Directors in its sole discretion that the payment of such Residency and Travel Expenses isno longer required.126PART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCEDirectors and Executive OfficersThe other information required by this item will be set forth in our Proxy Statement for the 2019 Annual Meeting of Stockholders and isincorporated in this Annual Report on Form 10-K by reference.Compliance with Section 16(a) of the Exchange ActThe information required by this item will be set forth in our Proxy Statement for the 2019 Annual Meeting of Stockholders and is incorporated inthis Annual Report on Form 10-K by reference.Code of EthicsWe have adopted a written code of business conduct and ethics that applies to our directors and officers (including our principal executive officer,principal financial officer, principal accounting officer or controller, or persons performing similar functions) as well as our other employees. A copyof our code of business conduct and ethics is available on our website www.conformis.com, under the heading "Investors—CorporateGovernance". We intend to post on our website all disclosures that are required by applicable law, the rules of the Securities and ExchangeCommission or the NASDAQ Global Select Market concerning any amendment to, or waiver of, our code of business conduct and ethics.Director NomineesThe information required by this item will be set forth in our Proxy Statement for the 2019 Annual Meeting of Stockholders and is incorporated inthis Annual Report on Form 10-K by reference.Audit CommitteeWe have separately designated a standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of1934, as amended, or the Exchange Act. Additional information regarding the Audit Committee that is required by this item will be set forth in ourProxy Statement for the 2019 Annual Meeting of Stockholders and is incorporated in this Annual Report on Form 10-K by reference.Audit Committee Financial ExpertOur board of directors has determined that Bradley Langdale is the “audit committee financial expert” as defined by Item 407(d)(5) of Regulation S-K of the Exchange Act and is “independent” under the rules of the NASDAQ Global Market.ITEM 11. EXECUTIVE COMPENSATIONThe information required by this item will be set forth in our Proxy Statement for the 2019 Annual Meeting of Stockholders and isincorporated in this Annual Report on Form 10-K by reference.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSThe information required by this item will be set forth in our Proxy Statement for the 2019 Annual Meeting of Stockholders and isincorporated in this Annual Report on Form 10-K by reference.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this item will be set forth in our Proxy Statement for the 2019 Annual Meeting of Stockholders and isincorporated in this Annual Report on Form 10-K by reference.127ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information required by this item will be set forth in our Proxy Statement for the 2019 Annual Meeting of Stockholders and isincorporated in this Annual Report on Form 10-K by reference.128PART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULESThe following documents are filed as part of this Annual Report on Form 10-K:1.Consolidated Financial Statement For a list of consolidated financial statements included herein, see Index to the Consolidated Financial Statements on page 84 of this AnnualReport on Form 10-K, incorporated into this item by reference.2. Financial Statement Schedules:No financial statement schedules have been submitted because they are not required or are not applicable because the information the required isincluded in the consolidated financial statements or the notes thereto.3. ExhibitsThe exhibits filed as part of this Annual Report on Form 10-K are listed in the Exhibit Index immediately preceding the signature page, whichExhibit Index is incorporated herein by reference.ITEM 16. FORM 10-K SUMMARYWe may voluntarily include a summary of information required by Form 10-K under this Item 16. We have elected not to include such summaryinformation.129EXHIBIT INDEX ExhibitNumber Description of Exhibit 1.1 Underwriting Agreement, dated as of January 25, 2018, by and among the Registrant and Cowen and Company LLC andCanaccord Genuity, Inc. as representatives of the several underwriters listed on Schedule 1 thereto (incorporated byreference to Exhibit 1.1 to the Registrant’s Current Report on Form 8-K (File No. 001-37474) filed on January 25, 2018)3.1 Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s currentreport on Form 8-K (File No. 001-3747) filed on July 8, 2015)3.2 Articles of Amendment to Restated Certificate of Incorporation of Registrant dated May 1, 2018 (incorporated by referenceto Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37474) filed on May 4, 2018)3.3 Amended and Restated By-laws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s currentreport on Form 8-K (File No. 001-3747) filed on July 8, 2015)4.1 Specimen certificate evidencing shares of common stock (incorporated by reference to Exhibit 4.1 to the Registrant’sregistration statement on Form S-1/A (File No. 333-204384) filed on June 18, 2015)10.1 Amended and Restated Information and Registration Rights Agreement, dated as of June 29, 2015, among the Registrantand the other parties thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s registration statement on FormS-1/A (File No. 333-204384) filed on June 29, 2015)10.2+ 2004 Stock Option Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s registration statement on Form S-1(File No. 333-204384) filed on May 22, 2015)10.3+ Form of Incentive Stock Option Agreement under 2004 Stock Option Plan (incorporated by reference to Exhibit 10.3 to theRegistrant’s registration statement on Form S-1 (File No. 333-204384) filed on May 22, 2015)10.4+ Form of Nonqualified Stock Option Agreement under 2004 Stock Option Plan (incorporated by reference to Exhibit 10.4 tothe Registrant’s registration statement on Form S-1 (File No. 333-204384) filed on May 22, 2015)10.5+ Form of Stock Purchase Agreement for Incentive Stock Option Agreement under 2004 Stock Option Plan (incorporated byreference to Exhibit 10.5 to the Registrant’s registration statement on Form S-1 (File No. 333-204384) filed on May 22,2015)10.6+ Form of Stock Purchase Agreement for Nonqualified Stock Option Agreement under 2004 Stock Option Plan (incorporatedby reference to Exhibit 10.6 to the Registrant’s registration statement on Form S-1 (File No. 333-204384) filed on May 22,2015)10.7+ 2011 Stock Option/Stock Issuance Plan (incorporated by reference to Exhibit 10.7 to the Registrant’s registrationstatement on Form S-1 (File No. 333-204384) filed on May 22, 2015)10.8+ Form of Notice of Grant of Incentive Stock Option under 2011 Stock Option/Stock Issuance Plan (incorporated byreference to Exhibit 10.8 to the Registrant’s registration statement on Form S-1 (File No. 333-204384) filed on May 22,2015)10.9+ Form of Notice of Grant of Nonstatutory Stock Option under 2011 Stock Option/Stock Issuance Plan (incorporated byreference to Exhibit 10.9 to the Registrant’s registration statement on Form S-1 (File No. 333-204384) filed on May 22,2015)10.10+ Form of Stock Purchase Agreement under 2011 Stock Option/Stock Issuance Plan (incorporated by reference to Exhibit10.10 to the Registrant’s registration statement on Form S-1 (File No. 333-204384) filed on May 22, 2015)10.11+ 2015 Stock Incentive Plan (incorporated by reference to Exhibit 10.11 to the Registrant’s registration statement on FormS-1 (File No. 333-204384) filed on May 22, 2015)10.12+ Form of Incentive Stock Option Agreement under 2015 Stock Incentive Plan (incorporated by reference to Exhibit 10.12 tothe Registrant’s registration statement on Form S-1 (File No. 333-204384) filed on May 22, 2015)10.13+ Form of Nonstatutory Stock Option Agreement under 2015 Stock Incentive Plan (incorporated by reference to Exhibit10.13 to the Registrant’s registration statement on Form S-1 (File No. 333-204384) filed on May 22, 2015)13010.14+ Form of Restricted Stock Agreement under 2015 Stock Incentive Plan (incorporated by reference to Exhibit 10.34 to theRegistrant’s registration statement on Form S-1/A (File No. 333-204384) filed on June 18, 2015)10.15+ Amended and Restated Employment Agreement, dated as of May 21, 2015, between the Registrant and Paul Weiner,together with the Employee Confidential Information, Inventions and Non-Competition Agreement, dated as of May 21,2015, between the Registrant and Paul Weiner (incorporated by reference to Exhibit 10.15 to the Registrant’s registrationstatement on Form S-1 (File No. 333-204384) filed on May 22, 2015)10.16+ Amended and Restated Revenue Sharing Agreement, dated as of September 2, 2011, between the Registrant and PhilippLang (incorporated by reference to Exhibit 10.18 to the Registrant’s registration statement on Form S-1 (File