SHOULDER INNOVATIONS, INC.

1. Summary of Significant Accounting Policies

Business Activity

Shoulder Innovations, Inc. (the “Company”) is principally involved in developing next generation shoulder replacement implants, utilizing contract manufacturing partners, and distributing them nationwide for surgeries through a network of employed and contracted sales representatives. The Company is headquartered in Grand Rapids, Michigan and markets and sells its products throughout the United States.

Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting. Certain information and note disclosures included in the Company’s annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed financial statements should be read in conjunction with the audited annual financial statements for the year ended December 31, 2024. There have been no material changes in our significant accounting policies as described in our audited annual financial statements for the year ended December 31, 2024. In the opinion of management, these unaudited condensed financial statements reflect all adjustments, including those of a normal and recurring nature, which are necessary for a fair presentation of the results for the interim period presented.

Reverse Stock Split

On July 23, 2025, the Company amended its amended and restated certificate of incorporation to effect a reverse stock split of shares of the Company’s common stock on a 1-for-19.08 basis (the “Reverse Stock Split”). The common stock warrants and options to purchase common stock were subsequently adjusted as a result of the Reverse Stock Split. All impacted share and per-share information included in these condensed financial statements and notes thereto have been retroactively adjusted to give effect to the Reverse Stock Split.

New Accounting Pronouncements

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740) ("ASC 740"). The update requires all public business entities on an annual basis to (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold and an explanation, if not otherwise evident, of the individual reconciling items disclosed, such as the nature, effect, and underlying causes of the reconciling items and the judgment used in categorizing the reconciling items. In addition, the update requires certain new disclosures of the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions in which income taxes paid is equal to or greater than five percent of total income taxes paid (net of refunds received). Other new disclosures required include income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign. The new guidance is effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The amendments are to be applied on a prospective basis, with retrospective application permitted. The Company is currently evaluating the impact of the new standard on its financial statements and related disclosures.

In November 2024, the FASB issued ASU 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses requires additional, disaggregated disclosure around certain income statement expense line items. This ASU mandates that entities, at each interim and annual period, disclose the amounts of (a) inventory purchases, (b) employee compensation, (c) depreciation, (d) intangible asset amortization, and (e) depletion, depreciation, and amortization for oil and gas activities included within each relevant expense caption presented on the income statement within continuing operations. Entities are also required to (1) combine certain disclosures already mandated under GAAP with these new requirements, (2) provide qualitative descriptions of expenses that are not disaggregated quantitatively, and (3) disclose total selling expenses and, annually, the definition of selling expenses. The guidance is effective for annual periods beginning after December 15, 2026, and interim periods beginning after December 15, 2027. Early adoption is permitted. The Company is currently evaluating the potential impact of adopting this new guidance on the Company’s financial statements and related disclosures.

2. Fair Value Measurements

The fair value of marketable securities as of June 30, 2025 and December 31, 2024 are summarized below:

Liabilities related to preferred stock warrants and the Series E purchase option are remeasured at fair value on a recurring basis using the Black-Scholes option pricing model. The following table presents the change in fair value of the preferred stock warrants and the Series E purchase option which are classified in Level 3 of the fair value hierarchy for the six months ended June 30, 2025:

The following table presents the change in fair value of the preferred stock warrants which are classified in Level 3 of the fair value hierarchy for the six months ended June 30, 2024:

The preferred stock warrants were valued under the option pricing model, which considers the estimated volatility of the Company’s common stock at the date of measurement based on selected metrics of applicable volatility calculations from guideline public companies. The remeasurement of the convertible preferred stock warrant liability resulted in $1,415 and $50 recognized as other (income) expense, net for the six months ended June 30, 2025 and June 30, 2024, respectively.

The Series E purchase option was valued under the option pricing model, which considers the estimated volatility of the Company’s common stock at the date of measurement based on selected metrics of applicable volatility calculations from guideline public companies. The remeasurement of the Series E purchase option resulted in $11,719 recognized as change in fair value of Series E purchase option for the six months ended June 30, 2025.

The fair value of the preferred stock warrants were estimated as of June 30, 2025 and 2024 using an option pricing model with the following weighted average assumptions:

3. Accrued Liabilities and Other Current Liabilities

Accrued liabilities and other current liabilities consist of the following:

4. Related Party Transactions

On October 22, 2020, the Company entered into a software license agreement with Genesis Software which was amended and restated on June 10, 2025. Robert Ball, the Company’s Chief Executive Officer and Executive Chairman, is a co-founder and director of Genesis Software. Mr. Ball and Matthew Ahearn, the Company’s Chief Operating Officer and a director, are directors of Genesis Investment Holdings, LLC, which has an ownership interest in Genesis Software. In addition, cultivate(MD) Capital Accelerator Fund L.P. and Genesis Investment Holdings, LLC, each beneficial owners of more than 5% of our capital stock, are investors in Genesis Software. The software licensing agreement is a 5-year term. The agreement required an upfront payment of $1,000, an incremental $500 payment when FDA clearance was obtained, and quarterly payments of royalties equal to 4% of the net sales price of each licensed product sold, until such time we have paid Genesis Software an aggregate of $7,000 under the software license agreement. For the three and six months ended June 30, 2025, the Company paid Genesis Software $398 and $741, respectively, pursuant to the license agreement. For the three and six months ended June 30, 2024, the Company paid Genesis Software $282 and $552, respectively, pursuant to the license agreement.

