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 September 30, 20212023

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 Namename of Registrantregistrant as Specifiedspecified in its Charter)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: (730720) 399-3400912-1332

 

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 Shares,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

☐

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 ☒

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐

As of November 19, 2021, the registrant had1, 2023, there were 76,374,88082,701,207 shares of the registrant's common stock, $0.01 par value per share, outstanding.

 

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”).

 

 

 

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 Income (Loss)Loss

2

 

Condensed Consolidated Statements Of Convertible Preferred Series Equity &of Stockholders’ Equity

3

 

Condensed Consolidated Statements of Cash Flows

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

2116

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

3225

Item 4.

Controls and Procedures

3225

 

 

 

PART II.

OTHER INFORMATION

3426

 

 

 

Item 1.

Legal Proceedings

3426

Item 1A.

Risk Factors

3426

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

3426

Item 3.

Defaults Upon Senior Securities

3526

Item 4.

Mine Safety Disclosures

3526

Item 5.

Other Information

3526

Item 6.

Exhibits

3527

Signatures

3729

 

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, 2021

 

December 31, 2020

 

 

September 30, 2023

 

 

December 31, 2022

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

7,876

 

$

17,501

 

 

$

34,949

 

 

$

38,468

 

Trade receivables, less allowance for doubtful accounts of $802 and $1,296, respectively

 

21,237

 

19,972

 

Trade receivables

 

 

33,615

 

 

 

37,687

 

Inventories, net

 

37,689

 

32,226

 

 

 

94,380

 

 

 

60,948

 

Income taxes receivable

 

857

 

1,479

 

 

 

1,022

 

 

 

615

 

Other current assets

 

 

4,565

 

 

617

 

 

 

4,826

 

 

 

4,658

 

Total current assets

 

72,224

 

71,795

 

 

 

168,792

 

 

 

142,376

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

26,471

 

22,363

 

 

 

73,530

 

 

 

61,938

 

 

 

 

 

 

 

Intangible assets, net

 

15,445

 

3,325

 

 

 

21,802

 

 

 

22,387

 

Goodwill

 

7,313

 

-

 

 

 

25,465

 

 

 

25,465

 

 

 

 

 

 

 

Deferred income taxes

 

95

 

100

 

 

 

132

 

 

 

148

 

 

 

 

 

 

 

Other assets

 

 

3,634

 

 

 

1,795

 

Total assets

 

$

121,548

 

$

97,583

 

 

$

293,355

 

 

$

254,109

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES, CONVERTIBLE PREFERRED SERIES EQUITY & STOCKHOLDERS' EQUITY

 

 

 

 

 

 

LIABILITIES & STOCKHOLDERS' EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

13,013

 

$

8,812

 

 

$

27,395

 

 

$

14,939

 

Accrued expenses

 

13,021

 

10,052

 

 

 

24,966

 

 

 

26,807

 

Accrued legal settlement

 

 

—

 

 

 

22,000

 

Other current liabilities

 

2,361

 

469

 

 

 

1,893

 

 

 

3,844

 

Current maturities of long-term debt

 

173

 

2,231

 

 

 

640

 

 

 

728

 

Income taxes payable

 

 

548

 

 

504

 

 

 

—

 

 

 

184

 

Total current liabilities

 

29,116

 

22,068

 

 

 

54,894

 

 

 

68,502

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt net, less current maturities

 

23,351

 

4,030

 

 

 

42,288

 

 

 

42,182

 

Other long-term liabilities

 

2,060

 

-

 

 

 

1,467

 

 

 

1,628

 

Deferred income taxes

 

 

327

 

 

 

342

 

Income taxes payable

 

 

635

 

 

 

527

 

Total liabilities

 

 

54,527

 

 

26,098

 

 

 

99,611

 

 

 

113,181

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

 

 

 

 

Convertible preferred series equity:

 

 

 

 

 

 

Series A convertible preferred stock, $0.01 par value, $0 cumulative preferred dividends, as of September 30, 2021 and December 31, 2020, respectively; 13,812,500 shares authorized, issued and outstanding as of September 30, 2021 and December 31, 2020, respectively

 

4,250

 

4,250

 

Series B convertible preferred stock, $0.01 par value, $2,328 and $812 cumulative preferred dividends as of September 30, 2021 and December 31, 2020, respectively; 6,608,700 shares authorized, issued and outstanding as of September 30, 2021 and December 31, 2020, respectively

 

38,358

 

36,842

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

 

 

Common stock, $0.01 par value, 74,687,845 and 72,187,845 shares authorized; 47,952,733 and 47,567,010 shares issued, and 47,039,212 and 46,738,540 shares outstanding as of September 30, 2021 and December 31, 2020, respectively

 

470

 

467

 

Common stock, $0.01 par value, 300,000,000 shares authorized;
83,469,426 and 78,684,107 shares issued, and 82,555,907 and 77,770,588
shares outstanding as of September 30, 2023 and December 31, 2022, respectively

 

 

824

 

 

 

776

 

Additional paid in capital

 

26,294

 

22,107

 

 

 

296,018

 

 

 

213,956

 

Retained earnings

 

3,384

 

12,418

 

Accumulated other comprehensive income

 

248

 

823

 

Treasury stock, at cost; 913,521 and 828,472 shares as of September 30, 2021 and December 31, 2020, respectively

 

 

(5,983

)

 

 

(5,422

)

Accumulated deficit

 

 

(96,071

)

 

 

(67,789

)

Accumulated other comprehensive loss

 

 

(1,045

)

 

 

(33

)

Treasury stock, at cost; 913,519 shares as of September 30, 2023 and December 31, 2022

 

 

(5,982

)

 

 

(5,982

)

Total stockholders' equity

 

 

24,413

 

 

30,393

 

 

 

193,744

 

 

 

140,928

 

Total liabilities, convertible preferred series equity & stockholders' equity

 

$

121,548

 

$

97,583

 

Total liabilities & stockholders' equity

 

$

293,355

 

 

$

254,109

 

 

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 INCOME (LOSS)LOSS

(in thousands, except share and per share data)

(unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net revenue

 

$

35,851

 

 

$

30,268

 

 

$

104,689

 

 

$

75,924

 

Cost of goods sold

 

 

7,096

 

 

 

7,049

 

 

 

20,209

 

 

 

15,386

 

Gross profit

 

 

28,755

 

 

 

23,219

 

 

 

84,480

 

 

 

60,538

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Research and development costs

 

 

4,118

 

 

 

2,346

 

 

 

11,254

 

 

 

8,174

 

Selling, general, and administrative

 

 

28,968

 

 

 

16,958

 

 

 

79,009

 

 

 

50,962

 

Total operating expenses

 

 

33,086

 

 

 

19,304

 

 

 

90,263

 

 

 

59,136

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

 

(4,331

)

 

 

3,915

 

 

 

(5,783

)

 

 

1,402

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense

 

 

 

 

 

 

 

 

 

 

 

 

Other expense

 

 

(98

)

 

 

(56

)

 

 

(124

)

 

 

(141

)

Interest expense

 

 

(573

)

 

 

(70

)

 

 

(1,174

)

 

 

(532

)

Total other expense

 

 

(671

)

 

 

(126

)

 

 

(1,298

)

 

 

(673

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income before income taxes

 

 

(5,002

)

 

 

3,789

 

 

 

(7,081

)

 

 

729

 

Income tax expense (benefit)

 

 

105

 

 

 

(19

)

 

 

437

 

 

 

1,396

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(5,107

)

 

$

3,808

 

 

$

(7,518

)

 

$

(667

)

Less: cumulative dividends on Series B convertible
   preferred stock

 

 

(574

)

 

 

(333

)

 

 

(1,516

)

 

 

(333

)

Net (loss) income attributable to common stockholders

 

$

(5,681

)

 

$

3,475

 

 

$

(9,034

)

 

$

(1,000

)

Foreign currency translation adjustment

 

 

(121

)

 

 

366

 

 

 

(575

)

 

 

(76

)

Comprehensive (loss) income

 

$

(5,802

)

 

$

3,841

 

 

$

(9,609

)

 

$

(1,076

)

Weighted average number of common stocks outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

47,005,334

 

 

 

43,429,308

 

 

 

46,926,344

 

 

 

42,792,176

 

Diluted

 

 

47,005,334

 

 

 

61,376,701

 

 

 

46,926,344

 

 

 

42,792,176

 

Net (loss) income per share attributable to common
   stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.12

)

 

$

0.08

 

 

$

(0.19

)

 

$

(0.02

)

Diluted

 

$

(0.12

)

 

$

0.06

 

 

$

(0.19

)

 

$

(0.02

)

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net revenue

 

$

52,783

 

 

$

46,006

 

 

$

155,828

 

 

$

129,875

 

Cost of goods sold

 

 

10,394

 

 

 

8,491

 

 

 

28,158

 

 

 

22,920

 

Gross profit

 

 

42,389

 

 

 

37,515

 

 

 

127,670

 

 

 

106,955

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development costs

 

 

7,244

 

 

 

6,337

 

 

 

21,976

 

 

 

18,100

 

Selling, general, and administrative

 

 

44,126

 

 

 

39,667

 

 

 

131,773

 

 

 

114,857

 

Total operating expenses

 

 

51,370

 

 

 

46,004

 

 

 

153,749

 

 

 

132,957

 

Operating loss

 

 

(8,981

)

 

 

(8,489

)

 

 

(26,079

)

 

 

(26,002

)

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

 

1,660

 

 

 

59

 

 

 

1,014

 

 

 

610

 

Interest expense, net

 

 

(1,119

)

 

 

(1,093

)

 

 

(3,127

)

 

 

(2,865

)

Total other income (expense)

 

 

541

 

 

 

(1,034

)

 

 

(2,113

)

 

 

(2,255

)

Loss before income taxes

 

 

(8,440

)

 

 

(9,523

)

 

 

(28,192

)

 

 

(28,257

)

Income tax (benefit) expense

 

 

(108

)

 

 

201

 

 

 

90

 

 

 

306

 

Net loss

 

$

(8,332

)

 

$

(9,724

)

 

$

(28,282

)

 

$

(28,563

)

Foreign currency translation adjustment

 

 

(630

)

 

 

(588

)

 

 

(1,012

)

 

 

(1,505

)

Comprehensive loss

 

$

(8,962

)

 

$

(10,312

)

 

$

(29,294

)

 

$

(30,068

)

Weighted average number of shares of common stock outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

82,548,892

 

 

 

76,850,949

 

 

 

81,878,814

 

 

 

76,595,118

 

Diluted

 

 

82,548,892

 

 

 

76,850,949

 

 

 

81,878,814

 

 

 

76,595,118

 

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.10

)

 

 

(0.13

)

 

$

(0.35

)

 

$

(0.37

)

Diluted

 

$

(0.10

)

 

 

(0.13

)

 

$

(0.35

)

 

$

(0.37

)

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

2

 

PARAGON 28, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED SERIES EQUITY & STOCKHOLDERS’ EQUITY

(in thousands, except for number of shares)

(unaudited)

 

 

 

Series A Convertible Preferred Stock

 

 

Series B Convertible Preferred Stock

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

Accumulated Other

 

 

 

 

 

Total

 

For the Three Months Ended September 30, 2021

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

Paid-in-Capital

 

 

Retained Earnings

 

 

Comprehensive Income

 

 

Treasury Stock

 

 

Stockholders' Equity

 

Balance, June 30, 2021

 

 

13,812,500

 

 

$

4,250

 

 

 

6,608,700

 

 

$

37,784

 

 

 

 

46,969,305

 

 

$

470

 

 

$

25,171

 

 

$

9,065

 

 

$

369

 

 

$

(5,983

)

 

$

29,092

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,107

)

 

 

-

 

 

 

-

 

 

 

(5,107

)

Series B convertible preferred stock dividend

 

 

-

 

 

 

-

 

 

 

-

 

 

 

574

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(574

)

 

 

-

 

 

 

-

 

 

 

(574

)

Options exercised

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

69,907

 

 

 

-

 

 

 

91

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

91

 

Foreign currency translation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(121

)

 

 

-

 

 

 

(121

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

1,032

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,032

 

Balance, September 30, 2021

 

 

13,812,500

 

 

$

4,250

 

 

 

6,608,700

 

 

$

38,358

 

 

 

 

47,039,212

 

 

$

470

 

 

$

26,294

 

 

$

3,384

 

 

$

248

 

 

$

(5,983

)

 

$

24,413

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2020

 

 

13,812,500

 

 

$

4,250

 

 

 

6,608,700

 

 

$

36,842

 

 

 

 

46,738,540

 

 

$

467

 

 

$

22,107

 

 

$

12,418

 

 

$

823

 

 

$

(5,422

)

 

$

30,393

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(7,518

)

 

 

-

 

 

 

-

 

 

 

(7,518

)

Issuance of common stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

151,515

 

 

 

1

 

 

 

999

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,000

 

Common stock repurchase

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

(85,049

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(561

)

 

 

(561

)

Series B convertible preferred stock dividend

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,516

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,516

)

 

 

-

 

 

 

-

 

 

 

(1,516

)

Options exercised

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

234,206

 

 

 

2

 

 

 

441

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

443

 

Foreign currency translation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(575

)

 

 

-

 

 

 

(575

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

2,747

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,747

 

Balance, September 30, 2021

 

 

13,812,500

 

 

$

4,250

 

 

 

6,608,700

 

 

$

38,358

 

 

 

 

47,039,212

 

 

$

470

 

 

$

26,294

 

 

$

3,384

 

 

$

248

 

 

$

(5,983

)

 

$

24,413

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-in-

 

 

Accumulated

 

 

Comprehensive

 

 

Treasury

 

 

Stockholders'

 

For the Three Months Ended September 30, 2023

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Stock

 

 

Equity

 

Balance, June 30, 2023

 

 

82,536,046

 

 

$

824

 

 

$

292,350

 

 

$

(87,739

)

 

$

(415

)

 

$

(5,982

)

 

$

199,038

 

Net loss

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(8,332

)

 

 

—

 

 

 

—

 

 

 

(8,332

)

Options exercised

 

 

19,861

 

 

 

—

 

 

 

70

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

70

 

Foreign currency translation

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(630

)

 

 

—

 

 

 

(630

)

Employee stock purchase plan

 

 

—

 

 

 

—

 

 

 

86

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

86

 

Stock-based compensation

 

 

—

 

 

 

—

 

 

 

3,512

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

3,512

 

Balance, September 30, 2023

 

 

82,555,907

 

 

$

824

 

 

$

296,018

 

 

$

(96,071

)

 

$

(1,045

)

 

$

(5,982

)

 

$

193,744

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2022

 

 

77,770,588

 

 

$

776

 

 

$

213,956

 

 

$

(67,789

)

 

$

(33

)

 

$

(5,982

)

 

$

140,928

 

Net loss

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(28,282

)

 

 

—

 

 

 

—

 

 

 

(28,282

)

Issuance of common stock,
  net of issuance costs of $827

 

 

4,312,500

 

 

 

43

 

 

 

68,410

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

68,453

 

Options exercised

 

 

435,673

 

 

 

5

 

 

 

2,530

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2,535

 

Foreign currency translation

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(1,012

)

 

 

—

 

 

 

(1,012

)

Employee stock purchase plan

 

 

37,146

 

 

 

—

 

 

 

828

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

828

 

Stock-based compensation

 

 

—

 

 

 

—

 

 

 

10,294

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

10,294

 

Balance, September 30, 2023

 

 

82,555,907

 

 

$

824

 

 

$

296,018

 

 

$

(96,071

)

 

$

(1,045

)

 

$

(5,982

)

 

$

193,744

 

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

3

 

3

 

PARAGON 28, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED SERIES EQUITY & STOCKHOLDERS’ EQUITY

(in thousands, except for number of shares)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A Convertible Preferred Stock

 

 

Series B Convertible Preferred Stock

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

Accumulated Other

 

 

 

 

 

Total

 

For the Three Months Ended September 30, 2020

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

Paid-in-Capital

 

 

Retained Earnings

 

 

Comprehensive Income

 

 

Treasury Stock

 

 

Stockholders' Equity

 

Balance, June 30, 2020

 

 

13,812,500

 

 

$

4,250

 

 

 

-

 

 

$

-

 

 

 

 

43,188,445

 

 

$

432

 

 

$

19,051

 

 

$

5,257

 

 

$

(436

)

 

$

(4,115

)

 

$

20,189

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,808

 

 

 

-

 

 

 

-

 

 

 

3,808

 

Issuance of series B convertible preferred stock, net of issuance costs of $1,970

 

 

-

 

 

 

-

 

 

 

6,608,700

 

 

 

36,030

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Series B convertible preferred stock dividend

 

 

-

 

 

 

-

 

 

 

-

 

 

 

333

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(333

)

 

 

-

 

 

 

-

 

 

 

(333

)

Options exercised

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

1,339,998

 

 

 

14

 

 

 

71

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

85

 

Foreign currency translation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

366

 

 

 

-

 

 

 

366

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

365

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

365

 

Balance, September 30, 2020

 

 

13,812,500

 

 

$

4,250

 

 

 

6,608,700

 

 

$

36,363

 

 

 

 

44,528,443

 

 

$

446

 

 

$

19,487

 

 

$

8,732

 

 

$

(70

)

 

$

(4,115

)

 

$

24,480

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2019

 

 

13,812,500

 

 

$

4,250

 

 

 

-

 

 

$

-

 

 

 

 

42,066,700

 

 

$

421

 

 

$

16,723

 

 

$

9,732

 

 

$

6

 

 

$

(3,884

)

 

$

22,998

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(667

)

 

 

-

 

 

 

-

 

 

 

(667

)

Issuance of common stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

243,825

 

 

 

2

 

 

 

1,344

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,346

 

Common stock repurchase

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

(41,667

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(231

)

 

 

(231

)

Issuance of series B convertible preferred stock, net of issuance costs of $1,970

 

 

-

 

 

 

-

 

 

 

6,608,700

 

 

 

36,030

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Series B convertible preferred stock dividend

 

 

-

 

 

 

-

 

 

 

-

 

 

 

333

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(333

)

 

 

-

 

 

 

-

 

 

 

(333

)

Options exercised

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

2,259,585

 

 

 

23

 

 

 

187

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

210

 

Foreign currency translation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(76

)

 

 

-

 

 

 

(76

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

1,233

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,233

 

Balance, September 30, 2020

 

 

13,812,500

 

 

$

4,250

 

 

 

6,608,700

 

 

$

36,363

 

 

 

 

44,528,443

 

 

$

446

 

 

$

19,487

 

 

$

8,732

 

 

$

(70

)

 

$

(4,115

)

 

$

24,480

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

Total

 

 

��

Common Stock

 

 

Additional

 

 

Accumulated

 

 

Comprehensive

 

 

Treasury

 

 