No. 333-204384) filed on May 22, 2015)10.17+ Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.20 to the Registrant’sregistration statement on Form S-1 (File No. 333-204384) filed on May 22, 2015)10.18 Lease Agreement, dated as of August 20, 2014, between the Registrant and Wakefield Investments, Inc. (incorporated byreference to Exhibit 10.23 to the Registrant’s registration statement on Form S-1 (File No. 333-204384) filed on May 22,2015)10.19 Sublease, dated as of May 30, 2012, between the Registrant and Reveal Imaging Technologies, Inc. (incorporated byreference to Exhibit 10.24 to the Registrant’s registration statement on Form S-1 (File No. 333-204384) filed on May 22,2015)10.20 First Amendment to Lease dated July 25, 2016 between Wakefield Investments, Inc. and Registrant for 600 ResearchDrive, Wilmington, Massachusetts (incorporated herein by reference to Exhibit 10.26 of the Registrant’s Annual Report onForm 10-K for the period ended December 31, 2016, filed with the Securities and Exchange Commission on March 8,2017, File No, 001-37474)10.21 Lease dated September 19, 2016 between Technology Park I Limited Partnership and Registrant for 600 Technology ParkDrive, Billerica, Massachusetts (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2016, filed with the Securities and Exchange Commission on November 10, 2016,File No. 001-37474)10.22 License Agreement, effective as of April 10, 2007, between the Registrant and Vertegen, Inc., as amended by FirstAmendment to License Agreement, dated as of May 20, 2015, between the Registrant and Vertegen, Inc. (incorporated byreference to Exhibit 10.26 to the Registrant’s registration statement on Form S-1/A (File No. 333-204384) filed on June 11,2015)10.23 Sponsor Designee Recommendation Agreement, dated as of May 21, 2015, between the Registrant and Procific(incorporated by reference to Exhibit 10.29 to the Registrant’s registration statement on Form S-1 (File No. 333-204384)filed on May 22, 2015)10.24† License Agreement, dated as of April 13, 2015, between the Registrant and MicroPort Orthopedics Inc. (incorporated byreference to Exhibit 10.32 to the Registrant’s registration statement on Form S-1/A (File No. 333-204384) filed on June 11,2015)10.25 License Agreement, dated as of April 13, 2015, between the Registrant and each of Wright Medical Group, Inc. and WrightMedical Technology, Inc. (incorporated by reference to Exhibit 10.33 to the Registrant’s registration statement on Form S-1/A (File No. 333-204384) filed on June 11, 2015)10.26 Form of Retention Agreements of Certain Officers (incorporated by reference to Exhibit 10.1 to the Registrant’s QuarterlyReport on Form 10-Q for the period ended June 30, 2016, filed with the Securities and Exchange Commission on August11, 2016, File No. 001-37474)10.27 Summary of Compensatory Arrangements of Certain Officers (incorporated by reference to the Registrant’s Form 8-K filedon February 9, 2016, File No. 001-37474)10.28+ Employment Agreement, dated October 19, 2016, by and between the Registrant and Mark A. Augusti, as amended andrestated effective December 2, 2016 (incorporated herein by reference to Exhibit 10.34 of the Registrant’s Annual Reporton Form 10-K for the period ended December 31, 2016, filed with the Securities and Exchange Commission on March 8,2017, File No, 001-37474)13110.29 Distribution Agreement, dated May 10, 2017, by and between ConforMIS, Inc. and Canaccord Genuity Inc. (incorporatedherein by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2017,filed with the Securities and Exchange Commission on May 10, 2017, File No, 001-37474)10.30 Loan and Security Agreement, dated January 6, 2017, by and between Conformis, Inc. and Oxford Finance, LLC(incorporated herein by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (File No. 001-37474) filedon January 9, 2017)10.31 First Amendment to Loan and Security Agreement, dated March 9, 2017, by and among Registrant and Oxford FinanceLLC (incorporated herein by reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37474) filed on May 10, 2017)10.32 Agreement Regarding Sublease dated April 13, 2017 between CCC Investors, LLC and Registrant for 28 Crosby Drive,Bedford, Massachusetts incorporated herein by reference to Exhibit 10.4 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37474) filed on May 10, 2017)10.33 Second Amendment to Loan and Security Agreement, dated June 30, 2017, by and among Registrant and Oxford FinanceLLC (incorporated