PARAGON 28, INC. 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, hallux valgus - which includes bunions and 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 establishedParagon 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 inHelsinki, 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 ofthe United States and 23 other countries. Inthe 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. Outsidethe 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 inthe 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$104.7 million for the nine months endedSeptember 30, 2021 to$129.9 million for the nine months endedSeptember 30, 2022 , an increase of 24%, and$35.9 million for three months endedSeptember 30, 2021 to$46.0 million for the three months endedSeptember 30, 2022 , an increase of 28%. 22 -------------------------------------------------------------------------------- Net loss increased from$7.5 million for the nine months endedSeptember 30, 2021 to$28.6 million for the nine months endedSeptember 30, 2022 and net loss increased from$5.1 million for the three months endedSeptember 30, 2021 to a net loss of$9.7 million for the three months endedSeptember 30, 2022 . Adjusted EBITDA decreased from$2.9 million for the nine months endedSeptember 30, 2021 to negative$9.2 million for the nine months endedSeptember 30, 2022 and negative$1.0 million for the three months endedSeptember 30, 2021 to negative$2.7 million for the three months endedSeptember 30, 2022 . Adjusted EBITDA is not a financial measure underU.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 ofDecember 31, 2021 andSeptember 30, 2022 , we had cash of$109.4 million and$56.3 million and an accumulated deficit of$(0.5) million and$(29.0) million , respectively. Our primary sources of capital from inception throughSeptember 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 theUnited 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 physicianswho 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
In sales and marketing, we are also dedicating meaningful resources to expand our commercial team inthe United States and in international markets. Our top commercial priorities inthe 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 includeBrazil ,Canada ,Colombia ,Germany ,Italy andJapan . 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. 23 --------------------------------------------------------------------------------
Continued and Expanded Access to Hospital Facilities
Inthe 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 outsidethe 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
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 theU.S. occurring in the fourth calendar quarter. OurU.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
InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 as a pandemic, and in response, certain states withinthe United States implemented shelter-in-place rules requiring elective surgical procedures to be delayed. As a result, our revenue growth was adversely impacted particularly fromMarch 2020 throughMay 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 andUnited 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 withU.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 underU.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;
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Adjusted EBITDA also does not reflect changes in, or cash requirements for, our working capital needs or the potentially dilutive impact of stock based compensation; and
•
Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt that we may incur. 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, employee stock purchase plan expense, non-recurring expenses and certain other non-cash expenses. For a full reconciliation of Adjusted EBITDA for the three and nine months endedSeptember 30, 2022 and 2021 to net income (loss) as the most comparable GAAP financial measure, please see the following table. Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (in thousands) Net loss$ (9,724 ) $ (5,107 ) $ (28,563 ) $ (7,518 ) Interest expense 1,093 573 2,865 1,174 Income tax expense 201 105 306 437 Depreciation and amortization expense 3,058 2,424 9,624 6,103 Stock based compensation expense 2,587 1,032 7,052 2,747 Employee stock purchase plan expense 100 - 100 - Change in fair value of earnout liability (1) (35 ) - (575 ) - Adjusted EBITDA$ (2,720 ) $ (973 )$ (9,191 ) $ 2,943
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(1) Represents non-cash change in the fair value of earnout liability for the
three and nine months ended
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 nine months endedSeptember 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 physicianswho 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 inthe 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 inthe 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. 25 --------------------------------------------------------------------------------
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 toU.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
The following table summarizes our results of operations for the period
presented below:
Three Months Ended September 30, Change
2022 2021 Amount %
(in thousands)
Net revenue $ 46,006 $ 35,851 $ 10,155 28 %
Cost of goods sold 8,491 7,096 1,395 20 %
Gross profit 37,515 28,755 8,760 30 %
Operating expenses
Research and development 6,337 4,118 2,219 54 %
Selling, general, administrative 39,667 28,968 10,699 37 %
Total operating expenses 46,004 33,086 12,918 39 %
Operating loss (8,489 ) (4,331 ) (4,158 ) *
Other expense 59 (98 ) 157 *
Interest expense (1,093 ) (573 ) (520 ) 91 %
Loss before income taxes (9,523 ) (5,002 ) (4,521 ) *
Income tax expense 201 105 96 91 %
Net loss $ (9,724 ) $ (5,107 ) $ (4,617 ) *
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* Not meaningful
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The following table represents total net revenue by geographic area, based on
the location of the customer for the three months ended September 30, 2022 and
2021, respectively.
Three Months Ended September 30,
2022 2021
(in thousands)
United States $ 39,960 $ 31,882
International 6,046 3,969
Total net revenue $ 46,006 $ 35,851
Net Revenue. Net revenue was $46.0 million for the three months ended September
30, 2022 , representing growth of 28% compared to the prior year period.