Stockholders'

 

For the Three Months Ended September 30, 2022

 

Shares

 

 

Amount

 

 

Paid-in-Capital

 

 

Deficit

 

 

Loss

 

 

Stock

 

 

Equity

 

Balance, June 30, 2022

 

 

76,537,568

 

 

$

764

 

 

$

202,367

 

 

$

(19,302

)

 

$

(909

)

 

$

(5,982

)

 

$

176,938

 

Net loss

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(9,724

)

 

 

—

 

 

 

—

 

 

 

(9,724

)

Options exercised

 

 

539,203

 

 

 

5

 

 

 

2,055

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2,060

 

Foreign currency translation

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(588

)

 

 

—

 

 

 

(588

)

Employee stock purchase plan

 

 

—

 

 

 

—

 

 

 

100

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

100

 

Stock-based compensation

 

 

—

 

 

 

—

 

 

 

2,587

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2,587

 

Balance, September 30, 2022

 

 

77,076,771

 

 

$

769

 

 

$

207,109

 

 

$

(29,026

)

 

$

(1,497

)

 

$

(5,982

)

 

$

171,373

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2021

 

 

76,447,287

 

 

$

763

 

 

$

197,868

 

 

$

(463

)

 

$

8

 

 

$

(5,982

)

 

$

192,194

 

Net loss

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(28,563

)

 

 

—

 

 

 

—

 

 

 

(28,563

)

Common stock repurchase

 

 

—

 

 

 

—

 

 

 

(266

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(266

)

Options exercised

 

 

629,484

 

 

 

6

 

 

 

2,355

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2,361

 

Foreign currency translation

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(1,505

)

 

 

—

 

 

 

(1,505

)

Employee stock purchase plan

 

 

—

 

 

 

—

 

 

 

100

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

100

 

Stock-based compensation

 

 

—

 

 

 

—

 

 

 

7,052

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

7,052

 

Balance, September 30, 2022

 

 

77,076,771

 

 

$

769

 

 

$

207,109

 

 

$

(29,026

)

 

$

(1,497

)

 

$

(5,982

)

 

$

171,373

 

 

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

4

 

PARAGON 28, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

Nine Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2021

 

 

2020

 

 

2023

 

 

2022

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(7,518

)

 

$

(667

)

 

$

(28,282

)

 

$

(28,563

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

6,094

 

4,493

 

 

 

10,602

 

 

 

9,624

 

Allowance for doubtful accounts

 

139

 

632

 

 

 

147

 

 

 

—

 

Provision for excess and obsolete inventories

 

2,226

 

2,770

 

 

 

2,053

 

 

 

(91

)

Stock-based compensation

 

2,747

 

1,233

 

 

 

10,294

 

 

 

7,052

 

Amortization of debt issuance costs

 

372

 

92

 

Change in fair value of earnout liabilities

 

60

 

-

 

Deferred income taxes

 

-

 

1,080

 

Loss on disposal of property and equipment

 

118

 

476

 

Unrealized FX gain/loss

 

178

 

153

 

Other

 

 

(1,428

)

 

 

(1,295

)

Changes in other assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(807

)

 

1,925

 

 

 

3,706

 

 

 

(10,227

)

Inventories

 

(7,860

)

 

(10,018

)

 

 

(35,558

)

 

 

(15,316

)

Other current assets

 

(3,952

)

 

948

 

Accounts payable

 

3,404

 

(5,220

)

 

 

12,468

 

 

 

951

 

Accrued expenses and other current liabilities

 

2,935

 

(2,109

)

Accrued expenses

 

 

3,718

 

 

 

176

 

Accrued legal settlement

 

 

(22,000

)

 

 

—

 

Income tax receivable/payable

 

 

668

 

 

175

 

 

 

(533

)

 

 

297

 

Other assets and liabilities

 

 

(2,704

)

 

 

1,442

 

Net cash used in operating activities

 

 

(1,196

)

 

 

(4,037

)

 

 

(47,517

)

 

 

(35,950

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of office building

 

 

—

 

 

 

(18,300

)

Purchases of property and equipment

 

(10,270

)

 

(7,511

)

 

 

(21,893

)

 

 

(15,637

)

Proceeds from sale of property and equipment

 

581

 

373

 

 

 

795

 

 

 

642

 

Purchases of intangible assets

 

(1,196

)

 

(495

)

 

 

(933

)

 

 

(1,720

)

Acquisition of Additive Orthopaedics

 

 

(15,000

)

 

 

-

 

Acquisition of Disior, net of cash received

 

 

—

 

 

 

(18,504

)

Net cash used in investing activities

 

 

(25,885

)

 

 

(7,633

)

 

 

(22,031

)

 

 

(53,519

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

 

Payments on note payable - related party

 

-

 

(3,000

)

Payments on revolving credit facility

 

-

 

(9,821

)

Proceeds from draw on term loan

 

 

—

 

 

 

20,000

 

Proceeds from issuance of long-term debt

 

25,985

 

472

 

 

 

—

 

 

 

16,000

 

Payments on long-term debt

 

(5,991

)

 

(1,092

)

 

 

(568

)

 

 

(367

)

Proceeds from PPP loan

 

-

 

3,747

 

Payments of debt issuance costs

 

(3,080

)

 

-

 

 

 

—

 

 

 

(420

)

Proceeds from issuance of common stock

 

1,001

 

1,348

 

Proceeds from issuance of Series B capital stock, net of issuance costs

 

-

 

36,030

 

Payments on treasury stock repurchased

 

(561

)

 

(231

)

Proceeds from issuance of common stock, net of issuance costs

 

 

68,453

 

 

 

—

 

Proceeds from exercise of stock options

 

 

442

 

 

210

 

 

 

2,535

 

 

 

2,224

 

Proceeds from employee stock purchase plan

 

 

560

 

 

 

—

 

Payments on earnout liability

 

 

(5,500

)

 

 

(500

)

Net cash provided by financing activities

 

 

17,796

 

 

27,663

 

 

 

65,480

 

 

 

36,937

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(340

)

 

(257

)

 

 

549

 

 

 

(495

)

Net decrease in cash

 

(9,625

)

 

15,736

 

 

 

(3,519

)

 

 

(53,027

)

Cash at beginning of period

 

 

17,501

 

 

2,610

 

 

 

38,468

 

 

 

109,352

 

Cash at end of period

 

$

7,876

 

$

18,346

 

 

$

34,949

 

 

$

56,325

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for taxes

 

$

381

 

$

162

 

Restricted cash (Note 5)

 

 

1,000

 

 

 

—

 

Cash paid for income taxes

 

 

610

 

 

 

788

 

Cash paid for interest

 

$

670

 

 

$

466

 

 

 

3,342

 

 

 

2,111

 

Purchase of property and equipment included in accounts payable

 

$

58

 

 

$

-

 

 

 

4,842

 

 

 

2,363

 

Series B convertible preferred stock dividend

 

$

1,516

 

$

333

 

 

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

5

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”,“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 ankle, charcot, fracture fixation, forefoot or hallux valgus - which includes bunion and hammertoe, ankle, flatfoot or progressive collapsing foot deformity ("PCDF"), charcot foot and flatfoot.orthobiologics. P28 is a United States (“U.S.”) based company incorporated in the State of Colorado,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 Europe.

Initial Public Offering

In October, 2021, the Company completed its initial public offering (“IPO”), in which it issued and sold 8,984,375 shares of its common stock at the public offering price of $16.00 per share, including 1,171,875 shares of its common stock upon the exercise of the underwriters’ option to purchase additional shares. The Company received net proceeds after deducting underwriting discounts and commissions of $133,688. The Company has incurred $2,977 of offering expenses classified as deferred IPO costs as of September 30, 2021 that will be offset against proceeds for the quarter ended December 31, 2021. In connection with the IPO, all of the shares of the Company’s outstanding convertible preferred stock automatically converted into an aggregate of 20,421,200 shares of the common stock.United Kingdom.

Basis of Presentation and Consolidation

The accompanying Condensed Consolidated Financial Statements include the accounts of Paragon 28, Inc. and its wholly owned subsidiaries, Paragon 28 Medical Devices Trading Limited—Ireland, Paragon 28 Medical Devices Trading Limited—South Africa, and Paragon Advanced Technologies, Inc.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, 2020,2022, which include a complete set of footnote disclosures, including our significant accounting policies.disclosures. The audited Consolidated Financial Statements and notes thereto for the year ended December 31, 20202022, are included in the Company’s final prospectus dated October 14, 2021 that forms a part of the Company’s Registration StatementAnnual filing on Form S-1 (File No. 333-259789) that was10-K filed with the SEC pursuant to Rule 424(b) (the “Final Prospectus”).on March 2, 2023. 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.

COVID-19 Pandemic

During the first quarter ended March 31, 2020, concerns related to the spread of coronavirus (“COVID-19”) began to create global business disruptions as well as disruptions in our operations. COVID-19 was declared a global pandemic by the World Health Organization on March 11, 2020. Governments at the national, state and local level in the U.S., and globally, implemented aggressive actions to reduce the spread of the virus, with such actions including lockdown and shelter in place orders, limitations on non-essential gatherings of people, suspension of all non-essential travel, and ordering certain businesses and governmental agencies to cease non-essential operations at physical locations. The spread of COVID-19 has caused significant volatility in the U.S. and international markets through the current period.

We have assessed various accounting estimates and other matters, including those that require consideration of forecasted financial information, in context with the unknown future impacts of COVID-19 using information that is reasonably available to us at this time. While our current assessment of our estimates did not have a material impact on our Condensed Consolidated Financial Statements as of and for the three and nine months ended September 30, 2021, as additional information becomes available to us, our future assessment of our estimates, including our expectations at the time regarding the duration, scope and severity of the pandemic, as

6

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(in thousands, except share and per share data)

(unaudited)

well as other factors, could materially and adversely impact our Condensed Consolidated Financial Statements in future reporting periods.

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 collectability of trade receivables, inventory obsolescence, impairment of long-lived assets, recoverability of goodwill and intangible assets, contingent earn-out liability,liabilities, income taxes and stock-based compensation.

Deferred Initial Public Offering CostsForeign Currency Translation‌

WeThe Condensed Consolidated Financial Statements are presented in U.S. dollars. The Company’s non-U.S. subsidiaries have incurred certain costsa functional currency (i.e., the currency in connection with our initial public offering (“IPO”) completed on October 19, 2021. We capitalizewhich operational activities are primarily conducted) that is other than the U.S. dollar, generally the currency of the country in which such deferred costs, which primarily consist of incremental legal, professional,subsidiaries are domiciled. Such subsidiaries’ assets and other third-party fees directly attributable to the IPO. The deferred IPO costs will be offset against IPO proceedsliabilities are translated into U.S. dollars at quarter-end exchange rates, while revenue and will be reflected in our results forexpenses are translated at average exchange rates during the quarter ended December 31, 2021. Asbased 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 Loss, net of September 30, 2021 and December 31, 2020, deferred IPO costs were $2,977and $0, respectively, and were included within Other current assets in the Condensed Consolidated Balance Sheets.tax.

Business Combination

We allocate the purchase consideration to the identifiable net assets acquired, including intangible assets and liabilities assumed, based on estimated fair values at the date of the acquisition. The excess of the fair value of the purchase consideration over the fair value of the identifiable assets and liabilities, if any, is recorded as goodwill. During the measurement period, which is up to one year from the acquisition date, we may adjust provisional amounts that were recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date.Significant Accounting Policies

Determining the fair value of assets acquired and liabilities assumed requires significant judgment, including the selection of valuation methodologies including the income approach, the cost approach, and the market approach. Significant assumptions used in those methodologies include, but are not limited to, the expected values of the underlying metric, the systematic risk embeddedThere have been no changes in the underlying metric, the volatility of the underlying metric, the risk-free rate, and the counterparty risk. The use of different valuation methodologies and assumptions is highly subjective and inherently uncertain and,Company's significant accounting policies as a result, actual results may differ materially from estimates.

Intangibles

The costs associated with applying for patents and trademarks are capitalized. Patents are amortizeddisclosed in Note 2 to our audited Consolidated Financial Statements included in our 2022 Annual Report on a straight-line basis over the lesser of the patent’s economic or legal life, which is seventeen years. Costs associated with capitalized patents include third-party attorney fees and other third-party fees as well as costs related to the following: the preparation of patent applications, government filings and registration fees, drawings, computer searches, and translations related to specific patents. Trademarks that are anticipated to be renewed every ten years have an indefinite life and are not amortized but tested for impairment annually. Once it is determined a trademark will no longer be renewed, the trademark is amortized over the remainder of the trademark’s registration period. Acquired intellectual property is assumed to have an indefinite life. Customer relationships and other intangibles, which mainly consist of noncompete arrangements, are amortized over an estimated useful life of three years on a straight-line basis. Developed technology is amortized over an estimated useful life of twelve years on a straight-line basis.Form 10-K.

Amortizable intangible assets are assessed for impairment upon triggering events that indicate that the carrying value of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount to future net undiscounted cash flows expected to be generated by the associated asset. If the asset’s carrying value is determined to not be recoverable, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of the intangible assets.

76

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(in thousands, except share and per share data)

(unaudited)

 

Indefinite-lived trademark assets and acquired intellectual property are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The Company can elect to first apply the optional qualitative impairment assessment to determine whether the indefinite-lived intangible asset is more-likely-than-not impaired. If, on the basis of the qualitative impairment assessment, an entity asserts that it is more likely than not that the indefinite-lived intangible asset is impaired, the Company would be required to calculate the fair value of the asset for an impairment test. Impairment loss is recognized if the carrying amount of the asset exceeds its fair value.

A qualitative assessment considers macroeconomic and other industry-specific factors, such as trends in short-term and long-term interest rates and the ability to access capital, and company specific factors such as trends in revenue generating activities, and merger or acquisition activity. If the Company elects to bypass qualitatively assessing its indefinite-lived intangible assets, or it is not more likely than not that the fair value of the intangible asset exceeds its carrying value, management estimates the fair value of the intangible asset and compares it to the carrying value. The estimated fair value of the intangible asset is established using an income approach based on a discounted cash flow model that includes significant assumptions about the future operating results and cash flows of the intangible asset or assets.

Goodwill

Goodwill represents the excess of the purchase price as compared to the fair value of net assets acquired and liabilities assumed. Goodwill is not amortized, but is tested for impairment annually or when indications of impairment exist. We can elect to qualitatively assess goodwill for impairment if it is more likely than not that the fair value of a reporting unit exceeds its carrying value.

Impairment exists when the carrying amount, including goodwill, of the reporting unit exceeds its fair value, resulting in an impairment charge for this excess (not to exceed the carrying amount of the goodwill). Our annual impairment testing date is October 1. The impairment, if determined, is recorded within Operating expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) in the period the determination is made. There were 0 impairments recorded during the periods presented.

Contingent Earn-out Consideration

Business combinations may include contingent earn-out consideration as part of the purchase price under which the Company will make future payments to the seller upon the achievement of certain milestones. The fair value of the contingent earn-out consideration is estimated as of the acquisition date at the present value of the expected contingent payments. Two methodologies may be considered in the valuation: the scenario-based model (“SBM”) and Monte Carlo simulation. The SBM relies on multiple outcomes to estimate the likelihood of future payoff of the contingent consideration. The resulting earnout payoff is then probability-weighted and discounted at an appropriate risk adjusted rate in order to arrive at the present value of the expected earnout payment. The Monte Carlo simulation is used to value the non-linear contingent considerations based on projected financial metrics. Each trial of the Monte Carlo simulation draws a value from the assumed distribution for the underlying metric. The earnout payoff for each simulation trial is calculated based on that particular simulated path for the underlying metrics and then discounted to present value using the risk-free rate, adjusted for counterparty credit risk. The value of the earnout is estimated as the average value from all simulation trials. The fair value estimates use unobservable inputs that reflect our own assumptions as to the ability of the acquired business to meet the targeted benchmarks and discount rates used in the calculations. The unobservable inputs are defined in ASC Topic 820, “Fair Value Measurements and Disclosures,” as Level 3 inputs.

We review the probabilities of achievement of the earnout milestones to determine impact on the fair value of the earnout consideration on a quarterly basis over the earn-out period. Actual results are compared to the estimates and probabilities of achievement used in our forecasts. Should actual results of the acquired business increase or decrease as compared to our estimates and assumptions, the estimated fair value of the contingent earn-out consideration liability will increase or decrease, up to the contractual limit, as applicable. Changes in the estimated fair value of the contingent earn-out consideration are reflected in our results of operations in the period in which they are identified. Changes in the estimated fair value of the contingent earn-out consideration may materially impact or cause volatility in our operating results.

Trade Receivables, Less Allowance for Doubtful Accounts

The Company estimates an allowance for doubtful accounts based upon an evaluation of the current status of receivables, historical experience, and other factors as necessary. It is reasonably possible that the Company’s estimate of the allowance for doubtful

8

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(in thousands, except share and per share data)

(unaudited)

accounts will change. The allowance for doubtful accounts was $802 and $1,296 as of September 30, 2021 and December 31, 2020, respectively.

Inventories, Net

The Company estimates a reserve for obsolete and slow-moving inventory based on current inventory levels, historical sales and future projected demand. Charges for excess and obsolete inventory are included in Cost of goods sold and were $1,004 and $1,239 for the three months ended September 30, 2021 and 2020, respectively and were $2,229 and $2,805 for the nine months ended September 30, 2021 and 2020, respectively. The inventory reserve was $18,833 and $16,771 as of September 30, 2021 and December 31, 2020, respectively.

Revenue Recognition

Revenue is recorded when our performance obligation is satisfied which is when our customers take title of the product, and typically when the product is used in surgery. As such, the timing of revenue recognition may differ from the timing of invoicing to our customers. We have recorded unbilled accounts receivable related to this timing difference of $3,181 and $3,273 as of September 30, 2021 and December 31, 2020, respectively.