herein by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (File No. 001-37474)filed on July 3, 2017)10.34† Asset Purchase Agreement dated August 9, 2017, by and between Conformis, Inc. and Broad Peak Manufacturing, LLC(incorporated herein by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37474)filed on November 9, 2017)10.35+ Amendment to Employment Agreement dated September 14, 2017, by and between Conformis, Inc. and Mark Augusti, itsPresident and Chief Executive Officer (incorporated herein by reference to Exhibit 10.2 of the Registrant’s Quarterly Reporton Form 10-Q (File No. 001-37474) filed on November 9, 2017)10.36 Third Amendment to Loan and Security Agreement, dated December 18, 2017, by and among Registrant and OxfordFinance LLC (incorporated herein by reference to Exhibit 10.40 of the Registrant’s Annual Report on Form 10-K (File No.001-37474) filed on March 9, 2018)10.37+ Second Amendment to the Amended and Restated Employment Agreement dated March 9, 2018, by and betweenConformis, Inc. and Paul S. Weiner (incorporated herein by reference to Exhibit 10.41 of the Registrant’s Annual Report onForm 10-K (File No. 001-37474) filed on March 9, 2018)10.38+ Employment Agreement dated March 14, 2018, by and between Conformis, Inc. and Patricia A. Davis, its Chief LegalOfficer, General Counsel and Corporate Secretary (incorporated herein by reference to Exhibit 10.1 of the Registrant’sQuarterly Report on Form 10-Q (File No. 001-37474) filed on May 4, 2018)10.39+ First Amendment to Employment Agreement dated May 3, 2018, by and between Conformis, Inc. and Patricia A. Davis,its Chief Legal Officer, General Counsel and Corporate Secretary (incorporated herein by reference to Exhibit 10.2 of theRegistrant’s Quarterly Report on Form 10-Q (File No. 001-37474) filed on May 4, 2018)10.40+ Third Amendment to Employment Agreement dated May 3, 2018, by and between Conformis, Inc. and Paul S. Weiner, itsChief Financial Officer (incorporated herein by reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q(File No. 001-37474) filed on May 4, 2018)10.41+ Second Amendment to Amended and Restated Employment Agreement dated July 31, 2018, by and between Conformis,Inc. and Mark Augusti, its Chief Executive Officer (incorporated herein by reference to Exhibit 10.1 of the Registrant’sQuarterly Report on Form 10-Q (File No. 001-37474) filed on August 2, 2018)10.42 Fourth Amendment to Loan and Security Agreement, dated July 31, 2018, by and among Registrant and Oxford FinanceLLC (incorporated herein by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37474) filed on August 2, 2018)10.43† Settlement and License Agreement dated September 14, 2018 between Conformis, Inc. and Smith & Nephew, Inc.(incorporated herein by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37474)filed on November 5, 2018)10.44 Fifth Amendment to Loan and Security Agreement, dated December 13, 2018, by and among Registrant and OxfordFinance LLC (incorporated herein by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (File No.001-37474) filed on December 14, 2018)13210.45 Registration Rights Agreement dated December 17, 2018 by and between Conformis, Inc. and Lincoln Park Capital Fund,LLC (incorporated herein by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (File No. 001-37474)filed on December 18, 2018)10.46+* Amendment to Employment Agreement dated March 8, 2019, by and between Conformis, Inc. and March Augusti, itsPresident and Chief Executive Officer21.1 Subsidiaries of the Registrant (incorporated by reference to Exhibit 10.21. to the Registrant’s registration statement onForm S-1 (File No. 333-204384) filed on May 22, 2015)23.1* Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm31.1* Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2* Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1# Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 200232.2# Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002101.INS XBRL Instance Document101.SCH XBRL Taxonomy Extension Schema Document101.CALXBRL Taxonomy Extension Calculation Linkbase Document101.LABXBRL Taxonomy Extension Label Linkbase Database101.PREXBRL Taxonomy Extension Presentation Linkbase Document101.DEFXBRL Taxonomy Extension Definition Linkbase Document *Filed herewith.†Confidential treatment has been granted as to certain portions, which portions have been omitted and filed separately with theSecurities and Exchange Commission.