EDGAR 10-K Filing

Company CIK: 1531978
Filing Year: 2025
Filename: 1531978_10-K_2025_0001558370-25-002386.json

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ITEM 1. BUSINESS
Item 1. Business.
Overview
Paragon 28, Inc. (collectively with its subsidiaries, “we,” “us,” “our,” “P28” or the “Company”) is 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, forefoot, 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. 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 strive to disrupt and transform the market by focusing exclusively on the foot and ankle to develop and commercialize differentiated, high quality orthopedic solutions, advanced procedural approaches and instrumentation that are collectively designed to enable surgeons to provide consistent, reproducible and effective outcomes. Our development strategy integrates all aspects of the procedure and we seek to enhance support systems beyond implants. We develop procedure specific solutions featuring meaningfully improved and purpose-built designs for implants and instrumentation, enhanced surgical techniques and clinical support. We rely on an unbiased, clinical, research-first approach to developing new products, which allows us to create disruptive technologies. Each of our systems is designed to deliver the surgeon an enhanced user-experience throughout the procedure, while improving patient outcomes and increasing the reproducibility of results. We couple this innovation and advancement with a dedication to medical education to support surgeons, patients and stakeholders within our organization, while also delivering our products through a clinically focused sales force.
We have developed a comprehensive portfolio of foot and ankle surgical systems and procedural techniques designed to address many of the conditions requiring surgery in the foot and ankle, including fracture fixation; forefoot; ankle; PCFD or flatfoot; charcot foot; and orthobiologics. Each system typically includes numerous plates, screws, staples, nails, advanced joint and bone replacements, orthobiologics, and other implantation instruments and disposables. Except for our total talus spacer, which is authorized for marketing under a Humanitarian Device Exemption (HDE), our marketed products are either Class II medical devices cleared by the U.S. Food and Drug Administration (FDA) for specific indications or they are Class I exempt for general orthopaedic use. We have no products that are Class III medical devices.
Our development pipeline is driven by our passion and commitment to designing products aimed at improving patient outcomes and creating surgical efficiencies. We have a dedicated team of design and development engineers that have embodied our research philosophy to drive continual innovation and a system of collaboration that allows us to harness and rapidly respond to customer feedback to drive development of new concepts and product iterations. The foregoing has helped us to expand our portfolio quickly and consistently, having launched over 80 product lines since 2011 including 12 product lines launched in 2024. We currently have more than 30 product and system offerings in development. We have also enhanced our offerings through licensing agreements and tuck-in acquisitions, such as our recent acquisitions of Additive Orthopaedics and Disior Oy.
We have dedicated substantial resources to building a leading commercial organization that consists of sales, marketing and medical education. We believe our entrepreneurial and clinically-oriented culture has allowed us to build a leading sales force which includes an estimated 249 producing U.S. sales representatives as of December 31, 2024. We define producing sales representatives as those sales representatives’ logging revenue, for at least one case, in all three months of each quarter. Our U.S. sales force consists primarily of independent sales representatives, the majority of whom are exclusive. During 2024, substantially all of our U.S. revenue was produced by our producing sales representatives. We began selling outside the United States in late 2016. As of December 31, 2024, we sell our products in 23 countries, and in 2024, our international business contributed approximately 17% of our revenue. We believe that we have a significant opportunity to continue to capture market share in existing and new territories both in the United States and internationally.
Success Factors
We believe the following success factors are essential to our mission of improving patient experiences and outcomes and will be significant factors in our continued success and growth:
Large, Growing, and Underdeveloped Foot and Ankle Market with Significant Unmet Clinical Needs.
The global market for implants and devices used in foot and ankle procedures is projected to grow at approximately 7% annually to reach $6.9 billion by 2028, representing the fastest growing market within orthopedics. The United States remains the largest market for foot and ankle procedures and is our largest market for product sales. Our estimates of the global foot and ankle market are based on internal and third-party data. We believe that growth in the foot and ankle market could accelerate with advancements in technology and an increased focus on and specialization in foot and ankle ailments. We also expect the foot and ankle market to benefit from general trends including an aging population, increased incidence of obesity and diabetes, as well as the broader patient populations’ desire to pursue a more active lifestyle.
Our market consists of medical devices and implants used across approximately six core sub-categories and conditions including fracture fixation, forefoot, ankle, PCFD or flatfoot, charcot foot and orthobiologics with varying levels of penetration across multiple providers. Additionally, the market is comprised of soft tissue, sports medicine, orthobiologics and analytical solutions across each of these sub-categories. We believe there is significant opportunity for further expansion and penetration across a broad subset of indications within foot and ankle due to current products delivering suboptimal patient outcomes, which is in part driven by a lack of anatomically specific technology and defined techniques. We also believe there has been a lack of innovation required to drive better clinical outcomes and surgeon experiences. We expect that new technologies driven by meaningful research, data analytics and AI will result in higher procedural success rates, which may prompt increased procedure volume.
Exclusive Focus on and Deep Understanding of the Foot and Ankle Market.
We established Paragon 28 in 2010 as a company exclusively dedicated to the foot and ankle market, unlike many of our competitors who spread their resources and focus across multiple orthopedic indications. The name of our company embodies this focus: “Paragon” being a model of excellence or perfection; “28” being the number of bones in the human foot. Our goal is to improve patient outcomes by introducing innovative technologies and procedures which re-invent the specialty. We believe our passion, expertise, and exclusive focus in foot and ankle has allowed us to profoundly understand the needs of our patients and physicians which has driven broad innovation and enhanced solutions. This dedication to foot and ankle has been instrumental in our success.
Total Solutions Provider with a Comprehensive Portfolio.
We have a broad and comprehensive portfolio of surgical solutions for the foot and ankle market. Each of our offerings are designed with both the patient and physician in mind to deliver an enhanced user-experience throughout the procedure, while improving patient outcomes and increasing the reproducibility of results. As of December 31, 2024 we had 720 issued or pending patents covering our portfolio. Our current suite of implants includes plates, plating systems, screws, staples, nails, and orthobiologics. Among other advanced technology solutions, we empower our physicians with a spectrum of pre-operative planning and intra-operative support systems including laser alignment tools, patient specific instrumentation, and other advanced technology solutions designed to enhance physician experiences and create procedural efficiencies. In 2024, we launched an additional 13 products that expand treatment options to various indications within the foot and ankle market.
Deep Clinical Expertise.
Our clinical expertise has been fundamental to our success in advancing the standard of care in foot and ankle surgery. We invest significant time and resources to understand the specific needs of our patients and physicians to help cultivate novel solutions. We take an unbiased, clinical, research-first approach to developing new products in our portfolio which allows us to develop disruptive technologies. To support our mission, we have built a team that has diverse experiences and educational backgrounds and have developed collaborative relationships with what we believe are the most forward-thinking foot and ankle specialists across a variety of indications. We believe collaboration with all stakeholders within the foot and ankle community is vital to product advancement and has been a driving force behind our success as a disruptor in the space.
Dedication to Medical Education.
We are dedicated to supporting our patients and surgeons with a comprehensive educational experience. To support our stakeholders, we have built a 250-person auditorium and a 40-station cadaveric operating lab that are used for on-site education and training sessions. In addition to education and training opportunities offered at our headquarters, we have developed and offer a broad range of regional programs and virtual seminars. The breadth of our educational and training programs allows us to cater to larger sized groups of surgeons and salespeople with significant flexibility around time and location in the United States and internationally. Since our inception, thousands of surgeons and stakeholders have participated in our education and training curriculums both on-site and through our other offerings.
Large Research & Development Team Leveraging Unique Insights.
We have a large and growing, dedicated team of development engineers that work hand-in-hand with thought-leading foot and ankle specialists and third-party development specialists to advance our mission. Our strong research & development team seeks to break barriers in foot and ankle as we rethink existing procedures and products. We have developed a culture and system of collaboration which allows us to harness and rapidly respond to customer feedback to drive development of new concepts and product iterations.
Our Growth Strategy
Our strategic levers to achieve our mission and drive continued growth include:
Continue to Invest in Research and Development to Further Improve Outcomes and Expand Our Addressable Market.
We have a strong history of developing and commercializing new products. We intend to maintain a procedurally focused approach to product development and have over 30 projects underway as of December 31, 2024. Our capabilities allow us to develop products that span a spectrum of regulatory pathways including 510(k) clearance and HDE.
Transform the Foot and Ankle Market by Leveraging Our Smart 28 Initiatives to Advance the Foot and Ankle Surgical Experience and Clinical Outcomes.
Smart 28 is our initiative to improve all aspects of foot and ankle treatments. We have launched our SMART28℠ Case Management Portal, a cutting-edge platform that leverages AI and a seamless user experience to coordinate patient-specific surgical plans. The first module to launch within the portal is SMART Bun-Yo-Matic℠, which revolutionizes preoperative planning and correction for hallux valgus by creating plans tailored to the individual patient. We have assembled and will continue to build a team of industry experts to detail the needs and direction of this initiative. As part of our Smart 28 initiative, we currently offer several innovative technologies including proprietary solutions and platforms for 3-D printing technology, 3-D modeling software, patient specific guides and implants and laser alignment tools, as well as our end-to-end, fully enabled cloud-based infrastructure and AI-platform. We believe these analytical tools will continuously improve as data points from each procedure using this platform is collected, such as the information regarding the impact of corrections on the musculoskeletal system and surrounding soft tissue. We believe such iterative, data-driven improvements will result in improved surgical outcomes.
Continue to Invest in Our Commercial Infrastructure Globally to Capture Market Share.
Our broad U.S. commercial footprint spans across all 50 states. Our products are also commercially available in 23 countries where we expect additional growth opportunities. In the United States, we believe there are approximately 2,400 orthopedic surgeons who specialize in foot and ankle, approximately 2,300 pediatric and trauma surgeons that treat foot and ankle and approximately 9,000 surgical podiatrists, approximately half of which are performing foot and ankle surgery. We continue to commit significant resources to clinical and procedural training and development of our commercial organization to provide high quality case support for our surgeon customers. We believe there is significant opportunity to increase sales in our current territories in the United States and internationally by selling to new physicians and increasing physician utilization of our existing and new solutions. Additionally, we plan to continue growing our sales organization and network 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, among other factors.
Advance Medical Education and Targeted Marketing Campaigns.
We have developed state-of-the art programs and facilities to further benefit the community and empower surgeons with the tools and knowledge to drive improved clinical outcomes. We plan to utilize these programs and facilities to effectively spread awareness of our solutions. We offer focused medical education courses for our customers, and we have created a curriculum of in-person and virtual courses, seminars and databases with the goal of providing continued education to our customers on our products, as well as teaching new surgical approaches. Our approach to clinical education is results-oriented and supported by robust data, which we believe allows us to drive trust among the broader community with more accurate and quantifiable information and feedback. We believe our focus on the advancement of education will contribute to the overall growth of the foot and ankle market and our business. We are also committed to patient education for foot and ankle therapies and invest resources in direct-to-patient marketing. Beyond our programs and facilities, we have a broad range of tools we use to drive patient awareness including social media campaigns and conference exhibits. We believe that our focus on clinical education through our expansive curriculum and training opportunities and directed outreach to educate patients will drive ongoing adoption of our solutions and products.
Actively Evaluate and Pursue Business Development Opportunities.
We have successfully executed strategic partnerships and acquisitions to broaden our capabilities within the pre-operative and intra-operative stages of the foot and ankle continuum of care, potentially broadening our total addressable patient population. We intend to continue to seek targeted external opportunities to enhance our solutions portfolio and distribution channels. Our approach to business development is highly disciplined and focused on bringing novel approaches and advanced technologies to our customers that can result in improved experiences for physicians and better results for our patients. We believe we are well positioned as a partner or acquirer of a business or team aligned with our mission of improving clinical outcomes in the foot and ankle market.
Our Industry
The foot and ankle are complex structures that combined contain 30 bones, with 28 in the foot alone, 34 joints and a network of more than 100 tendons, muscles and ligaments. While many foot and ankle problems can be successfully solved without surgery, many also require surgical intervention to resolve longstanding pain, deformities or correction of diseased tissue.
The products used in foot and ankle procedures generally include screws, wires and pins, plates, nails, fixators, staples, joint implants, soft tissue implants, and orthobiologics. In addition to the diversity of tools, there are also multiple approaches to treating foot and ankle conditions. We believe the diversity of tools and treatment methodologies adds to the complexity of foot and ankle procedures and the varying degrees of patient outcomes.
Our definition of the foot and ankle market includes the treatment of (1) fracture fixation; (2) forefoot; (3) ankle; (4) progressive collapsing foot deformity (PCFD) or flatfoot; (5) Charcot foot; and (6) orthobiologics.
Our Market Opportunity
We define our market as the market for surgical implants and devices used in foot and ankle procedures across all major indications, which include forefoot, fracture fixation, ankle, flatfoot or PCFD, charcot foot and orthobiologics. We believe each of these subsegments and orthobiologics represents its own market opportunity with varying growth rates. We estimate the global market for surgical implants and devices used in foot and ankle procedures was approximately $5.2 billion in 2024 and is expected to grow at approximately 7% annually, representing one of the fastest growing markets within orthopedics. The United States remains the largest market for foot and ankle procedures, representing approximately 55% of the global market in 2024, and is our largest market for product sales. Our estimates of the global foot and ankle market are based on internal and third-party data.
The broader global foot and ankle market opportunity across each major indication and orthobiologics is shown in the table below:
Estimated
Estimated
2024 Market Size
Annual
Foot and Ankle Market Segment
(in millions)
Growth
Forefoot(1)
$
1,800
%
Fracture Fixation
1,500
%
Ankle(2)
%
Flatfoot or PCFD
%
Charcot Foot
%
Orthobiologics(3)
%
Total Global Market
$
5,200
%
(1) Forefoot includes hallux valgus (bunions) and hammertoe.
(2) Ankle includes all non-fracture ankle conditions surrounding the ankle including soft tissue.
(3) Represents orthobiologics specific to the foot and ankle market.
We believe the foot and ankle market remains underpenetrated today due to high failure and recurrence rates experienced by patients. For example, revision rates for total ankle arthroplasty are approximately 22% after 5 years and 44% after 10 years irrespective of the implant compared to approximately 1% and 2% after three years for hip and knee procedures, respectively. Revision rates across other foot and ankle procedures vary, but also are generally higher than other orthopedic markets. We estimate that revision rates for certain foot and ankle procedures can be as high as approximately 20% to 70%.
Despite these high failure rates, we believe that the foot and ankle market growth will accelerate due to advancements in technology and an increased focus and specialization in foot and ankle ailments, improving patient outcomes and patient awareness of available treatments. We also expect the market to benefit from general trends including an aging population, increased incidence of obesity and diabetes, as well as the broader patient populations’ desire to pursue a more active lifestyle.
Limitations of Existing Approaches in the Foot and Ankle Market
The foot and ankle surgical implant and device market is dominated by a handful of incumbents who also operate across the broader medical technology and orthopedic markets. We believe technological advancement and growth in this market has been limited by certain trends in the industry, including:
● Lack of Sole Focus on and Dedication to Improving Outcomes in the Foot and Ankle Market.
Many of the current incumbent providers operate across multiple sectors both within orthopedics, as well as other medical technology segments and they have not traditionally created technologies designed exclusively for the foot and ankle surgeon. Typically, these incumbents include their foot and ankle products within broader orthopedic divisions where sales and development teams are allocating time and resources to a broad array of solutions across multiple anatomies beyond the foot and ankle.
● Lack of Overall Education and Awareness of Optimal Approaches for Treating Foot and Ankle Conditions, Resulting in Higher Failure and Recurrence Rates.
The foot and ankle market is an emerging segment of orthopedics and its patients within this segment experience high recurrence and failure rates that can be associated with a multitude of complications. We believe there has been a lack of focus on developing robust medical and clinical education platforms and curriculums aimed to benefit key stakeholders in foot and ankle.
● Lack of Procedural Support and Patient Specific Solutions.
Physicians treating patients with complex foot and ankle conditions are often required to re-purpose another solution for each patient, which may result in inconsistent patient outcomes. In addition, there is a general lack of supporting tools and instruments customized and specific to each patient and procedure. Surgeons have limited optionality for treating patients, which is problematic as there is a wide range of conditions with varying degrees of severity and patient-specific complicating factors such as age, weight and activity level. This lack of options can lead to both high and low severity patients receiving similar, often suboptimal treatment and patients receiving solutions that are not addressing patient-specific factors.
● Many Existing Solutions Are Repurposed from Other Large Joint Anatomies.
We believe that several options used in treating foot and ankle today are derived from and resemble implants and instruments used in other anatomies such as hip, knee or from general trauma. While these technologies are often highly regarded in their primary anatomies, they were not designed with the specific and complex anatomy of the foot and ankle in mind. There are larger force requirements and usually minimal soft tissue envelopes which can add to the complexity of treating the foot and ankle. We believe this lack of anatomically specific designs and implants has contributed to the high revision and failure rates experienced in our market.
● Advanced Technologies Not Fully Applied.
We believe that the foot and ankle market has seen limited investment in advanced technologies such as 3-D instrument and implant printing, data analytics, artificial intelligence and robotics. We believe there is a significant need for providers to gain access to such technologies to help make procedures more efficient and to provide patients with more reproducible and improved outcomes. Further, we believe many foot and ankle
surgeons are increasingly demanding advanced data analytic solutions to complement surgical support across the full procedural continuum from pre-operative planning, to intra-operative solutions, and ultimately post-operative feedback.
● Lack of Unbiased Research.
A majority of implants utilized in foot and ankle today were developed without a specific, research-based need in mind. We believe many research projects conducted in foot and ankle were conducted to bolster marketing or were conducted to support adoption of existing products and procedural techniques, and as a result, such research could be biased. Due to this potential bias, we believe there is a need to reorient key stakeholders to design products and procedures based on meaningful, unbiased clinical research.
We believe the combination of these limitations has led to a lack of product innovation and patient specific solutions, resulting in significant unmet need.
At Paragon 28, we aim to disrupt and improve the overall foot and ankle market across all functions of our organization. We are exclusively focused on foot and ankle, with our product development philosophy centered on improving the limitations of existing foot and ankle products and procedures to advance the standard of care.
We believe our differentiating characteristics that allow us to address current market limitations and improve patient outcomes include:
● Exclusive focus on foot and ankle market
● Highly focused and rigorously trained sales force
● Commitment to clinical education of all stakeholders
● Dedication to improving the procedural experience for physicians and offering a range of specific options to address all patients’ needs as opposed to repurposed solutions
● Ambition for each of our anatomically specific foot and ankle solutions to be the standard of care
● Development and utilization of advanced technologies through Smart 28
● Product development and designs to address issues identified through unbiased research
Our Solutions
We have built a comprehensive, full-line foot and ankle orthopedic device company. We let the needs and limitations of the procedure dictate the systems and technologies that we develop in order to identify the best solution to overcome and improve the entire surgical and patient experience. We approach each type of procedure from both the patient’s and the surgeon’s perspectives. The goal of each new solution is to improve patient outcomes, reduce ailment recurrence and complication rates, and to provide optionality to fit the specific needs of each patient. We respect that no two patients are the same, and with that in mind we develop our solutions with a range of optionality. The goal of each new solution for surgeons is to make the procedure simpler, more consistent, and more reproducible, and to identify new approaches to deformity correction that may address certain limitations.
We believe our commitment to this approach has allowed us to establish a brand and reputation of being innovators in the foot and ankle industry. Since inception, we have introduced numerous key technological advancements and innovative products that have advanced and challenged the status quo in our industry.
We believe the differentiation of our purpose-built solutions and the clinical value that we provide to our surgeon customers is demonstrated by our commercial success and growth. Since our first internally developed product, the PRESRVE Bone Wedges, launched in 2011, we have commercialized over 80 product systems. Additionally, we currently have more than 30 product and system offerings in our development pipeline the majority of which we expect to launch commercially in the next 24 months which represents our continued dedication to enhancing our product portfolio with novel and disruptive solutions. We have also rapidly expanded our global intellectual property portfolio and will continue to focus on only patenting what we view as truly unique.
Our Procedurally Focused Systems
We have developed a comprehensive portfolio of foot and ankle surgical systems covering all segments of the distal extremity market: forefoot, fracture fixation, flatfoot, ankle, Charcot and biologics. Each system typically includes one or more of the following: plates, screws, staples, nails, advanced joint and bone replacements, biologics, and other implantation instruments and disposables specifically designed for the particular surgical system. We focus our engineering efforts equally on each component of our surgical systems, from the implants to the procedural approach and instruments. Our products are available in a variety of sizes and configurations to best suit the individual patient’s anatomical and surgical requirements and our SMART Ecosystem will further allow us to tailor surgeries to specific patient needs across each segment.
Forefoot
Forefoot surgeries include a breadth of product technology to facilitate deformity corrections. This portfolio spans plates, screws, intramedullary nails, intramedullary PEEK devices, as well as instrument systems to support corrections (power units, alignment guides). Recent portfolio additions have leaned heavily towards bunion corrections and minimally invasive surgery to address increased demand in the market. Our flagship forefoot systems include the Gorilla Precision MTP Plating System, Gorilla Precision Lapidus Plating System, Phantom Lapidus Intramedullary Nail System, Bun-Yo-Matic Lapidus Clamp and Precision MIS Screw System.
Fracture Fixation
Fracture fixation surgeries demand robust hardware and soft tissue technology options to facilitate fracture management. This can include plates, tissue anchors, external fixation, syndesmotic sutures, and/or intramedullary nails. Our flagship fracture fixation systems include the Gorilla Ankle Fracture Plating System, Baby Gorilla Plating System, Monster Screw System, Monkey Bars External Fixation System, R3Flex Syndesmotic Repair System and Phantom Fibula Nail System.
Flatfoot
Flatfoot surgeries are supported by both our hardware and soft tissue portfolios. This can include procedures that require arthrodesis, bone osteotomies, and soft tissue repair. Product technology to facilitate flatfoot surgeries include plates, screws, and/or bone staples, as well as instrument systems to support soft tissue corrections. Recent portfolio additions have expanded our bone staple portfolio offering and our novel soft tissue correction systems. Our flagship flatfoot systems include the Gorilla Universal Plating System, JAWS Great White Staple System, Monster Screw System, Grappler Suture Anchor System and Mister Tendon Harvester System.
Ankle
The Ankle portfolio includes total ankle replacement, total talus replacement and additional fixation products designed to address ankle deformity. The total ankle replacement system consists of metallic and plastic implant components (3D-printed Titanium Tibia Base, Crosslinked Vitamin-E Tibial Insert, Cobalt Chrome Talar Dome) for use in primary and revision total ankle replacement surgery along with novel instrumentation offerings for site preparation and implant alignment (such as FasTrac Laser Alignment, MAVEN Patient Specific Instrumentation and Right Angle Drilling). The portfolio also includes the first and only patient specific total talus replacement System available in multiple materials
authorized for marketing. Our flagship fixation systems to address the ankle market include the Silverback Ankle Fusion Plating System and Phantom Hindfoot Nailing System.
Charcot
Charcot surgeries demand some of the most robust hardware devices to address the high-risk patient population. This segment is supported by hardware devices to help support this complex clinical need. This segment can include procedures that require arthrodesis, bone osteotomies, limb salvage procedures, and wound healing. Product technology to facilitate Charcot surgeries include plates, beaming screws, intramedullary nails, and/or external fixation. Our patented Precision™ Guided technology helps facilitate many of these difficult procedures. Our flagship Charcot systems include the Joust Beaming System, Gorilla Medial Column Plating System, and Monkey Rings External Fixation System.
Biologics
The biologics portfolio typically support other segment surgeries. This segment includes a breadth of products that provide deformity corrections using bone wedges or to facilitate boney fusion using engineering principles in biology. Our significant biologic products include V92 Cellular Bone Matrix, PRESERVE Bone Wedges, MgNum Bone Void Filler and BEAST Demineralized Bone Matrix.
Product Development and Pipeline
We are committed to continuously expanding our portfolio of foot and ankle solutions and to bring next-generation products to market. Our development pipeline is driven by our passion and commitment to designing products aimed at improving patient outcomes and creating surgical efficiencies. We have a dedicated team of design and development engineers that have embodied our research philosophy to drive continual innovation. Our internal engineering team is comprised of highly qualified individuals, and when needed we utilize third-party resources to augment and support our team with subject matter expertise. We believe our research philosophy provides us with a competitive edge in the marketplace, and includes the following principles:
● Research and understand the fundamentals of foot and ankle disease
● Perform unbiased research to rethink an existing procedure or product
● Incorporate multiple philosophies and approaches into product design
● Design purpose-built products
● Strive for every product to be the best on the market
● Remain fluid on technology to allow us to consider the most appropriate needs of each indication
We aim to further inform our product development and benefit the broader foot and ankle community by collaborating with university partners to perform meaningful, unbiased research. This research has resulted in publications that are unrelated to our existing products and can be used as tools to analyze existing technology, as well as drive creativity and learning opportunities for our engineers and foot and ankle surgeons.
Clinical Overview
We are committed to continued investment in clinical evidence and involving physicians who are recognized as thought leaders in foot and ankle. We believe these efforts will continue to generate a large compendium of publications to ultimately drive adoption of our products and increase awareness of foot and ankle procedures with the goal of establishing our products as the standard of care. Since inception, we have developed a broad set of published studies that we believe strengthens our position as a thought leader in our industry. The safety and clinical performance of our products
and the scientific advancement of orthopaedics are supported by over 150 journal publications, scientific presentations, white papers, and case studies.
We plan to continue investing in pre-clinical and post-clearance or post-certification studies to drive utilization of our products. As part of our clinical strategy, we emphasize and internally conduct performance testing of our products including mechanical implant testing in an effort to substantiate the claims we make and support marketing of our clinically meaningful systems.
Commercial Approach
We have dedicated substantial resources to building a leading commercial organization that consists of sales, marketing and medical education. We believe our entrepreneurial and clinically oriented culture has allowed us to grow our commercial team.
To support our commercial expansion and awareness of the clinical benefits of our solutions, we have made significant investments in our education and training programs. To date, we have trained thousands of surgeons and other professionals. In addition, in 2019 we opened a new corporate, research and development, and clinical headquarters, which includes a 250-person auditorium and a 40-station cadaveric lab that have the capacity to train up to 5,000 people per year. In the United States, we believe there are approximately 2,400 orthopedic surgeons who specialize in foot and ankle, approximately 2,300 pediatric and trauma surgeons that treat foot and ankle and approximately 9,000 surgical podiatrists, approximately half of which are performing foot and ankle surgery. In addition to education and training opportunities offered at our headquarters, we employ a broad range of additional options including regional programs and virtual seminars. The breadth of our educational and training programs allows us to cater to a broad range of surgeons and salespeople with significant flexibility around time and location.
Education for our commercial organization is extensive and on-going. We believe our extensive training programs have contributed to the clinical expertise of our sales representatives, enabling them to become trusted partners of foot and ankle surgeons.
Our U.S. sales forces consist primarily of independent sales representatives, the majority of whom are exclusive. For the year ended December 31, 2024, substantially all of our U.S. revenue was produced by 275 producing sales representatives. We define producing sales representatives as those sales representatives’ logging revenue, for at least one case, in all three months of each quarter. As of December 31, 2024, our international sales force consists of several independent sales agents and direct sales representatives, 9 non-stocking distributors, 8 stocking distributors, and 5 direct sales market. We began selling outside the U.S. in 2016. We believe that we have a significant opportunity to continue to capture market share in existing and new territories both in the United States and internationally. We expect to continue to dedicate meaningful resources to expand and strengthen our global sales force.
Competition
The foot and ankle market is dominated by a handful of incumbents that operate across the broader medical device and orthopedic markets. Our currently marketed products are, and any future products we commercialize will be, subject to competition. We believe that the principal competitive factors in our markets include:
● product features and design;
● technological advancements using data driven tools across foot and ankle continuum of care;
● physician training and education;
● product quality and standards including our reputation with our customers;
● patient experience;
● product price including level of coverage and reimbursement;
● clinical outcomes and ease of use;
● intellectual property; and
● customer service.
Within the lower extremities market, our primary competitors include multinational companies such as Stryker Corporation (Stryker), Arthrex, Inc. (Arthrex), Smith & Nephew plc (Smith and Nephew), Johnson & Johnson (J&J) and Zimmer Biomet Holdings, Inc. (Zimmer Biomet) as well as with companies with one or a limited number of foot and ankle products such as Enovis Medical (Enovis), Medline Industries, Inc. (Medline), Conmed Corporation (Conmed), and Treace Medical Concepts, Inc. (Treace).
Many of our multinational competitors have significant financial resources and in addition to competing for foot and ankle market share, they also compete with us in recruiting and retaining qualified sales and marketing professionals, qualified research and development expertise, speed and cadence of product launches and acquiring novel technologies that augment their existing portfolios.
Due to our growing international presence, we also compete with medical device manufacturers outside of the United States. These competitors may develop effective or less expensive products and obtain regulatory clearance or certification before us.
Intellectual Property
We actively seek to protect the technology, inventions and improvements that we consider important to our business using patents, trade secrets, trademarks and copyrights in the United States and foreign markets.
As of December 31, 2024, our patent portfolio included 366 owned and issued patents. Of our patents:
● Twenty-five patents relate to technologies used in our orthobiologics products. Of these, six are utility patents and nineteen are design patents, all of which relate to the associated tools and implants used; ten are U.S. patents, six are UK patents and nine are EU patents; and these patents begin to expire in 2028.
● Twenty patents relate to technologies used in our nails; of these five are design patents and fifteen are utility patents; two relate to surgical techniques and eighteen relate to the associated tools and/or implants used; seven are U.S. patents, four are European patents, four are UK patents, two are Spanish patents, one is a Swiss patent, one is a German patent, and one is a Japanese patent; and these patents begin to expire 2030.
● One hundred and eighty-eight patents relate to technologies used in our plating systems; of these one hundred and eighteen are design patents and seventy are utility patents; all of these patents relate to plates, the associated tools, and/or the associated surgical techniques; sixty-nine are U.S. patents, forty-two are EU patents, forty-eight are UK patents, six are German patents, six are French patents, nine are Spanish patents, five are Dutch patents, one is a Canadian patent, and one is an Australian patent, and one is a Japanese patent; and these patents begin to expire in 2028.
● Eleven patents relate to technologies used in our screws; of these three are design and eight are utility patents; all of these patents cover the tools used; four are U.S. patents, two are UK patents, one is an EU patent, one is a German patent, one is a Spanish patent, one is a French patent, and one is a Dutch patent; and these patents begin to expire 2032.
● Twenty-two patents relate to technologies used in our soft tissue systems; all of these are utility patents and relate to the implants, associated tools, and/or surgical techniques; seven are U.S. patents, three are Spanish patents,
three are UK patents, two are French patents, two are German patents, two are Dutch patents, one is an EU patent, one is a Canadian patent, and one is an Australian patent; and these patents begin to expire in 2037.
● Forty patents relate to technologies used in our instrument systems; of these twenty-nine are design patents and eleven are utility patents; all of these patents cover the instruments and/or the associated surgical techniques; fourteen are U.S. patents, twelve are EU patents, twelve are UK patents, one is a Spanish patent, and one is a Japanese patent; and these patents begin to expire in 2033.
● Forty-four patents relate to technologies used in our other products including hammertoe implants and titanium wedges; of these fourteen are design patents and twenty-nine are utility patents; all of these relate to the associated tools, system, implants, and/or surgical technique; twenty-six are U.S. patents, five are UK patents, six are EU patents, three are German patents, three are Spanish patents, three are French patents, three are Dutch patents, one is a Danish patent, one is an Irish patent, one is a Canadian patent and one is a Norwegian patent; and these patents begin to expire in 2033.
● Sixteen patents relate to technologies used in our total ankle arthroplasty system; all of these are U.S. utility patents that cover the implant system, the tools used, and the associated surgical methods; and these patents begin to expire in 2039.
In addition to our owned patents, we have nine patents that are in-licensed pursuant to our agreement with Biedermann Technologies GmbH & Co. KG (“Biedermann”) and two registered patents that are in-licensed pursuant to our agreement with Extremity Medical, LLC (“Extremity”). Of the nine patents licensed from Biedermann, six are utility patents and three are design patents. All of the Biedermann patents relate to technologies used in our JAWs staple system. Of the patents licensed from Biedermann, six are U.S. patents, one is an EU patent, one is a Chinese patent and one is a Japanese patent. The patents licensed from Biedermann begin to expire in 2033. The two patents licensed from Extremity are utility patents and relate to technology used in our Phantom Lapidus Intramedullary Nail System. The patents licensed from Extremity begin to expire in 2030.
We entered into the license agreement with Biedermann in July 2017 (“Biedermann License Agreement”). Pursuant to the Biedermann License Agreement, we are required to pay a royalty of four percent (4%) of net revenue related to the licensed intellectual property for 15 years following the date of first sale, including a minimum annual payment of $250,000. The term of the agreement is 20 years, and automatically renews for five-year periods thereafter. Payments to Biedermann under this license agreement totaled $300,000, $269,000 and $249,000 for the years ended December 31, 2024, 2023 and 2022, respectively. Amounts payable to Biedermann as of December 31, 2024 and December 31, 2023 were $92,000 and $155,000, respectively. We entered into the Extremity License Agreement in November of 2021 (“Extremity License Agreement”). Pursuant to the Extremity License Agreement, we are required to pay a royalty of four percent (4%) of net sales related to the licensed intellectual property until the expiration of the last expired patent. Payments to Extremity under this license agreement totaled $44,000, $57,000 and $64,000 for the years ended December 31, 2024, 2023 and 2022, respectively. We believe the Biedermann License Agreement and the Extremity License Agreement are both immaterial to our business.
As of December 31, 2024, we had 354 pending patent applications globally, including both utility and design patent applications. We have 84 applications pending in the United States, of which 78 are utility patent applications and six are design patent applications. In addition to these patent applications, we have one pending patent application that is pursuant to our license agreement with Biedermann. The patent pursuant to our license agreement with Biedermann includes seven utility patents and three design patents that cover technology related to our JAWS staple system. Of these patent applications, eight are U.S. patents and two are EU patents. Utility patent applications will expire 20 years from their earliest filing date when issued, and design patent applications will expire fifteen years from issuance. As a result, the earliest these patents could expire, if the applications issue, would be 2035. The pending patent applications are intended to exclude competitors from practicing the innovations of our currently marketed product offering, to protect potential future commercialization opportunities, and to strategically block potential workarounds by competitors.
We have U.S. trademark registrations for several of our most material marks, including “PARAGON 28,” “MONSTER,” “GORILLA” and “PHANTOM.” We also have pending U.S. trademark registrations on other material marks, including “APEX 3D,” “MAVEN,” “SILVERBACK,” and “R3ACT.”
The term of individual patents depends on the legal term for patents in the countries in which they are granted. In many countries, including the United States, the patent term for a utility patent is generally 20 years from the earliest claimed filing date of a non-provisional patent application in the applicable country. We cannot assure that patents will be issued from any of our pending applications or that, if patents are issued, they will be of sufficient scope or strength to provide meaningful protection for our technology. Notwithstanding the scope of the patent protection available to us, a competitor could develop competitive treatment methods or devices that are not covered by our patents, and we may be unable to stop such competitor from commercializing such treatment methods or devices. Furthermore, numerous U.S. and foreign-issued patents and patent applications owned by third-parties exist in the fields in which we are developing products. Because patent applications can take many years to issue, there may be applications unknown to us, which applications may later result in issued patents that our existing or future products or technologies may be alleged to infringe.
There has been substantial litigation regarding patent and other intellectual property rights in the medical device industry. In the future, we may need to engage in litigation to enforce patents issued or licensed to us, to protect our trade secrets or know-how, to defend against claims of infringement or misappropriation of the alleged rights of others or to determine the scope and validity of the alleged proprietary rights of others. Any such litigation could result in significant expense and could divert our attention and resources from other functions and responsibilities. Furthermore, even if our patents are found to be valid and infringed, a court may refuse to grant injunctive relief against the infringer and instead grant us monetary damages and/or ongoing royalties. Such monetary compensation may be insufficient to adequately offset the damage to our business caused by the infringer’s competition in the market.
Adverse determinations in litigation could subject us to significant liabilities to third-parties, could require us to seek licenses from third-parties and pay significant royalties to such third-parties and could prevent us from manufacturing, selling or using our product or techniques, any of which could severely harm our business.
Our knowledge and experience, creative product development, marketing staff and trade secret information, with respect to manufacturing processes, materials and product design, are as important as our patents in maintaining our proprietary product lines. As a condition of employment, we require all employees and key contractors to execute an agreement obligating them to maintain the confidentiality of our proprietary information and assign to us inventions and other intellectual property created during their employment. For more information, please see “Risk Factors-Risks Related to Our Intellectual Property.”
Manufacturing and Supply
We currently leverage multiple third-party manufacturing relationships to ensure high-quality, low-cost production while maintaining a capital efficient business model. We have multiple sources of supply for many of our surgical solutions’ critical components. Nearly all of our supply agreements do not have minimum manufacturing or purchase obligations. As such, we generally do not have any obligation to buy any given quantity of products, and our suppliers generally have no obligation to sell to us or to manufacture for us any given quantity of our products or components for our products. In most cases, we have redundant manufacturing capabilities for each of our products. Except during the height of the COVID-19 pandemic, 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 the capacity across our manufacturing base is sufficient to meet market demand for our products for the foreseeable future.
Order quantities and lead times for components purchased from suppliers are based on our forecasts derived from both historical demand and anticipated future demand. Lead times for components may vary depending on the size of the order, time required to fabricate, specific supplier requirements and current market demand for the components, sub-assemblies and materials. For a discussion of risks related to third-party contract manufacturers and suppliers, some of which are single source, see “Risk Factors-Risks Related to Administrative, Organizational and Commercial Operations and Growth.” We depend on third-party contract manufacturers and suppliers, some of which are single source, to produce
and package all elements comprising our foot and ankle products, and if these suppliers and manufacturers fail to supply us, our products or their components or subcomponents in sufficient quantities or at all, it will have a material adverse effect on our business, financial condition, and results of operations.”
Government Regulation
Our products, product candidates and operations are subject to extensive regulation by the FDA and other federal and state authorities in the United States, as well as comparable authorities in foreign jurisdictions. Our products are subject to regulation as medical devices in the United States under the Federal Food, Drug, and Cosmetic Act (FDCA) as implemented and enforced by the FDA, and to similar regulations as implemented and enforced by applicable regulatory authorities in foreign jurisdictions.
United States Regulation
The FDA regulates the development, design, non-clinical and clinical research, manufacturing, safety, efficacy, labeling, packaging, storage, installation, servicing, record keeping, premarket clearance or approval, adverse event reporting, advertising, promotion, marketing and distribution, and import and export of medical devices to ensure that medical devices distributed domestically are safe and effective for their intended uses and otherwise meet the requirements of the FDCA.
FDA Premarket Clearance and Approval Requirements
Unless an exemption applies, each medical device commercially distributed in the United States requires either FDA clearance of a 510(k) premarket notification, de novo classification, or a premarket approval (PMA). Under the FDCA, medical devices are classified into one of three classes-Class I, Class II or Class III-depending on the degree of risk associated with each medical device and the extent of manufacturer and regulatory control needed to ensure its safety and effectiveness. Class I includes devices with the lowest risk to the patient and are those for which safety and effectiveness can be assured by adherence to the FDA’s General Controls for medical devices, which include compliance with the applicable portions of the Quality System Regulation (QSR), facility registration and product listing, reporting of adverse medical events, and truthful and non-misleading labeling, advertising, and promotional materials. Class II devices are subject to the FDA’s General Controls, and special controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device. These special controls can include performance standards, post-market surveillance, patient registries and FDA guidance documents.
While most Class I devices are exempt from the 510(k) premarket notification requirement, manufacturers of most Class II devices are required to submit to the FDA a premarket notification under Section 510(k) of the FDCA requesting permission to commercially distribute the device. The FDA’s permission to commercially distribute a device subject to a 510(k) premarket notification is generally known as 510(k) clearance. Devices deemed by the FDA to pose the greatest risks, such as life sustaining, life supporting or some implantable devices, or devices that have a new intended use, or use advanced technology that is not substantially equivalent to that of a legally marketed device, are placed in Class III, requiring a PMA. Some pre-amendment devices are unclassified, but are subject to FDA’s premarket notification and clearance process in order to be commercially distributed. The majority of our currently marketed products are Class II devices subject to 510(k) clearance, though we also market certain Class I exempt devices that do not require 510(k) clearance and one Class III product that is marketed pursuant to an approved HDE application. We are also in the process of developing one of our pipeline products that we believe will be subject to the requirement for approval under a PMA before it can be marketed.
510(k) Clearance Marketing Pathway
To obtain 510(k) clearance, we must submit to the FDA a premarket notification submission demonstrating that the proposed device is “substantially equivalent” to a legally marketed predicate device. A predicate device is a legally marketed device that is not subject to premarket approval, i.e., a device that was legally marketed before May 28, 1976 (pre-amendments device) and for which a PMA is not required, a device that has been reclassified from Class III to Class II or I, or a device that was found substantially equivalent through the 510(k) process. The FDA’s 510(k) clearance process
usually takes from three to nine months, but may take longer. The FDA may require additional information, including clinical data, to make a determination regarding substantial equivalence. In addition, FDA collects user fees for certain medical device submissions and annual fees for medical device establishments. For fiscal year 2024, the standard user fee for a 510(k) premarket notification application is $24,335.
If the FDA agrees that the device is substantially equivalent to a predicate device currently on the market, it will grant 510(k) clearance to commercially market the device. If the FDA determines that the device is “not substantially equivalent” to a previously cleared device, the device is automatically designated as a Class III device. The device sponsor must then fulfill more rigorous PMA requirements or can request a risk-based classification determination for the device in accordance with the de novo classification process, which is a route to market for novel medical devices that are low to moderate risk and are not substantially equivalent to a predicate device.
After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change or modification in its intended use, will require a new 510(k) clearance or, depending on the modification, a PMA or de novo classification. The FDA requires each manufacturer to determine whether the proposed change requires submission of a 510(k) premarket notification, request for de novo classification or a PMA in the first instance, but the FDA can review any such decision and disagree with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination, the FDA can require the manufacturer to cease marketing and/or request the recall of the modified device until 510(k) marketing clearance, a PMA, or issuance of a de novo classification. Also, in these circumstances, the manufacturer may be subject to significant regulatory fines or penalties.
Over the last several years, the FDA has reformed its 510(k) clearance process. For example, in September 2019, the FDA issued revised final guidance describing an optional “safety and performance based” premarket review pathway for manufacturers of “certain, well-understood device types” to demonstrate substantial equivalence under the 510(k) clearance pathway by showing that such device meets objective safety and performance criteria established by the FDA, thereby obviating the need for manufacturers to compare the safety and performance of their medical devices to specific predicate devices in the clearance process. The FDA has developed and maintains a list of device types appropriate for the “safety and performance based” pathway and continues to develop product-specific guidance documents that identify the performance criteria for each such device type, as well as recommended testing methods where feasible.
PMA Approval Pathway
Class III devices require PMA approval before they can be marketed, although some pre-amendment Class III devices for which the FDA has not yet required a PMA are cleared through the 510(k) process. The PMA process is more demanding than the 510(k) premarket notification process. In a PMA, the manufacturer must demonstrate that the device is safe and effective, and the PMA must be supported by extensive data, including data from preclinical studies and human clinical trials, typically requiring an Investigational Device Exemption (IDE). The PMA must also contain a full description of the device and its components, a full description of the methods, facilities, and controls used for manufacturing, and proposed labeling. Following receipt of a PMA, the FDA determines whether the application is sufficiently complete to permit a substantive review. If the FDA accepts the application for review, it has 180 days under the FDCA to complete its review of a PMA, although in practice, the FDA’s review often takes significantly longer, and can take up to several years. An advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. The FDA may or may not accept the panel’s recommendation. In addition, the FDA will generally conduct a pre-approval inspection of the applicant or its third-party manufacturers’ or suppliers’ manufacturing facility or facilities to ensure compliance with the QSR. PMA applications are also subject to the payment of user fees, which for fiscal year 2025 includes a standard application fee of $540,783.
The FDA will approve the new device for commercial distribution if it determines that the data and information in the PMA constitutes valid scientific evidence and that there is reasonable assurance that the device is safe and effective for its intended use(s). The FDA may approve a PMA with post-approval conditions intended to ensure the safety and effectiveness of the device, including, among other things, restrictions on labeling, promotion, sale and distribution, and collection of long-term follow-up data from patients in the clinical study that supported PMA approval or requirements to conduct additional clinical studies post-approval. The FDA may condition PMA approval on some form of post-market
surveillance when deemed necessary to protect the public health or to provide additional safety and efficacy data for the device in a larger population or for a longer period of use. In such cases, the manufacturer might be required to follow certain patient groups for a number of years and to make periodic reports to the FDA on the clinical status of those patients. Failure to comply with the conditions of approval can result in material adverse enforcement action, including withdrawal of the approval.
Certain changes to an approved device, such as changes in manufacturing facilities, methods, or quality control procedures, or changes in the design performance specifications, which affect the safety or effectiveness of the device, require submission of a PMA supplement. PMA supplements often require submission of the same type of information as a PMA, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA and may not require as extensive clinical data or the convening of an advisory panel. Certain other changes to an approved device require the submission of a new PMA, such as when the design change causes a different intended use, mode of operation, and technical basis of operation, or when the design change is so significant that a new generation of the device will be developed, and the data that were submitted with the original PMA are not applicable for the change in demonstrating a reasonable assurance of safety and effectiveness. None of our products are currently marketed pursuant to a PMA.
De Novo Classification
Medical device types that the FDA has not previously classified as Class I, II, or III are automatically classified into Class III regardless of the level of risk they pose. The Food and Drug Administration Modernization Act of 1997 established a route to market for low to moderate risk medical devices that are automatically placed into Class III due to the absence of a predicate device, called the “Request for Evaluation of Automatic Class III Designation,” or the de novo classification procedure. This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA. Prior to the enactment of the Food and Drug Administration Safety and Innovation Act (FDASIA), in July 2012, a medical device could only be eligible for de novo classification if the manufacturer first submitted a 510(k) premarket notification and received a determination from the FDA that the device was not substantially equivalent. FDASIA streamlined the de novo classification pathway by permitting manufacturers to request de novo classification directly without first submitting a 510(k) premarket notification to the FDA and receiving a not substantially equivalent determination. As part of the de novo classification process, the FDA may also require supporting clinical data.
