UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
For the quarterly period ended
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As of November 8, 2024, there were
EXPLANATORY NOTE
As previously disclosed in Amendment No. 1 to our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2023, filed with the Securities and Exchange Commission (the “SEC”) on August 8, 2024 (the “Amended 2023 Annual Report”) and Amendment No. 1 to our Quarterly Report on Form 10-Q/A for the three months ended March 31, 2024, filed with the SEC on August 8, 2024 (the “Amended 2024 Quarterly Report”), we restated our audited consolidated financial statements for the fiscal year ended December 31, 2023, and the unaudited interim condensed consolidated financial statements for the periods ended March 31, 2023, June 30, 2023, September 30, 2023 and March 31, 2024. Accordingly, the audited consolidated financial statements as of December 31, 2023, and the unaudited interim condensed consolidated financial statements for the three and nine months ended September 30, 2023, included in this Quarterly Report on Form 10-Q (the “Quarterly Report”) have been restated to reflect the restatement as described in the Amended 2023 Annual Report and the Amended 2024 Quarterly Report.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report 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, 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”).
i
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)
|
| |||||
September 30, 2024 | December 31, 2023 | |||||
ASSETS | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | | $ | | ||
Trade receivables, net of allowance for doubtful accounts of $ | | | ||||
Inventories, net | | | ||||
Income taxes receivable | | | ||||
Other current assets | | | ||||
Total current assets | | | ||||
| ||||||
Property and equipment, net | | | ||||
Intangible assets, net | | | ||||
Goodwill | | | ||||
Deferred income taxes | | | ||||
Other assets | | | ||||
Total assets | $ | | $ | | ||
| ||||||
LIABILITIES & STOCKHOLDERS' EQUITY | ||||||
Current liabilities: | ||||||
Accounts payable | $ | | $ | | ||
Accrued expenses | | | ||||
Other current liabilities | | | ||||
Current maturities of long-term debt | | | ||||
Income taxes payable | | | ||||
Total current liabilities | | | ||||
| ||||||
Long-term liabilities: | ||||||
Long-term debt net, less current maturities | | | ||||
Other long-term liabilities | | | ||||
Deferred income taxes | | | ||||
Income taxes payable | | | ||||
Total liabilities | | | ||||
| ||||||
Commitments and contingencies (Note 10) | ||||||
| ||||||
Stockholders' equity: | ||||||
Common stock, $ | | | ||||
Additional paid in capital | | | ||||
Accumulated deficit | ( | ( | ||||
Accumulated other comprehensive income | | | ||||
Treasury stock, at cost; | ( | ( | ||||
Total stockholders' equity | | | ||||
Total liabilities & stockholders' equity | $ | | $ | | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
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 September 30, |
| Nine Months Ended September 30, | |||||||||
2024 |
| 2023 | 2024 |
| 2023 | |||||||
Net revenue | $ | | $ | | $ | | $ | | ||||
Cost of goods sold | | | | | ||||||||
Gross profit | | | | | ||||||||
| ||||||||||||
Operating expenses: | ||||||||||||
Research and development | | | | | ||||||||
Selling, general, and administrative | | | | | ||||||||
Total operating expenses | | | | | ||||||||
Operating loss | ( | ( | ( | ( | ||||||||
| ||||||||||||
Other income (expense): | ||||||||||||
Other income (expense), net | ( | | ( | ( | ||||||||
Interest expense, net | ( | ( | ( | ( | ||||||||
Total other expense, net | ( | ( | ( | ( | ||||||||
Loss before income taxes | ( | ( | ( | ( | ||||||||
Income tax expense (benefit) | | ( | | | ||||||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Foreign currency translation adjustment | | ( | | ( | ||||||||
Comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Weighted average number of shares of common stock outstanding: | ||||||||||||
Basic | | | | | ||||||||
Diluted | | | | | ||||||||
Net loss per share attributable to common stockholders: | ||||||||||||
Basic | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Diluted | $ | ( | $ | ( | $ | ( | $ | ( | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
PARAGON 28, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except for number of shares)
(unaudited)
Accumulated | ||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||
For the Three Months Ended | Common Stock | Paid-in- | Accumulated | Comprehensive | Treasury | Stockholders' | ||||||||||||||
September 30, 2024 |
| Shares |
| Amount |
| Capital |
| Deficit |
| Loss |
| Stock |
| Equity | ||||||
Balance, June 30, 2024 | | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | | |||||||
Net Loss | — | — | — | ( | — | — | ( | |||||||||||||
Options exercised | | | | — | — | — | | |||||||||||||
Restricted stock vested, net of shares withheld for taxes | | — | ( | — | — | — | ( | |||||||||||||
Foreign currency translation | — | — | — | — | | — | | |||||||||||||
Employee stock purchase plan | — | — | | — | — | — | | |||||||||||||
Stock-based compensation | — | — | | — | — | — | | |||||||||||||
Balance, September 30, 2024 | | $ | | $ | | $ | ( | $ | | $ | ( | $ | | |||||||
For the Nine Months Ended September 30, 2024 | ||||||||||||||||||||
Balance, December 31, 2023 | | $ | | $ | | $ | ( | $ | | $ | ( | $ | | |||||||
Net Loss | — | — | — | ( | — | — | ( | |||||||||||||
Options exercised | | | | — | — | — | | |||||||||||||
Restricted stock vested, net of shares withheld for taxes | | | ( | — | — | — | ( | |||||||||||||
Foreign currency translation | — | — | — | — | | — | | |||||||||||||
Employee stock purchase plan | | — | | — | — | — | | |||||||||||||
Stock-based compensation | — | — | | — | — | — | | |||||||||||||
Balance, September 30, 2024 | | $ | | $ | | $ | ( | $ | | $ | ( | $ | | |||||||
Accumulated | ||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||
For the Three Months Ended | Common Stock | Paid-in- | Accumulated | Comprehensive | Treasury | Stockholders' | ||||||||||||||
September 30, 2023 |
| Shares |
| Amount |
| Capital |
| Deficit |
| Loss |
| Stock |
| Equity | ||||||
Balance, June 30, 2023 | | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | | |||||||
Net loss | — | — | — | ( | — | — | ( | |||||||||||||
Offering costs associated with public offering | — | — | — | — | — | — | ||||||||||||||
Options exercised | | | — | — | — | | ||||||||||||||
Foreign currency translation | — | — | — | — | ( | — | ( | |||||||||||||
Employee stock purchase plan | — | — | | — | — | — | | |||||||||||||
Stock-based compensation | — | — | | — | — | — | | |||||||||||||
Balance, September 30, 2023 | | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | | |||||||
