Published: 2022-08-03 00:00:00 ET

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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 June 30, 2022

OR

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

For the transition period from to

Commission File Number: 001-40902

 

Paragon 28, Inc.

(Exact name of registrant as specified in its charter)

 

 

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

Registrant’s telephone number, including area code: (730) 399-3400

 

Not Applicable

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

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

 

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

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

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

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

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

 

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

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

As of August 1, 2022, there were 76,775,754 shares of the registrant's common stock, $0.01 par value per share, outstanding.

 

 

 

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future financial condition, future operations, projected costs, prospects, plans, objectives of management and expected market growth, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “design,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “positioned,” “potential,” “predict,” “seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology.

Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report on Form 10-Q, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur at all. Forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those indicated (both favorably and unfavorably). These risks and uncertainties include, but are not limited to, those described in Part I – Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2021, as well as our subsequent reports filed with the Securities and Exchange Commission. Caution should be taken not to place undue reliance on any such forward-looking statements. Except as required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed as exhibits completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of the forward-looking statements in this Quarterly Report on Form 10-Q by these cautionary statements.

 

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Table of Contents

 

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations and Comprehensive Loss	2
	Condensed Consolidated Statements of Convertible Preferred Series Equity & 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	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30
PART II.	OTHER INFORMATION	32
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	33
	Signatures	34

 

 

 

 

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

PARAGON 28, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)

 

		June 30, 2022				December 31, 2021
ASSETS
Current assets:
Cash		$	73,002			$	109,352
Trade receivables			32,598				25,939
Inventories, net			51,700				40,241
Income taxes receivable			660				920
Other current assets			3,129				3,078
Total current assets			161,089				179,530
Property and equipment, net			56,066				32,181
Intangible assets, net			20,352				16,505
Goodwill			26,975				6,329
Deferred income taxes			563				—
Total assets		$	265,045			$	234,545
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	14,564			$	13,028
Accrued expenses			21,407				18,232
Other current liabilities			6,926				1,929
Current maturities of long-term debt			757				153
Income taxes payable			305				615
Total current liabilities			43,959				33,957
Long-term liabilities:
Long-term debt net, less current maturities			42,519				7,476
Other long-term liabilities			905				840
Deferred income taxes			197				78
Income taxes payable			527				—
Total liabilities			88,107				42,351
Commitments and contingencies (Note 12)
Stockholders' equity:
Common stock, $0.01 par value, 300,000,000 shares authorized;    77,451,087 and 77,360,806  shares issued, and 76,537,568 and 76,447,287     shares outstanding as of June 30, 2022 and December 31, 2021, respectively			764				763
Additional paid in capital			202,367				197,868
Accumulated deficit			(19,302	)			(463	)
Accumulated other comprehensive (loss) income			(909	)			8
Treasury stock, at cost; 913,519 shares as of June 30, 2022 and December 31, 2021			(5,982	)			(5,982	)
Total stockholders' equity			176,938				192,194
Total liabilities & stockholders' equity		$	265,045			$	234,545

 

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

 

1

 

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PARAGON 28, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except share and per share data)

(unaudited)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2022				2021				2022				2021
Net revenue		$	42,498			$	35,734			$	83,869			$	68,838
Cost of goods sold			7,638				6,672				14,429				13,113
Gross profit			34,860				29,062				69,440				55,725
Operating expenses
Research and development costs			5,990				3,587				11,763				7,136
Selling, general, and administrative			37,948				26,645				75,190				50,041
Total operating expenses			43,938				30,232				86,953				57,177
Operating loss			(9,078	)			(1,170	)			(17,513	)			(1,452	)
Other income (expense)
Other income (expense)			652				1				551				(26	)
Interest expense, net			(1,104	)			(537	)			(1,772	)			(601	)
Total other expense			(452	)			(536	)			(1,221	)			(627	)
Loss before income taxes			(9,530	)			(1,706	)			(18,734	)			(2,079	)
Income tax expense			73				178				105				332
Net loss		$	(9,603	)		$	(1,884	)		$	(18,839	)		$	(2,411	)
Less: cumulative dividends on Series B convertible preferred stock			—				(473	)			—				(942	)
Net loss attributable to common stockholders		$	(9,603	)		$	(2,357	)		$	(18,839	)		$	(3,353	)
Foreign currency translation adjustment			(593	)			84				(917	)			(454	)
Comprehensive loss		$	(10,196	)		$	(2,273	)		$	(19,756	)		$	(3,807	)
Weighted average number of common stocks outstanding:
Basic			76,481,709				46,919,443				76,465,082				46,885,995
Diluted			76,481,709				46,919,443				76,465,082				46,885,995
Net loss per share attributable to common stockholders:
Basic		$	(0.13	)			(0.05	)		$	(0.25	)		$	(0.07	)
Diluted		$	(0.13	)			(0.05	)		$	(0.25	)		$	(0.07	)