Humanitarian Device Exemption Pathway
An HDE is a marketing pathway available to devices designated as humanitarian use devices, or HUDs. HUDs are devices receiving a designation from the FDA that the device is designed to treat or diagnose a disease or condition that occurs in fewer than 8,000 people in the U.S. per year. To market a HUD, the device must have received a HUD designation by the FDA and be approved by the FDA pursuant to an HDE application. An HDE approval is based on the applicant’s demonstration that there is no comparable device available and that the probable benefit to health from the proposed HUD outweighs the risk of injury or illness from its use, taking into account alternative treatments that are available for the condition or disease. However, a medical device approved pursuant to an HDE is exempt from the effectiveness requirements that would otherwise apply and to which the device would be subject if approved pursuant to a PMA, and clinical studies demonstrating effectiveness are not required to support approval. An approved HDE must be labeled with a disclaimer stating that the effectiveness of the device has not been established.
In addition, HUDs that receive HDE approval may not be sold for profit except in limited circumstances, such as where the disease or condition the HUD is intended to treat occurs in pediatric patients or subpopulations and the device is labeled for this use. Where the disease or condition occurs in adults and does not occur in the pediatric population (or occurs in the pediatric population in such numbers that development of the device for such population is impossible, highly impracticable, or unsafe), the device may also be sold for profit. However, in either case, to sell the device for profit, HDE holders must notify the FDA of the intent to sell for profit and are limited in the number of devices that may be sold for profit on an annual basis.
Prior to HUD use following HDE approval, the HDE holder is required to ensure that use of the use of the HUD has been approved by the facility’s IRB. Post-approval clinical studies may also be required. Our total talus spacer was authorized for marketing pursuant to an approved HDE with the requirement for a post-approval study.
Clinical Trials
Clinical trials are almost always required to support a PMA, HDE application, or de novo classification request and are sometimes required to support a 510(k) submission. All clinical investigations of devices to determine safety and effectiveness must be conducted in accordance with the FDA’s investigational device exemption (IDE) regulations which govern investigational device labeling, prohibit promotion of the investigational device, and specify an array of record keeping, reporting and monitoring responsibilities of study sponsors and study investigators. If the device presents a “significant risk,” to human health, as defined by the FDA, the FDA requires the device sponsor to submit an IDE application to the FDA, which must become effective before commencing human clinical trials. If the device under evaluation does not present a significant risk to human health, then the device sponsor is not required to submit an IDE application to the FDA before initiating human clinical trials, but must still comply with abbreviated IDE requirements when conducting such trials. A significant risk device is one that presents a potential for serious risk to the health, safety or welfare of a patient and either is implanted, used in supporting or sustaining human life, substantially important in diagnosing, curing, mitigating or treating disease or otherwise preventing impairment of human health, or otherwise presents a potential for serious risk to a subject. An IDE application must be supported by appropriate data, such as animal and laboratory test results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The IDE will automatically become effective 30 days after receipt by the FDA unless the FDA notifies the company that the investigation may not begin. If the FDA determines that there are deficiencies or other concerns with an IDE for which it requires modification, the FDA may permit a clinical trial to proceed under a conditional approval.
Regardless of the degree of risk presented by the medical device, clinical studies must be approved by, and conducted under the oversight of, an Institutional Review Board (IRB) for each clinical site. The IRB is responsible for the initial and continuing review of the IDE, and may pose additional requirements for the conduct of the study. If an IDE application is approved by the FDA and one or more IRBs, human clinical trials may begin at a specific number of investigational sites with a specific number of patients, as approved by the FDA. If the device presents a non-significant risk to the patient, a sponsor may begin the clinical trial after obtaining approval for the trial by one or more IRBs without separate approval from the FDA, but must still follow abbreviated IDE requirements, such as monitoring the investigation, ensuring that the investigators obtain informed consent, and labeling and record-keeping requirements. Acceptance of an IDE application for review does not guarantee that the FDA will allow the IDE to become effective and, if it does become effective, the FDA may or may not determine that the data derived from the trials support the safety and effectiveness of the device or warrant the continuation of clinical trials. An IDE supplement must be submitted to, and approved by, the FDA before a sponsor or investigator may make a change to the investigational plan that may affect its scientific soundness, study plan or the rights, safety or welfare of human subjects.
During a study, the sponsor is required to comply with the applicable FDA requirements, including, for example, trial monitoring, selecting clinical investigators and providing them with the investigational plan, ensuring IRB review, adverse event reporting, record keeping and prohibitions on the promotion of investigational devices or on making safety or effectiveness claims for them. The clinical investigators in the clinical study are also subject to FDA’s regulations and must obtain patient informed consent, rigorously follow the investigational plan and study protocol, control the disposition of the investigational device, and comply with all reporting and record keeping requirements. Additionally, after a trial begins, we, the FDA or the IRB could suspend or terminate a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits.
U.S. Regulation of HCT/Ps
Certain of our products are regulated as HCT/Ps. Section 361 of the PHSA authorizes the FDA to issue regulations to prevent the introduction, transmission or spread of communicable disease. HCT/Ps regulated as “Section 361” HCT/Ps are subject to requirements relating to registering facilities and listing products with the FDA, screening and testing for tissue donor eligibility, and Good Tissue Practices (cGTPs) when processing, storing, labeling, and distributing HCT/Ps, including required labeling information, stringent record keeping, and adverse event reporting. Specifically, cGTPs are
requirements that govern the methods used in, and the facilities and controls used for, the manufacture of HCT/Ps in a way that prevents the introduction, transmission, or spread of communicable diseases. Section 361 HCT/Ps do not require approval of a marketing application from the FDA before marketing. However, to be regulated as a Section 361 HCT/P, the product must, among other things, be “minimally manipulated,” which for structural tissue products means that the manufacturing processes do not alter the original relevant characteristics of the tissue relating to the tissue’s utility for reconstruction, repair, or replacement and for cells or nonstructural tissue products, means that the manufacturing processes do not alter the relevant biological characteristics of cells or tissues. A Section 361 HCT/P must also be intended for “homologous use,” which refers to use in the repair, reconstruction, replacement, or supplementation of a recipient’s cells or tissues with an HCT/P that performs the same basic function or functions in the recipient as in the donor. HCT/Ps that do not meet the criteria of Section 361 are regulated under Section 351 of the PHSA. Unlike Section 361 HCT/Ps, HCT/Ps regulated as “Section 351” HCT/Ps are subject to the requirement for premarket review and marketing authorization by the FDA.
In November 2017, the FDA released a guidance document entitled “Regulatory Considerations for Human Cells, Tissues, and Cellular and Tissue-Based Products: Minimal Manipulation and Homologous Use-Guidance for Industry and Food and Drug Administration Staff.” The guidance outlined the FDA’s position that all products being purportedly marketed as Section 361 HCT/Ps are more than minimally manipulated and would therefore require a marketing approval to be lawfully marketed in the United States. The guidance also indicated that the FDA would exercise enforcement discretion, using a risk-based approach, with respect to the IND application and pre-market approval requirements for certain HCT/Ps for a period of 36 months from the issuance date of the guidance to allow manufacturers to pursue INDs and/or seek marketing authorizations. Under this approach, the FDA indicated that high-risk products and uses could be subject to immediate enforcement action. In July 2020, the FDA extended its period of enforcement discretion to May 31, 2021. As of June 1, 2021, the FDA resumed enforcement of IND and premarket approval requirements with respect to these products.
Pervasive and Continuing Post-Market Regulation
After a product is cleared or approved for marketing (or where the product does not require affirmative marketing authorization, is marketed), numerous and pervasive regulatory requirements continue to apply. These include:
● establishment registration and device listing with the FDA;
● Quality System Regulation (QSR) requirements, which require manufacturers, including third-party manufacturers and suppliers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the design and manufacturing process;
● labeling regulations and FDA prohibitions against the promotion of investigational products, or the promotion of “off-label” uses of cleared or approved products;
● requirements related to promotional activities;
● clearance or approval of product modifications to 510(k)-cleared devices that could significantly affect safety or effectiveness or that would constitute a major change in intended use of one of our cleared devices, or approval of certain modifications to PMA devices or devices authorized for marketing pursuant to the HDE pathway;
● medical device reporting regulations, which require that a manufacturer report to the FDA if a device it markets may have caused or contributed to a death or serious injury, or has malfunctioned and the device or a similar device that it markets would be likely to cause or contribute to a death or serious injury, if the malfunction were to recur;
● correction, removal and recall reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA that may present a risk to health;
● the FDA’s recall authority, whereby the agency can order device manufacturers to recall from the market a product that is in violation of governing laws and regulations; and
● post-market surveillance activities and regulations, which apply when deemed by the FDA to be necessary to protect the public health or to provide additional safety and effectiveness data for the device.
Manufacturing processes for medical devices are required to comply with the applicable portions of the QSR, which cover the methods and the facilities and controls for the design, manufacture, testing, production, processes, controls, quality assurance, labeling, packaging, distribution, installation and servicing of finished devices intended for human use. The QSR also requires, among other things, maintenance of a device master record, device history file, design history file and complaint files. As a manufacturer, we are subject to periodic scheduled or unscheduled inspections by the FDA. Failure to maintain compliance with the QSR requirements could result in the shut-down of, or restrictions on, manufacturing operations and the recall or seizure of marketed products. The discovery of previously unknown problems with any marketed products, including unanticipated adverse events or adverse events of increasing severity or frequency, whether resulting from the use of the device within the scope of its clearance or off-label by a physician in the practice of medicine, could result in restrictions on the device, including the removal of the product from the market or voluntary or mandatory device recalls.
The FDA has broad regulatory compliance and enforcement powers. If the FDA determines that a manufacturer has failed to comply with applicable regulatory requirements, it can take a variety of compliance or enforcement actions, which may result in any of the following sanctions:
● warning letters, untitled letters, fines, injunctions, consent decrees and civil penalties;
● recalls, withdrawals, or administrative detention or seizure of our products;
● operating restrictions or partial suspension or total shutdown of production;
● refusing or delaying requests for 510(k) marketing clearance or PMA of new products or modified products;
● withdrawing 510(k) clearances, HDEs, or PMA that have already been granted;
● refusal to grant export approvals for our products;
● civil monetary penalties; or
● criminal prosecution.
Regulation of Medical Devices in the European Union
The European Union (EU) has adopted specific directives and regulations regulating the design, manufacture, clinical investigation, conformity assessment, labeling and adverse event reporting for medical devices.
Until May 25, 2021, medical devices were regulated by the Council Directive 93/42/EEC (EU Medical Devices Directive) which has been repealed and replaced by Regulation (EU) No 2017/745 (EU Medical Devices Regulation). In accordance with the EU Medical Devices Regulation’s recently extended transitional provisions, both (i) devices lawfully placed on the market pursuant to the EU Medical Devices Directive prior to May 26, 2021 and (ii) legacy devices lawfully placed on the EU market after May 26, 2021 in accordance with the EU Medical Devices Regulation transitional provisions may generally continue to be made available on the market or put into service, provided that the requirements of the transitional provisions are fulfilled. In particular, no substantial change must be made to the device in question. However, even in this case, manufacturers must comply with a number of new or reinforced requirements set forth in the EU Medical Devices Regulation with regard to registration of economic operators and of devices, post market surveillance, market surveillance and vigilance requirements. Our current certificates have been granted and renewed under the EU Medical
Devices Directive whose regime is described below. Pursuing marketing of medical devices in the EU will notably require that our devices be certified under the new regime set forth in the EU Medical Devices Regulation.
EU Medical Devices Directive
Under the EU Medical Devices Directive, all medical devices placed on the market in the EU must meet the relevant essential requirements laid down in Annex I to the EU Medical Devices Directive, including the requirement that a medical device must be designed and manufactured in such a way that it will not compromise the clinical condition or safety of patients, or the safety and health of users and others. In addition, the device must achieve the performance intended by the manufacturer and be designed, manufactured, and packaged in a suitable manner. The European Commission has adopted various standards applicable to medical devices. These include standards governing common requirements, such as sterilization and safety of medical electrical equipment and product standards for certain types of medical devices. There are also harmonized standards relating to design and manufacture. While not mandatory, compliance with these standards is viewed as the easiest way to satisfy the essential requirements as a practical matter as it creates a rebuttable presumption that the device satisfies that essential requirement.
To demonstrate compliance with the essential requirements laid down in Annex I to the EU Medical Devices Directive, medical device manufacturers must undergo a conformity assessment procedure, which varies according to the type of medical device and its risk classification. As a general rule, demonstration of conformity of medical devices and their manufacturers with the essential requirements must be based, among other things, on the evaluation of clinical data supporting the safety and performance of the products during normal conditions of use. Specifically, a manufacturer must demonstrate that the device achieves its intended performance during normal conditions of use, that the known and foreseeable risks, and any adverse events, are minimized and acceptable when weighed against the benefits of its intended performance, and that any claims made about the performance and safety of the device are supported by suitable evidence. Except for low-risk medical devices (Class I non-sterile, non-measuring devices), where the manufacturer can self-assess the conformity of its products with the essential requirements (except for any parts which relate to sterility or metrology), a conformity assessment procedure requires the intervention of a notified body. Notified bodies are independent organizations designated by EU member states to assess the conformity of devices before being placed on the market. A notified body would typically audit and examine a product’s technical dossiers and the manufacturer’s quality system (notified body must presume that quality systems which implement the relevant harmonized standards - which is ISO 13485:2016 for Medical Devices Quality Management Systems - conform to these requirements). If satisfied that the relevant product conforms to the relevant essential requirements, the notified body issues a certificate of conformity, which the manufacturer uses as a basis for its own declaration of conformity. The manufacturer may then apply the CE Mark to the device, which allows the device to be placed on the market throughout the EU.
Throughout the term of the certificate of conformity, the manufacturer will be subject to periodic surveillance audits to verify continued compliance with the applicable requirements. In particular, there will be a new audit by the notified body before it will renew the relevant certificate(s).
EU Medical Devices Regulation
The regulatory landscape concerning medical devices in the EU recently evolved. On April 5, 2017, the EU Medical Devices Regulation was adopted to establish a modernized and more robust EU legislative framework, with the aim of ensuring better protection of public health and patient safety. The EU Medical Devices Regulation, among other things, is intended to establish a uniform, transparent, predictable and sustainable regulatory framework across the EU for medical devices and ensure a high level of safety and health while supporting innovation. Unlike the EU Medical Devices Directive, the EU Medical Devices Regulation is directly applicable in EU member states without the need for member states to implement into national law. This aims at increasing harmonization across the EU.
The EU Medical Devices Regulation became effective on May 26, 2021, subject to transitional provisions.
The EU Medical Devices Regulation requires that before placing a device, other than a custom-made device, on the market, manufacturers (as well as other economic operators such as authorized representatives and importers) must register by submitting identification information to Eudamed, unless they have already registered. The information to be submitted
by manufacturers (and authorized representatives) also includes the name, address and contact details of the person or persons responsible for regulatory compliance. The new regulation also requires that before placing a device, other than a custom-made device, on the market, manufacturers must assign a unique identifier to the device and provide it along with other core data to the unique device identifier (UDI), database. These new requirements aim at ensuring better identification and traceability of the devices. Each device - and as applicable, each package - will have a UDI composed of two parts: a device identifier (UDI-DI) specific to a device, and a production identifier (UDI-PI) to identify the unit producing the device. Manufacturers are also notably responsible for entering the necessary data on Eudamed, which includes the UDI database, and for keeping it up to date. The obligations for registration in Eudamed will become applicable at a later date (as Eudamed is not yet fully functional). Until Eudamed is fully functional, the corresponding provisions of the EU Medical Devices Directive continue to apply for the purpose of meeting the obligations laid down in the provisions regarding exchange of information, including, and in particular, information regarding registration of devices and economic operators.
All manufacturers placing medical devices into the market in the EU must comply with the EU medical device vigilance system which has been reinforced by the EU Medical Devices Regulation. Under this system, serious incidents and Field Safety Corrective Actions (FSCAs) must be reported to the relevant authorities of the EU member states. These reports will have to be submitted through Eudamed - once functional - and aim to ensure that, in addition to reporting to the relevant authorities of the EU member states, other actors such as the economic operators in the supply chain will also be informed. Until Eudamed is fully functional, the corresponding provisions of the EU Medical Devices Directive continue to apply. Manufacturers are required to take FSCAs, which are defined as any corrective action for technical or medical reasons to prevent or reduce a risk of a serious incident associated with the use of a medical device that is made available on the market. A serious incident is any malfunction or deterioration in the characteristics or performance of a device on the market (e.g. inadequacy in the information supplied by the manufacturer, undesirable side-effect), which, directly or indirectly, might lead to either the death or serious deterioration of the health of a patient, user, or other persons or to a serious public health threat. An FSCA may include the recall, modification, exchange, destruction or retrofitting of the device. FSCAs must be communicated by the manufacturer or its legal representative to its customers and/or to the end users of the device through Field Safety Notices. For similar serious incidents that occur with the same device or device type and for which the root cause has been identified or a FSCA implemented or where the incidents are common and well documented, manufacturers may provide periodic summary reports instead of individual serious incident reports.
The advertising and promotion of medical devices is subject to some general principles set forth in EU legislation. According to the EU Medical Devices Regulation, only devices that are CE marked may be marketed and advertised in the EU in accordance with their intended purpose. Directive 2006/114/EC concerning misleading and comparative advertising and Directive 2005/29/EC on unfair commercial practices, while not specific to the advertising of medical devices, also apply to the advertising thereof and contain general rules, for example, requiring that advertisements are evidenced, balanced and not misleading. Specific requirements are defined at a national level. EU member states’ laws related to the advertising and promotion of medical devices, which vary between jurisdictions, may limit or restrict the advertising and promotion of products to the general public and may impose limitations on promotional activities with healthcare professionals.
Additional requirements applicable to products containing human cells and tissues
The EU does not have an overarching law or regulation that governs the legal framework surrounding products containing human tissues or cells in a way that would be analogous to HCT/Ps in the U.S. However, specific requirements apply with respect to human cells and tissues, in particular, when used in a product such as a medical device. Under EU law, the donation, procurement, testing, processing, preservation, storage and distribution of human tissues and cells intended for human application, and of manufactured products which are derived from such cells and tissues, are currently governed by Directive 2004/23/EC (the EU Tissues and Cells Directive).
To the extent the manufactured product is covered by another EU regulation or directive, only the requirements relating to donation, procurement and testing under the EU Tissues and Cells Directive apply in addition to the requirements set out under the relevant EU regulation or directive applicable to the product in question.
With respect to medical devices, as a general principle, the EU Medical Devices Regulation does not apply to tissues or cells, or their derivatives (i.e., non-cellular substances extracted from such tissue or cells through a manufacturing process, which do not contain any cells or tissue at the final substance stage), or products containing or consisting of such human materials.
However, the EU Medical Devices Regulation does apply to devices that are manufactured using derivatives of human tissues or cells, to the extent such human materials are non-viable or rendered so. In such a case, applicable requirements depend on the action of the device part and that of the human materials it contains. If the device incorporates, as an integral part, non-viable human cells and tissues or their derivatives and their action is ancillary to that of the device, (i) relevant provisions of the EU Tissues and Cells Directive on donation, procurement and testing apply with respect to the human tissues and cells incorporated in the device, and (ii) applicable requirements of the EU Medical Devices Regulation apply with respect to the assessment and certification of the device. If, however, the action of the human tissues or cells (or derivatives thereof) is not ancillary to that of the device, the device is governed by the EU Tissues and Cells Directive only, and the general safety and performance requirements set out under the EU Medical Devices Regulation only apply to the extent the safety and performance of the device part of the product are concerned.
The EU Tissues and Cells Directive provides for general quality and safety requirements with respect to activities performed in relation to human cells and tissues. Since, for such activities, EU directives are not being of direct application, these requirements are implemented under national law, in each EU member state, and as such applicable requirements may vary from one EU member state to another, as each is free to implement measures which are more stringent than those set out under the EU Tissues and Cells Directive. Among other things, the EU Tissues and Cells Directive requires the following:
● tissue and cell procurement and testing must be conducted by persons appropriately trained and experienced;
● tissue and cell establishments must (i) be accredited, designated, authorized or licensed by the national competent authority, (ii) perform appropriate controls to ensure compliance with applicable requirements, (iii) maintain records of their activities, and (iv) implement a quality system based on good practices principles set out by the European Commission - similar to cGTPs in the U.S.;
● a traceability system must be implemented such that the tissues and cells can be traced from the donor to the recipient, which includes appropriate labeling of said tissues and cells;
● import and export of human tissues and cells must be undertaken by establishments which are duly accredited, designated, authorized or licensed by the national competent authority, and these tissues and cells must comply with the requirements set out under the EU Tissues and Cells Directive; and
● a system for the notification of serious adverse events and reactions must be implemented.
On May 27, 2024, the proposal for a regulation on substances of human origin (SoHO) (the SoHO Regulation) was adopted. Unlike directives, in all EU member states, regulations are directly applicable without the need for adoption of EU member state laws implementing them, in all EU member states. The SoHO Regulation aims to repeal, replace, and aggregate the existing regulatory framework applicable to human blood, tissue and cells, consisting of Directive 2002/98/EC on blood and blood components and the EU Tissue and Cells Directive. The SoHO Regulation will apply as from August 7, 2027, with an extra year for certain provisions. The extent to which the requirements of the SoHO Regulation will apply to medical devices vary. Where SoHO are used to manufacture medical devices, the provisions applicable to the activities of SoHO donor recruitment, donor history review and eligibility assessment, testing of donors for eligibility or matching purposes, and collection of SoHO from donors or patients will generally apply. However, where non-viable SoHO or their derivatives incorporate, as an integral part, a medical device, and where the action of the non-viable SoHO or their derivatives is principal and not ancillary to that of the device, the non-viable SoHO or their derivatives and the final combination will be governed by the SoHO Regulation (in line with applicable provisions of the EU Medical Devices Regulation). The SoHO Regulation also seeks to improve consultation and cooperation between competent authorities regulating the different frameworks to ensure coherent oversight.
In the EU, regulatory authorities have the power to carry out announced and, if necessary, unannounced inspections of companies, as well as suppliers and/or sub-contractors and, where necessary, the facilities of professional users. Failure to comply with regulatory requirements (as applicable) could require time and resources to respond to the regulatory authorities’ observations and to implement corrective and preventive actions, as appropriate. Regulatory authorities have broad compliance and enforcement powers and if such issues cannot be resolved to their satisfaction can take a variety of actions, including untitled or warning letters, fines, consent decrees, injunctions, or civil or criminal penalties.
The aforementioned EU rules are generally applicable in the European Economic Area (EEA) which consists of the 27 EU member states plus Norway, Liechtenstein and Iceland.
Brexit
Since the end of the Brexit transition period on January 1, 2021, Great Britain (England, Scotland and Wales) has not been directly subject to EU laws, however under the terms of the Ireland/Northern Ireland Protocol, EU laws generally apply to Northern Ireland. The EU laws that have been transposed into United Kingdom (UK) law through secondary legislation remain applicable in Great Britain; however, new legislation such as the EU Medical Devices Regulation is not applicable in Great Britain.
On June 26, 2022, the MHRA published its response to a 10-week consultation on the post-Brexit regulatory framework for medical devices and diagnostics. The MHRA seeks to amend the UK Medical Devices Regulations 2002 (the UK MDR) (which continues to be based on the EU legislation which preceded the EU Medical Devices Regulation, primarily the EU Medical Devices Directive and the EU In Vitro Diagnostic Medical Devices Directive, i.e., Directive 98/79/EC), in particular to create a new access pathway to support innovation, create an innovative framework for regulating software and artificial intelligence as medical devices, reform in vitro diagnostic medical device regulation and foster sustainability through the reuse and remanufacture of medical devices. Regulations implementing the new regime were originally scheduled to come into force in July 2023, but the Government has recently confirmed that this date has been postponed until July 2024. Devices which have valid certification issued by EU notified bodies under the EU Medical Devices Regulation or Medical Devices Directive are subject to transitional arrangements. The Government has introduced legislation which provides that CE marked medical devices may be placed on the Great Britain market to the following timelines:
● general medical devices compliant with the EU Medical Devices Directive or EU active implantable medical devices directive (EU AIMDD) with a valid declaration and CE marking can be placed on the Great Britain market up until the sooner of expiry of certificate or June 30, 2028; and
● general medical devices, including custom-made devices, compliant with the EU Medical Devices Regulation and in vitro diagnostic medical devices compliant with the EU in vitro diagnostic medical devices regulation (EU IVDR) can be placed on the Great Britain market up until the June 30, 2030.
Following these transitional periods, it is expected that all medical devices will require a UK Conformity Assessment (UKCA) mark. Manufacturers may choose to use the UKCA mark on a voluntary basis prior to the regulations coming into force. However, from July 2025, products which do not have existing and valid CE certification under the EU Medical Devices Directive or EU Medical Devices Regulation and are therefore not subject to the transitional arrangements will be required to carry the UKCA mark if they are to be sold into the market in Great Britain. UKCA marking will not be recognized in the EU.
Under the terms of the Northern Ireland Protocol, Northern Ireland follows EU rules on medical devices and devices marketed in Northern Ireland require assessment according to the EU regulatory regime. Such assessment may be conducted by an EU notified body, in which case a CE mark is required before placing the device on the market in the EU or Northern Ireland. Alternatively, if a UK notified body conducts such assessment, a ‘UKNI’ mark applied, and the device may only be placed on the market in Northern Ireland and not the EU.
UK requirements applicable to products containing human cells and tissues
The UK MDR does not generally apply to tissues or cells of human origin or products incorporating or derived from tissues or cells of human origin. Products will be required to comply with the UK MDR if they are manufactured utilizing animal tissue which is rendered non-viable or non-viable products derived from animal tissue. The UK MDR states that with respect to devices manufactured utilizing tissues of animal origin, the relevant approved body must follow the procedures referred to in Commission Regulation 722/2012, which forms part of EU retained law. In particular, the manufacturer of the medical device must be able to verify that the device’s benefits outweigh the risks, taking into account:
● the risk analysis and risk management process;
● the justification for the use of animal tissues or derivatives, taking into consideration lower risk tissues or synthetic alternatives;
● the results of elimination and inactivation studies or results of the analysis of relevant literature;
● the manufacturer’s control of the sources of raw materials, finished products, production process, testing, and subcontractors; and
● the need to audit matters related to the sourcing and processing of animal tissues and derivatives, processes to eliminate or inactivate pathogens, including those activities carried out by suppliers.
The Human Tissue Act 2004 regulates the removal, storage and use of human tissue in England, Wales and Northern Ireland, and is based on the principle that consent is required for a set of “scheduled purposes,” which include transplantation, anatomical examination and research in connection with disorders or functioning of the human body. “Human tissue” is defined as material that has come from a human body and consists of, or includes, human cells. Separate legislation, the Human Tissue (Scotland) Act 2006, applies in Scotland.
The Human Tissue (Quality and Safety for Human Application) Regulations 2007 (as amended) implements the requirements of the EU Tissues and Cells Directive and sets out the activities of storing and importing human tissues and cells for human application can only be carried out by an establishment holding an appropriate license, issued from the Human Tissue Authority (the HTA). The following activities may be carried out either under an appropriate HTA license: procurement, testing, processing, export, and distribution. Alternatively, the listed activities can be carried out under the authority of a third-party agreement in the following circumstances:
● when the establishment carrying out the activity is acting on behalf of an appropriately licensed establishment; and
● when the third-party agreement meets the standards set out in the Guide to Quality and Safety Assurance of Human Tissues and Cells for Patient Treatment, as implemented by HTA Directions 001/2021.
The Human Tissue (Quality and Safety for Human Application) Regulations 2007 (as amended) sets out further conditions on licensed establishments, such as requirements to have a “designated individual” who plays an important role in ensuring compliance and a requirement to report serious adverse events (SAEs) or serious adverse reactions (SARs) to the HTA within 24 hours of discovery.
Establishments which export tissues and cells must demonstrate that exported tissue or cells meet the quality and safety standards as set out in the Human Tissue (Quality and Safety for Human Application) Regulations, 2007 (as amended). Further, establishments which import tissues and cells must demonstrate that imported tissue or cells meet “equivalent” quality and safety standards to those set out in the Human Tissue (Quality and Safety for Human Application) Regulations, 2007 (as amended).
Since July 1, 2021, establishments based in Great Britain which either import or export human tissues or cells for human application between Great Britain and a country in the EEA, have been required to obtain a license from the HTA. Licensing requirements to send tissues and cells from Great Britain to recipients in Northern Ireland have not changed post-Brexit.
Data Privacy & Security Laws
Numerous state, federal and foreign laws govern the collection, dissemination, use, access to, confidentiality and security of personal information, including health-related information. In the United States, numerous federal and state laws and regulations, including data breach notification laws, health information privacy and security laws, and consumer protection laws and regulations (e.g., Section 5 of the FTC Act), that govern the collection, use, disclosure, and protection of health-related and other personal information could apply to our operations or the operations of our partners. In addition, foreign laws govern the privacy and security of personal information, including health-related information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts. Failure to comply with these laws, where applicable, can result in the imposition of significant civil and/or criminal penalties and private litigation. Privacy and security laws, regulations, and other obligations are constantly evolving, may conflict with each other to complicate compliance efforts, and can result in investigations, proceedings, or actions that lead to significant civil and/or criminal penalties and restrictions on data processing.
Coverage and Reimbursement
In the United States, our currently approved products are commonly treated as general supplies utilized in orthopedic surgery and if covered by third-party payors, are paid for as part of the surgical procedure. Outside of the United States, there are many reimbursement programs through private payors as well as government programs. In some countries, government reimbursement is the predominant program available to patients and hospitals. Our commercial success depends in part on the extent to which governmental authorities, private health insurers and other third-party payors provide coverage for and establish adequate reimbursement levels for the procedures during which our products are used. Failure by physicians, hospitals, ambulatory surgery centers and other users of our products to obtain sufficient coverage and reimbursement from third-party payors for procedures in which our products are used, or adverse changes in government and private third-party payors’ coverage and reimbursement policies could materially adversely affect our business, financial condition, results of operations and prospects.
Based on our experience to date, third-party payors generally reimburse for the surgical procedures in which our products are used only if the patient meets the established medical necessity criteria for surgery. Some payors are moving toward a managed care system and control their health care costs by limiting authorizations for surgical procedures, including elective procedures using our devices. Although no uniform policy of coverage and reimbursement among payors in the United States exists and coverage and reimbursement for procedures can differ significantly from payor to payor, reimbursement decisions by particular third-party payors may depend upon a number of factors, including the payor’s determination that use of a product is:
● a covered benefit under its health plan;
● appropriate and medically necessary for the specific indication;
● cost effective; and
● neither experimental nor investigational.
Third-party payors are increasingly auditing and challenging the prices charged for medical products and services with concern for upcoding, miscoding, using inappropriate modifiers, or billing for inappropriate care settings. Some third-party payors must approve coverage for new or innovative devices or procedures before they will reimburse health care providers who use the products or therapies. Even though a new product may have been cleared for commercial distribution
by the FDA or certified in foreign jurisdictions, we may find limited demand for the product unless and until reimbursement approval has been obtained from governmental and private third-party payors.
A key component in ensuring whether the appropriate payment amount is received for physician and other services, including those procedures using our products, is the existence of a Current Procedural Terminology (CPT) code to describe the procedure in which the product is used. To receive payment, health care practitioners must submit claims to insurers using these codes for payment for medical services. CPT codes are assigned, maintained and annually updated by the American Medical Association and its CPT Editorial Board. If the CPT codes that apply to the procedures performed using our products are changed or deleted, reimbursement for performances of these procedures may be adversely affected.
In the United States, some insured individuals enroll in managed care programs, which monitor and often require pre-approval of the services that a member will receive. Some managed care programs pay their providers on a per capita (patient) basis, which puts the providers at financial risk for the services provided to their patients by paying these providers a predetermined payment per member per month and, consequently, may limit the willingness of these providers to use our products.
We believe the overall escalating cost of medical products and services being paid for by the government and private health insurance has led to, and will continue to lead to, increased pressures on the health care and medical device industry to reduce the costs of products and services. All third-party reimbursement programs are developing increasingly sophisticated methods of controlling health care costs through prospective reimbursement and capitation programs, group purchasing, redesign of benefits, requiring second opinions before major surgery, careful review of bills, encouragement of healthier lifestyles and other preventative services and exploration of more cost-effective methods of delivering health care.
In addition to uncertainties surrounding coverage policies, there are periodic changes to reimbursement levels. Third-party payors regularly update reimbursement amounts and also from time to time revise the methodologies used to determine reimbursement amounts. This includes routine updates to payments to physicians, hospitals and ambulatory surgery centers for procedures during which our products are used. These updates could directly impact the demand for our products.
Health Care Reform
Changes in healthcare policy could increase our costs, decrease our revenue and impact sales of and reimbursement for our current and future products. The United States and some foreign jurisdictions are considering or have enacted a number of legislative and regulatory proposals to change the health care system in ways that could affect our ability to sell our products profitably. Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting changes in health care systems with the stated goals of containing health care costs, improving quality or expanding access. Current and future legislative proposals to further reform health care or reduce health care costs may limit coverage of or lower reimbursement for the procedures associated with the use of our products. The cost containment measures that payors and providers are instituting and the effect of any health care reform initiative implemented in the future could impact our revenue from the sale of our products.
In the United States, the implementation of the Affordable Care Act (ACA) for example, has changed health care financing and delivery by both governmental and private insurers substantially, and affected medical device manufacturers significantly. The ACA, among other things, provided incentives to programs that increase the federal government’s comparative effectiveness research, and implemented payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain health care services through bundled payment models. Additionally, the ACA expanded eligibility criteria for Medicaid programs and created a new Patient-Centered Outcomes Research Institute to oversee, identify priorities, and conduct comparative clinical effectiveness research, along with funding for such research.
Since its enactment, there have been judicial and Congressional challenges to certain aspects of the ACA. On June 17, 2021, the U.S. Supreme Court dismissed the most recent judicial challenge to the ACA without specifically ruling on the constitutionality of the ACA. Prior to the Supreme Court’s decision, President Biden issued an executive order to initiate
a special enrollment period from February 15, 2021, through August 15, 2021, for purposes of obtaining health insurance coverage through the ACA marketplace. The executive order also instructed certain governmental agencies to review and reconsider their existing policies and rules that limit access to health care, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements, and policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the ACA.
In addition, other legislative changes have been proposed and adopted since the ACA was enacted. For example, the Budget Control Act of 2011, among other things, reduced Medicare payments to providers, effective on April 1, 2013, and, due to subsequent legislative amendments to the statute, will remain in effect through 2032, with the exception of a temporary suspension from May 1, 2020, through March 31, 2022, unless additional Congressional action is taken. Additionally, the American Taxpayer Relief Act of 2012, among other things, reduced Medicare payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. The Medicare Access and CHIP Reauthorization Act of 2015 repealed the formula by which Medicare made annual payment adjustments to physicians and replaced the former formula with fixed annual updates and a new system of incentive payments that are based on various performance measures and physicians’ participation in alternative payment models, such as accountable care organizations.
We expect additional state and federal health care reform measures to be adopted in the future, some of which could limit the amounts that federal and state governments will pay for health care products and services, which could result in reduced demand for our products or additional pricing pressure. Similar reform measures may be adopted in foreign jurisdictions. For instance, in December 2021, Regulation No 2021/2282 on Health Technology Assessment (HTA) amending Directive 2011/24/EU, was adopted in the EU. While the Regulation entered into force in January 2022, it only applies since January 2025, with preparatory and implementation-related steps to take place in the interim. The Regulation has a phased implementation depending on the concerned products. The Regulation intends to boost cooperation among EU member states in assessing health technologies, including certain high-risk medical devices, and provide the basis for cooperation at the EU level for joint clinical assessments in these areas. It will permit EU member states to use common HTA tools, methodologies, and procedures across the EU, working together in four main areas, including joint clinical assessment of the innovative health technologies with the highest potential impact for patients, joint scientific consultations whereby developers can seek advice from HTA authorities, identification of emerging health technologies to identify promising technologies early, and continuing voluntary cooperation in other areas. Individual EU member states will continue to be responsible for assessing non-clinical (e.g., economic, social, ethical) aspects of health technology, and making decisions on pricing and reimbursement.
Federal, State and Foreign Fraud and Abuse and Physician Payment Transparency Laws
In addition to FDA and foreign restrictions on marketing and promotion of drugs and devices, other federal, state, and foreign laws restrict our business practices. These laws include, without limitation, foreign, federal, and state anti-kickback and false claims laws, as well as transparency laws regarding payments or other items of value provided to health care providers.
The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind to induce or in return for purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of any good, facility, item or service reimbursable, in whole or in part, under Medicare, Medicaid or other federal health care programs. Although there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors are drawn narrowly. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under the federal Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all its facts and circumstances. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal health care covered business, the federal Anti-Kickback Statute has been violated. In addition, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. The majority of states also have anti-kickback laws which establish similar prohibitions, and in some cases, may apply more broadly to items or services covered by any third-party payor, including commercial insurers and self-pay patients.
The federal civil False Claims Act prohibits, among other things, any person or entity from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment or approval to the federal government or knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent claim to the federal government. As a result of a modification made by the Fraud Enforcement and Recovery Act of 2009, a claim includes “any request or demand” for money or property presented to the U.S. government. In addition, a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. Private parties may initiate “qui tam” whistleblower lawsuits against any person or entity under the federal civil False Claims Act in the name of the government and share in the proceeds of the lawsuit.
In addition, the civil monetary penalties statute, subject to certain exceptions, prohibits, among other things, the offer or transfer of remuneration, including waivers of copayments and deductible amounts (or any part thereof), to a Medicare or state healthcare program beneficiary if the person knows or should know it is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of services reimbursable by Medicare or a state healthcare program.
HIPAA also created additional federal criminal statutes that prohibit among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any health care benefit program, including private third-party payors, knowingly and willfully embezzling or stealing from a health care benefit program, willfully obstructing a criminal investigation of a health care offense, and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. Also, many states have similar fraud and abuse statutes or regulations that apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor.
Additionally, there has been a recent trend of increased foreign, federal, and state regulation of payments and transfers of value provided to health care professionals or entities. The federal Physician Payments Sunshine Act imposes annual reporting requirements on certain drug, biologics, medical supplies and device manufacturers for which payment is available under Medicare, Medicaid or CHIP for payments and other transfers of value provided by them, directly or indirectly, to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors), certain non-physician practitioners (physician assistants, nurse practitioners, clinical nurse specialists, certified nurse anesthetists, anesthesiologist assistants and certified nurse midwives) and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. In the EU, many EU member states have adopted specific anti-gift statutes that further limit commercial practices for medical devices, in particular vis-à-vis healthcare professionals and organizations. Additionally, there has been a recent trend of increased regulation of payments and transfers of value provided to healthcare professionals or entities and many EU member states have adopted national “Sunshine Acts” which impose reporting and transparency requirements (often on an annual basis), similar to the requirements in the United States, on medical device manufacturers. Certain foreign countries and U.S. states also mandate implementation of commercial compliance programs, impose restrictions on device manufacturer marketing practices and require tracking and reporting of gifts, compensation and other remuneration to health care professionals and entities.
Penalties for violation of any of the health care laws described above or any other governmental regulations that apply to us include, without limitation, civil, criminal and/or administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from participation in government programs, such as Medicare and Medicaid, injunctions, refusal to allow us to enter into government contracts, contractual damages, reputational harm, administrative burdens, diminished profits and future earnings, and the curtailment or restructuring of an entity’s operations.
Employees and Human Capital
We take pride in our employees and the products we provide to support our mission. As of December 31, 2024, we had 525 employees worldwide. Approximately 390 employees were located in the U.S., and 135 employees were located outside of the U.S. A significant number of our management and professional employees have had prior experience with orthopedics or other medical product companies. We currently have no employees working under collective bargaining agreements.
Our mission is to continuously improve the outcomes and experiences of patients suffering from foot and ankle conditions, and we operate under the following principles: inclusion and respect of individual surgeons’ preferences, creative innovation, high-quality, cost-effective implants, and a strong belief that through research and innovation, we can create new and improved solutions to the challenges faced by foot and ankle specialists. We espouse four key values in our efforts to create a strong culture around these principles: Competition - always improve and win; Common sense - responsible decision making; Creativity - solve problems and innovate; and Courage - be empowered to lead and disrupt.
We are committed to motivating, rewarding, attracting, and retaining high-caliber talent by providing employees with compensation plans that support the achievement of strategic business results and increase shareholder returns. We offer competitive, performance-based compensation and benefits, discounted equity ownership, employee recognition programs, and career development opportunities to attract and retain employees. We use a combination of fixed and variable compensation, including base salary, cash-based performance bonuses, and stock-based compensation awards. We employ competitive peer group analysis and multiple compensation surveys to benchmark compensation plans and consider other factors like market conditions, competitive landscape, and business climate when determining employee compensation.
We periodically evaluate our employee engagement and use these results to determine how we can continue to create work environments that energize our employees and enable them to develop and maintain a positive working culture.
We value the physical, mental, and financial wellbeing of our employees and sponsor wellness programs designed to incentivize employees to put themselves and their families first. We encourage participation in these programs through regular communications, educational sessions, and other incentives.
Facilities
In January 2022, we purchased our headquarters facility located at 14445 Grasslands Drive, Englewood, CO. Prior to the closing related to the purchase, we leased the building from AMBAR Grasslands LLC. We believe that this facility is sufficient to meet our current and anticipated needs in the near term and that additional space can be obtained on commercially reasonable terms as needed.
Corporate Information
We were formed in Colorado as a limited liability company in August 2010, converted to a Colorado corporation in March 2011 and reincorporated as a Delaware corporation in October 2021. Our principal executive office is located at 14445 Grasslands Drive, Englewood, CO 80112 and our telephone number is (720) 399-3400. Our website address is www.paragon28.com. We make available on or through our website certain reports and amendments to those reports that we file with or furnish to the United States Securities and Exchange Commission, or the SEC, in accordance with the Securities Exchange Act of 1934, as amended, or the Exchange Act. These include our annual reports on Form 10-K, our quarterly reports on Form 10-Q, and our current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. We make this information available on or through our website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC. References to our website address do not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of this document or any other document that we file with or furnish to the SEC. The SEC maintains a site on the worldwide web that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors.
Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this 2024 Annual Report on Form 10-K, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes thereto included elsewhere in this 2024 Annual Report on Form 10-K, before deciding whether to invest in shares of our common stock. The risks described below are not the only ones we face. The occurrence of any of the following risks or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial could materially and adversely affect our business, financial condition, results of operations and future prospects. In that event, the market price of our common stock could decline, and you could lose all or part of your investment. Please also see the section titled “Special Note Regarding Forward-Looking Statements.”
Risks Related to the Merger
The conditions for consummation under the Merger Agreement may not be satisfied at all or in the anticipated timeframe.
On January 28, 2025, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Zimmer, Inc. (“Zimmer”), a Delaware corporation and wholly owned subsidiary of Zimmer Biomet Holdings, Inc. (“Zimmer Biomet”), Gazelle Merger Sub I, Inc. (“Merger Sub”), a Delaware corporation and wholly owned subsidiary of Zimmer, and, for certain provisions of the Merger Agreement, Zimmer Biomet. Subject to the terms and conditions of the Merger Agreement, Merger Sub will be merged with and into us (the “Merger”), with us continuing as the surviving corporation and a wholly owned subsidiary of Zimmer.
Consummation of the Merger is subject to (i) the adoption of the Merger Agreement by the holders of a majority of the outstanding shares of Company common stock (the “Stockholder Approval”), (ii) the expiration or termination of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iii) certain other foreign regulatory approvals and (iv) the absence of any legal restraints that have the effect of preventing the consummation of the Merger, and (v) other conditions specified in the Merger Agreement. Additionally, Parent and Merger Sub’s obligations to consummate the Merger is subject to the absence of a Material Adverse Effect (as defined in the Merger Agreement) on the Company having occurred since the date of the Merger Agreement. As a result, there can be no assurance that the Merger will be consummated. These conditions are described in more detail in the Merger Agreement, which is filed as an exhibit to the Current Report on Form 8-K, filed with the SEC on January 29, 2025, and incorporated herein by reference.
The Company intends to pursue all required approvals in accordance with the Merger Agreement. However, no assurance can be given that the required approvals will be obtained and, even if all such approvals are obtained, no assurance can be given to the terms, conditions and timing of the approvals or that they will satisfy the terms of the Merger Agreement.
The announcement of, or a failure to consummate, the Merger could negatively impact our business, financial condition, results of operations or our stock price.
Our announcement of having entered into the Merger Agreement could cause a material disruption to our business and there can be no assurance that the conditions to the consummation of the Merger will be satisfied. The Merger Agreement may also be terminated by us and/or Zimmer in certain specified circumstances, as described below. We are subject to several risks as a result of the announcement of the Merger Agreement, including, but not limited to, the following:
● if the Merger is not completed within the expected timeframe, or at all, the share price of our common stock will change to the extent that the current market price of our common stock reflects an assumption that the Merger will be consummated;
● certain costs related to the Merger, including the fees and/or expenses of our legal, accounting and financial advisors must be paid even if the Merger is not completed;
● pursuant to the Merger Agreement, we are subject to certain restrictions on the conduct of our business prior to the completion of the Merger, which restrictions could adversely affect our ability to realize certain of our business strategies or take advantage of certain business opportunities;
● the attention of our management may be directed towards the consummation of the Merger and related matters, and their focus may be diverted from the day-to-day business operations of the Company, including from other opportunities that might otherwise be beneficial to us;
● our inability to retain existing key employees or hire new capable employees, given the uncertainty regarding our future, in order to execute on our continuing business operations;
● a failure to complete the Merger within the proposed timeframe, or at all, may result in negative publicity and/or a negative impression of us in the investment community or business community generally;
● difficulties maintaining relationships with collaborators, vendors, and other business partners;
● third-parties may determine to terminate and/or attempt to renegotiate their relationship with us as a result of the Merger, whether pursuant to the terms of their existing agreements with us or otherwise;
● upon termination of the Merger Agreement by us or Zimmer under specified circumstances, we would be required to pay a termination fee of approximately $40.0 million; and
● we could be subject to litigation related to any failure to complete the Merger.