For the Nine Months Ended September 30, 2023 | ||||||||||||||||||||
Balance, December 31, 2022 | | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | | |||||||
Net loss | — | — | — | ( | — | — | ( | |||||||||||||
Issuance of common stock, net of issuance costs of $ | | | | — | — | — | | |||||||||||||
Options exercised | | | | — | — | — | | |||||||||||||
Foreign currency translation | — | — | — | — | ( | — | ( | |||||||||||||
Employee stock purchase plan | | — | | — | — | — | | |||||||||||||
Stock-based compensation | — | — | | — | — | — | | |||||||||||||
Balance, September 30, 2023 | | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
PARAGON 28, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Nine Months Ended September 30, | |||||
2024 |
| 2023 | ||||
Cash flows from operating activities | ||||||
Net loss | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||
Depreciation and amortization | | | ||||
Allowance for doubtful accounts | | | ||||
Provision for excess and obsolete inventories | | | ||||
Stock-based compensation | | | ||||
Change in fair value of financial instruments | ( | ( | ||||
Other | | ( | ||||
Changes in other assets and liabilities, net of acquisitions: | ||||||
Accounts receivable | | | ||||
Inventories | ( | ( | ||||
Accounts payable | ( | | ||||
Accrued expenses | | | ||||
Accrued legal settlement | — | ( | ||||
Income tax receivable/payable | ( | ( | ||||
Other assets and liabilities | ( | ( | ||||
Net cash used in operating activities | ( | ( | ||||
| ||||||
Cash flows from investing activities | ||||||
Purchases of property and equipment | ( | ( | ||||
Proceeds from sale of property and equipment | | | ||||
Purchases of intangible assets | ( | ( | ||||
Net cash used in investing activities | ( | ( | ||||
| ||||||
Cash flows from financing activities | ||||||
Payments on long-term debt | ( | ( | ||||
Payments of debt issuance costs | ( | — | ||||
Proceeds from issuance of common stock, net of issuance costs | — | | ||||
Proceeds from exercise of options | | | ||||
RSU vesting, taxes paid | ( | — | ||||
Proceeds from employee stock purchase plan | | | ||||
Payments on earnout liability | ( | ( | ||||
Net cash provided by financing activities | | | ||||
| ||||||
Effect of exchange rate changes on cash and cash equivalents | ( | | ||||
Net decrease in cash and cash equivalents | ( | ( | ||||
Cash and cash equivalents at beginning of period | | | ||||
Cash and cash equivalents at end of period | $ | | $ | | ||
|
| |||||
Supplemental disclosures of cash flow information: | ||||||
Restricted cash | — | | ||||
Cash paid for income taxes | | | ||||
Cash paid for interest | | | ||||
Purchase of property and equipment included in accounts payable | | | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
NOTE 1. BUSINESS AND BASIS OF PRESENTATION
Business
Paragon 28, Inc. (collectively with its subsidiaries, “we,” “us,” “our,” “P28” or the “Company”) develops, distributes, and sells medical devices in the foot and ankle segment of the orthopedic implant marketplace. Our approach to product development is procedurally focused, resulting in a full range of procedure-specific foot and ankle products designed specifically for foot and ankle anatomy. Our products and product families include plates and plating systems, screws, staples, and nails aimed to address all major foot and ankle procedures including fracture fixation, forefoot or hallux valgus - which includes bunion and hammertoe, ankle, flatfoot or progressive collapsing foot deformity, charcot foot and orthobiologics. P28 is a United States (“U.S.”) based company incorporated in the State of Delaware, with headquarters in Englewood, Colorado. Our sales representatives and distributors are located globally with the majority concentrated in the U.S., Australia, South Africa, and the United Kingdom.
Basis of Presentation and Consolidation
The accompanying Condensed Consolidated Financial Statements include the accounts of Paragon 28, Inc. and its subsidiaries, all of which are wholly-owned. The accompanying Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information required by U.S. GAAP for complete financial statements. The interim Condensed Consolidated Financial Statements reflect all adjustments that are of a normal recurring nature and that are considered necessary for a fair representation of the results for the periods presented and should be read in conjunction with the audited Consolidated Financial Statements and notes thereto for the year ended December 31, 2023, which include a complete set of footnote disclosures, including our significant accounting policies. The audited Consolidated Financial Statements and notes thereto for the year ended December 31, 2023, are included in the Amended 2023 Annual Report. The results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year or for any other future period. All intercompany balances and transactions have been eliminated in consolidation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Because future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Any changes in these estimates will be reflected in the Company’s Condensed Consolidated Financial Statements. Significant items subject to such estimates and assumptions include the determination of the credit loss reserves for trade receivables, inventory obsolescence, impairment of long-lived assets, recoverability of goodwill and intangible assets, contingent earnout liabilities, interest rate swap valuation, income taxes and stock-based compensation. On January 1, 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. The effect of this change in estimate was a decrease of $
Foreign Currency Translation
The Condensed Consolidated Financial Statements are presented in U.S. dollars. The Company’s non-U.S. subsidiaries have a functional currency (i.e., the currency in which operational activities are primarily conducted) that is other than the U.S. dollar, generally the currency of the country in which such subsidiaries are domiciled. Such subsidiaries’ assets and liabilities are translated into U.S. dollars at quarter-end exchange rates, while revenue and expenses are translated at average exchange rates during the quarter based on the daily closing exchange rates. Adjustments that result from translating amounts from a subsidiary’s functional currency to U.S. dollars are reported in Accumulated other comprehensive income (loss), a separate component of stockholders’ equity.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share data)
(unaudited)
Transactions made in a currency other than the functional currency are remeasured to the functional currency at the exchange rates on the dates of the transactions. Foreign exchange gains and losses are recorded within Other income (expense), net on the consolidated statements of operations and comprehensive loss.