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

 

 

2

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PARAGON 28, INC. AND SUBSIDIARIES

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

(in thousands, except for number of shares)

(unaudited)

 

																																			Accumulated
		Series A Convertible								Series B Convertible																									Other								Total
		Preferred Stock								Preferred Stock									Common Stock								Additional				Accumulated				Comprehensive				Treasury				Stockholders'
For the Three Months Ended June 30, 2022		Shares				Amount				Shares				Amount					Shares				Amount				Paid-in-Capital				Deficit				Loss				Stock				Equity
Balance, March 31, 2022			—			$	—				—			$	—					76,449,162			$	763			$	199,736			$	(9,699	)		$	(316	)		$	(5,982	)		$	184,502
Net loss			—				—				—				—					—				—				—				(9,603	)			—				—				(9,603	)
Options exercised			—				—				—				—					88,406				1				288				—				—				—				289
Foreign currency translation			—				—				—				—					—				—				—				—				(593	)			—				(593	)
Stock-based compensation			—				—				—				—					—				—				2,343				—				—				—				2,343
Balance, June 30, 2022			—			$	—				—			$	—					76,537,568			$	764			$	202,367			$	(19,302	)		$	(909	)		$	(5,982	)		$	176,938
For the Six Months Ended June 30, 2022
Balance January 1, 2022			—			$	—				—			$	—					76,447,287			$	763			$	197,868			$	(463	)		$	8			$	(5,982	)		$	192,194
Net loss			—				—				—				—					—				—				—				(18,839	)			—				—				(18,839	)
Common stock repurchase			—				—				—				—					—				—				(266	)			—				—				—				(266	)
Options exercised			—				—				—				—					90,281				1				300				—				—				—				301
Foreign currency translation			—				—				—				—					—				—				—				—				(917	)			—				(917	)
Stock-based compensation			—				—				—				—					—				—				4,465				—				—				—				4,465
Balance, June 30, 2022			—			$	—				—			$	—					76,537,568				764				202,367				(19,302	)			(909	)			(5,982	)		$	176,938

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

 

3

 

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PARAGON 28, INC. AND SUBSIDIARIES

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

(in thousands, except for number of shares)

(unaudited)

 

																																			Accumulated
		Series A Convertible								Series B Convertible																									Other								Total
		Preferred Stock								Preferred Stock									Common Stock								Additional				Retained				Comprehensive				Treasury				Stockholders'
For the Three Months Ended June 30, 2021		Shares				Amount				Shares				Amount					Shares				Amount				Paid-in-Capital				Earnings				Income				Stock				Equity
Balance, March 31, 2021			13,812,500			$	4,250				6,608,700			$	37,311					46,886,805			$	468			$	24,062			$	11,422			$	285			$	(5,982	)		$	30,255
Net loss			—				—				—				—					—				—				—				(1,884	)			—				—				(1,884	)
Series B convertible preferred stock dividend			—				—				—				473					—				—				—				(473	)			—				—				(473	)
Options exercised			—				—				—				—					82,500				—				253				—				—				—				253
Foreign currency translation			—				—				—				—					—				—				—				—				84				—				84
Stock-based compensation			—				—				—				—					—				—				857				—				—				—				857
Balance, June 30, 2021			13,812,500			$	4,250				6,608,700			$	37,784					46,969,305			$	468			$	25,172			$	9,065			$	369			$	(5,982	)		$	29,092
For the Six Months Ended June 30, 2021
Balance January 1, 2021			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			—				—				—				—					—				—				—				(2,411	)			—				—				(2,411	)
Issuance of common stock			—				—				—				—					151,515				1				1,000				—				—				-				1,001
Common stock repurchase			—				—				—				—					(85,050	)			(1	)			—				—				—				(560	)			(561	)
Series B convertible preferred stock dividend			—				—				—				942					—				—				—				(942	)			—				—				(942	)
Options exercised			—				—				—				—					164,300				1				350				—				—				—				351
Foreign currency translation			—				—				—				—					—				—				—				—				(454	)			—				(454	)
Stock-based compensation			—				—				—				—					—				—				1,715				—				—				—				1,715
Balance, June 30, 2021			13,812,500			$	4,250				6,608,700			$	37,784					46,969,305			$	468			$	25,172			$	9,065			$	369			$	(5,982	)		$	29,092

 

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

 

4

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PARAGON 28, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

		Six Months Ended June 30,
		2022				2021
Cash flows from operating activities
Net loss		$	(18,839	)		$	(2,411	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			6,566				3,678
Allowance for doubtful accounts			—				127
Provision for excess and obsolete inventories			(446	)			1,232
Stock-based compensation			4,465				1,715
Amortization of debt issuance costs			248				126
Change in fair value of earnout liabilities			(1,040	)			—
Deferred income taxes			(707	)			—
Loss on disposal of property and equipment			623				223
Other			(638	)			—
Changes in other assets and liabilities, net of acquisitions:
Accounts receivable			(6,825	)			(105	)
Inventories			(11,518	)			(4,561	)
Other current assets			289				(1,323	)
Accounts payable			1,537				3,483
Accrued expenses and other current liabilities			1,992				1,725
Income tax receivable/payable			454				(43	)
Net cash (used in) provided by operating activities			(23,839	)			3,866
Cash flows from investing activities
Purchases of property and equipment			(29,204	)			(6,517	)
Proceeds from sale of property and equipment			519				400
Purchases of intangible assets			(783	)			(857	)
Acquisition of Disior, net of cash received			(18,504	)			(15,000	)
Net cash used in investing activities			(47,972	)			(21,974	)
Cash flows from financing activities
Proceeds from draw on term loan			20,000				—
Proceeds from issuance of long-term debt			16,000				24,846
Payments on long-term debt			(178	)			(5,945	)
Payments of debt issuance costs			(405	)			(2,978	)
Proceeds from issuance of common stock			—				1,000
Payments on treasury stock repurchased			—				(561	)
Proceeds from exercise of stock options			300				351
Net cash provided by financing activities			35,717				16,713
Effect of exchange rate changes on cash			(256	)			(62	)
Net decrease in cash			(36,350	)			(1,457	)
Cash at beginning of period			109,352				17,501
Cash at end of period		$	73,002			$	16,044
Supplemental disclosures of cash flow information:
Cash paid for taxes		$	386			$	374
Cash paid for interest		$	1,520			$	178
Purchase of property and equipment included in accounts payable		$	3,088			$	99
Series B convertible preferred stock dividend		$	—			$	942

 

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

 

5

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

(unaudited)

 

 

 

17

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(in thousands, except share and per share data)

(unaudited)

 

 

18

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(in thousands, except share and per share data)

(unaudited)

 

 

19

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

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

Overview

We are a leading medical device company exclusively focused on the foot and ankle orthopedic market and 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, hammertoe, ankle, 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 75 product systems, including approximately 9,000 SKUs to help fit the specific needs of each patient. 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. Smart 28, the company’s ecosystem of enabling technologies for pre-operative planning, intra-operative support, and post-operative evaluation, was augmented by the Additive Orthopaedics acquisition in 2021 and the Disior acquisition in the first quarter of 2022. With the Additive acquisition, we acquired the only 3-D printed, patient specific total talus spacer authorized for marketing pursuant to an approved HDE application, plus a proprietary, pre-operative surgical planning platform. With Disior, we acquired a leading three-dimensional analytics pre-operative planning software company based in Helsinki, Finland. These transactions broadened our capabilities within the pre-operative and intra-operative stages of the foot and ankle continuum of care. We expect to continue to invest in Smart 28 to improve foot and ankle patient outcomes.

