SEC Form 10-Q filed by Paragon 28 Inc.

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024

OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-40902

 

Paragon 28, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware	27-3170186
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
14445 Grasslands Drive Englewood, CO	80112
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (720) 912-1332

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common stock, $0.01 par value per share		FNA		The New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer		☒		Accelerated filer		☐
Non-accelerated filer		☐		Smaller reporting company		☐
Emerging growth company		☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of May 3, 2024, there were 82,951,360 shares of the registrant's common stock, $0.01 par value per share, outstanding.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future financial condition, future operations, projected costs, prospects, plans, objectives of management and expected market growth, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “design,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “positioned,” “potential,” “predict,” “seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology. All statements other than statements of historical fact contained in this Quarterly Report, including without limitation statements regarding our business model and strategic plans for our products, technologies and business, including our implementation thereof, the impact on our business, financial condition and results of operations from macroeconomic conditions, the timing of and our ability to obtain and maintain regulatory approvals, our commercialization efforts, our acquisitions, including resulting synergies and future milestone payouts, marketing and manufacturing capabilities and strategy, our expectations about the commercial success and market acceptance of our products, the sufficiency of our cash, cash equivalents and marketable securities, and the plans and objectives of management for future operations and capital expenditures are forward-looking statements.

The forward-looking statements in this Quarterly Report are only predictions and are based largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of known and unknown risks, uncertainties, and assumptions, including those described under the sections in this Quarterly Report entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this Quarterly Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely upon these forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise. We intend the forward-looking statements contained in this Quarterly Report to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

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Table of Contents

 

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations and Comprehensive Loss	2
	Condensed Consolidated Statements of Stockholders’ Equity	3
	Condensed Consolidated Statements of Cash Flows	4
	Notes to Unaudited Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4.	Controls and Procedures	17
PART II.	OTHER INFORMATION	18
Item 1.	Legal Proceedings	18
Item 1A.	Risk Factors	18
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	18
Item 3.	Defaults Upon Senior Securities	18
Item 4.	Mine Safety Disclosures	18
Item 5.	Other Information	18
Item 6.	Exhibits	19
	Signatures	20

 

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

PARAGON 28, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)

 

		March 31, 2024				December 31, 2023
ASSETS
Current assets:
Cash		$	58,222			$	75,639
Trade receivables, net of allowance for doubtful accounts of $1,701 and $1,339, respectively			40,262				37,323
Inventories, net			104,298				98,062
Income taxes receivable			597				794
Other current assets			4,013				3,997
Total current assets			207,392				215,815
Property and equipment, net			75,701				74,122
Intangible assets, net			21,458				21,674
Goodwill			25,465				25,465
Deferred income taxes			678				705
Other assets			3,900				2,918
Total assets		$	334,594			$	340,699
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	29,224			$	21,696
Accrued expenses			26,823				27,781
Other current liabilities			909				883
Current maturities of long-term debt			640				640
Income taxes payable			450				243
Total current liabilities			58,046				51,243
Long-term liabilities:
Long-term debt net, less current maturities			109,847				109,799
Other long-term liabilities			1,356				1,048
Deferred income taxes			231				233
Income taxes payable			638				635
Total liabilities			170,118				162,958
Commitments and contingencies (Note 10)
Stockholders' equity:
Common stock, $0.01 par value, 300,000,000 shares authorized;    83,858,930 and 83,738,974 shares issued, and 82,945,411 and 82,825,455    shares outstanding as of March 31, 2024 and December 31, 2023, respectively			828				827
Additional paid in capital			301,459				298,394
Accumulated deficit			(130,864	)			(115,630	)
Accumulated other comprehensive loss			(965	)			132
Treasury stock, at cost; 913,519 shares as of March 31, 2024 and December 31, 2023			(5,982	)			(5,982	)
Total stockholders' equity			164,476				177,741
Total liabilities & stockholders' equity		$	334,594			$	340,699

 

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

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PARAGON 28, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except share and per share data)

(unaudited)

 

	Three Months Ended March 31,
	2024				2023
Net revenue	$	61,082			$	52,036
Cost of goods sold		12,186				8,906
Gross profit		48,896				43,130
Operating expenses:
Research and development costs		7,584				7,049
Selling, general, and administrative		54,215				43,820
Total operating expenses		61,799				50,869
Operating loss		(12,903	)			(7,739	)
Other income (expense):
Other income (expense), net		515				(179	)
Interest expense, net		(2,622	)			(1,205	)
Total other expense, net		(2,107	)			(1,384	)
Loss before income taxes		(15,010	)			(9,123	)
Income tax expense (benefit)		224				(71	)
Net loss	$	(15,234	)		$	(9,052	)
Foreign currency translation adjustment		(1,097	)			(99	)
Comprehensive loss	$	(16,331	)		$	(9,151	)
Weighted average number of shares of common stock outstanding:
Basic		82,854,334				80,681,715
Diluted		82,854,334				80,681,715
Net loss per share attributable to common stockholders:
Basic	$	(0.18	)		$	(0.11	)
Diluted	$	(0.18	)		$	(0.11	)

 

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

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PARAGON 28, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except for number of shares)

(unaudited)

 

																		Accumulated
										Additional								Other								Total
		Common Stock								Paid-in-				Accumulated				Comprehensive				Treasury				Stockholders'
For the Three Months Ended March 31, 2024		Shares				Amount				Capital				Deficit				Loss				Stock				Equity
Balance, December 31, 2023			82,825,455			$	827			$	298,394			$	(115,630	)		$	132			$	(5,982	)		$	177,741
Net Loss			—				—				—				(15,234	)			—				—				(15,234	)
Options exercised			48,750				—				298				—				—				—				298
Restricted stock vested			71,206				1				(401	)			—				—				—				(400	)
Foreign currency translation			—				—				—				—				(1,097	)			—				(1,097	)
Employee stock purchase plan			—				—				80				—				—				—				80
Stock-based compensation			—				—				3,088				—				—				—				3,088
Balance March 31, 2024			82,945,411			$	828			$	301,459			$	(130,864	)		$	(965	)		$	(5,982	)		$	164,476

 

																		Accumulated
																		Other								Total
		Common Stock								Additional				Accumulated				Comprehensive				Treasury				Stockholders'
For the Three Months Ended March 31, 2023		Shares				Amount				Paid-in-Capital				Deficit				Loss				Stock				Equity
Balance December 31, 2022			77,770,588			$	776			$	213,956			$	(67,789	)		$	(33	)		$	(5,982	)		$	140,928
Net loss			—				—				—				(9,052	)			—				—				(9,052	)
Issuance of common stock,   net of issuance costs of $831			4,312,500				43				68,406				—				—				—				68,449
Options exercised			223,785				2				1,620				—				—				—				1,622
Foreign currency translation			—				—				—				—				(99	)			—				(99	)
Employee stock purchase plan			—				—				122				—				—				—				122
Stock-based compensation			—				—				3,182				—				—				—				3,182
Balance, March 31, 2023			82,306,873			$	821			$	287,286			$	(76,841	)		$	(132	)		$	(5,982	)		$	205,152

 

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

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PARAGON 28, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

		Three Months Ended March 31,
		2024				2023
Cash flows from operating activities
Net loss		$	(15,234	)		$	(9,052	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			4,258				3,117
Provision for excess and obsolete inventories			471				293
Stock-based compensation			3,088				3,182
Change in fair value			(519	)			80
Other			(785	)			100
Changes in other assets and liabilities, net of acquisitions:
Accounts receivable			(3,099	)			441
Inventories			(7,044	)			(8,435	)
Accounts payable			7,441				5,592
Accrued expenses			194				(877	)
Accrued legal settlement			—				(9,000	)
Income tax receivable/payable			398				132
Other assets and liabilities			(162	)			367
Net cash used in operating activities			(10,993	)			(14,060	)
Cash flows from investing activities
Purchases of property and equipment			(5,817	)			(7,521	)
Proceeds from sale of property and equipment			292				223
Purchases of intangible assets			(253	)			(254	)
Net cash used in investing activities			(5,778	)			(7,552	)
Cash flows from financing activities
Payments on long-term debt			(160	)			(197	)
Payments of debt issuance costs			—				(7	)
Proceeds from issuance of common stock, net of issuance costs			—				68,449
Options exercised			298				1,622
RSU vesting, taxes paid			(400	)			—
Payments on earnout liability			(1,000	)			(500	)
Net cash (used in) provided by financing activities			(1,262	)			69,367
Effect of exchange rate changes on cash			616				(340	)
Net (decrease) increase in cash			(17,417	)			47,415
Cash at beginning of period			75,639				38,468
Cash at end of period		$	58,222			$	85,883
Supplemental disclosures of cash flow information:
Cash paid for income taxes			—				—
Cash paid for interest			2,264				601
Purchase of property and equipment included in accounts payable			4,952				4,026

 

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

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and related notes thereto included in Part I-Item 1 of this Quarterly Report on Form 10-Q. This discussion and other parts of this report contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Our actual results could differ materially from those discussed in these forward-looking statements. See “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q.‌

Overview

We are a leading medical device company exclusively focused on the foot and ankle orthopedic market and are dedicated to improving patient lives. Our innovative orthopedic solutions, procedural approaches and instrumentation cover a wide range of foot and ankle ailments including fracture fixation, forefoot, ankle, flatfoot or progressive collapsing foot deformity (“PCFD”), charcot foot and orthobiologics. To treat these painful, debilitating or even life-threatening conditions, we provide a comprehensive portfolio of solutions that includes surgical implants and disposables, as well as surgical instrumentation. We design each of our products with both the patient and surgeon in mind, with the goal of improving outcomes, reducing ailment recurrence and complication rates, and making the procedures simpler, consistent and reproducible. We believe our passion, expertise, and exclusive focus in the foot and ankle market has allowed us to better understand the needs of our patients and physicians, which has enabled us to create innovations and enhanced solutions that disrupt and transform the foot and ankle market. As a result, we have experienced significant growth and momentum in our business.

During the first quarter of 2024, our sales increased as a result of new product launches in our charcot and flatfoot segments, higher surgical volume and sales force expansion. As a result, we achieved net revenue growth of 17% during the three months ended March 31, 2024, as compared to the corresponding prior year period.

Our gross profit margin was 80%, a decrease from the prior year period driven primarily by increased supplier costs, changes in product mix in the United States and increased revenue from International which has lower average selling prices.

 

Adjusted EBITDA was negative $5.5 million for the three months ended March 31, 2024, compared to negative $1.4 million for the three months ended March 31, 2023. The decrease in Adjusted EBITDA is primarily attributable to an increase in operating expenses, partially offset by an increase in gross profit.

Non-GAAP Financial Measures

Use of Non-GAAP Financial Measures and Their Limitations

In addition to our results and measures of performance determined in accordance with U.S. GAAP, we believe that certain non-GAAP financial measures are useful in evaluating and comparing our financial and operational performance over multiple periods, identifying trends affecting our business, formulating business plans and making strategic decisions.

Adjusted EBITDA is a key performance measure that our management uses to assess our financial performance and is also used for internal planning and forecasting purposes.

We believe that Adjusted EBITDA, together with a reconciliation to net loss, helps identify underlying trends in our business and helps investors make comparisons between our company and other companies that may have different capital structures, tax rates, or different forms of employee compensation. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects, and allowing for greater transparency with respect to a key financial metric used by our management in its financial and operational decision-making. Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider these measures in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these potential limitations include:

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Because of these and other limitations, you should consider our non-GAAP measures only as supplemental to other GAAP-based financial measures. For a full reconciliation of Adjusted EBITDA to the most comparable GAAP financial measure, see “Reconciliation Between GAAP and Non-GAAP Measure.

Reconciliation Between GAAP and Non-GAAP Measure

We define Adjusted EBITDA as earnings (loss) before interest expense, income tax expense (benefit), depreciation and amortization, stock-based compensation expense, employee stock purchase plan expense, non-recurring expenses and certain other non-cash expenses. For a full reconciliation of Adjusted EBITDA for the three months ended March 31, 2024 and 2023 to the most comparable GAAP financial measure, refer to the presentation below.