+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 byreference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent specificallyincorporated by reference into such filing.133SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to besigned on its behalf by the undersigned thereunto duly authorized. Date: March 12, 2019 CONFORMIS, INC. By: /s/Mark A. Augusti Mark A. AugustiPresident and Chief Executive OfficerPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf ofthe registrant and in the capacities and on the dates indicated. Signature Title Date/s/Mark A. Augusti Mark A. Augusti President and Chief Executive Officer(Principal Executive Officer) and Director March 12, 2019/s/Paul Weiner Paul Weiner Chief Financial Officer (Principal FinancialOfficer and Principal Accounting Officer) March 12, 2019/s/Kenneth Fallon III Kenneth Fallon III Chairman of the Board of Directors March 12, 2019/s/Philip W. Johnston Philip W. Johnston Director March 12, 2019/s/Carrie Bienkowski Carrie Bienkowski Director March 12, 2019/s/Bradley Langdale Bradley Langdale Director March 12, 2019/s/Richard Meelia Richard Meelia Director March 12, 2019/s/Michael Milligan Michael Milligan Director March 12, 2019134CONFORMIS, INC.THIRD AMENDMENT TO THEAMENDED AND RESTATED EMPLOYMENT AGREEMENTTHIS THIRD AMENDMENT TO THE AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the “ThirdAmendment”) is entered into and effective as of March 8, 2019 (the “Effective Date of the Third Amendment”) by and betweenConformis, Inc. (previously known as ConforMIS, Inc.), a Delaware corporation (the “Company”), and Mark A. Augusti (the“Executive”) and amends that certain letter agreement of employment dated October 19, 2016, as amended and restated effectiveDecember 2, 2016 and as amended by a first amendment effective August 1, 2017 and a second amendment effective as of July 31,2018 (collectively the “Agreement”).WHEREAS, the Company and Executive desire to amend the Agreement as set forth herein,NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, theparties agree as follows:1.All capitalized terms used and not otherwise defined in this Third Amendment shall have the same meanings ascribed tothem in the Agreement.2.Section 9 of the Agreement is hereby deleted in its entirety and replaced with the following:9. Establishment of Principal Residence in Massachusetts: In connection with your employment with the Company, youwill be required to establish your principal residence in Massachusetts. In order to assist with this process, the Companyreimbursed you up to $125,000 for reasonable expenses incurred by you in such establishment, including moving expenses(“Moving Expenses”) and expenses incurred in maintaining a temporary residence in Massachusetts and commuting betweenyour current home and your temporary residence in Massachusetts prior to its becoming your principal residence (the“Commuting Expenses”) (collectively, the “Residency Expenses”), such expenses incurred no later than August 1, 2017.Beginning August 2, 2017, the Company began reimbursing you up to $25,000 per calendar quarter for Residency Expenses,as well as commuting and other travel costs of your immediate family in traveling to and from your place of residence in NorthCarolina to your temporary residence in Massachusetts (collectively “Residency and Travel Expenses”), incurred by you, suchreimbursement to continue until the earlier of: (i) the establishment of your principal residence in Massachusetts, or (ii) adetermination by the Board of Directors in its sole discretion that the payment of such Residency Expenses and TravelExpenses are no longer required. It was the intent of the Board that you would be fully reimbursed for up to $25,000 percalendar quarter in Residency and Travel Expenses. In recognition that the reimbursement of Residency and Travel Expensesis and has been taxable compensation to you, the Company will pay to you $100,000 as an amount intended to cover taxespaid and to be paid by you resulting from receipt of Residency and Travel Expense payments from August 2, 2017 throughMarch 31, 2019. The Residency and Travel Expenses incurred prior to March 31, 2019 will be reimbursed in accordance withCompany policy, but no later than 60 days following the incurring of the expense, provided that you deliver to the Companyreasonable substantiation and documentation of such Residency and Travel Expenses. Beginning on April 1, 2019, theCompany will cease reimbursing your Travel and