In addition, our executive officers and directors may have interests in the Merger that are different from, or are in addition to, those of our stockholders generally. These interests include without limitation the following:
● each of our non-employee directors and executive officers is entitled to the same accelerated vesting of outstanding equity awards as all of our equity award holders;
● each of our executive officers is party to an employment agreement that provides for severance payments and benefits upon a qualifying termination in connection with a “change in control” which includes the Merger; and
● certain of our executive officers’ compensatory payments made in connection with the Merger may be subject to treatment in order to mitigate the potential impact of Section 280G and 4999 of the United States Internal Revenue Code of 1986, as amended, or the Code, following such mitigation treatment, we may enter into arrangements with such executive officers to provide tax reimbursement payments.
The Merger Agreement contains provisions that could make it difficult for a third-party to acquire us prior to the completion of the Merger.
The Merger Agreement contains restrictions on our ability to obtain a third-party proposal for an acquisition of our Company. These provisions include our agreement not to solicit or initiate any additional discussions with third-parties regarding other proposals to acquire us, as well as restrictions on our ability to respond to such proposals, subject to fulfillment of certain fiduciary requirements of our board of directors. The Merger Agreement also contains certain termination rights, including, under certain circumstances, a requirement for us to pay Zimmer a termination fee of approximately $40.0 million.
These provisions might discourage an otherwise-interested third-party from considering or proposing an acquisition of our company, even one that may be deemed of greater value to our stockholders than the Merger. Furthermore, even if
a third-party elects to propose an acquisition, the concept of a termination fee may result in that third-party offering a lower value to our stockholders than such third-party might otherwise have offered.
If the Merger is not consummated by the Outside Date, either we or Zimmer may terminate the Merger Agreement, subject to certain exceptions.
Either we or Zimmer may terminate the Merger Agreement if the Merger has not been consummated by November 28, 2025 (as such date may be extended to January 28, 2026, pursuant to the terms of the Merger Agreement (the “Outside Date”)). However, this termination right will not be available to a party to the Merger Agreement if that party failed to comply with its obligations under the Merger Agreement and that failure was the principal cause of the failure to consummate the Merger on or prior to such date. In the event the Merger Agreement is terminated by either party due to the failure of the Merger to close by the Outside Date or for any other reason provided under the Merger Agreement, we will have incurred significant costs and will have diverted significant management focus and resources from other strategic opportunities and ongoing business activities without realizing the anticipated benefits of the Merger.
Risks Related to Our Business and Industry
Our business is dependent upon the broad adoption of our products by hospitals, physicians and patients.
Our future growth and profitability depend on our ability to increase physician and patient awareness of our products and on the willingness of physicians and hospitals to adopt our products. Physicians may not adopt our products unless they are able to determine, based on experience, clinical data, medical society recommendations and other analyses, that our products provide a safe and effective treatment for foot and ankle conditions. Even if we are able to raise awareness among physicians, they may be slow in changing their medical treatment practices and may be hesitant to select our products for a variety of reasons, including:
● lack of experience with our products;
● long-standing relationships with companies and distributors that sell other products;
● lack of availability of adequate third-party payor coverage or reimbursement;
● competitive response and negative selling efforts from providers of alternative treatments;
● perception regarding the time commitment and skill development that may be required to gain familiarity and proficiency with our products;
● perceived liability risk generally associated with the use of new products and treatment options;
● lack or perceived lack of sufficient clinical evidence, including long-term data, supporting clinical benefits or the cost-effectiveness of our products over existing treatments; and
● the failure of key opinion leaders to provide recommendations regarding our products, or to assure physicians, patients and healthcare payors of the benefits of our products as an attractive alternative to other treatment options.
To effectively market and sell our products, we will need to continue to educate the medical community about the safety, efficacy, necessity and efficiency of our products and about the patient population that would potentially benefit from using our products. We cannot assure you that we will achieve broad education or market acceptance among physicians. In addition, some physicians may choose to utilize our products on only a subset of their total patient population or may not adopt our products at all. If we are not able to effectively demonstrate that our products are beneficial for a broad range of patients, adoption of our products will be limited and may not occur as rapidly as we anticipate or at all, which would have a material adverse effect on our business, financial condition and results of operations. We cannot assure you that our products will achieve broad market acceptance among hospitals, physicians and patients. Any failure
of our products to satisfy demand or to achieve meaningful market acceptance and penetration will harm our future prospects and have a material adverse effect on our business, financial condition and results of operations.
Our long-term growth depends on our ability to enhance our products, expand our indications and develop and commercialize additional products in a timely manner. If we cannot innovate, we may not be able to develop or exploit new products in time to remain competitive.
The market for our products is highly competitive, dynamic, and marked by rapid and substantial technological development and product innovation. New entrants or existing competitors could attempt to develop products that compete directly with ours. For us to remain competitive, it is essential to develop and bring to market new products. Demand for our products and future related products could be diminished by equivalent or superior products and technologies offered by competitors. If we are unable to innovate successfully, our products could become obsolete and our revenue would decline as our customers purchase our competitors’ products. Developing products is expensive and time-consuming and could divert management’s attention away from our core business. The success of any new product offering or product enhancements to our solution will depend on several factors, including our ability to:
● assemble sufficient resources to acquire or discover additional products;
● properly identify and anticipate surgeon and patient needs;
● develop and introduce new products and product enhancements in a timely manner;
● avoid infringing upon the intellectual property rights of third-parties;
● demonstrate, if required, the safety and efficacy of new products with data from preclinical and clinical studies and clinical trials;
● obtain the necessary regulatory clearances, approvals or certifications for expanded indications, new products or product modifications;
● be fully compliant with U.S. Food and Drug Administration (FDA) regulations and be fully compliant with foreign regulations for the marketing of new devices or modified products;
● produce new products in commercial quantities at an acceptable cost;
● provide adequate training to potential users of our products;
● receive adequate coverage and reimbursement for procedures performed with our products; and
● develop an effective and dedicated sales and marketing team.
If we are unable to develop or improve products, applications or features due to constraints, such as insufficient cash resources, high employee turnover, inability to hire personnel with sufficient technical skills or a lack of other research and development resources, we may not be able to maintain our competitive position compared to other companies. Furthermore, many of our competitors have the capability to devote a considerably greater amount of funds to their research and development programs than we do, and those that do not may be acquired by larger companies that could allocate greater resources to research and development programs. Our failure or inability to devote adequate research and development resources or compete effectively with the research and development programs of our competitors could harm our business.
In addition, we may choose to focus our efforts and resources on potential products or indications that ultimately prove to be unsuccessful, or to license or purchase a marketed product that does not meet our financial expectations. As a result, we may fail to capitalize on viable commercial products or profitable market opportunities, be required to forego or delay pursuit of opportunities with other potential products or other diseases that may later prove to have greater commercial potential, or relinquish valuable rights to such potential products through collaboration, licensing or other
royalty arrangements in cases in which it would have been advantageous for us to retain sole development and commercialization rights, which could adversely impact our business, financial condition and results of operations.
If we fail to manage our growth effectively, our business could be materially and adversely affected.
We have experienced recent rapid growth and anticipate further growth. This growth has placed significant demands on our management, financial, operational, technological and other resources, and we expect that our growth will continue to place significant demands on our management and other resources and will require us to continue developing and improving our operational, financial and other internal controls. In particular, continued growth increases the challenges involved in a number of areas, including recruiting and retaining sufficient skilled personnel for our direct sales force, providing adequate training and supervision to maintain our high-quality standards and preserving our culture and values. We may not be able to address these challenges in a cost-effective manner, or at all. To achieve our revenue goals, we must also successfully increase our supply of products from third-party manufacturers to meet expected customer demand. In the future, we may experience difficulties with quality control, component supply and shortages of qualified personnel, among other problems. These problems could result in delays in product availability and increases in expenses. Any such delay or increased expense could adversely affect our ability to generate revenue. In addition, rapid and significant growth will place a strain on our administrative and operational infrastructure. In order to manage our operations and growth, we will need to continue to improve our operational and management controls, hiring process, reporting and information technology systems and financial internal control procedures. If we do not effectively manage our growth, we may not be able to execute on our business plan, respond to competitive pressures, take advantage of market opportunities, satisfy customer requirements or maintain high-quality product offerings, which could have a material adverse effect on our business, financial condition and results of operations.
Our business plan relies on certain assumptions about the market for our products; however, the size and expected growth of our addressable market has not been established with precision and may be smaller than we estimate, and even if the addressable market is as large as we have estimated, we may not be able to capture additional market share.
Our estimates of the addressable market for our current products and future products are based on a number of internal and third-party estimates and assumptions, including the prevalence of foot and ankle disorders and the difficulty of persuading those suffering from foot and ankle disorders to undergo treatment, including surgery. While we believe our assumptions and the data underlying our estimates are reasonable, these assumptions and our estimates may not be correct. For example, we believe that the aging of the general population, increasing incidence of obesity and diabetes and increasingly active lifestyles will continue and that these trends will increase the need for our products and procedures. However, the projected demand for our products could materially differ from actual demand if our assumptions regarding these trends and acceptance of our products by the medical community prove to be incorrect or do not materialize, or if non-surgical treatments or other surgical techniques gain more widespread acceptance as a viable alternative to our foot and ankle solutions and procedures. In addition, even if the number of patients suffering from foot and ankle disorders who elect to undergo surgery increases as we expect, technological or medical advances could provide alternatives to address foot and ankle disorders and reduce demand for foot and ankle surgery. As a result, our estimates of the addressable market for our current or future products and procedures may prove to be incorrect. Even if the total addressable market for our current and future products and procedures is as large as we have estimated, we may not be able to penetrate the existing market to capture additional market share for the reasons discussed in this “Risk Factors” section. If the actual number of patients suffering from foot and ankle disorders who would benefit from our products, the price at which we can sell future products or the addressable market for our products is smaller than we estimate, or if the total addressable market is as large as we have estimated but we are unable to capture additional market share, it could have a material adverse effect on our business, financial condition and results of operations.
We operate in a very competitive business environment, and if we are unable to compete successfully against our existing or potential competitors, our business, financial condition and results of operations may be adversely affected.
Our existing foot and ankle products and procedures are, and any new foot and ankle products or procedures we develop and commercialize will be, subject to intense competition. The industry in which we operate is competitive, subject to change and sensitive to the introduction of new products, procedures or other market activities of industry participants. Our ability to compete successfully will depend on our ability to continue to promote awareness, educate and
train foot and ankle specialists with our foot and ankle products and procedures and gain their acceptance; develop additional products and procedures to improve our foot and ankle offerings and expand our product offerings in a timely manner; receive adequate coverage and reimbursement from third-party payors; and provide products that are easier to use, safer, less invasive and more effective than the products and procedures of our competitors. In addition, our ability to increase our customer base and achieve broader market acceptance of our products will depend to a significant extent on our ability to expand our marketing efforts. We plan to dedicate significant resources to our marketing programs. It will negatively affect our business, financial condition and results of operations if our marketing efforts and expenditures do not generate a corresponding increase in revenue. In addition, we believe that developing and maintaining broad awareness of our products in a cost-effective manner is critical to achieving broad acceptance of our products and expanding domestically and internationally. Promotion activities may not generate patient or physician awareness or increase revenue, and even if they do, any increase in revenue may not offset the costs and expenses we incur in building our brand. If we fail to successfully promote, maintain and protect our brand, we may fail to attract or retain the physician acceptance necessary to realize a sufficient return on our brand building efforts, or to achieve the level of brand awareness that is critical for broad adoption of our products.
In the foot and ankle market, we compete with large multinational companies such as Stryker, Arthrex, Smith & Nephew, J&J and Zimmer Biomet as well as with companies with one or a limited number of foot and ankle products such as Enovis, CrossRoads, Medline, Conmed, and Treace. We also face potential competition from many different sources, including academic institutions, governmental agencies and public and private research institutions.
At any time, these competitors and other potential market entrants may develop new products, procedures or treatment alternatives that could render our products obsolete or uncompetitive. In addition, one or more of such competitors may gain a market advantage by developing and patenting competitive products, procedures or treatment alternatives earlier than we can, obtaining regulatory clearances, approvals or certifications more rapidly than we can or selling competitive products at prices lower than ours. If medical research were to lead to the discovery of alternative therapies or technologies that improve or cure certain foot and ankle maladies as an alternative to surgery, such as by natural correction of the unstable joint in the middle of the foot, the use of pharmaceuticals or breakthrough bio-technological innovations or therapies, our profitability could suffer through a reduction in sales or a loss in market share to a competitor. The discovery of methods of prevention or the development of other alternatives to address certain foot and ankle maladies that we treat could result in decreased demand for our products and, accordingly, could have a material adverse effect on our business, financial condition and results of operations. Many of our current and potential competitors have substantially greater sales and financial resources than we do, more established distribution networks, a broader offering of products, entrenched relationships with surgeons and distributors and greater experience in launching, marketing, distributing and selling products or treatment alternatives.
We also compete with our competitors to engage the services of independent sales representatives, both those presently working with us and those with whom we hope to work with as we expand. In addition, we compete with our competitors in acquiring technologies and technology licenses complementary to our products or procedures or advantageous to our business. If we are unable to compete successfully against our existing or potential competitors, our business, financial condition and results of operations may be adversely affected, and we may not be able to grow at our expected rate, if at all.
We may expend our limited resources to pursue a particular product or indication and fail to capitalize on product or indications that may be more profitable or for which there is a greater likelihood of success.
Because we have limited financial and managerial resources, we focus on research programs and products that we identify for specific indications. As a result, we may forego or delay pursuit of opportunities with other products or for other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to timely capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs and products for specific indications may not yield any commercially viable products. If we do not accurately evaluate the commercial potential or target market for a particular product, we may relinquish valuable rights to that product through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product.
We face the risk of product liability claims that could be expensive, divert management’s attention and harm our reputation and business. We may not be able to maintain adequate product liability insurance.
Our business exposes us to the risk of product liability claims that are inherent in the testing, manufacturing and marketing of medical devices. This risk exists even if a device is cleared or approved for commercial sale by the FDA or approved or certified in foreign jurisdictions and manufactured in facilities licensed and regulated by the FDA or an applicable foreign regulatory authority. Our products are designed to affect, and any future enhancements to our products will be designed to affect, important bodily functions and processes. Any side effects, manufacturing defects, misuse or abuse associated with our products could result in patient injury or death. The medical device industry has historically been subject to extensive litigation over product liability claims, and we may face product liability suits. We may be subject to product liability claims if our products cause, or merely appear to have caused, patient injury or death. In addition, an injury that is caused by the activities of our suppliers, such as those who provide us with components and raw materials, may be the basis for a claim against us. Product liability claims may be brought against us by patients, healthcare providers or others selling or otherwise coming into contact with our products, among others. If we cannot successfully defend ourselves against product liability claims, we will incur substantial liabilities and reputational harm. In addition, regardless of merit or eventual outcome, product liability claims may result in:
● costs of litigation;
● distraction of management’s attention from our primary business;
● the inability to commercialize our products and develop enhancements to our products;
● decreased demand for our products;
● damage to our business reputation;
● product recalls or withdrawals from the market;
● withdrawal of clinical trial participants;
● substantial monetary awards to patients or other claimants; or
● loss of sales.
Additionally, we could experience a material design or manufacturing failure in our products, a quality system failure, other safety issues or heightened regulatory scrutiny that would warrant a recall of some of our products. While we may attempt to manage our product liability exposure by proactively recalling or withdrawing from the market any defective products, any recall or market withdrawal of our products may delay the supply of those products to our customers and may impact our reputation. We may not be successful in initiating appropriate market recall or market withdrawal efforts that may be required in the future and these efforts may not have the intended effect of preventing product malfunctions and the accompanying product liability that may result. Such recalls and withdrawals may also be used by our competitors to harm our reputation for safety or be perceived by patients as a safety risk when considering the use of our products, either of which could have a material adverse effect on our business, financial condition and results of operations.
Although we have product liability and clinical study liability insurance that we believe is appropriate, this insurance is subject to deductibles and coverage limitations. Our current product liability insurance may not continue to be available to us on acceptable terms, if at all, and, if available, coverage may not be adequate to protect us against any future product liability claims. If we are unable to obtain insurance at an acceptable cost or on acceptable terms or otherwise protect against potential product liability claims, we could be exposed to significant liabilities. A product liability claim, recall or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could have a material adverse effect on our business, financial condition and results of operations. Further, such product liability matters may negatively impact our ability to obtain insurance coverage or cost-effective insurance coverage in future periods.
Industry trends have resulted in increased downward pricing pressure on medical services and products, which may affect our ability to sell our products at prices necessary to support our current business strategy.
The trend toward health care cost containment through aggregating purchasing decisions and industry consolidation, along with the growth of managed care organizations, is placing increased emphasis on the delivery of more cost-effective medical therapies. For example:
● There has been consolidation among health care facilities and purchasers of medical devices, particularly in the United States. One of the results of such consolidation is that group purchasing organizations (GPOs), integrated delivery networks and large single accounts use their market power to consolidate purchasing decisions, which intensifies competition to provide products and services to health care providers and other industry participants, resulting in greater pricing pressures and the exclusion of certain suppliers from important market segments. For example, some GPOs negotiate pricing for their member hospitals and require us to discount, or limit our ability to increase, prices for certain of our products.
● Surgeons increasingly have moved from independent, outpatient practice settings toward employment by or affiliation with hospitals and other larger health care organizations, which aligns surgeons’ product choices with the institutional providers’ price sensitivities and adds to pricing pressures. Hospitals and health care facilities have introduced and may continue to introduce new pricing structures into their contracts to contain health care costs, including fixed price formulas and capitated and construct pricing.
● Certain hospitals provide financial incentives to doctors for reducing hospital costs (known as gainsharing), rewarding physician efficiency (known as physician profiling) and encouraging partnerships with health care service and goods providers to reduce costs.
● Existing and proposed laws, regulations and industry policies, in both domestic and international markets, regulate or seek to increase regulation of sales and marketing practices and the pricing and profitability of companies in the health care industry.
More broadly, provisions of the Affordable Care Act (ACA) have significantly impacted the way health care is developed and delivered in the United States and may adversely affect our business and results of operations. We cannot predict accurately what health care programs and regulations will ultimately be implemented at the federal or state level, or the effect of any future legislation or regulation in the United States or elsewhere. However, any changes that have the effect of reducing reimbursement by government health care programs and other third-party payors for procedures using our products or reducing medical procedure volumes could have a material and adverse effect on our business, financial condition and results of operations. Any decline in the amount that payors reimburse our customers for our products could make it difficult for customers to continue using, or to adopt, our products and could create additional pricing pressure for us. If we are forced to lower the price we charge for our products, or if we add more components to our systems, our gross margins will decrease, which will adversely affect our ability to invest in and grow our business. If we are unable to maintain our prices, or if our costs increase and we are unable to offset such increases with an increase in our prices, our margins could erode.
In addition, the largest medical device companies with multiple product franchises have increased their effort to leverage and contract broadly with customers across franchises by providing volume discounts and multi-year arrangements that could prevent our access to these customers or make it difficult, or impossible, to compete on price.
Our employees and independent contractors, including independent sales representatives and any other consultants, any future service providers and other vendors, may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could have an adverse effect on our results of operations.
We are exposed to the risk that our employees and independent contractors, including independent sales representatives and any other consultants, any future commercial collaborators, and other vendors may engage in misconduct or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent
conduct or other unauthorized activities that violate: federal, state, local, or foreign laws and regulations, as well as the laws, regulations and rules of regulatory bodies such as the FDA; manufacturing standards; U.S. federal and state health care fraud and abuse, data privacy laws and other similar non-U.S. laws; or laws that require the true, complete and accurate reporting of financial information or data. It is not always possible to identify and deter misconduct by employees and other third-parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with such laws or regulations. In addition, we are subject to the risk that a person or government could allege such fraud or other misconduct, even if none occurred. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business and financial results, including, without limitation, the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, disgorgements, possible exclusion from participation in Medicare, Medicaid and other U.S. or non U.S. health care programs, other sanctions, imprisonment, contractual damages, reputational harm, diminished profits and future earnings and curtailment of our operations, any of which could adversely affect our ability to operate our business and our results of operations.
Risks Related to Our Financial and Capital Requirements
Additional capital, if needed, may not be available on acceptable terms, if at all.
We may require additional capital to maintain and expand our operations. Our operations are capital-intensive and are expected to increase as we expand our sales force, research and development efforts and product offerings. If we raise additional funds through the issuance of equity, equity-linked or debt securities, those securities may have rights, preferences or privileges senior to those of our common stock, and our existing stockholders may experience dilution. Any debt financing secured by us in the future could require that a substantial portion of our operating cash flow be devoted to the payment of interest and principal on such indebtedness, which may decrease available funds for other business activities, and could involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. Additionally, any future collaborations we enter into with third-parties may provide capital in the near term but limit our potential cash flow and revenue in the future. If we raise additional funds through strategic partnerships and alliances and licensing arrangements with third-parties, we may have to relinquish valuable rights to our technologies or product candidates, or grant licenses on terms unfavorable to us. We cannot be certain that we will be able to obtain additional financing on favorable terms, if at all. If we cannot raise funds on acceptable terms, if and when needed, we may not be able to grow our business or respond to competitive pressures or unanticipated requirements, which could seriously harm our business.
The terms of our loan agreements require us to meet certain operating and financial covenants and place restrictions on our operating and financial flexibility. If we raise additional capital through debt financing, the terms of any new debt could further restrict our ability to operate our business.
Under the terms of our credit agreements with Ares Capital and Zions Bancorporation discussed in more detail under the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Long-Term Obligations,” in Part II of this Annual Report on Form 10-K, we are subject to certain affirmative and negative covenants limiting our and our subsidiaries’ ability to incur certain additional indebtedness, create certain liens, liquidate or dissolve, amend organizational documents or certain other material contracts, enter into a change of control transaction and make certain distributions and investments without our lenders’ consent. Additionally, the Ares Credit Agreement requires that we maintain certain minimum revenue levels tested on a quarterly basis, for the preceding twelve-month period, commencing with the fiscal quarter ending December 31, 2023. Our lenders may also declare us in default for certain types of events such as non-payment of debts when due, inaccurate representations and warranties, failure to comply with covenants and obligations, or with terms of certain other material indebtedness, certain material judgments, bankruptcy and insolvency, impairment of liens, a change of control and/or a material adverse effect. Upon such events, our lenders could declare an event of default, which would give them the right to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable. In addition, our lenders would have the right to proceed against the assets we provided as collateral under the loan agreements. For example, under our loan agreements, the lenders would have the right to enforce liens and security interests over substantially all of our
assets (excluding intellectual property) in the event of certain specified defaults. If the debt under any of our loan agreements is accelerated, we may not have sufficient cash or be able to sell sufficient assets to repay our debts or may have to curtail our growth plans, which would harm our business and financial condition.
Risks Related to Administrative, Organizational and Commercial Operations and Growth
The restatement of our previously issued financial statements, the errors that resulted in such restatement, the material weaknesses that were identified in our internal control over financial reporting, and the determination that our internal control over financial reporting and disclosure controls and procedures were not effective could impact our ability to accurately and timely report our financial results and other material disclosures or otherwise cause us to fail to meet our reporting obligations, which could have a material adverse effect on our operations, investor confidence in our business, the trading prices of our securities, and our ability to access the capital markets.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, our management is required to report upon the effectiveness of our internal control over financial reporting. Now that we are no longer an emerging growth company, our independent registered public accounting firm is required to attest to the effectiveness of our internal control over financial reporting. The rules governing the standards that must be met in assessing our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. In connection with our evaluation of our internal control over financial reporting, we may need to upgrade our systems, including information technology; implement additional financial and management controls, reporting systems and procedures; and hire additional accounting and finance staff.
Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could cause us to fail to meet our reporting obligations. In addition, any testing by us or our independent registered public accounting firm conducted in connection with Section 404 of the Sarbanes-Oxley Act of 2002 may reveal additional deficiencies in our internal control over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas for further attention or improvement. Currently identified or future instances of inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock. Additional internal control deficiencies could also result in a restatement of our financial results in the future. We could become subject to stockholder or other third-party litigation, as well as investigations by the SEC, the stock exchange on which our securities are listed, or other regulatory authorities, which could require additional financial and management resources and could result in fines, trading suspensions, payment of damages or other remedies.
Subsequent to the issuance of both the Company's consolidated financial statements as of and for the year ended December 31, 2023 and the Company's unaudited interim condensed consolidated financial statements as of and for the fiscal quarter ended March 31, 2024, we identified certain errors and determined that our previously issued audited consolidated financial statements for fiscal year ended December 31, 2023, and quarterly unaudited financial information for the quarters ended March 31, 2023, June 30, 2023, September 30, 2023, and March 31, 2024 should be restated (the “Restatement”). The Restatement was the result of material weaknesses in our control over financial reporting as discussed in Part II, Item 9A of this Annual Report on Form 10-K. As a result of these errors and the Restatement, we are subject to additional risks and uncertainties, including unanticipated costs for accounting and legal fees and consulting expenses (some of which have already been incurred), litigation, governmental proceedings or investigations and loss of investor confidence or reputational harm to our business.
Further, we determined that the identified material weaknesses in the Company’s internal control over financial reporting caused our internal control over financial reporting to be ineffective as of December 31, 2023. We also determined that our disclosure controls and procedures were not effective as of December 31, 2023, March 31, 2024 and June 30, 2024 for the same reason. As of the date of this Annual Report on Form 10-K, the material weaknesses have not been remediated and additional material weaknesses have been identified. Management is actively engaged in the planning for, and implementation of, remediation efforts to address our material weaknesses but there can be no assurance those efforts will be successful. For further discussion of the material weaknesses identified and our remediation efforts, see Part II, Item 9A, Controls and Procedures.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. Remediation efforts can be time-consuming, place a significant burden on management and add increased pressure to our financial resources and processes. The material weaknesses will not be considered remediated until a sustained period of time has passed to allow management to test the design and operational effectiveness of the corrective actions. If we do not remediate the material weaknesses in a timely manner, or if additional material weaknesses in our internal control over financial reporting are discovered, they may adversely affect our ability to record, process, summarize, and report financial information timely and accurately and, as a result, our financial statements may contain material misstatements or omissions. Additionally, our internal control environment and remediation efforts do not provide absolute assurance with regard to timely detecting or preventing control deficiencies and thus do not insulate us from any failure to meet our financial reporting obligations.
It is possible that additional control deficiencies could be identified by our management or by our independent registered public accounting firm in the future or may occur without being identified. Such a failure could require us to incur the expense of remediation, result in regulatory scrutiny, investigations or enforcement actions, cause investors to lose confidence in our reported financial condition or in the accuracy of our disclosures more generally, and have a negative effect on the trading price of our common stock, and otherwise raise reputational issues for our business or have a material adverse effect on our business, financial condition, results of operations, and cash flows. In addition, we may be unable to maintain compliance with the covenants under our debt instruments regarding the timely filing of periodic reports, and we may be subject to governmental investigations and penalties and litigation.
In addition, as a public company we are required to file accurate and timely quarterly and annual reports with the SEC under the Exchange Act. Any failure to report our financial results on an accurate and timely basis could result in sanctions, lawsuits, delisting of our shares from the NYSE or other adverse consequences that would materially harm our business.
If hospitals, ambulatory surgery centers and other health care facilities do not approve the use of our products, our sales may not increase.
In order for foot and ankle specialists to use our products at hospitals, ambulatory surgery centers and other health care facilities, we are often required to obtain approval from those hospitals, ambulatory surgery centers and health care facilities. Typically, hospitals, ambulatory surgery centers and health care facilities review the comparative effectiveness and cost of products used in the facility. The makeup and evaluation processes for health care facilities vary considerably, and it can be a lengthy, costly and time-consuming effort to obtain approval by the relevant health care facilities. Additionally, hospitals, ambulatory surgery centers, other health care facilities and GPOs, which manage purchasing for multiple facilities, may also require us to enter into a purchase agreement and satisfy numerous elements of their administrative procurement process, which can also be a lengthy, costly and time-consuming effort. If we do not obtain access to hospitals, ambulatory surgery centers and other health care facilities in a timely manner, or at all, via their approvals or purchase contract processes, or otherwise, or if we are unable to obtain approvals or secure contracts in a timely manner, or at all, our operating costs will increase, our sales may decrease and our operating results may be adversely affected. Furthermore, we may expend significant efforts on these costly and time-consuming processes but may not be able to obtain necessary approvals or secure a purchase contract from such hospitals, ambulatory surgery centers, health care facilities or GPOs.
If we fail to receive access to hospital facilities, our sales may decrease.
In the United States, in order for physicians to use our products, we expect that the hospital facilities where these physicians treat patients will typically require us to enter into purchasing contracts. This process can be lengthy and time-consuming and require extensive negotiations and management time. In the European Union (EU) certain institutions may require us to engage in a contract bidding process in the event that such institutions are considering making purchase commitments that exceed specified cost thresholds, which vary by jurisdiction. These processes are only open at certain periods of time, and we may not be successful in the bidding process. If we do not receive access to hospital facilities via these contracting processes or otherwise, or if we are unable to secure contracts or tender successful bids, our sales may decrease, and our operating results may be harmed. Furthermore, we may expend significant effort in these time-consuming processes and still may not obtain a purchase contract from such hospitals.
Performance issues, service interruptions or price increases by shipping carriers could adversely affect our business and harm our reputation and ability to provide our products on a timely basis.
Expedited, reliable shipping is essential to our operations. We rely heavily on providers of transport services for reliable and secure point-to-point transport of our products to our customers and for tracking these shipments. Should a carrier encounter delivery performance issues such as loss, damage or destruction of our products, it would be costly to replace our products in a timely manner, could cause surgeries using our products to be delayed or canceled and such occurrences may damage our reputation and lead to decreased demand for our products and increased cost and expense to our business. In addition, any significant increase in shipping rates could adversely affect our operating margins and results of operations. Similarly, strikes, severe weather, natural disasters or other service interruptions affecting delivery services we use would adversely affect our ability to process orders for our products on a timely basis.
If coverage or adequate levels of reimbursement from third-party payors for procedures using our products, or any future products we may seek to commercialize, are not obtained or maintained, foot and ankle specialists and patients may be reluctant to use our products and our business will suffer.
In the United States, health care providers who purchase our products generally rely on third-party payors, principally federally-funded Medicare, state-funded Medicaid and private health insurance plans, to pay for all or a portion of the cost of foot and ankle procedures and products utilized in those procedures. We may be unable to sell our products, or any future products we may seek to commercialize, on a profitable basis if third-party payors deny coverage or reduce their current levels of reimbursement for procedures using our products. Payors continue to review their coverage policies for existing and new therapies and may deny coverage for treatments that include the use of our products or any future products we may seek to commercialize. Third-party payors, whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controlling healthcare costs. In addition, no uniform policy of coverage and reimbursement for procedures using our solution exists among third-party payors. Therefore, coverage and reimbursement for procedures using our products can differ significantly from payor to payor.
In addition, some health care providers in the United States have adopted or are considering bundled payment methodologies and/or managed care systems in which providers contract to provide comprehensive health care for a fixed cost per person. Health care providers may attempt to control costs by authorizing fewer elective surgical procedures, including foot and ankle surgeries, or by requiring the use of the least expensive procedure available. In addition, third-party payors increasingly are requiring evidence that medical devices are cost-effective, and if we are unable to meet this requirement, the third-party payor may not cover procedures using our products, which could reduce sales of our products to health care providers who depend upon third-party payor reimbursement for payment. Changes in coverage policies or health care cost containment initiatives that limit or restrict reimbursement for procedures using our products may have an adverse effect on our business.
Outside of the United States, reimbursement levels vary significantly by country and by patient. Reimbursement is obtained from a variety of sources, including government sponsors, hospital budgets, public tenders/bids, or private health insurance plans, or combinations thereof. We participate in and have established appropriate market access in countries where required and applicable. Uncertainties regarding future healthcare policy, legislation and regulation, as well as private market practices and foreign regulations that might prohibit the use of certain of our products, could affect our ability to sell our products in commercially acceptable quantities at acceptable prices.
The majority of our sales force consists of independent sales representatives, and if we are unable to maintain and expand our network of independent sales representatives, we may be unable to generate anticipated sales.
Our revenue and profitability are directly dependent upon the sales and marketing efforts of our sales force. We utilize a sales force comprised primarily of independent sales representatives to sell our products to surgeons, hospitals, clinics, foot and ankle specialists and other end users and to assist us in promoting market acceptance of, and creating demand for, our products and procedures. As we increase our marketing efforts, we will need to retain, develop and grow the number of sales representatives that we employ. We have made and intend to continue making a significant investment in recruiting and training sales representatives and clinical representatives as we expand our business. There is significant competition for sales personnel experienced in relevant medical device sales. If we are unable to come to commercially reasonable
terms with a sales representative or representatives, we may not generate the expected level of sales and may need to spend more of our capital resources to hire sales personnel as employees. Once hired, the training process can be lengthy because it requires significant education for new sales representatives and to achieve the level of clinical competency with our products expected by foot and ankle specialists. Upon completion of the training, our sales representatives typically require lead time in the field to grow their network of accounts and achieve the productivity levels we expect them to reach in any individual territory. Furthermore, the use of our products often requires or benefits from direct support from us, including through our sales representatives that provide assistance in the operating room.
It will negatively affect our business, financial condition and results of operations if our efforts to expand and train our sales force do not generate a corresponding increase in revenue, and our higher fixed costs may slow our ability to reduce costs in the face of a sudden decline in demand for our products. Any failure to hire, develop and retain talented sales personnel, to achieve desired productivity levels in a reasonable period of time or timely reduce fixed costs, could negatively affect our business, financial condition and results of operations.
Even if we are able to attract and retain additional sales representatives, in situations where our sales representatives are not exclusive to us, there is a risk that a sales representative that we contract with will give higher priority to the products of other medical device companies, including products directly competitive with our products or may be required by larger medical devices companies to stop offering our products. Though we have established initiatives to further focus our independent sales channel on our products, these initiatives may not translate to the increase in sales or penetration which we expect. There can be no assurance that a sales representative will devote the resources necessary to provide effective sales and promotional support to our products. Also, to the extent we engage sales representatives from our competitors, we may have to wait until applicable non-competition provisions or obligations have expired. Notwithstanding the foregoing, we may still be subject to future allegations that these new hires have been improperly solicited, and that they have divulged to us proprietary or other confidential information of their former employers. Additionally, because the market for experienced sales personnel is competitive, our competitors may try to hire our sales representatives away from us. If successful, we would be required to dedicate resources to recruiting, filling and training those vacant positions. The loss of these personnel to competitors, or otherwise, will negatively affect our business, financial condition and results of operations. If we are unable to retain our direct sales force personnel or replace them with individuals of equivalent technical expertise and qualifications, or if we are unable to successfully instill such technical expertise in replacement personnel, it may negatively affect our business, financial condition and results of operations.
We depend on third-party contract manufacturers and suppliers, some of which are single source, to produce and package all elements comprising our foot and ankle products, and if these suppliers and manufacturers fail to supply us, our products or their components or subcomponents in sufficient quantities or at all, it may have a material adverse effect on our business, financial condition, and results of operations.
We utilize qualified medical device contract manufacturers and suppliers, some of which are single sources, to produce and package all elements comprising our foot and ankle products. Our significant single source suppliers include Tech Metals (which supplies parts used in our Gorilla plating system), 3D Systems (which supplies parts used in our APEX 3D Total Ankle Replacement system), Seaway (which supplies parts for our drill guides), and Orchid (which supplies parts used in our Apex Talus Implants). While we estimate replacing these single source suppliers could take up to approximately six months, in some of these examples alternative second source suppliers may not be readily available. We seek to strategically maintain sufficient levels of inventory to help mitigate supply disruption, usually holding sufficient inventory to allow for manufacturing from 90 to 180 days following the loss of a supplier, to accommodate varying demand mix and to achieve more efficient volume-based pricing on our components; however, potential future inaccuracies in our estimates could result in insufficient inventory to meet demand or excess inventory and the risk of inventory obsolescence and expiration. Further, while we have entered into several supply agreements in an effort to reinforce our supply chain, there is no guarantee the counter-party suppliers will adhere to the terms of these agreements.
Our suppliers may encounter problems during manufacturing for a variety of reasons, including, for example, failure to follow specific protocols and procedures, failure to comply with applicable legal and regulatory requirements, equipment malfunction and environmental factors, failure to properly conduct their own business affairs, and infringement of third-party intellectual property rights, any of which could delay or impede their ability to meet our requirements. Our
reliance on a third-party manufacturer and third-party suppliers also subjects us to other risks that could harm our business that we would not be subject to if we manufactured products ourselves, including, among others:
● we may not be a major customer of many of our suppliers, and these suppliers may therefore give other customers’ needs higher priority than ours;
● third-parties may threaten or enforce their intellectual property rights against our suppliers, which may cause disruptions or delays in shipment, or may force our suppliers to cease conducting business with us;
● we may not be able to obtain an adequate supply of components in a timely manner or on commercially reasonable terms;
● our suppliers, especially new suppliers, may make errors in manufacturing that could negatively affect the efficacy or safety of our products or cause delays in shipment;
● we may have difficulty locating and qualifying alternative suppliers;
● switching components or suppliers may require product redesign and possibly submission to FDA, notified bodies, or other foreign regulatory bodies, which could significantly impede or delay our commercial activities;
● one or more of our single-source suppliers may be unwilling or unable to supply components of our products;
● other customers may use fair or unfair negotiation tactics or pressures to impede our use of the suppliers;
● the occurrence of a fire, natural disaster or other catastrophe, or the occurrence of geopolitical conflicts, as well as any sanctions or other actions resulting therefrom, impacting one or more of our suppliers may affect their ability to deliver products to us in a timely manner;
● the occurrence of pandemics, epidemics and other public health emergencies may impact a manufacturing facility by limiting operating capacity or sideline critical employees involved in the manufacturing processes thereby affecting their ability to deliver products to us in a timely manner;
● our suppliers may encounter financial or other business hardships unrelated to our demand, which could inhibit their ability to fulfill our orders and meet our requirements;
● our suppliers may not maintain the confidentiality of our proprietary information; and
● higher manufacturing and product costs than more vertically integrated companies.
Any of these factors could cause delay or suspension of commercialization and marketing, regulatory submissions or required approvals, clearances or certifications, or cause us to incur higher costs. Furthermore, if our contract manufacturers fail to deliver the required commercial quantities of finished products on a timely basis and at commercially reasonable prices and we are unable to find one or more replacement manufacturers capable of production at a substantially equivalent cost, in substantially equivalent volumes and quality, and on a timely basis, we would likely be unable to meet demand for our products and we would lose potential revenue. Any difficulties in locating and hiring third-party manufacturers, or in the ability of third-party manufacturers to supply quantities of our products at the times and in the quantities we need, could have a material adverse effect on our business. It may take a significant amount of time and resources (including costs) to establish an alternative source of supply for our products and to have any such new source authorized by the FDA or foreign regulatory authorities or notified bodies. Given our reliance on certain single-source suppliers, we are especially susceptible to supply shortages because we do not have alternate suppliers currently available.
Moreover, some third-parties are located in markets subject to political and social risk, corruption, infrastructure problems and natural disasters, in addition to country-specific privacy and data security risk given current legal and
regulatory environments. Failure of third-parties to meet their contractual, regulatory, and other obligations may have a material adverse effect on our business, financial condition, and results of operations. Any of these matters could materially and adversely affect our business, financial condition, and results of operations.
Our results of operations will be materially harmed if we are unable to accurately forecast customer demand for our products and manage our inventory.
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 our cash used in operations has been associated with maintaining these levels of inventory. To ensure adequate inventory supply, we must forecast inventory needs and manufacture our products based on our estimates of future demand. Our ability to accurately forecast demand for our products could be negatively affected by many factors, including our failure to accurately manage our expansion strategy, product introductions by competitors, an increase or decrease in customer demand for our products or for products of our competitors, our failure to accurately forecast customer acceptance of new products, unanticipated changes in general market conditions or regulatory matters and weakening of economic conditions or consumer confidence in future economic conditions. Inventory levels in excess of customer demand may result in inventory write-downs or write-offs, which would cause our gross margin to be adversely affected and could impair the strength of our brand. Conversely, if we underestimate customer demand for our products, our internal manufacturing team may not be able to deliver products to meet our requirements, and this could result in damage to our reputation and customer relationships. In addition, if we experience a significant increase in demand, additional supplies of raw materials or additional manufacturing capacity may not be available when required on terms that are acceptable to us, or at all, or suppliers or may not be able to allocate sufficient capacity in order to meet our increased requirements, which will negatively affect our business, financial condition and results of operations.
We seek to maintain sufficient levels of inventory in order to protect ourselves from supply interruptions. As a result, we are subject to the risk that a portion of our inventory will become obsolete or expire, which could have a material adverse effect on our earnings and cash flows due to the resulting costs associated with the inventory obsolescence charges and costs required to replace such inventory.
We may enter into collaborations, in-licensing arrangements, joint ventures, strategic alliances or partnerships with third-parties that may not result in the development of commercially viable products, product improvements or the generation of significant future revenues.
In the ordinary course of our business, we may enter into collaborations, in-licensing arrangements, joint ventures, strategic alliances, partnerships or other arrangements to develop new products or product improvements and to pursue new markets. Proposing, negotiating and implementing collaborations, in-licensing arrangements, joint ventures, strategic alliances or partnerships may be a lengthy and complex process. Other companies, including those with substantially greater financial, marketing, sales, technology or other business resources, may compete with us for these opportunities or arrangements. We may not identify, secure, or complete any such transactions or arrangements in a timely manner, on a cost-effective basis, on acceptable terms or at all. We have limited institutional knowledge and experience with respect to these business development activities, and we may also not realize the anticipated benefits of any such transaction or arrangement. In particular, these collaborations may not result in the development of products that achieve commercial success or viable product improvements or result in significant revenues and could be terminated prior to developing any products.
Additionally, we may not be in a position to exercise sole decision making authority regarding the transaction or arrangement, which could create the potential risk of creating impasses on decisions, and our future collaborators may have economic or business interests or goals that are, or that may become, inconsistent with our business interests or goals. It is possible that conflicts may arise with our collaborators, such as conflicts concerning the achievement of performance milestones, or the interpretation of significant terms under any agreement, such as those related to financial obligations, or the ownership or control of intellectual property developed during the collaboration. If any conflicts arise with any future collaborators, they may act in their self-interest, which may be adverse to our best interest, and they may breach their obligations to us. In addition, we may have limited control over the amount and timing of resources that any future collaborators devote to our or their future products.
Disputes between us and our collaborators may result in litigation or arbitration which would increase our expenses and divert the attention of our management. Further, these transactions and arrangements will be contractual in nature and will generally be terminable under the terms of the applicable agreements and, in such event, we may not continue to have rights to the products relating to such transaction or arrangement or may need to purchase such rights at a premium. If we enter into in-bound intellectual property license agreements, we may not be able to fully protect the licensed intellectual property rights or maintain those licenses. Future licensors could retain the right to prosecute and defend the intellectual property rights licensed to us, in which case we would depend on the ability of our licensors to obtain, maintain and enforce intellectual property protection for the licensed intellectual property. These licensors may determine not to pursue litigation against other companies or may pursue such litigation less aggressively than we would. Further, entering into such license agreements could impose various diligence, commercialization, royalty or other obligations on us. Future licensors may allege that we have breached our license agreement with them, and accordingly seek to terminate our license, which could adversely affect our competitive business position and harm our business prospects.
We may seek to grow our business through acquisitions or investments in new or complementary businesses, products or technologies, through the licensing of products or technologies from third-parties or other strategic alliances, and the failure to manage acquisitions, investments, licenses or other strategic alliances, or the failure to integrate them with our existing business, could have a material adverse effect on our operating results, dilute our stockholders’ ownership, increase our debt or cause us to incur significant expense.
Our success depends on our ability to continually enhance and broaden our product offerings in response to changing clinician and patients’ needs, competitive technologies and market pressures. Accordingly, from time to time we may consider opportunities to acquire, make investments in or license other technologies, products and businesses that may enhance our capabilities, complement our existing products and technologies or expand the breadth of our markets or customer base. For example, in early 2022 we acquired Disior Oy. Our ability to realize the potential benefits of this acquisition and to integrate the acquired assets may not be successful or may not occur within our anticipated timeline. Potential and completed acquisitions, strategic investments, licenses and other alliances involve numerous risks, including:
● difficulty assimilating or integrating acquired or licensed technologies, products, employees or business operations;
● issues maintaining uniform standards, procedures, controls and policies;
● unanticipated costs associated with acquisitions or strategic alliances, including the assumption of unknown or contingent liabilities and the incurrence of debt or future write-offs of intangible assets or goodwill;
● diversion of management’s attention from our core business and disruption of ongoing operations;
● adverse effects on existing business relationships with suppliers, sales representatives, health care facilities, foot and ankle specialists and other health care providers;
● risks associated with entering new markets in which we have limited or no experience;
● potential losses related to investments in other companies;
● potential loss of key employees of acquired businesses;
● unanticipated or undisclosed liabilities of any target; and
● increased legal and accounting costs relating to the acquisitions or compliance with regulatory matters.
We do not know if we will be able to identify acquisitions or strategic relationships we deem suitable, whether we will be able to successfully complete any such transactions on favorable terms, if at all, or whether we will be able to successfully integrate any acquired business, product or technology into our business or retain any key personnel, suppliers,
sales representative, health care facilities, surgeons or other health care providers. Our ability to successfully grow through strategic transactions depends upon our ability to identify, negotiate, complete and integrate suitable target businesses, technologies or products and to obtain any necessary financing. These efforts could be expensive and time-consuming and may disrupt our ongoing business and prevent management from focusing on our operations.
If we pursue any foreign acquisitions, they may involve unique risks in addition to those mentioned above, including those related to integration of operations across different cultures, languages and legal and regulatory environments, currency risks and the particular economic, political and regulatory risks associated with specific countries.
To finance any acquisitions, investments or strategic alliances, we may choose to issue shares of our common stock as consideration, which could dilute the ownership of our stockholders. If the price of our common stock is low or volatile, we may be unable to consummate any acquisitions, investments or strategic alliances using our common stock as consideration. Additional funds may not be available on terms that are favorable to us, or at all.
We may not be able to establish or strengthen our brand.
We believe that establishing and strengthening Paragon 28 and our various foot and ankle procedure brands, including Smart 28, is important to achieving widespread acceptance of our foot and ankle products and procedures, particularly because of the highly competitive nature of the market for similar products. We believe the quality and reliability of our products are critical to building physician support for our foot and ankle products and solutions in the United States and abroad, and any negative publicity regarding the quality or reliability of our products and procedures could significantly damage our reputation in the market. In the course of conducting our business, we must adequately address quality issues that may arise with our products, including defects in third-party components included in our products. Although we have established internal procedures designed to minimize risks that may arise from quality issues, we may not be able to eliminate or mitigate occurrences of these issues and associated liabilities. In addition, even in the absence of quality issues, we may be subject to claims and liability if the performance of our products does not meet the expectations of physicians or patients.