Significant Accounting Policies
There have been no changes in the Company’s significant accounting policies as disclosed in Note 2 to our audited Consolidated Financial Statements included in our Amended 2023 Annual Report on Form 10-K/A.
Recently Issued Accounting Pronouncements
In October 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. The amendments in ASU 2023-06 modify the disclosure or presentation requirements of a variety of Topics in the Codification. Certain of the amendments represent clarifications to or technical corrections of the current requirements. ASU 2023-06 is applicable to all entities subject to the SEC’s existing disclosure requirements. The effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. The Company is currently evaluating the amendments in ASU 2023-06 and does not expect the adoption to have a significant impact on the Company’s Consolidated Financial Statements and related disclosures.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures ("ASU 2023-07"), which provides amendments to improve reportable segment disclosures requirements. The amendments in ASU 2023-07 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the amendments to determine the impact it will have on the Company’s Consolidated Financial Statements and related disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”), to enhance the transparency and decision usefulness of income tax disclosures. The main provisions in ASU 2023-09 enhance the disclosure requirements of rate reconciliations and income taxes paid. For public business entities, the amendments in ASU 2023-09 are effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The amendments in this update should be applied on a prospective basis, retrospective application is permitted. The Company is currently evaluating the amendments in this guidance to determine the impact it will have on the Company’s Consolidated Financial Statements and related disclosures.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share data)
(unaudited)
NOTE 3. INTANGIBLE ASSETS
Intangibles
Intangible assets as of September 30, 2024, were as follows:
| Gross |
| Accumulated |
| Net Carrying | ||||
Trademarks and tradenames, indefinite-lived | $ | | $ | — | $ | | |||
Patents, trademarks and tradenames, definite-lived | | | | ||||||
Customer relationships | | | | ||||||
Developed technology | | | | ||||||
Other intangibles | | | — | ||||||
Total intangible assets, net | $ | | $ | | $ | | |||
Intangible assets as of December 31, 2023, were as follows:
| Gross |
| Accumulated |
| Net Carrying | ||||
Trademarks and tradenames, indefinite-lived | $ | | $ | — | $ | | |||
Patents, definite-lived | | | | ||||||
Customer relationships | | | | ||||||
Developed technology | | | | ||||||
Other intangibles | | | | ||||||
Total intangible assets, net | $ | | $ | | $ | | |||
Amortization expense is included in Selling, general, and administrative expenses, on the Condensed Consolidated Statements of Operations and Comprehensive Loss, and was $
Expected future amortization expense is as follows:
2024 (Remaining) |
| $ | |
2025 | | ||
2026 | | ||
2027 | | ||
2028 | | ||
Thereafter | | ||
Total future amortization expense | $ | |
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share data)
(unaudited)
NOTE 4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures certain financial assets and liabilities at fair value. There is a fair value hierarchy which prioritizes inputs used in measuring fair value into three broad levels:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Includes other inputs that are directly or indirectly observable in the marketplace, such as quoted market prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Unobservable inputs which are supported by little or no market activity.
The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest-level input that is significant to the fair value measurement in its entirety.
The Company’s significant financial assets and liabilities measured at fair value as of September 30, 2024, were as follows:
| Level 1 |
| Level 2 |
| Level 3 |
| Total | |||
Financial Assets: | ||||||||||
Interest rate swap | $ | — | | — | $ | | ||||
The Company's significant financial assets and liabilities measured at fair value as of December 31, 2023, were as follows:
| Level 1 |
| Level 2 |
| Level 3 |
| Total | |||
Financial Assets: | ||||||||||
Interest rate swap | $ | — | | — | $ | | ||||
Financial Liabilities: | ||||||||||
Contingent consideration | $ | — | — | | $ | | ||||
The Company’s Level 2 asset pertains to an interest rate swap associated with the Zions Facility (as defined below), used to manage interest rate risk related to variable rate borrowings and manage exposure to the variability of cash flows. The interest rate swap is not designated for hedge accounting and is measured utilizing inputs observable in active markets. For the three and nine months ended September 30, 2024, we reassessed the fair value of our swap which resulted in an increase of $
The Company reassessed its Level 3 contingent earnout liability as of September 30, 2024, and determined it was not probable that the remaining two milestones associated with the acquisition of Additive Orthopaedics, LLC (“Additive Orthopaedics”) would be achieved. The Company wrote off the remaining earnout liability and recorded non-cash income of $
As of December 31, 2023, one project milestone associated with the acquisition of Disior LTD. (“Disior”) and one project milestone associated with the Additive Orthopaedics acquisition was included in Accrued expenses on the Consolidated Balance Sheet totaling $
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share data)
(unaudited)
quarter of 2024. For additional information on the Disior and Additive Orthopaedics acquisitions refer to Note 4 to our Consolidated Financial Statements included in the Amended 2023 Annual Report on Form 10-K/A for the year ended December 31, 2023.