 

		Three Months Ended March 31,
		2024				2023
		(in thousands)
Net loss		$	(15,234	)		$	(9,052	)
Interest expense, net			2,622				1,205
Income tax expense (benefit)			224				(71	)
Depreciation and amortization expense			4,258				3,117
Stock based compensation expense			3,088				3,182
Employee stock purchase plan expense			80				122
Change in fair value (1)			(519	)			80
Adjusted EBITDA		$	(5,481	)		$	(1,417	)

 

(1) Represents non-cash change in the fair value of our interest rate swap contract for the three months ended March 31, 2024 and earnout liability for the three months ended March 31, 2023.

Components of Our Results of Operations

Net Revenue

We derive our revenue from the sale of our foot and ankle orthopedic solutions, primarily implants. We also record as revenue any amounts billed to customers for shipping costs and record as cost of goods sold the actual shipping costs. We have elected to exclude from the measurement of the transaction price all taxes, such as sales, use, value-added, assessed by government authorities and collected from a customer. Therefore, revenue is recognized net of such taxes. In addition, we record revenue net of estimated discounts and other price concessions. No single customer accounted for 10% or more of our net revenue in the three months ended March 31, 2024 and 2023. We expect our net revenue to increase in the foreseeable future as we expand our sales territories, add new customers and increase the utilization of our products by our existing customers, though net revenue may fluctuate from quarter to quarter due to a variety of factors, including availability of reimbursement, the size and success of our sales force, the number of hospitals and physicians who are aware of and use our products and seasonality.

Cost of Goods Sold

Cost of goods sold consists primarily of finished products purchased from third-party suppliers, shipping costs, excess and obsolete inventory adjustments and royalties. Implants are manufactured to our specifications primarily by third-party suppliers in the United States. Cost of goods sold is recognized at the time the implant is used in surgery and the related revenue is recognized. Prior to use in surgery, the cost of our implants is recorded as inventories, net in our condensed consolidated balance sheets. Cost of goods sold is expected to increase due primarily to increased sales volume.

We calculate gross profit as net revenue less cost of goods sold, and gross margin as gross profit divided by net revenue. We expect our gross profit to increase in the foreseeable future as our net revenue grows, though our gross profit and gross margin have been and will continue to be affected by a variety of factors, primarily average selling prices, third-party manufacturing costs, change in mix of customers, excess and obsolete inventory adjustments, royalties and seasonality of our business. Our gross margin is higher for products we sell in the United States versus internationally due to higher average selling prices. We expect our gross margin to fluctuate from period to period, however, based upon the factors described above and seasonality.

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Operating Expenses

Research and Development

Research and development expense is comprised of engineering costs and research programs related to new product and sustaining product development activities, clinical studies and trials expenses, quality and regulatory expenses, and salaries and benefits related to research and development functions. We maintain a procedurally focused approach to product development and have projects underway to add new systems across multiple foot and ankle indications and to add additional functionality to our existing systems. We expect our research and development expenses to increase as we hire additional personnel to develop new product offerings and product enhancements.

Selling, General, and Administrative

Selling, general, and administrative expenses consist primarily of commissions paid to U.S. sales representatives, salaries, bonuses, and benefits related to selling, marketing, and general and administrative functions, and stock-based compensation. In addition, selling, general, and administrative expenses consist of the costs associated with marketing initiatives, physician and sales force medical education programs, surgical instrument depreciation, travel expenses, professional services fees (including legal, finance, audit and tax fees), insurance costs, facility expenses and other general corporate expenses.

We expect selling, general, and administrative expenses to continue to increase in the foreseeable future as we continue to grow our business. We also expect our administrative expenses, including stock-based compensation expense, to increase as we increase our headcount and expand our facilities and business processes to support our operations as a public company. Our selling, general and administrative expenses may fluctuate from period to period due to the seasonality of our business and as we continue to add direct sales territory managers in new territories.

Other Income (Expense)

Other Income (Expense), net

Other income (expense) consists primarily of changes in fair value related to earn-out liabilities and our interest rate swap contract.

Interest Expense, net

Interest expense consists of interest incurred, amortization of financing costs and interest income earned during the reported periods.