In addition, promoting and positioning our brand will depend largely on the success of our medical education efforts and our ability to educate foot and ankle specialists and patients. These brand promotion activities may not yield increased sales and, even if they do, any sales increases may not offset the expenses we incur to promote our brand. If we fail to successfully promote and maintain our brand, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, our foot and ankle solutions may not be accepted by physicians or patients, which would adversely affect our business, results of operations and financial condition.
Our inability to maintain contractual relationships with health care professionals could have a negative impact on our research and development and medical education programs.
We maintain contractual relationships with respected physicians and medical personnel in hospitals, private practice and universities who assist in clinical studies, product research and development and in the training of foot and ankle specialists on the safe and effective use of our products. We continue to place emphasis on the validation of the benefits of our foot and ankle products and procedures through clinical studies, the development of proprietary products and product improvements to develop our product lines as well as providing high quality training on those products. If we are unable to maintain these relationships, our ability to develop and market new and improved products and train on the use of those products could decrease, and future operating results could be unfavorably affected. At the same time, the medical device industry’s relationship with physicians is under increasing scrutiny by the U.S. Department of Health and Human Services Office of Inspector General (OIG), the U.S. Department of Justice (DOJ), the state attorneys general and other foreign and domestic government agencies. Our failure to comply with requirements governing the industry’s relationships with physicians or an investigation into our compliance by the OIG, the DOJ, state attorneys general and other government agencies, could negatively affect our business, financial condition and results of operations. See “Risk Factors-Risks Related to Regulatory Matters- Our relationships with customers, foot and ankle specialists and third-party payors are subject to federal and state health care fraud and abuse laws, false claims laws, physician payment transparency laws and other health care laws and regulations. If we or our employees, independent contractors, consultants, commercial partners, or vendors violate these laws we could face substantial penalties.”
We may be unable to continue to successfully demonstrate to foot and ankle specialists or key opinion leaders the merits of our products and technologies compared to those of our competitors, which may make it difficult to establish our products and technologies as a standard of care and achieve market acceptance.
Foot and ankle specialists play the primary role in determining the course of treatment and, ultimately, the type of products that will be used to treat a patient. As a result, our success depends, in large part, on our ability to effectively market and demonstrate to foot and ankle specialists the merits of our products and methodologies compared to those of our competitors. Acceptance of our products and methodologies depends on educating foot and ankle specialists as to the distinctive characteristics, clinical benefits, safety and cost-effectiveness of our products, procedures and technologies as compared to those of our competitors, and on training foot and ankle specialists in the proper use of our products. If we are not successful in convincing foot and ankle specialists of the merits of our products and methodologies or educating them on the use of our products, they may not use our products or may not use them effectively and we may be unable to increase our sales, sustain our growth or achieve and sustain profitability.
Also, since a number of our foot and ankle procedures and products are new, some foot and ankle specialists may be reluctant to change their surgical treatment practices for the following reasons, among others:
● lack of experience with our products and procedures;
● existing relationships with competitors and distributors that sell competitive products;
● lack or perceived lack of evidence supporting additional patient benefits;
● perceived liability risks generally associated with the use of new products and procedures;
● less attractive availability of coverage and reimbursement by third-party payors compared to procedures using competitive products and other techniques;
● costs associated with the purchase of new products and equipment; and
● the time commitment that may be required for training.
These reasons may affect the pace of adoption of our foot and ankle products and procedures and future products and techniques that we may offer.
In addition, we believe recommendations and support of our products and technologies by surgeons, foot and ankle specialists and other key opinion leaders in our industry are essential for market acceptance and establishment of our products and procedures as a standard of care. If we do not receive support from such surgeons, foot and ankle specialists and other key opinion leaders, if long-term data does not show the benefits of using our products and procedures or if the benefits offered by our products and procedures are not sufficient to justify their cost, foot and ankle specialists, hospitals and other health care facilities may not use our products and we might be unable to establish our products and procedures as a standard of care and continue to achieve market acceptance.
If foot and ankle specialists fail to safely and appropriately use our products, or if we are unable to train podiatrists and orthopedic surgeons on the safe and appropriate use of our products, we may be unable to achieve our expected sales, growth or profitability.
An important part of our sales process includes our ability to screen for and identify podiatrists and orthopedic surgeons who have the requisite training and experience to safely and appropriately use our products and to train a sufficient number of these foot and ankle specialists and to provide them with adequate instruction in use of our products. There is a training process involved for foot and ankle specialists to become proficient in the safe and appropriate use of our products. This training process may take longer or be more expensive than expected. Convincing foot and ankle specialists to dedicate the time and energy necessary for adequate training is challenging, and we may not be successful in
these efforts. Recent changes to federal guidance regarding medical education programs under the federal Anti-Kickback Statute also could limit our ability to train podiatrists and orthopedic surgeons, and such programs could be subject to challenge under the federal Anti-Kickback Statute. See “Risk Factors-Risks Related to Regulatory Matters-Our relationships with customers, foot and ankle specialists and third-party payors are subject to federal and state health care fraud and abuse laws, false claims laws, physician payment transparency laws and other health care laws and regulations. If we or our employees, independent contractors, consultants, commercial partners, or vendors violate these laws we could face substantial penalties.”
Furthermore, if clinicians are not properly trained, they may misuse or ineffectively use our products. Any improper use of our products may result in unsatisfactory outcomes, patient injury, negative publicity or lawsuits against us, any of which could harm our reputation and affect future product sales. Accordingly, if foot and ankle specialists fail to safely and appropriately use our products or if we are unable to train foot and ankle specialists on the safe and appropriate use of our products, we may be unable to achieve our expected sales, growth or profitability.
The loss of any member on our executive management team or our inability to attract and retain highly skilled members of our sales management and marketing teams and engineers could have a material adverse effect on our business, financial condition and results of operations.
Our success depends on the skills, experience and performance of the members of our executive management team including Albert DaCosta, our Co-Founder, Chairman, President and Chief Executive Officer, in particular. The individual and collective efforts of these executives will be important as we continue to commercialize our existing products, develop new products and technologies and expand our commercial activities. The loss or incapacity of existing members of our executive management team could have a material adverse effect on our business, financial condition and results of operations if we experience difficulties in hiring qualified successors. We do not maintain “key person” insurance for any of our executives or key employees. Additionally, the Merger may make it more difficult to attract and retain qualified employees due to the uncertainty about whether or when the transaction will close and the impact of the Merger on our employees.
Our commercial, quality and research and development programs and operations depend on our ability to attract and retain highly skilled team members. We may be unable to attract or retain qualified team members. All of our U.S. employees are at-will, which means that either we or the employee may terminate his or her employment at any time. The loss of key employees, failure of any key employee to perform, our inability to attract and retain skilled employees, as needed, or our inability to effectively plan for and implement a succession plan for key employees could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Intellectual Property
If we or our licensors are unable to obtain and maintain significant patent or other intellectual property protection for our products, or if the scope of our patents and other intellectual property rights is not sufficiently broad and does not adequately protect our products, our competitors could develop and commercialize products similar or identical to ours and we may be unable to gain significant market share and be unable to operate our business profitably.
Our success depends in large part on our and our licensors’ ability to obtain, maintain and solidify a proprietary position for our products, which will depend on our and our licensors’ success in obtaining effective intellectual property protection, including through patents, trade secrets, copyrights, know-how, trademarks, license agreements and contractual provisions to establish our intellectual property rights and protect our products. These legal means, however, afford only limited protection and may not completely protect our rights. Any failure to obtain or maintain patent and other intellectual property protection with respect to our products could harm our business, financial condition and results of operations.
As of December 31, 2024, our patent portfolio included 366 owned and issued patents and 32 in-licensed patents. Eighty-four of these patents are U.S. utility patents. As of December 31, 2024, we had 354 pending patent applications globally, including 84 in the United States. Outside of the United States we have patent applications pending in Europe, Australia, Canada, South Africa, Brazil, and Japan as well as through our PCT applications (which have been counted as pending U.S. patent applications). We cannot assure that our intellectual property position will not be challenged or that
all patents for which we have applied will be granted. The validity and breadth of claims in patents involve complex legal and factual questions and, therefore, may be highly uncertain. Uncertainties and risks that we face include the following:
● our pending or future patent applications may not result in the issuance of patents;
● the scope of any existing or future patent protection may not exclude competitors or provide competitive advantages to us;
● our patents may not be held valid or enforceable if subsequently challenged;
● our competitors might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop competitive products for sale in our major commercial markets;
● we may not develop additional proprietary technologies that are patentable;
● we cannot predict the scope of protection of any patent issuing based on our patent applications, including whether the patent applications that we own or in-license will result in issued patents with claims that cover our products or uses thereof in the United States or in other foreign countries;
● the claims of any patent issuing based on our patent applications may not provide protection against competitors or any competitive advantages, or may be challenged by third-parties;
● we may choose not to file a patent in order to maintain certain trade secrets or know-how, and a third-party may subsequently file a patent covering such intellectual property;
● we may fail to adequately protect and police our trademarks and trade secrets;
● other parties may claim that our products and designs infringe the proprietary rights of others-even if we are successful in defending our patents and proprietary rights, the cost of such litigation may adversely affect our business; and
● other parties may develop similar products, duplicate our products, or design around our patents.
The patent prosecution process is expensive and time-consuming, and we and our licensors may not be able to file, prosecute, maintain, enforce or license all necessary or desirable patents or patent applications at a reasonable cost or in a timely manner, or in all jurisdictions. Although we enter into non-disclosure and confidentiality agreements with parties who have access to confidential or patentable aspects of our research and development output, any of these parties may inadvertently or intentionally breach such agreements and disclose such output before a patent application is filed, thereby jeopardizing our ability to seek and obtain patent protection. We may choose not to seek patent protection for certain innovations and may choose not to pursue patent protection in certain jurisdictions, and under the laws of certain jurisdictions, patents or other intellectual property rights may be unavailable or limited in scope. It is also possible that we will fail to identify patentable aspects of our developments before it is too late to obtain patent protection. In addition, our ability to obtain and maintain valid and enforceable patents depends in part on whether the differences between our inventions and the prior art allow our inventions to be patented over the prior art. Furthermore, the publication of discoveries in scientific literature often lags behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until eighteen months after filing, or in some cases not at all. Therefore, we cannot be certain that we were the first to file for patent protection of such inventions. In addition, the laws of foreign jurisdictions may not protect our rights to the same extent as the laws of the United States. For example, certain countries outside of the United States do not allow patents for methods of treating the human body. This may preclude us from obtaining method patents outside of the United States having similar scope to those we have obtained or may obtain in the future in the United States. This includes certain key method patents covering our procedures and products. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish our ability
to protect our inventions, obtain, maintain and enforce our patent rights and, more generally, could affect the value of our patents. Additionally, we cannot predict whether the patent applications we are currently pursuing will issue as patents in any particular jurisdiction or whether the claims of any issued patents will provide sufficient protection from competitors or third-parties.
The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our patents may be challenged in the courts or patent offices in the United States and abroad, and as a result, may not provide us with adequate proprietary protection or competitive advantage against competitors with similar products. Moreover, we may be subject to a third-party pre-issuance submission of prior art to the U.S. Patent and Trademark Office (USPTO) or patent offices in foreign jurisdictions, or become involved in opposition, derivation, reexamination, inter partes review, post-grant review or interference proceedings challenging our patent rights or the patent rights of others. Such challenges may result in loss of exclusivity or freedom to operate or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar or identical products and techniques without payment to us, or limit the duration of the patent protection of our technology.
We cannot ensure that we do not infringe any patents or other proprietary rights held by third-parties. If our products were found to infringe any proprietary right of another party, we could be required to pay significant damages or license fees to such party and/or cease production, marketing and distribution of those products. Litigation may also be necessary to defend infringement claims of third-parties or to enforce patent rights we hold or to protect trade secrets or techniques we own. In addition, because patent applications can take many years to issue, and because publication schedules for pending applications vary by jurisdiction, there may be applications now pending of which we are unaware and which may result in issued patents which our current or future products infringe. Also, because the claims of published patent applications can change between publication and patent grant, there may be published patent applications that may ultimately issue with claims that we infringe.
We also rely on trade secrets and other unpatented proprietary technology. There can be no assurances that we can meaningfully protect our rights in our trade secrets and other unpatented proprietary technology or that others will not independently develop substantially equivalent proprietary products or processes or otherwise gain access to our proprietary technology. We seek to protect our trade secrets and proprietary know-how and technology, in part, with confidentiality and invention assignment agreements with employees and consultants that include confidentiality obligations and valid, present-tense intellectual property assignment obligations. There can be no assurances, however, that the agreements will not be breached, adequate remedies for any breach would be available or competitors will not discover our trade secrets or independently develop comparable intellectual property. Further, litigation may be necessary to obtain ownership or to defend against claims challenging ownership. Even if we or our licensors are successful in defending against such claims, litigation could result in substantial costs and be a distraction to our management and other employees, and such claims could harm our business, financial condition and results of operations.
Moreover, in some circumstances, we may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering technology that we license from third-parties, and are therefore reliant on our licensors and may be reliant on future licensors or licensees, to protect certain intellectual property used in our business. If our licensors or future licensors or licensees fail to adequately protect this intellectual property, our ability to commercialize products could suffer. For example, we rely on a current licensor to maintain the patents and otherwise protect the intellectual property we license pursuant to a license agreement with such third-party. Such licensor may not successfully prosecute, maintain and protect such patents and intellectual property or may determine not to pursue litigation against third-parties that are infringing these rights, or may pursue litigation less aggressively than we would.
Some of our patents and patent applications may in the future be jointly owned with third-parties. If we are unable to obtain an exclusive license to any such third-party joint owners’ interest in such patents or patent applications, such co-owners may be able to license their rights to other third-parties, including our competitors, and our competitors could market competing products and technology. In addition, we may need the cooperation of any such joint owners of our patents in order to enforce such patents against third-parties, and such cooperation may not be provided to us. Any of the foregoing could harm our business, financial condition and results of operations.
Obtaining and maintaining intellectual property protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental agencies, and our intellectual property protection could be reduced or eliminated for non-compliance with these requirements.
Periodic maintenance fees, renewal fees, annuities fees and various other governmental fees on patents and/or patent applications are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of the patent and/or patent application. The USPTO, the United States Copyright Office (USCO) and various foreign governmental agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the intellectual property application process. In addition, periodic maintenance fees, renewal fees, annuity fees and various other government fees on intellectual property registrations often must be paid to the USPTO, USCO and foreign agencies over the lifetime of the intellectual property registration and/or application and any intellectual property rights we may obtain in the future. While an unintentional lapse of an intellectual property registration or application by us or our patent maintenance vendors, can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the registration or application, resulting in partial or complete loss of intellectual property rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a registration or application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we fail to maintain the intellectual property registrations and applications covering our products, we may not be able to stop a competitor from developing and marketing products that are the same as or similar to our products, which would have a material adverse effect on our business.
We may not identify relevant third-party patents or may incorrectly interpret the relevance, scope or expiration of a third-party patent, which might adversely affect our ability to develop and market our products.
We have not performed comprehensive searches or analyses of third-party patents that may be relevant to our technology and products. We may not be able to conduct complete and thorough searches, we may not be able to identify all relevant third-party patents, and we may not be able to fully predict the scope of the patent claims or the expiration of relevant third-party patent applications that may issue as patents. We cannot be certain that we are aware of all third-party patents and pending applications in the United States and abroad that are relevant to or necessary for the commercialization of our products in any jurisdiction.
The scope of a patent claim is determined by an interpretation of the law, the written disclosure in a patent and the patent’s prosecution history. Our interpretation of the relevance or the scope of a patent or a pending application may be incorrect, which may negatively impact our ability to market our product candidates. We may incorrectly determine that our products are not covered by a third-party patent or may incorrectly predict whether a third-party’s pending application will issue with claims of relevant scope. Our determination of the expiration date of any patent in the United States or abroad that we consider relevant may be incorrect, which may negatively impact our ability to develop and market our product candidates. Our failure to identify and correctly interpret relevant patents may negatively impact our ability to develop and market our products.
In addition, the agreements under which we license intellectual property or technology to or from third-parties are complex, and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what we believe to be the scope of our rights to the relevant intellectual property or technology or increase what we believe to be our financial or other obligations under the relevant agreement, either of which could have a material adverse effect on our business, financial condition, results of operations and prospects. Moreover, if disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on commercially acceptable terms, we may be unable to successfully develop and commercialize the affected products.
Our business also would suffer if any future licensors fail to abide by the terms of the license, if the licensors fail to enforce licensed patents against infringing third-parties, if the licensed patents or other rights are found to be invalid or unenforceable, or if we are unable to enter into necessary licenses on acceptable terms. Moreover, our licensors may own or control intellectual property that has not been licensed to us, and, as a result, we may be subject to claims, regardless of their merit, that we are infringing or otherwise violating the licensor’s rights.
We are dependent on patents and other intellectual property licensed from others and may become dependent on other patents or other intellectual property licensed from others in the future. If we lose our licenses for intellectual property that is important to our business, we may not be able to continue developing or selling our products.
We have obtained licenses that give us rights to third-party intellectual property, including patents and know-how, that is necessary or useful to our business. The license agreements covering our products impose various obligations on us, including the obligation to pay certain royalties on sales of certain of our products. One or more of our licensors may allege that we have breached our license agreement with them, and accordingly seek to terminate our license. As a result, we may not be able to market products that were covered by the license, which would result in the loss of significant rights, restrict our ability to commercialize certain of our products and could adversely affect our competitive business position and harm our business prospects. In addition, any claims brought against us by our licensors could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations.
Licensing of intellectual property involves complex legal, business and scientific issues and is complicated by the rapid pace of scientific discovery in our industry. Disputes may arise regarding intellectual property subject to a licensing agreement, including:
● the scope of rights granted under license agreements and other interpretation-related issues;
● the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to license agreements;
● the sublicensing of patent and other rights under our collaborative development relationships;
● our diligence obligations under the license agreement and what activities satisfy those diligence obligations;
● the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by any of our current or future our licensors and us and our partners; and
● the priority of invention of patented technology.
If disputes over intellectual property that we have or may in the future license prevent or impair our ability to maintain our current or future licensing arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected product candidates. We are generally also subject to all of the same risks with respect to protection of intellectual property that we may license as we are for intellectual property that we own. If we or any of our current or future licensors fail to adequately protect this intellectual property, our ability to commercialize our products could suffer.
We have previously been party to lawsuits involving patents and other intellectual property and the possibility exists that we may in the future be party to other lawsuits or administrative proceedings involving patents or other intellectual property. If we were to lose any intellectual property lawsuits, a court could require us to pay significant damages and/or prevent us from selling our products.
The medical device industry is highly competitive and litigious with respect to patents, trademarks, trade secrets, and other intellectual property rights. Companies in the medical device industry have used intellectual property litigation to gain a competitive advantage. Our commercial success depends in part upon our ability and that of our contract manufacturers and suppliers to manufacture, market, and sell our products, and to use our proprietary technologies without infringing, misappropriating or otherwise violating the proprietary rights or intellectual property of third-parties. We may in the future become party to, or be threatened with, adversarial proceedings or litigation regarding intellectual property rights with respect to our products and any future products and technology, whether or not we are actually infringing, misappropriating or otherwise violating the rights of third-parties.
We may in the future be party to other lawsuits or other administrative proceedings involving our patents or other intellectual property, regardless of merit. A legal proceeding, regardless of the outcome, is unpredictable and generally expensive and time consuming and, even if resolved in our favor, could drain significant financial resources and divert the time and effort of our management. Protracted litigation to defend or prosecute our intellectual property rights could result in our customers or potential customers deferring or limiting their purchase or use of the affected products until resolution of the litigation. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the market price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.
If we are found to infringe a third-party’s intellectual property rights, we could be required to obtain a license from such third-party to continue selling, developing and marketing our products and techniques. However, we may not be able to obtain any required license on commercially reasonable terms or at all. The acquisition or licensing of third-party intellectual property rights is a competitive area, and our competitors may pursue strategies to acquire or license third-party intellectual property rights that we may consider attractive or necessary. If we are unable to successfully obtain rights to required third-party intellectual property rights or maintain the existing intellectual property rights we have, we may have to abandon development of the relevant products or redesign those products that contain the allegedly infringing intellectual property, which could harm our business, financial condition and results of operations. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. We could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, we could be found liable for monetary damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a patent. A finding of infringement could force us to cease some of our business operations, which could materially harm our business. Claims that we have misappropriated the confidential information or trade secrets of third-parties could have a similar negative impact on our business. Intellectual property litigation may lead to unfavorable publicity that harms our reputation and causes the market price of our common shares to decline.
Because competition in our industry is intense, competitors may infringe or otherwise violate our issued patents, patents of our licensors or other intellectual property. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming, and could distract our technical and management personnel from their normal responsibilities. Any claims we assert against perceived infringers could provoke these parties to assert counterclaims that our patents are invalid or unenforceable or file administrative actions against us alleging that we infringe their patents. In addition, in a patent infringement proceeding, a court may decide that a patent of ours is invalid or unenforceable, in whole or in part, construe the patent’s claims narrowly or refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation proceeding or administrative action could put one or more of our patents at risk of being invalidated or interpreted narrowly. Our competitors may assert invalidity on various grounds, including lack of novelty, obviousness, non-enablement, lack of written description or that we were not the first applicant to file a patent application related to our product. We may elect to enter into license agreements in order to settle patent infringement claims or to resolve disputes before litigation, and any such license agreements may require us to pay royalties and other fees that could be significant. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure.
Our competitors, many of which have made substantial investments in patent portfolios, trade secrets, trademarks and competing technologies, may have applied for or obtained, or may in the future apply for or obtain, patents or trademarks that may prevent, limit or otherwise interfere with our ability to make, use, sell and/or export our products or to use our technologies or product names. Moreover, individuals and groups that are non-practicing entities, commonly referred to as “patent trolls,” purchase patents and other intellectual property assets for the purpose of making claims of infringement in order to extract settlements. From time to time, we may receive threatening letters, notices or “invitations to license,” or may be the subject of claims that our products and business operations infringe or violate the intellectual property rights
of others. The defense of these matters can be time consuming, costly to defend in litigation, divert management’s attention and resources, damage our reputation and brand and cause us to incur significant expenses or make substantial payments. Further, the outcome of litigation is uncertain and such litigation could result in us being forced to stop making, selling or using products or technologies that allegedly infringe the asserted intellectual property; pay substantial damages or royalties to the party whose intellectual property rights we may be found to be infringing; redesign those products that contain the allegedly infringing intellectual property, which could be costly, disruptive, or infeasible; and/or attempt to obtain a license to the relevant intellectual property from third-parties, which may not be available on reasonable terms, or at all, or, from third-parties. In addition, third-parties may assert infringement claims against our customers. These claims may require us to initiate or defend protracted and costly litigation on behalf of our customers or indemnify our customers for any costs associated with their own initiation or defense of infringement claims, regardless of the merits of these claims. If any of these claims succeed or settle, we may be forced to pay damages or settlement payments on behalf of our customers or may be required to obtain licenses for the products they use. If we cannot obtain all necessary licenses on commercially reasonable terms, our customers may be forced to stop using our products.
If we fail to execute invention assignment agreements with our employees and contractors involved in the development of intellectual property or are unable to protect the confidentiality of our trade secrets, the value of our products and our business and competitive position could be harmed.
In addition to patent protection, we also rely on the protection of trademarks, copyrights, trade secrets, unpatented know-how, technology and other confidential and proprietary information to maintain our competitive position. We generally enter into confidentiality and invention assignment agreements with our employees, consultants and third-parties upon their commencement of a relationship with us. However, we may not enter into such agreements with all employees, consultants and third-parties who have been involved in the development of our intellectual property. In addition, these agreements may not provide meaningful protection against the unauthorized use or disclosure of our trade secrets or other confidential information, and adequate remedies may not exist if unauthorized use or disclosure were to occur. Any disclosure, either intentional or unintentional, by our employees, the employees of third-parties with whom we share our facilities or third-party consultants and vendors that we engage, or misappropriation by third-parties (such as through a cybersecurity breach) of our trade secrets and other proprietary information would impair our competitive advantages and could have a material adverse effect on our business, financial condition and results of operations. In particular, a failure to protect our proprietary rights may allow competitors to copy our products and procedures, which could adversely affect our pricing and market share. Further, other parties may independently develop substantially equivalent know-how and technology.
In addition to contractual measures, we try to protect the confidential nature of our proprietary information using commonly accepted physical and technological security measures. Such measures may not, for example, in the case of misappropriation of a trade secret by an employee or third-party with authorized access, provide adequate protection for our proprietary information. Our security measures may not prevent an employee or consultant from misappropriating our trade secrets and providing them to a competitor, and recourse we take against such misconduct may not provide an adequate remedy to protect our interests fully. Unauthorized parties may also attempt to copy or reverse engineer certain aspects of our products that we consider proprietary. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret can be difficult, expensive and time-consuming, and the outcome is unpredictable. Even though we use commonly accepted security measures, trade secret violations are often a matter of state law, and the criteria for protection of trade secrets can vary among different jurisdictions. In addition, trade secrets may be independently developed by others in a manner that could prevent legal recourse by us. While we have agreements with our employees, consultants and third- parties that obligate them to assign their inventions to us, these agreements may not be self-executing, not all employees or consultants may enter into such agreements, or employees or consultants may breach or violate the terms of these agreements, and we may not have adequate remedies for any such breach or violation. If any of our intellectual property or confidential or proprietary information, such as our trade secrets, were to be disclosed or misappropriated, or if any such information was independently developed by a competitor, it could have a material adverse effect on our competitive position, business, financial condition, results of operations and prospects.
If our trademarks and trade names are not adequately protected, we may not be able to build name recognition in our markets of interest and our competitive position may be harmed.
We rely on our trademarks, trade names and brand names to distinguish our products from the products of our competitors and have registered or applied to register many of these trademarks. We cannot guarantee that our trademark applications will be approved. During trademark registration proceedings, we may receive rejections of our applications by the USPTO or in other foreign jurisdictions. Although we would be given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, third-parties may also oppose our trademark applications or otherwise challenge our use of the trademarks. Our registered and unregistered trademarks, trade names, and brand names may be challenged, infringed, circumvented, declared generic or determined to be violating or infringing on other marks. We may not be able to protect our rights to these trademarks, trade names, and brand names which we rely upon to build name recognition among potential partners and customers in our markets of interest. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition, and could require us to devote resources to advertising and marketing new brands. Further, there can be no assurance that competitors will not infringe our trademarks or that we will have adequate resources to enforce our trademarks. We may also license our trademarks and trade names to third-parties, such as distributors. Though these license agreements may provide guidelines for how our trademarks and trade names may be used, a breach of these agreements or misuse of our trademarks and tradenames by our licensees may jeopardize our rights in or diminish the goodwill associated with our trademarks and trade names.
Patent terms may not be sufficient to effectively protect our products and business for an adequate period of time.
Patents have a limited lifespan. In the United States, if all maintenance fees are paid timely, the natural expiration of a utility patent is generally 20 years after its first effective non-provisional filing date and the natural expiration of a design patent is generally 14 years after its issue date, unless the filing date occurred on or after May 13, 2015, in which case the natural expiration of a design patent is generally 15 years after its issue date. However, the actual protection afforded by a patent varies from country to country, and depends on many factors, including the type of patent, the scope of its coverage, the availability of regulatory-related extensions, the availability of legal remedies in a particular country and the validity and enforceability of the patent. Although various extensions may be available, the term of a patent, and the protection it affords, is limited. Even if patents covering our proprietary technologies and their uses are obtained, once the patent has expired, we may be open to competition, which may harm our business prospects. In addition, although upon issuance in the United States a patent’s term can be extended based on certain delays caused by the USPTO, this extension can be reduced or eliminated based on certain delays caused by the patent applicant during patent prosecution. A patent term extension based on regulatory delay may be available in the United States. However, only a single patent can be extended for each marketing approval, and any patent can be extended only once, for a single product. Moreover, the scope of protection during the period of the patent term extension does not extend to the full scope of the claim, but instead only to the scope of the product as approved. Laws governing analogous patent term extensions in foreign jurisdictions vary widely, as do laws governing the ability to obtain multiple patents from a single patent family. Additionally, we may not receive an extension if we fail to exercise due diligence during the testing phase or regulatory review process, apply within applicable deadlines, fail to apply prior to expiration of relevant patents or otherwise fail to satisfy applicable requirements. Given the amount of time required for the development, testing and regulatory review of new products, patents protecting such products might expire before or shortly after such products are commercialized. If we do not have sufficient patent terms to protect our products, proprietary technologies and their uses, our business would be seriously harmed. As our patents expire, the scope of our patent protection will be reduced, which may reduce or eliminate any competitive advantage afforded by our patent portfolio. As a result, our reduced patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.
Changes in U.S. or foreign patent laws or their interpretation may limit our ability to obtain, maintain, defend and/or enforce our patents.
Patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. The Leahy-Smith America Invents Act (Leahy-Smith Act) includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted and also affect patent litigation. The USPTO has developed regulations and procedures to
govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first-to-file provisions, which became effective on March 16, 2013. The first to file provisions limit the rights of an inventor to patent an invention if not the first to file an application for patenting that invention, even if such invention was the first invention. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business.
However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the enforcement and defense of our issued patents. For example, the Leahy-Smith Act provides that an administrative tribunal known as the Patent Trial and Appeals Board (PTAB), provides a venue for challenging the validity of patents at a cost that is much lower than district court litigation and on timelines that are much faster. Although it is not clear what, if any, long-term impact the PTAB proceedings will have on the operation of our business, the initial results of patent challenge proceedings before the PTAB since its inception in 2013 have resulted in the invalidation of many U.S. patent claims. The availability of the PTAB as a lower-cost, faster and potentially more potent tribunal for challenging patents could increase the likelihood that our own patents will be challenged, thereby increasing the uncertainties and costs of maintaining and enforcing them.
The America Invents Act also includes a number of significant changes that affect the way U.S. patent applications will be prosecuted and also may affect patent litigation. These include allowing third-party submission of prior art to the USPTO during patent prosecution and additional procedures to attack the validity of a patent by the USPTO administered post-grant proceedings, including post-grant review, inter partes review and derivation proceedings.
Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in U.S. federal courts necessary to invalidate a patent claim, a third-party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Therefore, the America Invents Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. In addition, future actions by the U.S. Congress, the federal courts and the USPTO could cause the laws and regulations governing patents to change in unpredictable ways. Any of the foregoing could harm our business, financial condition and results of operations.
We have limited foreign intellectual property rights and may be unable to enforce our intellectual property rights throughout the world.
We have limited intellectual property rights outside the United States. Filing, prosecuting and defending patents or trademarks on our products and any future products in all countries throughout the world would be prohibitively expensive, and the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Consequently, we may not be able to prevent third-parties from practicing our inventions or utilizing our trademarks in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our products and any future products, and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing in these jurisdictions.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. This could make it difficult for us to stop infringement of our foreign patents, if obtained, or the misappropriation of our other intellectual property rights. For example, some foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third-parties. In addition, some countries limit the enforceability of patents against third-parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries.
Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of our intellectual property.
We are and in the future may be subject to claims that we or our employees have misappropriated the intellectual property of a third-party, including trade secrets or know-how, or are in breach of non-competition or non-solicitation agreements with our competitors and third-parties may claim an ownership interest in intellectual property that we regard as our own.
We could in the future be subject to claims that we or our employees have inadvertently or otherwise used or disclosed alleged trade secrets or other confidential information of former employers or competitors. Many of our employees and consultants were previously employed at or engaged by other medical device companies, including our competitors or potential competitors. Some of these employees, consultants and contractors may have executed proprietary rights, non-disclosure and non-competition agreements in connection with such previous employment. Although we try to ensure that our employees and consultants do not use the intellectual property, proprietary information, know-how or trade secrets of others in their work for us, we may be subject to claims that we or these individuals have, inadvertently or otherwise, misappropriated the intellectual property or disclosed the alleged trade secrets or other proprietary information, of these former employers, competitors or other third-parties. Additionally, we may be subject to claims that former employees, collaborators or other third-parties have an ownership interest in or inventorship of intellectual property we regard as our own, for example, based on claims that our agreements with employees or consultants obligating them to assign intellectual property to us are ineffective or in conflict with prior or competing contractual obligations to assign inventions to another employer, to a former employer, or to another person or entity. The failure to name the proper inventors on a patent application can result in the patents issuing thereon being unenforceable. Inventorship disputes may arise from conflicting views regarding the contributions of different individuals named as inventors, the effects of foreign laws where foreign nationals are involved in the development of the subject matter of the patent, conflicting obligations of third-parties involved in developing our product candidates or as a result of questions regarding co-ownership of potential joint inventions. Litigation may be necessary to defend against and resolve claims, and it may be necessary or we may desire to enter into a license to settle any such claim; however, there can be no assurance that we would be able to obtain a license on commercially reasonable terms, if at all. If our defense to those claims fails, in addition to paying monetary damages or a settlement payment, a court could prohibit us from using technologies, features or other intellectual property that are essential to our products, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of the former employers. An inability to incorporate technologies, features or other intellectual property that are important or essential to our products could have a material adverse effect on our business and competitive position and may prevent us from selling our products. In addition, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against these claims, litigation could result in substantial costs and could be a distraction to management. Any litigation or the threat thereof may adversely affect our ability to hire employees or contract with independent sales representatives. A loss of key personnel or their work product could hamper or prevent our ability to commercialize our products, which could materially and adversely affect our business, financial condition, operating results, cash flows and prospects.
In addition, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property that we regard as our own. The assignment of intellectual property rights may not be self-executing, or the assignment agreements may be breached, and we may be forced to bring claims against third-parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property. Such claims could have a material adverse effect on our business, financial condition, results of operations, and prospects.
If our third-party manufacturing partners do not respect our intellectual property and trade secrets and produce competitive products using our designs or intellectual property, our business, financial condition and results of operations would be harmed.
Although our agreements with third-party manufacturing partners generally seek to prevent them from misusing our intellectual property and trade secrets, or using our designs to manufacture products for our competitors, we may be unsuccessful in monitoring and enforcing our intellectual property rights against these manufacturing partners and may find counterfeit goods in the market being sold as our products or future products similar to ours produced for our competitors using our intellectual property. Although we take steps to stop counterfeits, we may not be successful and network operators who purchase these counterfeit goods may experience product defects or failures, harming our reputation and brand and causing us to lose future sales. Any of the foregoing could harm our business, financial condition and results of operations.
Risks Related to Regulatory Matters
We are subject to substantial government regulation that could have a material adverse effect on our business.
Our products and our business are subject to extensive regulation and review by numerous governmental authorities both in the United States and abroad. U.S. and foreign regulations govern the design, development, testing, clinical studies, premarket clearance, approval, certifications, safety, registration, manufacturing, packaging, storage, reporting, sales, distribution, marketing, labeling, promotion, relationships with health care professionals, recordkeeping procedures, post-marketing surveillance, post-market studies, and product import and export of our products. The regulatory process requires significant time, effort and expenditures to bring our products to market, and we cannot be assured that any of our products will be authorized for marketing. The regulations to which we are subject are complex and have tended to become more stringent over time. Regulatory changes could result in restrictions on our ability to carry on or expand our operations, higher than anticipated costs or lower than anticipated sales. The FDA and other regulatory authorities enforce these regulatory requirements through, among other means, periodic unannounced inspections. We do not know whether we will be found compliant in connection with any future regulatory inspections. Moreover, the FDA and other authorities have broad enforcement powers.
Our failure to comply with applicable regulatory requirements could result in:
● adverse publicity, warning letters, untitled letters, or “it has come to our attention” letters from the FDA, or similar letters from foreign regulatory authorities alleging noncompliance;
● fines, penalties, injunctions, or consent decrees;
● operating restrictions, partial suspension or total shutdown of production;
● denial of requests for regulatory clearance, approval or certification of new products, new intended uses or modifications to existing products;
● repair, replacement, refunds, recalls, or seizures of our products; or
● withdrawal or suspension of regulatory clearance, approval or certification that have already been granted and/or obtained.
Any of these events could result in higher than anticipated costs or lower than anticipated sales and have a material adverse effect on our reputation, business, financial condition and results of operations.
Our relationships with customers, physicians and third-party payors are subject to federal, state, and foreign health care fraud and abuse laws, false claims laws, physician payment transparency laws and other health care laws and regulations. If we or our employees, independent contractors, consultants, commercial partners, or vendors violate these laws, we could face substantial penalties.
Our relationships with customers, physicians and third-party payors are subject to federal, state, and foreign health care fraud and abuse laws, false claims laws, transparency laws with respect to payments and other transfers of value made to physicians and other licensed health care professionals, and other health care laws and regulations. In particular, the promotion, sales and marketing of health care items and services is subject to extensive laws and regulations designed to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive and other business arrangements. The U.S. health care laws and regulations that may affect our ability to operate include, but are not limited to:
● the federal Anti-Kickback Statute, which prohibits, among other things, any person or entity from knowingly and willfully, offering, paying, soliciting or receiving any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce, or in return for, the purchasing, leasing, ordering or arranging for the purchase, lease, or order of any item or service reimbursable under Medicare, Medicaid or other federal health care programs. The term “remuneration” has been broadly interpreted to include anything of value. Although there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors are drawn narrowly. Practices that may be alleged to be intended to induce the purchases or recommendations include any payments of more than fair market value and may be subject to scrutiny if they do not qualify for an exception or safe harbor. In addition, a person or entity does not need to have actual knowledge of this statute or specific intent to violate it in order to have committed a violation;
● federal civil and criminal false claims laws, including the federal civil False Claims Act, and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment or approval from Medicare, Medicaid or other federal government programs that are false or fraudulent or knowingly making a false statement to improperly avoid, decrease or conceal an obligation to pay money to the federal government, including federal health care programs. In addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act;
● the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) which created new federal civil and criminal statutes that prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud any health care benefit program or obtain, by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any health care benefit program, including private third-party payors and knowingly and willfully falsifying, concealing or covering up by any trick, scheme or device, a material fact or making any materially false, fictitious or fraudulent statements in connection with the delivery of, or payment for, health care benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;
● federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers;
● the federal Physician Payments Sunshine Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the government information related to payments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors), certain non-physician practitioners (physician assistants, nurse practitioners, clinical nurse specialists, certified nurse anesthetists, anesthesiologist assistants and certified nurse midwives) and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members; and
● state and foreign equivalents of each of the health care laws described above, among others, some of which may be broader in scope including, without limitation, state anti-kickback and false claims laws that may apply to sales or marketing arrangements and claims involving health care items or services reimbursed by non-governmental third-party payors, including private insurers, or that apply regardless of payor; state laws that require device companies to comply with the industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government; state laws that require device manufacturers to report information related to payments and other transfers of value to physicians and other health care providers, marketing expenditures; and state and local laws requiring the registration of device sales and medical representatives. Greater scrutiny of marketing practices in the medical device industry has resulted in numerous government investigations by various government authorities, and this industry-wide enforcement activity is expected to continue. The shifting regulatory environment, along with the requirement to comply with multiple jurisdictions with different and difficult compliance and reporting requirements, increases the possibility that we may run afoul of one or more laws. The costs to comply with these regulatory requirements are becoming more expensive and will also impact our profitability.
Because of the breadth of these laws and the narrowness of the statutory exceptions and regulatory safe harbors available, it is possible that some of our business activities, patient outreach programs or our arrangements with independent sales representatives and customers could be subject to challenge under one or more of such laws. We have also entered into consulting and royalty agreements with physicians, including some who have ownership interests in us and/or influence the ordering of or use our products in procedures they perform. Compensation under some of these arrangements includes the provision of stock or stock options. We could be adversely affected if regulatory agencies determine our financial relationships with such physicians to be in violation of applicable laws. Greater scrutiny of marketing practices in the medical device industry has resulted in numerous government investigations by various government authorities, and this industry-wide enforcement activity is expected to continue. The shifting regulatory environment, along with the requirement to comply with multiple jurisdictions with different and difficult compliance and reporting requirements, increases the possibility that we may run afoul of one or more laws. The costs to comply with these regulatory requirements are becoming more expensive and will also impact our profitability. It is not always possible to identify and deter employee misconduct or business noncompliance, and the precautions we take to detect and prevent inappropriate conduct may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If we or our employees, agents, independent contractors, consultants, commercial partners and vendors violate these laws, we may be subject to investigations, enforcement actions and/or significant penalties, including the imposition of significant civil, criminal and administrative penalties, damages, disgorgement, monetary fines, imprisonment, possible exclusion from participation in Medicare, Medicaid and other federal health care programs, contractual damages, reputational harm, diminished profits and future earnings, additional reporting requirements and/or oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, and/or curtailment of our operations, any of which could adversely affect our ability to operate our business and our results of operations.
We may not receive, or may be delayed in receiving, the necessary clearances, approvals or certifications for our future products or modifications to our current products, and failure to timely obtain necessary clearances, approvals or certifications for our future products or modifications to our current products would adversely affect our ability to grow our business.
In the United States, before we can market a new medical device, or a new use of, or new claim for or significant modification to an existing medical device product, we must first receive either clearance under Section 510(k) of the Federal Food, Drug, and Cosmetic Act (FDCA) or a PMA from the FDA, unless an exemption applies, or we qualify for de novo classification. In the 510(k) clearance process, before a device may be marketed, the FDA must determine that a proposed device is “substantially equivalent” to a legally-marketed “predicate” device, which includes a device that has been previously cleared through the 510(k) process, a device that was legally marketed before May 28, 1976 (pre-amendments device), a device that was originally on the U.S. market pursuant to a PMA and later down-classified, or a 510(k)-exempt device. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Clinical
data are sometimes required to support substantial equivalence. In the process of obtaining a PMA, the FDA must determine that a proposed device is safe and effective for its intended use based, in part, on extensive data, including, but not limited to, technical, pre-clinical, clinical trial, manufacturing and labeling data. The PMA process is typically required for devices that are deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices.
In the de novo classification process, a manufacturer whose novel device under the FDCA would otherwise be automatically classified as Class III and require the submission and approval of a PMA prior to marketing is able to request down-classification of the device to Class I or Class II on the basis that the device presents a low or moderate risk. If the FDA grants the de novo classification request, the applicant will receive authorization to market the device. This device type may be used subsequently as a predicate device for future 510(k) submissions.
We also acquired the total talus spacer, which has been authorized for marketing pursuant to an approved Humanitarian Device Exemption (HDE). An HDE allows for marketing of a Humanitarian Use Device, or HUD, which is a medical device designated by the FDA as intended to benefit patients in the treatment or diagnosis of a disease or condition that affects not more than 8,000 individuals in the United States per year. To market a HUD, the device must have received a HUD designation by the FDA and be approved by the FDA pursuant to an HDE application. An HDE approval is based on the applicant’s demonstration that there is no comparable device available and that the probable benefit to health from the proposed HUD outweighs the risk of injury or illness from its use, taking into account alternative treatments that are available for the condition or disease. However, a medical device approved pursuant to an HDE is exempt from the effectiveness requirements that would otherwise apply and to which the device would be subject if approved pursuant to a PMA, and clinical studies demonstrating effectiveness are not required to support approval. An approved HDE must be labeled with a disclaimer stating that the effectiveness of the device has not been established. In addition, HUDs that receive HDE approval may not be sold for profit except in limited circumstances. In any case, to sell the device for profit, HDE holders must notify the FDA of the intent to sell for profit and are limited in the number of devices that may be sold for profit on an annual basis. Prior to HUD use following HDE approval, the HDE holder is required to ensure that use of the use of the HUD has been approved by the facility’s IRB. Post-approval clinical studies may also be required. Our total talus spacer is subject to the requirement for a post-approval study as a condition of approval of the HDE.
Modifications to products that are approved through a PMA application generally require FDA approval. Similarly, certain modifications made to products cleared through an HDE require FDA approval, and products cleared through a 510(k) or authorized for marketing pursuant to a de novo classification may require a new 510(k) clearance. The marketing authorization process can be expensive, lengthy and uncertain. The FDA’s 510(k) clearance process usually takes from three to nine months, but can last longer. The process of obtaining a PMA is much more costly and uncertain than the 510(k) clearance process and generally takes from one to three years, or even longer, from the time the application is submitted to the FDA. In addition, a PMA generally requires the performance of one or more clinical trials. Despite the time, effort and cost, a device may not be approved or cleared by the FDA. Any delay or failure to obtain necessary regulatory clearances or approvals could harm our business. Furthermore, even if we are granted regulatory clearances or approvals, they may include significant limitations on the indicated uses for the device, which may limit the market for the device.
In the United States, except for the total talus spacer, we have obtained clearance of all of our non-exempt products through the 510(k) clearance process. Any modification to these products that has not been previously cleared may require us to submit a new 510(k) premarket notification and obtain clearance, or submit for PMA and obtain FDA approval, before implementing the change. Specifically, any modification to a 510(k)-cleared device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, design or manufacture, requires a new 510(k) clearance or, possibly, a PMA. The FDA requires every manufacturer to make this determination in the first instance, but the FDA may review any manufacturer’s decision. The FDA may not agree with our decisions regarding whether new clearances or approvals are necessary. We have made modifications to 510(k)-cleared products in the past and have determined based on our review of the applicable FDA regulations and guidance that in certain instances new 510(k) clearances or a PMA were not required. We may make modifications or add additional features in the future that we believe do not require a new 510(k) clearance or a PMA. If the FDA disagrees with our determination and requires us to submit new 510(k) premarket notifications or PMA applications for modifications to our previously cleared products for which we have concluded that new clearances or approvals are unnecessary, we may be required to cease marketing or
to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties. If the FDA requires us to go through a lengthier, more rigorous examination for future products or modifications to existing products than we had expected, product introductions or modifications could be delayed or canceled, which could adversely affect our ability to grow our business. The FDA, applicable foreign regulatory authorities and Notified Body can delay, limit or deny clearance, approval or certification of a device for many reasons, including:
● our inability to demonstrate to the satisfaction of the FDA or the applicable regulatory entity or Notified Body that our products are safe or effective for their intended uses;
● the disagreement of the FDA or the applicable foreign regulatory body with the design or implementation of our clinical trials or clinical studies or the interpretation of data from pre-clinical studies, clinical trials or clinical studies;
● serious and unexpected adverse device effects experienced by participants in our clinical trials or clinical studies;
● our inability to demonstrate that the clinical and other benefits of the device outweigh the risks;
● the manufacturing process or facilities we use may not meet applicable requirements; and
● the potential for approval or certification policies or regulations of the FDA or applicable foreign regulatory bodies to change significantly in a manner rendering our clinical data or regulatory filings insufficient for clearance, approval or certification.