Recently Adopted Accounting Pronouncements Issued Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. ASU 2016-02 supersedes the previous leases standard, ASC 840, Leases. ASU 2016-02, as subsequently amended for various technical issues, is effective for emerging growth companies following private company adoption dates in fiscal years beginning after December 15, 2021, and interim periods with fiscal years beginning after December 15, 2022. The Company is currently evaluating the new guidance, but does not believe it will have a material impact on the Consolidated Financial Statements.Pronouncements‌

In June 2016, the FASBFinancial Accounting Standards Board ("FASB") issued ASUAccounting Standards Update ("ASU") 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires entities to estimate all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The updated guidance also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses over the entire contractual term of the instrument from the date of initial recognition of that instrument. ASU 2016-13, as subsequently amended for various technical issues, is effective for emerging growth companies following private company adoption dates for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the newadopted ASU 2016-13 effective January 1, 2023. The adoption of this guidance to determine thedid not have a significant impact it will have on the Company's Condensed Consolidated Financial Statements.Statements and related disclosures.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) (“ASU 2019-12”), which is part of the FASB’s overall simplification initiative to reduce the costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. ASU 2019-12 simplifies accounting guidance for intra-period allocations, deferred tax liabilities, year-to-date losses in interim periods, franchise taxes, step-up in tax basis of goodwill, separate entity financial statements, and interim recognition of tax laws or rate changes. ASU 2019-12 is effective for emerging growth companies following private company adoption dates in fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the new guidance to determine the impact it will have on our Consolidated Financial Statements.adopted

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”), subsequently clarified in 2019-12 effective January 2021 by ASU 2021-01, Reference Rate Reform (Topic 848) (“ASU 2021-01”)1, 2023. The main provisions of this update provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference the London Inter-bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. The guidance in ASU 2020-04 and ASU 2021-01 was effective upon issuance and, once adopted, may be applied prospectively to contract modifications and hedging relationships through December 31, 2022. The adoption of this guidance did not have a significant impact on the Company's

9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(in thousands, except share and per share data)

(unaudited)

Condensed Consolidated Financial Statements and related disclosures.

NOTE 3. BUSINESS COMBINATION

Additive OrthopaedicsDisior Acquisition

On May 28, 2021January 10, 2022 (“ClosingDisior Acquisition Date”), the Company entered into an Asseta Securities Purchase Agreement (“APA”SPA”) with Additive Orthopaedics, LLCDisior LTD. (“Additive” or “Seller”Disior”) and completed an acquisition of substantially allacquired 100% of the operating and intangible assetsoutstanding equity of Additive, for total cash considerationDisior (the “Disior Acquisition”).

The aggregate purchase price of the Disior Acquisition was approximately $26,246 inclusive of an earn-out provision with a fair value of $15,0006,550 at closing.and certain net working capital adjustments and deferred payments totaling a net payable of $222. The APA alsoSPA provided for potential earn-out consideration to the Sellerseller in connection with the achievement of certain milestones including both project-based and revenue-based milestones, with various expiration dates through the fourthsecond anniversary of the ClosingDisior Acquisition Date. The earn-out has a maximum payment not to exceed $9,5008,000, in the aggregate. If an individual milestone is not met by the specified milestone expiration date, the earn-out related to that specific milestone will not be paid. The contingent earn-out consideration had an estimated fair value ofacquisition was primarily funded by a $3,91020,000 as ofdraw on the Closing Date. Acquisition related costs were approximately $524 during the nine months ended September 30, 2021 and are included in Selling, general, and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Loss. NaN acquisition related costs were incurred in the nine months ended September 30, 2020.

Additive’s 3D-printed Patient Specific Talus Spacer is the only U.S. Food and Drug Administration-approved patient-specific total talus replacement implant authorized in the U.S. for the treatment of avascular necrosis. The acquisition of Additive allowed the Company to further expand into the patient specific implant market.Company's term loan from Midcap.

The Company has accounted for the acquisition of AdditiveDisior under ASC Topic 805, Business Combinations (“ASC 805”). Additive’sDisior’s results of operations are included in the Condensed Consolidated Financial Statements beginning after May 28, 2021,January 10, 2022, the acquisition date.Disior Acquisition Date.

The following table summarizes the preliminary purchase consideration transferred in connection with the acquisition of Additive and consists of the following:price:

 

Consideration Paid

 

 

Cash consideration

$

15,000

 

Contingent consideration

 

3,910

 

Total consideration

$

18,910

 

Consideration paid

 

 

Cash consideration

$

19,696

 

Contingent consideration

 

6,550

 

Total consideration

$

26,246

 

 

7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

(unaudited)

The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed as of the ClosingDisior Acquisition Date:

 

 

 

 

 

Measurement

 

 

 

 

 

Preliminary allocation

 

 

period adjustments

 

 

Adjusted allocation

 

Assets acquired:

 

 

 

 

 

 

 

 

Accounts receivable

$

761

 

 

$

-

 

 

$

761

 

Inventory

 

113

 

 

 

-

 

 

 

113

 

Intangible assets

 

11,560

 

 

 

-

 

 

 

11,560

 

Goodwill

 

7,872

 

 

 

(559

)

 

 

7,313

 

Total Assets Acquired

$

20,306

 

 

$

(559

)

 

$

19,747

 

 

 

 

 

 

 

 

 

 

Liabilities assumed:

 

 

 

 

 

 

 

 

Accounts payable

$

796

 

 

$

-

 

 

$

796

 

Accrued expenses

 

600

 

 

 

(559

)

 

 

41

 

Total Liabilities Assumed

$

1,396

 

 

$

(559

)

 

$

837

 

Net assets acquired

$

18,910

 

 

$

-

 

 

$

18,910

 

Assets acquired:

 

 

Cash and cash equivalents

$

1,192

 

Other current assets

 

410

 

Intangible assets

 

6,800

 

Goodwill

 

19,136

 

Total assets acquired

 

27,538

 

 

 

Liabilities assumed:

 

 

Accruals and other current liabilities

 

615

 

Deferred tax liabilities, net

 

677

 

Total liabilities assumed

 

1,292

 

Net assets acquired

$

26,246

 

Due to a change in our estimated accrued expenses, we made a measurement period adjustment of $559 during the three and nine months ended September 30, 2021.

Identified intangible assets consist of noncompete arrangements, customer relationships,tradenames and developed technology. The fair value of each were determined with the assistance of an external valuation specialist using a combination of the income, market, and

10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(in thousands, except sharecost approach, and per share data)

(unaudited)

asset approach,relief from royalty rate method, in accordance with ASC 805. The purchase consideration was allocated to the identifiable net assets acquired based on estimated fair values at the date of the acquisition. The purchase consideration and its allocation are preliminary and may be adjusted to reflect new information obtained about facts and circumstances that existed as of the acquisition date. The excess of the fair value of the purchase consideration over the fair value of the identifiable assets and liabilities, if any, was recorded as goodwill. The goodwill is attributable to the expected synergies with the Company’s existing operations. The useful life on intangible assets was determined by management to be in line with the Company’s policy on intangible assets. Both determinations are outlined in the table below:

 

Fair Value

 

Developed technology

$

6,400

 

Tradenames

 

400

 

Total intangible assets

$

6,800

 

The entire amount of the purchase price allocated to goodwill will not be deductible for income tax purposes pursuant to Internal Revenue Code Section 197 over a 15-year period. The useful life determination was made by management in line withunder the Company’s policy on assets. Both determinations are outlined in the table below:

 

Fair Value

 

 

Estimated Useful Life (in years)

Noncompete arrangements

$

30

 

 

3

Customer relationships

 

240

 

 

3

Developed technology

 

11,290

 

 

12

 

$

11,560

 

 

 

There is no supplemental proforma presentation of operating results of the acquisition of Additive due to the immaterial impact on the Company’s Consolidated operations for the three and nine months ended September 30, 2021 and 2020. Finnish Income Tax Act.

NOTE 4. GOODWILL AND INTANGIBLE ASSETS

Goodwill

As of September 30, 20212023, and December 31, 2020,2022, goodwill was $7,31325,465 and $0, respectively; the activity is as follows:

Balance at December 31, 2020

 

 

 

$

-

 

Acquisitions

 

 

 

 

7,872

 

Measurement period adjustments

 

 

 

 

(559

)

Balance at September 30, 2021

 

 

 

$

7,313

 

.

Intangibles

Intangible assets as of September 30, 20212023, are as follows:

 

 

Estimated Useful Life
(in years)

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Net Carrying Amount

 

Patents, definite-lived

 

12.6

 

$

3,134

 

 

$

653

 

 

$

2,481

 

Trademarks, indefinite-lived

 

Indefinite

 

 

366

 

 

 

-

 

 

 

366

 

Acquired intellectual property, indefinite-lived

 

Indefinite

 

 

1,378

 

 

 

-

 

 

 

1,378

 

Customer relationships

 

3

 

 

240

 

 

 

27

 

 

 

213

 

Developed technology

 

12

 

 

11,290

 

 

 

314

 

 

 

10,976

 

Other intangibles

 

3

 

 

34

 

 

 

3

 

 

 

31

 

Total patents, trademarks and intangibles, net

 

 

 

$

16,442

 

 

$

997

 

 

$

15,445

 

Intangible assets, excluding the Additive intangible assets, increased $1,196 during the nine months ended September 30, 2021 due to the purchase of new patents and additional legal fees associated with our patents and trademarks.

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Net Carrying Amount

 

Trademarks and tradenames, indefinite-lived

 

$

971

 

 

$

—

 

 

$

971

 

Patents, definite-lived

 

 

7,534

 

 

 

2,578

 

 

 

4,956

 

Customer relationships

 

 

1,733

 

 

 

496

 

 

 

1,237

 

Developed technology

 

 

17,690

 

 

 

3,059

 

 

 

14,631

 

Other intangibles

 

 

30

 

 

 

23

 

 

 

7

 

Total intangible assets, net

 

$

27,958

 

 

$

6,156

 

 

$

21,802

 

 

118

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(in thousands, except share and per share data)

(unaudited)

 

Intangible assets as of December 31, 2020,2022, are as follows:

 

 

Estimated Useful Life
(in years)

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Net Carrying Amount

 

Patents, definite-lived

 

13.3

 

$

2,504

 

 

$

363

 

 

$

2,141

 

Trademarks, indefinite-lived

 

Indefinite

 

 

306

 

 

 

-

 

 

 

306

 

Acquired intellectual property, indefinite-lived

 

Indefinite

 

 

878

 

 

 

-

 

 

 

878

 

Total patents, trademarks and intangibles, net

 

 

 

$

3,688

 

 

$

363

 

 

$

3,325

 

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Net Carrying Amount

 

Trademarks, indefinite-lived

 

$

901

 

 

$

—

 

 

$

901

 

Patents, definite-lived

 

 

6,671

 

 

 

2,370

 

 

 

4,301

 

Customer relationships

 

 

1,733

 

 

 

279

 

 

 

1,454

 

Developed technology

 

 

17,690

 

 

 

1,973

 

 

 

15,717

 

Other intangibles

 

 

30

 

 

 

16

 

 

 

14

 

Total intangible assets, net

 

$

27,025

 

 

$

4,638

 

 

$

22,387

 

 

Amortization expense is included in Selling, general, and administrative expenses and was $494509 and $24440 for the three months ended September 30, 20212023 and 2020,2022, respectively. Amortization expense for the nine months ended September 30, 20212023 and 20202022 totaled $6351,519 and $722,290, respectively.

Expected future amortization expense is as follows:

2021 (Remaining)

 

$

636

 

2022

 

$

1,704

 

2023

 

$

1,226

 

2023 (Remaining)

 

$

505

 

2024

 

$

1,173

 

 

 

1,965

 

2025

 

$

1,136

 

 

 

1,924

 

2026

 

$

1,136

 

 

 

1,924

 

2027

 

 

1,924

 

 

NaNNo impairment charges related to intangibles and goodwill were recorded for the three and nine months ended September 30, 202130, 2023 and 2020. 2022.

NOTE 5. CONTINGENT EARN-OUT CONSIDERATIONFAIR 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 Company's significant financial assets and liabilities measured at fair value as of September 30, 2023 were as follows:

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

   Interest rate swap

$

—

 

 

 

2,024

 

 

 

—

 

 

$

2,024

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

    Contingent consideration

$

—

 

 

 

—

 

 

 

1,770

 

 

$

1,770

 

The Company’s Level 2 asset pertains to an interest rate swap associated with the Company's Zions Facility, 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, 2023, the $2,024 change in fair value of the Company's interest rate swap is recorded in Other assets on the Condensed Consolidated Balance Sheet and Other income (expense) within the Condensed Consolidated Statement of Operations and Comprehensive Loss.

The Company’s Level 3 instruments consist of contingent consideration. The following table provides a reconciliation of ourthe Level 3 earn-out liabilities for the nine months ended September 30, 2021:2023:

9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

(unaudited)

 

Balance at December 31, 2020

$

-

 

Acquisition date fair value of earn-out liabilities

 

3,910

 

Change in fair value of earn-out liabilities

 

60

 

Balance at September 30, 2021

$

3,970

 

Balance, December 31, 2022

$

3,640

 

Achieved milestones reclassified to accrued expenses

 

(2,500

)

Change in fair value of earn-out liabilities

 

630

 

Balance, September 30, 2023

$

1,770

 

 

The current portion of contingent earn-out liability is included in Other-current liabilities and the non-current portion is included in Other long-term liabilities on the Condensed Consolidated Balance Sheet.Sheets. As of September 30, 2021,2023, the current portion was $1,9101,444 and the non-current portion was $326. During the three and nine months ended September 30, 2021,2023, we reassessed the estimate of the earn-out liabilities which resulted in ana net increase of $60310 classified as otherand $630, recorded in Other expense within the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss). We made 0 cash paymentsLoss for contingent earn-out consideration during the three and nine months ended September 30, 2021.2023, respectively.

As of December 31, 2022, three project milestones associated with the Disior acquisition and two project milestones associated with the Additive Orthopaedics acquisition were included in Accrued expenses on the Consolidated Balance Sheet totaling $5,000 and $1,500, respectively. During the nine months ended September 30, 2023, $500 was paid in cash for one of the Additive Orthopaedics milestones and $5,000 was paid in cash for the Disior milestones. As of September 30, 2023, the remaining $1,000 related to the Additive Orthopaedics milestone was included in Accrued expenses on the Condensed Consolidated Balance Sheet. The total $1,000 accrual is included as restricted cash within the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2023. During the second quarter of 2023, the Company completed the fourth project milestone related to the Disior acquisition totaling $2,000 and during the third quarter of 2023 completed another project milestone associated with the Additive Orthopaedics acquisition totaling $500, both of which are also included in Accrued expenses on the Condensed Consolidated Balance Sheet as of September 30, 2023. For additional information on the Additive Orthopaedics acquisition refer to Note 3 to our Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.‌

NOTE 6. DEBT

Long-term debt as of September 30, 20212023, and December 31, 20202022, consists of the following:

12

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(in thousands, except share and per share data)

(unaudited)

September 30, 2021

 

December 31, 2020

 

 

September 30, 2023

 

 

December 31, 2022

 

Equipment note payable, due July 2021

$

9

 

 

$

72

 

New 2020 Term Loan

 

-

 

 

 

5,814

 

MidCap Term Loan

 

$

30,000

 

 

$

30,000

 

Zions Term Loan

 

 

15,093

 

 

 

15,573

 

Bank of Ireland Note Payable

 

290

 

 

 

427

 

 

 

—

 

 

 

86

 

MidCap Revolving Loan

 

15,985

 

 

 

-

 

MidCap Term Loan

 

10,000

 

 

 

-

 

$

26,284

 

 

$

6,313

 

 

 

45,093

 

 

 

45,659

 

Less: deferred issuance costs

 

(2,760

)

 

 

(52

)

 

 

(2,165

)

 

 

(2,749

)

Total debt, net of issuance costs

 

23,524

 

 

 

6,261

 

 

 

42,928

 

 

 

42,910

 

Less: current portion

 

(173

)

 

 

(2,231

)

 

 

(640

)

 

 

(728

)

Long-term debt, net, less current maturities

$

23,351

 

 

$

4,030

 

 

$

42,288

 

 

$

42,182

 

MidCap Credit Agreements

On May 6, 2021, the Company entered into a new credit agreement with MidCap Financial Trust to provide a total of $70,000 including up to a $30,000 revolving loan (“MidCap Revolving Loan”) and up to a $40,000 term loan (“MidCap Term Loan”), secured by substantially all the Company’s assets debt, and equity (“MidCap Credit Agreements”). The MidCap Term Loan iswas comprised of two tranches, the first of which providesprovided a commitment amount of $10,000, and the second a commitment of $30,000. The MidCap Term Loan and Midcap Revolving Loan bearbore a variable interest rate of LIBOR plus 6% and LIBOR plus 3%, respectively, and mature on the earlier of May 1, 2026, or a change in control event (the "Termination Date"). The entire principal balances of the MidCap Revolving Loan and MidCap Term Loan are due on the Termination Date. Interest payments are payable monthly with optional principal prepayments allowed under the MidCap Credit Agreements. The Midcap Credit Agreements required us to maintain minimum net product sales and minimum consolidated EBITDA, (each term as defined in the Midcap Credit Agreements), for the preceding twelve month period.‌

On November 9, 2022, the Company entered into an amendment to the MidCap Credit Agreements. The amendment to the Midcap Revolving Loan provides up to $50,000 in total borrowing capacity. The MidCap amendments modified the MidCap Credit Agreements to include provisions related to the transition from the LIBOR Interest Rate plus Applicable Margin to the SOFR Interest Rate plus Applicable Margin, maintaining the Applicable Margin of 6% under the MidCap Term Loan and increasing the Applicable Margin from 3% to 3.75% under the Midcap Revolving Loan. In addition, the MidCap amendments amended certain covenants, terms and provisions in the Midcap Credit Agreements to, among other things, modify the covenant levels for the Minimum Net Product Sales financial covenant and to remove the Minimum Consolidated EBITDA financial covenant. As of September 30, 2023, the Company was in compliance with all financial covenants under the amended Midcap Credit Agreements. Total debt issuance costs associated with the MidCap Credit Agreements was $3,080. Amortization expense associated with such debt issuance costs totaled $192for the three months ended September 30, 2021 and $318 for the nine months ended September 30,2021, and is included in Selling, general and administrative expenses on the Condensed Consolidated Statements of Operations and Comprehensive Loss.

Vectra Bank Colorado Loan Agreements

On June 20, 2018, the Company entered into a loan agreement (the “Loan Agreement”) with Zions Bancorporation, N.A. dba Vectra Bank Colorado (“VBC”). The Loan Agreement consisted of a $12,500 revolving line of credit (the “Revolving Loan”). The borrowing base on the Revolving Loan is an amount equal to the greater of 1.25 multiplied by the Company’s EBITDA for the past 12 months or the sum of: (1) 85% of eligible accounts receivable plus (2) 50% of eligible inventory plus (3) 30% of eligible fixed assets. The Revolving Loan bears interest at the adjustable rate equal to the one-month London Inter-bank Offered Rate (“LIBOR”) rate plus an applicable margin per annum, but not less than 2.00%, and had an original maturity of December 1, 2018. The applicable margin is subject to adjustment as provided in the Loan Agreement. The Revolving Loan may be used only for working capital purposes. The original Loan Agreement was secured by all assets and personal property of the Company, including all goods, equipment, inventory, cash, intellectual property, and certificates of deposit. The Loan Agreement contains financial and other customary covenants.

On November 27, 2018, the Company entered into the First Amendment to the Loan Agreement (“First VBC Loan Amendment”). The First VBC Loan Amendment extended the Revolving Loan maturity to June 30, 2019. A new Intellectual Property Security Agreement, dated November 27, 2018, was executed with the First VBC Loan Amendment which grants a security interest in substantially all assets of the Company, including all right, title, and interest of the Company in all currently owned and subsequently acquired copyrights, trademarks, and patents and all products and proceeds thereof to VBC.

On April 25, 2019, the Company entered into the Second Amendment to the Loan Agreement (“Second VBC Loan Amendment”). The Second VBC Loan Amendment added a $5,000 term loan facility (the “Term Loan”) to the Loan Agreement. The Term Loan bears interest at the adjustable rate equal to the one-month LIBOR plus an applicable margin per annum and has a maturity date of April 25, 2021. The Term loan may only be used to fund new equipment purchases and tenant improvements at the Company’s leased facilities.

On June 17, 2019, the Company entered into the Third Amendment to the Loan Agreement (“Third VBC Loan Amendment”). The Third VBC Loan Amendment extended the maturity date of the Revolving Loan to August 31, 2019. No other terms of the Loan Agreement were materially changed.

1310

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(in thousands, except share and per share data)

(unaudited)

 

On September 23, 2019, the Company entered into the Fourth Amendment to the Loan Agreement (“Fourth VBC Loan Amendment”). The Fourth VBC Loan Amendment extended the maturity date of the Revolving Loan to MidCap Credit Agreements were $June 30, 20201,942. The Fourth VBC Loan Amendment also sets forth a minimum tangible net worth calculated as total assets, excluding intangible assets, less total liabilities (i) of not less than $18,000 tested quarterly on a rolling 4-quarter basis commencing June 30, 2018, and (ii) of not less than $20,900 tested quarterly on a rolling 4-quarter basis commencing September 30, 2019.

On November 6, 2019, the Company entered into the Fifth Amendment to the Loan Agreement (“Fifth VBC Loan Amendment”). The Fifth VBC Loan Amendment added a $5,000 draw-to-term loan facility (the “Buyout Loan”) to the Loan Agreement. The Buyout Loan had a maturity date of June 30, 2020 and bears interest at the adjustable rate equal to the one-month LIBOR rate plus 2.00% per annum.

On March 27, 2020, the Company entered into the Amended and Restated Loan Agreement (the “New Loan Agreement”). The New Loan Agreement refinanced the existing Term Loan and existing Buyout Loan into a single term loan in the aggregate principal amount of $6,802 (the “New 2020 Term Loan”) and increased the maximum principal amount of the existing Revolving Loan to $15,000 (the “New 2020 Revolving Loan”). The maturity date for both loans was September 30, 2020 and was subsequently extended to October 5, 2023. The New Loan Agreement is secured by substantially all the Company’s assets. The New Loan Agreement contains financial and other customary covenants and bears an interest rate of 3%. The Company repaid this New 2020 Revolving Loan in 2021 with proceeds from the MidCap Credit agreements.

Bank of Ireland Note Payable

On June 12, 2020, the Company entered a term loan with Bank of Ireland in a principal amount of $474 (the “Bank of Ireland Note Payable”). The Bank of Ireland Note Payable bears an annual interest rate of 4% and is due in equal monthly installments over a 36-month period, including interest. The Bank of Ireland Note Payable contains financial and other customary covenants.

NOTE 7. NOTE PAYABLE—RELATED PARTY

On November 15, 2019, the Company entered into a $3,000 promissory note with a stockholder of the Company (the “Stockholder Note”). The Stockholder Note is unsecured and bears interest at a rate of 6% per annum, payable monthly. The Company paid the full principal and interest accrued on the Stockholder Note in July 2020. The interestAmortization expense associated with such Stockholder Note wasdebt issuance costs totaled $0183 and $20552 for the three and nine months ended September 3, 202130, 2023, respectively, and 2020,$165 and $409 for the three and nine months ended September 30, 2022, respectively, whichand is recordedincluded in Interest expense on the Condensed Consolidated Statements of Operations and Comprehensive Loss. Interest

On November 2, 2023, the Company paid all outstanding amounts owed under the MidCap Credit Agreements utilizing a portion of the proceeds from the Ares Credit Facilities, and concurrently terminated the Midcap Credit Facilities under the MidCap Credit Agreements. For additional information about the Ares Credit Facilities, refer to Note 14.

Zions Term Loan Facility

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 $16,000. The loans under the Zions Facility (i) bear interest at a variable rate per annum equal to the sum of (a) a one-month Term SOFR based rate, plus (b) 1.75%, adjusted on a monthly basis and (ii) mature on March 24, 2037. The Company is the fixed rate payor on an interest rate swap contract that effectively fixes the SOFR-based index utilized to determine the interest rate charged on the Zions Facility at 4.25% until maturity. Principal and interest payments are payable monthly, with optional prepayments allowed without premium or penalty.

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 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 $0, and (ii) the Fixed Charge Coverage Ratio which will be calculated as of the last day of each quarter on a trailing four quarter basis, as well as a certain level of Liquidity, if the Cash Flow is greater than $0. In addition, a Net Revenue Growth covenant was added which will be calculated as of the last day of each quarter on a year-over-year basis. As of September 30, 2023, the Company was in compliance with all financial covenants under the amended Zions Facility. Total debt issuance costs associated with the Zions Facility were $223. Amortization expense associated with such Stockholder Note wasdebt issuance costs totaled $04 and $11012 for the three and nine months ended September 30, 20212023, and 2020, respectively.is included in Interest expense on the Consolidated Statements of Operations and Comprehensive Loss, respectively and totaled $4 and $9 for the three and nine months ended September 30, 2022.

NOTE 8. CONVERTIBLE PREFERRED SERIES EQUITY AND7. STOCKHOLDERS’ EQUITY

Under its Amended and Restated ArticlesCertificate of Incorporation, dated July 22, 2020 and the Board resolution adopted June 27, 2021, the Company hadhas a total of 95,109,045310,000,000 shares of capital stock authorized for issuance, consisting of 74,687,845300,000,000 shares of common stock, par value of $0.01 per share, and 20,421,20010,000,000 shares of convertible preferred stock, par value of $0.01 per share. The convertible preferred stock consists of 13,812,500 shares of Series A convertible preferred stock and 6,608,700 shares of Series B convertible preferred stock.‌

Common Stock

InOn January 2021,30, 2023, the Company issued completed an aggregateunderwritten public offering (“the Offering”) of 151,5156,500,000 shares of its common stock at aan offering price of $6.6017.00, resulting per share, which consisted of 3,750,000 shares of common stock issued and sold by the Company and 2,750,000 shares of common stock sold by certain selling securityholders. On February 17, 2023, the underwriters exercised in totalfull their option to purchase an additional 562,500 shares and 412,500 shares of common stock from the Company and the selling securityholders, respectively.‌

The Company received aggregate net proceeds from the Offering of approximately $1,000.

Common stock reserved for future68,453 issuance are as follows:after deducting underwriting discounts and commissions and offering expenses payable by the Company. The selling securityholders received aggregate net proceeds from the Offering of approximately $50,700 after deducting underwriting discounts and commissions. The Company did not receive any of the proceeds from the sale of shares of Common Stock by the selling securityholders.

September 30, 2021

Convertible preferred stock

20,421,200

Common stock options granted and outstanding

5,307,200

Common stock reserved for future option grants

2,069,875

Total common stock reserved for future issuance

27,798,275

Treasury Stock

The Company did not purchase any of its common stock during the nine months ended September 30, 2023 and 2022. All previously repurchased shares were recorded in Treasury stock at cost.

1411

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(in thousands, except share and per share data)

(unaudited)

 

Series A Convertible Preferred Stock

In December 2011, the Company issued an aggregate of 3,250,005 shares of its Series A convertible preferred stock at a price of $0.30769 per share, resulting in total proceeds of approximately $1,000.

In February and November 2012, the Company issued an aggregate of 10,562,495 shares of its Series A convertible preferred stock at a price of $0.30769 per share, resulting in total proceeds of approximately $3,250.

As of September 30, 2021, there are 13,812,500 shares of Series A convertible preferred stock outstanding.

As of September 30, 2021 and December 31, 2020, the Company’s Series A convertible preferred stock have been classified as temporary equity in the accompanying Condensed Consolidated Balance Sheets given that a majority of the Company’s board of directors seats are held by convertible preferred stockholders and they could cause certain events to occur that are outside of the Company’s control whereby the Company could be obligated to redeem the convertible preferred stock.

In connection with the IPO, all of the shares of the Company’s outstanding Series A convertible preferred stock automatically converted into an aggregate of 13,812,500 shares of the common stock.

Convertible Series B Preferred Stock

In July 2020, the Company issued an aggregate of 6,608,700 shares of its Series B convertible preferred stock at a price of $5.75 per share, resulting in total net proceeds of approximately $36,030, net of issuance costs of $1,970.

As of September 30, 2021, there are 6,608,700 shares of Series B convertible preferred stock outstanding.

As of September 30, 2021 and December 31, 2020, the Company’s Series B convertible preferred stock have been classified as temporary equity in the accompanying balance sheets given that a majority of the Company’s Board of Directors seats are held by convertible preferred stockholders and they could cause certain events to occur that are outside of the Company’s control whereby the Company could be obligated to redeem the convertible preferred stock.

In connection with the IPO, all of the shares of the Company’s outstanding Series B convertible preferred stock automatically converted into an aggregate of 6,608,700 shares of the common stock.

Treasury Stock

The Company purchased a total of 85,050 and 41,665 shares of its common stock during the nine months ended September 30, 2021 and 2020, respectively, for $561 and $231, respectively. Share purchases during the first nine months of September 30, 2021 and 2020 were made at an average of $6.60 and $5.50 per share, respectively. All repurchased shares were recorded in Treasury stock at cost.

NOTE 9. EARNINGS (LOSS)8. LOSS PER SHARE

Basic net (loss) incomeloss per share is computed by dividing net (loss) incomeloss 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 stocksstock 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 continuing 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 months and nine months ended September 30, 20212023 and 2020,2022, respectively was as follows:

 

15

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(in thousands, except share and per share data)

(unaudited)

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands, except per share data)

2021

 

 

2020

 

 

2021

 

 

2020

 

Net (loss) income attributable to common stockholders

 

 

 

 

 

 

 

 

Net (loss) income attributable to Paragon 28, Inc.

$

(5,107

)

 

$

3,808

 

 

$

(7,518

)

 

$

(667

)

Less: Dividends on Series B convertible preferred stock

 

(574

)

 

 

(333

)

 

 

(1,516

)

 

 

(333

)

Net (loss) income attributable to common stockholders

$

(5,681

)

 

$

3,475

 

 

$

(9,034

)

 

$

(1,000

)

2023

 

 

2022

 

 

2023

 

 

2022

 

Net loss

$

(8,332

)

 

$

(9,724

)

 

$

(28,282

)

 

$

(28,563

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common stock outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

47,005,334

 

 

 

43,429,308

 

 

 

46,926,344

 

 

 

42,792,176

 

 

82,548,892

 

 

 

76,850,949

 

 

 

81,878,814

 

 

 

76,595,118

 

Diluted

 

47,005,334

 

 

 

61,376,701

 

 

 

46,926,344

 

 

 

42,792,176

 

 

82,548,892

 

 

 

76,850,949

 

 

 

81,878,814

 

 

 

76,595,118

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.12

)

 

$

0.08

 

 

$

(0.19

)

 

$

(0.02

)

$

(0.10

)

 

$

(0.13

)

 

$

(0.35

)

 

$

(0.37

)

Diluted

$

(0.12

)

 

$

0.06

 

 

$

(0.19

)

 

$

(0.02

)

$

(0.10

)

 

$

(0.13

)

 

$

(0.35

)

 

$

(0.37

)

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:

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Stock options

 

5,307,200

 

 

 

2,036,390

 

 

 

5,307,200

 

 

 

6,171,280

 

Series A convertible preferred stock

 

13,812,500

 

 

 

-

 

 

 

13,812,500

 

 

 

13,812,500

 

Series B convertible preferred stock

 

6,608,700

 

 

 

6,608,700

 

 

 

6,608,700

 

 

 

6,608,700

 

 

As of September 30,

 

 

2023

 

 

2022

 

Stock options

 

6,119,477

 

 

 

7,304,770

 

Restricted stock units

 

1,392,087

 

 

 

144,547

 

 

NOTE 10.9. 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 85% of the market price at the lesser of the date the purchase right is granted or exercisable. Eligible employees can contribute up to 15% of their gross base earnings for purchases under the ESPP through regular payroll deductions, limited to $25,000 worth of the Company’s shares of common stock for each calendar year in which the purchase right is outstanding. The Company currently holds offerings consisting of six month periods commencing on January 1st and July 1st of each calendar year, with a single purchase date at the end of the purchase period on June 30th and December 31st of each calendar year.

The Company approved and adopted the March 11, 2011 stock option plan, which permits the grant of stock options to its employees for up toissued 15,800,000 shares of common stock. Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant; those options generally, vest based on one to four years of continuous service and have ten-year contractual terms. There were 816,25037,146 and 785,00017,060 options grantedshares upon exercise of purchase rights during the nine months ended September 30, 20212023 and 2020. As of2022, respectively. The Company recognizes compensation expense on a straight-line basis over the service period. During the three months ended September 30, 2021,2023 and 2022, the Company had reserved recognized $2,069,87586 options for future grant. and $The time-based stock options vest in equal installments each year from 100one to four years.The performance-based options are eligible to vest in equal installments each year subject, respectively, of compensation expense related to the individual meeting certain sales targets.ESPP. During the nine months ended September 30, 2023 and 2022, the Company recognized $268 and $100, respectively, of compensation expense related to the ESPP.

12

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

(unaudited)

Stock Options

The following table summarizes the Company’s stock option plan and the activity for the nine months ended September 30, 2023:

 

Shares

 

 

Weighted-Average Exercise Price

 

 

Weighted-Average Remaining Contractual Term (Years)

 

Outstanding, December 31, 2022

 

6,538,536

 

 

$

10.02

 

 

 

7.36

 

Granted

 

225,000

 

 

 

18.33

 

 

 

 

Exercised or released

 

(379,705

)

 

 

6.68

 

 

 

 

Forfeited or expired

 

(264,354

)

 

 

14.80

 

 

 

 

Outstanding, September 30, 2023

 

6,119,477

 

 

$

10.32

 

 

 

6.89

 

Exercisable, September 30, 2023

 

4,232,008

 

 

$

8.22

 

 

 

6.34

 

Vested and expected to vest at September 30, 2023

 

6,112,107

 

 

$

10.31

 

 

 

6.89

 

During the three months ended September 30, 20212023 and 2020,2022, the Company recognized $1,0321,724 and $3652,254, respectively, of compensation expense related to stock options. During the nine months ended September 30, 20212023 and 2020,2022, the Company recognized $2,7475,320 and $1,2336,351, respectively of compensation expense related to stock options. Stock-based compensation expenses are recorded in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

Restricted Stock Units

The Company received cash infollowing table summarizes the amount of $91 and $85 from the exercise ofCompany’s restricted stock options for the three months ended September 30, 2021 and 2020, respectively. The Company received cash in the amount of $442 and $210 from the exercise of stock optionsunits activity for the nine months ended September 30, 2021 and 2020, respectively. The tax benefit from equity options exercised were $2023.19and $18

 for

 

Restricted Stock Units

 

 

Weighted-Average Fair Value

 

Outstanding, December 31, 2022

 

964,054

 

 

$

17.74

 

Granted

 

630,618

 

 

 

17.82

 

Vested

 

(55,968

)

 

 

16.97

 

Forfeited or expired

 

(146,617

)

 

 

17.81

 

Outstanding, September 30, 2023

 

1,392,087

 

 

$

17.80

 

Vested and expected to vest at September 30, 2023

 

1,378,740

 

 

$

17.80

 

During the three months ended September 30, 2021 and 2020, respectively. The tax benefit from equity options exercised were $93 and $44 for the nine months ended September 30, 20212023, the Company recognized $1,788 and 2020, respectively.$

4,974, respectively, of compensation expense related to RSUs. During the firstthree and nine months of 2020,ended September 30, 2022, the Company granted certain officersrecognized $332 and contractors$701, respectively of compensation expense related to RSUs. Stock-based compensation expenses are recorded in Selling, general and administrative expenses in the Company an aggregateCondensed Consolidated Statements of 785,000 options at a weighted average strike price of $6.11. Of the options granted, there were time-based optionsOperations and performance-based options, which vest upon achievement of the sales performance milestone.Comprehensive Loss.

1613

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(in thousands, except share and per share data)

(unaudited)

 

During the first nine months of 2021, the Company granted certain officers and contractors of the Company an aggregate of 816,250 time-based options at a weighted average strike price of $6.60.

The following summarizes the Company’s stock option plan and the activity for the three months and nine months ended September 30, 2021:

 

Nine Months Ended September 30,

 

 

2021

 

 

2020

 

Expected volatility

52% - 54%

 

 

51% - 56%

 

Expected dividends

 

0

 

 

 

0

 

Expected term (in years)

5.75 - 6.25

 

 

5.75 - 6.0

 

Risk-free rate

0.47% - 0.93%

 

 

0.35% - 1.66%

 

The aggregate intrinsic value of options outstanding as of September 30, 2021 is $43,432. The aggregate intrinsic value of vested and exercisable options as of September 30, 2021 is $28,713. The weighted average fair value of options granted during the nine months ended September 30, 2021 and 2020 was $5.04 and $3.26, respectively, on the dates of grant.

As of September 30, 2021, there was approximately $6,979 total unrecognized compensation cost related to non-vested stock-based compensation arrangements, which is expected to be recognized over a weighted average period of 1.86 years.

The fair value of each option award is estimated on the date of grant using a Black Scholes option pricing model. The absence of an active market for the Company’s common stock required it to estimate the fair value of the Company’s common stock for purposes of granting stock options and for determining stock-based compensation expense for the periods presented. The Company obtained third-party valuations to assist in determining the estimated fair value of its common stock in addition to contemporaneous sales of common stock. These third-party valuations used the methodologies, approaches, and assumptions consistent with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Expected volatilities are based on historical volatilities of comparable companies. The Company uses the “simplified” method of calculation for estimating expected term since the simplified method provides a reasonable estimate in comparison to actual experience. The risk-free rate is based on the U.S. Treasury yield rates for the expected term. The Company does not anticipate that dividends on common stock will be distributed in the near future. Below are the following assumptions used for the nine months ended September 30, 2021 and 2020 in determining the fair value of each option award:

 

Shares

 

 

Weighted-Average Exercise Price

 

 

Weighted-Average Remaining Contractual Term
(Years)

 

Outstanding December 31, 2020

 

4,759,530

 

 

$

4.55

 

 

 

7.84

 

Granted

 

816,250

 

 

 

6.49

 

 

 

 

Exercised

 

(234,205

)

 

 

1.89

 

 

 

 

Forfeited or expired

 

(34,375

)

 

 

6.16

 

 

 

 

Outstanding September 30, 2021

 

5,307,200

 

 

$

5.52

 

 

 

7.63

 

Exercisable September 30, 2021

 

2,864,992

 

 

$

3.68

 

 

 

6.27

 

Vested and expected to vest at September 30, 2021

 

5,307,200

 

 

$

5.52

 

 

 

7.63

 

NOTE 11. EMPLOYEE BENEFIT PLAN

The Company sponsors a defined contribution plan for eligible employees who are 21 years of age with three months of service can voluntarily contribute up to 100% of their eligible compensation. The Company has elected a Safe Harbor plan in which the Company must contribute 3% of eligible compensation. In addition, the Company may make discretionary contributions which are determined and authorized by the Board of Directors each plan year. The Company made matching contributions to its employee benefit

17

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(in thousands, except share and per share data)

(unaudited)

plan of $129 and $111 for the three months ended September 30, 2021 and 2020, respectively. The Company made matching contributions to its employee benefit plan of $425 and $360 for the nine months ended September 30, 2021 and 2020, respectively.

NOTE 12.10. INCOME TAXES

The effective tax rates for the nine months ended September 30, 20212023 and 20202022 are as follows:

 

Nine Months Ended September 30,

 

 

2021

 

 

2020

 

Effective tax rate

 

-6.3

%

 

 

-227.9

%

 

Nine Months Ended September 30,

 

 

2023

 

 

2022

 

Effective tax rate

 

(0.322

%)

 

 

(1.057

%)

For the three months ended September 30, 20212023 and 2020,2022, the Company recorded a tax benefit of $108 and tax expense of $201, respectively. For nine months ended September 30, 2023 and 2022, the Company recorded tax expense of $105 and benefit of $19, respectively. For the nine months ended September 30, 2021 and 2020, the Company recorded tax expense of $43790 and $1,396306, respectively. The majority of change in tax expense recorded in 2020 versus 2021 relates to losses generated in the U.S. for which no benefit is recognized.

The Company’s 20212023 and 20202022 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 as a result of the U.S. jurisdiction, Finland, Germany, United Kingdom and Italy jurisdictions that hashave a full valuation allowance recorded on U.S. 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 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, United Kingdom and Italy and continues to monitor and assess potential valuation allowances in all its jurisdictions.

NOTE 13.11. COMMITMENTS AND CONTIGENCIES

Leases

The Company leases office space, machinery and equipment under long-term lease agreements expiring through 2029. Rent expense under operating leases totaled $339 and $321 for the three months ended September 30, 2021 and 2020, respectively, and is included in Selling, general, and administrative expense in the Condensed Consolidated Statements of Operations and Comprehensive Loss. Rent expense under operating leases totaled $1,006 and $1,007 for the nine months ended September 30, 2021 and 2020, respectively.

Legal Proceedings

We areThe 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 ourthe exposure be materially different from ourthe estimates or should liabilities be incurred that were not previously accrued. Potential insurance reimbursements are not offset against potential liabilities.

During 2018 Wright Medical Technology, Inc. (“Wright Medical”) sued As of September 30 2023, the Company claiming patent infringement targeting essentially all of our patents. The case was subsequently updated to include trade secret misappropriations. Weis not involved in any legal proceedings that could have filed motions to dismiss all allegations. We currently believe that we have substantial and meritorious defenses to Wright Medical’s claims and intend to vigorously defend our position, including through the trial and appellate stages if necessary. As the case is ongoing, we are unable to determine the likelihood of an outcome or estimate a range of reasonably possible settlement, if any. Accordingly, we have not made an

18

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(in thousands, except share and per share data)

(unaudited)

accrual for any possible loss. The outcome of any litigation, however, is inherently uncertain, and anmaterial adverse judgment or settlement in the Wright Medical proceeding, if any, could materially and adversely affect our business,effect on its condensed consolidated financial position, results of operations or cash flows. We have incurred, and expect that we will continue to incur, significant expense in defending against the allegations made by Wright Medical.position.

NOTE 14.12. 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 (4%) of net revenue related to the licensed intellectual property for the 15 years following the date of first sale, including a minimum annual payment of $250. The term of the agreement is 20 years, and automatically renews for five-year periods thereafter. Payments to the entity under this license agreement totaled $2932 and $1628 for the three months ended September 30, 20212023 and 2020,2022, respectively. Payments to the entity under this license agreement totaled $236233 and $82221 for the nine months ended September 30, 20212023 and 2020,2022, respectively. Amounts payable to this entity as of September 30, 20212023, and December 31, 20202022, were $25128 and $175, respectively.

The Company purchased property and equipment of $299 and $323 for the three months ended September 30, 2021 and 2020, respectively, from a related party tray manufacturing company. The Company purchased property and equipment of $827 and $1,169 for the nine months ended September 30, 2021 and 2020, respectively, from a related party tray manufacturing company. Amounts payable as of September 30, 2021 and December 31, 2020 to this related party were $73 and $102164, respectively.

The Company paid professional services fees to a related party totaling $148123 and $2510 for the three months ended September 30, 20212023 and 2020,2022, respectively, and such fees are included in Selling, general, and administrative expense in the Condensed Consolidated Statements of Operations and Comprehensive Loss. The Company paid professional services fees to a related party totaling $485238 and $400266 for the nine months ended September 30, 20212023 and 2020,2022, respectively. Amounts payable as of September 30, 20212023 and December 31, 20202022 to this related party were $3466 and $680, respectively.

On August 27, 2017, the Company entered into a standard supplier quality agreement with a related party, owned by a non-officer employee of the Company, for purchases of screws14

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and surgical instrumentation. Payments to the related party under the agreement totaled $per share data)

241(unaudited)

 and $240 for the three months ended September 30, 2021 and 2020, respectively, and are included in Costs of goods sold in the Condensed Consolidated Statements of Operations and Comprehensive Loss. Payments to the related party under the agreement totaled $554 and $507 for the nine months ended September 30, 2021 and 2020, respectively. Amounts payable to the related party as of September 30, 2021 and December 31, 2020 were $238 and $119, respectively.

NOTE 15.13. SEGMENT AND GEOGRAPHIC INFORMATION

The following table represents total net revenue by geographic area, based on the location of the customer for the three months and nine months ended September 30, 20212023 and 2020,2022, respectively.

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2021

 

2020

 

2021

 

2020

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

United States

 

$

31,882

 

 

$

27,482

 

 

$

92,014

 

 

$

68,593

 

 

$

44,548

 

 

$

39,960

 

 

$

131,793

 

 

$

112,781

 

International

 

 

3,969

 

 

 

2,786

 

 

 

12,675

 

 

 

7,331

 

 

 

8,235

 

 

 

6,046

 

 

 

24,035

 

 

 

17,094

 

Total net revenue

 

$

35,851

 

 

$

30,268

 

 

$

104,689

 

 

$

75,924

 

 

$

52,783

 

 

$

46,006

 

 

$

155,828

 

 

$

129,875

 

NaNNo individual country with net revenue originating outside of the United States accounted for more than 10% of consolidated net revenue for the three months and nine months ended September 30, 20212023 and 2020.2022.

The following table represents total non-current assets, excluding deferred taxes, by geographic area for the as of September 30, 20212023 and December 31, 2020,2022, respectively.

 

19

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(in thousands, except share and per share data)

(unaudited)

 

September 30, 2021

 

December 31, 2020

 

 

September 30, 2023

 

 

December 31, 2022

 

United States

 

$

108,951

 

 

$

85,489

 

 

$

90,373

 

 

$

79,458

 

International

 

 

12,597

 

 

 

12,094

 

Finland

 

 

25,170

 

 

 

25,581

 

Other International

 

 

8,888

 

 

 

6,546

 

Total assets

 

$

121,548

 

 

$

97,583

 

 

$

124,431

 

 

$

111,585

 

 

NaN individual country with total assets outside of the United States accounted for more than 10% of consolidated total assets as of September 30, 2021 and December 31, 2020.

NOTE 16.14. SUBSEQUENT EVENTS

We have evaluated subsequent events throughOn November 22, 2021 which is the date these Condensed Consolidated Financial Statements were available to be issued.

On October 8, 2021,2, 2023, the Company filedand its wholly-owned subsidiary, Paragon Advanced Technologies, Inc. (“Paragon Advanced Technologies” and, together with the Company, the “Borrowers”), entered into a certificate of amendment (“Certificate of Amendment”new credit agreement (the “Ares Credit Agreement”) with the Secretary of State of the State of Delaware, pursuant to which, the Company effected a 5-for-1 forward stock split of the Company’s authorized, issuedAres Capital Corporation, as administrative agent and outstanding common stock, the Company’s authorized, issuedcollateral agent, and outstanding Series A convertible preferred stock,ACF FINCO I LP, as revolving agent (together, “Ares Capital”), and the Company’s authorized, issued and outstanding Series B convertible preferred stock (the “Stock Split”). The Stock Split was approved by the Company’s Board of Directors on October 6, 2021. All share amounts and per share data presented in the accompanying Condensed Consolidated Financial Statements have been retrospectively adjustedlenders party thereto, to reflect the forward stock split for all periods presented.

On October 19, 2021, the Company completed its IPO by issuing and selling 8,984,375 shares of its common stock, at a priceprovide senior secured credit facilities to the publicBorrowers in an aggregate principal amount of $16.00150,000, inclusive of a revolving credit facility of up to $50,000 per share.(the “Ares Revolving Loan”) and a term loan facility of up to $100,000 (the “Ares Term Loan”). The gross proceedsobligations under the Ares Credit Agreement are guaranteed by each of the Borrowers’ current and future domestic subsidiaries, and secured by liens on substantially all of the Borrowers’ and guarantors’ present and after-acquired assets, in each case, subject to certain customary exceptions. In connection with the closing of the Ares Credit Agreement, the Company drew down $25,000 and $75,000 on the Ares Revolving Loan and Ares Term Loan, respectively. The Ares Revolving Loan and Ares Term Loan bear interest at variable rates of Term SOFR plus 4% and Term SOFR plus 6.75%, respectively, subject in the case of the Ares Term Loan to certain step-downs and adjustments as set forth in the Ares Credit Agreement, and mature on the earlier of (i) November 2, 2028 and (ii) with respect to the Company fromAres Revolving Loan, 6 months prior to the initial public offering werematurity date of any other indebtedness in a principal or stated amount in excess of $143,750, before deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. The net proceeds after deducting underwriting discounts and commissions were $133,68812,500. The Company has incurred $2,977 of offering expenses classified as deferred IPO costs as of September 30, 2021 that will be offset against proceeds for the quarter ended December 31, 2021. Concurrent with the IPO, the Company issued 2,578,000 stock options with an exercise price of $16.00 per share and an estimated fair market value of $8.35 per share.

On October 19, 2021, upon the completion of the IPO, all convertible preferred stocks then outstanding, including 13,812,500 shares of Series A convertible preferred stock and 6,608,700 shares of Series B convertible preferred stock, converted into an aggregate of 20,421,200 shares of common stock. PursuantAres Credit Agreement contains a financial covenant requiring us to the terms of the Series B convertible preferred stock offering, the $2,328 of cash dividends accrued as of September 30, 2021 were cancelled upon conversion of the Series B preferred stock into common stock.maintain certain minimum revenue levels.

In October 2021, the Company’s board of directors adopted, and its stockholders approved, the 2021 Incentive Award Plan (“2021 Plan”), which became effective in connection with the IPO. The 2021 Plan provides forentry into the grant of incentive stock options, stock appreciation rights, restricted stock, RSU, performance stock units, performance bonus awards, dividend equivalents,Ares Credit Agreement, the Company terminated the commitments and other stock or cash based awards. The number of shares of the Company’s common stock reserved for issuancesatisfied all outstanding obligations under the 2021 Plan is MidCap Credit Agreements. Refer to Note 6 for additional information.7,641,979 shares.

In October 2021, the Company’s board of directors adopted, and its stockholders approved, the 2021 Employee Stock Purchase Plan (“ESPP”), which became effective in connection with the IPO. The ESPP authorizes the issuance of shares of common stock pursuant to purchase rights granted to employees. The ESPP initially provides participating employees with the opportunity to purchase up to an aggregate of 1,329,040 shares of the Company’s common stock.




2015

 

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 elsewhere in Part I-Item 1 of this quarterly report as well as our audited financial statements and the notes related thereto for the year ended December 31, 2020 that are included in our final prospectus dated October 14, 2021 that forms a part of our Registration StatementQuarterly Report on Form S-1 (File No. 333-259789) that was filed with the SEC pursuant to Rule 424(b) (the Final Prospectus).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. Factors that could cause or contribute to such differences include, but are not limited to, those discussedSee “Special Note Regarding Forward-Looking Statements” in the section titled “Risk Factors” included in our Final Prospectus.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 we 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, bunions,forefoot or hallux valgus - which includes bunion and hammertoe, ankle, flatfoot or progressive collapsing foot deformity (PCFD) or flatfoot,, 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. Our broad suite of surgical solutions comprises 7275 product systems, including approximately 8,7009,200 SKUs to help fit the specific needs of each patient.patient and procedure. 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.

We established Paragon 28 in 2010 as a company exclusively dedicated to the foot and ankle market. Since then, we have developed a comprehensive portfolio of foot and ankle surgical systems and procedural techniques designed to address the primary conditions requiring treatment in the foot and ankle, including fracture fixation; bunions; hammertoe; ankle; PCFD or flatfoot; charcot foot; and orthobiologics.‌

Our broad commercial footprint spans across all 50 United States and 2322 other countries. In the United States we primarily sell to hospitals and ambulatory surgery centers through a network of primarily independent sales representatives, the majority of whom are exclusive. Outside the United States we primarily sell to hospitals and ambulatory surgery centers through a network of sales representatives and stocking distributors. We plan to efficiently grow our sales organization and network to expand into new territories in the United States. We are also highly focused on expanding our global network by expanding our sales footprint in existing and select new international markets based on our assessment of size and opportunity.

We currently leverage multiple third-party manufacturing relationships to ensure low cost production while maintaining a capital efficient business model. We have multiple sources of supply for many of our surgical solutions’ critical components. Nearly all of our supply agreements do not have minimum manufacturing or purchase obligations. As such, we generally do not have any obligation to buy any given quantity of products, and our suppliers generally have no obligation to sell to us or to manufacture for us any given quantity of our products or components for our products. In most cases, we have redundant manufacturing capabilities for each of our products. Except during the height of the COVID-19 pandemic, weWe have not experienced any significant difficulty obtaining our products or components for our products necessary to meet demand, and we have only experienced limited instances where our suppliers had difficulty supplying products by the requested delivery date. We believe manufacturing capacity is sufficient to meet market demand for our products for the foreseeable future.

Net revenue increased from $75.9$46.0 million for the three months ended September 30, 2022, to $52.8 million for the three months ended September 30, 2023, an increase of 15%, and from $129.9 million for the nine months ended September 30, 20202022, to $104.7$155.8 million for the nine months ended September 30, 2021,2023, an increase of 38%, and20%.

Net loss decreased from $30.3$9.7 million for three months ended September 30, 2020 to $35.9 for the three months ended September 30, 2021, an increase of 18%.

Net loss increased2022, to $8.3 million for the three months ended September 30, 2023, and from $0.7$28.6 million for the nine months ended September 30, 20202022, to $7.5$28.3 million for the nine months ended September 30, 2021 and net income decreased2023.

Adjusted EBITDA improved from $3.8negative $2.7 million for the three months ended September 30, 20202022, to a net loss of $5.1negative $1.2 million for the three months ended September 30, 2021.

21

Adjusted EBITDA decreased2023, and from $7.5 millionnegative $9.2 million for the nine months ended September 30, 20202022, to $2.9 millionnegative $5.3 million for the nine months ended September 30, 2021 and from $6.3 million for the three months ended September 30, 2020 to negative $1.0 million for the three months ended September 30, 2021.2023. Adjusted EBITDA is not a financial measure under U.S. generally accepted accounting principles (GAAP). See “—Non-GAAP“Non-GAAP Financial Measures” for an explanation of how we compute this non-GAAP financial measure and for the reconciliation to the most directly comparable GAAP financial measure.

As of December 31, 20202022, and September 30, 2021,2023, we had cash of $17.5$38.5 million and $7.9$34.9 million and retained earningsan accumulated deficit of $12.4$67.8 million and $3.4$96.1 million, respectively. Our primary sources of capital from inception through September 30, 2021 have been from cash flows from operations, private placements of convertible preferred securities and the incurrence of indebtedness.

On October 19, 2021, we completed our initial public offering of 8,984,375 shares of our common stock, at a price to the public of $16.00 per share. The gross proceeds from the initial public offering were approximately $143.8 million, before deducting underwriting discounts and commissions and estimated offering expenses payable by us. The net proceeds after deducting underwriting discounts and commissions were $133.7 million. We have incurred $3.0 million of offering expenses classified as deferred IPO costs as of September 30, 2021 that will be offset against proceeds for the quarter ended December 31, 2021. Upon the completion of the IPO, all convertible preferred stocks then outstanding, including 13,812,500 shares of our Series A convertible preferred stock and 6,608,700 shares of our Series B convertible preferred stock, converted into an aggregate of 20,421,200 shares of common stock. The $2,328 of accrued cash dividends for the Series B convertible preferred stock were not declared by the board and consequently reversed upon conversion.

We believe that our existing cash, available debt borrowings and expected operating cash flows will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months. Based upon our current operating plan, we believe that the net proceeds from this offering, together with our existing cash, will enable us to fund our operating expenses and capital expenditure requirements for at least the next twelve months from the date of this offering.

We have invested heavily in both research and development and expansion of our sales and marketing functions and expect to continue to make substantial investments in these areas. Moreover, we expect to incur additional expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the United States Securities and Exchange Commission (SEC) and those of the NYSE, additional insurance expenses, investor relations activities and other administrative and professional services. As a result of these and other factors, 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 by entering into partnerships or through public or private equity offerings or debt financings, credit or loan facilities or a combination of one or more of these funding sources. If we raise additional funds by issuing equity securities, our stockholders may experience dilution.

Factors Affecting Our Results of Operations

We believe our performance and continued success depend on several factors that present significant opportunities. These factors include:

Investments in Product Development and Innovation, including Smart 28

We expect to continue to focus on long-term revenue growth through investments in our business. In research and development, our team is continually working on new products and iterations of our existing products. Further, we anticipate we will continue to invest significantly in our Smart 28 initiatives in order to improve patient outcomes by augmenting existing products and creating new products and related services that employ advanced technologies. We are committed to continuously expanding our portfolio of foot and ankle solutions and to bring next-generation products to market. While research and development and clinical testing are time consuming and costly, we believe expanding into new indications, implementing product improvements and continuing to demonstrate the efficacy, safety and cost effectiveness of our products through clinical data are all critical to increasing the adoption of our solutions. We continue to invest in programs to educate physicians who treat foot and ankle about the advantage of products. Accordingly, in the near term, we expect these activities to increase our operating expenses, but in the longer term we anticipate they will positively impact our business and results of operations.