Results of Operations

For the Three Months Ended March 31, 2024 and 2023

The following table summarizes our results of operations for the periods presented:

 

		Three Months Ended March 31,								Change
		2024				2023				Amount				%
		(in thousands)
Net revenue		$	61,082			$	52,036			$	9,046				17	%
Cost of goods sold			12,186				8,906				3,280				37	%
Gross profit			48,896				43,130				5,766				13	%
Operating expenses:
Research and development costs			7,584				7,049				535				8	%
Selling, general, administrative			54,215				43,820				10,395				24	%
Total operating expenses			61,799				50,869				10,930				21	%
Operating loss			(12,903	)			(7,739	)			(5,164	)			67	%
Other income (expense):
Other income (expense), net			515				(179	)			694			*
Interest expense, net			(2,622	)			(1,205	)			(1,417	)		*
Total other expense			(2,107	)			(1,384	)			(723	)			(52	)%
Income tax expense (benefit)			224				(71	)			295			*
Net loss		$	(15,234	)		$	(9,052	)		$	(6,182	)			(68	)%

* Not Meaningful

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The following table represents total net revenue by geographic area, based on the location of the customer for the three months ended March 31, 2024 and 2023, respectively.

		Three Months Ended March 31,
		2024				2023
		(in thousands)
United States		$	51,051			$	44,981
International			10,031				7,055
Total net revenue		$	61,082			$	52,036

 

Net Revenue. Net revenue increased $9.0 million, or 17%, from $52.0 million during the three months ended March 31, 2023 to $61.1 million during the corresponding period in 2024. Strengthening of the U.S. dollar reduced net revenue growth for the three months ended March 31, 2024, by less than 1% as compared to the prior year. U.S. net revenue was $51.1 million for the three months ended March 31, 2024, representing growth of 14% compared to the prior year. U.S. net revenue growth was primarily the result of new product launches in our charcot and flatfoot segments, increased surgical volume and sales force expansion. International revenue for the three months ended March 31, 2024, was $10.0 million, representing growth of 42% compared to the prior year. International revenue growth was driven primarily by the United Kingdom and Australia as we continue to focus on growing our international footprint.

Cost of Goods Sold and Gross Profit Margin. Cost of goods sold increased $3.3 million, or 37%, from $8.9 million during the three months ended March 31, 2023, to $12.2 million during the corresponding period in 2024, primarily due to increased variable costs. Gross profit margin for the three months ended March 31, 2024 decreased to 80.0%, compared to 82.9% in the same period of 2023. The decrease in gross profit margin is primarily the result of higher prices from suppliers, changes in product mix in the United States and increased revenue from International which has lower average selling prices.

Research and Development Expenses. Research and development expenses increased $0.5 million, or 8%, from $7.1 million during the three months ended March 31, 2023, to $7.6 million as compared to the corresponding period in 2024. We continue to invest in new product development to improve patient lives through our product pipeline.

Selling, General, and Administrative Expenses. Selling, general and administrative expenses increased $10.4 million, or 24%, from $43.8 million in the three months ended March 31, 2023, to $54.2 million during the corresponding period in 2024. The increase in selling, general, and administrative expenses was primarily driven by increased headcount, annual merit increases, investments in the commercial team, increased variable sales representative commission expense related to net revenue growth, an increase in professional service fees and an increase in depreciation expense.

Other Income, net. Other income increased $0.7 million, from an expense of $0.2 million for the three months ended March 31, 2023, to income of $0.5 million for the three months ended March 31, 2024. The increase in other income is primarily related to the change in fair value of the interest rate swap.

Interest Expense. Interest expense increased $1.4 million, from $1.2 million for the three months ended March 31, 2023, to $2.6 million for the three months ended March 31, 2024, primarily due to higher levels of outstanding debt and higher interest rates on our outstanding debt.

Liquidity and Capital Resources

Our primary sources of capital from inception through March 31, 2024, have been from ongoing operations, private placements of securities, proceeds from our public offerings and the incurrence of indebtedness. As of March 31, 2024, we had cash of $58.2 million and the principal amount of our outstanding consolidated debt aggregated to $114.8 million, of which $0.6 million is classified as current in our Condensed Consolidated Balance Sheet. As of March 31, 2024, we had available borrowing capacity of $50.0 million, comprised of $25.0 million on our Ares Term Loan and $25.0 million on our Ares Revolving Loan.