Until May 25, 2021, medical devices were regulated by the Council Directive 93/42/EEC (EU Medical Devices Directive) which has been repealed and replaced by Regulation (EU) No 2017/745 (EU Medical Devices Regulation) which became effective on May 26, 2021. Our current certificates have been granted and renewed under the EU Medical Devices Directive. Devices lawfully placed on the market pursuant to the EU Medical Devices Directive prior to May 26, 2021, may generally continue to be made available on the market or put into service until May 26, 2025, provided that the requirements of the transitional provisions are fulfilled. In particular, no significant change must be made to the device in question. However, as of May 26, 2021, we must comply with the EU Medical Devices Regulation requirements applying in place of the corresponding requirements of the EU Medical Devices Directive with regard to registration of economic operators and of devices, post-market surveillance, market surveillance and vigilance requirements.
Pursuing marketing of medical devices in the EU will notably require that our devices be certified under the new regime set forth in the EU Medical Devices Regulation when our current certificates expire.
If we fail to comply with applicable EU legislation, we would be unable to continue to affix the CE mark to our products, which would prevent us from selling them within the EU and the European Economic Area (EEA) (which consists of the 27 EU member states plus Norway, Liechtenstein and Iceland). Non-compliance with the above regulations would also prevent us from selling our products in these three countries.
The rules applicable in Great Britain differ from the EEA as a result of Brexit. On June 26, 2022, the Medicines and Healthcare Products Regulatory Agency (MHRA) published its response to a 10-week consultation on the future regulation of medical devices in the United Kingdom (UK). The MHRA proposes amendments to the UK Medical Devices Regulations 2002 (which are based on EU legislation, primarily the EU Medical Devices Directive), in particular to create new access pathways to support innovation, create an innovative framework for regulating software and artificial intelligence as medical devices, reform in vitro diagnostic regulation, and foster sustainability through the reuse and remanufacture of medical devices. The MHRA has stated that it remains its intention to implement the proposals from such consultation through secondary legislation. In addition, on November 14, 2024, the MHRA launched a new consultation on proposals to update the regulatory framework for medical devices in Great Britain, covering four topics, namely (1) a new international reliance scheme to enable swifter market access for certain devices that have already been approved in a comparable regulator country; (2) the new UK Conformity Assessed (UKCA) mark and, in particular, proposals to remove the requirement to place such UKCA marking on devices; (3) conformity assessment procedures for
in vitro diagnostic devices; and (4) maintaining in UK law certain pieces of “assimilated” EU law which are due to sunset in 2025. The MHRA consultation was opened until January 5, 2025 and it is expected that secondary legislation implementing the proposals would be introduced in 2025. The divergence of the new UK rules from EU law could adversely affect or delay our ability to obtain approval for our products in the UK, which could adversely affect our ability to grow our business.
We also market certain products that are comprised of human cells, tissues and cellular or tissue-based products (HCT/P). In the U.S., we are marketing our HCT/Ps pursuant to Section 361 of the PHSA and 21 CFR Part 1271 of FDA’s regulations. We do not manufacture these HCT/P products, but serve as a distributor for them. So-called Section 361 HCT/Ps are not currently subject to the FDA requirements to obtain marketing authorizations as long as they meet certain criteria provided in FDA’s regulations. HCT/Ps regulated as “361 HCT/Ps” are currently subject to requirements relating to registering facilities and listing products with the FDA, screening and testing for tissue donor eligibility, current good tissue practice requirements, or cGTPs, when processing, storing, labeling and distributing HCT/Ps, including required labeling information, stringent record keeping and adverse event reporting. If we or our suppliers fail to comply with these requirements, we could be subject to FDA enforcement action, including, for example, warning letters, fines, injunctions, product recalls or seizures, and, in the most serious cases, criminal penalties. To be regulated as Section 361 HCT/Ps, these products must meet FDA’s criteria to be considered “minimally manipulated” and intended for “homologous use,” among other requirements. HCT/Ps that do not meet the criteria to be considered Section 361 HCT/Ps are subject to the FDA’s regulatory requirements applicable to medical devices, orthobiologics or drugs. Device, orthobiologic or drug HCT/Ps must comply both with the requirements exclusively applicable to Section 361 HCT/Ps and, in addition, with other requirements, including requirements for marketing authorization. For example, Section 361 HCT/Ps do not require 510(k) clearance, PMA, approval of a Biologics License Application, or BLA, or other premarket authorization from FDA before marketing. We believe our HCT/Ps are regulated solely under Section 361 of the PHSA, and therefore, we have not sought or obtained 510(k) clearance, PMA, or licensure through a BLA for such HCT/Ps.
The FDA could disagree with our determination that these human tissue products are Section 361 HCT/Ps and could determine that these products are orthobiologics requiring a BLA or medical devices requiring 510(k) clearance or PMA, and could require that we cease marketing such products and/or recall them pending appropriate clearance, or licensure from the FDA. If we have to cease marketing and/or have to recall any of our Section 361 HCT/P products, our net sales would decrease, which would adversely affect our business, results of operations and financial condition. HCT/Ps that do not meet the criteria of Section 361 are regulated under Section 351 of the PHSA. Unlike Section 361 HCT/Ps, HCT/Ps regulated as “351” HCT/Ps are subject to premarket review and approval by the FDA. In November 2017, the FDA released a guidance document entitled “Regulatory Considerations for Human Cells, Tissues, and Cellular and Tissue-Based Products: Minimal Manipulation and Homologous Use-Guidance for Industry and Food and Drug Administration Staff.” The guidance indicated that the FDA would exercise enforcement discretion, using a risk-based approach, with respect to the IND application and pre-market approval requirements for certain HCT/Ps that it considered to be marketed unlawfully as Section 361 HCT/Ps for a period of 36 months from the issuance date of the guidance to allow manufacturers to pursue submission of an IND application. Under this approach, FDA indicated that high-risk products and uses could be subject to immediate enforcement action. The FDA resumed enforcement of Investigational New Drug Application and premarket approval requirements with respect to these products as of June 1, 2021.
In addition, the FDA may in the future modify the scope of its enforcement discretion with respect to Section 361 HCT/Ps or change its position on which current or future products qualify as Section 361 HCT/Ps, or determine that some or all of our HCT/P products may not be lawfully marketed under the FDA’s policy of enforcement discretion. Any regulatory changes could have adverse consequences for us and make it more difficult or expensive for us to conduct our business by requiring pre-market clearance or approval and compliance with additional post-market regulatory requirements with respect to those products.
In the EU, there is no standalone regulatory framework which applies to products containing human tissues or cells. However, specific requirements are applicable to the donation, procurement, testing, processing, preservation, storage and distribution of such human materials under Directive 2004/23/EC (the EU Tissues and Cells Directive), as implemented in the EU member states, which provides for general quality and safety requirements applicable to some or all of the abovementioned activities performed in relation to human cells and tissues. Additional requirements set out under other
EU regulations and directives, such as the EU Medical Devices Regulation, may also apply to our human tissues or cells containing products, depending on their characteristics.
EU member states national competent authorities may disagree with our determination of which requirements are applicable to our products and may determine that additional requirements are applicable to our products which contain human cells and tissues. Failure to comply with these requirements could jeopardize our ability to sell our products and result in enforcement actions, which could harm our reputation, business, financial condition, results of operations and prospects.
In addition, regulatory authorities’ policies with respect to human tissues or cells may change and additional government regulations may be enacted. For instance, the regulatory landscape related to human tissues and cells in the EU is evolving. In May 2024, the proposal for a regulation governing substances of human origin was adopted by the EU institutions. The Regulation will apply as from August 7, 2027, with an extra year for certain provisions. Such regulatory changes may have adverse consequences for us and make it more difficult or expensive for us to conduct our business in the EEA.
Modifications to our marketed medical device products may require new 510(k) clearances, PMAs, or certifications or may require us to cease marketing or recall the modified products until clearances, approvals or certifications are obtained.
Modifications to any of our current 510(k)-cleared products may require new regulatory approvals or clearances, including 510(k) clearances or PMAs, or require us to recall or cease marketing the modified systems until these clearances or approvals are obtained. The FDA requires device manufacturers to initially make and document a determination of whether or not a modification requires a new approval, supplement or clearance. A manufacturer may determine that a modification could not significantly affect safety or efficacy and does not represent a major change in its intended use, so that no new 510(k) clearance is necessary. However, the FDA can review a manufacturer’s decision and may disagree. The FDA may also on its own initiative determine that a new clearance or approval is required. We have made modifications to our products in the past and may make additional modifications in the future that we believe do not or will not require additional clearances or approvals. If the FDA disagrees and requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing our products as modified, which could require us to redesign our products and/or seek new marketing authorizations and harm our operating results. In these circumstances, we may be subject to significant enforcement actions. If the FDA requires us to go through a lengthier, more rigorous examination for future products or modifications to existing products than we had expected, product introductions or modifications could be delayed or canceled, which could adversely affect our ability to grow our business.
If a manufacturer determines that a modification to an FDA-cleared device could significantly affect its safety or effectiveness or would constitute a major change in its intended use, then the manufacturer must file for a new 510(k) clearance or possibly a PMA application. Where we determine that modifications to our products requires a new 510(k) clearance or PMA application, we may not be able to obtain those additional clearances or approvals for the modifications or additional indications in a timely manner, or at all. Obtaining clearances and approvals can be a time-consuming process, and delays in obtaining required future clearances or approvals would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our future growth.
In the EU, devices lawfully placed on the market pursuant to the EU Medical Devices Directive prior to May 26, 2021, may generally continue to be made available on the market or put into service until May 26, 2025, provided that the requirements of the transitional provisions are fulfilled. In particular, no substantial change must be made to the device as such a modification would trigger the obligation to obtain a new certification under the EU Medical Devices Regulation and therefore to have a notified body conducting a new conformity assessment of the devices. Once our devices will be certified under the EU Medical Devices Regulation, we must inform the notified body that carried out the conformity assessment of the medical devices that we market or sell in the EU and EEA of any planned substantial changes to our quality system or substantial changes to our medical devices that could affect compliance with the General safety and performance requirements laid down in Annex I to the EU Medical Devices Regulation or cause a substantial change to the intended use for which the device has been CE marked. The notified body will then assess the planned changes and verify whether they affect the products’ ongoing conformity with the EU Medical Devices Regulation. If the assessment
is favorable, the notified body will issue a new CE certificate of conformity or an addendum to the existing certificate attesting compliance with the general safety and performance requirements and quality system requirements laid down in the Annexes to the EU Medical Devices Regulation. The notified body may disagree with our proposed changes and product introductions or modifications could be delayed or canceled, which could adversely affect our ability to grow our business.
Failure to comply with post-marketing regulatory requirements could subject us to enforcement actions, including substantial penalties, and might require us to recall or withdraw a product from the market.
We are subject to ongoing and pervasive regulatory requirements governing, among other things, the manufacture, marketing, advertising, medical device reporting, sale, promotion, import, export, registration and listing of devices. For example, medical device manufacturers must submit periodic reports to the FDA as a condition of obtaining marketing authorization. These reports include information about failures and certain adverse events associated with the device after its clearance. Failure to submit such reports, or failure to submit the reports in a timely manner, could result in enforcement action by the FDA. Following its review of the periodic reports, the FDA might ask for additional information or initiate further investigation. In addition, any marketing authorizations we are granted are limited to the authorized indications for use. Further, the manufacturing facilities for a product are subject to periodic review and inspection. Subsequent discovery of problems with a product, manufacturer, or manufacturing facility may result in restrictions on the product, manufacturer or manufacturing facility, withdrawal of the product from the market or other enforcement actions.
The regulations to which we are subject are complex and have become more stringent over time. Regulatory changes could result in restrictions on our ability to continue or expand our operations, higher than anticipated costs, or lower than anticipated sales. Plus, regulations, such as the FDA and other state and foreign regulatory authorities, have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by the FDA, state or foreign regulatory authorities, which may include any of the following sanctions:
● untitled letters or warning letters;
● fines, injunctions, consent decrees and civil penalties;
● recalls, termination of distribution, administrative detention or seizure of our products;
● customer notifications or repair, replacement or refunds;
● operating restrictions or partial suspension or total shutdown of production;
● delays in or refusal to grant our requests for future clearances or approvals or foreign marketing authorizations or certifications of new products, new intended uses or modifications to existing products;
● withdrawals or suspensions of our current 510(k) clearances or HDE approval or certifications, resulting in prohibitions on sales of our products;
● FDA refusal to issue certificates to foreign governments needed to export products for sale in other countries; and
● criminal prosecution.
Any of these sanctions could result in higher than anticipated costs or lower than anticipated sales and have a material adverse effect on our reputation, business, financial condition and results of operations. In addition, the FDA may change its clearance policies, adopt additional regulations or revise existing regulations or take other actions, which may prevent or delay clearance or approval of our future products under development or impact our ability to modify our currently cleared products on a timely basis. Such changes may also occur in foreign jurisdictions where we market our products. Such policy or regulatory changes could impose additional requirements upon us that could delay our ability to obtain new
clearances, approvals or certifications, increase the costs of compliance or restrict our ability to maintain our clearances or certifications of our current products.
In addition, we are required to conduct post-market testing and surveillance to monitor the safety or effectiveness of some of our products. Later discovery of previously unknown problems with our products, including unanticipated adverse events or adverse events of unanticipated severity or frequency, manufacturing problems, or failure to comply with regulatory requirements such as the FDA’s Quality System Regulation (QSR), may result in changes to labeling, restrictions on such products or manufacturing processes, withdrawal of the products from the market, voluntary or mandatory recalls, a requirement to repair, replace or refund the cost of any medical device we manufacture or distribute, fines, suspension of regulatory approvals or certifications, product seizures, injunctions or the imposition of civil or criminal penalties which would adversely affect our business, operating results and prospects.
Legislative or regulatory reforms may have a material adverse effect on us.
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulation of medical devices. In addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations or take other actions, which may prevent or delay approval or clearance of our future products under development or impact our ability to modify our currently cleared products on a timely basis. For example, on February 23, 2022, the FDA issued a proposed rule to amend the QSR, which establishes current good manufacturing practice requirements for medical device manufacturers, to align more closely with the International Organization for Standardization, or ISO, standards. This proposal has not yet been finalized or adopted. Accordingly, it is unclear the extent to which this or any other proposals, if adopted, could impose additional or different regulatory requirements on us that could increase the costs of compliance or otherwise create competition that may negatively affect our business.
Additionally, in September 2019, the FDA issued revised guidance describing an optional “safety and performance based” premarket review pathway for manufacturers of “certain, well-understood device types” to demonstrate substantial equivalence under the 510(k) clearance pathway by showing that such device meets objective safety and performance criteria established by the FDA, thereby obviating the need for manufacturers to compare the safety and performance of their medical devices to specific predicate devices in the clearance process. The FDA maintains a list of device types appropriate for the “safety and performance based” pathway and continues to develop product-specific guidance documents that identify the performance criteria for each such device type, as well as the recommended testing methods, where feasible. The FDA may establish performance criteria for classes of devices for which we or our competitors seek or currently have received clearance, and it is unclear the extent to which such performance standards, if established, could impact our ability to obtain new 510(k) clearances or otherwise create competition that may negatively affect our business.
In addition, FDA and foreign regulations and guidance are often revised or reinterpreted by the FDA and other foreign authorities in ways that may significantly affect our business and our products. Any new statutes, regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of any future products or make it more difficult to obtain clearance, approval or certification for, manufacture, market or distribute our products. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such changes could, among other things, require additional testing before obtaining clearance, approval or certification; changes to manufacturing methods; recall, replacement or discontinuance of our products; or additional record keeping.
If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may be subject to enforcement action, and we may not achieve or sustain profitability.
The EU landscape concerning medical devices in the EU recently evolved. On April 5, 2017, the EU Medical Devices Regulation was adopted, which repeals and replaces the EU Medical Devices Directive and the Council Directive 90/385/EEC (the EU Active Implantable Medical Devices Directive). Unlike directives, which must be implemented into the national laws of the EU member states, the regulations are directly applicable, i.e., without the need for EU member states to implement into national laws, in all EU member states and are intended to eliminate current differences in the
regulation of medical devices among EU member States. The EU Medical Devices Regulation is also applicable in the EEA. The EU Medical Devices Regulation, among other things, is intended to establish a uniform, transparent, predictable and sustainable regulatory framework across the EU for medical devices and ensure a high level of safety and health while supporting innovation.
The modifications brought by this new Regulation may have an effect on the way we conduct our business in the EU and the EEA. For example, as a result of the transition towards the new regime, notified body review times have lengthened, and product introductions could be delayed, which could adversely affect our ability to grow our business in a timely manner.
In addition, in response to perceived increases in health care costs in recent years there have been and continue to be proposals by the federal government, state governments, regulators and third-party payors to control these costs and, more generally, to reform the U.S. health care system. Certain of these proposals could limit the prices we will be able to charge for our products or the amount of reimbursement available for our products and could limit the acceptance and availability of our products.
In March 2010, the federal government enacted the ACA. Among other provisions, the ACA established new value-based payment programs, increased funding of comparative effectiveness research, reduced hospital payments for avoidable readmissions and hospital acquired conditions, and pilot programs to evaluate alternative payment methodologies that promote care coordination (such as bundled physician and hospital payments). Also, Medicare payments to providers were reduced, effective on April 1, 2013, and will remain in effect through 2032, with the exception of a temporary suspension from May 1, 2020 through March 31, 2022, unless additional Congressional action is taken.
Since its enactment, there have been judicial, executive and Congressional challenges to certain aspects of the ACA. On June 17, 2021, the U.S. Supreme Court dismissed the most recent judicial challenge to the ACA brought by several states without specifically ruling on the constitutionality of the ACA. Prior to the Supreme Court’s decision, President Biden issued an executive order to initiate a special enrollment period from February 15, 2021, through August 15, 2021, for purposes of obtaining health insurance coverage through the ACA marketplace. The executive order also instructed certain governmental agencies to review and reconsider their existing policies and rules that limit access to health care, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements, and policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the ACA. There are additional state and federal health care reform measures under consideration that may be adopted in the future which could have a material adverse effect on our industry generally and on our customers. We cannot predict what health care programs and regulations will be ultimately implemented at the federal or state level, or the effect of any future legislation or regulation. However, any regulatory and legal changes that lower reimbursement for our products, increase taxes on our medical devices, increase cost containment pressures on us or others in the health care sector or reduce medical procedure volumes could adversely affect our business, financial condition, results of operations or cash flows.
In the EU, similar developments may affect our ability to profitably commercialize our products, if certified. In December 2021, Regulation No 2021/2282 on Health Technology Assessment (HTA) amending Directive 2011/24/EU, was adopted. While the Regulation entered into force in January 2022, it only applies since January 2025, with preparatory and implementation-related steps to take place in the interim. The Regulation has a phased implementation depending on the concerned products. The Regulation intends to boost cooperation among EU member states in assessing health technologies, including certain high-risk medical devices, and provide the basis for cooperation at the EU level for joint clinical assessments in these areas. The Regulation will permit EU member states to use common HTA tools, methodologies, and procedures across the EU, working together in four main areas, including joint clinical assessment of the innovative health technologies with the highest potential impact for patients, joint scientific consultations whereby developers can seek advice from HTA authorities, identification of emerging health technologies to identify promising technologies early, and continuing voluntary cooperation in other areas. Individual EU member states will continue to be responsible for assessing non-clinical (e.g., economic, social, ethical) aspects of health technology, and making decisions on pricing and reimbursement.
Our products must be manufactured in accordance with federal and state quality regulations and are subject to FDA and foreign inspection, and our failure to comply with these regulations could result in fines, product recalls, product liability claims, limits on future product clearances, reputational damage and other adverse impacts.
The methods used in, and the facilities used for, the manufacture of our products must comply with the FDA’s QSR and foreign requirements which are complex regulatory schemes that cover the procedures and documentation of the design, testing, production, process controls, quality assurance, labeling, packaging, handling, storage, distribution, installation, servicing and shipping of medical devices. Furthermore, we are required to verify that our suppliers maintain facilities, procedures and operations that comply with our quality standards and applicable regulatory requirements. The FDA, foreign regulatory authorities and notified bodies enforce the QSR through periodic announced or unannounced inspections or audits of medical device manufacturing facilities, which may include the facilities of subcontractors.
We or our third-party manufacturers may not take the necessary steps to comply with applicable regulations, which could cause delays in the delivery of our products. In addition, failure to comply with applicable FDA or foreign regulatory requirements or later discovery of previously unknown problems with our products or manufacturing processes could result in, among other things: (i) warning letters or untitled letters; (ii) fines, injunctions or civil penalties; (iii) suspension or withdrawal of approvals, clearances or certifications; (iv) customer notifications or repair, replacement, refunds, detention, seizures or recalls of our products; (v) total or partial suspension of production or distribution; (vi) administrative or judicially imposed sanctions; (vii) the FDA’s or foreign authorities or notified body’s refusal to grant pending or future clearances, approvals or certifications for our products; (viii) clinical holds; (ix) refusal to permit the import or export of our products; and (x) criminal prosecution of us or our employees. Any of these actions could significantly and negatively impact supply of our products. If any of these events occurs, our reputation could be harmed, we could be exposed to product liability claims and we could lose customers and suffer reduced revenue and increased costs.
The misuse or off-label use of our products may harm our reputation in the marketplace, result in injuries that lead to product liability suits or result in costly investigations, fines or sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be costly to our business.
Except for our total talus spacer, which is authorized for marketing under a HDE, and our orthobiologics such as our PRESERVE Bone Graft System, which are regulated as HCT/Ps, our marketed products are either Class II medical devices cleared by the FDA for specific indications or they are Class I exempt for general orthopaedic use. We have no products that are Class III medical devices. We train our marketing personnel and direct sales force to not promote our devices for uses outside of the FDA or foreign-authorized indications for use, known as “off-label uses.” We cannot, however, prevent a physician from using our devices off-label, when in the physician’s independent professional medical judgment he or she deems it appropriate. There may be increased risk of injury to patients if physicians attempt to use our devices off-label. Furthermore, the use of our devices for indications other than those cleared, approved or certified by the FDA or notified body may not effectively treat such conditions, which could harm our reputation in the marketplace among physicians and patients.
If the FDA or foreign regulatory authorities determines that our promotional materials or training constitute promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance or imposition of an untitled letter, which is used for violators that do not necessitate a warning letter, injunction, seizure, civil fine or criminal penalties. We could face similar consequences from action by foreign regulatory bodies. It is also possible that other federal, state or foreign enforcement authorities might take action under other regulatory authority, such as false claims laws, if they consider our business activities to constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, exclusion from participation in government health care programs and the curtailment of our operations.
In addition, physicians may misuse our products or use improper techniques if they are not adequately trained, potentially leading to injury and an increased risk of product liability. If our devices are misused or used with improper technique, we may become subject to costly litigation by our customers or their patients. As described above, product
liability claims could divert management’s attention from our core business, be expensive to defend and result in sizeable damage awards against us that may not be covered by insurance.
Our medical device products may cause or contribute to adverse medical events or be subject to failures or malfunctions that we are required to report to the FDA or foreign regulatory authorities, and if we fail to do so, we would be subject to sanctions that could harm our reputation, business, financial condition and results of operations. The discovery of serious safety issues with our products, or a recall of our products either voluntarily or at the direction of the FDA or another governmental authority, could have a negative impact on us.
We are subject to the FDA’s medical device reporting regulations and similar foreign regulations, which require us to report to the FDA and similar foreign regulations when we receive or become aware of information that reasonably suggests that one or more of our medical device products may have caused or contributed to a death or serious injury or malfunctioned in a way that, if the malfunction were to recur, it could cause or contribute to a death or serious injury. The timing of our obligation to report is triggered by the date we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events of which we become aware within the prescribed timeframe. We may also fail to recognize that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of the product. If we fail to comply with our reporting obligations, the FDA or foreign regulatory authorities could take action, including warning letters, untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties, revocation of our device clearance, approval or certification, seizure of our products or delay in clearance, approval or certification of future products.
The FDA and foreign regulatory bodies have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture of a product or in the event that a product poses an unacceptable risk to health. The FDA’s authority to require a recall must be based on a finding that there is reasonable probability that the device could cause serious injury or death. We may also choose to voluntarily recall a product if any material deficiency is found. A government-mandated or voluntary recall by us could occur as a result of an unacceptable risk to health, component failures, malfunctions, manufacturing defects, labeling or design deficiencies, packaging defects or other deficiencies or failures to comply with applicable regulations. Product defects or other errors may occur in the future. Depending on the corrective action we take to redress a product’s deficiencies or defects, the FDA or foreign regulatory authorities may require, or we may decide, that we will need to obtain new clearances, approvals, or certifications for the device before we may market or distribute the corrected device. Seeking such clearances, approvals, or certifications may delay our ability to replace the recalled devices in a timely manner. Moreover, if we do not adequately address problems associated with our devices, we may face additional regulatory enforcement action, including FDA or foreign regulatory authorities warning letters, product seizure, injunctions, administrative penalties or civil or criminal fines.
Companies are required to maintain certain records of recalls and corrections, even if they are not reportable to the FDA or foreign authorities. We may initiate voluntary withdrawals or corrections for our products in the future that we determine do not require notification of the FDA or foreign authorities. If the FDA or foreign authorities disagree with our determinations, it could require us to report those actions as recalls and we may be subject to enforcement action. A future recall announcement could harm our reputation with customers, potentially lead to product liability claims against us and negatively affect our sales. In addition, we have had in the past, and may in the future, reports of adverse events associated with our products and procedures. While inherent in the medical device and surgical industry, frequent adverse events can lead to reputational harm and negatively affect our sales. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business and may harm our reputation and financial results.
Disruptions at the FDA, other government agencies and notified bodies caused by funding shortages or global health concerns could hinder their ability to hire, retain or deploy key leadership and other personnel, or otherwise prevent new or modified products from being developed, cleared, approved or commercialized in a timely manner or at all, which could negatively impact our business.
The ability of the FDA, foreign regulatory authorities and notified bodies to review and clear, approve, or certify new products can be affected by a variety of factors, including government budget and funding levels, statutory, regulatory and policy changes, the FDA’s or other bodies’ ability to hire and retain key personnel and accept the payment of user fees and other events that may otherwise affect the FDA’s or other bodies’ ability to perform routine functions. Average review times at the FDA or other bodies’ have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable. Disruptions at the FDA, other agencies and notified bodies may also slow the time necessary for medical devices or modifications to cleared or authorized medical devices to be reviewed by necessary government agencies or certified by notified bodies, which would adversely affect our business. For example, over the last several years, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities.
If a prolonged government shutdown occurs, or if global health concerns prevent the FDA, other regulatory authorities or notified bodies from conducting their regular inspections, audits, reviews, or other regulatory activities, it could significantly impact the ability of the FDA, other regulatory authorities and notified bodies to timely review and process our regulatory submissions, which could have a material adverse effect on business.
In the EU, notified bodies must be officially designated to certify products and services in accordance with the EU Medical Devices Regulation. Their designation process, which is significantly stricter under the new Regulation, has experienced considerable delays due to the COVID-19 pandemic. Despite a recent increase in designations, the current number of notified bodies designated under the new Regulation remains significantly lower than the number of notified bodies designated under the previous regime. The current designated notified bodies are therefore facing a backlog of requests as a consequence of which review times have lengthened. This situation may impact the way we are conducting our business in the EU and the EEA and the ability of our notified body to timely review and process our regulatory submissions and perform its audits.
The clinical study process is lengthy and expensive with uncertain outcomes, and the results of earlier studies may not be predictive of future clinical trial or clinical study results or provide favorable safety or efficacy data for our products.
We cannot guarantee our on-going post-market clinical studies, or any other clinical study we may conduct or sponsor in the future, will be successful, and such clinical studies could be lengthy and expensive to conduct. Clinical testing is difficult to design and implement, can take many years, can be expensive and carries uncertain outcomes. Clinical studies must be conducted in accordance with the laws and regulations of the FDA, other applicable regulatory authorities’ and foreign authorities’ legal requirements, regulations or guidelines, and are subject to oversight by these governmental agencies and institutional review board or other reviewing bodies at the medical institutions where the clinical studies are conducted. Furthermore, we rely, and in the future may continue to rely upon, on contract research organizations (CROs), and clinical study sites to ensure the proper and timely conduct of our clinical studies and while we have agreements governing their committed activities, we have limited influence over their actual performance. To the extent our collaborators or the CROs fail to enroll participants for our clinical studies, fail to conduct the study to required good clinical practice standards or are delayed for a significant time in the execution of studies, including achieving full enrollment, we may be affected by increased costs, program delays or both.
The initiation and completion of any of clinical studies may be prevented, delayed or halted for numerous reasons, which could adversely affect the costs, timing or successful completion of our clinical studies. Furthermore, patient enrollment in clinical studies and completion of patient follow-up depend on many factors, including the size of the patient population, the nature of the study protocol, the proximity of patients to clinical sites, the eligibility criteria for the clinical study, patient compliance, competing clinical studies and clinicians’ and patients’ perceptions as to the potential advantages of the product being studied in relation to other available therapies, including any new treatments that may be approved for the indications we are investigating.
If the third-parties on which we rely to conduct our clinical studies and to assist us with pre-clinical development do not perform as required or expected, we may not be able to obtain regulatory clearance, approval or certification for or commercialize our products.
We may not have the ability to independently conduct our pre-clinical and clinical studies for our future products and we may need to rely on third-parties, such as CROs, medical institutions, collaborators, clinical investigators and contract laboratories to conduct such trials. Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with applicable protocol, legal and regulatory requirements and scientific standards, and our reliance on third-parties does not relieve us of our regulatory responsibilities. We and these third-parties are required to comply with GCP requirements, which are regulations and guidelines enforced by the FDA and comparable foreign regulatory authorities for products in clinical development. Regulatory authorities enforce these GCP requirements through periodic inspections of study sponsors, principal investigators and study sites.
If we or any of these third-parties fail to comply with applicable GCP regulations, the clinical data generated in our clinical studies may be deemed unreliable and the FDA or comparable foreign regulatory authorities or other bodies may require us to perform additional clinical studies before clearing or approving our marketing applications or certifying our products. We cannot assure you that, upon inspection, such regulatory authorities will determine that any of our future clinical studies or clinical trials comply with the GCP regulations. To the extent our collaborators or the CROs fail to enroll participants for our clinical studies, fail to conduct the study to GCP standards or are delayed for a significant time in the execution of trials, including achieving full enrollment, including on account of the outbreak of infectious disease, or otherwise, we may be affected by increased costs, program delays or both, any resulting data may be unreliable or unusable for regulatory purposes, and we may be subject to enforcement action.
If these third-parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if these third-parties need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our pre-clinical development activities or clinical studies may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval or certification for, or successfully commercialize, our products on a timely basis, if at all, and our business, operating results and prospects may be adversely affected.
Actual or perceived failures to comply with applicable data protection, privacy and security laws, regulations, standards and other requirements could adversely affect our business, results of operations and financial condition.
In the course of our operations, we may collect, use, store, disclose, transfer and otherwise process an increasing volume of personal information, including from our employees and third-parties with whom we conduct business. We and our partners may be subject to federal, state and foreign data protection laws and regulations (i.e., laws and regulations that address data privacy and security). In the United States, numerous federal and state laws and regulations, including data breach notification laws, health information privacy laws and consumer protection laws and regulations (e.g., Section 5 of the FTC Act), that govern the collection, use, disclosure and protection of health-related and other personal information could apply to our operations or the operations of our partners. We may also be subject to U.S. federal rules, regulations and guidance concerning data security for medical devices, including guidance from the FDA. In addition, we may obtain health information from third-parties (including research institutions from which we obtain clinical trial data) that are subject to privacy and security requirements under HIPAA, as amended. Depending on the facts and circumstances, we could be subject to significant penalties if we obtain, use or disclose individually identifiable health information maintained by a HIPAA-covered entity or business associate in a manner that is not authorized or permitted by HIPAA. The regulatory framework for data privacy and security worldwide is continuously evolving and developing and, as a result, interpretation and implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future.
Certain states have also adopted comparable privacy and security laws and regulations that govern the privacy, processing and protection of health-related and other personal information. Such laws and regulations will be subject to interpretation by various courts and other governmental authorities, thus creating potentially complex compliance issues for us and our future customers and strategic partners. For example, California enacted the California Consumer Privacy Act (CCPA) on June 28, 2018, which went into effect on January 1, 2020. The CCPA creates individual privacy rights for
California consumers and increases the privacy and security obligations of entities handling certain personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that has increased the likelihood of, and risks associated with data breach litigation. Further, the California Privacy Rights Act (CPRA), generally went into effect on January 1, 2023, and significantly amends the CCPA and imposes additional data protection obligations on covered businesses, including additional consumer rights processes, limitations on data uses, new audit requirements for higher risk data, and opt outs for certain uses of sensitive data. It has also created a new California data protection agency authorized to issue substantive regulations and could result in increased privacy and information security enforcement. Additional compliance investment and potential business process changes may be required. Similar laws have passed in Virginia, Colorado, Connecticut and Utah, and have been proposed in other states and at the federal level, reflecting a trend toward more stringent privacy legislation in the United States. The enactment of such laws could have potentially conflicting requirements that would make compliance challenging. In the event that we are subject to or affected by HIPAA, the CCPA, the CPRA or other domestic privacy and data protection laws, any liability from failure to comply with the requirements of these laws could adversely affect our financial condition.
In the EU, the European Union General Data Protection Regulation (GDPR) went into effect in May 2018 and imposes strict requirements for processing the personal data of individuals within the EEA. Companies that must comply with the GDPR face increased compliance obligations and risk, including more robust regulatory enforcement of data protection requirements and potential fines for noncompliance of up to €20 million or 4% of the annual global revenues of the noncompliant company, whichever is greater.
Among other requirements, the GDPR regulates transfers of personal data subject to the GDPR to third countries that have not been found to provide adequate protection to such personal data, including the United States; in July 2020, the Court of Justice of the European Union (CJEU) limited how organizations could lawfully transfer personal data from the EEA to the United States by invalidating the EU-US Privacy Shield Framework for purposes of international transfers and imposing further restrictions on use of the standard contractual clauses (SCCs). In March 2022, the US and EU announced a new regulatory regime intended to replace the invalidated regulations; however, this new EU-US Data Privacy Framework has not been implemented beyond an executive order signed by President Biden on October 7, 2022, on Enhancing Safeguards for United States Signals Intelligence Activities. European court and regulatory decisions subsequent to the CJEU decision of July 16, 2020, have taken a restrictive approach to international data transfers. As supervisory authorities issue further guidance on personal data export mechanisms, including circumstances where the SCCs cannot be used, and/or start taking enforcement action, we could suffer additional costs, complaints and/or regulatory investigations or fines, and/or if we are otherwise unable to transfer personal data between and among countries and regions in which we operate, it could affect the manner in which we provide our services, the geographical location or segregation of our relevant systems and operations, and could adversely affect our financial results.
Relatedly, following the UK’s withdrawal from the EEA and the EU, and the expiry of the transition period, from January 1, 2021, companies have had to comply with both the GDPR and the GDPR as incorporated into UK national law, the latter regime having the ability to separately fine up to the greater of £17.5 million or 4% of global turnover. If we do not comply with our obligations under the GDPR and the UK data protection laws, we could be exposed to the fines discussed above. In addition, we may be the subject of litigation and/or adverse publicity, which could adversely affect our business, results of operations and financial condition.
In addition to government regulation, privacy advocates and industry groups have and may in the future propose self-regulatory standards from time to time. These and other industry standards may legally or contractually apply to us, or we may elect to comply with such standards. We expect that there will continue to be new proposed laws and regulations concerning data privacy and security, and we cannot yet determine the impact such future laws, regulations and standards may have on our business.
We make public statements about our use and disclosure of personal information through our privacy policies, information provided on our website and press statements. Although we endeavor to comply with our public statements and documentation, we may at times fail to do so or be alleged to have failed to do so. The publication of our privacy policies and other statements that provide promises and assurances about data privacy and security can subject us to potential government or legal action if they are found to be deceptive, unfair or misrepresentative of our actual practices.
Any concerns about our data privacy and security practices, even if unfounded, could damage the reputation of our business and harm our business, financial condition and results of operations.
Although we work to comply with applicable laws, regulations and standards, our contractual obligations and other legal obligations, these requirements are evolving and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another or other legal obligations with which we must comply. Any failure or perceived failure by us or our employees, representatives, contractors, consultants, collaborators or other third-parties to comply with such requirements or adequately address privacy and security concerns, even if unfounded, could result in additional cost and liability to us, damage our reputation and adversely affect our business and results of operations. In addition, if our practices are not consistent, or viewed as not consistent, with legal and regulatory requirements, including changes in laws, regulations and standards or new interpretations or applications of existing laws, regulations and standards, we may also become subject to audits, inquiries, whistleblower complaints, adverse media coverage, investigations, criminal or civil sanctions, all of which may harm our business, financial condition and results of operations.
Risks Related to Ownership of Our Common Stock
The market price of our common stock may fluctuate substantially or may decline regardless of our operating performance, which could result in the loss of part or all of your investment.
The market price of our common stock may be highly volatile and may fluctuate or decline substantially as a result of a variety of factors, some of which are beyond our control or are related in complex ways, including:
● our failure to complete, delays in completing, or other developments related to the pending Merger;
● changes in analysts’ estimates, investors’ perceptions, recommendations by securities analysts or our failure to achieve analysts’ estimates;
● delays or setbacks in the ongoing commercialization of our foot and ankle products and procedures;
● the success of existing or new competitive products or technologies;
● regulatory or legal developments in the United States and other countries;
● developments or disputes concerning patent applications, issued patents or other proprietary rights;
● the recruitment or departure of key personnel;
● the commencement of litigation;
● actual or anticipated changes in estimates as to financial condition and results of operations;
● announcement or expectation of additional financing efforts;
● announcements by us or our competitors of significant business developments, acquisitions, new offerings, licenses, strategic partnerships, joint ventures or capital commitments;
● the impact pandemics, epidemics, endemics and other public health emergencies on the performance of elective procedures;
● the impact of political instability, natural disasters, events of terrorism and or war, such as the war between Ukraine and Russia, and the corresponding tensions created from such conflict between Russia, the United States
and countries in Europe as well as other countries such as China, and the conflict in the Middle East, (including recent attacks on merchant ships in the Red Sea);
● sales of our common stock by us, our insiders or other stockholders;
● variations in our financial results or those of companies that are perceived to be similar to us;
● various macroeconomic events, including changes in inflation, interest rates and overall economic conditions and uncertainties;
● changes in the structure of health care payment systems;
● market conditions in the medical device sectors;
● changes in the anticipated future size and growth rate of our market;
● the seasonality of our business;
● an increase in the rate of returns of our products or an increase in warranty claims;
● general economic, industry and market conditions, including economic recessions or slowdowns; and
● the other factors described in this “Risk Factors” section.
In recent years, the stock market in general, and the market for medical device companies in particular, has experienced significant price and volume fluctuations that have often been unrelated or disproportionate to changes in the operating performance of the companies whose stock is experiencing those price and volume fluctuations. Further, the stock market in general has been highly volatile due to various macroeconomic events. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance. Following periods of such volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Because of the potential volatility of our stock price, we may become the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business.
If our operating and financial performance in any given period does not meet any guidance that we provide to the public, the market price of our common stock may decline.
We have provided public guidance on our expected operating and financial results for future periods. Such guidance will be comprised of forward-looking statements subject to the risks and uncertainties described in this Annual Report and in our other public filings and public statements. Our actual results may not always be in line with or exceed any guidance we have provided, especially in times of economic uncertainty. If, in the future, our operating or financial results for a particular period do not meet any guidance we provide or the expectations of investment analysts, or if we reduce our guidance for future periods, the market price of our common stock may decline. Even if we do issue public guidance, there can be no assurance that we will continue to do so in the future.
If we fail to maintain proper and effective internal control over financial reporting, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, investors’ views of us and, as a result, the value of our common stock.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, our management is required to report upon the effectiveness of our internal control over financial reporting. Now that we are no longer an emerging growth company, our independent registered public accounting firm is required to attest to the effectiveness of our internal control over financial reporting. The rules governing the standards that must be met in assessing our internal control over financial
reporting are complex and require significant documentation, testing and possible remediation. In connection with our evaluation of our internal control over financial reporting, we may need to upgrade our systems, including information technology; implement additional financial and management controls, reporting systems and procedures; and hire additional accounting and finance staff.
Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could cause us to fail to meet our reporting obligations. In addition, any testing by us or our independent registered public accounting firm conducted in connection with Section 404 of the Sarbanes-Oxley Act of 2002 may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock. Internal control deficiencies could also result in a restatement of our financial results in the future. We could become subject to stockholder or other third-party litigation, as well as investigations by the SEC, the stock exchange on which our securities are listed, or other regulatory authorities, which could require additional financial and management resources and could result in fines, trading suspensions, payment of damages or other remedies.
As discussed in Part II, Item 9A of this Annual Report on Form 10-K, Management identified material weaknesses in our internal controls over financial reporting. We cannot assure you that the measures we have taken to date, and actions we may take in the future, will prevent or avoid any potential future material weaknesses.
In addition, as a public company we are required to file accurate and timely quarterly and annual reports with the SEC under the Exchange Act. Any failure to report our financial results on an accurate and timely basis could result in sanctions, lawsuits, delisting of our shares from the NYSE or other adverse consequences that would materially harm our business.
If securities analysts do not publish research or reports about our business or if they publish negative or inaccurate research about our business, our common stock price and trading volume could decline.
Our stock price and trading volume will be influenced by the way analysts and investors interpret our financial information and other disclosures. The trading market for our common stock depends, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If the number of analysts that cover us declines, demand for our common stock could decrease and our common stock price and trading volume may decline.
Regardless of accuracy, unfavorable interpretations of our financial information and other public disclosures could have a negative impact on our stock price. If our financial performance fails to meet analyst estimates, for any of the reasons discussed above or otherwise, or one or more of the analysts who cover us downgrade our common stock or change their opinion of our common stock, our stock price would likely decline. If one or more of these analysts cease to cover our stock, we could lose visibility in the market for our stock, which in turn could cause our stock price to decline.
We have not paid dividends in the past and do not expect to pay dividends in the future, and, as a result, any return on investment may be limited to the appreciation in the price of our stock.
We have never paid cash dividends and do not anticipate paying cash dividends on our common stock in the foreseeable future. The payment of dividends will depend on our earnings, capital requirements, financial condition, prospects for future earnings and other factors our board of directors may deem relevant. In addition, our loan agreements limit our ability to, among other things, pay dividends or make other distributions or payments on account of our common stock, in each case subject to certain exceptions. If we do not pay dividends, our stock may be less valuable because a return on your investment will only occur if our stock price appreciates and you then sell our common stock. There is no guarantee that our common stock will appreciate or even maintain the price at which our holders have purchased it. In addition, our loan agreements limit our ability to pay dividends or make other distributions or payments on account of our common stock, in each case subject to certain exceptions.
Future sales and issuances of our capital stock or rights to purchase capital stock could result in additional dilution of the percentage ownership of our stockholders and could cause the price of our common stock to decline.
We may issue additional securities. Future sales and issuances of our capital stock or rights to purchase our capital stock could result in dilution to our existing stockholders. We may sell common stock, convertible securities, and other equity securities in one or more transactions at prices and in a manner as we may determine from time to time to fund operations, develop new products, accelerate other strategies, make acquisitions or support other activities. Because our decision to issue debt or equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of any future offerings. If we sell any such securities in subsequent transactions, investors may be materially diluted. New investors to such subsequent transactions could gain rights, preferences, and privileges senior to those of holders of our common stock.
Insiders have substantial influence over us, which could limit your ability to affect the outcome of key transactions, including a change of control.
As of December 31, 2024, our directors, officers, and certain of their respective affiliates owned a substantial portion of our outstanding common stock. As a result, these stockholders, if they act together, will be able to influence our management and affairs and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control of our company and might affect the market price of our common stock.
Anti-takeover provisions in our amended and restated certificate of incorporation, as amended and second amended and restated bylaws, and Delaware law, could discourage a change in control of our company or a change in our management.
Our amended and restated certificate of incorporation, as amended (the “Certificate of Incorporation”) and second amended and restated bylaws contain provisions that might enable our management to resist a takeover. These provisions include:
● a classified board of directors, until the 2028 annual meeting of the stockholders;
● advance notice requirements applicable to stockholders for matters to be brought before a meeting of stockholders and requirements as to the form and content of a stockholders’ notice;
● a supermajority stockholder vote requirement for amending certain provisions of our Certificate of Incorporation and second amended and restated bylaws until the 2028 annual meeting of the stockholders and then a simple majority vote thereafter;
● the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer;
● allowing a supermajority of stockholders to remove directors only for cause until the 2028 annual meeting of the stockholders and then a simple majority vote thereafter;
● a requirement that the authorized number of directors may be changed only by resolution of the board of directors;
● allowing all vacancies, including newly created directorships, to be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum, except as otherwise required by law;
● eliminate cumulative voting in elections of directors;
● a requirement that our stockholders may only take action at annual or special meetings of our stockholders and not by written consent;
● limiting the forum to Delaware for certain litigation against us; and
● limiting the persons that can call special meetings of our stockholders to our board of directors, the chairperson of our board of directors, the chief executive officer or the president, in the absence of a chief executive officer.
These provisions might discourage, delay or prevent a change in control of our company or a change in our management. The existence of these provisions could adversely affect the voting power of holders of common stock and limit the price that investors might be willing to pay in the future for shares of our common stock. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law (the DGCL), which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder.
Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us.
Our Certificate of Incorporation and second amended and restated bylaws provide that we will indemnify our directors and officers, in each case to the fullest extent permitted by Delaware law.
In addition, as permitted by Section 145 of the DGCL, our amended and restated bylaws and our indemnification agreements that we have entered into with our directors and officers provide that:
● We will indemnify our directors and officers for serving us in those capacities or for serving other business enterprises at our request, to the fullest extent permitted by Delaware law. Delaware law provides that a corporation may indemnify such person if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the registrant and, with respect to any criminal proceeding, had no reasonable cause to believe such person’s conduct was unlawful.