Residency Expenses and will instead pay you a fixed amount of $41,666.50per quarter with the intention that you will receive a net amount of approximately $25,000 on an after-tax basis to use for yourtravel and residency expenses, with such amount payable until the earlier of: (i) the establishment of your principal residence inMassachusetts or (ii) a determination by the Board of Directors in its sole discretion that the payment of such amount is nolonger required. To the extent permitted by applicable law, the Company will exclude deductible moving expenses from yourW-2. For the avoidance of doubt, your establishment of your principal residence in Massachusetts is a material term of thisletter agreement.3.All terms and conditions of the Agreement not expressly amended by this Third Amendment remain in full force andeffect.4.This Third Amendment may be executed in one or more counterparts, and by facsimile or scanned and electronicallymailed or otherwise electronically transferred signatures, each of which shall be an original document, and all of which together willconstitute one and the same instrument.IN WITNESS WHEREOF, the Company and Executive hereby indicate their acceptance of the terms of this ThirdAmendment by the signatures of their authorized representatives below.Company: /s/Kenneth P. Fallon, III Kenneth P. Fallon, III, ChairmanExecutive: /s/Mark A. Augusti Mark A. AugustiEXHIBIT 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe have issued our report dated March 12, 2019, with respect to the consolidated financial statements included in the Annual Report ofConformis, Inc. on Form 10-K for the year ended December 31, 2018. We consent to the incorporation by reference of said report inthe Registration Statements of Conformis, Inc. on Forms S-8 (File No. 333-2054777, File No. 333-217872 and File No. 333-223802),and on Form S-3 (File No. 333-25464)./s/ GRANT THORNTON LLPBoston, MassachusettsMarch 12, 2019Exhibit 31.1 CERTIFICATIONS I, Mark A. Augusti, certify that: 1. I have reviewed this Annual Report on Form 10-K 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 thestatements 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 financialcondition, 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 ExchangeAct 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 theregistrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly duringthe 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, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordancewith 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 thedisclosure 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 fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’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 theregistrant’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 toadversely 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 overfinancial reporting. Date:March 12, 2019By:/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 Annual Report on Form 10-K 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 thestatements 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 financialcondition, 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 ExchangeAct Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly duringthe 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, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordancewith 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 thedisclosure 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 fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’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 theregistrant’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 toadversely 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 overfinancial reporting. Date:March 12, 2019By:/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 Annual Report on Form 10-K of ConforMIS, Inc. (the “Company”) for the period ended December 31, 2018 as filed with the Securitiesand 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:March 12, 2019By:/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 Annual Report on Form 10-K of ConforMIS, Inc. (the “Company”) for the period ended December 31, 2018 as filed with the Securitiesand 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:March 12, 2019By:/s/Paul Weiner Paul Weiner Chief Financial Officer (Principal Financial and Accounting Officer)

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