Continued Commercial Expansion in the United States and International Markets

In sales and marketing, we are also dedicating meaningful resources to expand our commercial team in the United States and in international markets. Our top commercial priorities in the United States include sales force expansion, expansion of our surgeon customer base, sales force channel productivity and increasing surgeon utilization. Our top commercial priorities in the international markets include expanding our market share in existing countries and targeting new countries where we can maximize strong average selling price (ASP) and margins. Our current expansion targets include Brazil, Colombia, Japan, Mexico, Sweden, Taiwan and Costa Rica, and we are exploring potential future opportunities in India, China and Russia. This process requires significant education and

2216

 

training forEmerging Growth Company

As an emerging growth company under the JOBS Act we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. We have elected to avail ourselves of this exemption and, therefore, while we are an emerging growth company, we will not be subject to new or revised accounting standards at the same time that they become applicable to other public companies that are not emerging growth companies. As a result, our commercial teamfinancial statements and interim financial statements may not be comparable to achieve the levelcompanies that comply with new or revised accounting pronouncements. However, we will no longer qualify as an emerging growth company as of technical competency with our products that is expected by physiciansDecember 31, 2023 and will no longer be able to gain experience building demand for our products. Upon completiontake advantage of the training, our commercial team typically requires time in the field to grow their networkextended transition period. Therefore, as of accounts and increase their productivity to the levelsDecember 31, 2023, we expect. Successfully recruiting, training and retaining additional sales representatives will be required to achieve growth, which will require significant investments by us.

Continued and Expanded Accessadopt new or revised accounting standards when they are applicable to Hospital Facilities

In the United States, in order for physicians to use our products, the hospital facilities where these physicians treat patients often require us to enter into purchasing contracts directly with the hospital facilities or with the GPOs of which the hospital facilities are members. This process can be lengthy and time-consuming and requires extensive negotiations and management time. In markets outside the United States, we may be required to engage in a contract bidding process in order to sell our products, where the bidding processes are only open at certain periods of time, and we may not be successful in the bidding process.

Inventory, Surgical Instrumentation and Supply Chain Management

Given the large variety and number of products we sell, in order to market and sell them effectively, we must maintain significant levels of inventory and surgical instrumentation. As a result, a significant amount of cash is expended for inventory and surgical instrumentation. There may also be times in which we determine that our inventory does not meet our product requirements. We may also over- or underestimate the quantities of required components, in which case we may expend extra resources or be constrained in the amount of end product that we can procure. These factors subject us to the risk of obsolescence and expiration, which may lead to impairment charges. Additionally, as we release later generations of products that contain advancements or additional features, the earlier generations may become obsolete.

Seasonality

We have experienced and expect to continue to experience seasonality in our business, with our highest sales volumes in the U.S. occurring in the fourth calendar quarter. Our U.S. sales volumes in the fourth calendar quarter tend to be higher as many patients elect to have surgery after meeting their annual deductible and having time to recover over the winter holidays.

Impact of COVID-19 Pandemic

In response to COVID-19, certain states within the United States implemented shelter-in-place rules requiring certain businesses not deemed “essential,” to close and requiring elective procedures to be delayed. As a result, our revenue growth was adversely impacted particularly from March 2020 through May 2020 when such shelter-in-place restrictions were largely eased. There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the United States and international economies. Further, the prevalence of new and potentially more contagious variants, such as the Delta variant, continue to create uncertainty for the duration and impact of the pandemic. The COVID-19 pandemic continues to have a material impact on our business and we cannot reasonably estimate the length or severity of this pandemic and its impact on the number of surgical procedures, in particular elective procedures,public companies that are performed.not emerging growth companies.

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 income,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

23

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 basedstock-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.

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, please see “—Reconciliation“Reconciliation Between GAAP and Non-GAAP Measure.”

17

Reconciliation Between GAAP and Non-GAAP Measure

We define Adjusted EBITDA as net incomeearnings (loss) before interest expense, income tax expense (benefit), depreciation and amortization, stock-based compensation expense, employee stock purchase plan expense, non-recurring expenses and non-recurringcertain other non-cash expenses. For a full reconciliation of Adjusted EBITDA for the three months and nine months ended September 30, 20212023 and 20202022 to the most comparable GAAP financial measure, please seerefer to the following table.presentation below.

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 31,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

Net Income (loss)

 

$

(5,107

)

 

$

3,808

 

 

$

(7,518

)

 

$

(667

)

Interest expense

 

 

573

 

 

 

70

 

 

 

1,174

 

 

 

532

 

Income tax expense (benefit)

 

 

105

 

 

 

(19

)

 

 

437

 

 

 

1,396

 

Depreciation and amortization expense

 

 

2,424

 

 

 

1,545

 

 

 

6,103

 

 

 

4,479

 

Stock based compensation expense

 

 

1,032

 

 

 

365

 

 

 

2,747

 

 

 

1,233

 

Excess and obsolete inventory expense related to supply chain disruption (1)

 

 

—

 

 

 

519

 

 

 

—

 

 

 

519

 

Adjusted EBITDA

 

$

(973

)

 

$

6,288

 

 

$

2,943

 

 

$

7,492

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Net loss

 

$

(8,332

)

 

$

(9,724

)

 

$

(28,282

)

 

$

(28,563

)

Interest expense, net

 

 

1,119

 

 

 

1,093

 

 

 

3,127

 

 

 

2,865

 

Income tax (benefit) expense

 

 

(108

)

 

 

201

 

 

 

90

 

 

 

306

 

Depreciation and amortization expense

 

 

4,188

 

 

 

3,058

 

 

 

10,602

 

 

 

9,624

 

Stock based compensation expense

 

 

3,512

 

 

 

2,587

 

 

 

10,294

 

 

 

7,052

 

Employee stock purchase plan expense

 

 

86

 

 

 

100

 

 

 

268

 

 

 

100

 

Change in fair value (1)

 

 

(1,714

)

 

 

(35

)

 

 

(1,394

)

 

 

(575

)

Adjusted EBITDA

 

$

(1,249

)

 

$

(2,720

)

 

$

(5,295

)

 

$

(9,191

)

------------------------------------------

(1) Represents non-recurring excessnon-cash change in the fair value of earnout liability and obsolete inventory expense caused by supply chain purchasing process disruption duringinterest rate swap contract for the COVID-19 pandemic.three and nine months ended September 30, 2023 and 2022.

Components of Our Results of Operations

Net Revenue

We currently 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 losses for bad debt. No single customer accounted for 10% or more of our net revenue in the three and nine months ended September 30, 20212023 and 2020.2022. 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

24

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 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, bonuses 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, including Smart 28 initiatives.enhancements.

18

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, though it may fluctuate from quarter to quarter. 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. Additionally, we anticipate increased expenses related to audit, legal, regulatory and tax-related services associated with being a public company, compliance with exchange listing and SEC requirements, director and officer insurance premiums and investor relations costs. We also expect to see an increase in our stock-based compensation expense with the establishment of a new equity plan associated with this offering and related grants either in the form of restricted stock units or options. In addition, we expect to continue to incur significant legal expenses related to the Wright Medical Litigation. 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, and amortization of financing costs and interest income earned during the reported periods.

Results of Operations

For the Three Months Ended September 30, 20212023 and 20202022

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

 

 

 

Three Months Ended September 30,

 

 

Change

 

 

 

2023

 

 

2022

 

 

Amount

 

 

%

 

 

 

(in thousands)

 

Net revenue

 

$

52,783

 

 

$

46,006

 

 

$

6,777

 

 

 

15

%

Cost of goods sold

 

 

10,394

 

 

 

8,491

 

 

 

1,903

 

 

 

22

%

Gross profit

 

 

42,389

 

 

 

37,515

 

 

 

4,874

 

 

 

13

%

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development costs

 

 

7,244

 

 

 

6,337

 

 

 

907

 

 

 

14

%

Selling, general, administrative

 

 

44,126

 

 

 

39,667

 

 

 

4,459

 

 

 

11

%

Total operating expenses

 

 

51,370

 

 

 

46,004

 

 

 

5,366

 

 

 

12

%

Operating loss

 

 

(8,981

)

 

 

(8,489

)

 

 

(492

)

 

 

(6

)%

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

 

1,660

 

 

 

59

 

 

 

1,601

 

 

*

 

Interest expense, net

 

 

(1,119

)

 

 

(1,093

)

 

 

(26

)

 

 

(2

)%

Total other income (expense)

 

 

541

 

 

 

(1,034

)

 

 

1,575

 

 

*

 

Income tax (benefit) expense

 

 

(108

)

 

 

201

 

 

 

(309

)

 

*

 

Net loss

 

$

(8,332

)

 

$

(9,724

)

 

$

1,392

 

 

 

14

%

------------------------------------------

25* Not meaningful

19

 

 

Three Months Ended
September 30,

 

 

Change

 

 

 

2021

 

 

2020

 

 

Amount

 

 

%

 

 

 

($ in thousands)

 

Net revenue

 

$

35,851

 

 

$

30,268

 

 

$

5,583

 

 

 

18

%

Cost of goods sold

 

 

7,096

 

 

 

7,049

 

 

 

47

 

 

 

1

%

Gross profit

 

 

28,755

 

 

 

23,219

 

 

 

5,536

 

 

 

24

%

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

4,118

 

 

 

2,346

 

 

 

1,772

 

 

 

76

%

Selling, general, administrative

 

 

28,968

 

 

 

16,958

 

 

 

12,010

 

 

 

71

%

Total operating expenses

 

 

33,086

 

 

 

19,304

 

 

 

13,782

 

 

 

71

%

Operating income (loss)

 

 

(4,331

)

 

 

3,915

 

 

 

(8,246

)

 

 

(211

)%

Other income (expense)

 

 

(98

)

 

 

(56

)

 

 

(42

)

 

 

(75

)%

Interest expense

 

 

(573

)

 

 

(70

)

 

 

(503

)

 

 

(719

)%

Income (loss) before income taxes

 

 

(5,002

)

 

 

3,789

 

 

 

(8,791

)

 

 

(232

)%

Income tax expense (benefit)

 

 

105

 

 

 

(19

)

 

 

124

 

 

 

653

%

Net income (loss)

 

 

(5,107

)

 

 

3,808

 

 

 

(8,915

)

 

 

(234

)%

 

The following table represents total net revenue by geographic area, based on the location of the customer for the three months ended September 30, 20212023 and 2020,2022, respectively.

 

 

 

Three Months Ended
September 30,

 

 

 

2021

 

 

2020

 

United States

 

$

31,882

 

 

$

27,482

 

International

 

 

3,969

 

 

 

2,786

 

Total net revenue

 

$

35,851

 

 

$

30,268

 

 

 

Three Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

United States

 

$

44,548

 

 

$

39,960

 

International

 

 

8,235

 

 

 

6,046

 

Total net revenue

 

$

52,783

 

 

$

46,006

 

Net Revenue. Net revenue increased $5.6$6.8 million, or 18%15%, from $30.3$46.0 million induring the three months ended September 30, 20202022, to $35.9$52.8 million induring the samecorresponding period in 2021. The increase in2023. U.S net revenue was due$44.6 million for three months ended September 30, 2023, representing growth of 11% compared to a $4.4 million or 16% increase inthe prior year. U.S. net revenue driven by an increase ingrowth was primarily the numberresult of producing U.S. sales representativesforce expansion and a higher amountnew product launches. International revenue for the three months ended September 30, 2023, was $8.2 million, representing growth of 36% compared to the prior year. International revenue generated per producing sales representative,growth was driven primarily by new product offerings. International revenue increased $1.2 million or 42% due to volume increasesour operations in our three largest international markets of Australia, South Africa, and the United Kingdom.Kingdom and Australia, as well as recent new markets entered including Canada, Germany and Spain.

Cost of Goods Sold and Gross Profit Margin. Despite Cost of goods sold increased net revenue$1.9 million, or 22%, from $8.5 million during the three months ended September 30, 2021, cost of goods sold was $7.12022, to $10.4 million during both the three months ended September 30, 2021corresponding period in 2023, primarily due to increased variable costs from higher net revenue and September 30, 2020. We sold a greater mix of higher gross profit margin products and had decreasedinventory excess and obsolete inventory expenses during the three months ended September 30, 2021. During the three months ended September 30, 2020, we incurred a $0.5 million, or 1.7% of net revenue, excess and obsolete inventory adjustment resulting from disruption in supply chain purchasing processes during the COVID-19 pandemic. As a result of the above, grossobsolescence expense. Gross profit margin for the three months ended September 30, 2021 increased2023, decreased to 80.2%80.3%, compared to 76.7%81.5% in the same period of 2020.2022.‌

Research and Development Expenses. Research and development expenses increased $1.8$0.9 million, or 76%14%, from $2.3$6.3 million induring the three months ended September 30, 20202022 to $4.1$7.2 million inas compared to the samecorresponding period in 2021.2023. The increase in research and development expenses was primarily due to additional investments in new product development, effortsinternational regulatory affairs, clinical studies and our quality management system, including increased personnel expenses.system.

Selling, General, and Administrative Expenses. Selling, general and administrative expenses increased $12.0$4.5 million, or 71%11%, from $17.0$39.7 million induring the three months ended September 30, 20202022, to $29.0$44.1 million induring the samecorresponding period in 2021.2023. The increase in selling, general, and administrative expenses was primarily due to increaseddriven by investments in sales and marketing, expenses, including commercial team expansion both in the U.S. and in our international markets, increased variable sales representative commission expensesexpense related to higherU.S. net revenue investments in the expansion of ourgrowth and increased U.S. sales force, increasedmarketing and medical education increased surgical instrument depreciation expense, and increased general and administrative expenses comprised of personnel expenses including stock based compensation expense and third party legal, accounting, and information technology services.programs.

Interest Expense. Interest expenseOther Income, net. Other income increased to $0.6$1.6 million, forfrom $0.1 million during the three months ended September 30, 2021 from $0.12022, to $1.7 million forduring the three months ended September 30, 20202023. The increase in other income is primarily related to the change in fair value of earn-out liabilities and interest rate swap.

Interest Expense, net. Interest expense was $1.1 million during both the three months ended September 30, 2023, and the three months ended September 30, 2022. While interest rates increased, interest expense remained flat primarily due to higher levels of outstanding debt.an offsetting increase in interest income.

2620

 

For the Nine Months Ended September 30, 20212023 and 20202022

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

 

 

 

Nine Months Ended
September 30,

 

 

Change

 

 

 

2021

 

 

2020

 

 

Amount

 

 

%

 

 

 

($ in thousands)

 

Net revenue

 

$

104,689

 

 

$

75,924

 

 

$

28,765

 

 

 

38

%

Cost of goods sold

 

 

20,209

 

 

 

15,386

 

 

 

4,823

 

 

 

31

%

Gross profit

 

 

84,480

 

 

 

60,538

 

 

 

23,942

 

 

 

40

%

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

11,254

 

 

 

8,174

 

 

 

3,080

 

 

 

38

%

Selling, general, administrative

 

 

79,009

 

 

 

50,962

 

 

 

28,047

 

 

 

55

%

Total operating expenses

 

 

90,263

 

 

 

59,136

 

 

 

31,127

 

 

 

53

%

Operating income (loss)

 

 

(5,783

)

 

 

1,402

 

 

 

(7,185

)

 

 

(512

)%

Other income (expense)

 

 

(124

)

 

 

(141

)

 

 

17

 

 

 

12

%

Interest expense

 

 

(1,174

)

 

 

(532

)

 

 

(642

)

 

 

(121

)%

Income (loss) before income taxes

 

 

(7,081

)

 

 

729

 

 

 

(7,810

)

 

 

1,071

%

Income tax expense (benefit)

 

 

437

 

 

 

1,396

 

 

 

(959

)

 

 

(69

)%

Net income (loss)

 

 

(7,518

)

 

 

(667

)

 

 

(6,851

)

 

 

(1,027

)%

 

 

Nine Months Ended September 30,

 

 

Change

 

 

 

2023

 

 

2022

 

 

Amount

 

 

%

 

 

 

(in thousands)

 

Net revenue

 

$

155,828

 

 

$

129,875

 

 

$

25,953

 

 

 

20

%

Cost of goods sold

 

 

28,158

 

 

 

22,920

 

 

 

5,238

 

 

 

23

%

Gross profit

 

 

127,670

 

 

 

106,955

 

 

 

20,715

 

 

 

19

%

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development costs

 

 

21,976

 

 

 

18,100

 

 

 

3,876

 

 

 

21

%

Selling, general, administrative

 

 

131,773

 

 

 

114,857

 

 

 

16,916

 

 

 

15

%

Total operating expenses

 

 

153,749

 

 

 

132,957

 

 

 

20,792

 

 

 

16

%

Operating loss

 

 

(26,079

)

 

 

(26,002

)

 

 

(77

)

 

 

0

%

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

 

1,014

 

 

 

610

 

 

 

404

 

 

*

 

Interest expense, net

 

 

(3,127

)

 

 

(2,865

)

 

 

(262

)

 

 

(9

)%

Total other expense

 

 

(2,113

)

 

 

(2,255

)

 

 

142

 

 

*

 

Income tax expense

 

 

90

 

 

 

306

 

 

 

(216

)

 

*

 

Net loss

 

$

(28,282

)

 

$

(28,563

)

 

$

281

 

 

 

1

%

------------------------------------------

* Not meaningful

The following table represents total net revenue by geographic area, based on the location of the customer for the nine months ended September 30, 20212023 and 2020,2022, respectively.

 

 

Nine Months Ended September 30,

 

 

Nine Months Ended
September 30,

 

 

2023

 

 

2022

 

 

2021

 

 

2020

 

 

(in thousands)

 

United States

 

$

92,014

 

$

68,593

 

 

$

131,793

 

 

$

112,781

 

International

 

 

12,675

 

 

7,331

 

 

 

24,035

 

 

 

17,094

 

Total net revenue

 

$

104,689

 

$

75,924

 

 

$

155,828

 

 

$

129,875

 

 

Net Revenue. Net revenue increased $28.8$26.0 million, or 38%20%, from $75.9$129.9 million induring the nine months ended September 30, 20202022, to $104.7$155.8 million induring the samecorresponding period in 2021. The increase in2023. Strengthening of the U.S. dollar reduced net revenue growth for the nine months ended September 30, 2023, by 0.6% as compared to the prior year. U.S net revenue was due$131.8 million for the nine months ended September 30, 2023, representing growth of 17% compared to a $23.4 million or 34% increase inthe prior year. U.S. net revenue drivengrowth was primarily the result of sales force expansion and new product launches. International revenue for the nine months ended September 30, 2023, was $24.0 million, representing growth of 41% compared to the prior year. Strengthening of the U.S. dollar reduced international net revenue growth for the nine months ended September 30, 2023, by an increase inapproximately 4.7% as compared to the number of U.S. producing sales representatives and a higher amount ofprior year. International revenue generated per producing sales representative,growth was driven primarily by new product offerings. International revenue increased $5.3 million primarily due to volume increasesour operations in our three largest international markets of Australia, South Africa, and the United Kingdom.Kingdom, Australia and Spain.