● We may, in our discretion, indemnify employees and agents in those circumstances where indemnification is permitted by applicable law.
● We are required to advance expenses, as incurred, to our directors and officers in connection with defending a proceeding, except that such directors or officers shall undertake to repay such advances if it is ultimately determined that such person is not entitled to indemnification.
● We will not be obligated pursuant to our amended and restated bylaws to indemnify a person with respect to proceedings initiated by that person against us or our other indemnitees, except with respect to proceedings authorized by our board of directors or brought to enforce a right to indemnification.
● The rights conferred in our amended and restated bylaws are not exclusive, and we are authorized to enter into indemnification agreements with our directors, officers, employees and agents and to obtain insurance to indemnify such persons.
● We may not retroactively amend our amended and restated bylaw provisions to reduce our indemnification obligations to directors, officers, employees and agents.
Our Certificate of Incorporation and second amended and restated bylaws provide that the Court of Chancery of the State of Delaware is the sole and exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ abilities to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our Certificate of Incorporation and second amended and restated bylaws provide that the Court of Chancery of the State of Delaware (or, in the event that the Court of Chancery does not have jurisdiction, the federal district court for the
District of Delaware or other state courts of the State of Delaware) is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a claim of breach of fiduciary duty, any action asserting a claim against us arising pursuant to the DGCL, our Certificate of Incorporation or our second amended and restated bylaws, or any action asserting a claim against us that is governed by the internal affairs doctrine; provided that, if and only if the Court of Chancery of the State of Delaware dismisses any such action for lack of subject matter jurisdiction, such action may be brought in another state or federal court sitting in the State of Delaware. Our Certificate of Incorporation and second amended and restated bylaws also provide that the federal district courts of the United States of America are the exclusive forum for the resolution of any complaint asserting a cause of action against any defendant arising under the Securities Act. Such provisions are intended to benefit and may be enforced by us, our officers and directors, employees and agents, including the underwriters and any other professional or entity who has prepared or certified any of this Annual Report. The choice of forum provisions do not apply to suits brought to enforce any liability or duty created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction.
We believe these provisions may benefit us by providing increased consistency in the application of Delaware law and federal securities laws by chancellors and judges, as applicable, particularly experienced in resolving corporate disputes, efficient administration of cases on a more expedited schedule relative to other forums and protection against the burdens of multi-forum litigation. These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees or stockholders, which may discourage lawsuits with respect to such claims or make such lawsuits more costly for stockholders, although our stockholders will not be deemed to have waived our compliance with federal securities laws and the rules and regulations thereunder. Furthermore, the enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that a court could find these types of provisions to be inapplicable or unenforceable. While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions, and there can be no assurance that such provisions will be enforced by a court in those other jurisdictions. If a court were to find one or more of the choice of forum provisions that are contained in our amended and restated certificate of incorporation and amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could seriously harm our business.
General Risk Factors
Unfavorable global and regional economic, political and health conditions could adversely affect our business, financial condition or results of operations.
Our results of operations could be adversely affected by global or regional economic, political and health conditions. A global financial crisis or global or regional political and economic instability (including changes in inflation, interest rates and overall economic conditions and uncertainties), tariffs, wars, terrorism, civil unrest, pandemics, epidemics, endemics and other public health emergencies, and other unexpected events, such as supply chain constraints or disruptions, could cause extreme volatility, increase our costs and disrupt our business. Business disruptions could include, among others, disruptions to our commercial activities, including due to supply chain or distribution constraints or challenges, clinical enrollment, clinical site availability, patient accessibility and conduct of our clinical trials, as well as temporary closures of our facilities and the facilities of suppliers or contract manufacturers in our supply chain. For example, these macroeconomic factors could affect the ability of our current or potential future manufacturers, sole source or single source suppliers, licensors or licensees to remain in business, or otherwise manufacture or supply components, materials or services relevant to our products. Any failure by any of them to remain in business could affect our ability to manufacture products or meet demand for our products. In addition, if inflation or other factors were to significantly increase our business costs, we may be unable to pass through price increases to our customers. Interest rates and the ability to access credit markets could also adversely affect the ability of our customers to purchase our products.
The imposition of tariffs and other orders or restrictions impacting trade could adversely impact our business, including by increasing or otherwise impacting the costs and expenses we incur in connection with our operations and supply chain, and by potentially increasing the price of our products to purchasers of our approved products. The actual impacts of any tariffs and other orders or restrictions are subject to a number of factors including the effective date and
duration of such tariffs, orders and restrictions, the amount, scope and nature of such inputs, any countermeasures that the target countries may take and any mitigating actions that may become available.
In addition, during certain crises and events, patients may prioritize other items over certain or all of their treatments and/or medications, which could have a negative impact on our commercial sales.
A severe or prolonged economic downturn, political disruption or adverse health conditions could result in a variety of risks to our business, including our ability to raise capital when needed on acceptable terms, if at all. Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the political or economic climate and financial market conditions could adversely impact our business.
Our operations are vulnerable to interruption or loss due to natural or other disasters, power loss, strikes and other events beyond our control.
A major hurricane, fire or other disaster (such as a major flood, earthquake or terrorist attack) affecting our headquarters or our other facilities, or facilities of our suppliers and manufacturers, could significantly disrupt our operations, and delay or prevent product shipment or installation during the time required to repair, rebuild or replace our suppliers’ and manufacturers’ damaged facilities, which delays could be lengthy and costly. Our headquarters facility in Englewood, Colorado, supports our commercial expansion, education and training programs. Our facilities, equipment and inventory would be costly to replace and could require substantial lead time to repair or replace. If any of our customers’ facilities are negatively impacted by a disaster, shipments of our products could be delayed. Additionally, customers may delay purchases of our products until operations return to normal. Even if we are able to quickly respond to a disaster, effects of the disaster could create some uncertainty in the operations of our business. Concerns about terrorism, the effects of a terrorist attack or political turmoil could have a negative effect on our operations, those of our suppliers and manufacturers and our customers.
We are subject to U.S. anti-bribery, anti-corruption, and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act, as well as export control, customs laws sanctions and other trade laws and regulations (collectively, the Trade Laws). We can face serious consequences for violations.
As we grow our international presence and global operations, we will be increasingly exposed to trade and economic sanctions and other restrictions imposed by the United States, the European Union and other governments and organizations. The U.S. Departments of Justice, Commerce, State and Treasury and other federal agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against corporations and individuals for violations of economic sanctions laws, export control laws, the U.S. Foreign Corrupt Practices Act (FCPA), and other federal statutes and regulations, including those established by the Office of Foreign Assets Control (OFAC). In addition, the UK Bribery Act of 2010 (Bribery Act) prohibits both domestic and international bribery, as well as bribery across both private and public sectors. An organization that fails to prevent bribery by anyone associated with the organization can be charged under the Bribery Act unless the organization can establish the defense of having implemented adequate procedures to prevent bribery. These anti-corruption laws generally prohibit companies and their employees, agents and intermediaries from authorizing, promising, offering or providing, directly or indirectly, corrupt or improper payments or anything else of value to recipients in the public or private sector. We can be held liable for the corrupt or illegal activities of our agents and intermediaries, even if we do not explicitly authorize or have actual knowledge of such activities. We are also subject to other U.S. laws and regulations governing export controls, as well as economic sanctions and embargoes on certain countries and persons.
Violations of Trade Laws can result in substantial criminal fines and civil penalties, imprisonment, the loss of trade privileges, debarment, tax reassessments, breach of contract and fraud litigation, reputational harm and other consequences. Likewise, any investigation of potential violations of Trade Laws could also have an adverse impact on our reputation, our business, results of operations and financial condition.
We cannot assure you that our policies and procedures are or will be sufficient or that directors, officers, employees, representatives, consultants and agents have not engaged and will not engage in conduct for which we may be held responsible, nor can we assure you that our business partners have not engaged and will not engage in conduct that could
materially affect their ability to perform their contractual obligations to us or even result in our being held liable for such conduct. Violations of the FCPA, OFAC restrictions, the Bribery Act or other export control, anti-corruption, anti-money laundering and anti-terrorism laws or regulations may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, financial condition and results of operations.
We, along with our suppliers, are dependent on various information technology systems, and failures of, interruptions to, or unauthorized tampering of those systems could have a material adverse effect on our business.
We and our suppliers rely extensively on information technology systems, networks and services, including internet sites, data hosting and processing facilities and tools, physical security system and other hardware, software and technical applications and platforms, some of which are managed, hosted, provided or used by third-parties or their vendors, to conduct business. These systems include, but are not limited to, ordering and managing materials from suppliers, converting materials to finished products (suppliers), shipping products to customers, processing transactions, summarizing and reporting results of operations, complying with regulatory, legal or tax requirements, providing data security and other processes necessary to manage our business.
A significant breakdown, invasion, corruption, destruction or interruption of critical information technology systems or infrastructure, by our workforce, others with authorized access to our systems or unauthorized persons could negatively impact operations. The use of cloud-based computing creates opportunities for the unintentional dissemination or intentional destruction of confidential information stored in our or our third-party providers’ systems, portable media or storage devices. Despite the implementation of security measures, our information technology systems and those of our contractors, consultants and collaborators have been and are vulnerable to damage from cyberattacks, “phishing” attacks, intentional or accidental actions or omissions to act that cause vulnerabilities, computer viruses and malware, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. Attacks upon information technology systems are increasing in their frequency, levels of persistence, sophistication and intensity, and are being conducted by sophisticated and organized groups and individuals with a wide range of motives and expertise. We may also face increased cybersecurity risks due to our reliance on internet technology and the number of our employees who are working remotely, which may create additional opportunities for cybercriminals to exploit vulnerabilities. Furthermore, because the techniques used to obtain unauthorized access to, or to sabotage, systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. We may also experience security breaches that may remain undetected for an extended period. Even if identified, we may be unable to adequately investigate or remediate incidents or breaches due to attackers increasingly using tools and techniques that are designed to circumvent controls, to avoid detection, and to remove or obfuscate forensic evidence.
We and certain of our service providers are from time to time subject to cyberattacks and security incidents. While we do not believe that we have experienced any significant system failure, accident or security breach to date, if our systems are damaged or cease to function properly due to any number of causes, ranging from catastrophic events to power outages to security breaches, and our business continuity plans do not effectively compensate timely, we may suffer interruptions in our ability to manage operations, and would also be exposed to a risk of loss, including financial assets or litigation and potential liability, which could materially adversely affect our business, financial condition, results of operations and prospects.
We cannot assure you that any limitations of liability provisions in our contracts would be enforceable or adequate or would otherwise protect us from any liabilities or damages with respect to any particular claim relating to a security lapse or breach. While we maintain certain insurance coverage, including cyber insurance, our insurance may be insufficient or may not cover all liabilities incurred by such attacks. We also cannot be certain that our insurance coverage will be adequate for data handling or data security liabilities actually incurred, that insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceeds available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our financial condition, operating results and reputation.
Our insurance policies are expensive and protect us only from some business risks, which leaves us exposed to significant uninsured liabilities.
We do not carry insurance for all categories of risk that our business may encounter. We presently have general liability, workers’ compensation, directors’ and officers’ and product liability insurance coverage, which is subject to deductibles and coverage limitations. If we are unable to obtain insurance at an acceptable cost or on acceptable terms or otherwise protect against potential product liability claims, we could be exposed to significant liabilities. A product liability claim, recall or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could negatively affect our business, financial condition and results of operations. We do not carry specific hazardous waste insurance coverage, and our property, casualty and general liability insurance policies specifically exclude coverage for damages and fines arising from hazardous waste exposure or contamination. Accordingly, we could be held liable for damages or be penalized with fines in an amount exceeding our resources, and our clinical studies, clinical trials or regulatory approvals could be suspended.
Operating as a public company makes it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the desired coverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, on our board committees or as executive officers. We do not know, however, if we will be able to maintain existing insurance with adequate levels of coverage. Any significant uninsured liability may require us to pay substantial amounts, which would negatively affect our business, financial condition and results of operations.
Our results may be impacted by changes in foreign currency exchange rates.
A significant proportion of our sales are outside of the United States, and a majority of those are denominated in foreign currencies, which exposes us to foreign currency risks, including changes in currency exchange rates. We do not currently engage in any hedging transactions. If we are unable to address these risks and challenges effectively, our international operations may not be successful, and our business could be harmed.
Governmental export or import controls could limit our ability to compete in foreign markets and subject us to liability if we violate them.
Our products may be subject to U.S. export controls. Governmental regulation of the import or export of our products, or our failure to obtain any required import or export authorization for our products, when applicable, will harm our international sales and adversely affect our revenue. Compliance with applicable regulatory requirements regarding the export of our products may create delays in the introduction of our products in international markets or, in some cases, prevent the export of our products to some countries altogether. Furthermore, U.S. export control laws and economic sanctions prohibit the shipment of certain products and services to countries, governments and persons targeted by U.S. sanctions. If we fail to comply with export and import regulations and such economic sanctions, we may be fined or other penalties could be imposed, including a denial of certain export privileges. Moreover, any new export or import restrictions, new legislation or shifting approaches in the enforcement or scope of existing regulations, or in the countries, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export our products to existing or potential customers with international operations. Any decreased use of our products or limitation on our ability to export or sell access to our products would likely negatively affect our business, financial condition and results of operations.
Changes in tax laws or regulations that are applied adversely to us or our customers may seriously harm our business.
New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, which could affect the tax treatment of any of our future domestic and foreign earnings. Any new taxes could adversely affect our domestic and international business operations, and our business and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us, possibly on a retroactive basis.
Our ability to use net operating losses to offset future taxable income may be subject to certain limitations.
Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” generally defined as a cumulative change of more than 50 percent (by value) in its equity ownership by certain stockholders over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards (the NOLs) and other pre-change tax attributes (such as research tax credits) to offset its post-change income or taxes may be limited. We may have experienced ownership changes in the past, and we may experience ownership changes as a result of future shifts in our equity ownership, some of which may be outside our control. As a result, our ability to use our pre-change federal NOLs and other tax attributes to offset future taxable income and taxes could be subject to limitations. For these reasons, we may not be able to utilize a material portion of the NOLs, even if we achieve profitability, which could adversely affect our business, financial condition and cash flows.
As international expansion of our business occurs, it will expose us to market, regulatory, political, operational, financial and economic risks associated with doing business outside of the United States.
Our long-term strategy is to increase our international presence. This strategy may include establishing and maintaining physician outreach and education capabilities outside of the United States and expanding our relationships with international payers. Doing business internationally involves a number of risks, including:
● difficulties in staffing and managing our international operations;
● increased competition as a result of more products and procedures receiving regulatory approval or otherwise free to market in international markets;
● export restrictions, trade regulations and foreign tax laws;
● fluctuations in currency exchange rates;
● new or increased tariffs and other changes in U.S. trade policy could trigger retaliatory actions, including increased tariffs, by affected countries;
● difficulties in developing effective marketing campaigns in unfamiliar foreign countries;
● multiple, conflicting and changing laws and regulations such as tax laws, privacy laws, export and import restrictions, employment laws, regulatory requirements and other governmental approvals, permits and licenses;
● reduced or varied protection for intellectual property rights in some countries;
● obtaining foreign certification and regulatory clearance where required in various countries;
● requirements to maintain data and the processing of that data on servers located within such countries;
● complexities associated with managing multiple payer reimbursement regimes, government payers or patient self-pay systems;
● customs clearance and shipping delays;
● limits on our ability to penetrate international markets if there is a preference for locally produced products or if we are required to manufacture our products locally;
● financial risks, such as longer payment cycles, difficulty collecting accounts receivable, foreign tax laws and complexities of foreign value-added tax systems, the effect of local and regional financial pressures on demand and payment for our products and exposure to foreign currency exchange rate fluctuations;
● restrictions on the site-of-service for use of our products and the economics related thereto for physicians, providers and payers;
● natural disasters, political and economic instability, including wars such as the war between Ukraine and Russia as well as any sanctions or other actions resulting therefrom, terrorism, political unrest, outbreak of disease, boycotts, curtailment of trade and other market restrictions; and
● regulatory and compliance risks that relate to maintaining accurate information and control over activities subject to regulation under the United States Foreign Corrupt Practices Act of 1977, or FCPA, U.K. Bribery Act of 2010 and comparable laws and regulations in other countries.
Any of these factors could significantly harm our future international expansion and operations and, consequently, have a material adverse effect on our business, financial condition and results of operations.
Our business could be negatively impacted by corporate citizenship and ESG matters and/or our reporting of such matters.
Institutional, individual, and other investors, proxy advisory services, regulatory authorities, consumers and other stakeholders are increasingly focused on environmental, social and governance (ESG) practices of companies. As we look to respond to evolving standards for identifying, measuring, and reporting ESG metrics, our efforts may result in a significant increase in costs and may nevertheless not meet investor or other stakeholder expectations and evolving standards or regulatory requirements, which may negatively impact our financial results, our reputation, our ability to attract or retain employees, our attractiveness as a service provider, investment, or business partner, or expose us to government enforcement actions, private litigation, and actions by stockholders or stakeholders.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments.
None.

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ITEM 2. PROPERTIES
Item 2. Properties.
Our corporate headquarters are located in Englewood, Colorado, where we own and occupy approximately 105,000 square feet of office space. We also maintain offices domestically in Michigan and internationally in Ireland, South Africa, Australia, Finland, Germany, and the U.K. We believe that our existing facilities are sufficient for our near-term needs.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
The Company may in the ordinary course of business face various claims brought by third-parties and the Company may, from time to time, make claims or take legal actions to assert its rights, including intellectual property rights as well as claims relating to employment matters and the safety or efficacy of its products. Any of these claims could cause the Company to incur substantial costs and, while the Company generally believes that it has adequate insurance to cover many different types of liabilities, its insurance carriers may deny coverage, may be inadequately capitalized to pay on valid claims, or the Company’s 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 the Company’s operations, cash flows and financial position. Additionally, any such claims, whether or not successful, could damage the Company’s reputation and business.
Class Action Litigation
On September 30, 2024, and October 18, 2024, respectively, two putative class action complaints were filed in the U.S. District Court for the District of Colorado. These complaints allege that the Company and certain current and former officers violated federal securities laws. The cases are captioned Ellington v. Paragon 28, Inc., et al., and Tiedt v. Paragon 28, Inc., et al., and a lead plaintiff has not yet been appointed. We believe the allegations in the complaint are without merit and intend to vigorously defend the litigation.
Given the early stage of the litigation matters described above, we are unable at this time to reasonably estimate possible losses or form a judgment that an unfavorable outcome is either probable or remote. However, litigation is subject to inherent uncertainties, and one or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect for the period in which they are resolved, and on our business generally. In addition, regardless of their merits or their ultimate outcomes, lawsuits and legal proceedings are costly, divert management attention, and may adversely affect our reputation, even if they are resolved in our favor.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures.
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information for Common Stock
Our common stock has traded on The New York Stock Exchange under the symbol “FNA” since October 15, 2021. Prior to that, there was no public market for our common stock.
Stock Performance Graph
The following graph compares the cumulative total stockholder return of an investment in (1) our common stock, (2) the cumulative total returns to the Russell 2000 index, and (3) the cumulative total returns to the S&P 500 Health Care index, for the period from October 15, 2021 (the date our common stock began trading) through December 31, 2024. The graph assumes an initial investment of $100 and that all dividends were reinvested. Such returns are based on historical results and are not indicative of future financial performance.
10/15/21
12/21
3/22
6/22
9/22
12/22
3/23
6/23
9/23
12/23
3/24
6/24
9/24
12/24
Paragon 28, Inc.
100.00
94.55
89.47
84.82
95.24
102.14
91.23
94.82
67.08
66.44
66.01
36.56
35.70
55.21
Russell 2000
100.00
102.14
94.45
78.21
76.50
81.27
83.49
87.84
83.33
95.03
99.95
96.67
105.64
105.99
S&P 500 Health Care
100.00
111.17
108.31
101.91
96.63
109.00
104.31
107.39
104.54
111.24
121.09
119.93
127.21
114.11
Stockholders
As of March 3, 2025, there were 71 holders of record of our common stock. The actual number of stockholders is greater than this number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.
Dividend Policy
We have never declared or paid, and do not anticipate declaring or paying in the foreseeable future, any cash dividends on our capital stock. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors, subject to applicable laws and will depend on then existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects, and other factors our board of directors may deem relevant.
Securities Authorized for Issuance under Equity Compensation Plans
See the section titled “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in Part III of this Annual Report on Form 10-K for information regarding securities authorized for issuance.
Sales of Unregistered Securities
None
Issuer Purchases of Equity Securities
None

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. 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 financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion and other parts of this report contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” within this Annual Report on Form 10-K.
Executive Level Overview
During the year ended December 31, 2024, our sales increased as a result of increased surgical volume driven primarily by U.S sales force expansion, growth in focused international markets and key product launches in the fracture fixation, forefoot, and ankle segments. As a result, we reported net revenue growth of 18% during the year ended December 31, 2024, as compared to the corresponding prior year period.
Our gross profit margin was 74.7% for the year ended December 31, 2024, compared to 76.0% during the year ended December 31, 2023, representing decreases from the corresponding prior year periods driven primarily by higher non-cash charges for excess and obsolete and other inventory adjustments, partially offset by lower freight expense, as a percent of revenue.
Adjusted EBITDA was negative $8.0 million and negative $18.1 million for the years ended December 31, 2024 and 2023, respectively. The improvement in Adjusted EBITDA for the year ended December 31, 2024 is primarily attributable to an increase in gross profit from higher revenue, partially offset by an increase in operating expenses. 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.
Pending Merger with Zimmer, Inc.
On January 28, 2025, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Zimmer, Inc. (“Zimmer”), a Delaware corporation and wholly owned subsidiary of Zimmer Biomet Holdings, Inc. (“Zimmer Biomet”), Gazelle Merger Sub I, Inc. (“Merger Sub”), a Delaware corporation and wholly owned subsidiary of Zimmer, and, for certain provisions of the Merger Agreement, Zimmer Biomet. Subject to the terms and conditions of the Merger Agreement, Merger Sub will be merged with and into us (the “Merger”), with us continuing as the surviving corporation and a wholly owned subsidiary of Zimmer.
Under the terms of the transaction, among other things, Zimmer will acquire all of our outstanding shares, which will automatically be converted into the right to receive (i) $13.00 in cash, without interest and (ii) one contractual contingent value right (a “CVR”) representing the right to receive up to $1.00 per CVR pursuant to the Contingent Value Rights Agreement to be entered into at or prior to the effective time of the Merger by and between Zimmer, a rights agent and, for certain provisions, Zimmer Biomet. The boards of directors of both companies have approved the Merger. The Merger is expected to close in the first half of 2025 subject to stockholder approval, regulatory approvals and other customary closing conditions.
Non-GAAP Financial Measures
Use of Non-GAAP Financial Measures and Their Limitations
In addition to our results and measures of performance determined in accordance with U.S. GAAP, we believe that certain non-GAAP financial measures are useful in evaluating and comparing our financial and operational performance over multiple periods, identifying trends affecting our business, formulating business plans and making strategic decisions.
Adjusted EBITDA is a key performance measure that our management uses to assess our financial performance and is also used for internal planning and forecasting purposes.
We believe that Adjusted EBITDA, together with a reconciliation to net loss, helps identify underlying trends in our business and helps investors make comparisons between our company and other companies that may have different capital structures, tax rates, or different forms of employee compensation. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects, and allowing for greater transparency with respect to a key financial metric used by our management in its financial and operational decision-making. Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider these measures in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these potential limitations include:
● other companies, including companies in our industry which have similar business arrangements, may report Adjusted EBITDA, or similarly titled measures but calculate them differently, which reduces their usefulness as comparative measures;
● although depreciation and amortization expenses are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditures for such replacements or for new capital expenditure requirements;
● Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs or the potentially dilutive impact of stock-based compensation; and
● Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt that we may incur.
Free Cash Flow is an additional key performance measure that our management uses to assess our financial performance and liquidity. Management believes Free Cash Flow is helpful in assessing our operational efficiency and the effectiveness of our capital expenditures, and that monitoring Free Cash Flow can help us manage financial risk. In addition, management believes Free Cash Flow provides meaningful incremental information to investors to consider when evaluating the performance of the Company.
Because of these and other limitations, you should consider our non-GAAP measures only as supplemental to other GAAP-based financial measures. For reconciliations of Adjusted EBITDA and Free Cash Flow to their most comparable GAAP financial measure, see “GAAP to Non-GAAP Reconciliations”.
Reconciliation Between GAAP and Non-GAAP Measure
Adjusted EBITDA
We define Adjusted EBITDA as earnings (loss) before interest expense, income tax expense (benefit), depreciation and amortization, stock-based compensation expense, employee stock purchase plan expense, non-recurring expenses and certain other non-cash expenses. For a full reconciliation of Adjusted EBITDA for the years ended December 31, 2024 and 2023 to the most comparable GAAP financial measure, refer to the presentation below.
Year Ended December 31,
(in thousands)
Net loss
$
(54,639)
$
(57,534)
Interest expense, net
11,531
5,165
Income tax expense
1,159
Depreciation and amortization expense
18,546
15,542
Stock based compensation expense
13,017
12,364
Employee stock purchase plan expense
Loss on early extinguishment of debt (1)
-
5,308
Workforce optimization - severance (2)
-
Other (3)
Adjusted EBITDA
$
(7,959)
$
(18,074)
(1) Represents non-recurring expenses related to the write-off of unamortized debt issuance costs and fees incurred to exit the MidCap Credit Agreements early
(2) Represents severance costs incurred pursuant to an ongoing operational efficiency strategy
(3) Represents the net impact of unrealized foreign currency gains and losses for the year ended December 31, 2024, and the change in the fair value of our interest rate swap contract and earnout liability for the years ended December 31, 2024 and 2023
Free Cash Flow
We define Free Cash Flow as net cash used in operating activities less capital expenditures. For a reconciliation of Free Cash Flow for the years ended December 31, 2024 and 2023, to the most comparable GAAP financial measure, refer to the presentation below.
Year ended December 31,
Net cash used in operating activities
$
(27,148)
$
(63,890)
Purchases of property and equipment
(15,797)
(26,716)
Free cash flow
$
(42,945)
$
(90,606)
Components of Our Results of Operations
Net Revenue
We derive our revenue from the sale of our foot and ankle orthopedic solutions, primarily implants. We also record as revenue any amounts billed to customers for shipping costs and record as cost of goods sold the actual shipping costs. We have elected to exclude from the measurement of the transaction price all taxes, such as sales, use, value-added, assessed by government authorities and collected from a customer. Therefore, revenue is recognized net of such taxes. In addition, we record revenue net of estimated discounts and other price concessions. No single customer accounted for 10% or more of our net revenue in the years ended December 31, 2024, 2023 and 2022. We expect our net revenue to increase
in the foreseeable future as we expand our sales territories, add new customers and increase the utilization of our products by our existing customers, though net revenue may fluctuate from quarter to quarter due to a variety of factors, including availability of reimbursement, the size and success of our sales force, the number of hospitals and physicians who are aware of and use our products and seasonality.
Cost of Goods Sold
Cost of goods sold consists primarily of finished products purchased from third-party suppliers, shipping costs, excess and obsolete and other 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 and other inventory adjustments, royalties and seasonality of our business. Our gross margin is higher for products we sell in the United States versus internationally due to higher average selling prices. We expect our gross margin to fluctuate from period to period, however, based upon the factors described above and seasonality.
Operating Expenses
Research and Development
Research and development expenses are comprised of engineering costs and research programs related to new product and sustaining product development activities, clinical studies and trials expenses, quality and regulatory expenses, and salaries and benefits related to research and development functions. We maintain a procedurally focused approach to product development and have projects underway to add new systems across multiple foot and ankle indications and to add additional functionality to our existing systems. We expect our research and development expenses to increase as we hire additional personnel to develop new product offerings and product enhancements.
Selling, General, and Administrative
Selling, general, and administrative expenses consist primarily of commissions paid to U.S. sales representatives, salaries, bonuses, and benefits related to selling, marketing, and general and administrative functions, and stock-based compensation. In addition, selling, general, and administrative expenses consist of the costs associated with marketing initiatives, physician and sales force medical education programs, surgical instrument depreciation, travel expenses, professional services fees (including legal, finance, audit and tax fees), insurance costs, facility expenses and other general corporate expenses.
Selling, general, and administrative expenses are expected to increase in the foreseeable future as we continue to grow our business. We also expect our administrative expenses, including stock-based compensation expense, to increase as we increase our headcount and expand our facilities and business processes to support our operations as a public company. Our selling, general and administrative expenses may fluctuate from period to period due to the seasonality of our business and as we continue to add direct sales territory managers in new territories.
Other Income (Expense)
Other Income (Expense), net
Other income (expense) consists primarily of changes in fair value related to contingent earn-out liabilities and our interest rate swap contract.
Loss on Early Extinguishment of Debt
Loss on early extinguishment of debt consists of the write-off of unamortized debt issuance costs and fees incurred to exit the MidCap Credit Agreements early.
Interest Expense, net
Interest expense, net consists of interest incurred, amortization of financing costs and interest income earned during the reported periods.
Results of Operations
For the Years Ended December 31, 2024 and 2023
The following table summarizes our results of operations for the period presented below.
Year Ended December 31,
Change
Amount
%
(in thousands)
Net revenue
$
256,182
$
216,389
$
39,793
18%
Cost of goods sold
64,693
51,954
12,739
25%
Gross profit
191,489
164,435
27,054
16%
Operating expenses:
Research and development
27,066
30,078
(3,012)
(10)%
Selling, general, administrative
205,201
180,022
25,179
14%
Total operating expenses
232,267
210,100
22,167
11%
Operating loss
(40,778)
(45,665)
4,887
11%
Other income (expense):
Other income (expense), net
(1,171)
(1,183)
(1)%
Loss on early extinguishment of debt
-
(5,308)
5,308
*
Interest expense, net
(11,531)
(5,165)
(6,366)
*
Total other expense, net
(12,702)
(11,656)
(1,046)
(9)%
Income tax expense
1,159
*
Net loss
$
(54,639)
$
(57,534)
$
2,895
5%
*
Not Meaningful
The following table represents total net revenue by geographic area, based on the location of the customer for the years ended December 31, 2024 and 2023, respectively.
Year Ended December 31,
(in thousands)
United States
$
212,145
$
183,505
International
44,037
32,884
Total net revenue
$
256,182
$
216,389
Net revenue increased by $39.8 million, or 18%, from $216.4 million during the year ended December 31, 2023, to $256.2 million during the same period in 2024. Strengthening of the U.S. dollar reduced net revenue growth for the year ended December 31, 2024, by less than 1% as compared to the prior year. U.S. net revenue was $212.1 million for the year ended December 31, 2024, representing an increase of 16% compared to the prior year. U.S. net revenue growth was the
result of increased surgical volume driven primarily by sales force expansion and new product launches in our fracture fixation, forefoot, and ankle segments. International revenue was $44.0 million, representing an increase of 34% compared to the prior year. Strengthening of the U.S. dollar reduced international net revenue growth for the year ended December 31, 2024, by approximately 1% as compared to the prior year. International revenue growth was driven primarily by our operations in the United Kingdom, Australia and South Africa.
Cost of Goods Sold and Gross Profit Margin. Cost of goods sold increased $12.7 million, or 25%, from $52.0 million during the year ended December 31, 2023, to $64.7 million in the same period in 2024, primarily due to an increase in net revenue, region mix and non-cash increases in inventory write-offs and excess and obsolete inventory. Gross profit margin for the year ended December 31, 2024, decreased to 74.7%, compared to 76.0% in the same period of 2023. The decrease in gross profit margin is primarily due to higher non-cash charges for excess and obsolete and other inventory adjustments, partially offset by lower freight expense as a percentage of revenue.
Research and Development Expenses. Research and development expenses decreased $3.0 million, or 10%, from $30.1 million in the year ended December 31, 2023, to $27.1 million in the same period in 2024. The decrease in research and development expenses is primarily due to the implementation of cost savings initiatives to lower outsourced consulting services as the Company focuses on internalizing new product development and capitalization of Smart 28 development costs.
Selling, General, and Administrative Expenses. Selling, general and administrative expenses increased $25.2 million, or 14%, from $180.0 million for the year ended December 31, 2023, to $205.2 million in the same period in 2024. The increase in selling, general, and administrative expenses was primarily driven by increased variable sales representative commission expense related to net revenue growth, increased personnel expenses, an increase in depreciation expense and an increase in professional service and legal fees, partially offset by cost saving initiatives related to travel and entertainment and savings from improved marketing and medical education event efficiencies.
Other Income (Expense), net. Other expense, net remained flat during the years ended December 31, 2023 and 2024. For the year ended December 31, 2024, other expense, net consisted primarily of unrealized FX loss, partially offset by the change in fair value of the Company’s financial instruments. For the year ended December 31, 2023, other expense, net consisted of the change in fair value of the Company’s financial instruments.
Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt was $5.3 million for the year ended December 31, 2023, as we wrote off the unamortized debt issuance costs and incurred fees to exit the MidCap Credit Agreements early. No such loss was incurred for the year ended December 31, 2024.
Interest Expense, net. Interest expense, net increased $6.3 million, from $5.2 million for the year ended December 31, 2023, to $11.5 million for the year ended December 31, 2024, primarily due to higher levels of outstanding debt and higher interest rates on our outstanding debt.
For the Years Ended December 31, 2023 and 2022
For a comparison of our results of operations and cash flows for the years ended December 31, 2023 and 2022, see Part II, Item 7 of the Annual Report on Form 10-K/A for the year ended December 31, 2023 filed with the SEC on August 8, 2024, which comparative information is incorporated by reference in this Annual Report.
Liquidity and Capital Resources
Our primary sources of capital from inception through December 31, 2024, have been from ongoing operations, proceeds from our public and private securities offerings and the incurrence of indebtedness. As of December 31, 2024, we had cash and cash equivalents of $34.6 million.
On January 30, 2023, we completed the Offering of 6,500,000 shares of our common stock at an offering price of $17.00 per share, which consisted of 3,750,000 Primary Shares and 2,750,000 Secondary Shares. Under the terms of the underwriting agreement entered into with the underwriters, we and the selling securityholders granted the underwriters an
option exercisable for 30 days to purchase up to an additional 562,500 shares and 412,500 shares of common stock, respectively (the “Option Shares”), at the public offering price, less underwriting discounts and commissions which was exercised on February 17, 2023. We received net proceeds from the Offering of approximately $68.5 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We did not receive any of the proceeds from the sale of shares of common stock by the selling securityholders.
The principal amount of our outstanding consolidated debt aggregated to $114.3 million, of which $0.6 million is classified as current in our Consolidated Balance Sheet. At December 31, 2024, we had $75.0 million principal outstanding under our Ares Term Loan (as defined below) and $25.0 million available borrowing capacity as well as $25.0 million outstanding under our Ares Revolving Loan (as defined below) and $25.0 million available borrowing capacity. As of December 31, 2024, we also had $14.3 million outstanding under our secured term loan facility with Zions Bancorporation, N.A., dba Vectra Bank Colorado (the “Zion Facility”).
We believe that our existing cash, additional available borrowing capacity and expected revenues will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months. Our primary short-term needs for capital for our planned operations, which are subject to change, include:
● continued commercialization efforts and expansion of our sales and marketing infrastructure and programs to drive anticipated sales growth in the United States and elsewhere; and
● expanding our research and development initiatives to improve our existing products and develop new products and solutions.
We have based our short-term capital needs and planned operating requirements on assumptions that may prove to be incorrect and we may use all our available capital resources sooner than we expect. Although not anticipated at this time, we may require additional financing to fund our operations and planned growth. We may also seek additional financing opportunistically. We may seek to raise any additional capital through public or private equity offerings or debt financings, credit or loan facilities or a combination of one or more of these funding sources. Additional funds may not be available to us on acceptable terms or at all. If we fail to obtain necessary capital when needed on acceptable terms, or at all, we could be forced to delay, limit, reduce or terminate our product development programs, commercialization efforts or other operations. If we raise additional funds by issuing equity securities, our stockholders will suffer dilution and the terms of any financing may adversely affect the rights of our stockholders. In addition, as a condition to providing additional funds to us, future investors may demand, and may be granted, rights superior to those of existing stockholders. If we raise additional capital through collaborations agreements, licensing arrangements or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product or grant licenses that may not be favorable to us. Debt financing, if available, may involve restrictive covenants limiting our flexibility in conducting future business activities, and, in the event of insolvency, debt holders would be repaid before holders of our equity securities received any distribution of our corporate assets. In addition, market conditions impacting financial institutions could impact our ability to access some or all of our cash, cash equivalents and marketable securities, and we may be unable to obtain alternative funding when and as needed on acceptable terms, if at all.
Long-Term Obligations
Ares Credit Agreement
On November 2, 2023, the Company entered into a new credit agreement with Ares Capital Corporation to provide a total of $150.0 million, inclusive of a revolving credit facility of up to $50.0 million (the “Ares Revolving Loan”) and a term loan facility of up to $100.0 million (the “Ares Term Loan”). The obligations under the Ares Credit Agreement are guaranteed by each of the Borrowers’ current and future domestic subsidiaries and secured by liens on substantially all of the Borrowers’ and guarantors’ present and after-acquired assets, in each case, subject to certain customary exceptions. In connection with the closing of the Ares Credit Agreement, the Company drew down $25.0 million and $75.0 million on the Ares Revolving Loan and Ares Term Loan, respectively. The Ares Revolving Loan and Ares Term Loan bear interest at variable rates of Term SOFR plus 4% and Term SOFR plus 6.75%, respectively, subject in the case of the Ares Term Loan to certain step-downs and adjustments as set forth in the Ares Credit Agreement, and mature on the earlier of
(i) November 2, 2028, and (ii) with respect to the Ares Revolving Loan, 6 months prior to the maturity date of any other indebtedness in a principal or stated amount in excess of $12.5 million. The Ares Credit Agreement contains a financial covenant requiring us to maintain certain minimum revenue levels. As of December 31, 2024, the Company was in compliance with all financial covenants under the Ares Credit Agreement.
MidCap Credit Agreements
On May 6, 2021, the Company entered into a new credit agreement with MidCap Financial Trust to provide a total of $70.0 million including up to a $30.0 million revolving loan (“MidCap Revolving Loan”) and up to a $40.0 million term loan (“MidCap Term Loan”), secured by substantially all the Company’s assets (“MidCap Credit Agreements”). The MidCap Term Loan was comprised of two tranches, the first of which provided a commitment amount of $10.0 million, and the second a commitment of $30.0 million. The MidCap Term Loan and Midcap Revolving Loan bore a variable interest rate of LIBOR plus 6% and LIBOR plus 3%, respectively, and matured on the earlier of May 1, 2026, or a change in control event (the “Termination Date”). The entire principal balances of the MidCap Revolving Loan and MidCap Term Loan were due on the Termination Date. Interest payments were payable monthly, with optional principal prepayments allowed under the MidCap Credit Agreements. The Midcap Credit Agreements required us to maintain minimum net product sales and minimum consolidated EBITDA, (each term as defined in the Midcap Credit Agreements), for the preceding twelve-month period.
On November 9, 2022, the Company entered into an amendment to the MidCap Credit Agreements. The amendment to the Midcap Revolving Loan provided up to $50.0 million in total borrowing capacity. The MidCap amendments modified the MidCap Credit Agreements to include provisions related to the transition from the LIBOR Interest Rate plus Applicable Margin to the SOFR Interest Rate plus Applicable Margin, maintaining the Applicable Margin of 6% under the MidCap Term Loan and increasing the Applicable Margin from 3% to 3.75% under the Midcap Revolving Loan. In addition, the MidCap amendments amended certain covenants, terms and provisions in the Midcap Credit Agreements to, among other things, modify the covenant levels for the Minimum Net Product Sales financial covenant and to remove the Minimum Consolidated EBITDA financial covenant.
On November 2, 2023, in connection with the entry into the Ares Credit Agreement, the Company terminated the commitments and satisfied all outstanding obligations under the MidCap Credit Agreements. During the year ended December 31, 2023, the Company recorded a loss on early extinguishment of debt of $5.3 million related to the write-off of the remaining unamortized debt issuance costs and fees incurred to exit the MidCap Credit Agreements early.
Vectra Bank Colorado Loan Agreements
On March 24, 2022, the Company entered into a secured term loan facility (the “Zions Facility”) with Zions Bancorporation, N.A. dba Vectra Bank Colorado in the principal amount of $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.
Effective as of November 10, 2022, the Company entered into the First Amendment to the Zions Facility. The amendment to the Zions Facility amends the financial covenants to require the Company to maintain (i) the Liquidity Ratio, if the Cash Flow as of the last day of any quarter measured on a trailing three month basis is less than or equal to $0, and (ii) the Fixed Charge Coverage Ratio which will be calculated as of the last day of each quarter on a trailing four quarter basis, as well as a certain level of Liquidity, if the Cash Flow is greater than $0. In addition, a Net Revenue Growth covenant was added which will be calculated as of the last day of each quarter on a year-over-year basis.
Effective as of November 2, 2023, the Company entered into the Second Amendment to the Zions Facility (the “Second Amendment). The Second Amendment replaces references to MidCap Financial Trust and MidCap Credit Agreements with references to Ares and the Ares Credit Agreement. As of December 31, 2024, we were in compliance with all financial covenants under the Second Amendment.
Cash Flows
The following table sets forth the primary sources and uses of cash for the periods presented below:
Year Ended December 31,
Change
Amount
%
(in thousands)
Net cash (used in) provided by:
Operating activities
$
(27,148)
$
(63,890)
$
36,742
58%
Investing activities
(15,685)
(26,987)
11,302
42%
Financing activities
128,653
(128,360)
(100)%
Effect of exchange rate changes on cash and cash equivalents
1,481
(605)
2,086
*
Net (decrease) increase in cash and cash equivalents
$
(41,059)
$
37,171
$
(78,230)
*
*
Not Meaningful
Net Cash Used in Operating Activities
Net cash used in operating activities for the year ended December 31, 2024, was $27.1 million, consisting of net loss of $54.6 million and negative changes in working capital of $15.5 million, partially offset by non-cash expenses of $43.0 million, which primarily consisted of $18.5 million of depreciation and amortization, $13.0 million of stock-based compensation expense, and $10.1 million of excess and obsolete inventory charges. The changes in working capital are primarily comprised of a net increase in inventory of $11.1 million and a decrease in accounts payable of $5.7 million.
Net cash used in operating activities for the year ended December 31, 2023, was $63.9 million, consisting of a $57.5 million net loss, inclusive of $3.4 million of early exit fees associated with our Midcap debt, inventory increases of $32.6 million and final legal settlement payments of $22.0 million, partially offset by non-cash expenses of $36.0 million, which primarily consisted of $15.5 million of depreciation and amortization and $12.4 million of stock-based compensation expense, $4.0 million of excess and obsolete inventory, and other working capital improvements of $12.3 million. The changes in working capital are comprised primarily of a $6.7 million increase in accounts payable and a $6.4 million increase in accrued expenses.
Net Cash Used in Investing Activities
Net cash used in investing activities for the year ended December 31, 2024, was $15.7 million, consisting primarily of surgical instrumentation purchases.
Net cash used in investing activities for the year ended December 31, 2023, was $27.0 million, consisting primarily of surgical instrumentation purchases plus other purchases of property, plant and equipment.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the year ended December 31, 2024, was $0.3 million, consisting primarily of $3.1 million received from the exercise of options, partially offset a $1.0 million payment related to the completion of a milestone associated with the Additive Orthopaedics acquisition, a $1.0 million payment related to the completion of a milestone associate with the Disior acquisition, and taxes paid of $0.9 million on the vesting of RSUs.
Net cash provided by financing activities for the year ended December 31, 2023, was $128.7 million, consisting of net proceeds from long-term debt of $64.9 million and $68.5 million of proceeds from the issuance of common stock, net of issuance costs related to the Offering on January 30, 2023, partially offset by payments of $8.0 million related to the completion of certain milestones associated with the Disior and Additive Orthopaedics acquisitions.
Critical Accounting Policies
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.
The following discussion addresses our most critical accounting estimates, which are those that are most important to our financial condition and results of operations and require our most difficult, subjective and complex judgments.
Revenue Recognition
We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). Revenue is generated primarily from the sale of our implants and disposables and, to a much lesser extent, from the sale of our surgical instrumentation. We sell our products through employee sales personnel and independent sales representatives in the U.S. Outside the U.S., sales are through independent sales representatives and to stocking distributors. We have consignment agreements with certain distributors and hospitals. Our customers are primarily hospitals and surgery centers.
Revenue is recorded, net of estimated discounts and other price concessions, when our performance obligation is satisfied which is when our customers take title of the product, and typically when the product is used in surgery. We generally have written contracts with our customers which incorporate pricing and our standard terms and conditions. Any discounts we offer are outlined in our customer agreements. As the discounts are known at the time of purchase, no estimates are required at the time of revenue recognition. Shipping and handling costs are recorded as cost of goods sold and amounts billed to customers for shipping and handling costs are recorded in revenue. We have elected to exclude from the measurement of the transaction price all taxes (e.g., sales, use, value-added) assessed by government authorities and collected from a customer. Therefore, revenue is recognized net of such taxes. Commissions to sales agents for the sales exceeding their quotas are classified as incremental costs of obtaining a contract as such costs would not have been incurred if the contract was not signed. We have elected to use the practical expedient to expense such costs that should be capitalized as the amortization period of the costs would be less than one year.
Due to the nature of our products, returns are minimal and an estimate for returns is not material. The timing of revenue recognition may differ from the timing of invoicing to our customers. We have recorded unbilled accounts receivable involving management judgement related to this timing difference of $5.9 million and $5.6 million as of December 31, 2024, and December 31, 2023, respectively.
Inventories, Net
Inventories are considered finished goods and are purchased from third-party contract manufacturers. These inventories consist of implants, hardware, and consumables and are held in our warehouse, with third-party independent sales representatives or distributors, or consigned directly with hospitals.