We believe that our existing cash, additional available borrowing capacity and expected revenues will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months. Our primary short-term needs for capital for our planned operations, which are subject to change, include:

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We have based our short-term capital needs and planned operating requirements on assumptions that may prove to be incorrect and we may use all our available capital resources sooner than we expect. Although not anticipated at this time, we may require additional financing to fund our operations and planned growth. We may also seek additional financing opportunistically. We may seek to raise any additional capital through public or private equity offerings or debt financings, credit or loan facilities or a combination of one or more of these funding sources. Additional funds may not be available to us on acceptable terms or at all. If we fail to obtain necessary capital when needed on acceptable terms, or at all, we could be forced to delay, limit, reduce or terminate our product development programs, commercialization efforts or other operations. If we raise additional funds by issuing equity securities, our stockholders will suffer dilution and the terms of any financing may adversely affect the rights of our stockholders. In addition, as a condition to providing additional funds to us, future investors may demand, and may be granted, rights superior to those of existing stockholders. If we raise additional capital through collaborations agreements, licensing arrangements or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product or grant licenses that may not be favorable to us. Debt financing, if available, may involve restrictive covenants limiting our flexibility in conducting future business activities, and, in the event of insolvency, debt holders would be repaid before holders of our equity securities received any distribution of our corporate assets. In addition, market conditions impacting financial institutions could impact our ability to access some or all of our cash, cash equivalents and marketable securities, and we may be unable to obtain alternative funding when and as needed on acceptable terms, if at all.

Cash Flows

The following table sets forth the primary sources and uses of cash for the periods presented:

		Three Months Ended March 31,								Change
		2024				2023				Amount				%
		(in thousands)
Net cash (used in) provided by:
Operating activities		$	(10,993	)		$	(14,060	)		$	3,067				22	%
Investing activities			(5,778	)			(7,552	)			1,774				23	%
Financing activities			(1,262	)			69,367				(70,629	)		*
Effect of exchange rate changes on cash			616				(340	)			956			*
Net decrease in cash		$	(17,417	)		$	47,415			$	(64,832	)		*

* Not Meaningful

Net Cash Used in Operating Activities

Net cash used in operating activities for the three months ended March 31, 2024 was $11.0 million, consisting of net loss of $15.2 million partially offset by non-cash expenses of $6.5 million, which primarily consisted of $4.3 million of depreciation and amortization and $3.1 million of stock-based compensation expense, and negative changes in working capital of $2.3 million. The changes in working capital are comprised of a net inventory increase of $7.0 million and an increase in accounts receivable of $3.1 million, partially offset by an increase in accounts payable of $7.4 million.

Net cash used in operating activities for the three months ended March 31, 2023 was $14.1 million, consisting of net loss of $9.1 million offset by non-cash expenses of $6.8 million, which primarily consisted of $3.2 million of stock-based compensation expense and $3.1 million of depreciation and amortization, and negative changes in working capital of $11.8 million. The changes in working capital included a $9.0 million legal settlement payment and a net inventory increase of $8.4 million, partially offset by an increase in accounts payable of $5.6 million and a reduction in accounts receivable of $0.4 million.

Net Cash Used in Investing Activities

Net cash used in investing activities for the three months ended March 31, 2024 was $5.8 million, consisting primarily of surgical instrumentation purchases.

Net cash used in investing activities for the three months ended March 31, 2023 was $7.6 million, consisting primarily of surgical instrumentation purchases plus other purchases of property, plant and equipment.

Net Cash Provided by Financing Activities

Net cash used in financing activities for the three months ended March 31, 2024 was $1.3 million, consisting primarily of a $1.0 million payment related to the completion of a milestone associated with the Additive Orthopaedics acquisition.

Net cash provided by financing activities for the three months ended March 31, 2023 was $69.4 million, consisting primarily of $68.5 million of proceeds from the issuance of common stock, net of issuance costs related to the Offering on January 30, 2023 and $1.6 million of proceeds from the exercise of stock options.