Strengthening of the U.S. dollar reduced net revenue growth for the three months
ended September 30, 2022 by 2.1 percentage points as compared to the prior year
period. U.S. net revenue was $40.0 million for the three months ended September
30, 2022 , representing growth of 25% compared to the prior year period. U.S. net
revenue growth was primarily the result of sales force productivity gains driven
largely by new product launches and the benefits from medical education and
training and sales force expansion. International revenue was $6.0 million for
the three months ended September 30, 2022 , representing growth of 52% compared
to the prior year period. Strengthening of the U.S. dollar reduced international
revenue growth for the three months ended September 30, 2022 by 19 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 , with Spain also a top driver of growth due to increased
distribution capabilities.
Cost of Goods Sold and Gross Profit Margin. Cost of goods sold increased $1.4
million , or 20%, from $7.1 million in the three months ended September 30, 2021
to $8.5 million in the same period in 2022. Gross profit margin for the three
months ended September 30, 2022 increased to 81.5%, compared to 80.2% in the
same period of 2021, primarily due to lower inventory excess and obsolescence
expense.
Research and Development Expenses. Research and development expenses increased
$2.2 million , or 54%, from $4.1 million in the three months ended September 30,
2021 to $6.3 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 $10.7 million , or 37%, from $29.0 million in
the three months ended September 30, 2021 to $39.7 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
For the Nine Months Ended
The following table summarizes our results of operations for the period presented below:
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Nine Months Ended September
30, Change
2022 2021 Amount %
(in thousands)
Net revenue $ 129,875 $ 104,689 $ 25,186 24 %
Cost of goods sold 22,920 20,209 2,711 13 %
Gross profit 106,955 84,480 22,475 27 %
Operating expenses
Research and development 18,100 11,254 6,846 61 %
Selling, general, administrative 114,857 79,009 35,848 45 %
Total operating expenses 132,957 90,263 42,694 47 %
Operating loss (26,002 ) (5,783 ) (20,219 ) *
Other income (expense) 610 (124 ) 734 *
Interest expense (2,865 ) (1,174 ) (1,691 ) *
Loss before income taxes (28,257 ) (7,081 ) (21,176 ) *
Income tax expense 306 437 (131 ) (30 )%
Net loss $ (28,563 ) $ (7,518 ) $ (21,045 ) *
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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 nine months endedSeptember 30, 2022 and 2021, respectively. Nine Months Ended September 30, 2022 2021 (in thousands) United States$ 112,781 $ 92,014 International 17,094 12,675 Total net revenue$ 129,875 $ 104,689 Net Revenue. Net revenue was$129.9 million for the nine months endedSeptember 30, 2022 , representing growth of 24% compared to prior year period. Strengthening of theU.S. dollar reduced net revenue growth for the nine months endedSeptember 30, 2022 by 1.4 percentage points as compared to the prior year period.U.S. net revenue was$112.8 million for the nine months endedSeptember 30, 2022 , representing growth of 23% compared to the prior year period.U.S. net revenue growth was primarily the result of sales force productivity gains driven largely by new product launches and the benefits from medical education and training and sales force expansion, offset partially by modest COVID disruptions. International revenue was$17.1 million for the nine months endedSeptember 30, 2022 , representing growth of 35% compared to the prior year period. Strengthening of theU.S. dollar reduced international net revenue growth for the nine months endedSeptember 30, 2022 by approximately 11.4 percentage points as compared to the prior year period. International revenue growth was driven primarily by our three largest international markets ofAustralia ,South Africa and theUnited Kingdom . Cost of Goods Sold and Gross Profit Margin. Cost of goods sold increased$2.7 million , or 13%, from$20.2 million in the nine months endedSeptember 30, 2021 to$22.9 million in the same period in 2022. Gross profit margin for the nine months endedSeptember 30, 2022 increased to 82.4%, compared to 80.7% in the same period of 2021, primarily due to lower inventory excess and obsolescence expense. Research and Development Expenses. Research and development expenses increased$6.8 million , or 61%, from$11.3 million in the nine months endedSeptember 30, 2021 to$18.1 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 inMay 2021 andDisior Oy inJanuary 2022 . Selling, General, and Administrative Expenses. Selling, general and administrative expenses increased$35.8 million , or 45%, from$79.0 million in the nine months endedSeptember 30, 2021 to$115.0 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-personU.S. marketing and medical education events, commercial team expansion both in theU.S. and in our international markets, increased variable sales representative commission expense related toU.S. net 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. 28 -------------------------------------------------------------------------------- Interest Expense. Interest expense increased to$2.9 million for the nine months endedSeptember 30, 2022 from$1.2 million for the nine months endedSeptember 30, 2021 primarily due to higher levels of outstanding debt.