Inventories are stated at the lower of cost or net realizable value, with the U.S inventory cost determined on a first-in, first-out basis and International inventory cost determined on a weighted average cost basis. When sold, inventory is relieved at weighted average cost. We evaluate the carrying value of our inventories in relation to historical sales, current inventory levels, and consideration of the life cycle of the product. A significant decrease in demand or development of products could result in an increase in the amount of excess inventory on hand, which could lead to additional charges for excess and obsolete inventory. The Company estimates a reserve for obsolete and slow-moving inventory based on current inventory levels and historical sales. During the year ended December 31, 2024, the Company revised the inputs used in estimating the reserve on obsolete and slow-moving inventory based on current inventory levels, historical sales and forecasted sales. Expenses for excess and obsolete inventory are included in Cost of goods sold in the Consolidated
Statements of Operations and Comprehensive Loss. The inventory reserve was $30.8 million and $20.9 million as of December 31, 2024 and 2023, respectively.
A feature of the orthopedic business is the high level of product inventory required, some of which is located at customer premises and is available for customers’ immediate use (referred to as consignment inventory). Complete sets of products, including large and small sizes, have to be made available in this way. These outer sizes are used less frequently than standard sizes and towards the end of the product life cycle are inevitably in excess of requirements. Adjustments to carrying value are therefore required to be made to orthopedic inventory to anticipate this situation. These adjustments are calculated in accordance with a formula based on levels of inventory compared with historical and forecast usage. This formula is applied on an individual product line basis and is first applied when a product group has been on the market for two years. This method of calculation is considered appropriate based on experience, but it involves management judgements on effectiveness of inventory deployment, length of product lives, phase-out of old products and efficiency of manufacturing planning systems.
Stock-Based Compensation
All stock-based awards to employees and nonemployee contractors, including any grants of stock, stock options, restricted stock units (“RSU”), performance stock units (“PSU”) and the option to purchase common stock under the Employee Stock Purchase Plan (“ESPP”), are measured at fair value at the grant date and recognized over the relevant vesting period in accordance with ASC Topic 718 (“ASC 718”). Stock-based awards to nonemployees are recognized as a selling, general and administrative expense over the period of performance. Such awards are measured at fair value at the date of grant. In addition, for awards that vest immediately, the awards are measured at fair value and recognized in full at the grant date.
The Company estimates the fair value of each stock-option award containing service and/or performance conditions on the grant date using the Black-Scholes option valuation model which incorporates assumptions as to stock price volatility, the expected life of the options, risk-free interest rate and dividend yield. The Company relies on its historical volatility as an input to the option pricing model as management believes that this rate will be representative of future volatility over the expected term of the options. The expected term until exercise represents the weighted-average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and the Company’s historical exercise patterns. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The Company has not paid any dividends since its inception and does not anticipate paying any dividends for the foreseeable future, so the dividend yield is assumed to be zero. The Company estimates forfeitures of share-based awards at the time of grant and revises such estimates in subsequent periods if actual forfeitures differ from the original estimate. Option awards are generally granted with an exercise price equal to the fair value of the Company’s common stock at the date of grant.
The Company estimates the fair value its performance stock units (“PSU’s”) on the grant date using the Monte Carlo simulation. See Note 11 to our consolidated financial statements included in this Annual Report for additional information regarding the valuation of our PSU’s.
Subsequent to the IPO, the fair value of the Company’s common stock underlying its equity awards is based on the quoted market price of the Company’s common stock on the grant date. Prior to the IPO, because there was no public market for the Company’s common stock, the fair value of the common stock underlying the stock awards has historically been determined at the time of grant of the stock option by considering a number of objective and subjective factors, including sales of shares of common stock, third-party valuations performed, important developments in the Company’s operations, actual operating results and financial performance, the conditions in the medical device industry and the economy in general, and the stock price performance, volatility of comparable public companies, and an assumption for a discount for lack of marketability, among other factors.
Recently Issued Accounting Pronouncements
See Note 2 to our consolidated financial statements included in this Annual Report for new accounting pronouncements not yet adopted as of the date of this report.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
The primary objectives of our investment activities are to preserve principal and provide liquidity. In the normal course of business, we are exposed to market risk related to fluctuating interest rates. The Company has both fixed and variable rate debt to manage the impact of these fluctuations. The Company is the fixed rate payor on an interest rate swap contract to help manage some of this risk. Based on our overall interest rate exposure as of December 31, 2024, we do not believe a hypothetical 10 percent change in interest rates on our variable rate indebtedness would have a material effect on our results of operations.
Foreign Currency Risk
Our business is primarily conducted in U.S. dollars. 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. Any transactions that may be conducted in foreign currencies could have a material effect on our results of operations, financial position or cash flows.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34)
Consolidated Balance Sheets as of December 31, 2024 and 2023
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2024, 2023 and 2022
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2024, 2023 and 2022
Consolidated Statements of Cash Flows for the years ended December 31, 2024, 2023 and 2022
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Paragon 28, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Paragon 28, Inc. and subsidiaries (the "Company") as of December 31, 2024 and 2023, the related consolidated statements of operations and comprehensive loss, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2024, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America (GAAP). Also, in our opinion, because of the effect of the material weaknesses identified below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Annual Report on Internal Control Over Financial Reporting” within Item 9a. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Material Weaknesses
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment:
a)
a material weakness in the control environment component of COSO as the Company lacked a sufficient complement of financial and accounting personnel with the necessary technical and accounting knowledge, experience, and training related to accounting in accordance with GAAP.
b)
the material weakness in the control environment contributed to a lack of controls designed and implemented to timely prevent a material misstatement in the accounting for the existence and valuation of inventory. The identified control deficiencies, individually and in the aggregate, are material weaknesses relating to: (i) the calculation of the excess and obsolescence reserve (ii) capitalization of purchase price variances and (iii) existence and completeness of inventory on hand.
c)
a material weakness in the monitoring component of COSO as management did not design and implement effective ongoing monitoring activities over the execution of business performance reviews and account analysis, as well as the application of GAAP, which resulted in the inability to identify material errors in the financial statements and to communicate all relevant internal control deficiencies to those parties responsible for taking corrective action in a timely manner.
d)
a material weakness resulting from the lack of designed and documented controls within the process of recording customer pricing or pricing changes at the Company’s domestic and international operations. Specifically, the Company did not document and maintain review controls over validating accuracy on initial contract pricing and changes during the year.
e)
a material weakness from the failure to design and maintain effective information technology (“IT”) general computer controls over the IT systems used within the processing of key financial transactions at the Company’s international operations. Specifically, management did not design and maintain user access controls to ensure appropriate segregation of duties over the preparation and review of journal entries, or adequately restrict user and privileged access to financial applications, programs, and data to appropriate company personnel.
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the financial statements as of the year ended December 31, 2024 of the company, and this report does not affect our opinion on such financial statements.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Inventories - Excess and Obsolete Inventories - Refer to Note 2 to the financial statements
Critical Audit Matter Description
Inventories are stated at the lower of cost or net realizable value. The Company estimates a reserve for obsolete and slow-moving inventory based on current inventory levels, historical sales and forecasted sales. Expenses for excess and obsolete inventory are included in Cost of goods sold in the Consolidated Statements of Operations and Comprehensive Loss.
A feature of the orthopedic business is the high level of product inventory required, some of which is located at customer premises and is available for customers’ immediate use (referred to as consignment inventory). Complete sets of products, including large and small sizes, have to be made available in this way. These outer sizes are used less frequently than standard sizes and towards the end of the product life cycle are inevitably in excess of requirements. Adjustments to carrying value are therefore required to be made to orthopedic inventory to anticipate this situation.
The inventory reserve was $30,803 and $20,921 as of December 31, 2024 and 2023, respectively. We identified management’s estimate of excess and obsolete inventories as a critical audit matter because of the high degree of subjectivity involved in developing the estimates and sensitivity related to key assumptions including projected sales by product, and product life cycle. The subjectivity and sensitivity in these key assumptions required a high degree of auditor judgment when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to excess and obsolete inventories.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to excess and obsolete inventories included the following, among others:
-
We performed analytical procedures to evaluate the reasonableness of changes in inventory balances and related excess, slow moving and obsolete reserves by comparing the current year and prior year balances.
-
We tested management’s process for developing the excess and obsolete estimate by:
·
inquiring of management, including personnel with operational roles, regarding certain estimates and assumptions specific to selected inventory items. These estimates and assumptions include product life cycles, forecasted sales, application of methodology following a two year period on market, and classification of outer (non-standard) versus standard inventory;
·
testing certain underlying data used by management in making their estimates and assumptions related to excess and obsolete inventories, including quantities of inventory on hand and historical and projected sales by product;
-
We assessed the reasonableness of the assumptions used in the calculations of the provision for estimated excess, slow moving and obsolete inventories by developing an independent expectation and comparing our independent expectation to the results of the Company's calculations.
-
We tested the mathematical accuracy of management's calculations on a sample basis.
/s/ Deloitte & Touche LLP
Denver, Colorado
March 6, 2025
We have served as the Company's auditor since 2020.
PARAGON 28, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31, 2024
December 31, 2023
ASSETS
Current assets:
Cash and cash equivalents
$
34,580
$
75,639
Trade receivables, net of allowances and estimated credit losses of $712 and $1,339, respectively
39,016
37,323
Inventories, net
90,031
90,046
Income taxes receivable
1,215
Other current assets
4,005
3,997
Total current assets
168,847
207,799
Property and equipment, net
71,379
74,122
Intangible assets, net
20,359
21,674
Goodwill
25,465
25,465
Deferred income taxes
Other assets
3,970
2,918
Total assets
$
290,717
$
332,683
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
15,976
$
21,696
Accrued expenses
29,915
27,781
Other current liabilities
1,430
Current maturities of long-term debt
Income taxes payable
Total current liabilities
48,134
51,243
Long-term liabilities:
Long-term debt net, less current maturities
110,046
109,799
Other long-term liabilities
1,295
1,048
Deferred income taxes
Income taxes payable
Total liabilities
160,131
162,958
Commitments and contingencies (Note 14)
Stockholders' equity:
Common stock, $0.01 par value, 300,000,000 shares authorized; 84,770,249 and 83,738,974 shares issued, and 83,856,730 and 82,825,455 shares outstanding as of December 31, 2024 and December 31, 2023, respectively
Additional paid in capital
314,823
298,394
Accumulated deficit
(178,285)
(123,646)
Accumulated other comprehensive (expense) income
(807)
Treasury stock, at cost; 913,519 shares as of December 31, 2024 and December 31, 2023
(5,982)
(5,982)
Total stockholders' equity
130,586
169,725
Total liabilities & stockholders' equity
$
290,717
$
332,683
The accompanying notes are an integral part of these consolidated financial statements.
PARAGON 28, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except share and per share data)
Year Ended December 31,
Net revenue
$
256,182
$
216,389
$
181,383
Cost of goods sold
64,693
51,954
32,117
Gross profit
191,489
164,435
149,266
Operating expenses:
Research and development
27,066
30,078
24,650
Selling, general, and administrative
205,201
180,022
159,323
Legal settlement
-
-
27,000
Total operating expenses
232,267
210,100
210,973
Operating loss
(40,778)
(45,665)
(61,707)
Other income (expense):
Other income (expense), net
(1,171)
(1,183)
Loss on early extinguishment of debt
-
(5,308)
-
Interest expense, net
(11,531)
(5,165)
(4,129)
Total other expense, net
(12,702)
(11,656)
(4,006)
Loss before income taxes
(53,480)
(57,321)
(65,713)
Income tax expense (benefit)
1,159
(64)
Net loss
$
(54,639)
$
(57,534)
$
(65,649)
Foreign currency translation adjustment
(939)
(41)
Comprehensive loss
$
(55,578)
$
(57,369)
$
(65,690)
Weighted average number of shares of common stock outstanding:
Basic
83,311,245
82,087,329
76,766,100
Diluted
83,311,245
82,087,329
76,766,100
Net loss per share attributable to common stockholders:
Basic
$
(0.66)
$
(0.70)
$
(0.86)
Diluted
$
(0.66)
$
(0.70)
$
(0.86)
The accompanying notes are an integral part of these consolidated financial statements.
PARAGON 28, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except for number of shares)
Additional
Other
Total
Common Stock
Paid-in-
Accumulated
Comprehensive
Treasury
Stockholders'
Shares
Amount
Capital
Deficit
Income (Loss)
Stock
Equity
Balance, December 31, 2021
76,447,287
$
$
197,868
$
(463)
$
$
(5,982)
$
192,194
Net loss
-
-
-
(65,649)
-
-
(65,649)
Offering costs associated
with initial public offering
-
-
(266)
-
-
-
(266)
Options exercised
1,284,333
5,258
-
-
-
5,271
Foreign currency translation
-
-
-
-
(41)
-
(41)
Employee stock purchase plan
38,968
-
-
-
-
Stock-based compensation
-
-
10,365
-
-
-
10,365
Balance, December 31, 2022
77,770,588
213,956
(66,112)
(33)
(5,982)
142,605
Net loss
-
-
-
(57,534)
-
-
(57,534)
Issuance of common stock
net of issuance costs of $827
4,312,500
68,410
-
-
-
68,453
Options exercised
668,925
2,399
-
-
-
2,406
Foreign currency translation
-
-
-
-
-
Employee stock purchase plan
73,442
1,265
-
-
-
1,266
Stock-based compensation
-
-
12,364
-
-
-
12,364
Balance, December 31, 2023
82,825,455
298,394
(123,646)
(5,982)
169,725
Net loss
-
-
-
(54,639)
-
-
(54,639)
Options exercised
626,469
3,126
-
-
-
3,132
Restricted stock vested, net of taxes
286,739
(858)
-
-
-
(855)
Foreign currency translation
-
-
-
-
(939)
-
(939)
Employee stock purchase plan
118,067
1,144
-
-
-
1,145
Stock-based compensation
-
-
13,017
-
-
-
13,017
Balance, December 31, 2024
83,856,730
$
$
314,823
$
(178,285)
$
(807)
$
(5,982)
$
130,586
The accompanying notes are an integral part of these consolidated financial statements.
PARAGON 28, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
Cash flows from operating activities
Net loss
$
(54,639)
$
(57,534)
$
(65,649)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
18,546
15,542
13,728
Allowance for trade receivables and estimated credit losses
Provision for excess and obsolete inventories
10,113
4,037
Loss on early extinguishment of debt
-
1,881
-
Stock-based compensation
13,017
12,364
10,365
Change in fair value of financial instruments
(778)
(57)
Other
1,244
Changes in other assets and liabilities, net of acquisitions:
Accounts receivable
(2,884)
(161)
(12,013)
Inventories
(11,143)
(32,628)
(21,852)
Accounts payable
(5,674)
6,742
1,895
Accrued expenses
4,298
6,428
2,317
Accrued legal settlement
-
(22,000)
22,000
Income tax receivable/payable
(504)
(50)
Other assets and liabilities
(655)
(1,650)
Net cash used in operating activities
(27,148)
(63,890)
(49,181)
Cash flows from investing activities
Purchase of office building
-
-
(18,300)
Purchases of property and equipment
(15,797)
(26,716)
(22,813)
Proceeds from sale of property and equipment
1,264
1,043
Purchases of intangible assets
(1,152)
(1,314)
(1,973)
Acquisitions, net of cash received
-
-
(18,504)
Net cash used in investing activities
(15,685)
(26,987)
(60,693)
Cash flows from financing activities
Proceeds from draw on term loan
-
-
20,000
Proceeds from issuance of long-term debt
-
100,000
16,000
Payments on long-term debt
(640)
(30,727)
(570)
Payments of debt issuance costs
(18)
(4,423)
(732)
Proceeds from issuance of common stock, net of issuance costs
-
68,453
-
Proceeds from exercise of options
3,132
2,406
5,271
RSU vesting, taxes paid
(856)
-
-
Proceeds from employee stock purchase plan
Payments on earnout liability
(2,000)
(8,000)
(1,000)
Net cash provided by financing activities
128,653
39,487
Effect of exchange rate changes on cash and cash equivalents
1,481
(605)
(497)
Net (decrease) increase in cash and cash equivalents
(41,059)
37,171
(70,884)
Cash and cash equivalents at beginning of period
75,639
38,468
109,352
Cash and cash equivalents at end of period
$
34,580
$
75,639
$
38,468
Supplemental disclosures of cash flow information:
Restricted cash
$
-
$
1,000
$
-
Cash paid for income taxes
2,097
1,103
Cash paid for interest
11,973
4,271
3,073
Purchase of property and equipment included in accounts payable
2,226
3,402
3,402
The accompanying notes are an integral part of these consolidated financial statements.
NOTE 1. BUSINESS AND BASIS OF PRESENTATION
Business
Paragon 28, Inc. (collectively with its subsidiaries, “we,” “us,” “our,” “P28” or the “Company”) develops, distributes, and sells medical devices in the foot and ankle segment of the orthopedic implant marketplace. Our approach to product development is procedurally focused, resulting in a full range of products designed specifically for foot and ankle anatomy. Our products and product families include plates and plating systems, screws, staples, and nails aimed to address all major foot and ankle procedures including fracture fixation, forefoot, or hallux valgus - which includes bunion, hammertoe, ankle, flatfoot or progressive collapsing foot deformity, charcot foot and orthobiologics. P28 is a United States (“U.S.”) based company incorporated in the State of Delaware, with headquarters in Englewood, Colorado. Our sales representatives and distributors are located globally with the majority concentrated in the U.S., Australia, South Africa, and the United Kingdom.
Secondary Public Offering
On January 30, 2023, the Company completed an underwritten public offering (“the Offering”) of 6,500,000 shares of its common stock at an offering price of $17.00 per share, which consisted of 3,750,000 shares of common stock issued and sold by the Company and 2,750,000 shares of common stock sold by certain selling securityholders. On February 17, 2023, the underwriters exercised in full their option to purchase an additional 562,500 shares and 412,500 shares of common stock from the Company and the selling securityholders, respectively.‌
The Company received aggregate net proceeds from the Offering of approximately $68,453 after deducting underwriting discounts and commissions and offering expenses payable by the Company. The selling securityholders received aggregate net proceeds from the Offering of approximately $50,700 after deducting underwriting discounts and commissions. The Company did not receive any of the proceeds from the sale of shares of Common Stock by the selling securityholders.
Basis of Presentation and Consolidation
The accompanying Consolidated Financial Statements include the accounts of Paragon 28, Inc. and its subsidiaries, all of which are wholly-owned. All intercompany balances and transactions have been eliminated in consolidation. The accompanying Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”). Amounts reported in thousands, except for number of shares, within these notes to the consolidated financial statements are computed based on the actual amounts.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Because future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Any changes in these estimates will be reflected in the Company’s Consolidated Financial Statements. Significant items subject to such estimates and assumptions include the determination of the credit loss reserves for trade receivables, inventory obsolescence, impairment of long-lived assets, recoverability of goodwill and intangible assets, contingent earn-out liability, interest rate swap valuation, income taxes and stock-based compensation. On January 1, 2024, the Company revised the inputs used in estimating the reserve on obsolete and slow-moving inventory to include forecasted sales, in addition to current inventory levels and historical sales. The effect of this change in estimate was a decrease of $662 to the Company’s reserve for obsolete and slow-moving inventory during the twelve months ended December 31, 2024.
Foreign Currency Translation
The Consolidated Financial Statements are presented in U.S. dollars. The Company’s non-U.S. subsidiaries may have a functional currency (i.e., the currency in which operational activities are primarily conducted) that is other than the U.S. dollar, generally the currency of the country in which such subsidiaries are domiciled. In these instances, such subsidiaries’ assets and liabilities are translated into U.S. dollars at year-end exchange rates, while revenue and expenses are translated at average exchange rates during the year based on the daily closing exchange rates. Adjustments that result from translating amounts from a subsidiary’s functional currency to U.S. dollars are reported in Accumulated other comprehensive loss, net of tax, a separate component of stockholders' equity.
Transactions made in a currency other than the functional currency are remeasured to the functional currency at the exchange rates on the dates of the transaction. Foreign exchange gains and losses are recorded within Other income (expense), net on the Consolidated Statements of Operations and Comprehensive Loss.
Business Combinations
We allocate the purchase consideration to the identifiable net assets acquired, including intangible assets and liabilities assumed, based on estimated fair values at the date of the acquisition. The excess of the fair value of the purchase consideration over the fair value of the identifiable assets and liabilities, if any, is recorded as goodwill. During the measurement period, which is up to one year from the acquisition date, we may adjust provisional amounts that were recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date.
Determining the fair value of assets acquired and liabilities assumed requires significant judgment, including the selection of valuation methodologies including the income approach, the cost approach, and the market approach. Significant assumptions used in those methodologies include, but are not limited to, the expected values of the underlying metric, the systematic risk embedded in the underlying metric, the volatility of the underlying metric, the risk-free rate, and the counterparty risk. The use of different valuation methodologies and assumptions is highly subjective and inherently uncertain and, as a result, actual results may differ materially from estimates.
Cash
Cash and cash equivalents include cash, money market funds and highly liquid investments with an original maturity of three months or less. There were no contractual or other restrictions as to the use of cash for the years ended December 31, 2024 or 2022. As of December 31, 2023, $1,000 related to the achievement of an Additive Orthopaedics acquisition milestone was included as restricted cash within the Consolidated Balance Sheets and Consolidated Statement of Cash Flows. For additional information regarding the Additive Orthopaedics acquisition milestone refer to Note 7 to our Consolidated Financial Statements.
Trade Receivables, Less Allowances and Estimated Credit Losses
Trade receivables due from customers are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days from the invoice date and are stated at the amount billed to the customer.
Trade receivables also include unbilled receivables due from customers that represent completed surgical cases that are pending customer-issued purchase orders. These unbilled receivables are covered by agreements with customers, the products have typically been used in a surgery, and collection is determined to be probable.
The Company estimates an allowance for trade receivables and estimated credit losses based upon an evaluation of the current status of receivables, historical experience, and other factors as necessary. It is reasonably possible that the Company’s estimate of the allowance for trade receivables and credit losses will change.
The following table presents the activity in the allowance for trade receivables and estimated credit losses for the years ended December 31, 2024, 2023 and 2022:
December 31,
Beginning of year
$
1,339
$
1,688
$
1,032
Additions charged against income
1,853
Write-offs
(1,439)
(572)
(1,197)
End of year
$
$
1,339
$
1,688
Inventories, Net
Inventories are considered finished goods and are purchased from third-party contract manufacturers. These inventories consist of implants, hardware, and consumables and are held in our warehouse, with third-party independent sales representatives or distributors, or consigned directly with hospitals.
Inventories are stated at the lower of cost or net realizable value, with the U.S inventory cost determined on a first-in, first-out basis and International inventory cost determined on a weighted average cost basis. When sold, inventory is relieved at weighted average cost. We evaluate the carrying value of our inventories in relation to historical sales, current inventory levels, and consideration of the life cycle of the product. A significant decrease in demand or development of products could result in an increase in the amount of excess inventory on hand, which could lead to additional charges for excess and obsolete inventory. The Company estimates a reserve for obsolete and slow-moving inventory based on current inventory levels, historical sales and forecasted sales. Expenses for excess and obsolete inventory are included in Cost of goods sold in the Consolidated Statements of Operations and Comprehensive Loss. The inventory reserve was $30,803 and $20,921 as of December 31, 2024 and 2023, respectively.
A feature of the orthopedic business is the high level of product inventory required, some of which is located at customer premises and is available for customers’ immediate use (referred to as consignment inventory). Complete sets of products, including large and small sizes, have to be made available in this way. These outer sizes are used less frequently than standard sizes and towards the end of the product life cycle are inevitably in excess of requirements. Adjustments to carrying value are therefore required to be made to orthopedic inventory to anticipate this situation. These adjustments are calculated in accordance with a formula based on levels of inventory compared with historical and forecast usage. This formula is applied on an individual product line basis and is first applied when a product group has been on the market for two years. This method of calculation is considered appropriate based on experience, but it involves management judgements on effectiveness of inventory deployment, length of product lives, phase-out of old products and efficiency of manufacturing planning systems.
Property and Equipment, Net
Property and equipment are recorded at cost less accumulated depreciation. Expenditures for renewals and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized and included in Property and equipment, net in the Consolidated Balance Sheets. When equipment is retired or sold, the cost
and related accumulated depreciation are eliminated from the accounts and the resulting gain or loss is included in included in Selling, general and administrative in the Consolidated Statements of Operations and Comprehensive Loss.
Depreciation is computed using the straight-line method based on useful lives of the assets which range from three to twenty-five years, which best reflects the pattern of use. The Company depreciates surgical instrumentation, once available for use, over a five-year period and in certain cases, once available for use, over a three-year period. Depreciation for surgical instrumentation used in surgery is included in Selling, general, and administrative expense in the Consolidated Statements of Operations and Comprehensive Loss. Leasehold improvements are amortized using the straight-line method over the shorter of the asset’s useful life or the lease term.
Property and equipment are assessed for impairment upon triggering events that indicate the carrying value of an asset group may not be recoverable. Recoverability is measured by a comparison of the carrying amount to future net undiscounted cash flows of the asset group expected to be generated from its use and eventual disposition. If the asset group’s carrying value is determined to not be recoverable, the impairment to be recognized is measured by which the carrying amount exceeds the fair value of the asset group. No impairment charges related to property and equipment were recorded in any of the periods presented.
Intangibles
The costs associated with applying for patents and trademarks are capitalized. Patents are amortized on a straight-line basis over the lesser of the patent’s economic or legal life, which is approximately eighteen years. Costs associated with capitalized patents include third-party attorney fees and other third-party fees as well as costs related to the following: the preparation of patent applications, government filings and registration fees, drawings, computer searches, and translations related to specific patents. Trademarks that are anticipated to be renewed every ten years have an indefinite life and are not amortized but tested for impairment annually. Once it is determined a trademark will no longer be renewed, the trademark is amortized over the remainder of the trademark’s registration period. Customer relationships are amortized over an estimated useful life of three to seven years on a straight-line basis. Other intangibles, which mainly consist of noncompete arrangements, are amortized over an estimated useful life of three years on a straight-line basis. Developed technology is amortized over an estimated useful life of twelve years on a straight-line basis.
Amortizable intangible assets are assessed for impairment upon triggering events that indicate that the carrying value of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount to future net undiscounted cash flows expected to be generated by the associated asset. If the asset’s carrying value is determined to not be recoverable, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of the intangible assets. No impairment charges related to amortizable assets were recorded for the years ended December 31, 2024, 2023 and 2022.
Indefinite-lived trademark assets are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The Company can elect to first apply the optional qualitative impairment assessment to determine whether the indefinite-lived intangible asset is more-likely-than-not impaired. If, on the basis of the qualitative impairment assessment, an entity asserts that it is more likely than not that the indefinite-lived intangible asset is impaired, the Company would be required to calculate the fair value of the asset for an impairment test. Impairment loss is recognized if the carrying amount of the asset exceeds its fair value.
A qualitative assessment considers macroeconomic and other industry-specific factors, such as trends in short-term and long-term interest rates and the ability to access capital, and company specific factors such as trends in revenue generating activities, and merger or acquisition activity. If the Company elects to bypass qualitatively assessing its indefinite-lived intangible assets, or it is not more likely than not that the fair value of the intangible asset exceeds its carrying value, management estimates the fair value of the intangible asset and compares it to the carrying value. The estimated fair value of the intangible asset is established using an income approach based on a discounted cash flow model that includes significant assumptions about the future operating results and cash flows of the intangible asset or assets.
The Company elected to perform a qualitative analysis for its indefinite-lived intangible assets as of October 1, 2024, the annual test date. The Company determined, after performing the qualitative analysis, that there was no evidence that it
is more likely than not that the fair value of its intangible assets was less than the carrying amount. Therefore, it was not necessary to perform a quantitative impairment test and no such impairment charges were recognized during the years ended December 31, 2024, 2023 and 2022.
Goodwill
Goodwill represents the excess of the purchase price as compared to the fair value of net assets acquired and liabilities assumed. Goodwill is not amortized, but is tested for impairment annually or when indications of impairment exist. Goodwill is tested at the reporting unit level as defined in ASC 350. Per this definition, a reporting unit is an operating segment or one level below an operating segment. The Company has determined that it has one reporting unit for the purpose of goodwill impairment. We can elect to qualitatively assess goodwill for impairment if it is more likely than not that the fair value of a reporting unit exceeds its carrying value.
Impairment exists when the carrying amount, including goodwill, of the reporting unit exceeds its fair value, resulting in an impairment charge for this excess (not to exceed the carrying amount of the goodwill). The impairment, if determined, is recorded within Operating expenses in the Consolidated Statements of Operations and Comprehensive Loss in the period the determination is made. No such impairment charges were recognized during the years ended December 31, 2024, 2023 and 2022.
Fair Value of Financial Instruments
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. There is a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2- Includes other inputs that are directly or indirectly observable in the marketplace, such as quoted market prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Unobservable inputs which are supported by little or no market activity.
Financial instruments (principally cash and cash equivalents, trade receivables, accounts payable and accrued expenses) are carried at cost, which approximates fair value due to the short-term maturity of these instruments. The majority of our debt is carried at cost, which approximates fair value due to the variable interest rate associated with our debt. However, we are the fixed rate payor on an interest rate swap contract associated with the Company’s Zions Facility, which is classified as Level 2. We reassess the fair value of our interest rate swap on a quarterly basis. The change in fair value is recorded in Other income (expense), net in the Consolidated Statements of Operations and Comprehensive Loss. The Company does not have any assets or liabilities presented in the Level 1 category as of December 31, 2024 and 2023, and does not have any assets or liabilities presented in the Level 3 category as of December 31, 2024. There were no changes in level hierarchies during the year ended December 31, 2023. See "Contingent Earn-out Consideration" below for a discussion on our Level 3 inputs.
Fair Value of Non-Financial Assets
The Company’s non-financial assets, which consist primarily of property and equipment, right-of-use assets, goodwill, and other intangible assets, are not required to be carried at fair value on a recurring basis and are reported at carrying value. The fair values of these assets are determined, as required, based on Level 3 measurements, including estimates of the amount and timing of future cash flows based upon historical experience, expected market conditions, and management’s plans.
Contingent Earn-out Consideration
Business combinations may include contingent earn-out consideration as part of the purchase price under which the Company will make future payments to the seller upon the achievement of certain milestones. The fair value of the contingent earn-out consideration is estimated as of the acquisition date at the present value of the expected contingent payments and is subsequently remeasured at each balance sheet date. Two methodologies are considered in the valuation: the scenario-based model (“SBM”) and Monte Carlo simulation. The SBM relies on multiple outcomes to estimate the likelihood of future payoff of the contingent consideration. The resulting earnout payoff is then probability-weighted and discounted at an appropriate risk adjusted rate in order to arrive at the present value of the expected earnout payment. The Monte Carlo simulation is used to value the non-linear contingent considerations based on projected financial metrics. Each trial of the Monte Carlo simulation draws a value from the assumed distribution for the underlying metric. The earnout payoff for each simulation trial is calculated based on that particular simulated path for the underlying metrics and then discounted to present value using the risk-free rate, adjusted for counterparty credit risk. The value of the earnout is estimated as the average value from all simulation trials. The fair value estimates use unobservable inputs that reflect our own assumptions as to the ability of the acquired business to meet the targeted benchmarks and discount rates used in the calculations. The unobservable inputs are defined in ASC Topic 820, “Fair Value Measurements and Disclosures,” as Level 3 inputs.
We review the probabilities of achievement of the earnout milestones to determine impact on the fair value of the earnout consideration on a quarterly basis over the earn-out period. Actual results are compared to the estimates and probabilities of achievement used in our forecasts. Should actual results of the acquired business increase or decrease as compared to our estimates and assumptions, the estimated fair value of the contingent earn-out consideration liability will increase or decrease, up to the contractual limit, as applicable. Changes in the estimated fair value of the contingent earn-out consideration are recorded in Other income (expense), net in the Consolidated Statements of Operations and Comprehensive Loss and are reflected in the period in which they are identified. Changes in the estimated fair value of the contingent earn-out consideration may materially impact or cause volatility in our operating results. For additional information on the Company’s earnout liabilities refer to Note 7 to our Consolidated Financial Statements
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance if it is more likely than not that some portion, or all, of a deferred tax asset will not be realized. The determination as to whether a deferred tax asset will be realized is made on a jurisdictional basis and is based on both positive and negative evidence. This evidence includes historic taxable income, projected future taxable income, the expected timing of the reversal of existing temporary differences and the implementation of tax planning strategies.
The Company records uncertain tax positions in accordance with Accounting Standards Codification (“ASC”) Topic 740 on the basis of a two-step process in which (1) the Company determines whether it is more-likely-than-not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
The Company evaluates its tax positions that have been taken or are expected to be taken on income tax returns to determine if an accrual is necessary for uncertain tax positions. The Company will recognize interest and penalties as a component of income tax expense if incurred.
Revenue Recognition
We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). Revenue is generated primarily from the sale of our implants and disposables and, to a much lesser extent, from the sale of our surgical instrumentation. We sell our products through employee sales personnel, and independent sales representatives in the U.S. Outside the U.S., sales are through independent sales representatives and to stocking distributors. We have consignment agreements with certain distributors and hospitals. Our customers are primarily hospitals and surgery centers.
Revenue is recorded, net of estimated discounts and other price concessions, when our performance obligation is satisfied, which is when our customers take title of the product, typically when the product is used in surgery. We generally have written contracts with our customers which incorporate pricing and our standard terms and conditions. Any discounts we offer are outlined in our customer agreements. As the discounts are known at the time of purchase, no estimates are required at the time of revenue recognition. Shipping and handling costs are recorded as cost of goods sold and amounts billed to customers for shipping and handling costs are recorded in revenue. We have elected to exclude from the measurement of the transaction price all taxes (e.g., sales, use, value-added) assessed by government authorities and collected from a customer. Therefore, revenue is recognized net of such taxes. Commissions to sales agents for the sales exceeding their quotas are classified as incremental costs of obtaining a contract as such costs would not have been incurred if the contract was not signed. We have elected to use the practical expedient to expense such costs that should be capitalized as the amortization period of the costs would be less than one year.
Due to the nature of our products, returns are minimal and an estimate for returns is not material. The timing of revenue recognition may differ from the timing of invoicing to our customers. We recorded unbilled revenue of $5,884 and $5,598 as of December 31, 2024 and 2023, respectively, within Net revenue on the Consolidated Statements of Operations and Comprehensive Loss. Determining unbilled revenue involves management judgment.
Cost of Goods Sold
Cost of goods sold consists primarily of products purchased from third-party suppliers, freight, shipping, excess and obsolete and other inventory charges, and royalties. Implants are manufactured to our specifications by third-party suppliers. Most implants are produced in the U.S. Cost of goods sold is recognized for consigned implants at the time the implant is used in surgery and the related revenue is recognized. Prior to their use in surgery, the cost of consigned implants is recorded as Inventories, net in our Consolidated Balance Sheets.
Stock-Based Compensation
All stock-based awards to employees and nonemployee contractors, including any grants of stock, stock options, restricted stock units (“RSU”), performance stock units ("PSU") and the option to purchase common stock under the Employee Stock Purchase Plan (“ESPP”), are measured at fair value at the grant date and recognized over the relevant vesting period in accordance with the ASC Topic 718, Compensation - Stock Compensation (“ASC 718”). Stock-based awards to nonemployees are recognized as a selling, general and administrative expense over the period of performance. Such awards are measured at fair value at the date of grant. In addition, for awards that vest immediately, the awards are measured at fair value and recognized in full at the grant date.
The Company estimates the fair value of each stock-option award containing service and/or performance conditions on the grant date using the Black-Scholes option valuation model which incorporates assumptions as to stock price volatility, the expected life of the options, risk-free interest rate and dividend yield. The Company relies on its historical volatility as an input to the option pricing model as management believes that this rate will be representative of future volatility over the expected term of the options. The expected term until exercise represents the weighted-average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and the Company’s historical exercise patterns. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The Company has not paid any dividends since its inception and does not anticipate paying any dividends for the foreseeable future, so the dividend yield is assumed to be zero. The Company estimates forfeitures of share-based awards at the time of grant and revises such estimates in subsequent periods if actual forfeitures differ from original estimates. Option awards are generally granted with an exercise price equal to the fair value of the Company’s common stock at the date of grant.
The Company estimates the fair value its performance stock units (“PSU’s”) on the grant date using the Monte Carlo simulation. Refer to Note 11 to our Consolidated Financial Statements for additional information regarding the valuation of our PSU’s.
Subsequent to the IPO, the fair value of the Company’s common stock underlying its equity awards is based on the quoted market price of the Company’s common stock on the grant date. Prior to the IPO, because there was no public market for the Company’s common stock, the fair value of the common stock underlying the stock awards has historically been determined at the time of grant of the stock option by considering a number of objective and subjective factors, including sales of shares of common stock, third-party valuations performed, important developments in the Company’s operations, actual operating results and financial performance, the conditions in the medical device industry and the economy in general, and the stock price performance, volatility of comparable public companies, and an assumption for a discount for lack of marketability, among other factors.
Research and Development
Research and development expense is comprised of in-house research and development of new products and technologies, clinical studies and trials, regulatory expenses, and employee related compensation and expenses. We maintain a procedurally focused approach to product development and have projects underway to add new products to our existing systems and to add new systems across multiple foot and ankle indications.
Leases
At the inception of a contractual arrangement, the Company determines whether the contract contains a lease by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset in exchange for consideration over a period of time. If both criteria are met, the Company calculates the associated lease liability and corresponding right-of-use asset upon lease commencement using a discount rate based on a borrowing rate commensurate with the term of the lease. The Company records lease liabilities within current liabilities or long-term liabilities based upon the length of time associated with the lease payments. The Company records its operating lease right-of-use assets within Other assets.
Contingencies
A liability is contingent if the amount is not presently known but may become known in the future as a result of the occurrence of some uncertain future event. We accrue a liability for an estimated loss if we determine that the potential loss is probable of occurring and the amount can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether the amount of an exposure is reasonably estimable, and accruals are based only on the information available to our management at the time the judgment is made. We expense legal costs, including those legal costs incurred in connection with a loss contingency, as incurred.
Recently Adopted Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures ("ASU 2023-07"), which provides amendments to improve reportable segment disclosure requirements by including expense and profitability measures. The Company adopted the ASU 2023-07 effective January 1, 2024. As a result, the Company has included the additional required disclosures in Note 16 with retrospective presentation to all prior periods presented in the financial statements. The adoption of this guidance did not have a significant impact on the Company’s related disclosures.
Recently Issued Accounting Pronouncements
In October 2023, the FASB issued Accounting Standards Update ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. The amendments in ASU 2023-06 modify the disclosure or presentation requirements of a variety of Topics in the Codification. Certain of the amendments represent clarifications to or technical corrections of the current requirements. ASU 2023-06 is applicable to all entities subject to the SEC’s existing disclosure requirements. The effective date for each amendment will be the date
on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. The Company is currently evaluating the amendments in ASU 2023-06 and does not expect the adoption to have a significant impact on the Company’s related disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures ("ASU 2023-09"), to enhance the transparency and decision usefulness of income tax disclosures. The main provisions in ASU 2023-09 enhance the disclosure requirements of rate reconciliations and income taxes paid. For public business entities, the amendments in ASU 2023-09 are effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The amendments in this update should be applied on a prospective basis, retrospective application is permitted. The Company is currently evaluating the amendments in this guidance to determine the impact it will have on the Company’s Consolidated Financial Statements and related disclosures.
In November 2024, the FASB issued ASU 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses (“ASU 2024-03”), which provides amendments to improve the disclosures about a public business entity’s expenses and provide more detailed information about the types of expenses in commonly presented expense captions. The amendments in ASU 2024-03 are effective for fiscal years beginning after December 15, 2026, with early adoption permitted. The Company is currently evaluating the amendments in ASU 2024-03 to determine the impact it will have on the Company’s Consolidated Financial Statements and related notes for the year-ended December 31, 2027, upon adoption.
NOTE 3. BUSINESS COMBINATIONS
Disior
On January 10, 2022 ("Disior Acquisition Date"), the Company entered into a Securities Purchase Agreement (“SPA”) with Disior LTD. (“Disior”) and acquired 100% of the outstanding equity of Disior (the "Disior Acquisition").
The aggregate purchase price of the Disior Acquisition was approximately $26,246 inclusive of an earn-out provision with a fair value of $6,550 and certain net working capital adjustments and deferred payments totaling a net payable of $222. The SPA provided for potential earn-out consideration to the seller in connection with the achievement of certain milestones with various expiration dates through the second anniversary of the Disior Acquisition Date. The earn-out has a maximum payment not to exceed $8,000 in the aggregate. If an individual milestone is not met by the specified milestone expiration date, the earn-out related to that specific milestone will not be paid. The acquisition was primarily funded by a $20,000 draw on the Company’s term loan from Midcap. Acquisition related costs were $761 during the year ended December 31, 2022, and are included in Selling, general, and administrative expenses in the Consolidated Statements of Operations and Comprehensive Loss. No acquisition related costs were incurred during the years ended December 31, 2024 and 2023.
The Company has accounted for the acquisition of Disior under ASC Topic 805, Business Combinations (“ASC 805”). Disior’s results of operations are included in the Consolidated Financial Statements beginning after January 10, 2022, the Disior Acquisition Date.
The following table summarizes the purchase price:
Consideration paid
Cash consideration
$
19,696
Contingent consideration
6,550
Total consideration
$
26,246
The following table summarizes the fair values of the assets acquired and liabilities assumed as of the Disior Acquisition Date:
Assets acquired:
Cash and cash equivalents
$
1,192
Other current assets
Intangible assets
6,800
Goodwill
19,136
Total assets acquired
27,538
Liabilities assumed:
Accruals and other current liabilities
Deferred tax liabilities, net
Total liabilities assumed
1,292
Net assets acquired
$
26,246
Identified intangible assets consist of tradenames and developed technology. The fair value of each were determined with the assistance of an external valuation specialist using a combination of the income, market, cost approach, and relief from royalty rate method, in accordance with ASC 805. The purchase consideration was allocated to the identifiable net assets acquired based on estimated fair values at the date of the acquisition. The excess of the fair value of the purchase consideration over the fair value of the identifiable assets and liabilities, if any, was recorded as goodwill. The goodwill is attributable to the expected synergies with the Company’s existing operations. The useful life on intangible assets was determined by management to be in line with the Company’s policy on intangible assets. Both determinations are outlined in the table below:
Fair Value
Estimated Useful Life (in years)
Developed technology
$
6,400
Tradenames
Total intangible assets
$
6,800
The entire amount of the purchase price allocated to goodwill will not be deductible for income tax purposes under the Finnish Income Tax Act.
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 2024 and 2023 consist of the following:
Estimated Life
December 31,
(in years)
Surgical instrumentation
3 - 5
$
70,251
$
60,100
Buildings
20,289
20,190
Computer and software
3-5
17,847
16,546
Leasehold improvements
Various
8,197
8,307
Machinery and equipment
4,000
3,843
Land
3,625
3,625
Other
5-15
3,574
2,785
Office equipment and furniture
5 - 7
2,329
2,267
Construction in progress
Various
Total
130,162
117,951
Less: accumulated depreciation
(58,783)
(43,829)
Property and equipment, net
$
71,379
$
74,122
Depreciation expense is included in Selling, general, and administrative expenses in the Consolidated Statements of Operations and Comprehensive Loss and was $16,229, $13,515 and $10,824 for the years ended December 31, 2024, 2023 and 2022, respectively.
NOTE 5. GOODWILL AND INTANGIBLE ASSETS
Goodwill
We perform our annual test of goodwill impairment in the fourth quarter of every year. The Company determined, after performing the qualitative analysis that there was no evidence that it is more likely than not that the fair value of the reporting unit was less than the carrying amount. Therefore, it was not necessary to perform a quantitative impairment test. As of December 31, 2024 and 2023, goodwill was $25,465.
Intangibles
Intangible assets as of December 31, 2024 are as follows:
Estimated Useful Life
(in years)
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Trademarks and tradenames, indefinite-lived
Indefinite
$
$
-
$
Patents, trademarks and tradenames, definite-lived
17.8
9,296
3,183
6,113
Customer relationships
3-7
1,641
Developed technology
17,690
4,958
12,732
Other intangibles
-
Total intangible assets, net
$
29,311
$
8,952
$
20,359
Intangible assets as of December 31, 2023 are as follows:
Estimated Useful Life
(in years)
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Trademarks and tradenames, indefinite-lived
Indefinite
$
$
-
$
Patents, definite-lived
17.6
7,900
2,649
5,251
Customer relationships
3-7
1,733
1,166
Developed technology
17,690
3,424
14,266
Other intangibles
Total intangible assets, net
$
28,340
$
6,666
$
21,674
Amortization expense is included in Selling, general, and administrative expenses, which is included on the Consolidated Statements of Operations and Comprehensive Loss, and was $2,317, $2,027 and $2,904 for the years ended December 31, 2024, 2023 and 2022, respectively. During the second quarter of 2024, the Company recategorized one of its intangible assets from Trademarks and tradenames, indefinite-lived to Patents, trademarks and tradenames, definite-lived and recorded the related amortization expense.
Expected future amortization expense is as follows:
$
2,050
2,050
1,970
1,971
1,826
Thereafter
9,838
Total future amortization expense
$
19,705
No impairment charges related to intangible assets and goodwill were recorded for the years ended December 31, 2024, 2023 and 2022.
NOTE 6. ACCRUED EXPENSES
Accrued expenses consist of the following as of December 31, 2024 and 2023, respectively:
December 31,
Accrued compensation
$
9,333
$
10,213
Other accrued expenses
8,232
5,553
Accrued commissions
7,114
6,126
Accrued interest
2,864
2,006
Accrued purchases
2,372
1,883
Accrued earnout payment
-
2,000
Total accrued expenses
$
29,915
$
27,781
NOTE 7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures certain financial assets and liabilities at fair value. There is a fair value hierarchy which prioritizes inputs used in measuring fair value into three broad levels:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Includes other inputs that are directly or indirectly observable in the marketplace, such as quoted market prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Unobservable inputs which are supported by little or no market activity.
The Company’s significant financial assets and liabilities measured at fair value as of December 31, 2024, were as follows:
Level 1
Level 2
Level 3
Total
Financial Assets:
Interest rate swap
$
-
1,428
-
$
1,428
The Company’s significant financial assets and liabilities measured at fair value as of December 31, 2023, were as follows:
Level 1
Level 2
Level 3
Total
Financial Assets:
Interest rate swap
$
-
-
$
Financial Liabilities:
Contingent consideration
$
-
-
$
The Company’s Level 2 asset pertains to an interest rate swap associated with the Company’s Zions Facility, used to manage interest rate risk related to variable rate borrowings and manage exposure to the variability of cash flows. The interest rate swap is not designated for hedge accounting and is measured utilizing inputs observable in active markets. For the year ended December 31, 2024, we reassessed the fair value of our interest rate swap which resulted in an increase
of $438. The change in fair value is recorded in Other assets on the Consolidated Balance Sheet, Other income (expense) within the Consolidated Statement of Operations and Comprehensive Loss.