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Critical Accounting Estimates

Management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenue, expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material. During the three months ended March 31, 2024, the Company revised the inputs used in estimating the reserve on obsolete and slow-moving inventory to include forecasted sales, in addition to current inventory levels and historical sales.

During the three months ended March 31, 2024, there were no material changes to our critical accounting policies or in the methodology used for estimates from those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023, other than the item described above.

Recent Accounting Pronouncements

See Note 2 to our condensed consolidated financial statements included in this quarterly report for recently adopted and recently issued accounting pronouncements not yet adopted and their potential impact to our financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

The primary objectives of our investment activities are to preserve principal and provide liquidity. In the normal course of business, we are exposed to market risk related to fluctuating interest rates. The Company has both fixed and variable rate debt to manage the impact of these fluctuations. The Company is the fixed rate payor on an interest rate swap contract to help manage some of this risk. Based on our overall interest rate exposure as of March 31, 2024, we do not believe a hypothetical 10 percent change in interest rates on our variable rate indebtedness would have a material effect on our results of operations.

Foreign Currency Risk

Our business is primarily conducted in U.S. dollars. Any transactions that may be conducted in foreign currencies are not expected to have a material effect on our results of operations, financial position or cash flows. As we expand internationally our results of operations and cash flows may become increasingly subject to fluctuations due to changes in foreign currency exchange rates.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(e) under the Exchange Act) that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Disclosure Controls and Procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We may in the ordinary course of business face various claims brought by third parties and we may, from time to time, make claims or take legal actions to assert our rights, including intellectual property rights as well as claims relating to employment matters and the safety or efficacy of our products. Any of these claims could cause us to incur substantial costs and, while we generally believe that we have adequate insurance to cover many different types of liabilities, our insurance carriers may deny coverage, may be inadequately capitalized to pay on valid claims, or our policy limits may be inadequate to fully satisfy any associated costs, damage awards or settlements. If this were to happen, the payment of any such awards could have a material adverse effect on our operations, cash flows and financial position. Additionally, any such claims, whether or not successful, could damage our reputation and business. We were not involved in any legal proceedings as of March 31, 2024, that could have a material adverse effect on our business, financial condition, or operating results.

Item 1A. Risk Factors.

As of the date of this Quarterly Report on Form 10-Q, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. We may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None

Item 3. Defaults Upon Senior Securities.

None

Item 4. Mine Safety Disclosures.

Not applicable

Item 5. Other Information.

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Item 6. Exhibits.

The following exhibits are included within or incorporated herein by reference.

 

Exhibit Number		Description	Incorporated by Reference
			Form	Exhibit	Date Filed	File Number	Filed Herewith
3.1		Amended and Restated Certificate of Incorporation of Paragon 28, Inc.	8-K	3.1	10/19/2021	001-40902
3.1.1		Certificate of Amendment to amended and Restated Certificate of Incorporation of Paragon 28, Inc.	8-K	3.1	05/19/2023	001-40902
3.2		Second Amended and Restated Bylaws	8-K	3.2	05/19/2023	001-40902
4.1		Form of Common Stock Certificate	S-1/A	4.2	10/08/2021	333-259789
4.2		Amended and Restated Investors’ Rights Agreement, dated as of July 28, 2020, by and between Paragon 28, Inc. and the investors party thereto.	S-1	4.3	09/24/2021	333-259789
10.1		Agreement dated April 3, 2024, by and between Kristina Wright and the Company.	8-K	10.1	04/04/2024	001-40902
31.1		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.					X
31.2		Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.					X
32.1*		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.					X
32.2*		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.					X
101.INS		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

* The certifications attached as Exhibit 32.1 and 32.2 that accompany this Quarterly Report are deemed furnished and not filed with the U.S. Securities and Exchange Commission and are not to be incorporated by reference into any filing of Paragon 28, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report, irrespective of any general incorporation language contained in such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

		PARAGON 28, INC.
Date: May 8, 2024		By:	/s/ Albert DaCosta
		Name:	Albert DaCosta
		Title:	Chief Executive Officer (Principal Executive Officer)

 

Date: May 8, 2024		By:	/s/ Kristina Wright
		Name:	Kristina Wright
		Title:	Interim Chief Financial Officer (Principal Financial Officer)

 

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