Liquidity and Capital Resources
As ofDecember 31, 2021 andSeptember 30, 2022 , we had cash of$109.4 million and$56.3 million , and an accumulated deficit of$(0.5) million and$(29.0) million , respectively. Our primary sources of capital from inception throughSeptember 30, 2022 have been from cash flows from operations, private placements of securities, proceeds from our public offering and the incurrence of indebtedness. OnMarch 24, 2022 , we entered into a secured term loan facility to finance the purchase of ourDenver, Colorado headquarters, withVectra Bank Colorado in the principal amount of$16.0 million . OnOctober 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 . OnMay 6, 2021 , we entered into a new credit agreement withMidcap 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. AtSeptember 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). In addition, onNovember 9, 2022 we entered into an amendment to the Midcap Revolving Loan Agreement (defined below) providing up to$50.0 million in total borrowing capacity. We believe that our$56.3 million of cash as ofSeptember 30, 2022 , the additional$60.0 million of available borrowings under our amended 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
OnMarch 27, 2020 , we entered into an Amended and Restated Loan Agreement (the "Vectra Loan Agreement") withVectra 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 wasSeptember 30, 2020 and it was subsequently extended toOctober 5, 2023 . We repaid the 2020 Loans in 2021 in connection with entering into the Midcap Term Loan Agreement described below. OnMarch 24, 2022 , we entered into a secured term loan facility (the "Zions Facility") with Zions Bancorporation, N.A. dbaVectra 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 onMarch 24, 2037 . Principal and interest payments are payable monthly, with optional prepayments allowed without premium or penalty. OnNovember 10, 2022 , the Company entered into the First Amendment to the Zions Facility with Zions Bancorporation, N.A. dbaVectra Bank Colorado . 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.
Midcap Loan Agreement
OnMay 6, 2021 , we entered into a term loan agreement (the "Midcap Term Loan Agreement") withMidcap 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 onMay 6, 2021 . The Second Tranche was partially funded$20.0 million onJanuary 10, 2022 . The Midcap Term Loans mature onMay 1, 2026 . The Midcap Term Loans accrue interest at the LIBOR Rate plus 6.00% per annum. OnMay 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 ofMay 6, 2021 we had access to a$20.0 million revolving line of 29 -------------------------------------------------------------------------------- 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 onMay 1, 2026 . The Midcap Revolving Loan accrues interest at the LIBOR Rate plus 3.00% per annum. OnNovember 9, 2022 , the Company entered an amendment to the MidCap Revolving Loan withMidCap Funding IV Trust (the "Revolving Loan Agreement") and an amendment to the MidCap Term Loan withMidCap Financial Trust (the "Term Loan Agreement" and together with the "Revolving Loan Agreement", "MidCap Credit Agreements"). The amendment to the Midcap Revolving Loan provides up to$50.0 million in total borrowing capacity compared to up to$30.0 million available previously. 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. 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 (as defined in the Midcap Loan Agreements), for the preceding twelve month period. Contractual Obligations
In
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:
•
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 inthe 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;
•
the costs associated with being a public company; and
•
the impact of the COVID-19 pandemic on our operations and business.
30
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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.
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
2022 2021 Amount %
(in thousands)
Net cash (used in) provided by:
Operating activities $ (35,950 ) $ (1,196 ) $ (34,754 ) *
Investing activities (53,519 ) (25,885 ) (27,634 ) (107 )%
Financing activities 36,937 17,796 $ 19,141 108 %
Effect of exchange rate
changes of cash (495 ) (340 ) (155 ) 46 %
Net decrease in cash $ (53,027 ) $ (9,625 ) $ (43,402 ) *
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* Not meaningful
Net cash used in operating activities for the nine months endedSeptember 30, 2022 was$36.0 million , consisting primarily of net loss of$28.6 million plus non-cash expenses of$15.3 million , which primarily consisted of$9.6 million of depreciation and amortization and$7.1 million of stock-based compensation expense, and increased working capital of$22.7 million , including$15.3 million of inventory purchases, a$10.2 million increase in accounts receivable and other working capital decreases of$2.9 million . Net cash used in operating activities for the nine months endedSeptember 30, 2021 was$1.2 million , consisting primarily of net loss of$7.5 million plus non-cash expenses of$11.9 million , which primarily consisted of$6.1 million of depreciation and amortization,$2.2 million provision for excess and obsolete inventory and$2.7 million of stock-based compensation expense, and negative changes in working capital of$5.6 million , including$7.9 million of inventory purchases and$2.9 million in deferred IPO expenses offset partially by a$3.4 million increase in accounts payable 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 endedSeptember 30, 2021 .
Net cash used in investing activities for the nine months endedSeptember 30, 2022 was$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 ourDenver 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. Net cash used in investing activities for the nine months endedSeptember 30, 2021 was$25.9 million , consisting primarily of our purchase of the assets of Additive Orthopedics for$15.0 million , surgical instrumentation purchases of$7.9 million , and capitalization of certain patent costs.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the nine months endedSeptember 30, 2022 was$36.9 million , consisting of$36.0 million proceeds from long-term debt, including a$20.0 million draw on the Company's Midcap Term Loan to finance the Disior acquisition and a$16.0 million loan to finance the purchase of the Company'sDenver headquarters. 31 -------------------------------------------------------------------------------- Net cash provided by financing activities for the nine months endedSeptember 30, 2021 was$17.8 million , consisting of$26.0 million of proceeds from the Midcap Revolving Loan and the Midcap Term Loan, which was partially offset by the long-term debt repayments of$6.0 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 withU.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenue, expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material. During the nine months endedSeptember 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 endedDecember 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.
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