NOTE 5. DEBT
Long-term debt as of September 30, 2024 and December 31, 2023 consists of the following:
| September 30, 2024 |
| December 31, 2023 | |||
Ares Revolving Loan | $ | | $ | | ||
Ares Term Loan | | | ||||
Zions Term Loan | | | ||||
| | | ||||
Less: deferred issuance costs | ( | ( | ||||
Total debt, net of issuance costs | | | ||||
Less: current portion | ( | ( | ||||
Long-term debt, net, less current maturities | $ | | $ | | ||
Ares Credit Agreement
On November 2, 2023, the Company and its wholly-owned subsidiary, Paragon Advanced Technologies, Inc. (“Paragon Advanced Technologies” and, together with the Company, the “Borrowers”) entered into a new credit agreement (the “Ares Credit Agreement”) with Ares Capital Corporation (“Ares”) to provide a total of $
Vectra Bank Colorado Loan Agreements
On March 24, 2022, the Company entered into a secured term loan facility (the “Zions Facility”) with Zions Bancorporation, N.A. dba Vectra Bank Colorado in the principal amount of $
Effective as of November 10, 2022, the Company entered into the First Amendment to the Zions Facility. The amendment to the Zions Facility amends the financial covenants to require the Company to maintain (i) the Liquidity
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share data)
(unaudited)
Ratio, if the Cash Flow as of the last day of any quarter measured on a trailing three month basis is less than or equal to $
Effective as of November 2, 2023, the Company entered into the Second Amendment to the Zions Facility (the “Second Amendment”). The Second Amendment replaces references to MidCap Financial Trust and MidCap Credit Agreements with references to Ares and the Ares Credit Agreement. As of September 30, 2024, the Company was in compliance with all financial covenants under the Second Amendment. Total debt issuance costs associated with the Zions Facility were $
NOTE 6. STOCKHOLDERS’ EQUITY
Under its Amended and Restated Certificate of Incorporation, the Company has a total of
Common Stock
On January 30, 2023, the Company completed an underwritten public offering (“the Offering”) of
The Company received aggregate net proceeds from the Offering of approximately $
Treasury Stock
The Company did
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share data)
(unaudited)
NOTE 7. LOSS PER SHARE
Basic net loss per share is computed by dividing net loss attributable to common stockholders (the numerator) by the weighted average number of common stock outstanding for the period (the denominator). Diluted net income per share of common stock attributable to common stockholders is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period adjusted for the dilutive effects of common stock equivalents using the treasury stock method or the method based on the nature of such securities. In periods when losses from operations are reported, the weighted-average number of shares of common stock outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. The computation of net loss per share for the three and nine months ended September 30, 2024 and 2023 was as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Weighted-average common stock outstanding: | ||||||||||||
Basic | | | | | ||||||||
Diluted | | | | | ||||||||
Loss per share: | ||||||||||||
Basic | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Diluted | $ | ( | $ | ( | $ | ( | $ | ( | ||||
The following outstanding potentially dilutive securities were excluded from the calculation of diluted net loss per share attributable to common stockholders because their impact would have been antidilutive for the period presented:
As of September 30, | ||||||
| 2024 |
| 2023 | |||
Stock options | | | ||||
Restricted stock units | | | ||||
NOTE 8. STOCK-BASED COMPENSATION
Employee Stock Purchase Plan
The Company’s Employee Stock Purchase Plan (“ESPP”) provides participating employees with the opportunity to purchase the Company’s common stock at
The Company issued
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share data)
(unaudited)
Stock Options
The following summarizes the Company’s stock option plan and the activity for the nine months ended September 30, 2024.
| Shares |
| Weighted-Average |
| Weighted-Average | ||
Outstanding, December 31, 2023 | | $ | | ||||
Granted | — | — | |||||
Exercised or released | ( | | |||||
Forfeited or expired | ( | | |||||
Outstanding, September 30, 2024 | | $ | | ||||
Exercisable, September 30, 2024 | | $ | | ||||
Vested and expected to vest at September 30, 2024 | | $ | | ||||
During the three months ended September 30, 2024 and 2023, the Company recognized $
Restricted Stock Units
The following table summarizes the Company’s restricted stock units activity for the nine months ended September 30, 2024:
| Restricted |
| Weighted-Average | ||
Outstanding, December 31, 2023 | | $ | | ||
Granted | | | |||
Vested | ( | | |||
Forfeited or expired | ( | | |||
Outstanding, September 30, 2024 | | $ | | ||
Vested and expected to vest at September 30, 2024 | | $ | | ||
During the three months ended September 30, 2024 and 2023, the Company recognized $
Performance Share Units
On March 8, 2024, the Company granted
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share data)
(unaudited)
Free Cash Flow (“aFCF”) for the trailing twelve months ending December 31, 2026, or the consummation of a change in control if earlier (“Performance Period”). aFCF is defined as Total Operating Cash Flow plus Investing Cash Flow adjusted for certain nonrecurring items. Upon achievement of the minimum threshold performance metric, the executive may earn a pro rata portion of their respective target shares and up to
On August 7, 2024, the Company granted
Stock-based compensation expense is recognized on a straight-line basis over the vesting period, beginning at the point in time that the performance condition is considered probable of achievement. The probability of achieving the performance condition is assessed at each reporting period. If it is deemed probable that the performance condition will be met, compensation cost will be recognized based on the grant date fair value of the award expected to be earned. If it is deemed that it is not probable that the performance condition will be met, the Company will discontinue the recognition of compensation cost and any compensation cost previously recorded will be reversed. At September 30, 2024, achievement of the performance condition for the performance share units was deemed probable with
NOTE 9. INCOME TAXES
The effective tax rates for the nine months ended September 30, 2024 and 2023 are as follows:
Nine Months Ended September 30, | |||||
| 2024 |
| 2023 | ||
Effective tax rate | ( | % | ( | % | |
For the three months ended September 30, 2024 and 2023, the Company recorded tax expense of $
The Company’s fiscal year 2024 and 2023 income tax expense and rates differed from the amount of income tax determined by applying the U.S. Federal income tax rate to pre-tax income primarily due to the U.S., Finland, Germany and Italy jurisdictions that have a full valuation allowance recorded on deferred tax assets. In addition, the tax rate is lower than the U.S. statutory federal tax rate as a result of foreign earnings that are taxed at lower tax rates.
The Company continues to monitor the realization of its deferred tax assets and assesses the need for a valuation allowance. The Company analyzes available positive and negative evidence to determine if a valuation allowance is needed based on the weight of the evidence. This objectively verifiable evidence includes the current and prior two years’ profit
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share data)
(unaudited)
and loss positions after considering pre-tax book income plus or minus permanent adjustments as well as other positive and negative evidence available. This process requires management to make estimates, assumptions, and judgments that are uncertain in nature. The Company has established a valuation allowance with respect to deferred tax assets in the U.S., Finland, Germany, and Italy and continues to monitor and assess potential valuation allowances in all its jurisdictions.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is involved in various lawsuits, claims, inquiries, and other regulatory and compliance matters, most of which are routine to the nature of our business. When it is probable that a loss will be incurred and where a range of the loss can be reasonably estimated, the best estimate within the range is accrued. When the best estimate within the range cannot be determined, the low end of the range is accrued. The ultimate resolution of these claims could affect future results of operations should the exposure be materially different from the estimates or should liabilities be incurred that were not previously accrued. Potential insurance reimbursements are not offset against potential liabilities.