Cost of Goods Sold and Gross Profit Margin. Cost of goods sold increased $4.8$5.2 million, or 31%23%, from $15.4$22.9 million in the nine months ended September 30, 2020 to $20.2 million in the same period in 2021. The increase in cost of goods sold during the nine months ended September 30, 2021 was2022, to $28.2 million during the corresponding period in 2023, primarily due to increased variable costs of goods sold resulting from higher net revenue.revenue combined with higher inventory excess and obsolescence expense and an increase in outbound freight costs. Gross profit margin for the nine months ended September 30, 2021 increased2023 decreased to 80.7%81.9%, compared to 79.7%82.4% in the same period of 2020, primarily the result of the $0.52022.‌

Research and Development Expenses. Research and development expenses increased $3.9 million, or 0.7% of net revenue, excess and obsolete inventory adjustment21%, from $18.1 million during the nine months ended September 30, 2020 resulting from disruption in supply chain purchasing processes during2022, to $22.0 million as compared to the COVID-19 pandemic.

Research and Development Expenses. Research and development expenses increased $3.1 million, or 38%, from $8.2 million in the nine months ended September 30, 2020 to $11.3 million in the samecorresponding period in 2021.2023. The increase in research and development expenses was primarily due to additional investments in new product development, effortsinternational regulatory affairs, clinical studies and our quality management system, including increased personnel expenses.system.

21

Selling, General, and Administrative Expenses. Selling, general and administrative expenses increased $28.0$16.9 million, or 55%15%, from $50.9$114.9 million induring the nine months ended September 30, 20202022 to $79.0$131.8 million induring the samecorresponding period in 2021.2023. The increase in selling, general, and administrative expenses was primarily due to increaseddriven by investments in sales and marketing, expenses, including commercial team expansion both in the U.S. and in our international markets, increased variable sales representative commission expensesexpense related to higherU.S. net revenue investments in the expansion of ourgrowth and increased U.S. sales force, increasedmarketing and medical education increased surgical instrument depreciation expense, and increased general and administrative expenses comprised of personnel expenses including stock based compensation expense, ERP implementation expenses, and third party legal, accounting, and information technology servicesprograms.

Other Income, net.

27

Other income increased $0.4 million, from $0.6 million during the nine months ended September 30, 2022, to $1.0 million during the nine months ended September 30, 2023. The increase in other income is primarily related to the change in fair value of earn-out liabilities and interest rate swap.

Interest Expense.Expense, net. Interest expense increased to $1.2$3.1 million for the nine months ended September 30, 20212023, from $0.5$2.9 million for the nine months ended September 30, 20202022, primarily due to higher levels of outstanding debt.debt and higher interest rates on our outstanding debt, offset partially by higher interest income.

Liquidity and Capital Resources

As of December 31, 2020 and September 30, 2021, we had cash of $17.5 million and $7.9 million, and retained earnings of $12.4 million and $3.8 million, respectively. Our primary sources of capital from inception through September 30, 20212023, have been from cash flows from operations, private placements of convertible preferred securities, proceeds from our public offerings and the incurrence of indebtedness.

On October 19, 2021,January 30, 2023, we completed our initial public offeringthe Offering of 8,984,3756,500,000 shares of our common stock at aan offering price of $17.00 per share, which consisted of 3,750,000 shares of common stock issued and sold by us and 2,750,000 shares of common stock sold by certain selling securityholders. On February 17, 2023, the underwriters exercised in full their option to purchase an additional 562,500 shares and 412,500 shares of common stock from us and the public of $16.00 per share. The grossselling securityholders, respectively. We received aggregate net proceeds from the initial public offering wereOffering of approximately $143.8$68.5 million, beforeafter deducting underwriting discounts and commissions and estimated offering expenses payable by us. The netWe did not receive any of the proceeds after deducting underwriting discounts and commissions were $133.7 million. We have incurred $3.0 millionfrom the sale of offering expenses classified as deferred IPO costs asshares of common stock by the selling securityholders.

As of September 30, 2021 that will be offset against proceeds for the quarter ended2023, and December 31, 2021.2022, we had cash of $34.9 million and $38.5 million, and an accumulated deficit of $96.1 million and $67.8 million, respectively. We maintain cash balances with financial institutions in excess of insured limits.

As of September 30, 2023, we had $30.0 million principal amount outstanding and $10.0 million borrowing capacity under our term loan with Midcap Financial Trust as well as $0 outstanding and $50.0 million borrowing capacity under our revolving loan with Midcap Trust (collectively, the “Midcap Credit Agreements”). As of September 30, 2023, we also had $15.1 million outstanding under our secured term loan facility with Zions Bancorporation, N.A., dba Vectra Bank Colorado (the “Zion Facility”). For additional information about the Midcap Credit Agreements and our secured term with the Zion Facility, refer to Note 6.

On May 6, 2021,November 2, 2023, we entered into a new credit agreementthe Ares Credit Agreement with Midcap Financial Trust (Midcap)Ares Capital, and the lenders party thereto, to provide a total of $150.0 million, inclusive of a revolving credit facility of up to $70.0$50.0 million in total borrowings, including a $30.0 million revolving loan and a $40.0 million deferred draw term loan secured by our intellectual propertyfacility of up to $100.0 million. In connection with the closing of the Ares Credit Agreement, the Company drew down $25.0 million and other assets,$75.0 million on the Ares Revolving Loan and usedAres Term Loan, respectively. The Company utilized a portion of the proceeds obtained from Ares Capital to repay our former term loan agreement. At September 30, 2021, we have $26.0 million of Midcap debtsatisfy all outstanding including $16.0 millionobligations under the Midcap Revolving Loan (defined below)MidCap Credit Facilities and $10.0 million underconcurrently terminated the Midcap Term Loans (defined below). MidCap Credit Agreements. For additional information about the Ares Credit Agreement, refer to Note 14.

We believe that our existing cash, additional available borrowings under our Midcap credit facilityborrowing capacity and expected revenues will be sufficient to meet our capital requirements and fund our operations for the next 12 months. However, we may decide to raise additional financing, in addition to the net proceeds from this offering, to support further growth ofOur primary short-term needs for capital for our operations.

Long-Term Obligations

Vectra Bank Colorado Loan Agreements

On June 20, 2018, we entered into a loan agreement (the VBC Loan Agreement) with Zions Bancorporation, N.A. dba Vectra Bank Colorado (VBC). The VBC Loan Agreement consisted of a $12.5 million revolving line of credit (the Revolving Loan). The borrowing base on the Revolving Loan is an amount equal to the greater of 1.25 multiplied by our EBITDA for the past 12 months or the sum of: (1) 85% of eligible accounts plus (2) 50% of eligible inventory plus (3) 30% of eligible fixed assets. The Revolving Loan bears interest at the adjustable rate equal to the one-month London Inter-bank Offered Rate (LIBOR) rate plus an applicable margin per annum, but not less than 2.00%, and had an original maturity of December 1, 2018. The applicable margin isplanned operations, which are subject to adjustment as provided in the VBC Loan Agreement. The Revolving Loan may be used only for working capital purposes. The original VBC Loan Agreement was secured by all assets and personal property of the Company, including all goods, equipment, inventory, cash, intellectual property, and certificates of deposit. The VBC Loan Agreement contains financial and other customary covenants.change, include:

On November 27, 2018, we entered into the First Amendment to the VBC Loan Agreement (the First VBC Loan Amendment). The First VBC Loan Amendment extended the Revolving Loan maturity to June 30, 2019. A new Intellectual Property Security Agreement, dated November 27, 2018, was executed in connection with the First VBC Loan Amendment which grants a security interest in substantially all of our assets, including all right, title, and interest of all of our owned and subsequently acquired copyrights, trademarks, and patents and all products and proceeds thereof to VBC. On April 25, 2019, we entered into the Second Amendment to the VBC Loan Agreement (the Second VBC Loan Amendment). The Second VBC Loan Amendment added a $5.0 million term loan facility (the Term Loan) to the VBC Loan Agreement. The Term Loan bears interest at the adjustable rate equal to the one-month LIBOR plus an applicable margin per annum and has a maturity date of April 25, 2021. The Term loan may only be used to fund new equipment purchases and tenant improvements at our leased facilities. On June 17, 2019, we entered into the Third Amendment to the VBC Loan Agreement (the Third VBC Loan Amendment). The Third VBC Loan Amendment extended the maturity date of the Revolving Loan to August 31, 2019. No other terms of the VBC Loan Agreement were materially changed. On September 23, 2019, we entered into the Fourth Amendment to the VBC Loan Agreement (the Fourth VBC Loan Amendment). The Fourth VBC Loan Amendment extended the maturity date of the Revolving Loan to June 30, 2020. The Fourth VBC Loan Amendment also sets forth a minimum tangible net worth calculated as total assets, excluding intangible assets, less total liabilities (i) of not less than $18.0 million tested quarterly on a rolling four-quarter basis commencing June 30, 2018, and (ii) of not less than $20.9 million tested quarterly on a rolling four-quarter basis commencing September 30, 2019. On November 6, 2019, we entered into the Fifth Amendment to the VBC Loan Agreement (the Fifth VBC Loan Amendment). The Fifth VBC Loan Amendment added a $5.0 million draw-to-term loan facility (the Buyout Loan) to the VBC Loan Agreement. The Buyout Loan had a maturity date of June 30, 2020 and bore interest at the adjustable rate equal to the one-month LIBOR rate plus 2.00% per annum. On March 27, 2020, we entered into the Amended and Restated VBC Loan Agreement (the New VBC Loan Agreement) with VBC. The New VBC Loan Agreement refinanced the existing Term Loan and existing Buyout Loan into a single term loan in the aggregate principal amount of $6.8 million (the New 2020 Term Loan) and increased the maximum principal amount of the existing Revolving Loan to $15.0•

28

million (the New 2020 Revolving Loan). The maturity date for both loans was September 30, 2020 and was subsequently extended to October 5, 2023. The New VBC Loan Agreement is secured by substantially all of our assets. The New VBC Loan Agreement contains financial and other customary covenants and bears an interest rate of 3% per annum. The Company repaid this New 2020 Revolving Loan in 2021.

Midcap Loan Agreement

On May 6, 2021, we entered into a term loan agreement (the Midcap Term Loan Agreement) with Midcap Financial Trust (Midcap) as agent and lenders named therein. The Midcap Term Loan Agreement includes two tranches, with the first being for a total of $10.0 million (the First Tranche) and the second being for a total of $30.0 million (the Second Tranche, and together with the First Tranche, the Midcap Term Loans). The First Tranche was fully funded on May 6, 2021. The Second Tranche remains fully available and may be funded from May 6, 2021 until December 31, 2022, or if earlier, upon the occurrence of an event of default under the Midcap Term Loan Agreement. The Midcap Term Loans mature on May 1, 2026. The Midcap Term Loans accrue interest at the LIBOR Rate plus 6.00% per annum.

On May 6, 2021, we also entered into a revolving loan agreement (the Midcap Revolving Loan Agreement, and together with the Midcap Term Loan Agreement, the Midcap Loan Agreements) with Midcap as an agent and the lenders named therein. Pursuant to the terms of the Midcap Revolving Loan Agreement, as of May 6, 2021 we had access to a $20.0 million revolving line of credit (the Midcap Revolving Loan), that can increase by an additional $10.0 million upon our written request and the consent of the agent and lenders. The Midcap Revolving Loan Agreement matures on May 1, 2026. The Midcap Revolving Loan accrues interest at the LIBOR Rate plus 3.00% per annum.

The Midcap Loan Agreements are secured by all of our assets and personal property, including all goods, equipment, inventory, cash, intellectual property, and certificates of deposit. The Midcap Loan Agreements include customary conditions to borrowing, events of default, and covenants, including affirmative covenants and negative covenants that restrict our and our subsidiaries’ ability to, among other things, incur additional indebtedness, create or incur liens, merge or consolidate with other companies, liquidate or dissolve, sell or transfer assets, pay dividends or make distributions, subject to certain exceptions.

Funding Requirements

We use our cash to fund our operations, which primarily include the costs of purchasing our foot and ankle orthopedic implants and disposables and associated instrumentation, as well as our operating expenses, including research and development and selling, general and administrative. We expect our operating expenses to increase for the foreseeable future as we continue to invest in

expanding our research and development initiatives to improve our existing products and as we continue to expanddevelop new products and solutions; and
•
continued commercialization efforts and expansion of our sales and marketing infrastructure and programs to both drive and support anticipated sales growth. In addition, we expect our general and administrative expenses to increase for the foreseeable future as we hire personnel and expand our infrastructure to both drive and support the anticipated growth in our organization. We will also incur additional expenses as a result of operating as a public company and also expect to increase the size of our administrative function to support the growth of our business. The timing and amount of our operating expenditures will depend on many factors, including:

the research and development activities we intend to undertake in order to improve our existing products and development new products and solutions;
the costs of our ongoing commercialization activities in the United States and elsewhere, including expanding territories, increasing sales and marketing personnel, actual and anticipated product sales, marketing, manufacturing and distribution;
whether or not we pursue acquisitions or investments in businesses, products or technologies that are complementary to our current business;
the degree and rate of market acceptance of our products;
the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
our need to implement additional infrastructure and internal systems;
the emergence of competing technologies or other adverse market developments;
any product liability or other lawsuits;
the expenses needed to attract and retain skilled personnel;
changes or fluctuations in our inventory and surgical instrumentation;
our implementation of various computerized information systems;

29

the costs associated with being a public company; and
the impact of the COVID-19 pandemic on our operations and business.elsewhere;

We have based this estimateour short-term capital needs and planned operating requirements on assumptions that may prove to be wrong,incorrect and we could utilizemay 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 necessary additional capital by entering into partnerships or through public or private equity offerings or debt financings, credit or loan facilities or a combination of one or more of these or other 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

22

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, is likely tomay 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 below:

 

 

Nine Months Ended
September 30,

 

 

Change

 

 

Nine Months Ended September 30,

 

 

Change

 

 

2021

 

 

2020

 

 

Amount

 

 

%

 

 

2023

 

 

2022

 

 

Amount

 

 

%

 

 

(in thousands, other than percent change)

 

 

 

 

 

(in thousands)

 

Net cash (used in) provided by:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

(1,196

)

 

$

(4,037

)

 

$

2,841

 

70

%

 

$

(47,517

)

 

$

(35,950

)

 

$

(11,567

)

 

 

(32

)%

Investing activities

 

(25,885

)

 

(7,633

)

 

(18,252

)

 

(239

)%

 

 

(22,031

)

 

 

(53,519

)

 

 

31,488

 

 

 

59

%

Financing activities

 

17,796

 

27,663

 

$

(9,867

)

 

(36

)%

 

 

65,480

 

 

 

36,937

 

 

 

28,543

 

 

 

77

%

Effect of exchange rate changes of cash

 

 

(340

)

 

 

(257

)

 

 

(83

)

 

 

(32

)%

Net (decrease) increase in cash

 

$

(9,625

)

 

$

15,736

 

$

(25,361

)

 

 

(161

)%

Effect of exchange rate changes on cash

 

 

549

 

 

 

(495

)

 

 

1,044

 

 

*

 

Net decrease in cash

 

$

(3,519

)

 

$

(53,027

)

 

$

49,508

 

 

 

93

%

------------------------------------------

* Not meaningful

23

 

Net Cash Provided byUsed in Operating Activities

Net cash used in operating activities for the nine months ended September 30, 20212023, was $1.2$47.5 million, consisting primarily of a $28.3 million net loss, inventory increases of $7.5$35.6 million plusand final legal settlement payments of $22.0 million, offset partially by non-cash expenses of $11.9$21.7 million, which primarily consisted of $6.1including $10.6 million of depreciation and amortization $2.2 million provision for excess and obsolete inventory, and $2.7$10.3 million of stock-based compensation expense, and negative changes inother working capital improvements of $5.6$16.7 comprised primarily of a $3.7 million including $7.9decrease in accounts receivable and a $12.5 million of inventory purchases and $2.9 million in deferred IPO expenses offset partially by an increase in accounts payable of $3.4 million and an increase in accrued expenses and other current liabilities of $2.9 million. The Company paid $2.5 million of IPO expenses during the nine months ended September 30, 2021.payable.

Net cash used in operating activities for the nine months ended September 30, 20202022, was $4.0$36.0 million, consisting primarily of net loss of $0.7$28.6 million plus non-cash expenses of $10.9$15.3 million, which primarily consisted of $4.5$9.6 million of depreciation and amortization $2.8 million provision for excess and obsolete inventory, $1.2$7.1 million of stock-based compensation expense, and $1.1 million in charges related to deferred income taxes, and negative changes inincreased working capital of $14.3$22.7 million, including $10.0$15.3 million of inventory purchases, a $5.2$10.2 million decreaseincrease in accounts payable, and a $2.1 million decrease in accrued expensesreceivable and other current liabilities, offset partially by a $1.9 million reduction in accounts receivable.working capital decreases of $2.9 million.

Net Cash Used in Investing Activities

Net cash used in investing activities for the nine months ended September 30, 20212023, was $25.9$22.0 million, consisting primarily of our purchase of the assets of Additive Orthopedics for $15.0 million, surgical instrumentation purchases plus other purchases of $7.9 million,property, plant and capitalization of certain patent costs.equipment.

Net cash used in investing activities for the nine months ended September 30, 20202022, was $7.6$53.5 million, consisting primarily of our purchase of Disior for $18.5 million (financed by a $20.0 million draw on the Company's term loan), the purchase of our Denver headquarters building for $18.3 million (financed in part by a $16.0 million mortgage loan), surgical instrumentation purchases for $8.4 million, capital spend associated with the launch of SAP of $3.4 million and capitalization of certain patent costs.

30

Net Cash Provided by Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 20212023, was $17.8$65.5 million, consisting primarily of $26.0$68.5 million of proceeds from the Midcap Revolving Loanissuance of common stock, net of issuance costs related to the Offering on January 30, 2023, and $2.5 million of proceeds from the Midcap Term Loan, which wasexercise of stock options, partially offset by the long-term debt repayments of $6.0 million and the payment of $3.0$5.5 million in debt issuance costs.payments related to the completion of certain milestones associated with the Disior and Additive Orthopaedics Acquisitions.