Our broad commercial footprint spans across all 50 states of the United States and 23 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 although we are starting to experience some inflationary pressure and extended lead times, primarily limited to raw materials and labor. Except during the height of the COVID-19 pandemic, we 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 $68.8 million for the six months ended June 30, 2021 to $83.9 million for the six months ended June 30, 2022 , an increase of 22%, and $35.7 million for three months ended June 30, 2021 to $42.5 million for the three months ended June 30, 2022, an increase of 19%.

 

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Net loss increased from $2.4 million for the six months ended June 30, 2021 to $18.8 million for the six months ended June 30, 2022 and net loss increased from $1.9 million for the three months ended June 30, 2021 to a net loss of $9.6 million for the three months ended June 30, 2022.

Adjusted EBITDA decreased from $3.9 million for the six months ended June 30, 2021 to negative $6.5 million for the six months ended June 30, 2022 and $1.6 million for the three months ended June 30, 2021 to negative $3.2 million for the three months ended June 30, 2022. Adjusted EBITDA is not a financial measure under U.S. generally accepted accounting principles (GAAP). See “—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, 2021 and June 30, 2022, we had cash of $109.4 million and $73.0 million and an accumulated deficit of $(0.5) million and $(19.3) million, respectively. Our primary sources of capital from inception through June 30, 2022 have been from cash flows from operations, private placements of securities, proceeds from our public offering and the incurrence of indebtedness.

We believe that our existing cash and available debt borrowings will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months.

We have made significant investments in both research and development and in the expansion of our sales force and marketing and medical education programs, and we expect to continue to make substantial investments in these areas. We have also made significant investments in general and administrative expense 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 the NYSE listing standards, additional insurance expenses, investor relations activities, and other administrative and professional services. We do not expect to make significant incremental investments in general administrative expense. As a result of these and other factors, although not anticipated at this time, we may require additional financing to fund our operations and planned growth. We may also seek additional financing opportunistically. We may seek to raise any additional capital 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, Canada, Colombia, Germany, Italy and Japan. This process requires significant education and training for our commercial team to achieve the level of technical competency with our products that is expected by physicians and to gain experience building demand for our products. Upon completion of the training, our commercial team typically requires time in the field to grow their network of accounts and increase their productivity to the levels we expect. Successfully recruiting, training and retaining additional sales representatives will be required to achieve growth, which will require significant investments by us.

 

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Continued and Expanded Access 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 March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, and in response, certain states within the United States implemented shelter-in-place rules requiring elective surgical procedures to be delayed. As a result, our revenue growth was adversely impacted particularly from March 2020 through May 2020 until such shelter-in-place restrictions were eased. Early in the first quarter of 2022, the Omicron variant of COVID 19 led to a deferral of surgeries with those headwinds beginning to decrease in mid-February. Absent a resurgence in headwinds, we expect the elective procedure environment to continue to improve; however, the pandemic has led to severe disruptions in the market, supply chain and the global and United States economies that may continue. We cannot reasonably estimate the length or severity of these impacts on our business.

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

 

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

Reconciliation Between GAAP and Non-GAAP Measure

We define Adjusted EBITDA as earnings before interest expense, income tax expense(benefit), depreciation and amortization, stock-based compensation expense, non-recurring expenses and certain other non-cash expenses. For a full reconciliation of Adjusted EBITDA for the three and six months ended June 30, 2022 and 2021 to net income (loss) as the most comparable GAAP financial measure, please see the following table.

		Three Months Ended June 30,								Six Months Ended June 30,
		2022				2021				2022				2021
		(in thousands)
Net loss		$	(9,603	)		$	(1,884	)		$	(18,839	)		$	(2,411	)
Interest expense			1,104				537				1,772				601
Income tax expense			73				178				105				332
Depreciation and amortization expense			3,536				1,939				6,566				3,678
Stock based compensation expense			2,343				857				4,465				1,715
Change in fair value of earnout liability (1)			(620	)			—				(540	)			—
Adjusted EBITDA		$	(3,167	)		$	1,627			$	(6,471	)		$	3,915

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(1) Represents non-cash change in the fair value of earnout liability for the three and six months ended June 30, 2022

Components of Our Results of Operations

Net Revenue

We derive our revenue from the sale of our foot and ankle orthopedic solutions, primarily implants. We also record as revenue any amounts billed to customers for shipping costs and record as cost of goods sold the actual shipping costs. We have elected to exclude from the measurement of the transaction price all taxes, such as sales, use, value-added, assessed by government authorities and collected from a customer. Therefore, revenue is recognized net of such taxes. In addition, we record revenue net of estimated losses for bad debt. No single customer accounted for 10% or more of our net revenue in the three and six months ended June 30, 2022 and 2021. We expect our net revenue to increase in the foreseeable future as we expand our sales territories, add new customers, launch new products and increase the utilization of our products by our existing customers, though net revenue may fluctuate from quarter to quarter due to a variety of factors, including availability of reimbursement, the size and success of our sales force, the number of hospitals and physicians who are aware of and use our products and seasonality.

Cost of Goods Sold

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

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

 

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Operating Expenses

Research and Development

Research and development expense is comprised of engineering costs and research programs related to new product and sustaining product development activities, clinical studies and trials expenses, quality and regulatory expenses, and salaries, 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.

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. 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.

Interest Expense

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

Results of Operations

For the Three Months Ended June 30, 2022 and 2021

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

 

		Three Months Ended June 30,								Change
		2022				2021				Amount				%
		(in thousands)
Net revenue		$	42,498			$	35,734			$	6,764				19	%
Cost of goods sold			7,638				6,672				966				14	%
Gross profit			34,860				29,062				5,798				20	%
Operating expenses
Research and development			5,990				3,587				2,403				67	%
Selling, general, administrative			37,948				26,645				11,303				42	%
Total operating expenses			43,938				30,232				13,706				45	%
Operating loss			(9,078	)			(1,170	)			(7,908	)		*
Other expense			652				1				651			*
Interest expense			(1,104	)			(537	)			(567	)			106	%
Loss before income taxes			(9,530	)			(1,706	)			(7,824	)		*
Income tax expense			73				178				(105	)			(59	)%
Net loss		$	(9,603	)		$	(1,884	)		$	(7,719	)		*

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* Not meaningful

The following table represents total net revenue by geographic area, based on the location of the customer for the three months ended June 30, 2022 and 2021, respectively.

		Three Months Ended June 30,
		2022				2021
		(in thousands)
United States		$	36,798			$	30,998
International			5,700				4,736
Total net revenue		$	42,498			$	35,734

 

 

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Net Revenue. Net revenue was $42.5 million for the three months ended June 30, 2022, representing growth of 19% compared to the prior year period. Strengthening of the U.S. dollar reduced net revenue growth for the three months ended June 30, 2022 by 140 basis points as compared to the prior year period. U.S. growth was the result of increased revenue contribution from new product launches and benefits from medical education and training, resulting in strong sales force productivity gains, offset partially by modest COVID disruptions. International revenue was $5.7 million for the three months ended June 30, 2022, representing growth of 20% compared to the prior year period. Strengthening of the U.S. dollar reduced international revenue growth for the three months ended June 30, 2022 by 10 percentage points as compared to the prior year period. International revenue growth was driven by our three largest international markets of Australia, South Africa and the United Kingdom.

Cost of Goods Sold and Gross Profit Margin. Cost of goods sold increased $1.0 million, or 14%, from $6.7 million in the three months ended June 30, 2021 to $7.6 million in the same period in 2022. Gross profit margin for the three months ended June 30, 2022 increased to 82.0%, compared to 81.3% in the same period of 2021, primarily due to lower inventory excess and obsolescence expense.

Research and Development Expenses. Research and development expenses increased $2.4 million, or 67%, from $3.6 million in the three months ended June 30, 2021 to $6.0 million in the same period in 2022. The increase in research and development expenses was primarily due to further investments in product development, clinical studies, quality and the acquisitions of Additive Orthopedics in May 2021 and Disior Oy in January 2022.

Selling, General, and Administrative Expenses. Selling, general and administrative expenses increased $11.3 million, or 42%, from $26.6 million in the three months ended June 30, 2021 to $38.0 million in the same period in 2022. The increase in selling, general, and administrative expenses as compared to prior year period was driven by investments in sales and marketing, including in-person U.S. marketing and medical education events, commercial team expansion both in the U.S. and in our international markets, increased variable sales representative commission expense related to revenue growth, increased general and administrative expenses due to the costs of becoming a publicly traded company in the fourth quarter of 2021, and one-time SAP implementation costs.

Interest Expense. Interest expense increased to $1.1 million for the three months ended June 30, 2022 from $0.5 million for the three months ended June 30, 2021 primarily due to higher levels of outstanding debt.

For the Six Months Ended June 30, 2022 and 2021

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

 

		Six Months Ended June 30,								Change
		2022				2021				Amount				%
		(in thousands)
Net revenue		$	83,869			$	68,838			$	15,031				22	%
Cost of goods sold			14,429				13,113				1,316				10	%
Gross profit			69,440				55,725				13,715				25	%
Operating expenses
Research and development			11,763				7,136				4,627				65	%
Selling, general, administrative			75,190				50,041				25,149				50	%
Total operating expenses			86,953				57,177				29,776				52	%
Operating loss			(17,513	)			(1,452	)			(16,061	)		*
Other income (expense)			551				(26	)			577			*
Interest expense			(1,772	)			(601	)			(1,171	)		*
Loss before income taxes			(18,734	)			(2,079	)			(16,655	)		*
Income tax expense			105				332				(227	)			(68	)%
Net loss		$	(18,839	)		$	(2,411	)		$	(16,428	)		*

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* Not meaningful

The following table represents total net revenue by geographic area, based on the location of the customer for the six months ended June 30, 2022 and 2021, respectively.

 

 

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		Six Months Ended June 30,
		2022				2021
		(in thousands)
United States		$	72,821			$	60,132
International			11,048				8,706
Total net revenue		$	83,869			$	68,838

 

Net Revenue. Net revenue was $83.9 million for the six months ended June 30, 2022, representing growth of 22% compared to prior year period. Strengthening of the U.S. dollar reduced net revenue growth for the six months ended June 30, 2022 by 100 basis points as compared to the prior year period. U.S. revenue was $72.8 million for the six months ended June 30, 2022, representing growth of 21% compared to the prior year period. U.S. revenue growth was driven by sales force expansion and sales force productivity gains resulting from new product launches and medical education and training, offset partially by modest COVID disruptions. International revenue was $11.0 million for the six months ended June 30, 2022, representing growth of 27% compared to the prior year period. Strengthening of the U.S. dollar reduced international net revenue growth for the six months ended June 30, 2022 by approximately 800 basis points as compared to the prior year period. International revenue growth was driven by our three largest international markets of Australia, South Africa and the United Kingdom.

Cost of Goods Sold and Gross Profit Margin. Cost of goods sold increased $1.3 million, or 10%, from $13.1 million in the six months ended June 30, 2021 to $14.4 million in the same period in 2022. Gross profit margin for the six months ended June 30, 2022 increased to 82.8%, compared to 81.0% in the same period of 2021, primarily due to lower inventory excess and obsolescence expense.

Research and Development Expenses. Research and development expenses increased $4.6 million, or 65%, from $7.1 million in the six months ended June 30, 2021 to $11.8 million in the same period in 2022. The increase in research and development expenses as compared to the prior year period was primarily due to further investments in product development, clinical studies, quality and the acquisitions of Additive Orthopeadics in May 2021 and Disior Oy in January 2022.

Selling, General, and Administrative Expenses. Selling, general and administrative expenses increased $25.1 million, or 50%, from $50.0 million in the six months ended June 30, 2021 to $75.2 million in the same period in 2022. The increase in selling, general, and administrative expenses as compared to the prior year period was driven primarily by investments in sales and marketing, including in-person U.S. marketing and medical education events, commercial team expansion both in the U.S. and in our international markets, increased variable sales representative commission expense related to U.S. revenue growth, increased general and administrative expenses due to costs of becoming a publicly traded company in the fourth quarter of 2021, mergers and acquisitions related expenses, and one-time SAP implementation costs.

Interest Expense. Interest expense increased to $1.8 million for the six months ended June 30, 2022 from $0.6 million for the six months ended June 30, 2021 primarily due to higher levels of outstanding debt.

 

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Liquidity and Capital Resources

As of December 31, 2021 and June 30, 2022, we had cash of $109.4 million and $73.0 million, and an accumulated deficit of $(0.5) million and $(19.3) million, respectively. Our primary sources of capital from inception through June 30, 2022 have been from cash flows from operations, private placements of securities, proceeds from our public offering and the incurrence of indebtedness.

On March 24, 2022, we entered into a secured term loan facility to finance the purchase of our Denver, Colorado headquarters, with Vectra Bank Colorado in the principal amount of $16.0 million.

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 all expenses were $129.1 million.

On May 6, 2021, we entered into a new credit agreement with Midcap Financial Trust (Midcap) to provide up to $70.0 million in total borrowings, including a $30.0 million revolving loan and a $40.0 million deferred draw term loan, secured by our intellectual property and other assets. At June 30, 2022, we had $0 of Midcap debt outstanding under the Midcap Revolving Loan (defined below) and $30.0 million under the Midcap Term Loans (defined below). We believe that our $73.0 million of existing cash, the additional $40.0 million of available borrowings under our Midcap credit facility and our expected future 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 to support further growth of our operations.

Long-Term Obligations

Vectra Bank Colorado Loan Agreements

On March 27, 2020, we entered into an Amended and Restated Loan Agreement (the “Vectra Loan Agreement”) with Vectra Bank Colorado. The Vectra Loan Agreement refinanced our existing Term Loan and existing Buyout Loan into a single term loan in the aggregate principal amount of $6.8 million (the “2020 Term Loan”) and increased the maximum principal amount of the existing Revolving Loan to $15.0 million (the 2020 Revolving Loan and together with the 2020 Term Loan, “2020 Loans”). The maturity date for both loans was September 30, 2020 and it was subsequently extended to October 5, 2023. We repaid the 2020 Loans in 2021 in connection with entering into the Midcap Term Loan Agreement described below.

On March 24, 2022, we entered into a secured term loan facility (the “Zions Facility”) with Zions Bancorporation, N.A. dba Vectra Bank Colorado in the principal amount of $16.0 million. 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. Principal and interest payments are payable monthly, with optional prepayments allowed without premium or penalty. The Zions Facility includes a financial covenant requiring us to maintain a minimum fixed charge coverage ratio, measured on a trailing four quarter basis as of the last day of each fiscal quarter.

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 was partially funded $20.0 million on January 10, 2022. 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. The Midcap Loan Agreements require us to maintain minimum net product sales and minimum consolidated EBITDA, (each term as defined in the Midcap Loan Agreements), for the preceding twelve month period.

 

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Contractual Obligations

In January 2022, the Company purchased its' headquarters and terminated the existing lease agreement; therefore, there were no remaining significant future lease payment obligations as of June 30, 2022.

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 and as we continue to expand our sales and marketing infrastructure and programs to both drive and support anticipated sales growth. The timing and amount of our operating expenditures will depend on many factors, including:

Although not anticipated, we may seek to raise any necessary additional capital 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 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 to 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.

 

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Cash Flows

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

		Six Months Ended June 30,								Change
		2022				2021				Amount				%
		(in thousands)
Net cash (used in) provided by:
Operating activities		$	(23,839	)		$	3,866			$	(27,705	)			(717	)%
Investing activities			(47,972	)			(21,974	)			(25,998	)			(118	)%
Financing activities			35,717				16,713			$	19,004				114	%
Effect of exchange rate    changes of cash			(256	)			(62	)			(194	)			313	%
Net decrease in cash		$	(36,350	)		$	(1,457	)		$	(34,893	)		*

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

* Not meaningful

Net Cash Provided by Operating Activities

 

Net cash used in operating activities for the six months ended June 30, 2022 was $23.8 million, consisting primarily of net loss of $18.8 million plus non-cash expenses of $9.1 million, which primarily consisted of $6.6 million of depreciation and amortization and $4.5 million of stock-based compensation expense, and negative changes in working capital of $14.1 million, including $11.5 million of inventory purchases, a $6.8 million increase in accounts receivable offset partially by a $1.5 million increase in accounts payable and a $2.0 million increase in accrued expenses and other liabilities.

Net cash provided by operating activities for the six months ended June 30, 2021 was $3.9 million, consisting primarily of net loss of $2.4 million plus non-cash expenses of $7.1 million, which primarily consisted of $3.7 million of depreciation and amortization, $1.2 million provision for excess and obsolete inventory and $1.7 million of stock-based compensation expense, and negative changes in working capital of $0.8 million, including $4.5 million of inventory purchases offset partially by a $3.5 million increase in accounts payable.

Net Cash Used in Investing Activities

Net cash used in investing activities for the six months ended June 30, 2022 was $48.0 million, consisting primarily of our purchase of the assets of Disior for $18.5 million, the purchase of our office building of $18.3 million, surgical instrumentation purchases for $6.0 million, capital spend associated with the launch of SAP of $2.8 million and capitalization of certain patent costs.

Net cash used in investing activities for the six months ended June 30, 2021 was $22.0 million, consisting primarily of our purchase of the assets of Additive Orthopedics for $15.0 million, surgical instrumentation purchases, and capitalization of certain patent costs.

Net Cash Provided by Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2022 was $35.7 million, consisting of $36.0 million proceeds from long-term debt, which was partially offset by the long-term debt repayments of $0.2 million and the payment of $0.4 million in debt issuance costs.

Net cash provided by financing activities for the six months ended June 30, 2021 was $16.7 million, consisting of $24.8 million of proceeds from the Midcap Revolving Loan and the Midcap Term Loan, which was partially offset by the long-term debt repayments of $5.9 million and the payment of $3.0 million in debt issuance costs.

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.

 

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During the six months ended June 30, 2022, there were no material changes to our critical accounting policies or in the methodology used for estimates from those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.

Recently Issued Accounting Pronouncements

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

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 results of operations are not dependent on investments, the risk associated with fluctuating interest rates is limited to our investment portfolio, and we believe that a hypothetical 10% change in interest rates would not have a significant impact 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 but we do not believe the changing interest rates on our variable interest rate facilities would have a significant impact on our results of operations.

Foreign Currency Risk

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

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 our initial 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 (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our 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 because of a material weakness in our internal control over financial reporting as described below.

Changes in Internal Control Over Financial Reporting

Except as set forth below, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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Our Management's Annual Report on Internal Control Over Financial Reporting included in our Annual Report on Form 10-K for the year ended December 31, 2021 described material weaknesses in our internal control over financial reporting related to the fact that we did not design or maintain an effective 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. We have been in the process of designing, implementing, and testing the operating effectiveness of measures to remediate the material weakness in our internal control over financial reporting. During the six months ended June 30, 2022, we continued to:

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.

Limitations on Effectiveness of Disclosure Controls and Procedures

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

 

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

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 completed discovery on our counterclaims in April, 2022 and finished briefing summary judgement motions on June 15, 2022. A trial has been set for June 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 addition to Wright Medical’s claims set forth above, we received in December 2021 an additional complaint from Wright Medical covering patents different than the Wright Asserted Patents. While the proceedings in connection with such complaint are in early stages, we do not at this time believe they represent a material liability to our company.

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.

Item 1A. Risk Factors.

As of the date of this Quarterly Report on Form 10-Q, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. We may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.

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

None

Item 3. Defaults Upon Senior Securities.

None

Item 4. Mine Safety Disclosures.

Not applicable

Item 5. Other Information.

None

 

 

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Item 6. Exhibits.

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

 

Exhibit Number		Description
3.1		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 the 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 the 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).
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.

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

 

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SIGNATURES

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

 

		PARAGON 28, INC.
Date: August 3, 2022		By:	/s/ Albert DaCosta
		Name:	Albert DaCosta
		Title:	Chief Executive Officer

 

Date: August 3, 2022		By:	/s/ Stephen M. Deitsch
		Name:	Stephen M. Deitsch
		Title:	Chief Financial Officer

 

 

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