Class Action Litigation
On September 30, 2024, and October 18, 2024, respectively, two putative class action complaints were filed in the U.S. District Court for the District of Colorado. These complaints allege that the Company and certain current and former officers violated federal securities laws. The cases are captioned Ellington v. Paragon 28, Inc., et al., and Tiedt v. Paragon 28, Inc., et al. We believe the allegations in the complaint are without merit and intend to vigorously defend the litigation.
Given the early stage of the litigation matters described above, we are unable at this time to reasonably estimate possible losses or form a judgment that an unfavorable outcome is either probable or remote. However, litigation is subject to inherent uncertainties, and one or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect for the period in which they are resolved, and on our business generally. In addition, regardless of their merits or their ultimate outcomes, lawsuits and legal proceedings are costly, divert management attention, and may adversely affect our reputation, even if they are resolved in our favor.
NOTE 11. RELATED PARTY TRANSACTIONS
The Company has a license agreement dated July 1, 2017 for certain intellectual property with an entity that is affiliated with one of the directors of the Company, under which the Company pays a royalty of four percent (
The Company paid professional services fees to a related party totaling $
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share data)
(unaudited)
NOTE 12. SEGMENT AND GEOGRAPHIC INFORMATION
Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker, which is our Chief Executive Officer, in deciding how to allocate resources and in assessing performance. We manage our business globally within
The following table represents total net revenue by geographic area, based on the location of the customer for the three and nine months ended September 30, 2024 and 2023, respectively.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
United States | $ | | $ | | $ | | $ | | ||||
International | | | | | ||||||||
Total net revenue | $ | | $ | | $ | | $ | | ||||
The following table represents total non-current assets, excluding deferred taxes, by geographic area as of September 30, 2024 and December 31, 2023, respectively.
| September 30, 2024 |
| December 31, 2023 | |||
United States | $ | | $ | | ||
Finland | | | ||||
Other International | | | ||||
Total assets | $ | | $ | | ||
NOTE 13. EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution plan for eligible employees who are 21 years of age with three months of service. Eligible employees can voluntarily contribute up to
15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Unaudited Interim Condensed Consolidated Financial Statements and related notes thereto included in Part I - Item 1 of this Quarterly Report. As discussed in the "Explanatory Note", amounts throughout this discussion and analysis for our unaudited interim condensed consolidated statements for the three and nine months ended September 30, 2023 have been restated to reflect the impact of the restatement as described in the Amended 2024 Quarterly Report. In addition to historical information, the following discussion contains forward-looking statements, including, but not limited to, statements regarding the Company's expectation for future performance, liquidity and capital resources, that involve risks, uncertainties and assumptions that could cause actual results to differ materially from the Company's expectations. The Company’s actual results may differ materially from those contained in or implied by any forward-looking statements. Factors that could cause such differences include those identified below and those described in “Special Note Regarding Forward-Looking Statements”. The Company assumes no obligation to update any of these forward-looking statements.
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, 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 three and nine months ended September 30, 2024, our sales increased as a result of increased surgical volume driven primarily by U.S sales force expansion, growth in focused international markets and key product launches in the ankle, forefoot and fracture fixation segments. As a result, we reported net revenue growth of 18%, during the three and nine months ended September 30, 2024, as compared to the corresponding prior year periods.
Our gross profit margin was 74.1% and 75.5% for the three and nine months ended September 30, 2024, respectively, compared to 77.4% and 78.3% during the three and nine months ended September 30, 2023, representing decreases from the corresponding prior year periods driven primarily by higher non-cash charges for excess and obsolete inventory, partially offset by lower freight expense, as a percent of revenue.
Adjusted EBITDA was positive $0.4 million and negative $2.8 million for the three months ended September 30, 2024 and 2023, respectively. The improvement in Adjusted EBITDA for the three months ended September 30, 2024 is primarily attributable to an increase in gross profit from higher revenue and a change in the fair value of financial instruments, partially offset by an increase in operating expenses. Adjusted EBITDA was negative $10.3 million and negative $10.9 million for the nine months ended September 30, 2024 and 2023, respectively. The improvement in Adjusted EBITDA for the nine months ended September 30, 2024 is primarily attributable to an increase in gross profit from higher revenue, partially offset by an increase in operating expenses.
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.
16
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:
| ● | other companies, including companies in our industry which have similar business arrangements, may report Adjusted EBITDA, or similarly titled measures but calculate them differently, which reduces their usefulness as comparative measures; |
| ● | although depreciation and amortization expenses are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditures for such replacements or for new capital expenditure requirements; |
| ● | Adjusted EBITDA also does not reflect changes in, or cash requirements for, our working capital needs or the potentially dilutive impact of stock-based compensation; and |
| ● | Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt that we may incur. |
Free Cash Flow is an additional key performance measure that our management uses to assess our financial performance and liquidity. Additionally, management believes Free Cash Flow is helpful to assessing our operational efficiency and the effectiveness of our capital expenditures, and that monitoring Free Cash Flow can help us manage financial risk. In addition, management believes Free Cash Flow provides meaningful incremental information to investors to consider when evaluating the performance of the Company.
Because of these and other limitations, you should consider our non-GAAP measures only as supplemental to other GAAP-based financial measures. For reconciliations of Adjusted EBITDA and Free Cash Flow to their most comparable GAAP financial measure, see “GAAP to Non-GAAP Reconciliations”.