For the three and six months ended June 30, 2025, the Company paid $453 and $1,024, respectively, for software development to Genesis Software. For the three and six months ended June 30, 2024, the Company paid $689 and $1,143, respectively, for software development to Genesis Software. Amounts payable of $151 and $276 are included in accounts payable on the balance sheets at June 30, 2025 and December 31, 2024, respectively.

The Company has entered into a consulting agreement with Genesis Innovation Group, an entity under common ownership. The consulting agreement is currently on a year-to-year basis. The agreement requires compensation for services performed. If services performed are on an hourly basis, the Company shall be responsible to pay for hours actually worked by the consultant’s employees. The Company will reimburse the consultant for all reasonable expenses incurred in connection with performing services for the Company. For the three and six months ended June 30, 2025, the Company paid Genesis Innovation Group $1,060 and $2,295, respectively. For the three and six months ended June 30, 2024, the Company paid Genesis Innovation Group $905 and $1,847, respectively. Amounts payable of $522 and $537 are included in accounts payable on the balance sheets at June 30, 2025 and December 31, 2024, respectively.

During the first quarter of 2024, Robert Ball, the Company’s Chief Executive Officer and Executive Chairman, was an investor in Revelation Medical Devices (“RMD”), which manufactures surgical instruments used during procedures involving our systems. After the first quarter of 2024, Mr. Ball is no longer an investor in RMD. For the six months ended June 30, 2024, the Company paid RMD $859.

5. Convertible Preferred Stock

On March 6, 2025, the Company entered into a Series E Preferred Stock Purchase Agreement pursuant to the Series E Preferred Stock Financing, whereby it received a total commitment amount of $40,130 for the issuance and sale of 58,774,332 shares of Series E Preferred Stock pursuant totwo separate closing tranches, the first of which closed on March 6, 2025 whereby the Company issued 29,455,169 shares of series E preferred stock resulting in total gross proceeds to the Company of $20,111. The second tranche can occur any time prior to September 15, 2025, for the issuance and sale of 29,319,143 shares of Series E Preferred Stock for an aggregate purchase price of $20,019. The Company determined that the second tranche constitutes a free standing financial instrument and allocated $218 of the Series E proceeds to the purchase option, which is included in accrued liabilities in the Condensed Balance Sheets.

In June 2025 the Company called the second tranche of its Series E Preferred Stock for the issuance of 29,319,143 shares of Series E Preferred Stock resulting in gross proceeds to the Company of $20,019. The Series E purchase option was revalued as of the date the second tranche was called. The Company recognized the change in value of the Series E purchase option in the change in fair value of Series E purchase option caption in its Condensed Statements of Operations and Comprehensive Loss. The fair value of the Series E purchase option was recognized as Series E convertible preferred stock upon the exercise of the Series E purchase option. See Note 2 for additional details.

On March 4, 2025, Genesis Investment Holdings, LLC exercised 988,999 series Seed warrants resulting in proceeds of $83.

For the three and six months ended June 30, 2025,625,000 and 750,000 Series B warrants were exercised, respectively, resulting in proceeds of $232 and $279, respectively.

For all series of preferred stock, the initial conversion price equals their original issuance price per share, at June 30, 2025 and December 31, 2024, adjusted for the Reverse Stock Split as described in Note 1.

Issued and Outstanding Preferred Shares

Authorized, issued, and outstanding Preferred Stock were as follows:

6. Loss Per Share

Basic loss per share is computed by dividing the net loss after tax attributable to common stockholders by the weighted average shares outstanding during the period. Diluted loss per share is computed by including potentially dilutive securities outstanding during the period in the calculation of weighted average shares outstanding. The Company did not have any dilutive securities during the periods presented; therefore, diluted loss per share is equal to basic loss per share.

Presented in the table below is a reconciliation of the numerator and denominator for the basic and diluted loss per share (“LPS”) calculations for the three and six months ended June 30:

The following securities were not included in the computation of diluted shares outstanding because the effect would be anti-dilutive:

7. Segment Information

The Company reports segment information based on how the Company’s chief operating decision maker (“CODM”) is the Chief Executive Officer, regularly reviews operating results, allocates resources and makes decisions regarding business operations. For segment reporting purposes the Company’s business structure is comprised ofone operating and reportable segment. The CODM uses segment gross margin and net loss for determining the allocation of resources (including employees, financial, or capital resources) to the segment to achieve the Company's strategic plan and to assess the performance of the segment by monitoring actual results against performance targets established in the Company's annual budget and forecasting process.

All revenue for the three and six months ended June 30, 2025 and 2024 was generated from customers located in the United States. No customers represent 10% or more of the Company’s total revenue for the three and six months ended June 30, 2025 and 2024. The measure of segment assets is reported on the balance sheets as total assets.

The table below is a summary of the segment net loss, including significant segment expenses:

Depreciation expense for the three and six months ended June 30, 2025 totaled $643 and $1,235, respectively. Depreciation expense of $623 and $1,198 for instruments is in sales and marketing and $20 and $37 for computer equipment, furniture and fixtures, and leasehold improvements are included in general, and administrative expenses in the statements of operations and comprehensive loss for the three and six months ended June 30, 2025, respectively. Depreciation expense for the three and six months ended June 30, 2024 totaled $440 and $863, respectively. Depreciation expense of $432 and $847 for instruments is in sales and marketing and $8 and $16 for computer equipment, furniture and fixtures, and leasehold improvements are included in general, and administrative expenses in the statements of operations and comprehensive loss for the three and six months ended June 30, 2024, respectively.

Amortization expense related to the Company’s software license for the three and six months ended June 30 2025, totaled $75 and $150. Amortization expense related to the Company’s software license for the three and six months ended June 30, 2024 totaled $75 and $150. Amortization expense is included in general and administrative expense.

8. Commitments and Contingencies

Litigation

The Company from time to time is involved in legal matters incidental to the conduct of its business. Legal fees and other costs associated with such actions are expensed as incurred. The Company assesses the need to record a liability for litigation and contingencies. Accrual estimates are recorded when and if it is determinable that such a liability for litigation and contingencies are both probable and reasonably estimable.

In February 2024, the Company filed a complaint against Catalyst Orthoscience Inc. (“Catalyst”) claiming patent infringement through Catalyst’s making, using, selling, offering for sale in the United States, and/or importing into the United States, reverse shoulder systems. In response to the Company’s suit, Catalyst filed a counterclaim claiming patent infringement of certain of the Company’s products. The Company believes that it has substantial and meritorious defenses to Catalyst’s claims and intend to vigorously defend its position, including through the trial and appellate stages if necessary. As the counterclaim is ongoing, the Company is unable to determine the likelihood of an outcome or estimate a range of reasonably possible settlement, if any. Accordingly, the Company has not made an accrual for any possible loss. The outcome of any litigation, however, is inherently uncertain, and an adverse judgment or settlement in the counterclaim proceeding, if any, could have a material and adverse effect the Company’s business, financial position, results of operations or cash flows.

9. Subsequent Events

On July 18, 2025, the Company issued $40,000 aggregate principal amount of convertible notes. The convertible notes mature on September 1, 2028 and accrue interest at a rate of 5.0% per annum through June 30, 2026, at which time the interest rate shall increase to 10.0% per annum. Upon the consummation of an initial public offering by the Company prior to the maturity date, the convertible notes automatically convert into a number of shares of common stock equal to the outstanding principal amount of the notes and any accrued interest divided by the applicable conversion price. The conversion price is the lower of (i) a 20.0% discount to the initial public offering price and (ii) $280,000 divided by the number of fully diluted shares of capital stock (on an as-converted basis) outstanding immediately prior to the initial public offering but excluding the convertible notes (the “IPO Capitalization”); provided that, in no event shall such conversion price be less than the quotient obtained by dividing $210,000 by the IPO Capitalization. Upon a liquidation event, the holders of the convertible notes shall receive a cash payment equal to the sum of 1.3 times the outstanding principal amount of the convertible notes plus any accrued interest.

On August 1, 2025 the convertible note and accrued interested converted into 2,810,428 shares of common stock.

On July 21, 2025, the Company amended the Trinity Loan Agreement to extend the commitment date of the tranche (ii) $15,000 draw from before December 31, 2024 to before December 31, 2025 and to extend the commitment date of the tranche (iii) $15,000 draw from before December 31, 2025 to before December 31, 2026. The interest rate on the instrument was amended from a floor of 11.5% to 11.0%, along with increasing the interest only period from an initial term of 48-months to 60-months. Additionally, warrants originally vesting upon the funding of the tranche (iii) draw were cancelled and are no longer outstanding.

On July 23, 2025, the Company amended its amended and restated certificate of incorporation to effect the Reverse Stock Split of shares of the Company’s common stock on a 1-for-19.08 basis. The number of authorized shares was increased to 730,000,000 shares of common stock. The par values of the common stock and redeemable convertible preferred stock were not adjusted as a result of the Reverse Stock Split. In connection with the Reverse Stock Split, the conversion ratio for the Company’s outstanding redeemable convertible preferred stock was adjusted. All references to common stock, common stock warrants, and options to purchase common stock share data, per share data, and related information contained in the financial statements have been retroactively adjusted to reflect the effect of the Reverse Stock Split for all periods presented.

On August 1, 2025, the Company completed its initial public offering (“IPO”), selling 5,000,000 shares of its common stock at $15.00 per share. Upon completion of the Company’s IPO, we received net proceeds of approximately $64,800, after deducting underwriting discounts and commissions and offering expenses.