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 included in the Company’s final prospectus, dated July 30, 2025, filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”) on August 1, 2025 (the “Prospectus”). 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 unaudited condensed financial statements and notes thereto have been retroactively adjusted to give effect to the Reverse Stock Split.

Initial Public Offering

On August 1, 2025, the Company closed its initial public offering (“IPO”), and issued 5,000,000 shares of common stock at public offering price of $15.00 per share. The Company received net proceeds of approximately $64,212, after deducting underwriting discounts and commissions and offering expenses. Immediately prior to the closing of the IPO, all outstanding shares of convertible preferred stock and $40,000 in aggregate principal amount of convertible notes converted into 15,176,862 shares of common stock. In connection with the closing of the IPO, on August 1, 2025, the Company amended and restated its certificate of incorporation to authorize the issuance of up to 730,000,000 shares of common stock, par value $0.001 per share and 20,000,000 shares of preferred stock, par value $0.001 per share.

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 its financial statements and related disclosures.

2. Fair Value Measurements

The fair value of marketable securities as of September 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 nine months ended September 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 nine months ended September 30, 2024:

The preferred stock warrants were valued under the option pricing model, which considers the estimated volatility of the Company’s equity 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 $256 and $75 recognized as other expense (income), net for the nine months ended September 30, 2025 and September 30, 2024, respectively.

The Series E purchase option was valued under the option pricing model, which considers the estimated volatility of the Company’s equity 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 an increase in fair value of Series E purchase option for the nine months ended September 30, 2025.

The convertible notes were valued using the fair value election per ASC 825 Financial Instruments. The convertible notes were valued using the expected stock price upon IPO and the probability of the IPO occurring. The Company weighted an IPO scenario at 97% and a liquidation event at 3% and an expected stock price within the floor and cap described in Note 9. The initial fair value measurement at issuance of the convertible notes was $49,815 and resulted in $9,952 recognized as a day one loss which is included in change in fair value of convertible notes, net for the three and nine months ended September 30, 2025 in the Company’s Condensed Statements of Operations and Comprehensive Loss. At completion of the Company’s IPO the convertible notes and accrued interest converted into 2,810,428 shares of common stock. The Company recognized a $7,739 gain upon settlement of the convertible notes which is recognized in change in fair value of convertible notes, net for the three and nine months ended September 30, 2025 in the Company’s Condensed Statements of Operations and Comprehensive Loss.

3. Accrued Liabilities

Accrued 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 has a 5-year term. The agreement required an upfront payment of $1,000, an incremental $500 payment when Food and Drug Administration (“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 nine months ended September 30, 2025, the Company paid Genesis Software $433 and $1,174, respectively, pursuant to the license agreement. For the three and nine months ended September 30, 2024, the Company paid Genesis Software $325 and $877, respectively, pursuant to the license agreement.

For the three and nine months ended September 30, 2025, the Company paid $302 and $1,326, respectively, for software development to Genesis Software. For the three and nine months ended September 30, 2024, the Company paid $506 and $1,649, respectively, for software development to Genesis Software. Amounts payable of $445 and $276 are included in accounts payable on the Condensed Balance Sheets at September 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 nine months ended September 30, 2025, the Company paid Genesis Innovation Group $1,093 and $3,388, respectively. For the three and nine months ended September 30, 2024, the Company paid Genesis Innovation Group $1,136 and $2,983, respectively. Amounts payable of $588 and $537 are included in accounts payable on the Condensed Balance Sheets at September 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 nine months ended September 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 could have occurred 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.

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 nine months ended September 30, 2025,250,000 and 1,000,000 Series B warrants were exercised, respectively, resulting in proceeds of $93 and $372, respectively.

Immediately prior to the closing of the Company’s IPO on August 1, 2025, all shares of the Company’s redeemable convertible preferred stock converted into shares of the Company’s common stock.