Net cash provided by financing activities for the nine months ended September 30, 20202022, was $27.7$36.9 million, consisting primarily of $36.0 million of proceeds from long-term debt, including a $20.0 million draw on the issuance of Series B capital stock, $3.7Company's Midcap Term Loan to finance the Disior acquisition and a $16.0 million in proceeds fromloan to finance the PPP loan and $1.3 million in proceeds from the issuance of common stock, which were partially offset by $9.8 million repayments of our long term debt and $3.0 million of payments on our note payable related party.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements, such as structured finance, special purpose entities, or variable interest entities during the three and nine months ended September 30, 2021 and 2020.

Contractual Obligations and Commitments

The following table sets out, as of September 30, 2021, our contractual obligations and commitments due by period:

 

 

Payments Due By Period

 

 

 

Less
Than 1
Year

 

 

1-3
Years

 

 

3-5
Years

 

 

More
Than 5
Years

 

 

Total

 

 

 

(in thousands)

 

Operating lease obligations

 

$

288

 

 

$

3,559

 

 

$

3,273

 

 

$

1,250

 

 

$

8,370

 

Debt, including interest

 

 

571

 

 

 

4,140

 

 

 

—

 

 

 

—

 

 

 

4,711

 

Total

 

$

859

 

 

$

7,699

 

 

$

3,273

 

 

$

1,250

 

 

$

13,081

 

On May 6, 2021, we entered into new loan agreements with Midcap to provide up to $70.0 million in total borrowings and used a portionpurchase of the proceeds to repay all outstanding indebtedness under our former term loan agreement with VBC. As of September 30, 2021, we have $26.0 million of Midcap debt outstanding including $16.0 million under the Midcap Revolving Loan and $10.0 million under the Midcap Term Loans. The incurrence of indebtedness under the Midcap loans and the repayment of the outstanding indebtedness under the VBC term loan are not reflected in the above table.

We enter into contracts in the normal course of business with (i) clinical research organizations and clinical sites, (ii) contract manufacturers, (iii) regulatory consultants and (iv) various other vendors in operating our business. These contracts generally provide for termination provisions with notice, and therefore we believe that our non-cancelable obligations under these agreements were not material as of September 30, 2021.Company's Denver headquarters.

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 threenine months ended September 30, 2021,2023, there were no other 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 Final Prospectus.Company's Annual Report on Form 10-K for the year ended December 31, 2022.

Recently Issued Accounting Pronouncements

See Note 2 to our condensed consolidated financial statements included elsewhere in this quarterly report for new accountingrecently adopted pronouncements not yet adopted as of the date of this report.

3124

 

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. Since our resultsIn the normal course of operationsbusiness, we are not dependent on investments, theexposed to market risk associated withrelated to fluctuating interest ratesrates. The Company has both fixed and variable rate debt to manage the impact of these fluctuations. Accordingly, the Company is limited tothe fixed rate payor on an interest rate swap contract. Based on our investment portfolio, andoverall interest rate exposure as of September 30, 2023, we do not believe that a hypothetical 10%10 percent change in interest rates on our variable rate indebtedness would not have a significant impactmaterial effect on our financial statements included elsewhere in this quarterly report. We do not currently use or plan to use financial derivatives in our investment portfolio. We do not currently engage in hedging transactions to manage our exposure to interest rate risk.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.

Emerging Growth Company

As an emerging growth company under the JOBS Act we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, while we are an emerging growth company, we will not be subject to new or revised accounting standards at the same time that they become applicable to other public companies that are not emerging growth companies. As a result, our financial statements and interim financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

We will remain an emerging growth company until the earliest of (i) the last day of our first fiscal year in which we have total annual gross revenues of $1.07 billion or more, (ii) the last day of the first fiscal year in which we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, with at least $700.0 million of equity securities held by non-affiliates as of the end of the last business day of the second quarter of that fiscal year, (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities, or (iv) the last day of our fiscal year after the fifth anniversary of the date of the completion of this offering.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (asas defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act)Act of 1934, as amended (the "Exchange Act"), as of the end of the period covered by this Quarterly Report.Report on Form 10-Q. Based on thatsuch evaluation, our Chief Executive Officer and our Chief 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 not effective at the reasonable assurance level becauselevel.

During the quarter ended September 30, 2023, we identified an interest rate swap agreement associated with our Zions Facility, entered into during the quarter ended March 31, 2022, that had not been appropriately evaluated for accounting and disclosure considerations. This resulted in an immaterial error related to the recognition and disclosure of the interest rate swap in prior reporting periods, which is an indication that a material weakness inexisted within our internal control over financial reporting as described below.

However, our management, including our Chief Executive Officercontrols for those prior periods. The immaterial error and our Chief Financial Officer, has concluded that, notwithstanding the identified material weakness in our internal control over financial reporting, the condensed consolidated financial statementsdisclosure considerations were corrected in this Quarterly Report fairly present, in all material respects, our financial position, results of operations and cash flowson Form 10-Q for the periods presented in conformity with U.S. GAAP.period ended September 30, 2023.

Material Weaknesses in Internal Control Over Financial Reporting

In connection with the preparation of our financial statements for the years ended December 31, 2020 and 2019, management identified certain material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of ourthe Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses identified during the audit process relate to the fact that weThis control deficiency did not designresult in a material misstatement of our prior period condensed consolidated annual or maintain an effectiveinterim financial statements. We have determined that amending previously filed reports to correct the immaterial error is not required. However, the control environment, with the primary contributing factor being lack of adequate staffing with the appropriate technical accounting competency, training and experience to account for more complex accounting matters. This deficiency alsocould have resulted in inconsistently established authorities and responsibilities, including inadequate segregationmaterial misstatements that may not have been prevented or detected. We have implemented enhanced internal controls that helped to identify this deficiency; however, those controls have not yet operated for a sufficient period of duties, and also contributedtime to conclude the following additional deficiencies (each of which individually represents a material weakness)matter has been fully remediated.

Changes in Internal Control over Financial Reporting

Other than the changes made to remediate the matter above, there were no changes in our internal control over financial reporting.

32

we did not designreporting (as defined in Rule 13a-15(f) and maintain effective controls related15d-15(e) under the Exchange Act) during our most recent fiscal quarter that have materially affected, or are reasonably likely to manual journal entries. Specifically, certain personnel had the ability to both prepare and post manual journal entries without an independent review by someone without the ability to prepare and post manual journal entries.
we did not design and maintain formal accounting policies, processes and controls to analyze, account for and disclose complex transactions.

Each of the control deficiencies described above could result in a misstatement of one or more account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, our management has determined that each of the control deficiencies described above constitute a material weakness.

Management’s Plan to Remediate the Material Weaknesses

We are in the process of designing, implementing, and testing the operating effectiveness of measures to remediate the material weakness inmaterially affect, our internal control over financial reporting. During the nine months ended September 30, 2021, we:

hired additional and qualified technical accounting and reporting personnel with significant knowledge and experience with U.S. GAAP and SEC financial reporting requirements;
established and designed internal financial reporting processes;
worked on designing a control framework to ensure effective segregation of duties;
worked on designing and implementing controls over this enterprise resource planning system we implemented earlier in 2021 to, among other things, automate certain controls, enforce segregation of duties and facilitate the review of journal entries.

The material weaknesses will not be considered remediated until management completes the design and implementation of the measures described above and the controls operate for a sufficient period of time and management has concluded, through testing, that these controls are effective.

Inherent Limitations on Effectiveness of Disclosure Controls and Procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that there are inherent limitations in the effectiveness of any control system, including the potential for human error and the possible circumvention or overriding of controls and procedures, noprocedures. No matter how well designed and operated, an effective control system can provide only reasonable, not absolute, assurance that the control objectives of achieving the desiredsystem are adequately met. Accordingly, the management of the Company, including its Chief Executive Officer and Chief Financial Officer, does not expect that the control objectives.system can prevent or detect all error or fraud. 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

On March 23, 2018, Wright Medical, which was subsequently acquired by Stryker Corporation, filed the Wright Complaint against us in the United States District Court for the District of Colorado, Case No. 18-cv-00691-STV. The Wright Complaint, as amended, asserts that we (i) have infringed and continue to infringe nine Wright Medical patents (the Wright Asserted Patents), (ii) have misappropriated and continue to misappropriate Wright Medical trade secrets and confidential material, (iii) have and are unfairly competing with Wright Medical, and (iv) have intentionally interfered with Wright Medical contracts. The Wright Complaint, as amended, requests customary remedies for the claims raised, including (a) a judgment that we have infringed the Wright Medical patents and misappropriated, used and disclosed Wright Medical’s trade secrets, (b) a permanent injunction preventing us from further engaging in the alleged misconduct, including infringing the Wright Medical patents, from manufacturing, selling or distributing products that allegedly infringe such Wright Medical patents and from misappropriating Wright Medical’s trade secrets and confidential information, (c) damages, including punitive and statutory enhanced damages, (d) attorneys’ fees, (e) interest on any foregoing sums, and (f) any relief as the court deems just and equitable, which could include future royalty payments. We filed a motion to dismiss certain of Wright Medical’s claims, which the Court granted-in-part on September 30, 2019. The parties have completed fact discovery and expert discovery for Wright’s claims. On August 28, 2021, the Court granted our motion for leave to file counterclaims against Wright for abuse of process and tortious interference with contracts and reopened discovery. The parties are scheduled to complete fact discovery on our counterclaims on December 3, 2021, and complete expert discovery on our counterclaims on February 2, 2022. The parties are currently scheduled to complete summary judgment briefing by April 2022. No trial has been set, but the Court noted that due to COVID-related backlog the case would likely not be tried until the fourth quarter of 2022 or first quarter of 2023.

We currently believe that we have substantial and meritorious defenses to Wright Medical’s claims and intend to vigorously defend our position, including through the trial and appellate stages if necessary. The outcome of any litigation, however, is inherently uncertain and there can be no assurance that the outcome of the case or the costs of litigation, regardless of outcome, will not have a material adverse effect on our business.

In connection with, the Wright Complaint, on March 28, 2019, we challenged the patentability of some of the Wright Asserted Patents through four Inter Partes Review (IPR) proceedings instituted with the Patent and Trial and Appeal Board of the United States Patent and Trademark Office (PTAB). On September 23, 2020 and October 1, 2020, we prevailed before the PTAB and those decisions are now on appeal in the United States Court of Appeals for the Federal Circuit, Case Nos. 21-1340, -1342, -1344, and -1345.

In addition to the above, 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, 2023, that could have a material adverse effect on our condensed consolidated financial position.

Item 1A. Risk Factors.

Factors that could causeFor a discussion of our actual results to differ materially from thosepotential risks and uncertainties, see the information in this Quarterly“Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-Q are any of10-K for the risks described in our final prospectus dated October 14, 2021 that forms a part of our Registration Statement on Form S-1 (File No. 333-259789) that was filed withyear ended December 31, 2022. Other than the SEC pursuant to Rule 424(b) (the “Final Prospectus”). As of the date of this Quarterly Report on Form 10-Q,risk factors set forth below, there have been no material changes to the risk factors disclosed in our Final Prospectus.Annual Report on Form 10-K for the year ended December 31, 2022. 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.

The terms of our loan agreements require us to meet certain operating and financial covenants and place restrictions on our operating and financial flexibility. If we raise additional capital through debt financing, the terms of any new debt could further restrict our ability to operate our business.

Under the terms of our credit agreements with Ares Capital and Zions Bancorporation discussed in more detail in Notes 6 and 14 to our condensed consolidated financial statements included in this quarterly report, we are subject to certain affirmative and negative covenants limiting our and our subsidiaries’ ability to incur certain additional indebtedness, create certain liens, liquidate or dissolve, amend organizational documents or certain other material contracts, enter into a change of control transaction and make certain distributions and investments without our lenders’ consent. Additionally, the Ares Credit Agreement requires that we maintain certain minimum revenue levels tested on a quarterly basis, for the proceeding twelve-month period, commencing with the fiscal quarter ending December 31, 2023. Our lenders may also declare us in default for certain types of events such as non-payment of debts when due, inaccurate representations and warranties, failure to comply with covenants and obligations, or with terms certain other of material indebtedness, certain material judgments, bankruptcy and insolvency, impairment of liens, a change of control and/or a material adverse effect. Upon such events, our lenders could declare an event of default, which would give them the right to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable. In addition, our lenders would have the right to proceed against the assets we provided as collateral under the loan agreements. For example, under our loan agreements, the lenders would have the right to enforce liens and security interests over substantially all of our assets (excluding intellectual property) in the event of certain specified defaults. If the debt under any of our loan agreements is accelerated, we may not have sufficient cash or be able to sell sufficient assets to repay our debts or may have to curtail our growth plans, which would harm our business and financial condition.

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

Issuance of Equity AwardsNone

From July 1, 2021 through September 30, 2021, we issued 83,000 stock options with an exercise price of $13.71 per share.

Use of Proceeds

34

Our Registration Statement on Form S-1, as amended (File No. 333-259789) (the “Form S-1”), for our IPO was declared effective by the SEC on October 26, 2021. The Form S-1 registered the offering and sale of 8,984,375 shares of common stock. On October 19, 2021, we closed our IPO, in which we issued 8,984,375 shares of common stock at a price to the public of $16.00 per share, including 1,171,875 shares issued upon the exercise of the underwriters’ option to purchase additional shares. Upon completion of the sale of the shares of our common stock referenced in the preceding sentences, the IPO terminated.

No payments were made to our directors or officers or their associates, holders of 10% or more of any class of our equity securities or any affiliates in connection with the issuance and sale of the securities registered.

There has been no material change in the planned use of proceeds from our IPO as described in our Final Prospectus.

Item 3. Defaults Upon Senior Securities.

None

Item 4. Mine Safety Disclosures.

Not applicable

Item 5. Other Information.

NoneDuring the three months ended September 30, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

26

Item 6. Exhibits.

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

 

Exhibit

Number

Description

3.1

Exhibit Number

Description

Incorporated by Reference

Filed Herewith

 

 

 

Form

Exhibit

Date Filed

File Number

 

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

3.1.1

05/19/2023

001-40902

 

3.2

 

Second Amended and Restated By laws

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

9/24/2021

333-259789

 

10.1+

 

Employment Agreement, effective as of July 27, 2023, by and between Paragon 28, Inc. and Robert McCormack.

 

 

 

 

X

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)

 

 

 

 

 

 

Amended and Restated Certificate of Incorporation of Paragon 28, Inc. (incorporated by reference from Exhibit 3.1 of the registrants Current Report on Form 8-K filed October 19, 2021).

3.2

Amended and Restated Bylaws (incorporated by reference from Exhibit 3.2 of registrant's Current Report on Form 8-K filed October 19, 2021

4.1

Form of Common Stock Certificate (incorporated by reference from Exhibit 4.2 of registrant's registration statement Form S-1/A filed on October 8, 2021).

4.2

Amended and Restated Investors’ Rights Agreement, by and between Paragon 28, Inc. and the investors party thereto, dated as of July 28, 2020 (incorporated by reference from Exhibit 4.3 of registrant's registration statement Form S-1 filed on September 24, 2021).

10.1+

2021 Incentive Plan of Paragon 28, Inc (incorporated by reference from Exhibit 99.2(a) of registrant's registration statement Form S-8 filed on October 20, 2021).

10.4+

Omnibus Stock Option and Award Plan (incorporated by reference from Exhibit 10.4 of registrant's registration statement on Form S-1 filed on September 24, 2021).

10.4(a)+

Form of Award Agreement pursuant to Omnibus Stock Option and Award Plan (incorporated by reference from Exhibit 10.4(a) of registrant's registration statement on Form S-1 filed on September 24, 2021).

10.5

Form of Indemnification Agreement (incorporated by reference from Exhibit 10.5 of registrant's registration statement on Form S-1/A filed on October 12, 2021).

10.6

Industrial Lease Agreement, by and between Admar Grasslands, LLC and Paragon 28, Inc., dated as of May 21, 2018 (incorporated by reference from Exhibit 10.6 of registrant's registration statement on Form S-1 filed on September 24, 2021).

10.7

Credit and Security Agreement (Term Loan), by and between Midcap Financial Trust and Paragon 28, Inc., dated as of May 6, 2021 (incorporated by reference from Exhibit 10.7 of registrant's registration statement on Form S-1 filed on September 24, 2021).

10.8

Credit and Security Agreement (Revolving Loan) by and between Midcap Financial Trust and Paragon 28, Inc., dated as of May 6, 2021. (incorporated by reference from Exhibit 10.8 of registrant's registration statement on Form S-1 filed on September 24, 2021).

10.9+

Form of Non-Employee Director Compensation Policy (incorporated by reference from Exhibit 10.9 of registrant's registration statement on Form S-1/A filed on October 8, 2021).

35

10.11(a)+

Form of Stock Option Grant Notice and Stock Option Agreement under the 2021 Incentive Award Plan. (incorporated by reference from Exhibit 10.10(a) of the registrant’s registration statement on Form S-1/A filed October 8, 2021).

10.11(b)+

Form of Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement under the 2021 Incentive Award Plan (incorporated by reference from Exhibit 10.10(b) of the registrant’s registration statement on Form S-1/A filed October 8, 2021).

10.12+

Employment Agreement, by and between Paragon 28, Inc. and Albert DaCosta, effective October 8, 2021 (incorporated by reference from Exhibit 10.12 of registrant's registration statement on Form S-1/A filed on October 8, 2021).

10.13+

Employment Agreement, by and between Paragon 28, Inc. and Stephen M. Deitsch, effective October 8, 2021 (incorporated by reference from Exhibit 10.13 of registrant's registration statement on Form S-1 filed on October 8, 2021).

10.14+

Employment Agreement, by and between Paragon 28, Inc. and Matthew Jarboe, effective October 8, 2021 (incorporated by reference from Exhibit 10.14 of registrant's registration statement on Form S-1 filed on October 8, 2021).

10.15+

2021 Employee Stock Purchase Plan (incorporated by reference from Exhibit 99.3 of registrant's registration statement Form S-8 filed on October 20, 2021).

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.

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.

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.

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.

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)

* Filed herewith.

+ Indicates management contract or compensatory plan.

†27

* 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.

3628

 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 22, 20218, 2023

By:

/s/ Albert DaCosta

Name:

Albert DaCosta

Title:

Chief Executive Officer (Principal Executive Officer)

 

PARAGON 28, INC.

Date: November 22, 20218, 2023

By:

/s/ Stephen M. Deitsch

Name:

Stephen M. Deitsch

Title:

Chief Financial Officer (Principal Financial Officer)

 

3729