The Company’s Level 3 instruments consist of contingent consideration. The Company did not achieve the remaining two milestones associated with the acquisition of Additive Orthopaedics, LLC (“Additive Orthopaedics”) during the year ended December 31, 2024. The Company wrote off the remaining earnout liability and recorded non-cash income of $340 in Other income (expense), net within the Consolidated Statement of Operations and Comprehensive Loss for the year ended December 31, 2024.
As of December 31, 2023, the contingent earn-out liabilities are included in Other-current liabilities on the Consolidated Balance Sheet. During the year ended December 31, 2023, we reassessed the estimate of the earn-out liabilities which resulted in a net increase of $200 recorded in Other (expense) income within the Consolidated Statement of Operations and Comprehensive Loss for the year ended December 31, 2023.
As of December 31, 2023, one project milestone associated with the acquisition of Disior LTD. (“Disior”) and one project milestone associated with the Additive Orthopaedics acquisition was included in Accrued expenses on the Consolidated Balance Sheet totaling $2,000. During the first quarter of 2024, $1,000, included as restricted cash within the Consolidated Statement of Cash Flows for the year ended December 31, 2023, was paid in cash related to the Additive Orthopaedics milestone. The remaining $1,000 related to the Disior acquisition was paid during the second quarter of 2024. For additional information on the Disior acquisition refer to Note 3 to our Consolidated Financial Statements and for additional information on the Additive Orthopaedics acquisition refer to Note 4 to our Consolidated Financial Statements included in the amended 2023 Annual Report on Form 10-K/A for the year ended December 31, 2023.
NOTE 8. DEBT
Long-term debt as of December 31, 2024, and December 31, 2023, consists of the following:
December 31, 2024
December 31, 2023
Ares Revolving Loan
$
25,000
$
25,000
Ares Term Loan
75,000
75,000
Zions Term Loan
14,293
14,933
Total
114,293
114,933
Less: deferred issuance costs
(3,607)
(4,494)
Total debt, net of issuance costs
110,686
110,439
Less: current portion
(640)
(640)
Long-term debt, net, less current maturities
$
110,046
$
109,799
Ares Credit Agreement
On November 2, 2023, the Company entered into a new credit agreement with Ares Capital Corporation to provide a total of $150,000, inclusive of a revolving credit facility of up to $50,000 (the “Ares Revolving Loan”) and a term loan facility of up to $100,000 (the “Ares Term Loan”). The obligations under the Ares Credit Agreement are guaranteed by each of the Borrowers’ current and future domestic subsidiaries and secured by liens on substantially all of the Borrowers’ and guarantors’ present and after-acquired assets, in each case, subject to certain customary exceptions. In connection with the closing of the Ares Credit Agreement, the Company drew down $25,000 and $75,000 on the Ares Revolving Loan and Ares Term Loan, respectively. The Ares Revolving Loan and Ares Term Loan bear interest at variable rates of Term SOFR plus 4% and Term SOFR plus 6.75%, respectively, subject in the case of the Ares Term Loan to certain step-downs and adjustments as set forth in the Ares Credit Agreement, and mature on the earlier of (i) November 2, 2028, and (ii) with respect to the Ares Revolving Loan, 6 months prior to the maturity date of any other indebtedness in a principal or stated amount in excess of $12,500. The Ares Credit Agreement contains a financial covenant requiring the Company to maintain certain minimum revenue levels. As of December 31, 2024, the Company was in compliance with all financial covenants under the Ares Credit Agreement. Total remaining unamortized debt issuance costs associated with the Ares Credit Agreement were $3,405. Amortization expense associated with such debt issuance costs totaled $870, $147 and $0 for the years ended December 31, 2024, 2023 and 2022, respectively, and is included in Interest expense on the Consolidated Statements of Operations and Comprehensive Loss.
MidCap Credit Agreements
On May 6, 2021, the Company entered into a new credit agreement with MidCap Financial Trust to provide a total of $70,000 including up to a $30,000 revolving loan (“MidCap Revolving Loan”) and up to a $40,000 term loan (“MidCap Term Loan”), secured by substantially all the Company’s assets (“MidCap Credit Agreements”). The MidCap Term Loan was comprised of two tranches, the first of which provided a commitment amount of $10,000, and the second a commitment of $30,000. The MidCap Term Loan and Midcap Revolving Loan bore a variable interest rate of LIBOR plus 6% and LIBOR plus 3%, respectively, and matured on the earlier of May 1, 2026, or a change in control event (the "Termination Date"). The entire principal balances of the MidCap Revolving Loan and MidCap Term Loan were due on the Termination Date. Interest payments were payable monthly, with optional principal prepayments allowed under the MidCap Credit Agreements. The Midcap Credit Agreements required us to maintain minimum net product sales and minimum consolidated EBITDA, (each term as defined in the Midcap Credit Agreements), for the preceding twelve-month period.
On November 9, 2022, the Company entered into an amendment to the MidCap Credit Agreements. The amendment to the Midcap Revolving Loan provided up to $50,000 in total borrowing capacity. The MidCap amendments modified the MidCap Credit Agreements to include provisions related to the transition from the LIBOR Interest Rate plus Applicable Margin to the SOFR Interest Rate plus Applicable Margin, maintaining the Applicable Margin of 6% under the MidCap Term Loan and increasing the Applicable Margin from 3% to 3.75% under the Midcap Revolving Loan. In addition, the MidCap amendments amended certain covenants, terms and provisions in the Midcap Credit Agreements to, among other things, modify the covenant levels for the Minimum Net Product Sales financial covenant and to remove the Minimum Consolidated EBITDA financial covenant.
On November 2, 2023, in connection with the entry into the Ares Credit Agreement, the Company terminated the commitments and satisfied all outstanding obligations under the MidCap Credit Agreements. During the year ended December 31, 2023, the Company recorded a loss on early extinguishment of debt of $5,308, inclusive of the write-off of remaining unamortized debt issuance costs of $1,881 and fees incurred to exit the MidCap Credit Agreements early of $3,427. Amortization expense associated with debt issuance costs prior to write-off totaled $613 and $586 for the years ended December 31, 2023 and 2022, respectively, and is included in Interest expense on the Consolidated Statements of Operations and Comprehensive Loss.
Vectra Bank Colorado Loan Agreements
On March 24, 2022, the Company entered into a secured term loan facility (the “Zions Facility”) with Zions Bancorporation, N.A. dba Vectra Bank Colorado in the principal amount of $16,000. The loans under the Zions Facility
(i) bear interest at a variable rate per annum equal to the sum of (a) a one-month Term SOFR based rate, plus (b) 1.75%, adjusted on a monthly basis and (ii) mature on March 24, 2037. Principal and interest payments are payable monthly, with optional prepayments allowed without premium or penalty.
Effective as of November 10, 2022, the Company entered into the First Amendment to the Zions Facility. The amendment to the Zions Facility amends the financial covenants to require the Company to maintain (i) the Liquidity Ratio, if the Cash Flow as of the last day of any quarter measured on a trailing three month basis is less than or equal to $0, and (ii) the Fixed Charge Coverage Ratio which will be calculated as of the last day of each quarter on a trailing four quarter basis, as well as a certain level of Liquidity, if the Cash Flow is greater than $0. In addition, a Net Revenue Growth covenant was added which will be calculated as of the last day of each quarter on a year-over-year basis.
Effective as of November 2, 2023, the Company entered into the Second Amendment to the Zions Facility (the "Second Amendment"). The Second Amendment replaces references to MidCap Financial Trust and MidCap Credit Agreements with references to Ares and the Ares Credit Agreement. As of December 31, 2024, the Company was in compliance with all financial covenants under the Second Amendment. Total remaining unamortized debt issuance costs associated with the Zions Facility were $202. Amortization expense associated with such debt issuance costs totaled $17, $16, and $13 for the years ended December 31, 2024, 2023 and 2022, respectively, and is included in Interest expense on the Consolidated Statements of Operations and Comprehensive Loss.
Debt Maturities Schedule
The required principal payments for the Ares Revolving Loan, Ares Term Loan and the Zions Facility are as follows:
$
100,640
Thereafter
11,093
Total
$
114,293
NOTE 9. STOCKHOLDERS’ EQUITY
Common Stock
On January 30, 2023, the Company completed an underwritten public offering (“the Offering”) of 6,500,000 shares of its common stock at an offering price of $17.00 per share, which consisted of 3,750,000 shares of common stock issued and sold by the Company and 2,750,000 shares of common stock sold by certain selling securityholders. On February 17, 2023, the underwriters exercised in full their option to purchase an additional 562,500 shares and 412,500 shares of common stock from the Company and the selling securityholders, respectively.‌
The Company received aggregate net proceeds from the Offering of approximately $68,453 after deducting underwriting discounts and commissions and offering expenses payable by the Company. The selling securityholders received aggregate net proceeds from the Offering of approximately $50,700 after deducting underwriting discounts and commissions. The Company did not receive any of the proceeds from the sale of shares of Common Stock by the selling securityholders.
The Company did not issue any common stock during the years ended December 31, 2024 and 2022.
Each holder of common stock is entitled to one vote for each share owned on all matters voted upon by the stockholders, and a majority vote is required for all actions taken by stockholders. Common stock has no preemptive rights,
no cumulative voting rights and no redemption or conversion provisions. Holders of common stock are entitled to receive dividends when and if, declared by the Board of Directors.
Treasury Stock
The Company did not purchase any shares of its common stock during the years ended December 31, 2024, 2023 and 2022.
NOTE 10. LOSS PER SHARE
Basic net loss per share is computed by dividing net loss attributable to common stockholders (the numerator) by the weighted average number of common stock outstanding for the period (the denominator). Diluted net loss per common stock attributable to common stockholders is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period adjusted for the dilutive effects of common stock equivalents using the treasury stock method or the if-converted method based on the nature of such securities. In periods when losses from continuing operations are reported, the weighted-average number of common stock outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. The computation of net loss per share for the years ended December 31, 2024, 2023 and 2022, respectively was as follows:
Year Ended December 31,
Net loss
$
(54,639)
$
(57,534)
$
(65,649)
Weighted-average common stock outstanding:
Basic
83,311,245
82,087,329
76,766,100
Diluted
83,311,245
82,087,329
76,766,100
Loss per share:
Basic
$
(0.66)
$
(0.70)
$
(0.86)
Diluted
$
(0.66)
$
(0.70)
$
(0.86)
The following outstanding potentially dilutive securities were excluded from the calculation of diluted net loss per share attributable to common stockholders because their impact would have been antidilutive for the period presented:
December 31,
Stock options
4,689,615
5,943,898
6,538,536
Restricted stock units
2,866,861
1,317,402
964,054
NOTE 11. STOCK-BASED COMPENSATION
The Company’s Employee Stock Purchase Plan ("ESPP") and 2021 Incentive Award Plan (“2021 Plan”) were adopted by the Company’s Board of Directors on October 8, 2021. The ESPP and 2021 Plan were both adopted by the Company’s stockholders on October 19, 2021, and became effective on the date prior to the first date of the effectiveness of the registration statement on Form S-1 filed by the Company.
Employee Stock Purchase Plan
The ESPP initially provided participating employees with the opportunity to purchase up to an aggregate of 1,329,040 shares of the Company’s common stock at 85% of the market price at the lesser of the date the purchase right is granted or exercisable. The ESPP provides that the number of shares reserved and available for issuance will automatically increase each January 1, beginning on January 1, 2022, and ending on January 1, 2031, by the lesser of 1% of all classes of the Company’s common stock outstanding on the immediately preceding December 31, or such smaller number of shares as
determined by the Company’s Board or the committee. As of December 31, 2024, 3,468,996 shares remained available for issuance.
Eligible employees can contribute up to 15% of their gross base earnings for purchases under the ESPP through regular payroll deductions, limited to $25,000 worth of the Company’s shares of common stock for each calendar year in which the purchase right is outstanding. The Company currently holds offerings consisting of six-month periods commencing on January 1st and July 1st of each calendar year, with a single purchase date at the end of the purchase period on June 30th and December 31st of each calendar year.
During the years ended December 31, 2024, 2023 and 2022, the Company issued 118,067, 73,442 and 38,968 shares, respectively, upon exercise of purchase rights. The Company recognizes compensation expense on a straight-line basis over the service period. During the years ended December 31, 2024, 2023 and 2022, the Company recognized $470, $322 and $213 of compensation expense, respectively, related to the ESPP.
Below are the assumptions used for the years ended December 31, 2024, 2023 and 2022, in determining the fair value of shares under the ESPP:
Year Ended December 31,
Expected volatility
86.44%
54.64%
70.27%
Expected dividends
-
-
-
Expected term (in years)
0.50
0.50
0.50
Discount rate
15.00%
15.00%
15.00%
Risk-free rate
4.24%
5.26%
2.79%
2021 Incentive Award Plan
The 2021 Plan authorized the Company to issue an initial aggregate maximum number of shares of common stock equal to (i) 7,641,979 shares plus (ii) a number of shares that are available for issuance under the 2011 Plan plus (iii) any shares that are subject to 2011 Plan that become available for issuance (via expiration, forfeitures, etc.) plus (iv) an increase commencing on January 1, 2022, and continuing annually on the anniversary thereof through January 1, 2031, equal to the lesser of (a) 5% of the shares of all classes of the Company’s common stock outstanding on the last day of the immediately preceding calendar year or (b) such smaller number of shares as determined by the Company’s Board or the committee. As of December 31, 2024, the Company had reserved 16,408,251 shares of common stock for future grant.
Stock Options
The following table summarizes the Company’s stock option plan and the activity for the year ended December 31, 2024:
Shares
Weighted-Average
Exercise Price
Weighted-Average
Remaining Contractual
Term (Years)
Outstanding, December 31, 2023
5,943,898
$
10.28
6.53
Granted
-
-
-
Exercised or released
(661,728)
5.29
-
Forfeited or expired
(592,555)
13.51
-
Outstanding, December 31, 2024
4,689,615
$
10.57
5.55
Exercisable, December 31, 2024
4,058,975
$
9.70
5.31
Vested and expected to vest at December 31, 2024
4,687,054
$
10.57
5.55
During the years ended December 31, 2023 and 2022, there were 225,000 and 359,054 options granted at a weighted average strike price of $18.33 and $16.08, respectively. There were no options issued during 2024.
The Company received cash in the amount of $3,132, $2,406 and $5,271 from the exercise of stock options for the years ended December 31, 2024, 2023 and 2022, respectively. The tax benefit from equity options exercised were $747, $560 and $1,223 for the years ended December 31, 2024, 2023 and 2022, respectively.
The aggregate intrinsic value of options outstanding at December 31, 2024, is $12,274. The aggregate intrinsic value of vested and exercisable options at December 31, 2024 is $12,247. The aggregate intrinsic value of options exercised during the years ended December 31, 2024, 2023 and 2022, is $2,069, $4,742 and $18,764, respectively.
As of December 31, 2024, there was approximately $1,944 total unrecognized compensation cost related to non-vested stock option compensation arrangements, which is expected to be recognized over a weighted average period of 0.60 years.
Below are the assumptions used for the years ended December 31, 2023 and 2022, in determining the fair value of each option award:
Year Ended December 31,
Expected volatility
66.20%
55% - 70%
Expected dividends
-
-
Expected term (in years)
6.25
6.00
Risk-free rate
4.11%
1.69% - 2.79%
Restricted Stock Units
RSUs granted under the 2021 Plan have a ten-year contractual term and typically vest over a three or four-year period, contingent upon continued service with the Company. The following table summarizes the Company’s restricted stock units’ activity for the year ended December 31, 2024:
Year Ended December 31,
Restricted
Stock Units
Weighted-Average
Fair Value
Outstanding, beginning of period
1,317,402
$
17.06
Granted
1,992,071
11.15
Vested
(400,689)
17.23
Forfeited or expired
(387,001)
14.94
Outstanding, end of period
2,521,783
$
12.69
Outstanding and expected to vest at end of period
2,461,530
$
12.67
During the years ended December 31, 2024, 2023 and 2022, the Company granted 1,992,071, 776,359 and 929,090 RSUs, respectively. The grant date fair value for RSUs is the thirty-day trailing average market price of the common stock on the date of grant.
As of December 31, 2024, there was approximately $24,792 total unrecognized compensation cost related to non-vested RSUs, which is expected to be recognized over a weighted average period of 1.65 years.
Performance Share Units
On March 8, 2024, the Company granted 241,881 performance share units (“PSUs”) with a weighted-average fair value of $11.69 to certain executives, of which 21,638 were forfeited with a weighted-average fair value of $11.00 during the six months ended June 30, 2024. The grant date fair value of PSUs granted to the Chief Executive Officer was calculated using a Monte Carlo simulation and was based on assumptions, including expected volatility of 59.7%, expected dividends of 0%, and a 4.21% risk-free rate. Other granted PSUs’ fair value were based on the Company’s share price on the date of grant, or $11.00 per share. The PSUs will vest based on the Company’s achievement level relative to Adjusted Free Cash Flow (“aFCF”) for the trailing twelve months ending December 31, 2026, or the consummation of a change in
control if earlier (“Performance Period”). aFCF is defined as Total Operating Cash Flow plus Investing Cash Flow adjusted for certain nonrecurring items. Upon achievement of the minimum threshold performance metric, the executive may earn a pro rata portion of their respective target shares and up to 200% of their target shares upon maximum achievement. The Chief Executive Officer was granted 166,924 of the 241,881 PSUs which may be further increased or decreased by up to 25%, based on the achievement of Relative Total Stockholder Return, as defined as the stockholder return of the Company relative to certain of its peer companies within the Healthcare Equipment Select Industry Index. The PSUs additionally require the executive to provide service over the performance period. Termination of service prior to completion of the Performance Period, except by reason of death or disability, will result in automatic forfeiture of the performance share units. If the executive’s termination of service occurs by reason of death or disability on or after January 1, 2025, a pro-rata number of the PSUs shall vest at the level based on actual performance through the end of the Performance Period, multiplied by a fraction equal to (x) the number of days elapsed between the beginning of the Performance Period and the date of executive’s termination of service, divided by (y) the total number of days in the Performance Period.
On August 7, 2024, the Company granted 124,835 PSUs with a weighted-average fair value of $8.45 to the Company’s Chief Financial Officer (“CFO”) and EVP of Supply Chain Operations. The grant date fair value of PSUs granted to the CFO and EVP of Supply Chain Operations was calculated using a Monte Carlo simulation and was based on assumptions, including expected volatility of 60.8%, expected dividends of 0%, and a 3.88% risk-free rate. The PSUs will vest based on the Company’s achievement level relative to Adjusted Free Cash Flow for the trailing twelve months ending December 31, 2026, or the consummation of a change in control if earlier.
Stock-based compensation expense is recognized on a straight-line basis over the vesting period, beginning at the point in time that the performance condition is considered probable of achievement. The probability of achieving the performance condition is assessed at each reporting period. If it is deemed probable that the performance condition will be met, compensation cost will be recognized based on the grant date fair value of the award expected to be earned. If it is deemed that it is not probable that the performance condition will be met, the Company will discontinue the recognition of compensation cost and any compensation cost previously recorded will be reversed. At December 31, 2024, achievement of the performance condition for the performance share units was deemed probable with 332,053 PSUs expected to vest, and the expense recorded for the year ended December 31, 2024, was $1,253. Stock-based compensation expenses are recorded in Selling, general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Loss.
Stock-Based Compensation Expense
Stock-based compensation expenses are recorded in Selling, general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Loss. During the years ended December 31, 2024, 2023 and 2022, the Company recognized $2,038, $5,542 and $8,500 respectively, of compensation expense related to stock options. During the years ended December 31, 2024, 2023 and 2022, the Company recognized $9,726, $6,822 and $1,865, respectively, of compensation expense related to RSUs.
NOTE 12. EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution plan for eligible employees who are 21 years of age with three months of service. Eligible employees can voluntarily contribute up to 100% of their eligible compensation. The Company has elected a safe harbor plan in which the Company must contribute 3% of eligible compensation. In addition, the Company may make discretionary contributions which are determined and authorized by the Board of Directors each plan year. The Company made contributions to its employee benefit plan of $1,306, $1,190 and $992 for the years ended December 31, 2024, 2023 and 2022, respectively.
NOTE 13. INCOME TAXES
Total provision (benefit) for income taxes for the years ended December 31, 2024, 2023 and 2022:
December 31,
Loss before taxes
Domestic
$
(53,871)
$
(56,342)
$
(64,071)
Foreign
(979)
(1,642)
Total loss before taxes
(53,480)
(57,321)
(65,713)
Current tax expense:
Federal
-
-
State
Foreign
1,358
Total current tax expense
1,447
Deferred tax expense (benefit):
Federal
(10,204)
(11,309)
(15,900)
State
(868)
(1,402)
(1,939)
Foreign
(885)
(1,099)
(909)
Change in valuation allowance
11,669
13,129
18,273
Total deferred tax expense (benefit)
(288)
(681)
(475)
Total tax expense (benefit):
Federal
(10,204)
(11,204)
(15,900)
State
(779)
(1,344)
(1,843)
Foreign
(368)
(594)
Change in valuation allowance
11,669
13,129
18,273
Total income tax expense (benefit)
$
1,159
$
$
(64)
The Company files tax returns in the U.S. federal jurisdiction, various state jurisdictions and applicable foreign jurisdictions. We are no longer subject to U.S. federal or state tax examinations for the years prior to 2021.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred taxes as of December 31, 2024 and 2023 were:
December 31,
Deferred tax assets:
Receivable allowances
$
$
Accrued expenses
1,020
1,262
S263A capitalizable costs
1,944
2,923
Inventory reserves
6,677
4,635
Research and development credits
5,047
3,974
Net operating losses
28,969
25,176
Interest expense
4,614
2,407
Stock-based Compensation
5,486
4,496
Lease Liability
R&D IRC 174(b) capitalized costs
7,176
5,161
Other
Total deferred tax assets
61,994
51,407
Valuation allowance
(53,340)
(41,671)
Net deferred tax assets
8,654
9,736
Deferred tax liabilities:
Property and Equipment
(5,833)
(6,808)
Section 481 adjustment
(410)
(821)
Patents and trademarks
(1,387)
(1,343)
Right of use asset
(345)
(292)
Total deferred tax liabilities
(7,975)
(9,264)
Total net deferred tax asset
$
$
A valuation allowance is established when it is “more likely than not” that all, or a portion, of net deferred tax assets will not be realized. As a result, the Company has concluded based on all available evidence and determined that valuation allowances of $53,340 and $41,671 should be provided for certain deferred tax assets at December 31, 2024, and 2023, respectively. As of December 31, 2024 and 2023 we had federal US net operating loss carryforwards of $110,620 and $97,490, respectively, which have an indefinite carryforward period and $65,428 of combined state net operating loss carryforwards in various states that will begin to expire in 2034. Additionally, the Company has foreign net operating loss carryforwards of $11,963 that will begin to expire in 2028.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Gross unrecognized tax benefits - beginning of period
$
1,523
$
1,431
Increases related to current year tax positions
Increases related to prior year tax positions
-
Gross unrecognized tax benefits - end of period
$
1,794
$
1,523
The unrecognized tax benefits of $1,794, if recognized, will impact the Company’s effective tax rate. In accordance with the Company’s accounting policy, accrued interest and penalties are recognized related to unrecognized tax benefits as a component of tax expense. As of December 31, 2024, we have accrued $106 of interest or penalties associated with unrecognized tax benefits. The Company expects the total amount of tax contingencies will not decrease in 2025 based on statute of limitation expiration.
A reconciliation of the provision for income taxes at the federal statutory rate compared to the effective tax rate for the years ended December 31, 2024, 2023 and 2022 is:
Statutory U.S. federal tax rate
$
(11,230)
$
(12,037)
$
(13,800)
State taxes net of federal benefit
(797)
(1,356)
(1,863)
Non-U.S. earnings taxed at rates different than the U.S. statutory rate
(2)
(80)
Foreign source earnings, net of associated foreign tax credits
1,237
Benefit of tax credits
(1,342)
(501)
(458)
Stock based compensation
(2,852)
Section 162(m) excess compensation
Change in valuation allowance
11,669
13,129
18,273
Change in unrecognized tax benefits
Other
(551)
Total provision (benefit) for income taxes
$
1,159
$
$
(64)
As of December 31, 2024, our foreign operations held cash totaling $5,672. We have not provided for a U.S. deferred tax liability or foreign withholding tax on the undistributed earnings from our non-U.S. subsidiaries that are considered to be indefinitely reinvested. If such earnings were to be distributed, any U.S. deferred tax liability or foreign withholding tax would not be significant.
NOTE 14. COMMITMENTS AND CONTIGENCIES
Leases
The Company determines if an arrangement is a lease at inception by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset in exchange for consideration over a period of time. If both criteria are met, the Company determines the initial classification and measurement of its right-of-use (“ROU”) asset and lease liabilities at the lease commencement date and thereafter, if modified. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.
The Company leases certain office space and equipment under operating leases. Our lease contracts are a necessary part of our business, but we do not believe they are significant to our overall operations. As of December 31, 2024 and 2023, right-of-use assets of $1,843 and $1,533, respectively, are included in Other assets on the Consolidated Balance Sheets. Operating lease liabilities are included within the current and long-term portions of other liabilities of $605 and $543 and $1,295 and $1,048, respectively, on the Consolidated Balance Sheets. During the years ended December 31, 2024, 2023 and 2022, the Company recorded lease expense of $764, $574 and $408, respectively, as a component of Operating income (expense) in the Consolidated Statements of Operations and Comprehensive Loss Income.
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. In order to apply the incremental borrowing rate, a portfolio approach with a collateralized rate was utilized wherein assets were grouped based on similar terms and economic environments in a manner whereby the Company reasonably expects that the application does not differ materially from a lease-by-lease approach.
Legal Proceedings
The Company is involved in various lawsuits, claims, inquiries, and other regulatory and compliance matters, most of which are routine to the nature of our business. When it is probable that a loss will be incurred and where a range of the loss can be reasonably estimated, the best estimate within the range is accrued. When the best estimate within the range cannot be determined, the low end of the range is accrued. The ultimate resolution of these claims could affect future results of operations should the exposure be materially different from the estimates or should liabilities be incurred that were not previously accrued. Potential insurance reimbursements are not offset against potential liabilities.
Class Action Litigation
On September 30, 2024, and October 18, 2024, respectively, two putative class action complaints were filed in the U.S. District Court for the District of Colorado. These complaints allege that the Company and certain current and former officers violated federal securities laws. The cases are captioned Ellington v. Paragon 28, Inc., et al., and Tiedt v. Paragon 28, Inc., et al., and a lead plaintiff has not yet been appointed. We believe the allegations in the complaint are without merit and intend to vigorously defend the litigation.
Given the early stage of the litigation matters described above, we are unable at this time to reasonably estimate possible losses or form a judgment that an unfavorable outcome is either probable or remote. However, litigation is subject to inherent uncertainties, and one or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect for the period in which they are resolved, and on our business generally. In addition, regardless of their merits or their ultimate outcomes, lawsuits and legal proceedings are costly, divert management attention, and may adversely affect our reputation, even if they are resolved in our favor.
NOTE 15. RELATED PARTY TRANSACTIONS
The Company has a license agreement dated July 1, 2017, for certain intellectual property with an entity that is affiliated with one of the directors of the Company, under which the Company pays a royalty of four percent (4%) of net revenue related to the licensed intellectual property for the 15 years following the date of first sale, including a minimum annual payment of $250. The term of the agreement is 20 years, and automatically renews for five-year periods thereafter. Payments to the entity under this license agreement totaled $300, $269 and $249 for the years ended December 31, 2024, 2023 and 2022, respectively. Amounts payable to this entity as of December 31, 2024 and 2023 were $92 and $155, respectively.
The Company paid professional services fees to a related party totaling $27, $327 and $405 for the years ended December 31, 2024, 2023 and 2022, respectively, and are included in Selling, general, and administrative expense in the Consolidated Statements of Operations and Comprehensive Loss. Amounts payable as of December 31, 2024 and 2023 to this related party were $14 and $16, respectively.
NOTE 16. SEGMENT AND GEOGRAPHIC INFORMATION
The Company’s chief operating decision maker (“CODM”) is the Chief Executive Officer, who manages our business globally within one operating and reportable segment. The CODM evaluates operating performance based on consolidated net loss. The CODM considers the performance of these measures against planned and forecasted amounts to make investing and resource allocation decisions. For information about how the Company derives revenue, as well as the Company’s accounting policies, refer to Note 2 to our Consolidated Financial Statements.
The following table sets forth significant expense categories and other specified amounts included in consolidated net loss that are reviewed by the CODM, or are otherwise regularly provided to the CODM, for the years ended December 31, 2024, 2023, and 2022:
Year Ended December 31,
Net revenue
$
256,182
$
216,389
$
181,383
Standard cost of goods sold
39,009
30,870
20,571
Shipping costs
10,234
10,861
9,637
Excess and obsolete inventory
10,094
4,037
Other cost of goods sold(1)
5,356
6,186
1,424
Gross profit
191,489
164,435
149,266
Research and development
27,066
30,078
24,650
Commissions
70,259
58,733
50,731
Marketing and medical education
23,536
24,907
22,455
General and administrative
75,686
65,046
59,580
Depreciation and amortization
18,546
15,542
13,728
Other segment expenses(2)
17,174
15,794
12,829
Legal settlement
-
-
27,000
Operating loss
(40,778)
(45,665)
(61,707)
Other income (expense), net
(1,171)
(1,183)
Loss on early extinguishment of debt
-
(5,308)
-
Interest income
1,798
1,891
-
Interest expense
(13,329)
(7,056)
(4,129)
Income tax expense (benefit)
1,159
(64)
Net loss
$
(54,639)
$
(57,534)
$
(65,649)
(1) Other cost of goods sold include costs associated with inventory adjustments and royalties
(2) Other segment expenses include bonus, salaries and management support related to selling functions
Product sales attributed to a country or region include product sales to hospitals, physicians and distributors. No individual customer accounted for more than 10% of total product sales for any of the periods presented. No customer accounted for more than 10% of consolidated accounts receivable as of December 31, 2024 and 2023.
The following table represents total net revenue by geographic area, based on the location of the customer for the years ended December 31, 2024, 2023 and 2022, respectively:
Year Ended December 31,
United States
$
212,145
$
183,505
$
158,105
International
44,037
32,884
23,278
Total net revenue
$
256,182
$
216,389
$
181,383
No individual country with net revenue originating outside of the United States accounted for more than 10% of consolidated net revenue for the years ended December 31, 2024, 2023 and 2022.
The following table represents total non-current assets, excluding deferred taxes, by geographic area for the years ended December 31, 2024 and 2023, respectively:
Year Ended December 31,
United States
$
87,118
$
89,531
Finland
25,069
25,032
Other International
8,986
9,616
Total assets
$
121,173
$
124,179
x
NOTE 17. SUBSEQUENT EVENT
Pending Merger with Zimmer, Inc.
On January 28, 2025, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Zimmer, Inc. (“Zimmer”), a Delaware corporation and wholly owned subsidiary of Zimmer Biomet Holdings, Inc. (“Zimmer Biomet”), Gazelle Merger Sub I, Inc. (“Merger Sub”), a Delaware corporation and wholly owned subsidiary of Zimmer, and, for certain provisions of the Merger Agreement, Zimmer Biomet. Subject to the terms and conditions of the Merger Agreement, Merger Sub will be merged with and into the Company (the “Merger”), with the Company continuing as the surviving corporation and a wholly owned subsidiary of Zimmer.
Pursuant to the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each outstanding share of the Company’s common stock, par value $0.01 per share (“Company common stock”) (other than shares owned by the Company, Zimmer, Merger Sub or any of their respective subsidiaries (which shares will be canceled) and shares with respect to which appraisal rights are properly exercised and not withdrawn under Delaware law), will automatically be converted into the right to receive (i) $13.00 in cash, without interest and (ii) one contractual contingent value right (a “CVR”) representing the right to receive up to $1.00 per CVR pursuant to the CVR Agreement to be entered into at or prior to the Effective Time, by and between Zimmer, a rights agent and, for certain provisions, Zimmer Biomet.
The consummation of the Merger is subject to certain closing conditions, including (i) the adoption of the Merger Agreement by the holders of a majority of the outstanding shares of Company common stock, (ii) the expiration or termination of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iii) certain other foreign regulatory approvals and (iv) the absence of any legal restraints that have the effect of preventing the consummation of the Merger. Additionally, Zimmer and Merger Sub’s obligations to consummate the Merger is subject to the absence of a Material Adverse Effect (as defined in the Merger Agreement) on the Company having occurred since the date of the Merger Agreement. Moreover, each party’s obligation to consummate the Merger is subject to certain other conditions, including the accuracy of the other party’s representations and warranties in the Merger Agreement (subject to certain materiality qualifiers) and the other party’s compliance in all material respects with its obligations under the Merger Agreement. Consummation of the Merger is not subject to a financing condition.
The Merger Agreement generally requires the Company to operate its business in the ordinary course consistent with past practice, and subjects the Company to customary interim operating covenants that restrict the Company from taking certain specified actions without Zimmer’s approval, in each case, until the Merger is completed or the Merger Agreement is terminated in accordance with its terms and subject to certain exceptions.
The Merger Agreement contains certain customary termination rights for the Company and Zimmer, including a right to terminate the Merger Agreement if the Merger is not completed by November 28, 2025 (as such date may be extended to January 28, 2026, pursuant to the terms of the Merger Agreement, the “Outside Date”). The Merger Agreement further provides that, upon termination of the Merger Agreement under certain specified circumstances, including, among others, the Company’s termination of the Merger Agreement to enter into a written definitive agreement for a Superior Proposal (as defined in the Merger Agreement) or following a change in recommendation of the Company’s Board of Directors, the Company will be obligated to pay Zimmer a termination fee of $40 million.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosures.
Management, including the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, our disclosure controls and procedures were not effective as of December 31, 2024, because of the material weaknesses in our internal control over financial reporting described below.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Because of its inherent limitation, internal control over financial reporting may not prevent or detect misstatements. Effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements.
Management, including the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2024, based on criteria established in “Internal Control - Integrated Framework” (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment and those criteria, management identified material weaknesses in internal control as described below. Consequently, management concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2024.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
During fiscal year 2024, errors were identified with respect to our accounting for the valuation and existence of inventory, including the calculation of the excess and obsolescence reserve, capitalization of purchase price variances, and the existence of inventory located both at the Company’s warehouse and at third party vendors. Additionally, we have identified other material weaknesses during fiscal year 2024 related to customer pricing around recorded revenue and general IT controls. As of the end of the 2024 fiscal year the material weaknesses identified have not been remediated. The material weaknesses are as follows (the “Material Weaknesses”):
●a material weakness in the control environment component of COSO as the Company lacked a sufficient complement of financial and accounting personnel with the necessary technical and accounting knowledge, experience, and training related to accounting in accordance with GAAP.
●the material weakness in the control environment contributed to a lack of controls designed and implemented to timely prevent a material misstatement in the accounting for the existence and valuation of
inventory. The identified control deficiencies, individually and in the aggregate, are material weaknesses relating to: (i) the calculation of the excess and obsolescence reserve (ii) capitalization of purchase price variances and (iii) existence and completeness of inventory on hand.
●a material weakness in the monitoring component of COSO as management did not design and implement effective ongoing monitoring activities over the execution of business performance reviews and account analysis, as well as the application of GAAP, which resulted in the inability to identify material errors in the financial statements and to communicate all relevant internal control deficiencies to those parties responsible for taking corrective action in a timely manner.
●a material weakness resulting from the lack of designed and documented controls within the process of recording customer pricing or pricing changes at the Company’s domestic and international operations. Specifically, the Company did not document and maintain review controls over validating accuracy on initial contract pricing and changes during the year.
●a material weakness from the failure to design and maintain effective information technology (“IT”) general computer controls over the IT systems used within the processing of key financial transactions at the Company’s international operations. Specifically, management did not design and maintain user access controls to ensure appropriate segregation of duties over the preparation and review of journal entries, or adequately restrict user and privileged access to financial applications, programs, and data to appropriate company personnel.
The Material Weaknesses above could result in future misstatements of the accounts or disclosures that would result in a material misstatement to our annual or interim consolidated financial statements that would not be prevented or detected.
The effectiveness of our internal control over financial reporting as of December 31, 2024, was audited by Deloitte & Touche LLP, our independent registered public accounting firm, as stated in its report, which is included herein.
Plan for Remediation of the Material Weaknesses
Management, with oversight by the Audit Committee of the Board, is devoting significant time, attention, and resources to remediate the Material Weaknesses and to strengthen its internal control over financial reporting. We have developed a remediation plan that includes:
● Evaluating and updating (as appropriate) the organizational design and reporting structure of the controllership function, including evaluating the sufficiency, experience, and training of personnel within our accounting function.
● Hiring, developing, and retaining accounting resources with appropriate accounting and internal controls expertise related to accounting in accordance with U.S. GAAP.
● Engaging third-party resources with the appropriate technical knowledge and experience to assist with accounting, designing and implementing related control activities.
● Designing and implementing additional and/or enhancing controls relating to the valuation and existence of inventory, including the calculation of the excess and obsolescence reserve, capitalization of purchase price variances, existence and completeness of inventory.
● Designing and implementing effective monitoring activities over the execution of business performance reviews, account analysis and enhanced communication of internal control deficiencies to those parties responsible for taking corrective action in a timely manner.
● Designing, implementing and documenting a formalized control plan related to customer pricing, including reviews validating accuracy on initial contract pricing and price changes recorded during the year.
● Designing and implementing a formalized control plan related to IT general controls, including controls related to managing access to financially significant systems and segregation of duties within our IT environment at the Company’s international operations.
Management believes that the measures described above and others that may be implemented will remediate the identified Material Weaknesses and strengthen the Company’s internal control over financial reporting. Management has begun to take these actions to remediate the Material Weaknesses and may take additional measures to address control deficiencies or determine to modify, or in the appropriate circumstances not to complete, certain of the remediation measures identified. The Material Weaknesses will not be considered remediated until the remediation plan has been implemented and there has been appropriate time to conclude through testing that the controls are operating effectively.
Changes in Internal Control Over Financial Reporting
During 2024, the Company expanded NetSuite to Ireland, Germany, Italy, and the Republic of South Africa. NetSuite became the primary financial reporting and resource planning system for the Company’s international operations. The implementation of NetSuite has materially changed the Company’s internal control over financial reporting for these operations.
Except as set forth in connection with our Material Weaknesses and the change noted above, there were no changes in our internal control over financial reporting during the quarter ended December 31, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information.
During the three months ended December 31, 2024, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance.
We have adopted a code of ethics for directors, officers (including our principal executive officer, principal financial officer and principal accounting officer) and employees, known as the Code of Business Conduct. This code is publicly available on our website at ir.paragon28.com under the Governance section. If we make any amendments to this code other than technical, administrative or other non-substantive amendments, or grant any waivers, including implicit waivers, from a provision of this code we will disclose the nature of the amendment or waiver, its effective date and to whom it applies on our website at paragon28.com or in a Current Report on Form 8-K filed with the SEC.
The Company has an insider trading policy governing the purchase, sale and other dispositions of the Company’s securities that applies to all Company personnel, including directors, officers, employees, and other covered persons. The Company believes that its insider trading policy is reasonably designed to promote compliance with insider trading laws, rules and regulations, and listing standards applicable to the Company. A copy of the Company’s insider trading policy is filed as Exhibit 19.1 to this Form 10-K.
The information required by this Item 10 regarding our directors, executive officers and corporate governance will be included in our definitive proxy statement to be filed with the SEC with respect to our 2025 Annual Meeting of stockholders and is incorporated herein by reference or will be set forth in an amendment to this Annual Report to be filed on Form 10-K/A with the SEC no later than 120 days after the end of the fiscal year covered by this Annual Report.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation.
The information required by this Item 11 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2025 Annual Meeting of stockholders and is incorporated herein by reference or will be set forth in an amendment to this Annual Report to be filed on Form 10-K/A with the SEC no later than 120 days after the end of the fiscal year covered by this Annual Report.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item 12 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2025 Annual Meeting of stockholders and is incorporated herein by reference or will be set forth in an amendment to this Annual Report to be filed on Form 10-K/A with the SEC no later than 120 days after the end of the fiscal year covered by this Annual Report.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item 13 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2025 Annual Meeting of stockholders and is incorporated herein by reference or will be set forth in an amendment to this Annual Report to be filed on Form 10-K/A with the SEC no later than 120 days after the end of the fiscal year covered by this Annual Report.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services.
The information required by this Item 14 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2025 Annual Meeting of stockholders and is incorporated herein by reference or will be set forth in an amendment to this Annual Report to be filed on Form 10-K/A with the SEC no later than 120 days after the end of the fiscal year covered by this Annual Report.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules.
(a) Documents filed as part of this report:
(1) Financial Statements:
See Item 8 - Financial Statements and Supplementary Data of Part II of this Report.
(2) Financial Statement Schedules
All schedules are omitted because they are not applicable or not required, or because the required information is included in the consolidated financial statements or related notes.
(3) Exhibits required by Item 601 of Regulation S-K
The following exhibits are included within or incorporated herein by reference:
Yes
Incorporated by Reference
Exhibit
Number
Description
Form
Exhibit
Date Filed
File
Number
Filed
Herewith
2.1 ˄
Agreement and Plan of Merger, dated January 28, 2025, by and among Zimmer, Inc., Paragon 28, Inc., Gazelle Merger Sub I and Zimmer Biomet Holdings, Inc.
8-K
2.1
1/29/2025
001-40902
3.1
Amended and Restated Certificate of Incorporation of Paragon 28, Inc.
8-K
3.1
10/19/2021
001-40902
3.1.1
Certificate of Amendment to Amended and Restated Certificate of Incorporation of Paragon 28, Inc.
8-K
3.1.1
5/19/2023
001-40902
3.2
Second Amended and Restated Bylaws
8-K
3.2
5/19/2023
001-40902
4.1
Form of Common Stock Certificate
S-1/A
4.2
10/8/2021
333-259789
4.2
Amended and Restated Investors’ Rights Agreement, dated as of July 28, 2020, by and between Paragon 28, Inc. and the investors party thereto
S-1
4.3
9/24/2021
333-259789
4.3
Description of Paragon 28, Inc.’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934.
10-K/A
4.3
8/8/2024
001-40902
10.1+
2021 Incentive Plan of Paragon 28, Inc.
S-8
99.2(a)
10/20/2021
333-260367
10.2+
Omnibus Stock Option and Award Plan
S-1
10.4
9/24/2021
333-259789
10.2(a)+
Form of Award Agreement pursuant to Omnibus Stock Option and Award Plan
S-1
10.4(a)
9/24/2021
333-259789
10.3
Form of Indemnification Agreement
S-1/A
10.5
10/12/2021
333-259789
10.4+
Form of Non-Employee Director Compensation Policy
S-1/A
10.9
10/8/2021
333-259789
10.5(a)+
Form of Stock Option Grant Notice and Stock Option Agreement under the 2021 Incentive Award Plan
S-1/A
10.10(a)
10/8/2021
333-259789
10.5(b)+
Form of Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement under the 2021 Incentive Award Plan
S-1/A
10.10(b)
10/8/2021
333-259789
10.6+
Employment Agreement, effective as of October 8, 2021, by and between Paragon 28, Inc. and Albert DaCosta
S-1
10.12
10/8/2021
333-259789
10.7+
Employment Agreement, effective as of August 5, 2024, by and between Paragon 28, Inc. and Chadi Chahine
10-Q
10.1
8/8/2024
001-40902
10.8+
Employment Agreement, effective as of October 8, 2021, by and between Paragon 28, Inc. and Matthew Jarboe
S-1
10.14
10/8/2021
333-259789
10.9+
2021 Employee Stock Purchase Plan
S-8
99.3
10/20/2021
333-260367
10.10
Contract to Buy and Sell Real Estate
10-K
10.16
3/8/2022
001-40902
10.11
Business Loan Agreement, effective as of March 24, 2022, by and between Zions Bancorporation, N.A., d/b/a Vectra Bank Colorado, and Paragon 28, Inc.
10-Q
10.1
5/9/2022
001-40902
10.12
First Amendment to Business Loan Agreement, effective as of November 10, 2022, by and between Zions Bancorporation, N.A. dba Vectra Bank Colorado and Paragon 28, Inc.
10-Q
10.3
11/10/2022
001-40902
10.13
Second Amendment to Business Loan Agreement, effective as of November 2, 2023, by and between Paragon 28, Inc. and Zions Bancorporation, N.A. DBA Vectra Bank Colorado.
8-K
10.2
11/07/2023
001-40902
10.14˄
Credit Agreement, dated as of November 2, 2023, among the Company, as a borrower, Paragon Advanced Technologies, Inc., as a borrower, the lenders party thereto, Ares Capital Corporation, as administrative agent and as collateral agent, and ACF FINCO I LP, as revolving agent.
8-K
10.1
11/07/2023
001-40902
10.15+
Employment Agreement, effective as of July 27, 2023, by and between Paragon 28, Inc. and Robert McCormack
10-Q
10.1
11/8/2023
001-40902
19.1
Paragon 28 Inc. Insider Trading and Disclosure Policy
X
21.1
List of Subsidiaries.
X
23.1
Consent of Independent Registered Public Accounting Firm
X
24.1
Power of Attorney (included in the signature page to this Form 10-K)
X
31.1
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
X
31.2
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
X
32.1†
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
X
32.2†
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
X
97.1
Paragon 28, Inc. Policy for Recovery of Erroneously Awarded Compensation
10-K
97.1
2/29/2024
001-40902
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 With Embedded Linkbase Documents
Cover Page Interactive Data File (embedded within the Inline XBRL document)
+
Indicates management contract or compensatory plan.
˄
Registrant has (i) redacted portions of the exhibit as permitted under Item 601(b)(10) of Regulation S-K, (ii) omitted schedules and exhibits pursuant to Item 601(a)(5) of Regulation S-K and (iii) redacted certain other information as permitted under Item 601(a)(6) of Regulation S-K. The Registrant agrees to furnish supplementally a copy of the unredacted and complete copy of the exhibit to the SEC upon request.
†
The certifications attached as Exhibit 32.1 and 32.2 that accompany this Annual Report on Form 10-K 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 Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing.