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CONFORMIS INC MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

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

Overview


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

A key driver in the outpatient shift of orthopedic procedures is the ongoing
changes by the Centers for Medicare & Medicaid Services ("CMS"). In recent
years, CMS removed key musculoskeletal services from the inpatient-only list,
including total knee arthroplasty in 2018 and total hip arthroplasty in 2020.
CMS also continues to expand the ASCs covered procedure list, including total
knee arthroplasty in 2020 and total hip arthroplasty in 2021. Additionally, the
COVID-19 pandemic has fueled efforts to reduce risk and lengths of stay that
further accelerated the shift of procedures to outpatient facilities. In
addition, as healthcare costs rise, governments, including CMS, are looking to
reduce their healthcare expenditures markedly through reimbursement reductions
and cost-shifting to patients.

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

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

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

The Identity Imprint™ knee system provides a data-informed high-quality knee implant system that provides a level of personalization through its patient-specific instruments (“PSI”) and proprietary algorithms for pre-

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surgical planning, but is only available in pre-designed standard sizes, all at a price comparable to standard off-the-shelf options; and


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

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

On November 11, 2019, we entered full commercial launch of the Conformis hip
system. In September 2020, we announced the Cordera hip system, and in December
2020, we commenced the U.S. commercial launch of the Cordera Match hip system,
one of multiple planned product extensions featuring the Cordera hip system. We
are planning for a limited commercial launch of a second hip stem within our hip
portfolio by mid-2022. This will be a shorter stem conducive to the popular
direct anterior approach and be offered in the most common standard sizes.

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

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

We were incorporated in Delaware and commenced operations in 2004.

COVID-19 Pandemic


In December 2019, a human infection originating in China was traced to a novel
strain of coronavirus. The virus subsequently spread to other parts of the
world, including the United States and Europe, and caused unprecedented
disruptions in the global economy as efforts to contain the spread of the virus
intensified. In March 2020, the World Health Organization declared this
coronavirus outbreak ("COVID-19") to be a pandemic. The future progression of
the pandemic, including the scope, severity and duration of the pandemic,
potential resurgences, the speed and effectiveness of vaccine and treatment
developments, and the direct and indirect economic effects of the pandemic and
containment measures, and its effects on our business and operations remain
uncertain. We have experienced significantly decreased demand for our products
during the pandemic as healthcare providers and individuals have de-prioritized
and deferred medical procedures deemed to be elective, such as joint replacement
procedures, which has had and is expected to continue to have a significant
negative effect on our revenue.

Such negative effects were most pronounced during the second quarter of 2020,
when a significant number of hospitals were either closed for elective
procedures or otherwise operating at significantly reduced volumes. Generally,
we saw an increase in procedure volumes during the summer of 2020, as many
regions were able to reopen for elective procedures, with an existing patient
backlog.

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However, in the United States and Germany, which are our major sales markets,
estimated case counts increased in the fourth quarter of 2020 and peaked in
January 2021. While worldwide case counts have declined after January, we saw a
decline in elective procedures during the first quarter of 2021. In Germany,
case counts declined after January 2021 but then increased again in the second
quarter. Germany case counts began to decline mid-way through the second quarter
but the Company saw a decline in Germany elective procedures during the second
quarter of 2021. In the United States, elective procedures improved sequentially
in the second quarter of 2021 over first quarter of 2021 consistent with the
market. However, in the third and fourth quarters of 2021, we experienced higher
levels of deferred and rescheduled knee and hip procedures as a result of the
surge in COVID-19 cases associated with the Delta and Omicron variants. We
expect that these negative effects will continue in the near-term until
infection rates decline further from their current level, and more of the
population is vaccinated. However, the future progression of the pandemic
remains uncertain. To the extent that individuals in these markets continue to
de-prioritize or delay deferrable procedures as a result of the COVID-19
pandemic or otherwise, our business, cash flows, financial condition and results
of operations could continue to be negatively affected.

On March 20, 2020, we provided notice to our employees of a furlough of
approximately 80 employees effective as of March 23, 2020 to help address
decreased demand for our products. The furlough resulted in reduced production
capacity at our manufacturing facilities, but sufficient to meet demand. While
we have not experienced and do not currently anticipate significant
interruptions in our supply chain, extended or additional quarantines, travel
restrictions and other measures may significantly impact the ability of
employees of our third-party suppliers to get to their places of work to
manufacture the key components and materials necessary for our products. We have
experienced and may experience further shortages of mask and gown consumables
used in our clean room processes, which may further limit our production
capacity and further delay the joint replacement procedures in which our
products are used. Any delay or shortage of such components or materials or
delays in delivering our products may result in our inability to satisfy
consumer demand for our products in a timely manner or at all, which could harm
our reputation, future sales, profitability and financial condition. On April
17, 2020, we entered into an approximately $4.7 million promissory note (the
"PPP Note"), with East West Bank under the Paycheck Protection Program ("PPP")
offered by the U.S. Small Business Administration (the "SBA"), to mitigate the
negative financial and operational impacts of the pandemic. On April 23, 2020,
we accelerated a plan to return to full-time employment the vast majority of
those employees who were furloughed on March 23, 2020. This plan was completed
at the end of April 2020.

Components of our results of operations

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

Revenue


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

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

Royalty and licensing revenue for the year ended December 31, 2021, includes
revenue of $15.0 million generated from our settlement with Stryker Corporation
("Stryker"), Wright Medical Technology, Inc. ("Wright Medical"), and Tornier,
Inc. ("Tornier" and, collectively with Stryker and Wright Medical, the "Stryker
Parties"), $25.0
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million recognized under the Development and License Agreements with Stryker,
and $1.0 million generated from our license agreement (the "License Agreement")
with Paragon 28. Royalty and licensing revenue for the year ended December 31,
2020 includes revenue of $9.6 million generated from our settlement and license
agreement (the "Zimmer Settlement and License Agreement") with Zimmer Biomet,
Zimmer US, Inc. and Biomet Manufacturing, LLC (collectively,"Zimmer Biomet").
Ongoing royalty revenue is generated from our license agreement (the "MicroPort
License Agreement") with MicroPort Orthopedics Inc., a wholly owned subsidiary
of MicroPort Scientific Corporation, or collectively, MicroPort. The MicroPort
License Agreement will expire upon the expiration of the last to expire of our
patents and patent applications licensed to MicroPort, which currently is
expected to occur in 2031.

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

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

Cost of revenue


  We produce our computer aided designs, or CAD, in-house and in India and use
them to direct most of our product manufacturing efforts. We manufacture all of
our PSI, or iJigs, tibial trays used in our total knee implants, and
polyethylene tibia tray inserts for our iTotal CR and our iTotal PS product, in
our facility in Wilmington, Massachusetts. We polish our femoral implants used
in our total and partial knee products in our facility in Wallingford,
Connecticut. Starting in 2019, we began to manufacture the lateral partial
tibial tray components in our facility in Wilmington, Massachusetts. We
outsource the production of the remainder of the partial knee tibial components,
femoral castings, and other knee and hip components to third-party suppliers.
Our suppliers make our personalized implant components using the CAD designs we
supply. Cost of revenue consists primarily of costs of raw materials,
manufacturing personnel, outsourced CAD labor, manufacturing supplies, inbound
freight, manufacturing overhead, and depreciation expense. Also included in cost
of revenue for the year ended December 31, 2020, are legal fees payable to
external counsel in connection with our patent licensing and enforcement
activities related to the Settlement and License Agreement with Zimmer Biomet.

  We calculate gross margin as revenue less cost of revenue divided by revenue.
Our gross margin has been and will continue to be affected by a variety of
factors, including primarily volume of units produced, manufacturing
efficiencies, our average selling price, the geographic mix of sales, product
sales mix, the number of cancelled sales orders resulting in wasted implants,
and royalty revenue.

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

•absorbing overhead costs across a larger volume of product sales;
•obtaining more favorable pricing for the materials used in the manufacture of
our products;
•obtaining more favorable pricing of certain components of our products
manufactured for us by third parties;
•increasing the proportion of our CAD design activities that is performed
in-house at our India facility; and
•developing new versions of our software used in the design of our joint
replacement implants, which we believe will reduce costs associated with the
design process.

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

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Operating expenses

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


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

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

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

Total other income (expenses), net


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

Income tax provision

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


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Consolidated results of operations

Comparison of the years ended December 31, 2021 and 2020


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

                                                               2021                                     2020                                  2021 vs 2020
                                                                        As a%                                    As a%
                                                                         of                                        of
                                                                        Total                                    Total                   $                    %
Years Ended December 31,                           Amount              Revenue              Amount              Revenue               Change                Change
Revenue
Product revenue                                  $ 58,318                    58  %       $  58,540                    85  %       $       (222)                   -  %
Royalty and licensing                              41,542                    42             10,221                    15                31,321                  306
Total revenue                                      99,860                   100             68,761                   100                31,099                   45
Cost of revenue                                    34,179                    34             35,046                    51                  (867)                  (2)
Gross profit                                       65,681                    66             33,715                    49                31,966                   95

Operating expenses:
Sales and marketing                                24,904                    25             22,646                    33                 2,258                   10
Research and development                           14,791                    15             11,939                    17                 2,852                   24
General and administrative                         28,994                    29             24,244                    35                 4,750                   20

Total operating expenses                           68,689                    69             58,829                    86                 9,860                   17
Loss from operations                               (3,008)                   (3)           (25,114)                  (37)               22,106                   88
Total other income/(expenses), net                    686                     1                863                     1                  (177)                 (21)
Loss before income taxes                           (2,322)                   (2)           (24,251)                  (35)               21,929                   90
Income tax provision                                   91                     -                 42                     -                    49                  117
Net loss                                         $ (2,413)                   (2) %       $ (24,293)                  (35) %       $     21,880                   90  %


Product revenue. Product revenue was $58.3 million for the year ended
December 31, 2021 compared to $58.5 million for the year ended December 31, 2020a decrease of $0.2 million. Product revenue remained consistent with prior year as COVID-19 cases continue to impact our business.