17
GAAP to Non-GAAP Reconciliations
Adjusted EBITDA
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 and nine months ended September 30, 2024 and 2023, to the most comparable GAAP financial measure, refer to the presentation below.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
(in thousands) | ||||||||||||
Net loss | $ | (12,338) | $ | (11,151) | $ | (43,519) | $ | (35,211) | ||||
Interest expense, net | 3,031 | 1,119 | 8,570 | 3,127 | ||||||||
Income tax expense | 205 | (108) | 601 | 90 | ||||||||
Depreciation and amortization expense | 4,705 | 4,188 | 13,573 | 10,602 | ||||||||
Stock based compensation expense | 3,425 | 3,512 | 9,537 | 10,294 | ||||||||
Employee stock purchase plan expense | 84 | 86 | 252 | 268 | ||||||||
Change in fair value of financial instruments(1) | 334 | (423) | (267) | (57) | ||||||||
Workforce optimization - severance(2) | 986 | — | 986 | — | ||||||||
Adjusted EBITDA | $ | 432 | $ | (2,777) | $ | (10,267) | $ | (10,887) | ||||
| (1) | Represents the non-cash change in fair value of our interest rate swap contract and earnout liability for all periods presented. |
| (2) | Represents severance costs incurred pursuant to an ongoing operational efficiency strategy. |
Free Cash Flow
We define Free Cash Flow as net cash provided by operating activities less capital expenditures. For a reconciliation of Free Cash Flow for the three and nine months ended September 30, 2024 and 2023, to the most comparable GAAP financial measure, refer to the presentation below.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2024 |
| 2023 |
| 2024 | 2023 | |||||||
(in thousands) | ||||||||||||
Net cash used in operating activities | $ | (2,665) | $ | (14,114) | $ | (23,869) | $ | (47,517) | ||||
Purchases of property and equipment | (3,628) | (6,539) | (13,119) | (21,893) | ||||||||
Free cash flow | $ | (6,293) | $ | (20,653) | $ | (36,988) | $ | (69,410) | ||||
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 and nine months ended September 30, 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.
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Cost of Goods Sold, Gross Profit and Gross Margin
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.
Operating Expenses
Research and Development
Research and development expenses is comprised of engineering costs and research programs related to new product and sustaining product development activities, clinical studies and trial 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 service 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), net consists primarily of changes in fair value related to contingent earn out liabilities and our interest rate swap contract.
Interest Expense, net
Interest expense, net consists of interest incurred, amortization of financing costs and interest income earned during the reported periods.
19
Results of Operations
For the Three Months Ended September 30, 2024 and 2023
The following table summarizes our results of operations for the periods presented:
Three Months Ended September 30, | Change | ||||||||||
| 2024 |
| 2023 |
| Amount |
| % | ||||
(in thousands) | |||||||||||
Net revenue | $ | 62,336 | $ | 52,783 | $ | 9,553 | 18% | ||||
Cost of goods sold | 16,159 | 11,922 | 4,237 | 36% | |||||||
Gross profit | 46,177 | 40,861 | 5,316 | 13% | |||||||
Operating expenses: | |||||||||||
Research and development | 5,661 | 7,244 | (1,583) | (22)% | |||||||
Selling, general, administrative | 48,967 | 44,126 | 4,841 | 11% | |||||||
Total operating expenses | 54,628 | 51,370 | 3,258 | 6% | |||||||
Operating loss | (8,451) | (10,509) | 2,058 | 20% | |||||||
Other income (expense): | |||||||||||
Other income (expense), net | (651) | 369 | (1,020) | * | |||||||
Interest expense, net | (3,031) | (1,119) | (1,912) | * | |||||||
Total other expense, net | (3,682) | (750) | (2,932) | * | |||||||
Income tax expense (benefit) | 205 | (108) | 313 | * | |||||||
Net loss | $ | (12,338) | $ | (11,151) | $ | (1,187) | (11)% | ||||
* | Not Meaningful |
The following table represents total net revenue by geographic area, based on the location of the customer for the three months ended September 30, 2024 and 2023, respectively.
Three Months Ended September 30, | ||||||
| 2024 |
| 2023 | |||
(in thousands) | ||||||
United States | $ | 51,160 | $ | 44,548 | ||
International | 11,176 | 8,235 | ||||
Total net revenue | $ | 62,336 | $ | 52,783 | ||
Net Revenue. Net revenue increased $9.6 million, or 18%, from $52.8 million during the three months ended September 30, 2023, to $62.3 million during the corresponding period in 2024. Weakening of the U.S. dollar increased net revenue growth for the three months ended September 30, 2024, by less than 1% as compared to the prior year. U.S. net revenue was $51.2 million for the three months ended September 30, 2024, representing growth of 15% compared to the prior year. U.S. net revenue growth was the result of increased surgical volume driven primarily by sales force expansion and new product launches in our ankle, forefoot and fracture fixation segments. International revenue for the three months ended September 30, 2024, was $11.2 million, representing growth of 36% compared to the prior year. International revenue growth was driven primarily by the United Kingdom, Australia, and South Africa.
Cost of Goods Sold and Gross Profit Margin. Cost of goods sold increased $4.2 million, or 36%, from $11.9 million during the three months ended September 30, 2023, to $16.2 million during the corresponding period in 2024, primarily due to an increase in net revenue, region mix and non-cash increases in inventory write-offs and excess and obsolete inventory. Gross profit margin for the three months ended September 30, 2024, decreased to 74.1%, compared to 77.4% in the same period of 2023. The decrease in gross profit margin was primarily due to higher non-cash charges for excess and obsolete inventory, partially offset by lower freight expense as a percentage of revenue.
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Research and Development Expenses. Research and development expenses decreased $1.6 million, or 22%, from $7.2 million during the three months ended September 30, 2023, to $5.7 million as compared to the corresponding period in 2024. The decrease in research and development expenses is primarily due to the implementation of cost savings initiatives to lower outsourced consulting services as the Company focuses on internalizing new product development.
Selling, General, and Administrative Expenses. Selling, general and administrative expenses increased $4.8 million, or 11%, from $44.1 million during the three months ended September 30, 2023, to $49.0 million during the corresponding period in 2024. The increase in selling, general, and administrative expenses was primarily driven by increased variable sales representative commission expense related to net revenue growth and an increase in professional service fees.
Other Income (Expense), net. Other income (expense), net decreased $1.0 million, from income of $0.4 million during the three months ended September 30, 2023, to expense of $0.6 million for corresponding period in 2024. The change from other income to expense is primarily related to the changes in fair value of the Company’s contingent earnout liabilities and interest rate swap contract.
Interest Expense, net. Interest expense, net increased $1.9 million, from $1.1 million for the three months ended September 30, 2023, to $3.0 million for the corresponding period in 2024, primarily due to higher levels of outstanding debt and higher interest rates on our outstanding debt.
For the Nine Months Ended September 30, 2024 and 2023
The following table summarizes our results of operations for the periods presented:
Nine Months Ended September 30, | Change | ||||||||||
| 2024 |
| 2023 |
| Amount |
| % | ||||
(in thousands) | |||||||||||
Net revenue | $ | 184,434 | $ | 155,828 | $ | 28,606 | 18% | ||||
Cost of goods sold | 45,262 | 33,750 | 11,512 | 34% | |||||||
Gross profit | 139,172 | 122,078 | 17,094 | 14% | |||||||
| |||||||||||
Operating expenses: | |||||||||||
Research and development | 20,328 | 21,976 | (1,648) | (7)% | |||||||
Selling, general, administrative | 153,188 | 131,773 | 21,415 | 16% | |||||||
Total operating expenses | 173,516 | 153,749 | 19,767 | 13% | |||||||
Operating loss | (34,344) | (31,671) | (2,673) | 8% | |||||||
| |||||||||||
Other income (expense): | |||||||||||
Other income (expense), net | (4) | (323) | 319 | (99)% | |||||||
Interest expense, net | (8,570) | (3,127) | (5,443) | * | |||||||
Total other expense, net | (8,574) | (3,450) | (5,124) | * | |||||||
Income tax expense | 601 | 90 | 511 | * | |||||||
Net loss | $ | (43,519) | $ | (35,211) | $ | (8,308) | (24)% | ||||
* | Not Meaningful |
21
The following table represents total net revenue by geographic area, based on the location of the customer for the nine months ended September 30, 2024 and 2023, respectively.
Nine Months Ended September 30, | ||||||
| 2024 |
| 2023 | |||
(in thousands) | ||||||
United States | $ | 151,913 | $ | 131,793 | ||
International | 32,521 | 24,035 | ||||
Total net revenue | $ | 184,434 | $ | 155,828 | ||
Net Revenue. Net revenue increased $28.6 million, or 18%, from $155.8 million during the nine months ended September 30, 2023 to $184.4 million during the corresponding period in 2024. Weakening of the U.S. dollar increased net revenue growth for the nine months ended September 30, 2024, by less than 1% as compared to the prior year. U.S. net revenue was $151.9 million for the nine months ended September 30, 2024, representing growth of 15% compared to the prior year. U.S. net revenue growth was primarily the result of increased surgical volume driven primarily by sales force expansion and new product launches in our ankle, forefoot and fracture fixation segments. International revenue for the nine months ended September 30, 2024, was $32.5 million, representing growth of 35% compared to the prior year. International revenue growth was driven primarily by the United Kingdom, Australia, and South Africa.
Cost of Goods Sold and Gross Profit Margin. Cost of goods sold increased $11.5 million, or 34%, from $33.8 million during the nine months ended September 30, 2023, to $45.3 million during the corresponding period in 2024, primarily due to an increase in net revenue, region mix and non-cash increases in inventory write-offs and excess and obsolete inventory. Gross profit margin for the nine months ended September 30, 2024, decreased to 75.5%, compared to 78.3% in the same period of 2023. The decrease in gross profit margin was primarily due to an increase in non-cash charges for excess and obsolete inventory, partially offset by lower freight expense as a percentage of revenue.
Research and Development Expenses. Research and development expenses decreased $1.6 million, or 7%, from $22.0 million during the nine months ended September 30, 2023, to $20.3 million during the nine months ended September 30, 2024. The decrease in research and development expenses is primarily due to the implementation of cost savings initiatives to lower outsourced consulting services as the Company focuses on internalizing new product development.
Selling, General, and Administrative Expenses. Selling, general and administrative expenses increased $21.4 million, or 16%, from $131.8 million in the nine months ended September 30, 2023, to $153.2 million during the corresponding period in 2024. The increase in selling, general, and administrative expenses was primarily driven by increased variable sales representative commission expense related to net revenue growth, increased personnel expenses, an increase in depreciation expense and an increase in professional service and legal fees.
Other Income (Expense), net. Other expense decreased $0.3 million, from $0.3 million during the nine months ended September 30, 2023 to $0.0 million during corresponding period in 2024. The decrease in other expense is primarily related to the changes in fair value of the Company’s contingent earnout liabilities and interest rate swap contract.
Interest Expense, net. Interest expense, net increased $5.4 million, from $3.1 million for the nine months ended September 30, 2023, to $8.6 million for the corresponding period in 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 September 30, 2024, have been from ongoing operations, proceeds from public and private securities offerings and the incurrence of indebtedness. As of September 30, 2024, we had cash of $39.1 million and the principal amount of our outstanding consolidated debt aggregated to $110.6 million, of which $0.6 million is classified as current in our Condensed Consolidated Balance Sheet. As of September 30, 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.
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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:
| ● | expanding our research and development initiatives to improve our existing products and develop new products and solutions; and |
| ● | continued commercialization efforts and expansion of our sales and marketing infrastructure and programs to drive anticipated sales growth in the United States and elsewhere. |
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:
Nine Months Ended September 30, | Change | ||||||||||
| 2024 |
| 2023 |
| Amount |
| % | ||||
(in thousands) | |||||||||||
Net cash (used in) provided by: | |||||||||||
Operating activities | $ | (23,869) | $ | (47,517) | $ | 23,648 | 50% | ||||
Investing activities | (13,074) | (22,031) | 8,957 | 41% | |||||||
Financing activities | 670 | 65,480 | (64,810) | (99)% | |||||||
Effect of exchange rate changes on cash and cash equivalents | (221) | 549 | (770) | * | |||||||
Net decrease in cash and cash equivalents | $ | (36,494) | $ | (3,519) | $ | (32,975) | * | ||||
* | Not Meaningful |
Net Cash Used in Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2024, was $23.9 million consisting of net loss of $43.5 million, partially offset by non-cash expenses of $33.2 million, which primarily consisted of $13.6 million of depreciation and amortization, $9.5 million of stock-based compensation expense, and $8.8 million of excess and obsolete inventory, and negative changes in working capital of $13.6 million. The changes in working capital are comprised primarily of a net inventory increase of $14.6 million, partially offset by an increase in accrued expenses of $1.5 million.
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Net cash used in operating activities for the nine months ended September 30, 2023 was $47.5 million, consisting of net loss of $35.2 million, inventory increases of $31.1 million and final legal settlement payments of $22.0 million partially offset by non-cash expenses of $24.2 million, which primarily consisted of $10.6 million of depreciation and amortization and $10.3 million of stock-based compensation expense, and changes in working capital of $36.5 comprised primarily of a $12.5 million increase in accounts payable and $3.7 million decrease in accounts receivable.
Net Cash Used in Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2024 was $13.1 million, consisting primarily of surgical instrumentation purchases.
Net cash used in investing activities for the nine months ended September 30, 2023 was $22.0 million, consisting primarily of surgical instrumentation purchases plus other purchases of property, plant and equipment.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2024 was $0.7 million, consisting primarily of funds received from the exercise of options, partially offset by a $1.0 million payment related to the completion of a milestone associated with the Additive Orthopaedics acquisition and a $1.0 million payment related to the completion of a milestone associated with the Disior acquisition.
Net cash provided by financing activities for the nine months ended September 30, 2023, was $65.5 million, consisting 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 $2.5 million of proceeds from the exercise of stock options, partially offset by $5.5 million in payments related to the completion of certain milestones associated with the Disior and Additive Orthopaedics acquisitions.
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 nine months ended September 30, 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 nine months ended September 30, 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 Amended 2023 Annual Report, other than the item described above.
Recently Issued 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
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contract to help manage some of this risk. Based on our overall interest rate exposure as of September 30, 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
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of our principal executive officer and principal financial officer, has 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. Based on that evaluation, our principal executive officer and principal financial officer have identified certain material weaknesses in our internal controls over financial reporting which were also disclosed in our Amended 2023 Annual Report. As a result of these material weaknesses, management has concluded that our disclosure controls and procedures were not effective as of September 30, 2024 at a reasonable assurance level in ensuring information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
Plan for Remediation of the Material Weaknesses
Management, with oversight by the Audit Committee of the board of directors, is devoting significant time, attention, and resources to remediate the material weaknesses and to strengthen its monitoring, control environment, and internal control over financial reporting. We have developed a remediation plan that includes:
| ● | Evaluating and updating (as appropriate) the organizational design and reporting structure of the controllership function, including evaluating the sufficiency, experience, and training of personnel within our accounting function. |
| ● | Hiring, developing, and retaining accounting resources with appropriate accounting and internal controls expertise related to accounting for inventory in accordance with GAAP. |
| ● | Engaging third-party resources with the appropriate technical knowledge and experience to assist with the accounting for inventory and designing and implementing related control activities. |
| ● | Designing and implementing additional and/or enhancing controls relating to the valuation of inventory, including the calculation of the excess and obsolescence reserve and capitalization of purchase price variances. |
| ● | Designing and implementing effective monitoring activities over the execution of business performance reviews and account analysis and enhance communication of internal control deficiencies to those parties responsible for taking corrective action in a timely manner. |
We plan to continue to devote significant time and attention to remediate these material weaknesses as soon as reasonably practicable. Management believes that the measures described above and others that may be implemented will
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remediate the identified material weaknesses and strengthen the Company’s internal control over financial reporting. Management has begun to take these actions to remediate the material weaknesses and may take additional measures to address control deficiencies or determine to modify, or in the appropriate circumstances not to complete, certain of the remediation measures identified. The material weaknesses will not be considered remediated until the remediation plan has been implemented and there has been appropriate time to conclude through testing that the controls are operating effectively.
Changes in Internal Control Over Financial Reporting
Other than as described above in connection with our material weaknesses, there were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the fiscal quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the 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 September 30, 2024, that could have a material adverse effect on our business, financial condition, or operating results.
Class Action Litigation
On September 30, 2024, and October 18, 2024, respectively, two putative class action complaints were filed in the U.S. District Court for the District of Colorado. These complaints allege that the Company and certain current and former officers violated federal securities laws. The cases are captioned Ellington v. Paragon 28, Inc., et al., and Tiedt v. Paragon 28, Inc., et al. We believe the allegations in the complaint are without merit and intend to vigorously defend the litigation.
Given the early stage of the litigation matters described above, we are unable at this time to reasonably estimate possible losses or form a judgment that an unfavorable outcome is either probable or remote. However, litigation is subject to inherent uncertainties, and one or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect for the period in which they are resolved, and on our business generally. In addition, regardless of their merits or their ultimate outcomes, lawsuits and legal proceedings are costly, divert management attention, and may adversely affect our reputation, even if they are resolved in our favor.
Item 1A. Risk Factors.
As of the date of this Quarterly Report, there have been no material changes to the risk factors disclosed in our Amended 2023 Annual Report. 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
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Item 5. Other Information.
During the three months ended September 30, 2024, no director or officer of the Company
Item 6. Exhibits.
The following exhibits are included within or incorporated herein by reference.
|
| Incorporated by Reference | ||||||||||
Exhibit | Description | Form |
| Exhibit |
| Date Filed |
| File |
| Filed | ||
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 | 8-K | 3.2 | 05/19/2023 | 001-40902 | ||||||||
4.1 | S-1/A | 4.2 | 10/08/2021 | 333-259789 | ||||||||
4.2 | S-1 | 4.3 | 09/24/2021 | 333-259789 | ||||||||
31.1 | X | |||||||||||
31.2 | X | |||||||||||
32.1* | X | |||||||||||
32.2* | 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: November 12, 2024 | By: | /s/ Albert DaCosta | |
Name: | Albert DaCosta | ||
Title: | Chief Executive Officer (Principal Executive Officer) | ||
Date: November 12, 2024 | By: | /s/ Chadi Chahine | |
Name: | Chadi Chahine | ||
Title: | Chief Financial Officer (Principal Financial Officer) | ||
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