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

A summary of preferred stock is as follows:

Issued and Outstanding Preferred Shares

As of December 31 2024, the total authorized, issued, and outstanding shares of Preferred Stock were as follows (in thousands, except par value, share and per share amounts):

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 nine months ended September 30, 2025 and 2024 (in thousands, except par value, share and per share amounts):

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”), who is the Chief Executive Officer, regularly reviews operating results, allocates resources and makes decisions regarding business operations. 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 nine months ended September 30, 2025 and 2024 was generated from customers located in the United States. No customers represent 10% or more of the Company’s net revenue for the three and nine months ended September 30, 2025 and 2024. The measure of segment assets is reported on the Condensed Balance Sheets as total assets.

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

Depreciation expense for the three and nine months ended September 30, 2025 totaled $768 and $2,003, respectively. Depreciation expense of $744 and $1,942 for instruments is in sales and marketing and $24 and $61 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 nine months ended September 30, 2025, respectively. Depreciation expense for the three and nine months ended September 30, 2024 totaled $489 and $1,352, respectively. Depreciation expense of $469 and $1,316 for instruments is in sales and marketing and $20 and $36 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 nine months ended September 30, 2024, respectively.

Amortization expense related to the Company’s software license for the three and nine months ended September 30 2025, totaled $75 and $225. Amortization expense related to the Company’s software license for the three and nine months ended September 30, 2024 totaled $75 and $225. Amortization expense is included in general and administrative expense.

8. Commitments and Contingencies

Litigation

From time to time, the Company may be a party to legal proceedings that arise in the ordinary course of business, some of which may be covered by insurance. The Company establishes an accrual for legal proceedings if and when those matters reach a stage where they present loss contingencies that are both probable and reasonably estimable. In such cases, there may be a possible exposure to loss in excess of any amounts accrued. The Company monitors those matters for developments that would affect the likelihood of a loss and the accrued amount, if any, thereof, and adjust the amount as appropriate. If the loss contingency at issue is not both probable and reasonably estimable, the Company does not establish an accrual, but it will continue to monitor the matter for developments that could make the loss contingency both probable and reasonably estimable. If there is at least a reasonable possibility that a material loss will occur, the Company will provide disclosure regarding the contingency. Except as disclosed below, management believes that the Company does not have any pending legal proceedings that, separately or in the aggregate, would have a material adverse effect on the Company’s results of operations, financial condition or cash flows.

On February 28, 2024, the Company filed a complaint against Catalyst Orthoscience Inc. (“Catalyst”) in United States District Court for the District of Delaware 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 lawsuit, on March 20, 2024, Catalyst filed a counterclaim in United States District Court for the District of Delaware claiming patent infringement by certain of the Company’s products. The Company is seeking an injunction, monetary damages, interest, fees and other costs. The Company believes that it has substantial and meritorious defenses to Catalyst’s claims and intends to vigorously defend its position, including through the trial and appellate stages if necessary. As the Company’s lawsuit and Catalyst’s counterclaim is ongoing, the Company is unable to determine the likelihood of an outcome or estimate a range of reasonably possible losses, 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. Debt

On July 18, 2025, the Company issued $40,000 aggregate principal amount of convertible notes. The convertible notes were to 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 was to 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 converted 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 was 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 received a cash payment equal to the sum of 1.3 times the outstanding principal amount of the convertible notes plus any accrued interest. The Company recognized a $9,952 loss related to the issuance of the convertible notes. Refer to Note 2, Fair Value Measurements, for discussion regarding the valuation of the convertible notes.

On August 1, 2025 the convertible notes and accrued interest converted into 2,810,428 shares of common stock. The Company recognized a $7,739 gain upon the conversion of the convertible notes.

On July 21, 2025, the Company amended the Trinity Loan Agreement to extend the commitment date of the second and third tranches as follows: (i) a $15,000 draw from before December 31, 2024 to before December 31, 2025 and to extend the commitment date of the tranche (ii) a $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 third tranche draw were cancelled and are no longer outstanding.