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


                                        2021                         2020                     2021 vs 2020
                                             As a % of                    As a % of
                                              Product                      Product            $             %
Years Ended December 31,        Amount        Revenue        Amount        Revenue         Change         Change
United States                 $ 50,990            87  %    $ 50,736            87  %    $       254          1  %
Germany                          5,422             9          6,526            11            (1,104)       (17)
Rest of world                    1,906             4          1,278             2               628         49
Product revenue               $ 58,318           100  %    $ 58,540           100  %    $      (222)         -  %



  Product revenue in the United States was generated through our direct sales
force and independent sales representatives. Product revenue outside the United
States was generated through our direct sales force and distributors. The
percentage of product revenue generated in the United States was 87% for each of
the years ended December 31, 2021 and 2020.

United States product revenue increased $0.3 million to $51.0 million or 1% year
over year. The increase in revenue inside the United States was primarily due to
growth in our hip products. Germany product revenue decreased $1.1 million to
$5.4 million, or 17% year over year on a reported basis and 21% on a constant
currency basis. The decline was primarily due to COVID-19 negatively impacting
elective procedure volumes and
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reimbursement denials from MDK in Germany. Rest of World product revenue increased $0.6 million to $1.9 millionor 49% year-over-year on a reported basis and 39% on a constant currency basis, primarily due to an increase in elective surgeries in the UK which were lower in the prior period as a result of the COVID-19 pandemic.


  Royalty and licensing revenue. Royalty and licensing revenue was $41.5 million
for the year ended December 31, 2021 compared to $10.2 million for the year
ended December 31, 2020, an increase of $31.3 million or 306%. The increase in
royalty and licensing revenue was driven by $25.0 million in revenue recognized
in connection with receiving 510(k) clearance from the FDA, which was for the
third of three milestones under the License Agreement with Stryker, $15.0
million in revenue recognized under the Settlement and License Agreement with
the Stryker Parties, and $1.0 million in revenue recognized under the License
Agreement with Paragon 28. Royalty and licensing revenue for the year ended
December 31, 2020 includes $9.6 million in revenue recognized under the Zimmer
Settlement and Licensing Agreement with Zimmer Biomet.

  Cost of revenue, gross profit and gross margin.  Cost of revenue was $34.2
million for the year ended December 31, 2021 compared to $35.0 million for the
year ended December 31, 2020, a decrease of $0.9 million or 2%. The decrease was
due primarily to lower legal fees as 2020 included outside counsel expense in
connection with our patent licensing and enforcement activities related to the
Settlement and License Agreement with Zimmer Biomet. Gross profit was $65.7
million for the year ended December 31, 2021 compared to $33.7 million for the
year ended December 31, 2020, an increase of $32.0 million or 95%. Gross margin
was 66% for the year ended December 31, 2021 compared to 49% for the year ended
December 31, 2020, an increase of 1,680 basis points. The increase in gross
margin was driven primarily by the Stryker licensing revenue under the
Development and License Agreements and the Stryker Parties licensing revenue
under the Settlement and License Agreement.

  Sales and marketing.  Sales and marketing expense was $24.9 million for the
year ended December 31, 2021 compared to $22.6 million for the year ended
December 31, 2020, an increase of $2.3 million or 10%. The increase was due
primarily to higher personnel costs of $0.4 million, commission expense of $0.7
million, tradeshow and surgeon training of $0.5 million, market research of $0.2
million, marketing collateral of $0.1 million, legal fees of $0.1 million,
depreciation expense of $0.1 million, and travel and entertainment of $0.1
million. Sales and marketing expense decreased as a percentage of total revenue
to 25% for the year ended December 31, 2021 compared to 33% for the year ended
December 31, 2020.

  Research and development.  Research and development expense was $14.8 million
for the year ended December 31, 2021 compared to $11.9 million for the year
ended December 31, 2020, an increase of $2.9 million or 24%. The increase was
due primarily to an increase in professional services of $0.6 million, revenue
share expense of $0.4 million, project prototype costs of $0.5 million,
personnel related costs of $0.5 million, and a reduction of $0.9 million of cost
allocated to the advance on research and development. Research and development
expense decreased as a percentage of total revenue to 15% for the year ended
December 31, 2021 from 17% for the year ended December 31, 2020.

  General and administrative.  General and administrative expense was $29.0
million for the year ended December 31, 2021 compared to $24.2 million for the
year ended December 31, 2020, an increase of $4.8 million or 20%. The increase
was primarily due to an increase in legal fees of $2.8 million, an increase in
freight costs of $1.5 million, an increase in insurance of $0.2 million, an
increase in office and facilities expenses of $0.1 million, and an increase in
other various expenses of $0.2 million. General and administrative expense
decreased as a percentage of total revenue to 29% for the years ended
December 31, 2021 from 35% for the year ended December 31, 2020.

   Total other income (expenses), net.  Total other income (expenses), net was
$0.7 million of other income for the year ended December 31, 2021 compared to
other income of $0.9 million for the year ended December 31, 2020, a change of
$0.2 million, or 21%. The change was primarily due to higher interest expense,
net of $0.1 million, a decrease of $6.3 million in foreign currency exchange
transaction loss and a loss on the extinguishment of debt of $1.1 million. This
was offset by the recognition of a gain on forgiveness of PPP loan of $4.8
million, and the recognition of $2.5 million for the unused portion of the
advance on research and development under the Development Agreement with
Stryker.

  Income taxes.  Income tax provision was $91,000 for the year ended
December 31, 2021 and $42,000 for the year ended December 31, 2020. We continue
to generate losses for U.S. federal and state tax purposes and have net
operating loss carryforwards creating a deferred tax asset. We maintain a full
valuation allowance for deferred tax assets.

Comparison of the years ended December 31, 2020 and 2019

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For a discussion of the comparison of our results of operations for the fiscal
years ended December 31, 2020 and 2019, refer to the Management's Discussion and
Analysis of Financial Condition and Results of Operations section in our
previously filed Annual Report on Form 10-K for the fiscal year ended
December 31, 2020.


Liquidity, capital resources and plan of operations

Sources of liquidity and funding requirements


  From our inception in June 2004 through the year ended December 31, 2021, we
have financed our operations primarily through private placements of preferred
stock, our initial public offering in 2015, other equity financings, debt and
convertible debt financings, equipment purchase loans, patent licensing, and
product revenue beginning in 2007. We have not yet attained profitability and
continue to incur operating losses and negative operating cash flows.

At December 31, 2021we had an accumulated deficit of $530.9 million.


In January 2017, we filed a shelf registration statement on Form S-3, which was
declared effective by the SEC on May 9, 2017 (the "2017 Shelf Registration
Statement"). The 2017 Shelf Registration Statement allows us to sell from time
to time up to $200 million of common stock, preferred stock, debt securities,
warrants, or units comprised of any combination of these securities, for our own
account in one or more offerings. On May 10, 2017, we filed with the SEC a
prospectus supplement, pursuant to which we could issue and sell up to $50
million of our common stock and entered into an Equity Distribution Agreement
("Distribution Agreement") with Canaccord Genuity LLC (formerly, Canaccord
Genuity Inc.) ("Canaccord"), pursuant to which Canaccord agreed to sell shares
of our common stock from time to time, as our agent in an "at-the-market"
("ATM"), offering as defined in Rule 415 promulgated under the U.S. Securities
Act of 1933, as amended, or the Securities Act. We are not obligated to sell any
number of shares under the Distribution Agreement. On August 4, 2020, we and
Canaccord mutually agreed to terminate the Distribution Agreement, and as of
that date, we had sold 2,663,000 shares under the Distribution Agreement
resulting in net proceeds of $4.4 million.

On March 23, 2020, we filed a new shelf registration statement on Form S-3 or
the New Shelf Registration Statement, which was declared effective by the SEC on
August 5, 2020. Under the New Shelf Registration Statement, we will be permitted
to sell from time to time up to $200 million of common stock, preferred stock,
debt securities, warrants, or units comprised of any combination of these
securities, for its own account in one or more offerings. The New Shelf
Registration Statement is intended to provide us flexibility to conduct sales of
our registered securities, subject to market conditions and our future capital
needs. On August 5, 2020, we filed with the SEC a prospectus supplement, for the
sale and issuance of up to $25 million of its common stock and entered into an
ATM issuance sales agreement (the "Sales Agreement"), with Cowen and Company,
LLC ("Cowen"), pursuant to which we may offer and sell shares of the our common
stock to or through Cowen, acting as agent and/or principal, from time to time
in an "at-the-market" offering as defined in Rule 415 promulgated under the
Securities Act of 1933, as amended, including without limitation sales made by
means of ordinary brokers' transactions on the Nasdaq Capital Market or
otherwise at market prices prevailing at the time of sale, in block
transactions, or as otherwise directed by us. Cowen will use commercially
reasonable efforts to sell the Common Stock from time to time, based upon
instructions from us (including any price, time or size limits or other
customary parameters or conditions we may impose). We will pay Cowen a
commission of up to 3.0% of the gross sales proceeds of any Common Stock sold
through Cowen under the Sales Agreement, and we also provided Cowen with
customary indemnification rights. The shares of Common Stock being offered
pursuant to the Sales Agreement will be offered and sold pursuant to the New
Shelf Registration Statement. We are not obligated to make any sales of Common
Stock under the Sales Agreement. The offering of shares of Common Stock pursuant
to the Sales Agreement will terminate upon the earlier of (i) the sale of all
Common Stock subject to the Sales Agreement or (ii) termination of the Sales
Agreement in accordance with its terms. As of December 31, 2021, we had not sold
any shares under the Sales Agreement.
  On December 17, 2018, we entered into a stock purchase agreement (the "Stock
Purchase Agreement") with Lincoln Park Capital ("LPC"). Upon entering into the
Stock Purchase Agreement, we sold 1,921,968 shares of common stock for $1.0
million to LPC, representing a premium of 110% to the previous day's closing
price. Additionally, as consideration for LPC's commitment to purchase shares of
common stock under the LPC Agreement, we issued 354,430 shares to LPC.  We have
the right at our sole discretion to sell to LPC up to $20.0 million worth of
shares over a 36-month period subject to the terms of the Stock Purchase
Agreement. We will
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control the timing of any sales to LPC and LPC will be obligated to make
purchases of our common stock upon receipt of requests from us in accordance
with the terms of the Stock Purchase Agreement. There are no upper limits to the
price per share LPC may pay to purchase the up to $20.0 million worth of common
stock subject to the Stock Purchase Agreement, and the purchase price of the
shares will be based on the then prevailing market prices of our shares at the
time of each sale to LPC as described in the Stock Purchase Agreement, provided
that LPC will not be obligated to make purchases of our common stock pursuant to
receipt of a request from us on any business day on which the last closing trade
price of our common stock on the Nasdaq Capital Market (or alternative national
exchange in accordance with the Stock Purchase Agreement) is below a floor price
of $0.25 per share. No warrants, derivatives, financial or business covenants
are associated with the Stock Purchase Agreement and LPC has agreed not to cause
or engage in any manner whatsoever, any direct or indirect short selling or
hedging of shares of our common stock. The Stock Purchase Agreement may be
terminated by us at any time, at our sole discretion, without any cost or
penalty. On August 5, 2020, we filed with the SEC a prospectus supplement, for
the sale and issuance of up to $17.6 million of our common stock pursuant to the
Stock Purchase Agreement dated December 17, 2018. As of December 31, 2021, we
have sold 4,521,968 shares under the Stock Purchase Agreement resulting in
proceeds of $3.4 million.

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

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

On June 25, 2019, we entered into a Loan and Security Agreement (the "2019
Secured Loan Agreement") with Innovatus Life Sciences Lending Fund I, LP
("Innovatus"), as collateral agent and lender, East West Bank and the other
lenders party thereto from time to time (the "Lenders"), pursuant to which the
Lenders agreed to make term loans and to provide a revolving credit facility to
us to repay existing indebtedness, for working capital and general business
purposes, in a principal amount of up to $30 million. We used the proceeds from
the 2019 Secured Loan Agreement to pay off the $15 million term loan from Oxford
Finance LLC. In addition, Innovatus purchased approximately $3 million of our
common stock at the previous day's closing price. During the first quarter of
2020, we reported that we may not be able to meet our second quarter revenue
covenant and would work with Innovatus with the goal of adjusting the revenue
covenants under the 2019 Secured Loan Agreement. On July 1, 2020, we entered
into a third amendment to the 2019 Secured Loan Agreement, which, among other
things, waived the trailing six-month revenue covenant milestones that applied
to the quarters ended June 30, September 30 and December 31, 2020 under the
agreement, reduced the revenue covenant milestones that apply thereafter, and
delays until June 25, 2021 our option to prepay all, but not less than all, of
the term loans advanced under the 2019 Secured Loan Agreement. On August 20,
2020, we entered into a fourth amendment to the 2019 Secured Loan Agreement,
which, among other things, waived certain provisions of the agreement that apply
to Conformis India LLP.

On March 1, 2021, we entered into a fifth amendment to the 2019 Secured Loan
Agreement, which, among other things, waives the trailing six-month revenue
covenant milestones that apply to the quarters ending March 31, June 30,
September 30 and December 31, 2021 and reduces the revenue covenant milestones
that apply in 2022.
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The revenue covenant milestones remain unchanged for 2023 and 2024. The amendment increased our minimum cash covenant to $5 million until December 31, 2021.


On November 22, 2021, we entered into a Credit and Security Agreement (the "New
Credit Agreement") with MidCap Financial Services, LLC ("MidCap Financial
Services"), as servicer for MidCap Financial Trust to refinance the Company's
existing senior secured indebtedness. The New Credit Agreement provides for a
five-year, $21 million secured term loan facility (the "Term Facility"), and
replaces our existing credit facility under the 2019 Secured Loan Agreement,
with Innovatus, as collateral agent and lender, East West Bank and other lenders
party thereto (collectively, the "Lenders"). We used the proceeds from the debt
financings to pay off our existing credit facility under the 2019 Secured Loan
Agreement with the Lenders.

The New Credit Agreement contains customary affirmative and negative covenants,
including limitations on our ability to incur additional debt, grant or permit
additional liens, make investments and acquisitions, merge or consolidate with
others, dispose of assets, pay dividends and distributions, pay subordinated
indebtedness and enter into affiliate transactions. In addition, the New Credit
Agreement contains a minimum liquidity covenant requiring the us to maintain
unrestricted cash and cash equivalents in excess of $4.0 million. The New Credit
Agreement also includes events of default customary for facilities of this type
and upon the occurrence of such events of default, subject to customary cure
rights, all outstanding loans under the Term Facility may be accelerated. As of
December 31, 2021, we were not in breach of covenants under the New Credit
Agreement. For further information regarding the 2019 Secured Loan Agreement and
the Amendments, and the New Credit Agreement see "Note I-Debt and Notes Payable"
in the financial statements and related notes appearing elsewhere in this Annual
Report on Form 10-K.

On September 30, 2019, we entered into an Asset Purchase Agreement with
Howmedica Osteonics Corp., a subsidiary of Stryker Corporation also known as
Stryker Orthopaedics, or Stryker. In connection with entering into the Asset
Purchase Agreement, we also entered into a Development Agreement, a License
Agreement, and other ancillary agreements contemplated by the Asset Purchase
Agreement with Stryker. Under the terms of the agreements, we agreed to sell and
license to Stryker certain assets relating to our patient-specific
instrumentation technology, and to develop, manufacture, and supply
patient-specific instrumentation for use in connection with Stryker's
"off-the-shelf" non-personalized knee implant offerings. We received $14 million
upfront and became eligible to receive up to an additional $16 million in
milestone payments pursuant to the License Agreement and the Development
Agreement. As of December 31, 2021, we had successfully completed the third of
three milestones with Stryker and received $11.0 million, for a total aggregate
received of $16.0 million for achievement of these milestones. Under the
long-term Distribution Agreement, we began supplying patient-specific
instrumentation to Stryker.

The Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), was
enacted on March 27, 2020 in the United States. On April 17, 2020, we entered
into an approximately $4.7 million promissory note, or the PPP Note, with East
West Bank as the lender under the PPP offered by the SBA, to mitigate the
negative financial and operational impacts of the COVID-19 pandemic. The
interest rate on the PPP Note is a fixed rate of 1% per annum. We are required
to make one payment of all outstanding principal plus all accrued unpaid
interest on April 9, 2022, or the Maturity Date. We were required to pay regular
monthly payments in an amount equal to one month's accrued interest commencing
on August 2, 2021, with all subsequent interest payments to be due on the same
day of each month after that. All interest which accrues during the deferral
period were to be payable on the Maturity Date. According to the terms of the
PPP, all or a portion of the loan as well as any accrued interest may be fully
forgiven if the funds are used for payroll costs (and at least 60% of the
forgiven amount must have been used for payroll), interest on certain other
outstanding debt, rent, and utilities. In accordance with the CARES Act, we used
the proceeds of the loan primarily for payroll costs. We submitted the loan
forgiveness application to the lender on December 11, 2020. We resubmitted the
application on February 23, 2021 with additional supporting documentation as
requested by the lender. On March 4, 2021, our lender submitted our application
to the SBA for their review and on June 30, 2021, we received notification
through our lender that the SBA had rendered a final decision regarding its
review of the PPP loan forgiveness application, fully approving the loan
forgiveness application as of June 28, 2021.

On May 22, 2020, we entered into the Zimmer Settlement and License Agreement
with Zimmer Biomet, pursuant to which the parties agreed to terms for resolving
then-existing patent disputes. Under the Settlement and License Agreement, we
and Zimmer Biomet agreed to dismiss both outstanding patent infringement
lawsuits between the parties; we granted to Zimmer Biomet a royalty-free,
non-exclusive, worldwide license to certain of our patents for Zimmer Biomet's
patient-specific instrumentation used with off-the-shelf knee, hip, and shoulder
implants; and Zimmer Biomet granted us a fully paid-up, royalty-free,
non-exclusive, worldwide license to certain Zimmer Biomet patents for our
implants and PSI for the knee. Under the agreement, Zimmer Biomet was required
to pay us a total of $9.6 million in installments through January 15, 2021, and
all such payments were made and received by such date. No payment was due from
us to Zimmer Biomet.
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On February 17, 2021, we closed an offering of our common stock under the New
Shelf Registration Statement and issued and sold 80,952,381 shares of our common
stock at a public offering price of $1.05 per share, for aggregate net proceeds
of approximately $79.6 million. We intend to use the net proceeds of the
offering of the shares for general corporate purposes, which may include
research and development costs, sales and marketing costs, clinical studies,
manufacturing development, the acquisition or licensing of other businesses or
technologies, repayment and refinancing of debt, including our secured term loan
facility, working capital and capital expenditures.

On April 8, 2021, we entered into a License Agreement with Paragon 28, granting
Paragon 28 a non-exclusive license under a subset of our U.S. patents for the
use of PSI with off-the-shelf implants. In connection with this License
Agreement, we recognized revenue of $1.0 million during the quarter ended June
30, 2021.

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

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

•expansion of our sales and marketing efforts;

•expansion of our manufacturing capacity;

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

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

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

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



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

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

  At December 31, 2021, we had cash and cash equivalents of $100.6 million and
$0.6 million in restricted cash allocated to lease deposits.  Based on our
current operating plan, we expect to fund our operations, capital expenditure
requirements and debt service with existing cash and cash equivalents as of
December 31, 2021,
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anticipated revenue from operations, revenue that may be generated in connection
with licensing intellectual property, available sales of shares under the Sales
Agreement and the Stock Purchase Agreement and funds from potential exercises of
our common stock warrants. We have based this expectation on assumptions that
may prove to be wrong, such as the revenue that we expect to generate from the
sale of our products, the gross profit we expect to generate from those
revenues, and the fact that we could use our capital resources sooner than we
expect.

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

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,
                                        2021          2020         $ Change      % Change
Net cash (used in) provided by:
Operating activities                 $ (8,399)$ (18,310)$  9,911           54  %
Investing activities                   (2,300)        (3,249)          949           29
Financing activities                   82,803         23,757        59,046          249
Effect of exchange rate on cash          (121)            81          (202)        (249)
Total                                $ 71,983$   2,279$ 69,704        3,059  %



  Net cash used in operating activities.  Net cash used in operating activities
was $8.4 million for the year ended December 31, 2021 and $18.3 million for the
year ended December 31, 2020, a decrease of $9.9 million. The $9.9 million
decrease in net cash used in operating activities was primarily affected by a
decrease in net loss of $21.8 million, an increase in accounts payable, accrued
expenses and other liabilities of $6.5 million, and a decrease in royalty and
licensing receivable of $2.1 million, partially offset by an increase in
accounts receivable of $3.1 million, an increase in inventory of $2.1 million,
and a decrease in contract liability and advance on research and development
under the Agreements with Stryker of $18.5 million. Non-cash reconciling items
include an increase in unrealized foreign exchange gain/loss of $6.2 million, an
increase on the loss on extinguishment of debt of $1.1 million, and a decrease
due to the gain on forgiveness of PPP loan of $4.8 million.

  Net cash used in investing activities.  Net cash used in investing activities
was $2.3 million for the year ended December 31, 2021 compared to $3.2 million
cash used in investing activities for the year ended December 31, 2020, a
decrease of $0.9 million. The decrease is due to a decrease in costs related to
the acquisition of property, plant, and equipment.

  Net cash provided by financing activities.  Net cash provided by financing
activities was $82.8 million for the year ended December 31, 2021 and $23.8
million for the year ended December 31, 2020, an increase of $59.0 million. The
increase is due to $79.6 million of net proceeds from the issuance of common
stock under the New Shelf Registration Statement, $5.3 million of proceeds from
the exercise of common stock warrants, and $2.1 million of net costs related to
the refinancing of the Innovatus debt, compared to $15.9 million of proceeds
from the issuance of common stock and prefunded warrants under the registered
direct offering, net proceeds of $3.1 million from issuance of common stock and
$4.7 million of proceeds from the issuance of the PPP loan during the same
period last year.


Revenue share agreements

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

  The aggregate revenue share percentage of net revenue from our currently
marketed knee replacement products, including percentages under revenue share
agreements with all of our scientific advisory board members, ranges, depending
on the particular product, from 0.8% to 6.2%. We incurred aggregate revenue
share expense, included in research and development, including all amounts
payable under our scientific advisory board revenue share agreements of $2.2
million during the year ended December 31, 2021, and representing 3.7% of
product revenue, $1.6 million during the year ended December 31, 2020,
representing 2.7% of product revenue. For further information, see "Note
H-Commitments and Contingencies-Revenue Share Agreements" in the financial
statements and related notes appearing 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, 2021, we did not have any relationships with
unconsolidated organizations or financial partnerships, such as structured
finance or special purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes.


Critical accounting policies and estimates


  We have prepared our consolidated financial statements in conformity with
accounting principles generally accepted in the United States. Our preparation
of these financial statements and related disclosures requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses
during the reporting periods. We believe the critical accounting policies and
estimates that require the use of significant estimates and judgments in the
preparation of our consolidated financial statements include revenue
recognition, inventory valuations, impairment assessments, and income tax
reserves and related allowances. We evaluate our estimates and judgments on an
ongoing basis. Actual results may differ from these estimates under different
assumptions or conditions. Our critical accounting policies and estimates are
more fully described in "Note B - Summary of Significant Accounting Policies" to
the consolidated financial statements appearing in this Annual Report on Form
10-K.


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, Spain, Portugal, the Netherlands,
Belgium, the Dutch Antilles, Suriname, Australia, the United Arab Emirates, the
Sultanate of Oman, Italy, Poland and other markets. In order for surgeons to use
our products, the medical facilities where these surgeons treat patients
typically require us to enter into pricing agreements.

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  Product revenue is recognized when, or as, obligations under the terms of a
contract are satisfied, which occurs when control of the promised products or
services is transferred to customers. Revenue is measured as the amount of
consideration the Company expects to receive in exchange for transferring
products or services to a customer ("transaction price"). When determining the
transaction price of a contract, an adjustment is made if payment from a
customer occurs either significantly before or significantly after performance,
resulting in a significant financing component. Applying the practical expedient
in paragraph 606-10-32-18, the Company does not assess whether a significant
financing component exists if the period between when the Company performs its
obligations under the contract and when the customer pays is one year or less.
None of the Company's contracts contained a significant financing component as
of December 31, 2021. Payment is typically due between 30 - 60 days from
invoice.

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

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

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

Under ASC 606, the individual rights to license certain of our patents are
accounted for as a single performance obligation. The earnings process is
complete and revenue is recognized upon the execution of the contract, when
collectability is probable and all other revenue recognition criteria have been
met. Ongoing royalty revenue is generated from our agreement with MicroPort
Orthopedics Inc., a wholly owned subsidiary of MicroPort Scientific Corporation,
or collectively, MicroPort. Under ASC 606, the license agreement with MicroPort
indicates that the licenses are functional and thus revenue recognition is upon
the license execution date.

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


  We determined that the Asset Purchase Agreement and the License Agreement is
within the scope of ASC 606. Under the Asset Purchase and License Agreements, we
are required to provide certain assets and the right to use the license for a
specific purpose. The assets and the right to use the license are highly
interdependent and is considered one performance obligation. The transaction
price of $25.0 million was determined using the residual approach under ASC 606
by deducting the other services (development) performed under the agreement
noting the arrangement does not contain a significant financing component.
  We recognize a contract liability when there is an obligation to transfer
goods or services and consideration has already been received from the customer.
We concluded that Stryker meets the definition of a customer for a portion of
the obligations under the Stryker Agreements. The contract liability balances as
of January 1, 2021 and 2020, were $14.0 million and $12.0 million, respectively,
which were related to consideration received from the customer under the Asset
Purchase Agreement and Development Agreement. We concluded the license rights
under the License Agreement were functional and would be recognized at the point
in time when 510(k) clearance was received from the FDA as required under
Milestone 3 in the License Agreement, or upon termination by Stryker and
Stryker's election to purchase the license rights. On April 19, 2021, we
achieved the third of three milestones
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under the License Agreement when it received 510(k) clearance from the FDA and
received $11.0 million from Stryker. In connection with the 510(k) clearance, we
recognized as royalty and license revenue the $14.0 million that was previously
deferred as contract liability, plus the $11.0 million payment received, for a
total aggregate of $25.0 million during the quarter ended June 30, 2021. There
are no amounts recorded as contract liability as of December 31, 2021. In
addition, during the quarter ended June 30, 2021, we recorded $2.5 million in
other income for the remaining portion of the advance on research and
development, that was not used to offset against research and development
expenses.

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. We regularly review our
inventory quantities on hand and related cost and record a provision for any
excess or obsolete inventory based on its estimated forecast of product demand
and existing product configurations. We also review our inventory value to
determine if it reflects the lower of cost or net realizable value. Appropriate
consideration is given to inventory items sold at negative gross margin,
purchase commitments and other factors in evaluating net realizable value.
During the years ended December 31, 2021, and 2020, we recognized provisions of
$2.6 million, and $2.7 million, respectively, to adjust our inventory value to
the lower of cost or net realizable value for estimated unused product related
to known and potential cancelled cases, which is included in cost of revenue.

Long-lived assets


We test impairment of long-lived assets when events or changes in circumstances
indicate that the assets might be impaired. If changes in circumstances lead us
to believe that any of our long-lived assets may be impaired, we will test the
asset group for recoverability, by evaluating whether the estimated undiscounted
cash flows, including estimated residual value, generated from the asset group
are sufficient to support the carrying value of the assets. During the quarters
ended March 31, 2021, June 30, 2021 and September 30, 2021, there were no
changes in circumstances that led us to believe that our long-lived assets may
be impaired. During the quarter ended December 31, 2021, we had experienced a
significant decrease in our stock price and incurred current-period operating
losses associated with our asset group, and as such, an assessment for
recoverability was performed. We evaluated whether the estimated undiscounted
cash flows, including estimated terminal value, generated from the asset group
were sufficient to support the carrying value of the assets. If the cash flow
estimates or the significant operating assumptions upon which they are based
change in the future, we may be required to record impairment charges. During
the years ended December 31, 2021 and 2020, no such impairment charges were
recognized.


Income taxes

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

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

  The tax benefit from an uncertain tax position is only recognized if it is
more likely than not that the tax position will be sustained on examination by
the taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the consolidated financial statements from these
positions are measured based on the largest benefit that has a greater than
fifty percent likelihood of being realized upon ultimate resolution. We review
our tax positions on an annual basis and more frequently as facts surrounding
tax positions change. Based on these future events, we may recognize uncertain
tax positions or reverse current uncertain tax positions, the impact of which
would affect the consolidated financial statements.
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We have operations in Germanythe United Kingdom and India. The operating results of these operations will be permanently reinvested in those jurisdictions. As a result, we have only provided for income taxes at local rates when required.


  On March 27, 2020, the U.S. government enacted the CARES Act which included
modifications to the limitation on business interest expense, net operating loss
provisions, and other various U.S. tax law updates. We analyzed these aspects of
the CARES Act and it had no material impact on our consolidated financial
statements.

On December 27, 2020, the U.S government enacted the Consolidated Appropriations
Act, 2021 "the Act", which included various tax extenders, an update to meals
and entertainment expensing, and the deductibility of expenses related to PPP
loan proceeds. We applied the Act in regards to expenses related to the PPP loan
proceeds, which previously would have been non-deductible.


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