UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
( State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of May 3, 2022, there were
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future financial condition, future operations, projected costs, prospects, plans, objectives of management and expected market growth, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “design,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “positioned,” “potential,” “predict,” “seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology.
Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report on Form 10-Q, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur at all. Forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those indicated (both favorably and unfavorably). These risks and uncertainties include, but are not limited to, those described in Part I – Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2021, as well as our subsequent reports filed with the Securities and Exchange Commission. Caution should be taken not to place undue reliance on any such forward-looking statements. Except as required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed as exhibits completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of the forward-looking statements in this Quarterly Report on Form 10-Q by these cautionary statements.
Table of Contents
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Page |
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PART I. |
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Item 1. |
1 |
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1 |
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Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) |
2 |
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Condensed Consolidated Statements of Convertible Preferred Series Equity & Stockholders’ Equity |
3 |
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4 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
5 |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
19 |
Item 3. |
27 |
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Item 4. |
28 |
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PART II. |
29 |
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Item 1. |
29 |
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Item 1A. |
29 |
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Item 2. |
29 |
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Item 3. |
29 |
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Item 4. |
29 |
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Item 5. |
30 |
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Item 6. |
30 |
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31 |
i
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
PARAGON 28, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
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March 31, 2022 |
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December 31, 2021 |
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ASSETS |
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Current assets: |
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Cash |
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$ |
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$ |
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Trade receivables, less allowance for doubtful accounts of $ |
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Inventories, net |
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Income taxes receivable |
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Other current assets |
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Total current assets |
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Property and equipment, net |
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Intangible assets, net |
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Goodwill |
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Deferred income taxes |
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Total assets |
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$ |
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$ |
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LIABILITIES & STOCKHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued expenses |
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Other current liabilities |
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Current maturities of long-term debt |
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Income taxes payable |
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Total current liabilities |
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Long-term liabilities: |
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Long-term debt net, less current maturities |
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Other long-term liabilities |
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Deferred income taxes |
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Income taxes payable |
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Total liabilities |
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Stockholders' equity: |
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Common stock, $ |
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Additional paid in capital |
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Accumulated deficit |
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( |
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( |
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Accumulated other comprehensive income |
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( |
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Treasury stock, at cost; |
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( |
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( |
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Total stockholders' equity |
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Total liabilities & stockholders' equity |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
1
PARAGON 28, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share and per share data)
(unaudited)
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Three Months Ended March 31, |
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2022 |
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2021 |
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Net revenue |
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$ |
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$ |
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Cost of goods sold |
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Gross profit |
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Operating expenses |
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Research and development costs |
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Selling, general, and administrative |
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Total operating expenses |
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Operating loss |
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( |
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( |
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Other expense |
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Other expense |
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( |
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( |
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Interest expense, net |
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( |
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( |
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Total other expense |
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( |
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( |
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Loss before income taxes |
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( |
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( |
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Income tax expense |
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Net loss |
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$ |
( |
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$ |
( |
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Less: cumulative dividends on Series B convertible preferred stock |
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( |
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Net loss attributable to common stockholders |
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$ |
( |
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$ |
( |
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Foreign currency translation adjustment |
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( |
) |
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( |
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Comprehensive loss |
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$ |
( |
) |
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$ |
( |
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Weighted average number of common stocks outstanding: |
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Basic |
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Diluted |
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Net loss per share attributable to common stockholders: |
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Basic |
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$ |
( |
) |
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$ |
( |
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Diluted |
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$ |
( |
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$ |
( |
) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
PARAGON 28, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED SERIES EQUITY & STOCKHOLDERS’ EQUITY
(in thousands, except for number of shares)
(unaudited)
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Accumulated |
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Other |
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Total |
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Series A Convertible Preferred Stock |
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Series B Convertible Preferred Stock |
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Common Stock |
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Additional |
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Accumulated |
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Comprehensive |
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Treasury |
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Stockholders' |
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For the Three Months Ended March 31, 2022 |
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Shares |
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Amount |
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Shares |
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Amount |
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Shares |
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Amount |
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Paid-in-Capital |
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Deficit |
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Income |
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Stock |
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Equity |
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Balance, January 1, 2022 |
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— |
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$ |
— |
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— |
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$ |
— |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
( |
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$ |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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— |
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( |
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Issuance of common stock |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Offering costs associated with initial public offering |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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— |
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— |
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( |
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Options exercised |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Foreign currency translation |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Balance, March 31, 2022 |
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— |
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$ |
— |
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— |
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$ |
— |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
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$ |
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Accumulated |
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Other |
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Total |
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Series A Convertible Preferred Stock |
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Series B Convertible Preferred Stock |
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Common Stock |
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Additional |
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Retained |
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Comprehensive |
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Treasury |
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Stockholders' |
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For the Three Months Ended March 31, 2021 |
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Shares |
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Amount |
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Shares |
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Amount |
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Shares |
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Amount |
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Paid-in-Capital |
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Earnings |
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Income |
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Stock |
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Equity |
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Balance, January 1, 2021 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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— |
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( |
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Issuance of common stock |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Common stock repurchase |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
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— |
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— |
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— |
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( |
) |
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( |
) |
Series B convertible preferred stock dividend |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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— |
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( |
) |
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Options exercised |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Foreign currency translation |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Balance, March 31, 2021 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
PARAGON 28, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Three Months Ended March 31, |
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2022 |
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2021 |
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Cash flows from operating activities |
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Net loss |
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$ |
( |
) |
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$ |
( |
) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
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Depreciation and amortization |
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Allowance for doubtful accounts |
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Provision for (reversal of) excess and obsolete inventories |
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( |
) |
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Stock-based compensation |
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Amortization of debt issuance costs |
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Change in fair value of earnout liabilities |
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Deferred income taxes |
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( |
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Loss on disposal of property and equipment |
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Other |
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( |
) |
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Changes in other assets and liabilities, net of acquisitions: |
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Accounts receivable |
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( |
) |
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Inventories |
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( |
) |
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( |
) |
Other current assets |
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( |
) |
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( |
) |
Accounts payable |
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( |
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Accrued expenses and other current liabilities |
|
|
( |
) |
|
|
|
|
Income tax receivable/payable |
|
|
|
|
|
|
||
Net cash (used in) provided by operating activities |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
||
Cash flows from investing activities |
|
|
|
|
|
|
||
Purchases of property and equipment |
|
|
( |
) |
|
|
( |
) |
Proceeds from sale of property and equipment |
|
|
|
|
|
|
||
Purchases of intangible assets |
|
|
( |
) |
|
|
( |
) |
Acquisition of Disior, net of cash received |
|
|
( |
) |
|
|
|
|
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
||
Cash flows from financing activities |
|
|
|
|
|
|
||
Proceeds from draw down on term loan |
|
|
|
|
|
|
||
Proceeds from issuance of long-term debt |
|
|
|
|
|
|
||
Payments on long-term debt |
|
|
( |
) |
|
|
( |
) |
Payments of debt issuance costs |
|
|
( |
) |
|
|
|
|
Proceeds from issuance of common stock |
|
|
|
|
|
|
||
Payments on treasury stock repurchased |
|
|
|
|
|
( |
) |
|
Proceeds from exercise of stock options |
|
|
|
|
|
|
||
Net cash provided by (used in) financing activities |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
||
Effect of exchange rate changes on cash |
|
|
( |
) |
|
|
( |
) |
Net (decrease) increase in cash |
|
|
( |
) |
|
|
|
|
Cash at beginning of period |
|
|
|
|
|
|
||
Cash at end of period |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
||
Cash paid for taxes |
|
$ |
|
|
$ |
|
||
Cash paid for interest |
|
|
|
|
|
|
||
Purchase of property and equipment included in accounts payable |
|
|
|
|
|
|
||
Series B convertible preferred stock dividend |
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
NOTE 1. BUSINESS AND BASIS OF PRESENTATION
Business
Paragon 28, Inc. (collectively with its subsidiaries, “we”, “us”, “our”, “P28” or the “Company”) develops, distributes, and sells medical devices in the foot and ankle segment of the orthopedic implant marketplace. Our approach to product development is procedurally focused, resulting in a full range of procedure-specific foot and ankle products designed specifically for foot and ankle anatomy. Our products and product families include plates and plating systems, screws, staples, and nails aimed to address all major foot and ankle procedures including ankle, charcot, fracture fixation, hallux valgus, hammertoe, and flatfoot. P28 is a United States (“U.S.”) based company incorporated in the State of Colorado, with headquarters in Englewood, Colorado. Our sales representatives and distributors are located globally with the majority concentrated in the U.S. and Europe.
Initial Public Offering
In October, 2021, the Company completed its initial public offering (“IPO”), in which it issued and sold
Basis of Presentation and Consolidation
The accompanying Condensed Consolidated Financial Statements include the accounts of Paragon 28, Inc. and its subsidiaries, all of which are wholly-owned. The accompanying Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information required by U.S. GAAP for complete financial statements. The interim Condensed Consolidated Financial Statements reflect all adjustments that are of a normal recurring nature and that are considered necessary for a fair representation of the results for the periods presented and should be read in conjunction with the audited Consolidated Financial Statements and notes thereto for the year ended December 31, 2021, which include a complete set of footnote disclosures, including our significant accounting policies. The audited Consolidated Financial Statements and notes thereto for the year ended December 31, 2021 are included in the Company’s Annual filing on Form 10-K filed with the SEC on March 8, 2022. The results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year or for any other future period. All intercompany balances and transactions have been eliminated in consolidation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Because future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Any changes in these estimates will be reflected in the Company’s Condensed Consolidated Financial Statements. Significant items subject to such estimates and assumptions include the determination of the collectability of trade receivables, inventory obsolescence, impairment of long-lived assets, recoverability of goodwill and intangible assets, contingent earn-out liabilities, income taxes and stock-based compensation.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share data)
(unaudited)
Foreign Currency Translation
The Condensed Consolidated Financial Statements are presented in U.S. dollars. The Company’s non-U.S. subsidiaries have a functional currency (i.e., the currency in which operational activities are primarily conducted) that is other than the U.S. dollar, generally the currency of the country in which such subsidiaries are domiciled. Such subsidiaries’ assets and liabilities are translated into U.S. dollars at quarter-end exchange rates, while revenue and expenses are translated at average exchange rates during the quarter based on the daily closing exchange rates. Adjustments that result from translating amounts from a subsidiary’s functional currency to U.S. dollars are reported in Accumulated Other Comprehensive (Loss) Income, net of tax.
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.
Trade Receivables, Less Allowance for Doubtful Accounts
The Company estimates an allowance for doubtful accounts based upon an evaluation of the current status of receivables, historical experience, and other factors as necessary. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change. The allowance for doubtful accounts was $
Inventories, Net
The Company estimates a reserve for obsolete and slow-moving inventory based on current inventory levels, historical sales and future projected demand. Charges (benefit) for excess and obsolete inventory are included in Cost of goods sold and were $(
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
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.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share data)
(unaudited)
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.
Goodwill
Goodwill represents the excess of the purchase price as compared to the fair value of net assets acquired and liabilities assumed. Goodwill is not amortized, but is tested for impairment annually or when indications of impairment exist. We can elect to qualitatively assess goodwill for impairment if it is more likely than not that the fair value of a reporting unit exceeds its carrying value.
Impairment exists when the carrying amount, including goodwill, of the reporting unit exceeds its fair value, resulting in an impairment charge for this excess (not to exceed the carrying amount of the goodwill). Our annual impairment testing date is October 1. The impairment, if determined, is recorded within Operating expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) in the period the determination is made. There were
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 may be considered in the valuation: the scenario-based model (“SBM”) and Monte Carlo simulation. The SBM relies on multiple outcomes to estimate the likelihood of future payoff of the contingent consideration. The resulting earnout payoff is then probability-weighted and discounted at an appropriate risk adjusted rate in order to arrive at the present value of the expected earnout payment. The Monte Carlo simulation is used to value the non-linear contingent considerations based on projected financial metrics. Each trial of the Monte Carlo simulation draws a value from the assumed distribution for the underlying metric. The earnout payoff for each simulation trial is calculated based on that particular simulated path for the underlying metrics and then discounted to present value using the risk-free rate, adjusted for counterparty credit risk. The value of the earnout is estimated as the average value from all simulation trials. The fair value estimates use unobservable inputs that reflect our own assumptions as to the ability of the acquired business to meet the targeted benchmarks and discount rates used in the calculations. The unobservable inputs are defined in ASC Topic 820, “Fair Value Measurements and Disclosures,” as Level 3 inputs.
We review the probabilities of achievement of the earnout milestones to determine impact on the fair value of the earnout consideration on a quarterly basis over the earn-out period. Actual results are compared to the estimates and probabilities of achievement used in our forecasts. Should actual results of the acquired business increase or decrease as compared to our estimates and assumptions, the estimated fair value of the contingent earn-out consideration liability will increase or decrease, up to the contractual limit, as applicable. Changes in the estimated fair value of the contingent earn-out consideration are recorded in other (expense) income in the Consolidated Statements of Operations and Comprehensive (Loss) Income 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.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share data)
(unaudited)
Revenue Recognition
Revenue is recorded when our performance obligation is satisfied which is when our customers take title of the product, and typically when the product is used in surgery. As such, the timing of revenue recognition may differ from the timing of invoicing to our customers. We have recorded unbilled accounts receivable related to this timing difference of $
Accounting Pronouncements Issued Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. ASU 2016-02 supersedes the previous leases standard, ASC 840, Leases. ASU 2016-02, as subsequently amended for various technical issues, is effective for emerging growth companies following private company adoption dates in fiscal years beginning after December 15, 2021, and interim periods with fiscal years beginning after December 15, 2022. The Company is currently evaluating the new guidance, but does not believe it will have a material impact on the Consolidated Financial Statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires entities to estimate all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The updated guidance also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses over the entire contractual term of the instrument from the date of initial recognition of that instrument. ASU 2016-13, as subsequently amended for various technical issues, is effective for emerging growth companies following private company adoption dates for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the new guidance to determine the impact it will have on the Consolidated Financial Statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) (“ASU 2019-12”), which is part of the FASB’s overall simplification initiative to reduce the costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. ASU 2019-12 simplifies accounting guidance for intra-period allocations, deferred tax liabilities, year-to-date losses in interim periods, franchise taxes, step-up in tax basis of goodwill, separate entity financial statements, and interim recognition of tax laws or rate changes. ASU 2019-12 is effective for emerging growth companies following private company adoption dates in fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. The adoption of this guidance is not expected to have a significant impact on the Company's Consolidated Financial Statements and related disclosures.
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
The aggregate purchase price of the Disior Acquisition was approximately $
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share data)
(unaudited)
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 Condensed Consolidated Financial Statements beginning after January 10, 2022, the Disior Acquisition Date.
The following table summarizes the purchase price:
Consideration Paid |
|
|
|
Cash consideration |
$ |
|
|
Contingent consideration |
|
|
|
Total consideration |
$ |
|
Acquisition-related costs, which consisted of fees incurred for advisory, legal, and accounting services, were $
Certain amounts recorded in connection with the Disior Acquisition are still considered preliminary as we continue to gather the necessary information to finalize our fair value estimates and provisional amounts. Provisional amounts include items related to working capital adjustments, identified intangibles, and earnout consideration.
During the measurement period, which is up to one year from the Disior Acquisition Date, we may adjust provisional amounts that were recognized at the Disior Acquisition Date to reflect new information obtained about facts and circumstances that existed as of the Disior Acquisition Date.
The preliminary purchase price allocation for Disior, which may be adjusted by material amounts as we finalize our fair value estimates and provisional amounts, was as follows:
Assets acquired: |
|
|
|
Cash and cash equivalents |
$ |
|
|
Other current assets |
|
|
|
Intangible assets |
|
|
|
Goodwill |
|
|
|
Total assets acquired |
$ |
|
|
|
|
|
|
Liabilities assumed: |
|
|
|
Accruals and other current liabilities |
$ |
|
|
Deferred tax liabilities, net |
|
|
|
Total liabilities assumed |
$ |
|
|
Net assets acquired |
$ |
|
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 purchase consideration and its allocation are preliminary and may be adjusted to reflect new information obtained about facts and circumstances that existed as of the acquisition date. The excess of the fair value of the purchase consideration over the fair value of the identifiable assets and liabilities, if any, was recorded as goodwill. The goodwill is attributable to the expected synergies with the Company’s existing operations.
|
Fair Value |
|
|
Estimated Useful Life (in years) |
|
Developed Technology |
$ |
|
|
||
Tradenames |
|
|
|
Indefinite |
|
|
$ |
|
|
|
The entire amount of the purchase price allocated to goodwill will not be deductible for income tax purposes under the Finnish Income Tax Act.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share data)
(unaudited)
Additive Orthopaedics
On May 28, 2021 (“Closing Date”), the Company entered into an Asset Purchase Agreement (“APA”) with Additive Orthopaedics, LLC (“Additive” or “Seller”) and completed an acquisition of substantially all of the operating and intangible assets of Additive, for total cash consideration of $
Additive’s 3D-printed Patient Specific Talus Spacer is the only U.S. Food and Drug Administration-approved patient-specific total talus replacement implant authorized in the U.S. for the treatment of avascular necrosis. The acquisition of Additive allowed the Company to further expand into the patient specific implant market.
The Company has accounted for the acquisition of Additive under ASC Topic 805, Business Combinations (“ASC 805”). Additive’s results of operations are included in the Condensed Consolidated Financial Statements beginning after May 28, 2021, the acquisition date.
The following table summarizes the purchase consideration transferred in connection with the acquisition of Additive and consists of the following:
Consideration Paid |
|
|
|
Cash consideration |
$ |
|
|
Contingent consideration |
|
|
|
Total consideration |
$ |
|
The following table summarizes the fair values of the assets acquired and liabilities assumed as of the Closing Date:
Assets acquired: |
|
|
|
Accounts receivable |
$ |
|
|
Inventory |
|
|
|
Intangible assets |
|
|
|
Goodwill |
|
|
|
Total Assets Acquired |
|
|
|
|
|
|
|
Liabilities assumed: |
|
|
|
Accounts payable |
|
|
|
Accrued expenses |
$ |
|
|
Total Liabilities Assumed |
|
|
|
Net assets acquired |
$ |
|
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share data)
(unaudited)
Identified intangible assets consist of noncompete arrangements, customer relationships, and developed technology. The fair value of each were determined with the assistance of an external valuation specialist using a combination of the income, market, and asset approach, 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. As of March 31, 2022, the purchase consideration and its allocation are final. 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 entire amount of the purchase price allocated to goodwill will be deductible for income tax purposes pursuant to Internal Revenue Code Section 197 over a 15-year period.
|
Fair Value |
|
|
Estimated Useful Life (in years) |
|
Noncompete arrangements |
$ |
|
|
||
Customer relationships |
|
|
|
||
Developed technology |
|
|
|
||
|
$ |
|
|
|
NOTE 4. GOODWILL AND INTANGIBLE ASSETS
Goodwill
As of March 31, 2022 and December 31, 2021, goodwill was $
Balance, December 31, 2021 |
|
|
|
$ |
|
|
Acquisitions |
|
|
|
|
|
|
Balance, March 31, 2022 |
|
|
|
$ |
|
Intangibles
Intangible assets as of March 31, 2022 are as follows:
|
|
Estimated Useful Life |
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Amount |
|
|||
Trademarks and tradenames, indefinite-lived |
|
Indefinite |
|
$ |
|
|
|
— |
|
|
$ |
|
||
Patents, definite-lived |
|
|
|
|
|
|
|
|
|
|
||||
Customer relationships |
|
|
|
|
|
|
|
|
|
|
||||
Developed technology |
|
|
|
|
|
|
|
|
|
|
||||
Other intangibles |
|
|
|
|
|
|
|
|
|
|
||||
Total intangible assets, net |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
Intangible assets, excluding the Disior intangible assets, increased $
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share data)
(unaudited)
Intangible assets as of December 31, 2021, are as follows:
|
|
Estimated Useful Life |
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Amount |
|
|||
Trademarks, indefinite-lived |
|
Indefinite |
|
$ |
|
|
|
— |
|
|
$ |
|
||
Patents, definite-lived |
|
|
|
|
|
|
|
|
|
|
||||
Customer relationships |
|
|
|
|
|
|
|
|
|
|
||||
Developed technology |
|
|
|
|
|
|
|
|
|
|
||||
Other intangibles |
|
|
|
|
|
|
|
|
|
|
||||
Total intangible assets, net |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
Amortization expense is included in Selling, general, and administrative expenses and was $
Expected future amortization expense is as follows:
2022 (Remaining) |
|
|
|
$ |
|
|
2023 |
|
|
|
|
|
|
2024 |
|
|
|
|
|
|
2025 |
|
|
|
|
|
|
2026 |
|
|
|
|
|
|
2027 |
|
|
|
|
|
NOTE 5. CONTINGENT EARN-OUT CONSIDERATION
The following table provides a reconciliation of our Level 3 earn-out liabilities for the three months ended March 31, 2022:
Balance, December 31, 2021 |
$ |
|
|
Acquisition date fair value of earn-out liabilities |
|
|
|
Change in fair value of earn-out liabilities |
|
|
|
Balance, March 31, 2022 |
$ |
|
The current portion of contingent earn-out liability is included in Other-current liabilities and the non-current portion is included in Other long-term liabilities on the Condensed Consolidated Balance Sheets. As of March 31, 2022, the current portion was $
NOTE 6. DEBT
Long-term debt as of March 31, 2022 and December 31, 2021 consists of the following:
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||
MidCap Term Loan |
$ |
|
|
$ |
|
||
Bank of Ireland Note Payable |
|
|
|
|
|
||
Vectra Term Loan Facility |
|
|
|
|
|
||
|
$ |
|
|
$ |
|
||
Less: deferred issuance costs |
|
( |
) |
|
|
( |
) |
Total debt, net of issuance costs |
|
|
|
|
|
||
Less: current portion |
|
( |
) |
|
|
( |
) |
Long-term debt, net, less current maturities |
$ |
|
|
$ |
|
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share data)
(unaudited)
MidCap Credit Agreements
On May 6, 2021, the Company entered into a new credit agreement with MidCap Financial Trust to provide a total of $
Vectra Bank Colorado Loan Agreements
On March 27, 2020, the Company entered into an Amended and Restated Loan Agreement (the “Vectra Loan Agreement”) with Vectra Bank Colorado. The Vectra Loan Agreement refinanced the Company's existing Term Loan and existing Buyout Loan into a single term loan in the aggregate principal amount of $
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 $
Bank of Ireland Note Payable
On June 12, 2020, the Company entered a term loan with Bank of Ireland in a principal amount of $
NOTE 7. CONVERTIBLE PREFERRED SERIES EQUITY AND STOCKHOLDERS’ EQUITY
On October 8, 2021, the Company filed a certificate of amendment with the Secretary of State of the State of Delaware, pursuant to which, the Company effected a
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share data)
(unaudited)
Common Stock
In October 2021, the Company completed its initial public offering ("IPO"), in which it issued and sold
Series A Convertible Preferred Stock
In December 2011, the Company issued an aggregate of
In February and November 2012, the Company issued an aggregate of
In connection with the IPO, all of the shares of the Company’s outstanding Series A convertible preferred stock automatically converted into an aggregate of
Convertible Series B Preferred Stock
In July 2020, the Company issued an aggregate of
In connection with the IPO, all of the shares of the Company’s outstanding Series B convertible preferred stock automatically converted into an aggregate of
Treasury Stock
The Company purchased a total of
NOTE 8. EARNINGS (LOSS) PER SHARE
Basic net (loss) income per share is computed by dividing net (loss) income attributable to common stockholders (the numerator) by the weighted average number of common stock outstanding for the period (the denominator). Diluted net income per common stock attributable to common stockholders is computed by dividing net income by the weighted average number of common stocks outstanding during the period adjusted for the dilutive effects of common stock equivalents using the treasury stock method or the method based on the nature of such securities. In periods when losses from continuing operations are reported, the weighted-average number of common stock outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.
|
Three Months Ended March 31, |
|
|||||
(in thousands, except per share data) |
2022 |
|
|
2021 |
|
||
Net loss attributable to common stockholders |
|
|
|
|
|
||
Net loss attributable to Paragon 28, Inc. |
$ |
( |
) |
|
$ |
( |
) |
Less: Dividends on Series B convertible preferred stock |
|
|
|
|
( |
) |
|
Net loss attributable to common stockholders |
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
||
Weighted-average common stock outstanding: |
|
|
|
|
|
||
Basic |
|
|
|
|
|
||
Diluted |
|
|
|
|
|
||
|
|
|
|
|
|
||
Loss per share: |
|
|
|
|
|
||
Basic |
$ |
( |
) |
|
$ |
( |
) |
Diluted |
$ |
( |
) |
|
$ |
( |
) |
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share data)
(unaudited)
The following outstanding potentially dilutive securities were excluded from the calculation of diluted net loss per share attributable to common stockholders because their impact would have been antidilutive for the period presented:
|
Three Months Ended March 31, |
|
|||||
|
2022 |
|
|
2021 |
|
||
Stock options |
|
|
|
|
|
||
Restricted stock units |
|
|
|
|
|
NOTE 9. STOCK-BASED COMPENSATION
Employee Stock Purchase Plan
The Employee Stock Purchase Plan (“ESPP”) was adopted by the Company’s Board of Directors on October 8, 2021. The 2021 Plan was 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. The ESPP initially provides participating employees with the opportunity to purchase up to an aggregate of
2021 Incentive Award Plan
The 2021 Incentive Award Plan (“2021 Plan”) was adopted by the Company’s Board of Directors on October 8, 2021. The 2021 Plan was 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. The 2021 Plan authorizes the Company to issue an initial aggregate maximum number of shares of common stock equal to (i)
Stock Options
There were
During the three months ended March 31, 2022 and 2021, the Company recognized $
The Company received cash in the amount of $
During the three months ended March 31, 2022, the Company granted certain officers and contractors of the Company an aggregate of
During the three months ended March 31, 2021, the Company granted certain officers and contractors of the Company an aggregate of
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share data)
(unaudited)
Below are the assumptions used for the three months ended March 31, 2022 and 2021 in determining the fair value of each option award:
|
Three Months Ended March 31, |
|
|||||
|
2022 |
|
|
2021 |
|
||
Expected volatility |
|
% |
|
|
% |
||
Expected dividends |
|
|
|
|
|
||
Expected term (in years) |
|
|
|
|
|
||
Risk-free rate |
|
% |
|
|
% |
The aggregate intrinsic value of the options outstanding as of March 31, 2022 is $
As of March 31, 2022, there was approximately $
The following summarizes the Company’s stock option plan and the activity for the three months ended March 31, 2022:
|
Shares |
|
|
Weighted-Average Exercise Price |
|
|
Weighted-Average Remaining Contractual Term |
|
|||
Outstanding, December 31, 2021 |
|
|
|
$ |
|
|
|
|
|||
Granted |
|
|
|
|
|
|
|
|
|||
Exercised |
|
( |
) |
|
|
|
|
|
|
||
Forfeited or expired |
|
( |
) |
|
|
|
|
|
|
||
Outstanding, March 31, 2022 |
|
|
|
$ |
|
|
|
|
|||
Exercisable, March 31, 2022 |
|
|
|
$ |
|
|
|
|
|||
Vested and expected to vest at March 31, 2022 |
|
|
|
$ |
|
|
|
|
Restricted Stock Units
During the three months ended March 31, 2022,
The grant date fair value for RSUs is the market price of the common stock on the date of grant. The total fair value of RSUs vested during the three months ended March 31, 2022 and 2021 was $
During the three months ended March 31, 2022 and 2021, the Company recognized $
As of March 31, 2022, there was approximately $
NOTE 10. EMPLOYEE BENEFIT PLAN
16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share data)
(unaudited)
NOTE 11. INCOME TAXES
The effective tax rates for the three months ended March 31, 2022 and 2021 are as follows:
|
Three Months Ended March 31, |
|
|||||
|
2022 |
|
|
2021 |
|
||
Effective tax rate |
|
( |
%) |
|
|
( |
%) |
For the three months ended March 31, 2022 and 2021, the Company recorded tax expense of $
The Company’s 2022 and 2021 income tax expense and rates differed from the amount of income tax determined by applying the U.S. Federal income tax rate to pre-tax income primarily as a result of the U.S. jurisdiction that has a full valuation allowance recorded on U.S. and Finnish deferred tax assets. In addition, the tax rate is lower than the U.S. statutory federal tax rate as a result of foreign earnings that are taxed at lower tax rates.
The Company continues to monitor the realization of its deferred tax assets and assesses the need for a valuation allowance. The Company analyzes available positive and negative evidence to determine if a valuation allowance is needed based on the weight of the evidence. This objectively verifiable evidence includes the current & prior two years' profit and loss positions after considering pre-tax book income plus or minus permanent adjustments as well as other positive & negative evidence available. This process requires management to make estimates, assumptions, and judgments that are uncertain in nature. The Company has established a valuation allowance with respect to deferred tax assets in the U.S. and Finland and continues to monitor and assess potential valuation allowances in all its jurisdictions.
NOTE 12. COMMITMENTS AND CONTIGENCIES
Legal Proceedings
We are 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 our exposure be materially different from our estimates or should liabilities be incurred that were not previously accrued. Potential insurance reimbursements are not offset against potential liabilities.
During 2018 Wright Medical Technology, Inc. (“Wright Medical”) sued the Company, claiming patent infringement targeting essentially all of our patents. The case was subsequently updated to include trade secret misappropriations. We have filed motions to dismiss all allegations. We currently believe that we have substantial and meritorious defenses to Wright Medical’s claims and intend to vigorously defend our position, including through the trial and appellate stages if necessary. As the case is ongoing, we are unable to determine the likelihood of an outcome or estimate a range of reasonably possible settlement, if any. Accordingly, we have not made an accrual for any possible loss. The outcome of any litigation, however, is inherently uncertain, and an adverse judgment or settlement in the Wright Medical proceeding, if any, could materially and adversely affect our business, financial position and results of operations or cash flows. In addition to Wright Medical’s claims set forth above, we received in December 2021 an additional complaint from Wright Medical covering patents different than the Wright Asserted Patents. While the proceedings in connection with such complaint are in early stages, we do not at this time believe they represent a material liability to our company. We have incurred, and expect that we will continue to incur, significant expense in defending against the allegations made by Wright Medical.
NOTE 13. 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 (
17
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share data)
(unaudited)
The Company paid professional services fees to a related party totaling $
NOTE 14. SEGMENT AND GEOGRAPHIC INFORMATION
The following table represents total net revenue by geographic area, based on the location of the customer for the three months ended March 31, 2022 and 2021, respectively.
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
United States |
|
$ |
|
|
$ |
|
||
International |
|
|
|
|
|
|
||
Total net revenue |
|
$ |
|
|
$ |
|
No individual country with net revenue originating outside of the United States accounted for more than 10% of consolidated net revenue for three months ended March 31, 2022 and 2021.
The following table represents total non-current assets, excluding deferred taxes, by geographic area as of March 31, 2022 and December 31, 2021, respectively.
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||
United States |
|
$ |
|
|
$ |
|
||
International |
|
|
|
|
|
|
||
Total assets |
|
$ |
|
|
$ |
|
No individual country with total non-current assets outside of the United States accounted for more than 10% of consolidated total assets as of March 31, 20221 and December 31, 2021.
18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes thereto included in Part I-Item 1 of this Quarterly Report on Form 10-Q. This discussion and other parts of this report contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Our actual results could differ materially from those discussed in these forward-looking statements. See “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q.
Overview
We are a leading medical device company exclusively focused on the foot and ankle orthopedic market and we are dedicated to improving patient lives. Our innovative orthopedic solutions, procedural approaches and instrumentation cover a wide range of foot and ankle ailments including fracture fixation, bunions, hammertoe, ankle, progressive collapsing foot deformity (PCFD) or flatfoot, charcot foot and orthobiologics. To treat these painful, debilitating or even life-threatening conditions, we provide a comprehensive portfolio of solutions that includes surgical implants and disposables, as well as surgical instrumentation. Our broad suite of surgical solutions comprises 73 product systems, including approximately 9,100 SKUs to help fit the specific needs of each patient. We design each of our products with both the patient and surgeon in mind, with the goal of improving outcomes, reducing ailment recurrence and complication rates, and making the procedures simpler, consistent and reproducible. We believe our passion, expertise, and exclusive focus in the foot and ankle market has allowed us to better understand the needs of our patients and physicians, which has enabled us to create innovations and enhanced solutions that disrupt and transform the foot and ankle market. As a result, we have experienced significant growth and momentum in our business.
We established Paragon 28 in 2010 as a company exclusively dedicated to the foot and ankle market. Since then, we have developed a comprehensive portfolio of foot and ankle surgical systems and procedural techniques designed to address the primary conditions requiring treatment in the foot and ankle, including fracture fixation; bunions; hammertoe; ankle; PCFD or flatfoot; charcot foot; and orthobiologics. Smart 28, the company’s ecosystem of enabling technologies for pre-operative planning, intra-operative support, and post-operative evaluation, was augmented by the Additive Orthopaedics acquisition in 2021 and the Disior acquisition in the first quarter of 2022. With the Additive acquisition, we acquired the only 3-D printed, patient specific total talus spacer authorized for marketing pursuant to an approved HDE application, plus a proprietary, pre-operative surgical planning platform. With Disior, we acquired a leading three-dimensional analytics pre-operative planning software company based in Helsinki, Finland. These transactions broadened our capabilities within the pre-operative and intra-operative stages of the foot and ankle continuum of care. We expect to continue to invest in Smart 28 to improve foot and ankle patient outcomes.
Our broad commercial footprint spans across all 50 states of the United States and 23 other countries. In the United States we primarily sell to hospitals and ambulatory surgery centers through a network of primarily independent sales representatives, the majority of whom are exclusive. Outside the United States we primarily sell to hospitals and ambulatory surgery centers through a network of sales representatives and stocking distributors. We plan to efficiently grow our sales organization and network to expand into new territories in the United States. We are also highly focused on expanding our global network by expanding our sales footprint in existing and select new international markets based on our assessment of size and opportunity.
We currently leverage multiple third-party manufacturing relationships to ensure low cost production while maintaining a capital efficient business model. We have multiple sources of supply for many of our surgical solutions’ critical components. Nearly all of our supply agreements do not have minimum manufacturing or purchase obligations. As such, we generally do not have any obligation to buy any given quantity of products, and our suppliers generally have no obligation to sell to us or to manufacture for us any given quantity of our products or components for our products. In most cases, we have redundant manufacturing capabilities for each of our products although we are starting to experience some inflationary pressure and extended lead times, primarily limited to raw materials and labor. Except during the height of the COVID-19 pandemic, we have not experienced any significant difficulty obtaining our products or components for our products necessary to meet demand, and we have only experienced limited instances where our suppliers had difficulty supplying products by the requested delivery date. We believe manufacturing capacity is sufficient to meet market demand for our products for the foreseeable future.
Net revenue increased from $33.1 million for three months ended March 31, 2021 to $41.4 million for the three months ended March 31, 2022, an increase of 25%.
Net loss increased from $0.5 million for the three months ended March 31, 2021 to a net loss of $9.2 million for the three months ended March 31, 2022.
19
Adjusted EBITDA decreased from $2.3 million for the three months ended March 31, 2021 to negative $3.3 million for the three months ended March 31, 2022. Adjusted EBITDA is not a financial measure under U.S. generally accepted accounting principles (GAAP). See “—Non-GAAP Financial Measures” for an explanation of how we compute this non-GAAP financial measure and for the reconciliation to the most directly comparable GAAP financial measure.
As of December 31, 2021 and March 31, 2022, we had cash of $109.4 million and $93.7 million and an accumulated deficit of $(0.5) million and $(9.7) million, respectively. Our primary sources of capital from inception through March 31, 2022 have been from cash flows from operations, private placements of securities, proceeds from our public offering and the incurrence of indebtedness.
We believe that our existing cash and available debt borrowings will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months.
We have made significant investments in both research and development and in the expansion of our sales and marketing functions, and expect to continue to make substantial investments in these areas. We have also made significant investments in general and administrative expense as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the United States Securities and Exchange Commission (SEC) and the NYSE listing standards, additional insurance expenses, investor relations activities, and other administrative and professional services. We do not expect to make significant incremental investments in general administrative expense. As a result of these and other factors, although not anticipated at this time, we may require additional financing to fund our operations and planned growth. We may also seek additional financing opportunistically. We may seek to raise any additional capital by entering into partnerships or through public or private equity offerings or debt financings, credit or loan facilities or a combination of one or more of these funding sources. If we raise additional funds by issuing equity securities, our stockholders may experience dilution.
Factors Affecting Our Results of Operations
We believe our performance and continued success depend on several factors that present significant opportunities. These factors include:
Investments in Product Development and Innovation, including Smart 28
We expect to continue to focus on long-term revenue growth through investments in our business. In research and development, our team is continually working on new products and iterations of our existing products. Further, we anticipate we will continue to invest significantly in our Smart 28 initiatives in order to improve patient outcomes by augmenting existing products and creating new products and related services that employ advanced technologies. We are committed to continuously expanding our portfolio of foot and ankle solutions and to bring next-generation products to market. While research and development and clinical testing are time consuming and costly, we believe expanding into new indications, implementing product improvements and continuing to demonstrate the efficacy, safety and cost effectiveness of our products through clinical data are all critical to increasing the adoption of our solutions. We continue to invest in programs to educate physicians who treat foot and ankle about the advantage of products. Accordingly, in the near term, we expect these activities to increase our operating expenses, but in the longer term we anticipate they will positively impact our business and results of operations.
Continued Commercial Expansion in the United States and International Markets
In sales and marketing, we are also dedicating meaningful resources to expand our commercial team in the United States and in international markets. Our top commercial priorities in the United States include sales force expansion, expansion of our surgeon customer base, sales force channel productivity and increasing surgeon utilization. Our top commercial priorities in the international markets include expanding our market share in existing countries and targeting new countries where we can maximize strong average selling price (ASP) and margins. Our current expansion targets include Brazil, Canada, Colombia, Germany, Italy and Japan. This process requires significant education and training for our commercial team to achieve the level of technical competency with our products that is expected by physicians and to gain experience building demand for our products. Upon completion of the training, our commercial team typically requires time in the field to grow their network of accounts and increase their productivity to the levels we expect. Successfully recruiting, training and retaining additional sales representatives will be required to achieve growth, which will require significant investments by us.
Continued and Expanded Access to Hospital Facilities
In the United States, in order for physicians to use our products, the hospital facilities where these physicians treat patients often require us to enter into purchasing contracts directly with the hospital facilities or with the GPOs of which the hospital facilities are members. This process can be lengthy and time-consuming and requires extensive negotiations and management time. In markets outside the United States, we may be required to engage in a contract bidding process in order to sell our products, where the bidding processes are only open at certain periods of time, and we may not be successful in the bidding process.
20
Inventory, Surgical Instrumentation and Supply Chain Management
Given the large variety and number of products we sell, in order to market and sell them effectively, we must maintain significant levels of inventory and surgical instrumentation. As a result, a significant amount of cash is expended for inventory and surgical instrumentation. There may also be times in which we determine that our inventory does not meet our product requirements. We may also over- or underestimate the quantities of required components, in which case we may expend extra resources or be constrained in the amount of end product that we can procure. These factors subject us to the risk of obsolescence and expiration, which may lead to impairment charges. Additionally, as we release later generations of products that contain advancements or additional features, the earlier generations may become obsolete.
Seasonality
We have experienced and expect to continue to experience seasonality in our business, with our highest sales volumes in the U.S. occurring in the fourth calendar quarter. Our U.S. sales volumes in the fourth calendar quarter tend to be higher as many patients elect to have surgery after meeting their annual deductible and having time to recover over the winter holidays.
Impact of COVID-19 Pandemic
In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, and in response, certain states within the United States implemented shelter-in-place rules requiring elective surgical procedures to be delayed. As a result, our revenue growth was adversely impacted particularly from March 2020 through May 2020 until such shelter-in-place restrictions were eased. Early in the first quarter of 2022, the Omicron variant of COVID 19 led to a deferral of surgeries with those headwinds beginning to decrease in mid-February. Absent a resurgence in headwinds, we expect the elective procedure environment to continue to improve; however, the pandemic has led to severe disruptions in the market, supply chain and the global and United States economies that may continue. We cannot reasonably estimate the length or severity of these impacts on our business.
Non-GAAP Financial Measures
Use of Non-GAAP Financial Measures and Their Limitations
In addition to our results and measures of performance determined in accordance with U.S. GAAP, we believe that certain non-GAAP financial measures are useful in evaluating and comparing our financial and operational performance over multiple periods, identifying trends affecting our business, formulating business plans and making strategic decisions.
Adjusted EBITDA is a key performance measure that our management uses to assess our financial performance and is also used for internal planning and forecasting purposes.
We believe that Adjusted EBITDA, together with a reconciliation to net income, helps identify underlying trends in our business and helps investors make comparisons between our company and other companies that may have different capital structures, tax rates, or different forms of employee compensation. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects, and allowing for greater transparency with respect to a key financial metric used by our management in its financial and operational decision-making. Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider these measures in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these potential limitations include:
Because of these and other limitations, you should consider our non-GAAP measures only as supplemental to other GAAP-based financial measures. For a full reconciliation of Adjusted EBITDA to the most comparable GAAP financial measure, please see “—Reconciliation Between GAAP and Non-GAAP Measure.
21
Reconciliation Between GAAP and Non-GAAP Measure
We define Adjusted EBITDA as earnings before interest expense, income tax expense(benefit), depreciation and amortization, stock-based compensation expense, non-recurring expenses and certain other non-cash expenses. For a full reconciliation of Adjusted EBITDA for the three months ended March 31, 2022 and 2021 to net income (loss) as the most comparable GAAP financial measure, please see the following table.
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(in thousands) |
|
|||||
Net loss |
|
$ |
(9,236 |
) |
|
$ |
(527 |
) |
Interest expense |
|
|
668 |
|
|
|
64 |
|
Income tax expense |
|
|
32 |
|
|
|
154 |
|
Depreciation and amortization expense |
|
|
3,030 |
|
|
|
1,739 |
|
Stock based compensation expense |
|
|
2,122 |
|
|
|
858 |
|
Change in fair value of earnout liability (1) |
|
|
80 |
|
|
|
— |
|
Adjusted EBITDA |
|
$ |
(3,304 |
) |
|
$ |
2,288 |
|
(1) Represents non-cash change in the fair value of earnout liability for the three months ended March 31, 2022
Components of Our Results of Operations
Net Revenue
We derive our revenue from the sale of our foot and ankle orthopedic solutions, primarily implants. We also record as revenue any amounts billed to customers for shipping costs and record as cost of goods sold the actual shipping costs. We have elected to exclude from the measurement of the transaction price all taxes, such as sales, use, value-added, assessed by government authorities and collected from a customer. Therefore, revenue is recognized net of such taxes. No single customer accounted for 10% or more of our net revenue in the three months ended March 31, 2022 and 2021. We expect our net revenue to increase in the foreseeable future as we expand our sales territories, add new customers and increase the utilization of our products by our existing customers, though net revenue may fluctuate from quarter to quarter due to a variety of factors, including availability of reimbursement, the size and success of our sales force, the number of hospitals and physicians who are aware of and use our products and seasonality.
Cost of Goods Sold
Cost of goods sold consists primarily of finished products purchased from third-party suppliers, shipping costs, excess and obsolete inventory adjustments and royalties. Implants are manufactured to our specifications primarily by third-party suppliers in the United States. Cost of goods sold is recognized at the time the implant is used in surgery and the related revenue is recognized. Prior to use in surgery, the cost of our implants is recorded as inventories, net in our consolidated balance sheets. Cost of goods sold is expected to increase due primarily to increased sales volume.
We calculate gross profit as net revenue less cost of goods sold, and gross margin as gross profit divided by net revenue. We expect our gross profit to increase in the foreseeable future as our net revenue grows, though our gross profit and gross margin have been and will continue to be affected by a variety of factors, primarily average selling prices, third-party manufacturing costs, change in mix of customers, excess and obsolete inventory adjustments, royalties and seasonality of our business. Our gross margin is higher for products we sell in the United States versus internationally due to higher average selling prices. We expect our gross margin to fluctuate from period to period, however, based upon the factors described above and seasonality.
Operating Expenses
Research and Development
Research and development expense is comprised of engineering costs and research programs related to new product and sustaining product development activities, clinical studies and trials expenses, quality and regulatory expenses, and salaries, bonuses and benefits related to research and development functions. We maintain a procedurally focused approach to product development and have projects underway to add new systems across multiple foot and ankle indications and to add additional functionality to our existing systems. We expect our research and development expenses to increase as we hire additional personnel to develop new product offerings and product enhancements, including Smart 28 initiatives.
22
Selling, General, and Administrative
Selling, general, and administrative expenses consist primarily of commissions paid to U.S. sales representatives, salaries, bonuses, and benefits related to selling, marketing, and general and administrative functions, and stock-based compensation. In addition, selling, general, and administrative expenses consist of the costs associated with marketing initiatives, physician and sales force medical education programs, surgical instrument depreciation, travel expenses, professional services fees (including legal, finance, audit and tax fees), insurance costs, facility expenses and other general corporate expenses.
We expect selling, general, and administrative expenses to continue to increase in the foreseeable future as we continue to grow our business, though it may fluctuate from quarter to quarter. We also expect our administrative expenses, including stock-based compensation expense, to increase as we increase our headcount and expand our facilities and business processes to support our operations as a public company. Additionally, we anticipate increased expenses related to audit, legal, regulatory and tax-related services associated with being a public company, compliance with exchange listing and SEC requirements, director and officer insurance premiums and investor relations costs. We also expect to see an increase in our stock-based compensation expense with the establishment of the equity plans that became effective in connection with our initial public offering and related grants either in the form of restricted stock units or options. In addition, we expect to continue to incur significant legal expenses related to the Wright Medical Litigation. Our selling, general and administrative expenses may fluctuate from period to period due to the seasonality of our business and as we continue to add direct sales territory managers in new territories.
Interest Expense
Interest expense consists of interest incurred and amortization of financing costs during the reported periods.
Results of Operations
For the Three Months Ended March 31, 2022 and 2021
The following table summarizes our results of operations for the period presented below:
|
|
Three Months Ended March 31, |
|
|
Change |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
% |
|
||||
|
|
(in thousands) |
|
|||||||||||||
Net revenue |
|
$ |
41,371 |
|
|
$ |
33,104 |
|
|
$ |
8,267 |
|
|
|
25 |
% |
Cost of goods sold |
|
|
6,791 |
|
|
|
6,441 |
|
|
|
350 |
|
|
|
5 |
% |
Gross profit |
|
|
34,580 |
|
|
|
26,663 |
|
|
|
7,917 |
|
|
|
30 |
% |
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Research and development |
|
|
5,773 |
|
|
|
3,549 |
|
|
|
2,224 |
|
|
|
63 |
% |
Selling, general, administrative |
|
|
37,242 |
|
|
|
23,396 |
|
|
|
13,846 |
|
|
|
59 |
% |
Total operating expenses |
|
|
43,015 |
|
|
|
26,945 |
|
|
|
16,070 |
|
|
|
60 |
% |
Operating loss |
|
|
(8,435 |
) |
|
|
(282 |
) |
|
|
(8,153 |
) |
|
* |
|
|
Other expense |
|
|
(101 |
) |
|
|
(27 |
) |
|
|
(74 |
) |
|
|
274 |
% |
Interest expense |
|
|
(668 |
) |
|
|
(64 |
) |
|
|
(604 |
) |
|
|
944 |
% |
Loss before income taxes |
|
|
(9,204 |
) |
|
|
(373 |
) |
|
|
(8,831 |
) |
|
* |
|
|
Income tax expense |
|
|
32 |
|
|
|
154 |
|
|
|
(122 |
) |
|
|
(79 |
)% |
Net loss |
|
|
(9,236 |
) |
|
|
(527 |
) |
|
|
(8,709 |
) |
|
* |
|
* Not Meaningful
The following table represents total net revenue by geographic area, based on the location of the customer for the three months ended March 31, 2022 and 2021, respectively.
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
United States |
|
$ |
36,023 |
|
|
$ |
29,134 |
|
International |
|
|
5,348 |
|
|
|
3,970 |
|
Total net revenue |
|
$ |
41,371 |
|
|
$ |
33,104 |
|
23
Net Revenue. Net revenue increased $8.3 million, or 25%, from $33.1 million in the three months ended March 31, 2021 to $41.4 million in the same period in 2022. The increase in net revenue was due to a $6.9 million, or 24%, increase in U.S. net revenue driven by an increase in our surgeon customer base, an increase in the number of our producing sales representatives and a higher amount of revenue generated per producing sales representative. International revenue increased $1.4 million, or 35%, primarily due strong performance in South Africa and the United Kingdom.
Cost of Goods Sold and Gross Profit Margin. Cost of goods sold increased $0.4 million, or 5%, from $6.4 million in the three months ended March 31, 2021 to $6.8 million in the same period in 2022, primarily due to higher net revenue, offset partially by lower excess and obsolete inventory expense during the three months ended March 31, 2022. As a result, gross profit margin for the three months ended March 31, 2022 increased to 83.6%, compared to 80.5% in the same period of 2021.
Research and Development Expenses. Research and development expenses increased $2.2 million, or 63%, from $3.6 million in the three months ended March 31, 2021 to $5.8 million in the same period in 2022. The increase in research and development expenses was primarily due to additional investments in new product development related to our recent acquisitions of Additive Orthopedics and Disior Oy.
Selling, General, and Administrative Expenses. Selling, general and administrative expenses increased $13.8 million, or 59%, from $23.4 million in the three months ended March 31, 2021 to $37.2 million in the same period in 2022. The increase in selling, general, and administrative expenses was primarily driven by increased sales and marketing expenses, including sales representative commission expenses related to higher net revenue, increased investments in the expansion of our U.S. sales force, increased surgeon medical education, increased surgical instrument depreciation expense, and increased stock based compensation expense. General and administrative expenses also increased driven by Disior acquisition related expenses and increased expenses primarily related to becoming a publicly traded company.
Interest Expense. Interest expense increased to $0.7 million for the three months ended March 31, 2022 from $0.1 million for the three months ended March 31, 2021 primarily due to higher levels of outstanding debt.
Liquidity and Capital Resources
As of December 31, 2021 and March 31, 2022, we had cash of $109.4 million and $93.7 million, and an accumulated deficit of $(0.5) million and $(9.7) million, respectively. Our primary sources of capital from inception through March 31, 2022 have been from cash flows from operations, private placements of securities, proceeds from our public offering and the incurrence of indebtedness.
On October 19, 2021, we completed our initial public offering of 8,984,375 shares of our common stock, at a price to the public of $16.00 per share. The gross proceeds from the initial public offering were approximately $143.8 million, before deducting underwriting discounts and commissions and estimated offering expenses payable by us. The net proceeds after deducting all expenses were $129.1 million.
On May 6, 2021, we entered into a new credit agreement with Midcap Financial Trust (Midcap) to provide up to $70.0 million in total borrowings, including a $30.0 million revolving loan and a $40.0 million deferred draw term loan, secured by our intellectual property and other assets, and used a portion of proceeds to repay our former term loan agreement. At March 31, 2022, we had $0 of Midcap debt outstanding under the Midcap Revolving Loan (defined below) and $30.0 million under the Midcap Term Loans (defined below). In addition, on March 24, 2022, we entered into a secured term loan facility with Vectra Bank Colorado in the principle amount of $16.0 million. In connection with the Vectra Loan Agreement (as defined below), certain terms of the Midcap Credit Agreements were also amended. We believe that our existing cash, additional $40.0 million available borrowings under our Midcap credit facility and expected revenues will be sufficient to meet our capital requirements and fund our operations for the next 12 months. However, we may decide to raise additional financing to support further growth of our operations.
Long-Term Obligations
Vectra Bank Colorado Loan Agreements
On March 27, 2020, the we entered into an Amended and Restated Loan Agreement (the “Vectra Loan Agreement”) with Vectra Bank Colorado. The Vectra Loan Agreement refinanced our existing Term Loan and existing Buyout Loan into a single term loan in the aggregate principal amount of $6.8 million (the “2020 Term Loan”) and increased the maximum principal amount of the existing Revolving Loan to $15.0 million (the 2020 Revolving Loan and together with the 2020 Term Loan, “2020 Loans”). The maturity date for both loans was September 30, 2020 and it was subsequently extended to October 5, 2023. We repaid the 2020 Loans in 2021 in connection with entering into the Midcap Term Loan Agreement described below.
24
On March 24, 2022, we entered into a secured term loan facility (the “Zions Facility”) with Zions Bancorporation, N.A. dba Vectra Bank Colorado in the principal amount of $16.0 million. The loans under the Zions Facility (i) bear interest at a variable rate per annum equal to the sum of (a) a one-month Term SOFR based rate, plus (b) 1.75%, adjusted on a monthly basis and (ii) mature on March 24, 2037. Principal and interest payments are payable monthly, with optional prepayments allowed without premium or penalty. The Zions Facility includes a financial covenant requiring us to maintain a minimum fixed charge coverage ratio of 1.15 to 1.00, measured on a trailing four quarter basis as of the last day of each fiscal quarter. As of March 31, 2022, we were in compliance with this covenant.
Midcap Loan Agreement
On May 6, 2021, we entered into a term loan agreement (the “Midcap Term Loan Agreement”) with Midcap Financial Trust (“Midcap”) as agent and lenders named therein. The Midcap Term Loan Agreement includes two tranches, with the first being for a total of $10.0 million (the “First Tranche”) and the second being for a total of $30.0 million (the “Second Tranche”, and together with the “First Tranche”, the “Midcap Term Loans”). The First Tranche was fully funded on May 6, 2021. The Second Tranche was partially funded $20.0 million on January 10, 2022. The Midcap Term Loans mature on May 1, 2026. The Midcap Term Loans accrue interest at the LIBOR Rate plus 6.00% per annum.
On May 6, 2021, we also entered into a revolving loan agreement (the “Midcap Revolving Loan Agreement”, and together with the “Midcap Term Loan Agreement”, the “Midcap Loan Agreements”) with Midcap as an agent and the lenders named therein. Pursuant to the terms of the Midcap Revolving Loan Agreement, as of May 6, 2021 we had access to a $20.0 million revolving line of credit (the “Midcap Revolving Loan”), that can increase by an additional $10.0 million upon our written request and the consent of the agent and lenders. The Midcap Revolving Loan Agreement matures on May 1, 2026. The Midcap Revolving Loan accrues interest at the LIBOR Rate plus 3.00% per annum.
The Midcap Loan Agreements are secured by all of our assets and personal property, including all goods, equipment, inventory, cash, intellectual property, and certificates of deposit. The Midcap Loan Agreements include customary conditions to borrowing, events of default, and covenants, including affirmative covenants and negative covenants that restrict our and our subsidiaries’ ability to, among other things, incur additional indebtedness, create or incur liens, merge or consolidate with other companies, liquidate or dissolve, sell or transfer assets, pay dividends or make distributions, subject to certain exceptions. The Midcap Loan Agreements require us to maintain minimum net product sales and minimum consolidated EBITDA, (each term as defined in the Midcap Loan Agreements amended on March 24, 2022), for the preceding twelve month period. As of March 31, 2022, we were in compliance with all financial covenants under the Midcap Loan Agreements.
Contractual Obligations
In January 2022, the Company purchased its' headquarters and terminated the existing lease agreement; therefore, there were no remaining significant future lease payment obligations as of March 31, 2022.
Funding Requirements
We use our cash to fund our operations, which primarily include the costs of purchasing our foot and ankle orthopedic implants and disposables and associated instrumentation, as well as our operating expenses, including research and development and selling, general and administrative. We expect our operating expenses to increase for the foreseeable future as we continue to invest in expanding our research and development initiatives and as we continue to expand our sales and marketing infrastructure and programs to both drive and support anticipated sales growth. The timing and amount of our operating expenditures will depend on many factors, including:
25
Although not anticipated, we may seek to raise any necessary additional capital through public or private equity offerings or debt financings, credit or loan facilities or a combination of one or more of these or other funding sources. Additional funds may not be available to us on acceptable terms or at all. If we fail to obtain necessary capital when needed on acceptable terms, or at all, we could be forced to delay, limit, reduce or terminate our product development programs, commercialization efforts or other operations. If we raise additional funds by issuing equity securities, our stockholders will suffer dilution and the terms of any financing may adversely affect the rights of our stockholders. In addition, as a condition to providing additional funds to us, future investors may demand, and may be granted, rights superior to those of existing stockholders. If we raise additional capital through collaborations agreements, licensing arrangements or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product or grant licenses that may not be favorable to us. Debt financing, if available, is likely to involve restrictive covenants limiting our flexibility in conducting future business activities, and, in the event of insolvency, debt holders would be repaid before holders of our equity securities received any distribution of our corporate assets.
Cash Flows
The following table sets forth the primary sources and uses of cash for the periods presented below:
|
|
Three Months Ended March 31, |
|
|
Change |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
% |
|
||||
|
|
(in thousands) |
|
|||||||||||||
Net cash (used in) provided by: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating activities |
|
$ |
(9,503 |
) |
|
$ |
3,686 |
|
|
$ |
(13,189 |
) |
|
|
(358 |
)% |
Investing activities |
|
|
(41,636 |
) |
|
|
(3,015 |
) |
|
|
(38,621 |
) |
|
* |
|
|
Financing activities |
|
|
35,570 |
|
|
|
(22 |
) |
|
$ |
35,592 |
|
|
* |
|
|
Effect of exchange rate |
|
|
(136 |
) |
|
|
(470 |
) |
|
|
334 |
|
|
|
(71 |
)% |
Net (decrease) increase in cash |
|
$ |
(15,705 |
) |
|
$ |
179 |
|
|
$ |
(15,884 |
) |
|
|
(8,874 |
)% |
* Not Meaningful
Net Cash Provided by Operating Activities
Net cash used in operating activities for the three months ended March 31, 2022 was $9.5 million, consisting primarily of net loss of $9.2 million plus non-cash expenses of $5.5 million, which primarily consisted of $3.0 million of depreciation and amortization and $2.1 million of stock-based compensation expense, and negative changes in working capital of $5.8 million, including $2.3 million of inventory purchases, an increase in accounts receivable of $2.2 million and a decrease in accounts payable of $1.2 million.
Net cash provided by operating activities for the three months ended March 31, 2021 was $3.7 million, consisting primarily of net loss of $0.5 million plus non-cash expenses of $4.2 million, which primarily consisted of $1.7 million of depreciation and amortization, $1.0 million provision for excess and obsolete inventory, and $0.9 million of stock-based compensation.
Net Cash Used in Investing Activities
Net cash used in investing activities for the three months ended March 31, 2022 was $41.6 million, consisting primarily of our purchase of the assets of Disior for $18.2 million, the purchase of our office building of $18.3 million, surgical instrumentation purchases of $4.7 million, and capitalization of certain patent costs.
Net cash used in investing activities for the three months ended March 31, 2021 was $3.0 million, consisting primarily of surgical instrumentation purchases.
26
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the three months ended March 31, 2022 was $35.6 million, consisting primarily of $36.0 million of proceeds from long-term debt, which was partially offset by the long-term debt repayments of $37 thousand and the payment of $0.4 million in debt issuance costs.
Net cash used in financing activities for the three months ended March 31, 2021 was $22 thousand, consisting primarily of $1.0 million of proceeds from the issuance of common stock, which were offset by $0.5 million repayments of our long term debt and $0.5 million of treasury stock repurchased.
Critical Accounting Estimates
Management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenue, expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material.
During the three months ended March 31, 2022, there were no material changes to our critical accounting policies or in the methodology used for estimates from those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
Recently Issued Accounting Pronouncements
See Note 2 to our consolidated financial statements included elsewhere in this quarterly report for new accounting pronouncements not yet adopted as of the date of this report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
The primary objectives of our investment activities are to preserve principal and provide liquidity. Since our results of operations are not dependent on investments, the risk associated with fluctuating interest rates is limited to our investment portfolio, and we believe that a hypothetical 10% change in interest rates would not have a significant impact on our financial statements included elsewhere in this quarterly report. We do not currently use or plan to use financial derivatives in our investment portfolio. We do not currently engage in hedging transactions to manage our exposure to interest rate risk but we do not believe the changing interest rates on our variable interest rate facilities would have a significant impact on our results of operations.
Foreign Currency Risk
Our business is primarily conducted in U.S. dollars. Any transactions that may be conducted in foreign currencies are not expected to have a material effect on our results of operations, financial position or cash flows. As we expand internationally our results of operations and cash flows may become increasingly subject to fluctuations due to changes in foreign currency exchange rates.
Emerging Growth Company
As an emerging growth company under the JOBS Act we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, while we are an emerging growth company, we will not be subject to new or revised accounting standards at the same time that they become applicable to other public companies that are not emerging growth companies. As a result, our financial statements and interim financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
We will remain an emerging growth company until the earliest of (i) the last day of our first fiscal year in which we have total annual gross revenues of $1.07 billion or more, (ii) the last day of the first fiscal year in which we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, with at least $700.0 million of equity securities held by non-affiliates as of the end of the last business day of the second quarter of that fiscal year, (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities, or (iv) the last day of our fiscal year after the fifth anniversary of the date of the completion of our initial offering.
27
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were not effective at the reasonable assurance level because of a material weakness in our internal control over financial reporting as described below.
Changes in Internal Control Over Financial Reporting
Except as set forth below, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Our Management's Annual Report on Internal Control Over Financial Reporting included in our Annual Report on Form 10-K for the year ended December 31, 2021 described material weaknesses in our internal control over financial reporting related to the fact that we did not design or maintain an effective control environment, with the primary contributing factor being lack of adequate staffing with the appropriate technical accounting competency, training and experience to account for more complex accounting matters. We have been in the process of designing, implementing, and testing the operating effectiveness of measures to remediate the material weakness in our internal control over financial reporting. During the three months ended March 31, 2022, we continued to:
The material weaknesses will not be considered remediated until management completes the design and implementation of the measures described above and the controls operate for a sufficient period of time and management has concluded, through testing, that these controls are effective.
Limitations on Effectiveness of Disclosure Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
28
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
On March 23, 2018, Wright Medical, which was subsequently acquired by Stryker Corporation, filed the Wright Complaint against us in the United States District Court for the District of Colorado, Case No. 18-cv-00691-STV. The Wright Complaint, as amended, asserts that we (i) have infringed and continue to infringe nine Wright Medical patents (the Wright Asserted Patents), (ii) have misappropriated and continue to misappropriate Wright Medical trade secrets and confidential material, (iii) have and are unfairly competing with Wright Medical, and (iv) have intentionally interfered with Wright Medical contracts. The Wright Complaint, as amended, requests customary remedies for the claims raised, including (a) a judgment that we have infringed the Wright Medical patents and misappropriated, used and disclosed Wright Medical’s trade secrets, (b) a permanent injunction preventing us from further engaging in the alleged misconduct, including infringing the Wright Medical patents, from manufacturing, selling or distributing products that allegedly infringe such Wright Medical patents and from misappropriating Wright Medical’s trade secrets and confidential information, (c) damages, including punitive and statutory enhanced damages, (d) attorneys’ fees, (e) interest on any foregoing sums, and (f) any relief as the court deems just and equitable, which could include future royalty payments. We filed a motion to dismiss certain of Wright Medical’s claims, which the Court granted-in-part on September 30, 2019. The parties have completed fact discovery and expert discovery for Wright’s claims. On August 28, 2021, the Court granted our motion for leave to file counterclaims against Wright for abuse of process and tortious interference with contracts and reopened discovery. The parties completed discovery on our counterclaims in April, 2022. The parties are currently scheduled to complete summary judgment briefing by June 15, 2022. No trial has been set, but the Court noted that due to COVID-related backlog the case would likely not be tried until the fourth quarter of 2022 or first quarter of 2023.
We currently believe that we have substantial and meritorious defenses to Wright Medical’s claims and intend to vigorously defend our position, including through the trial and appellate stages if necessary. The outcome of any litigation, however, is inherently uncertain and there can be no assurance that the outcome of the case or the costs of litigation, regardless of outcome, will not have a material adverse effect on our business. In addition to Wright Medical’s claims set forth above, we received in December 2021 an additional complaint from Wright Medical covering patents different than the Wright Asserted Patents. While the proceedings in connection with such complaint are in early stages, we do not at this time believe they represent a material liability to our company.
In addition to the above, we may in the ordinary course of business face various claims brought by third parties and we may, from time to time, make claims or take legal actions to assert our rights, including intellectual property rights as well as claims relating to employment matters and the safety or efficacy of our products. Any of these claims could cause us to incur substantial costs and, while we generally believe that we have adequate insurance to cover many different types of liabilities, our insurance carriers may deny coverage, may be inadequately capitalized to pay on valid claims, or our policy limits may be inadequate to fully satisfy any associated costs, damage awards or settlements. If this were to happen, the payment of any such awards could have a material adverse effect on our operations, cash flows and financial position. Additionally, any such claims, whether or not successful, could damage our reputation and business.
Item 1A. Risk Factors.
As of the date of this Quarterly Report on Form 10-Q, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. We may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Mine Safety Disclosures.
Not applicable
29
Item 5. Other Information.
None
Item 6. Exhibits.
The following exhibits are included within or incorporated herein by reference.
Exhibit Number |
|
Description |
3.1 |
|
|
3.2 |
|
|
4.1 |
|
|
4.2 |
|
|
10.1* |
|
|
10.2* |
|
|
10.3* |
|
|
31.1* |
|
|
31.2* |
|
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1* |
|
|
32.2* |
|
|
101.INS |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document |
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* Filed herewith.
The certifications attached as Exhibit 32.1 and 32.2 that accompany this Quarterly Report are deemed furnished and not filed with the U.S. Securities and Exchange Commission and are not to be incorporated by reference into any filing of Paragon 28, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report, irrespective of any general incorporation language contained in such filing.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
PARAGON 28, INC. |
|
|
|
|
|
Date: May 9, 2022 |
|
By: |
/s/ Albert DaCosta |
|
|
Name: |
Albert DaCosta |
|
|
Title: |
Chief Executive Officer |
|
|
|
|
Date: May 9, 2022 |
|
By: |
/s/ Stephen M. Deitsch |
|
|
Name: |
Stephen M. Deitsch |
|
|
Title: |
Chief Financial Officer |
31
Exhibit 10.1
BUSINESS LOAN AGREEMENT
THIS BUSINESS LOAN AGREEMENT (hereinafter referred to as this “Agreement”) is executed to be effective as of March 24, 2022, by and between ZIONS BANCORPORATION, N.A. dba VECTRA BANK COLORADO, its successors and assigns (“Lender”), and PARAGON 28, INC., a Delaware corporation (the “Borrower”).
Recitals
A. Lender has agreed to make a term loan (the “Loan”) to Borrower in the principal amount of Sixteen Million and No/100 dollars ($16,000,000.00).
B. Borrower is executing a promissory note (the “Note”) payable to Lender evidencing the Loan. The Note is secured by, inter alia, the Deed of Trust (as herein defined) encumbering that certain parcel of real property located in Douglas County, Colorado, which is legally described on Exhibit A, and certain other property.
C. Lender is willing to make the Loan to Borrower as set forth above, all upon the terms, covenants, and conditions as set forth in this Agreement.
In consideration of the mutual covenants and agreements herein contained, Borrower and Lender agree as follows:
ARTICLE I
Definitions
Section 1.1 Definitions. The following terms shall have the meanings indicated whenever used herein:
“Accounts” means “accounts” as defined in Article 9 of the UCC.
“Acquisition” means any transaction or series of related transactions for the purpose of or resulting, directly or indirectly, in (a) the acquisition (including through licensing) of all or substantially all of the assets of a Person, or of any business, line of business or division or other unit of operation of a Person, (b) the acquisition of fifty percent (50%) or more of the Equity Interests of any Person, whether or not involving a merger or consolidation with such other Person, or otherwise causing any Person to become a Subsidiary of Borrower, or (c) any merger or consolidation or any other combination with another Person.
“Affiliate” means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.
“Anti-Corruption Laws” means all laws, rules, and regulations of any jurisdiction applicable to Borrower from time to time concerning or relating to bribery or corruption.
“Asset Disposition” means any sale, transfer, assignment or other disposition (including by merger, allocation of assets (including allocation of assets to any series of a limited liability company), division, consolidation or amalgamation, but excluding leases, subleases, licenses or sublicenses of, or dispositions resulting from any casualty or other damage to, any property or asset) by Borrower thereof of any asset of Borrower.
|
|
|
DOCPROPERTY "CUS_DocIDChunk0" 4864-1678-9519.7
“Assignment of Leases and Rents” means that certain Assignment of Leases and Rents entered into by Borrower to the benefit of Lender as of the date hereof.
“Beneficial Ownership Certification” means a certification regarding beneficial ownership as required by the Beneficial Ownership Regulation.
“Beneficial Ownership Regulation” means 31 C.F.R. § 1010.230.
“Borrower Unrestricted Cash” means, as of any date of determination, unrestricted cash and Cash Equivalents of Borrower that (a) is held in the name of Borrower in a Deposit Account or Securities Account maintained with Lender, (b) are not subject to any Lien (other than Permitted Liens), and (c) are not funds for the payment of a drawn or committed but unpaid draft, ACH or EFT transaction as of the applicable date of determination.
“Business Day” means any day that is not a Saturday, Sunday or other day on which commercial banks in Denver are authorized or required by law to remain closed; provided, however, that in the case of a Business Day which relates to the determination of Term SOFR (as defined in the Note), the term “Business Day” means any day (other than a Saturday or Sunday) on which banks generally are open in New York City, New York for the conduct of substantially all of their commercial lending activities and interbank wire transfers can be made on the Fedwire system except a day on which the Securities Industry and Financial Markets Association (SIFMA) recommends that the fixed income departments of its members be closed for the entire day for purposes of trading in United States government securities.
“Capital Expenditures” means, without duplication, any expenditure or commitment to expend money for any purchase or other acquisition of any asset which would be classified as a fixed or capital asset on a consolidated balance sheet of Borrower and its Subsidiaries prepared in accordance with GAAP.
“Capital Lease” means any lease of any property by a Person as lessee which would, in accordance with GAAP, be required to be accounted for as a capital lease on the balance sheet of such Person.
“Cash Equivalents” means, as of any date of determination, any of the following: (a) marketable securities (i) issued or directly and unconditionally guaranteed as to interest and principal by the United States government, or (ii) issued by any agency of the United States the obligations of which are backed by the full faith and credit of the United States, in each case maturing within one (1) year after such date; (b) marketable direct obligations issued by any state of the United States or any political subdivision of any such state or any public instrumentality thereof, in each case maturing within one (1) year after such date and having, at the time of the acquisition thereof, a rating of at least A-1 from S&P or at least P-1 from Moody’s; (c) commercial paper maturing no more than one (1) year from the date of creation thereof and having, at the time of the acquisition thereof, a rating of at least A-1 from S&P or at least P-1 from Moody’s, or carrying an equivalent rating by a nationally recognized rating agency, if both of the two named rating agencies cease publishing ratings of commercial paper issuers generally; (d) certificates of deposit or bankers’ acceptances maturing within one (1) year after such date and issued or accepted by Lender or by any commercial bank organized under the laws of the United States or any state thereof or the District of Columbia that (i) is at least “adequately capitalized” (as defined in the regulations of its primary federal banking regulator), and (ii) has Tier 1 capital (as defined in such regulations) of not less than $100,000,000; and (e) shares of any money market mutual fund that (i) has substantially all of its assets invested continuously in the types of investments referred to in clauses (a) and (b) above, (ii) has net assets of not less than $500,000,000, and (iii) has the highest rating obtainable from either S&P or Moody’s.
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“Change in Control” means the acquisition of “beneficial ownership” (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934), directly or indirectly, by any Person or “group” (within the meaning of the Securities Exchange Act of 1934 and the rules of the SEC thereunder as in effect on the date hereof) other than the equity holders of the Borrower on the Closing Date and the Affiliates thereof, of Equity Interests representing more than 50% of the aggregate ordinary voting power represented by the issued and outstanding Equity Interests of Borrower; provided that to the extent that Borrower is a Person whose Equity Interests are publicly traded on a national securities exchange or “Over the Counter” market, any transfers of such publicly traded shares shall not constitute (or result in) a Change in Control.
“Closing Date” means the date of this Agreement.
“Code” means the Internal Revenue Code of 1986, as amended from time to time.
“Collateral” means (a) the Trust Estate and (b) the leases in respect of the Real Property and such other property related thereto and described in Section 1 of the Assignment of Leases and Rents, in each case, to the extent pledged as security for the Loan and other Obligations under the Security Documents, and in any event excluding any Excluded Property.
“Compliance Certificate” means a certificate duly executed by a Responsible Officer of Borrower, appropriately completed and substantially in the form of Exhibit B hereto.
“Consolidated EBITDA” has the meaning provided in the Compliance Certificate.
“Completion” means that (a) the Improvements are substantially completed in accordance with the Plans, as approved by Lender, paid for in full, free of all mechanics’, labor, materialmen’s and other similar lien claims, and substantial completion has been approved by the General Contractor; and (b) Lender has received acceptable evidence that all requirements of Governmental Authorities and all private restrictions and covenants relating to such Improvements have been complied with or satisfied and that all required certificates of occupancy have been issued (if applicable).
“Completion Date” means the date that is twelve (12) months from the Closing Date (as such date may be extended by Lender in writing in its reasonable discretion).
“Contingent Obligation” means, with respect to any Person, any direct or indirect liability of such Person: (a) with respect to any Indebtedness of another Person (a “Third Party Obligation”) if the purpose or intent of such Person incurring such liability, or the effect thereof, is to provide assurance to the obligee of such Third Party Obligation that such Third Party Obligation will be paid or discharged, or that any agreement relating thereto will be complied with, or that any holder of such Third Party Obligation will be protected, in whole or in part, against loss with respect thereto; (b) with respect to any undrawn portion of any letter of credit issued for the account of such Person or as to which such Person is otherwise liable for the reimbursement of any drawing; (c) under any Hedging Transaction, to the extent not yet due and payable; (d) to make take-or-pay or similar payments if required regardless of nonperformance by any other party or parties to an agreement; or (e) for any obligations of another Person pursuant to any Guarantee or pursuant to any agreement to purchase, repurchase or otherwise acquire any obligation or any property constituting security therefor, to provide funds for the payment or discharge of such obligation or to preserve the solvency, financial condition or level of income of another Person. The amount of any Contingent Obligation shall be equal to the amount of the obligation so Guaranteed or otherwise supported or, if not a fixed and determinable amount, the maximum amount so Guaranteed or otherwise supported.
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“Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. “Controlling” and “Controlled” have meanings correlative thereto.
“Debt Service” means, for any period, an amount equal to the sum of all scheduled interest and principal payments paid in cash for such period (including that portion attributable to Capital Leases in accordance with GAAP), on account of long-term Indebtedness of the Borrower and its Subsidiaries, determined on a consolidated basis in accordance with GAAP (excluding (a) revolving loans incurred under the MidCap Revolving Credit Agreement and (b) net payments (less net credits) under Hedging Transactions to the extent such net payments are allocable to such period in accordance with GAAP, whether or not paid in cash during such period), and calculated net of interest income of Borrower and its Subsidiaries received in cash.
“Deed of Trust” means the Deed of Trust and Fixture Filing (With Assignment of Leases and Rents and Security Agreement) dated as of even date herewith, encumbering the Trust Estate, and securing Borrower’s repayment of the Loan and all other Obligations to Lender under the Loan Documents; provided, however, that in no event shall the Deed of Trust grant (or require the granting of) any Lien on any Excluded Property.
“Deposit Account” means a “deposit account” (as defined in Article 9 of the UCC), an investment account, or other account in which funds are held or invested for credit to or for the benefit of Borrower.
“Distribution” means as to any Person (a) any dividend or other distribution or payment (whether in cash, securities or other property) on, or in respect of, any Equity Interest in such Person (except those payable solely in its Equity Interests), (b) any payment by such Person on account of (i) the purchase, redemption, retirement, defeasance, surrender, cancellation, termination or acquisition of any Equity Interests in such Person or any claim respecting the purchase or sale of any Equity Interest in such Person, or (ii) any option, warrant or other right to acquire any Equity Interests in such Person, (c) any management fees, salaries or other fees or compensation to any Person holding an Equity Interest in a Borrower or a Subsidiary of a Borrower (other than (i) payments of salaries to individuals, (ii) directors fees, and (iii) advances and reimbursements to employees or directors, all in the ordinary course of business), an Affiliate of Borrower or an Affiliate of any Subsidiary of Borrower, (d) any lease or rental payments to an Affiliate or Subsidiary of Borrower, or (e) repayments of or debt service on loans or other indebtedness (other than conversion to Equity Interests) held by an Affiliate of Borrower (other than any Subsidiary) unless permitted under and made pursuant to a Subordination Agreement applicable to such loans or other indebtedness.
“Environmental Agreement” means the Environmental Indemnity Agreement dated as of even date herewith, from Borrower for the benefit of Lender.
“Equipment” means “equipment” as defined in Article 9 of the UCC.
“Equity Interests” means shares of capital stock, partnership interests, membership interests in a limited liability company, beneficial interests in a trust or other equity ownership interests in a Person, and any warrants, options or other rights entitling the holder thereof to purchase or acquire any of the foregoing, but excluding any debt securities convertible into any of the foregoing.
“Events of Default” means certain events and conditions more fully described in Article VII.
“Excluded Property” means, collectively:
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provided that all rights to payment of money due or to become due pursuant to, and all products and proceeds (and rights to the proceeds) from the sale of, any Excluded Property referred to in clause (a) above shall be and at all times remain subject to the security interests created by this Agreement (unless such proceeds would independently constitute Excluded Property).
“Financial Statements” means any and all balance sheets and related statements of operations and cash flows delivered to Lender pursuant to Section 5.7 of this Agreement.
“Financing Statement” means each UCC Financing Statement evidencing the security interest granted by the Deed of Trust in the Collateral.
“Fixed Charge Coverage Ratio” means, for any period, for Borrower and its Subsidiaries on a consolidated basis, the ratio of (a) (i) Consolidated EBITDA for such period minus (ii) Distributions made in cash in such period (other than Distributions between Borrower and any Subsidiary), to (b) Debt Service for such period.
“GAAP” means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the United States accounting profession), which are applicable to the circumstances as of the date of determination.
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“General Contractor” means Project Vision and Boots.
“Governmental Authority” means the government of the U.S., any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government.
“Guarantee” by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Indebtedness or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise), or (b) entered into for the purpose of assuring in any other manner the obligee of such Indebtedness or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part), provided, however, that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term “Guarantee” used as a verb has a corresponding meaning..
“Hedging Transaction” means and includes any transaction now existing or hereafter entered into which is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, forward transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions) or any combination thereof whether linked to one or more interest rates, foreign currencies, commodity prices, equity prices or other financial measures, including without limitation the interest rate hedging transactions entered into pursuant to the Hedging Transaction Documents.
“Hedging Transaction Documents” mean and include all ISDA Master Agreements and Schedules thereto between Borrower and Lender, and all Confirmations (as such term is defined in such ISDA Master Agreement) between Borrower and Lender executed in connection with any Hedging Transactions entered into between Borrower and Lender now or in the future, together with all renewals of, extensions of, modifications of, consolidations of and substitutions for any of the foregoing.
“Improvements” means the improvements described in the Plans, which are to be placed or constructed upon the Real Property, and all other improvements that will be constructed upon the Real Property in accordance with the Plans or otherwise as expressly permitted hereunder or approved in writing by Lender.
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“Indebtedness” of Borrower means, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising and paid on a timely basis and in the ordinary course of business, (d) all Capital Leases of such Person, (e) all non-contingent obligations of such Person to reimburse any bank or other Person in respect of amounts paid under a letter of credit, banker’s acceptance or similar instrument, (f) all obligations secured by a Lien on any asset of such Person, whether or not such obligation is otherwise an obligation of such Person, (h) “earnouts”, purchase price adjustments, profit sharing arrangements, deferred purchase money amounts and similar payment obligations or continuing obligations of any nature of such Person arising out of purchase and sale contracts entered into in connection with an Acquisition or any other material commercial or licensing transaction (provided that the amount of such indebtedness shall be deemed to be the amount that is required as of such date to be reflected as a liability on the balance sheet of such Person in accordance with GAAP), (i) all Indebtedness of others Guaranteed by such Person, and (j) off balance sheet liabilities of such Person. Without duplication of any of the foregoing, Debt of Borrowers shall include the Loans.
“Intellectual Property” means all copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work, whether published or unpublished, any patents, patent applications and like protections, including improvements, divisions, continuations, renewals, reissues, extensions, and continuations-in-part of the same, trademarks, trade names, service marks, rights of use of any name, domain names, or any other similar rights, to the extent permitted by applicable law, any applications therefor, whether registered or not, know-how, operating manuals, trade secret rights, clinical and non-clinical data, rights to unpatented inventions, and any claims for damage by way of any past, present, or future infringement of any of the foregoing.
“Investment” means, with respect to any Person, directly or indirectly, (a) to purchase or acquire any stock or stock equivalents, or any obligations or other securities of, or any interest in, any other Person, including the establishment or creation of a Subsidiary, (b) to make or otherwise consummate any Acquisition, or (c) make, purchase or hold any advance, loan, extension of credit or capital contribution to or in, or any other investment in, any other Person. The amount of any Investment shall be the original cost of such Investment plus the cost of all additions thereto, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect thereto.
“Land” means those certain parcels of real property legally described on Exhibit A hereto.
“Lien” means any mortgage, deed of trust, pledge, charge, encumbrance, security interest, collateral assignment or other lien of any kind.
“Loan Documents” means this Agreement, the Note, the Security Documents, the Environmental Agreement, all Hedging Transaction Documents, and all other documents, instruments or agreements evidencing, governing, or securing the Loan or other Obligations; provided, however, that in no event shall any Loan Document grant (or require the granting of) any Lien on any Excluded Property.
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“Loan Expenses” means all expenses, charges, costs and fees of Lender referred to or required by the terms of this Agreement, including but not limited to all recording, filing, and registration fees; document preparation fees; title insurance charges and premiums; reasonable attorneys’ fees and disbursements of Lender’s attorneys and their staff; copying expenses; loan and commitment fees; reasonable costs of consultants retained by Lender in connection with administering this Agreement; costs of surveys; fees of any engineer and other professionals retained by Lender in connection with this Agreement; costs of determining flood plain status; costs of all environmental audits; appraisal fees; and actual out-of-pocket expenses incurred by Lender in administering this Agreement.
“Margin Stock” means “margin stock” as such term is defined in Regulation T, U, or X of the Board of Governors of the Federal Reserve System.
“Material Adverse Effect” means a material adverse effect on (a) the financial condition, operations, business or properties of Borrower and its Subsidiaries (taken as a whole), (b) the ability of Borrower to perform its obligations (taken as a whole) under the Loan Documents (taken as a whole) to which it is a party, (c)Lender’s Liens on the Collateral granted pursuant to the Loan Documents or the priority of such Liens, in each case, except solely as a result of any action or inaction of Lender (provided that such action or inaction is not caused by Borrower’s failure to comply with the terms of the Loan Documents), or (d) the rights and remedies of Lender under the Loan Documents (taken as a whole) or the ability of Lender to enforce the Obligations or realize upon the Collateral.
“Material Intangible Assets” means all of (a) Intellectual Property owned by Borrower or its Subsidiaries and (b) in-bound license or sublicense agreements or other agreements with respect to rights in Intellectual Property not owned by Borrower or a Subsidiary thereof (other than over-the- counter software, software that is commercially available to the public, open source licenses and enabling licenses in the ordinary course of business), in each case, that are material to the financial condition, business or operations of Borrower and its Subsidiaries (taken as a whole) as determined by Lender in its reasonable discretion.
“MidCap” means the MidCap Revolving Agent and/or the MidCap Term Agent, individually and collectively, as applicable.
“MidCap Credit Agreements” means, collectively, the MidCap Revolving Credit Agreement and the MidCap Term Credit Agreement.
“MidCap Financing Documents” means, collectively, (a) the “Financing Documents” (as defined in the MidCap Revolving Credit Agreement) and (b) the “Financing Documents” (as defined in the MidCap Term Credit Agreement).
“MidCap Revolving Agent” means MidCap Funding IV Trust a Delaware statutory trust, in its capacity as Agent under (and as defined in) the Midcap Revolving Credit Agreement (and its successors and assigns in such capacity).
“MidCap Revolving Credit Agreement” means that certain Credit and Security Agreement (Revolving Loan), dated as of May 6, 2021, by and among Borrower, the other borrowers party thereto, the MidCap Revolving Agent, and the lenders party thereto from time to time (as amended, restated, amended and restated, supplemented, refinanced or otherwise modified from time to time).
“MidCap Term Agent” means MidCap Financial Trust, a Delaware statutory trust, in its capacity as Agent under (and as defined in) the Midcap Term Credit Agreement (and its successors and assigns in such capacity).
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“MidCap Term Credit Agreement” means that certain Credit and Security Agreement (Term Loan), dated as of May 6, 2021, by and among Borrower, the other borrowers party thereto, the MidCap Term Agent, and the lenders party thereto from time to time (as amended, restated, amended and restated, supplemented, refinanced, or otherwise modified from time to time).
“Obligations” means all unpaid principal of and accrued and unpaid interest on the Loan, all accrued and unpaid fees and all expenses, reimbursements, indemnities and other obligations and indebtedness (including interest and fees accruing during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding), obligations and liabilities of Borrower to Lender or any indemnified party, individually or collectively, existing on the Closing Date or arising thereafter, direct or indirect, joint or several, absolute or contingent, matured or unmatured, liquidated or unliquidated, secured or unsecured, arising by contract, operation of law or otherwise, arising or incurred under this Agreement or any of the other Loan Documents or in respect of any of the Loans made or reimbursement or other obligations incurred or other instruments at any time evidencing any thereof, including, without limitation, amounts owing to Lender or its Affiliates pursuant to Hedging Transactions under the Hedging Transaction Documents.
“OFAC” means the Office of Foreign Assets Control of the United States Department of the Treasury.
“ordinary course of business” means, in respect of any transaction involving Borrower or any Subsidiary, the ordinary course of Borrower’s or Subsidiary’s business and undertaken by such Person in good faith and not for purposes of evading any covenant or restriction in any Loan Document.
“Other Loan Documents” has the meaning set forth in Section 2.6.
“Permitted Acquisition” means any Acquisition by Borrower; provided that, so long as the MidCap Credit Agreements have not been terminated or repaid (including pursuant to a refinancing or restructuring thereof), such Acquisition is not prohibited under the MidCap Credit Agreements. In the event that the MidCap Credit Agreements are terminated or repaid (including pursuant to a refinancing or restructuring thereof), all restrictions related to Acquisitions will cease and “Permitted Acquisition” shall mean any Acquisition by Borrower.
“Permitted Asset Dispositions” means the following Asset Dispositions:
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“Permitted Contest” means, with respect to any tax obligation or other obligation allegedly or potentially owing from Borrowers or its Subsidiary to any governmental tax authority or other third party, a contest maintained in good faith by appropriate proceedings promptly instituted and diligently conducted and with respect to which such reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made on the books and records and financial statements of the Borrower or the applicable Subsidiary; provided, however, that (a) compliance with the obligation that is the subject of such contest is effectively stayed during such challenge; (b) Borrower’s and its Subsidiaries’ title to, and its right to use, the Collateral is not adversely affected thereby and Lender’s Lien and priority on the Collateral are not adversely affected, altered or impaired thereby; (c) the Collateral or any part thereof or any interest therein shall not be in any danger of being sold, forfeited or lost by reason of such contest by Borrower or its Subsidiaries; and (d) upon a final determination of such contest, Borrower and its Subsidiaries shall promptly comply with the requirements thereof.
“Permitted Contingent Obligations” means:
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“Permitted Debt” means:
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“Permitted Distributions” means the following Distributions: (a) Distributions by Borrower to any Subsidiary; (b) Distributions payable solely in Equity Interests so long as such Distributions do not result in a Change in Control; (c) Distributions made in cash, provided that an Event of Default does not exist at the time of such Distribution; (d) Distributions of Equity Interests upon the conversion or exchange of Equity Interests (including options and warrants) or Subordinated Debt (and payments in respect of fractional shares); (e) payments in lieu of fractional shares of equity securities arising out of stock dividends, splits, combinations or conversions; (f) the issuance of its Equity Interests upon the exercise of warrants or options to purchase Equity Interests of Borrower and (g) any other Distributions not otherwise prohibited under the MidCap Credit Agreements.
“Permitted Exceptions” shall have the meaning set forth in the Deed of Trust.
“Permitted Investments” means:
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“Permitted Liens” means:
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“Permitted Refinancing” means Indebtedness constituting a refinancing, extension or renewal of Indebtedness; provided that the refinanced, extended, or renewed Indebtedness (a) has an aggregate outstanding principal amount not greater than the aggregate principal amount of the Indebtedness being refinanced or extended (plus any reasonable and customary interest, fees, premiums and costs and expenses), (b) has a weighted average maturity (measured as of the date of such refinancing or extension) and maturity no shorter than that of the Indebtedness being refinanced or extended, (c) is not entered into as part of a sale leaseback transaction, (d) is not secured by a Lien on any Collateral other than the collateral securing the Indebtedness being refinanced or extended, (e) the obligors of which are the same as the obligors of the Indebtedness being refinanced or extended, (f) is otherwise on terms no less favorable to Borrower and its Subsidiaries, taken as a whole, than those of the Indebtedness being refinanced or extended, and (g) no Event of Default has occurred and is continuing at the time such refinancing, extension or renewal occurs or would result therefrom.
“Person” means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, governmental authority or other entity.
“Plans” means the final renovation plans for the Improvements, including drawings, specifications, details and manuals, as approved by Lender.
“Real Property” means the Land and all appurtenances thereto (including all water rights and grazing privileges, if any), together with any improvements now existing and from time to time constructed, erected and installed thereon.
“Responsible Officer” means any of the President, Chief Executive Officer, Chief Financial Officer, Vice President of Finance and Controller, or any other officer of Borrower requested by Borrower and acceptable to Lender.
“Sanctioned Country” means, at any time, a country, region or territory which is the subject or target of any Sanctions (at the time of this Agreement, Crimea, Cuba, Iran, North Korea, and Syria).
“Sanctioned Person” means, at any time, (a) any Person listed in any Sanctions-related list of designated Persons maintained by OFAC or the U.S. Department of State, (b) any Person operating, organized or resident in a Sanctioned Country, or (c) any Person owned or controlled by any such Person or Persons described in the foregoing clauses (a) or (b) or (d) any Person otherwise the subject of any Sanctions.
“Sanctions” means all economic or financial sanctions or trade embargoes imposed, administered or enforced from time to time by the U.S. government, including those administered by the OFAC or the U.S. Department of State.
“SEC” means the Securities and Exchange Commission of the United States.
“Securities Account” means a “securities account” (as defined in Article 9 of the UCC), an investment account, or other account in which investment property or securities are held or invested for credit to or for the benefit of Borrower.
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“Security Documents” means the Deed of Trust, Financing Statements, and any and all other documents, instruments, or agreements securing the Loan and/or other Obligations; provided, however, that in no event shall any Security Document grant (or require the granting of) any Lien on any Excluded Property.
“Subordinated Debt” means any Indebtedness of Borrower incurred pursuant to the terms of the Subordinated Debt Documents and with the prior written consent of Lender, all of which documents must be in form and substance acceptable to Lender in its sole discretion.
“Subordinated Debt Documents” means any documents evidencing and/or securing Indebtedness governed by a Subordination Agreement, all of which documents must be in form and substance acceptable to Lender in its sole discretion.
“Subordination Agreement” means each agreement between Lender and another creditor of Borrower, as the same may be amended, supplemented, restated or otherwise modified from time to time in accordance with the terms thereof, pursuant to which the Indebtedness owing from Borrower and/or the Liens securing such Indebtedness granted by Borrower to such creditor are subordinated in any way to the Obligations and the Liens created under the Security Documents, the terms and provisions of such Subordination Agreements to have been agreed to by and be acceptable to Lender in the exercise of its sole discretion.
“subsidiary” means, with respect to any Person (the “parent”) at any date, any corporation, limited liability company, partnership, association or other entity of which securities or other ownership interests representing more than 50% of the equity, or in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, controlled or held.
“Subsidiary” means any direct or indirect subsidiary of Borrower.
“Taxes” means all present or future taxes, levies, imposts, duties, deductions, withholdings (including backup withholding), assessments, fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto.
“Term Loan Maturity Date” shall have the meaning set forth in the Note.
“Title Company” means First American Title Insurance Company, and any reinsurers or coinsurers required by Lender, which company, reinsurers, and coinsurers shall be satisfactory to Lender in its absolute and sole discretion under this Agreement.
“Trust Estate” has the meaning set forth in the Deed of Trust.
“UCC” means the Uniform Commercial Code as in effect from time to time in the State of Colorado or in any other state, the laws of which are required to be applied in connection with the issue of perfection of security interests in any Collateral.
“USA PATRIOT Act” means the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001
Section 1.2 Incorporation of Recitals. The foregoing Recitals are hereby incorporated in this Agreement and expressly made a part hereof.
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Section 1.3 Certain References. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine, and neuter forms. The words “hereof”, “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Article, Section, Schedule, and Exhibit references are to this Agreement unless otherwise specified. All such Schedules and Exhibits are incorporated herein by such references and made a part hereof. The words “include,” “includes,” and “including” shall be deemed to be followed by “without limitation” whether or not they are in fact followed by such words or words of like import. The word “will” shall be construed to have the same meaning and effect as the word “shall”. The words “asset” and “property” shall be construed to have the same meaning and effect and to refer to any right or interest in or to assets and properties of any kind whatsoever, whether real, personal or mixed, and whether tangible or intangible (including trademarks, trade names, copyrights, patents and other intellectual property). References herein to any agreement, document, or instrument (including this Agreement) shall also include and refer to any amendment, modification, restatement, renewal, or extension thereof.
Section 1.3 Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder (including, without limitation, determinations made pursuant to the exhibits hereto) shall be made, and all financial statements required to be delivered hereunder shall be prepared on a consolidated basis in accordance with GAAP applied on a basis consistent with the most recent audited consolidated financial statements of Borrower and its consolidated Subsidiaries delivered to Lender on or prior to the Closing Date, except with respect to unaudited financial statements (i) for non-compliance with FAS 123R, and (ii) for the absence of footnotes and subject to year-end audit adjustments; provided that (x) all obligations of any Person that are or would have been treated as operating leases for purposes of GAAP prior to the issuance by the Financial Accounting Standards Board on February 25, 2016 of an Accounting Standards Update (the “ASU”) shall continue to be accounted for as operating leases for purposes of all financial definitions, calculations and covenants for purposes of this Agreement (whether or not such operating lease obligations were in effect on such date), notwithstanding the fact that such obligations are required in accordance with the ASU (on a prospective or retroactive basis or otherwise) to be treated as capitalized lease obligations in accordance with GAAP. If at any time any change in GAAP would affect the computation of any financial ratio or financial requirement set forth in any Loan Document, and either Borrower or the Lender shall so request, Lender and Borrower shall negotiate in good faith to amend such ratio or requirement to preserve the original intent thereof in light of such change in GAAP; provided, however, that until so amended, (a) such ratio or requirement shall continue to be computed in accordance with GAAP prior to such change therein and (b) Borrower shall provide to Lender financial statements and other documents required under this Agreement which include a reconciliation between calculations of such ratio or requirement made before and after giving effect to such change in GAAP. Notwithstanding any other provision contained herein, all terms of an accounting or financial nature used herein shall be construed, and all computations of amounts and ratios referred to herein shall be made, without giving effect to any election under Statement of Financial Accounting Standards 159 (or any other Financial Accounting Standard having a similar result or effect) to value any Debt or other liabilities of Borrower or any Subsidiary at “fair value”, as defined therein.
ARTICLE II
The Loan
Section 2.1 Agreement to Borrow and Lend. Subject to the terms and conditions set forth herein, Lender agrees to make the Loan to Borrower on the Closing Date.
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Section 2.2 Maturity Date. The entire outstanding principal amount of the Loan, together with all accrued but unpaid interest thereon and all other outstanding Obligations, shall be due and payable in full on the Term Loan Maturity Date.
Section 2.3 Interest Rate and Payments. The Loan shall bear interest at the rate set forth in the Note. Borrower shall make payments of principal and interest on the Loan at the times and in the manner set forth in the Note.
Section 2.4 Use of Loan Proceeds. The Loan shall be used by Borrower solely for refinancing the Real Property and completion of the Improvements in accordance with the Plans.
Section 2.5 No Further Disbursements. Lender has no obligation to disburse Loan proceeds at the Closing Date or thereafter except as provided herein. In its sole discretion, Lender may make further disbursements (for example, to pay mechanics’ liens or otherwise preserve the Collateral), following written demand to Borrower and Borrower’s failure to pay within the time limits provided in such demand, and all such disbursements will be deemed advances under the Note and secured by the Security Documents.
Section 2.6 Security. The Loan, and all other present or future Obligations of Borrower to Lender, pursuant to any other Loan Documents, and all further renewals, extensions, modifications, and restatements of the foregoing, whether or not Borrower executes any extension agreement or renewal instruments (collectively, “Other Loan Documents”), shall be secured by the Security Documents and by such other documents, instruments and agreements as Lender may reasonably request in order to carry out the terms and conditions of this Agreement and the Loan Documents. Notwithstanding the foregoing or anything in this Agreement or any other Loan Document to the contrary, in no event (a) shall this Agreement, any other Loan Document, or any other document, instrument or agreement referred to in this Section 2.6, grant (or require the granting of) any Lien on any Excluded Property or (b) shall the Collateral include any Excluded Property.
ARTICLE III
Loan Disbursements
Section 3.1 Conditions Precedent to Disbursement of Loan Proceeds. Lender shall have no obligation to make disbursements of the proceeds of the Loan unless all of the following conditions precedent are satisfied (all documents to be delivered to the Lender pursuant to the terms of this Agreement shall be satisfactory in form and substance to the Lender and its counsel in their reasonable discretion):
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Section 3.2 Other Payments. At its discretion, Lender, after giving notice to Borrower, may pay from the undisbursed proceeds of the Loan any of the following:
(a) Loan Expenses; provided, however, that all Loan Expenses (after giving credit to Borrower for any amounts previously paid to Lender for application to Loan Expenses) incurred through the Closing Date (other than those agreed to be paid by Lender set forth herein) shall be paid by Borrower at the closing of the Loan;
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(b) subject to Sections 5.13(a) and 6.1, any amounts necessary to clear title to the Real Property or to pay liens and encumbrances upon the Real Property prior to the lien of the Deed of Trust;
(c) any other amounts Lender may reasonably determine are due and payable in connection with the terms and provisions hereof or of the Note or the Loan Documents, or to preserve any collateral for the Obligations; and
(d) interest and/or fees on the Loan or other Obligations, if not otherwise paid by Borrower.
Any such payments shall for all purposes be deemed to be disbursements of the principal of the Loan.
ARTICLE IV
Representations and Warranties of Borrower
Borrower promises that each representation and warranty set forth below is and will be true, accurate and correct as of the Closing Date. Further, each Loan is Borrower’s representation and warranty on that date that the representations and warranties in this Agreement remain true, accurate, and complete in all material respects; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date.
Section 4.1 Organization and Qualification.
(a) Borrower is, duly organized or incorporated, as applicable, validly existing, and in good standing under the laws of the State of its organization or incorporation, and is qualified to in each jurisdiction where such qualification is legally required, and is entitled to own or lease property in the places where such property is now owned or leased and is empowered to conduct business as now conducted; and
(b) Borrower has not carried on business under any name other than that shown in this Agreement within five years prior to the date of this Agreement.
Section 4.2 Authority and Enforceability. Borrower has full power to enter into and perform its obligations under this Agreement and the Loan Documents to which it is a party and all other documents contemplated hereby or executed pursuant hereto. The execution and delivery of this Agreement and the Loan Documents and all other documents contemplated hereby or executed pursuant hereto and the performance and observance of their terms, conditions and obligations have been duly authorized by all necessary action on the part of Borrower. The Loan Documents to which it is a party constitute, and any other agreement required hereby, will constitute, when executed and delivered by Borrower to Lender, binding obligations of Borrower, enforceable in accordance with their terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, and other laws affecting creditors’ rights generally and by principles of equity.
Section 4.3 No Conflict. The execution and delivery of the Loan Documents to which Borrower is party and consummation of all the transactions contemplated hereby and thereby, do not and will not conflict with, or be in contravention of, as applicable, Borrower’s governing documents, any law, order, rule or regulation applicable to Borrower, or any agreement or instrument to which Borrower is a party or by which the Real Property is bound or affected, and will not result in the creation of any lien, charge or encumbrance of any nature upon the Real Property other than liens permitted under Section 6.1.
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Section 4.4 Financial Condition.
(a) Any Financial Statements of Borrower delivered to Lender are accurate and complete in all material respects, have been prepared, if for Borrower, in accordance with GAAP, and fairly represent the financial condition of the subjects thereof as of the respective dates of such Financial Statements. Borrower knows of no material contingent liabilities affecting Borrower that are not disclosed in any such Financial Statements. Since the date of the most recent Financial Statements (if any), there has been no material adverse change in Borrower’s financial condition, assets, liabilities, or business nor has any other event or condition of any character occurred or arisen that could reasonably be expected to have a Material Adverse Effect. No additional material obligations have been entered into by Borrower since the date of its most recent Financial Statements (if any) other than as disclosed to Lender in writing.
(b) No bankruptcy or insolvency proceedings are pending or contemplated by Borrower or, to Borrower’s knowledge, against Borrower.
Section 4.5 Litigation. Except as disclosed on Borrower’s 10-K filed with the SEC, there is no action, suit, or legal proceeding pending or, to the best or Borrower’s knowledge threatened (or, to the best of Borrower’s knowledge, any basis therefor) against Borrower or affecting the properties or assets of Borrower in any court or before any arbitrator of any kind or before or by any governmental body which would have a material adverse effect on Borrower’s ability to perform its obligations under any Loan Document to which it is a party. Borrower is not in default with respect to any order of any court, arbitrator, or governmental body, and Borrower is not subject to or a party to any order of any court or governmental body arising out of any action, suit, or proceeding under any statute or other law respecting antitrust, monopoly, restraint of trade, unfair competition or similar matters. For the purposes of this Section, the term “governmental body” includes any federal, state, municipal, or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, and the term “order” includes any order, writ, injunction, decree, judgment, award, determination, direction, or demand.
Section 4.6 Taxes. Borrower has filed all federal, state, and local tax returns that are required to be filed and has paid all taxes shown on such returns and on all assessments received by it to the extent that such taxes and assessments have become due. All federal and state income taxes and all other taxes and assessments of any nature with respect to which Borrower is obligated have been paid when due.
Section 4.7 Title. Title to all Collateral described in the Security Documents is (or will be, with respect to Collateral hereafter acquired) vested solely in Borrower, free and clear of all Liens, except for Liens permitted under Section 6.1. Except as disclosed by the commitment for a mortgagee’s title insurance policy to be issued by the Title Company to Lender, Borrower has not made any contract or arrangement of any kind the performance of which by another party could give rise to a Lien on the Real Property.
Section 4.8 No Other Financing. Borrower has not received any other financing for any purpose secured by the Real Property or any other collateral securing the Obligations, other than Permitted Debt.
Section 4.9 No Default. There is no default on the part of Borrower under this Agreement or any document executed by Borrower in connection herewith and no event has occurred that with notice or the passage of time or both would constitute a default hereunder or under any such document.
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Section 4.10 Compliance with Laws; Environmental Audit.
(a) To Borrower’s knowledge, the Real Property and any and all operations conducted thereon comply with all applicable federal, state, and local laws, including without limitation any and all applicable building, zoning, subdivision, environmental, and other laws, ordinances, and regulations affecting the Real Property or any operation thereon.
(b) Borrower has investigated the current and prior uses of the Real Property, have inspected the Real Property and have determined that, except as disclosed in any environmental reports delivered to Lender, the Real Property is not contaminated by any hazardous substance or environmental pollutants in violation of any federal, state or local environmental statutes or ordinances, including without limitation violation of the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Hazardous Materials Transportation Act and the Resource, Conservation and Recovery Act, all as amended from time to time.
(c) Borrower has not caused any hazardous materials, hazardous wastes, hazardous substances, toxic chemicals, pollutants, or other contaminants to be located on, in, or adjacent to the Real Property, or in the soils or ground water of the Real Property, nor does Borrower have knowledge of any such hazardous materials, hazardous wastes, hazardous substances, toxic chemicals, pollutants, or other contaminants located on, in, or adjacent to the Real Property, or in the soils or ground water of the Real Property.
Section 4.11 No Brokers. Borrower has dealt with no broker, finder or other party entitled to any commission, fee, or other compensation in connection with the Loan. Borrower agrees to defend, indemnify and hold Lender and its officers, directors, employees, and agents harmless from any and all manner of cost, liability, expense, and damage whatsoever, including, but not limited to reasonable attorneys’ fees, arising from any breach of this Section.
Section 4.12 Information Correct. All information furnished in any document required to be furnished by Borrower under or in connection with this Agreement or the other Loan Documents is accurate and complete in all material respects.
Section 4.13 Knowledge of Encumbrances. Borrower has no knowledge of easements, or encumbrances relating to the Real Property that are not of record.
Section 4.14 Investment Company Status. Borrower is not an “investment company” as defined in, or subject to regulation under, the Investment Company Act of 1940.
Section 4.15 Subsidiaries. Borrower has no subsidiaries other than those identified on Schedule 4.15.
Section 4.16 Disclosure. Borrower has disclosed to the Lender all agreements, instruments and corporate or other restrictions to which Borrower is subject, and all other matters known to it, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. None of the reports, financial statements, certificates or other information furnished by or on behalf of the Borrower to the Lender in connection with the negotiation of this Agreement or any other Loan Document (as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that, with respect to projected financial information, the Borrower represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time delivered and, if such projected financial information was delivered prior to the Closing Date, as of the Closing Date.
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Section 4.17 Federal Reserve Regulations. No part of the proceeds of the Loan has been used or will be used, whether directly or indirectly, for any purpose that entails a violation of any of the Regulations of the Board of Governors of the Federal Reserve System of the U.S., including Regulations T, U and X.
Section 4.18 Anti-Corruption Laws and Sanctions TC “SECTION 3.21. Anti-Corruption Laws and Sanctions “ \f C \l “2” . Borrower has implemented and maintains in effect policies and procedures designed to ensure compliance by Borrower, its Subsidiaries, and their respective directors, officers, employees and agents with Anti-Corruption Laws and applicable Sanctions, and Borrower, its Subsidiaries and their respective officers and directors and to the knowledge of Borrower its employees and agents, are in compliance with Anti-Corruption Laws and applicable Sanctions in all material respects and are not knowingly engaged in any activity that would reasonably be expected to result in Borrower being designated as a Sanctioned Person. None of (a) Borrower, any Subsidiary, any of their respective directors or officers or (b) to the knowledge of Borrower, any agent of Borrower or any Subsidiary that will act in any capacity in connection with or benefit from the credit facility established hereby, is a Sanctioned Person. None of the Loan, use of proceeds, or any transaction contemplated by this Agreement or the other Loan Documents will violate Anti-Corruption Laws or applicable Sanctions.
ARTICLE V
Affirmative Covenants of Borrower
Until payment or performance in full of all the Obligations (other than contingent indemnification or expense reimbursement obligations that have not yet been asserted), Borrower shall:
Section 5.1 Pay Note. Duly and punctually pay or cause to be paid in lawful money of the United States, the principal and interest on the Note on the dates, at the place and in the manner set forth therein, and perform and observe all other Obligations.
Section 5.2 Compliance with Laws. Comply promptly with all laws, rules, regulations, resolutions, ordinances, and codes (including without limitation all environmental laws and regulations) applicable to Borrower, the conduct and operation of its business, the Real Property, and Borrower’s ownership and development thereof, and keep in effect all permits or approvals obtained in connection therewith.
Section 5.3 Permits, Licenses and Approvals. Obtain properly, comply with, and keep in effect all permits, licenses, and approvals required from governmental bodies in order to operate the Property as contemplated by Borrower.
Section 5.4 Purchase of Materials. Not to purchase or contract for any materials, equipment, furnishings, fixtures or articles of personal property to be placed or installed on the Real Property under any security agreement in which the seller reserves or purports to reserve title or the right of removal or repossession, or the right to consider them personal property after their incorporation in the Real Property, unless Lender in each instance has authorized Borrower to do so in writing.
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Section 5.5 Insurance, Etc. Maintain and keep in force the policies of insurance and bonds required by the Deed of Trust, with Lender named as loss payee, mortgagee, and additional insured, as its interest may appear, in amounts, form and content and through an insurer or insurers, all reasonably satisfactory to Lender. All policies of insurance required hereunder must be issued by companies approved by Lender having an A.M. Best’s rating reasonably acceptable to Lender, with limits, coverage, forms, deductibles, inception and expiration dates and cancellation provisions reasonably acceptable to Lender. In addition, each required property insurance policy must contain a Lender’s Loss Payable Form (Form 438 BFU or equivalent) in favor of Lender and provide that all proceeds be payable to Lender to the extent of its interest. Such insurance shall include, at a minimum, fire and extended coverage for full insurable value (based on replacement value) and include a standard mortgagee’s clause with stipulation that coverage will not be cancelled or diminished without a minimum of 30 days prior written notice to Lender, and without disclaimer of the insurer’s liability for failure to give such notice. When any required insurance policy expires, Borrower must furnish Lender with proof acceptable to Lender that the policy has been reinstated or a new policy issued, continuing in force the insurance covered by the expired policy.
Section 5.6 Accounts and Records. Keep and maintain full and accurate accounts and records of operations in accordance with accounting principles applicable to businesses of the type in which Borrower is engaged and consistent with principles heretofore applied by Borrower in preparation of the Financial Statements supplied to Lender and permit Lender by its duly authorized agents to inspect and copy such accounts and records at any time and date designated by Lender as long as Borrower receives at least ten (10) days’ written notice of such designation.
Section 5.7 Reporting Requirements. Borrower will furnish or cause to be furnished to Lender:
(a) within 120 days after the end of each fiscal year of Borrower, its audited consolidated financial statements prepared under GAAP, consistently applied, together with an unqualified opinion on such consolidated financial statements from an independent certified public accounting firm (other than a “going concern” statement, explanatory note or like qualification or exception resulting solely from (i) an upcoming maturity date of indebtedness occurring within one year from the time such opinion is delivered or (ii) anticipated financial covenant non-compliance);
(b) within 45 days after the end of each of the first three fiscal quarters of each fiscal year of Borrower, its consolidated financial statements as of the end of and for such fiscal quarter and the then elapsed portion of such fiscal year, prepared under GAAP in all material respects (subject to normal year-end adjustments and the absence of footnotes), consistently applied, setting forth in each case in comparative form the figures for (or, in the case of the balance sheet, as of the end of) the corresponding period or periods of the previous fiscal year;
(c) concurrently with any delivery of Financial Statements under clause (a) or (b) above, a Compliance Certificate (i) certifying, in the case of the Financial Statements delivered under clause (b) above, as presenting fairly in all material respects the financial condition and results of operations of Borrower and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and the absence of footnotes, (ii) certifying as to whether an Event of Default has occurred and, if an Event of Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, and (iii) setting forth reasonably detailed calculations demonstrating compliance with Section 5.21;
(d) omitted;
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(e) within ten (10) Business Days of delivery or filing thereof, copies of all statements, reports and notices made available to Borrower’s security holders and copies of all reports and other filings made by Borrower with any stock exchange on which any securities of Borrower are traded and/or the Securities and Exchange Commission; and
(f) such other readily available information regarding the operations, changes in ownership of Equity Interests, business affairs and financial condition of Borrower, or compliance with the terms of this Agreement, as Lender may reasonably and customarily request.
Documents required to be delivered pursuant to this Section 5.7 may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date (i) on which Borrower (or a representative thereof) (x) posts such documents or (y) provides a link thereto on its website; provided that Borrower shall promptly notify (which notice may be by facsimile or electronic mail) Lender of the posting of any such documents at its website address and provide to Lender by electronic mail electronic versions (i.e., soft copies) of such documents; (ii) in respect of the items required to be delivered pursuant to Section 5.7(e) above in respect of information filed by Borrower with any securities exchange or with the SEC or any analogous governmental or private regulatory authority with jurisdiction over matters relating to securities (other than Form 10-Q reports and Form 10-K reports described in Sections 5.7(a) and (b), respectively), on which such items have been made available on the SEC website or the website of the relevant analogous governmental or private regulatory authority or securities exchange.
Notwithstanding the foregoing, the obligations in clauses (a) and (b) of this Section 5.7 may instead be satisfied with respect to any financial statements of Borrower by filing Borrower’s Form 10-K or 10-Q, as applicable, with the SEC or any securities exchange, in each case, within the time periods specified in such paragraphs and without any requirement to provide notice of such filing to Lender.
Section 5.8 Borrower’s Existence. (a) Maintain and preserve the existence of Borrower as a corporation in the State of Delaware and (b) maintain its right to transact business in Colorado and in all other states where its activities and ownership of assets are such that qualification to transact business is necessary under the laws of such states unless, solely in the case of this clause (b), a failure to do so could not reasonably be expected to have a Material Adverse Effect.
Section 5.9 Notifications. Promptly notify Lender in writing upon (a) becoming aware of any Event of Default or any event that would become an Event of Default upon notice or the passage of time or both, (b) any Material Adverse Effect, and (c) the pendency or threat (in writing) of any material litigation or arbitration and of any tax deficiency or other proceeding before any governmental body or official affecting Borrower or the Real Property, in each case under this clause (c), which if adversely determined, would reasonably be expected to have a Material Adverse Effect or which in any manner calls into question the validity or enforceability of any Financing Document.
Section 5.10 Bonds. Notify Lender within ten (10) days following receipt of any written notice of lien relating to the Real Property (other than a Permitted Lien). Within ten (10) days written request from Lender for the posting of a bond with respect to any lien (other than a Permitted Lien), Borrower shall furnish a corporate surety bond or affirmative title insurance protection, in form and with companies reasonably satisfactory to Lender.
Section 5.11 Protection of Real Property. Protect and insure the Real Property, or cause such protection and insurance, including all fixtures and all personal property stored on the Real Property for installation on the Real Property, from removal, destruction and damage.
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Section 5.12 Indemnities. Provide, or cause to be provided, Lender and Title Company with such indemnities of Borrower as Lender or such Title Company may reasonably request, including without limitation any indemnification that Title Company may require to provide a title insurance policy to Lender.
Section 5.13 Payment of Taxes and Other Obligations.
(a) Duly and punctually pay and discharge all taxes, assessments, and other charges against Borrower or the Real Property prior to the date when they shall become delinquent, and all charges for labor, materials, and supplies owed by Borrower that if unpaid might become a lien against any part of the Real Property, except that Borrower may contest any taxes, assessments, or charges in good faith by appropriate proceedings, and Borrower shall pay, or cause to be paid, the taxes, assessments or charges notwithstanding such contest, if, in the opinion of Lender, the Real Property is in jeopardy or in danger of being forfeited, sold at judicial sale or sheriff’s sale, or foreclosed.
(b) Duly and punctually pay principal and interest on all of Borrower’s debt obligations and the amounts due on all lease and other obligations of Borrower.
Section 5.14 Payment of Expenses. Pay within ten (10) days following written demand therefore all Loan Expenses.
Section 5.15 Credit Investigation. Permit Lender to make a credit investigation of Borrower in such sufficient detail as Lender may reasonably require. Such credit information may be updated periodically by Lender to assure maintenance of good credit standing during the term of the Loan or any extension thereof.
Section 5.16 Cooperation. Promptly execute any and all documents and take any and all actions reasonably required by Lender in connection with any action taken or proposed to be taken by Lender under the provisions of Section 7.2.
Section 5.17 Use of Proceeds. Use the proceeds of the Loan only to refinance the Real Property and to make improvements to the Real Property.
Section 5.18 Further Assurances. From time to time record, register, and file all such notices, statements and other documents and take such other steps, including without limitation, effecting the amendment of any Security Document, as may be necessary as Lender may from time to time reasonably request to render fully valid and enforceable under all applicable laws the rights, liens and priorities of Lender with respect to all security in the Collateral from time to time furnished under this Agreement or intended to be so furnished, in each case in such form and at such times as shall be reasonably satisfactory to Lender, and pay all fees and expenses incident to compliance with this Section.
Section 5.19 Indemnity. Borrower shall indemnify, defend with counsel acceptable to Lender, and hold Lender harmless from and against all liabilities, claims, actions, damages, costs, and expenses (including reasonable legal fees and expenses of Lender’s separate counsel) arising out of or resulting from the ownership, operation, or use of the Real Property, regardless of the basis for such claims, other than (a) matters caused by the gross negligence or willful misconduct of Lender, or (b) matters resulting from action which occur after receipt of a deed of foreclosure, deed-in-lieu of foreclosure or date Lender takes possession of the Real Property as long as such matters do not relate back to actions or events which occurred during or prior to Borrower’s ownership, operation or use of the Real Property.
Section 5.20 Borrower’s Accounts. Borrower shall maintain its primary deposit accounts with Lender.
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Section 5.21 Financial Covenant. Borrower will maintain, from and after the Closing Date, to be tested as of the last day of each fiscal quarter of Borrower (commencing with the fiscal quarter ending June 30, 2022), a Fixed Charge Coverage Ratio of not less than 1.15 to 1.00, which shall be calculated on a trailing four quarter basis.
Section 5.22 Beneficial Ownership. During any period in which Borrower is not a Person whose stock is publicly traded on the New York Stock Exchange or Nasdaq, to the extent that Borrower constitutes a “legal entity customer” under (and as defined in) the Beneficial Ownership Regulation, Borrower agrees to promptly notify Lender (a) of any change in direct or indirect ownership interests in the Borrower as reported in the Beneficial Ownership Certification or other similar certification provided to Lender prior to or in connection with the execution of this Agreement (the “Certification”), or (b) if the individual with significant managerial responsibility identified in the Certification ceases to have that responsibility or if the information reported about that individual changes. Borrower hereby agrees to provide such information and documentation as Lender may request during the term of the Loan to confirm or update the continued accuracy of the any information provided in connection with the foregoing.
ARTICLE VI
Negative Covenants of Borrower
Until payment and performance in full of all of the Obligations (other than contingent indemnification or expense reimbursement obligations that have not yet been asserted), Borrower shall not, without the prior written consent of Lender:
Section 6.1 Liens. Create, assume, incur or suffer to exist any mortgage, pledge, security interest, lien, or other encumbrance upon any Collateral other than Permitted Liens.
Section 6.2 Value of Property. Do or suffer to be done any act whereby the value of any part of the Real Property could reasonably be expected to be reduced below the appraised value of the Real Property as of the date hereof.
Section 6.3 Assignment. Assign or attempt to assign any of its rights or delegate any of its duties hereunder or under the Loan Documents, except as otherwise permitted hereunder.
Section 6.4 Omitted.
Section 6.5 Change in Business. (a) Make or permit any material adverse change in Borrower’s financial condition, assets, or liabilities (except as would not be reasonably expected to result in a Material Adverse Effect), (b) change materially the nature or kind of business conducted by Borrower (provided that, notwithstanding the foregoing, Borrower shall be permitted to engage in any line of business engaged in by Borrower or its Subsidiaries on the Closing Date or that are reasonably related, complementary or incidental thereto or are extensions thereof), or (c) change Borrower’s fiscal year.
Section 6.6 Consolidations, Mergers, and Sales of Assets.
(a) Consolidate or merge or amalgamate with or into any Person unless Borrower is the surviving entity of such consolidation, merger or amalgamation; or
(b) Make or consummate any Asset Disposition other than Permitted Asset Dispositions.
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Section 6.7 Distributions. Make any Distributions other than Permitted Distributions.
Section 6.8 Investments. Directly or indirectly (a) acquire, make, own, hold or otherwise consummate any Investment other than Permitted Investments; or (b) purchase or carry Margin Stock.
Section 6.9 Continuity of Ownership. Cause or permit, either directly or indirectly, any Change in Control of Borrower or a change in ownership of the Real Property.
Section 6.10 Environmental Hazards. Permit the Real Property to be used or operated in any manner such that the Real Property may or does become contaminated by any hazardous substance or environmental pollutant in violation of any federal, state or local environmental statute or ordinances, including without limitation violation of the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Hazardous Materials Transportation Act and the Resource, Conservation and Recovery Act, all as amended from time to time.
Section 6.11 Other Indebtedness. Incur any Indebtedness other than Permitted Debt.
Section 6.12 Loans. Make any loans or advances to any Person, except Permitted Investments.
Section 6.13 Restrictive Agreement. Enter into or assume any agreement (other than the Loan Documents, the Midcap Financing Documents and any Permitted Refinancing thereof) that prohibits, restricts or imposes any condition upon the ability of the Borrower to create, incur or permit to exist any Lien upon any of the Collateral, in each case, other than (1) Permitted Liens, (2) restrictions or conditions imposed by any agreement relating to purchase money indebtedness, Capital Leases and other secured Debt permitted by this Agreement if such restrictions or conditions apply only to the property or assets securing such Debt, (3) customary anti-assignment provisions contained in leases, licenses, contracts and other agreements to the extent not otherwise prohibited under the terms of this Agreement, and (4) restrictions existing on the Closing Date; provided that the foregoing shall not apply to restrictions and conditions imposed by any applicable law, or mortgages on real property other than the Land.
Section 6.14 Prohibited Activities. Use, occupy, or permit the use or occupancy of the Real Property by Borrower or any lessee, tenant, licensee, permitee, agent, or any other person in any manner that would be a violation of any applicable federal, state or local law or regulation, regardless of whether such use or occupancy is lawful under any conflicting law, including without limitation any law relating to the use, sale, possession, cultivation, manufacture, distribution or marketing of any controlled substances or other contraband (whether for commercial, medical, or personal purposes), or any law relating to the medicinal use or distribution of marijuana (collectively, “Prohibited Activities”). Any new lease, license, sublease or other agreement for use, occupancy or possession of the Real Property (collectively a “lease”) with any third person (“lessee”), or any amendments made to existing leases, shall expressly prohibit the lessee from engaging or permitting others to engage in any Prohibited Activities. Borrower shall, promptly following written demand, provide Lender with a written statement setting forth its compliance with this section and stating whether any Prohibited Activities are or may be occurring in, on or around the Real Property. If Borrower becomes aware that any lessee is likely engaged in any Prohibited Activities, Borrower shall, in compliance with applicable law, terminate, or cause to be terminated, the applicable lease and take all actions permitted by law to discontinue such activities. Borrower shall keep Lender fully advised of its actions and plans to comply with this section and to prevent Prohibited Activities. This paragraph is a material consideration and inducement upon which Lender relies in extending credit and other financial accommodations to Borrower. Failure by Borrower to comply with this section shall constitute a material non-curable Event of Default. Notwithstanding anything in this agreement or the other Loan Documents regarding rights to cure Events of Default, Lender is entitled upon breach of this paragraph to immediately
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exercise any and all remedies under the Loan Documents, and by law. In addition and not by way of limitation, Borrower shall indemnify, defend and hold Lender harmless from and against any loss, claim, damage, liability, fine, penalty, cost or expense (including reasonable attorneys’ fees and expenses) arising from, out of or related to any Prohibited Activities at or on the Real Property, Prohibited Activities by Borrower or any lessee of the Real Property, or Borrower’s breach, violation, or failure to enforce or comply with any of the covenants set forth in this section. This indemnity includes, without limitation any claim by any governmental entity or agency, any lessee, or any third person, including any governmental action for seizure or forfeiture of the Real Property (with or without compensation to Lender, and whether or not the Real Property is taken free of or subject any lien or security interest of Lender).
Section 6.15 Hedging Transaction Documents TC “SECTION 6.07. Swap Agreements” \f C \l “2” . Enter into any Hedging Transactions, except (a) the Hedging Transaction Documents, (b) Hedging Transactions entered into to hedge or mitigate risks associated with liabilities, commitments, investments, assets, or property held or reasonably anticipated by Borrower or any Subsidiary and not for purposes of speculation, and (c) Hedging Transactions entered into in order to effectively cap, collar or exchange interest rates (from fixed to floating rates, from one floating rate to another floating rate or otherwise) with respect to any interest-bearing liability or investment of Borrower or any Subsidiary.
ARTICLE VII
Events of Default and Remedies
Section 7.1 Events of Default. The occurrence of any one or more of the following events or existence of one or more of the following conditions shall constitute an “Event of Default” under this Agreement:
(a) Any failure by Borrower to pay when due any principal, interest, premium or fee under any Loan Document or any other amount payable under any Loan Document and, with respect to any such payment other than principal or interest, such failure shall continue for three (3) Business Days after the date such amount was due.
(b) Any failure or neglect by Borrower to perform or observe any of the covenants, conditions or provisions in Sections 5.7, 5.9, 5.19, 5.21 or Article VI hereof.
(c) Any failure or neglect by Borrower to perform or observe any other covenants, conditions or provisions of this Agreement (other than those set forth in subsections (a) or (b) of this Section 7.1) and such failure or neglect is not waived by Lender and either cannot be remedied or, if it can be remedied, it continues unremedied for a period of within thirty (30) days after the earlier of (i) receipt by Borrower of notice from Lender of such default, or (ii) actual knowledge of any Responsible Officer of the Borrower of such default; provided, however, that if the default cannot by its nature be cured within the thirty (30) day period or cannot after diligent attempts by Borrower be cured within such thirty (30) day period, and such default is likely to be cured within a reasonable time (not to exceed the end of the twenty (20) day additional period), then Borrower shall have an additional period (which period shall not in any case exceed twenty (20) days) to attempt to cure such default, and within such additional twenty (20) day period the failure of Borrower to cure the default shall not be deemed an Event of Default.
(d) Any written representation, warranty, certification or statement made by Borrower in any Loan Document or in any certificate, financial statement or other document delivered pursuant to any Loan Document is incorrect in any respect (or in any material respect if such representation, warranty, certification or statement is not by its terms already qualified as to materiality) when made (or deemed made).
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(e) Borrower shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law or any analogous procedure or step is taken in any other jurisdiction) now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize the foregoing.
(f) an involuntary case or other proceeding shall be commenced Borrower seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of forty-five (45) days; or an order for relief shall be entered against Borrower under applicable federal bankruptcy, insolvency or other similar law in respect of (i) bankruptcy, liquidation, winding-up, dissolution or suspension of general operations, (ii) composition, rescheduling, reorganization, arrangement or readjustment of, or other relief from, or stay of proceedings to enforce, some or all of the debts or obligations, or (iii) possession, foreclosure, seizure or retention, sale or other disposition of, or other proceedings to enforce security over, all or any substantial part of the assets of Borrower.
(g) [Reserved].
(h) [Reserved].
(i) [Reserved].
(j) The institution of any legal action or proceedings to enforce any lien or encumbrance upon any portion of any Collateral or security for the Loan that is not dismissed within thirty (30) days after its institution.
(k) The occurrence of any event of default under any other Loan Document (including, for the avoidance of doubt, any Hedging Transaction Documents) and the expiration of any applicable notice and cure period provided in such Loan Document therefore (if any).
(l) (i) Failure of Borrower to pay when due or within any applicable grace period any principal, interest or other amount on Indebtedness (other than under any Loan Document), or the occurrence of any breach, default, condition or event with respect to any Indebtedness (other than the under any Loan Document), after the expiry of any applicable grace period, in each case, if the effect of such failure or occurrence is to cause (or to permit the holder or holders of any such Indebtedness to cause) any such Indebtedness having an individual principal amount in excess of $1,000,000 or having an aggregate principal amount in excess of $2,500,000 to become or be declared due prior to its stated maturity, or (ii) without limiting the foregoing, the occurrence of any breach or default under any terms or provisions of any Subordinated Debt Document or under any agreement subordinating the Subordinated Debt to all or any portion of the Obligations or the occurrence of any event requiring (or that would allow the holders thereof to require) the prepayment or mandatory redemption of any Subordinated Debt.
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(m) Except to the extent arising out of, resulting from or relating to any action, suit, litigation or legal proceeding disclosed on Borrower’s 10-K filed with the SEC prior to the Closing Date, there is entered against Borrower or any Subsidiary thereof (i) one or more final judgments or orders for the payment of money or fines or penalties issued by any Governmental Authority involving in the aggregate a liability (not fully covered or paid by insurance as to which the relevant insurance company has acknowledged coverage) of $5,000,000 or more, or (ii) one or more non-monetary final judgments that have, or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect and, in either case (i) or (ii), (A) enforcement proceedings are commenced by any creditor or any such Governmental Authority, as applicable, upon such judgment, order, penalty or fine, as applicable, or (B) such judgment, order, penalty or fine, as applicable, shall not have been vacated, discharged, stayed or bonded, as applicable, pending appeal within 30 days from the entry or issuance thereof.
(n) The occurrence of any Material Adverse Effect if, at any time such a Material Adverse Effect occurs or exists, (i) the outstanding principal amount of the Loan exceeds $7,500,000, and (ii) Borrower has less than $10,000,000 of Borrower Unrestricted Cash.
(o) Any of the Loan Documents shall for any reason fail to constitute the valid and binding agreement of any party thereto, or Borrower shall so assert, in each case, unless such Loan Document terminates pursuant to the terms and conditions thereof without any breach or default thereunder by Borrower.
(p) So long as Borrower is an entity whose equity is registered with the Securities and Exchange Commission and/or is publicly traded on and/or registered with a public securities exchange, Borrower’s equity fails to remain registered with the Securities and Exchange Commission in good standing, and/or such equity fails to remain publicly traded on and registered with a public securities exchange.
(q) The institution by any Governmental Authority of criminal proceedings against Borrower.
(r) The occurrence of a Change in Control.
Section 7.2 Remedies.
(a) Upon the occurrence and during the continuance of any Event of Default that has continued beyond any applicable cure periods, Lender shall be under no further obligation to make payments or disbursements hereunder or take any other action with respect to this Agreement. The Obligations, with all accrued interest and other amounts payable hereunder, shall, at the option of Lender, become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are expressly waived by Borrower. Lender may proceed with every remedy available at law or in equity or provided for herein or in any Loan Document, and all expenses incurred by Lender in connection with any remedy shall be deemed indebtedness of Borrower to Lender and a part of the Obligations. Lender may apply the proceeds from any Collateral or from any other source against any of the Obligations as and in any order it sees fit.
(b) Without limiting the foregoing, upon the occurrence of an Event of Default hereunder that has continued beyond any applicable cure periods, Lender shall have the right to take possession of the Real Property and perform any and all work it deems advisable or necessary to protect Lender’s interests therein and to operate the Real Property.
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(c) No delay or failure of Lender in the exercise of any right or remedy provided for hereunder shall be deemed a waiver of the right by Lender and no exercise or partial exercise or waiver of any right or remedy shall be deemed a waiver of any further exercise of such right or remedy or of any other right or remedy that Lender may have. The enforcement of any rights of Lender as to any security for any Obligations shall not affect the rights of Lender to enforce payment of such Obligations and to recover judgment for any portion thereof remaining unpaid. The rights and remedies herein expressed are cumulative and not exclusive of any right or remedy that Lender shall otherwise have.
(d) In addition to all liens upon, and rights of setoff against, the monies, securities or other property of Borrower given to Lender by law, Lender shall have a lien and a right of setoff against, and Borrower hereby grants to Lender a security interest in, all monies, securities and other property of Borrower constituting Collateral, now and hereafter in the possession of or on deposit with Lender, whether held in the Borrower’s operating accounts with Lender or in any other general or special account or deposit, or for safekeeping or otherwise; every such lien and right of setoff may be exercised without notice or demand upon Borrower’s default in the payment of the Obligations, or upon the occurrence of any Event of Default under this Agreement or any other document or instrument executed and delivered in connection with the Loan that has, in each case, continued beyond any applicable cure periods. No lien or right of setoff shall be deemed to have been waived by any act or conduct on the part of Lender, by any neglect to exercise such right of setoff or to enforce such lien, or by any delay in so doing.
(e) Lender may report information about Borrower’s account to credit bureaus. Late payments, missed payments, or other defaults on Borrower’s account may be reflected in Borrower’s credit report.
ARTICLE VIII
Rights and Duties of Lender
Section 8.1 No Responsibility for Development, Etc. Lender assumes no responsibility for development of the Real Property, and nothing herein shall be construed as establishing a relationship between Lender and any other party except lender-borrower relationship between Lender and Borrower. Lender shall owe no duty to any person by reason of this Agreement to operate the Real Property or construct any improvements thereon or to exercise any of its rights hereunder. Notwithstanding any approval or review of any development or construction plans and specifications by Lender, Lender is not, and shall not be construed to be, liable to any party for any damage that may result from defects in the design or construction of any improvements constructed on the Real Property. Borrower hereby agrees to indemnify, defend with legal counsel acceptable to Lender, and save Lender harmless from any and all such liability, claims for such liability and costs and expenses relating thereto, including, without limitation, reasonable attorney’s fees and disbursements that Lender may incur in defending itself against such claims.
Section 8.2 Right to Assign. Lender may assign, negotiate, pledge, or otherwise hypothecate its right, title, and interest (or any part thereof) in this Agreement, the Note, and the Loan Documents or any of its rights and security hereunder or thereunder, and may assign and delegate any or all of its primary supervisory and disbursing functions. In case of such assignment, Borrower will accord full recognition thereto and hereby agrees that all rights and remedies of Lender in connection with the interest so assigned shall be enforceable against Borrower by the assignee thereof. Borrower specifically consents to a sale of participation interests in the Loan by Lender to any financial institutions of Lender’s choosing.
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ARTICLE IX
Miscellaneous
Section 9.1 Amendments. No provision or term of this Agreement may be amended, modified, revoked, supplemented, waived or otherwise changed except by a written instrument duly executed by Borrower and Lender, and designated as an amendment, supplement or waiver.
Section 9.2 Counting of Days. Whenever this Agreement specifies a certain number of days, the days shall be counted using calendar days unless the applicable provision specifically calls for business days. In computing any period of time described herein, the day of the act or event as to which the designated period of time begins to run is not to be included, and the last day of the period so computed is to be included. The last day of any period of time described herein shall be deemed to end at 5:00 p.m. in the Denver, Colorado, metropolitan area. If any period of time set forth in this Agreement expires on a holiday or other nonbusiness day, then such expiration date shall be the next business day. If the date for performance of any action hereunder falls on a holiday or other nonbusiness day, then such date shall be extended to the next business day. As used herein, “a holiday or other nonbusiness day” shall mean Saturday and Sunday of each week and banking holidays observed in the Denver, Colorado, metropolitan area. All other days of the week shall constitute business days.
Section 9.3 Notices.
(a) Except in the case of notices and other communications expressly permitted to be given by telephone (and subject to paragraph (b) below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail, as follows:
(i) if to Borrower at:
Paragon 28, Inc.
14445 Grasslands Drive
Englewood, CO 80112
Attention: Steve Deitsch
(ii) if to Lender at:
Zions Bancorporation, N.A. dba Vectra Bank Colorado
2000 S. Colorado Blvd., Suite 2-1200
Denver, CO 80222
Attention: Justin Carter, Senior Vice President
All such notices and other communications (i) sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received, (ii) sent by fax shall be deemed to have been given when sent, provided that if not given during normal business hours for the recipient, such notice or communication shall be deemed to have been given at the opening of business on the next Business Day of the recipient, or (iii) delivered through electronic communication to the extent provided in paragraph (b) below shall be effective as provided in such paragraph.
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(b) Notices and other communications to Lender hereunder may be delivered or furnished by electronic communications (including e-mail and internet or intranet websites) pursuant to procedures approved by Lender. Each of Lender or Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it; provided that approval of such procedures may be limited to particular notices or communications. All such notices and other communications (i) sent to an e-mail address shall be deemed received upon the sender’s receipt of an acknowledgement from the intended recipient (such as by the “return receipt requested” function, as available, return e-mail or other written acknowledgement), provided that if not given during the normal business hours of the recipient, such notice or communication shall be deemed to have been given at the opening of business on the next Business Day for the recipient, and (ii) posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient, at its e-mail address as described in the foregoing clause (i), of notification that such notice or communication is available and identifying the website address therefor; provided that, for both clauses (i) and (ii) above, if such notice, e-mail or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next Business Day of the recipient.
(c) Any party hereto may change its address or e-mail address for notices and other communications hereunder by notice to the other parties hereto.
Section 9.4 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument.
Section 9.5 Headings. The article and section headings herein are for convenience only and shall not affect the construction hereof.
Section 9.6 Entire Agreement; Integration. This Agreement, the Loan Documents, and the other documents and instruments reference herein constitute and incorporate the entire agreement between Lender and Borrower concerning the subject matter of this Agreement, and supersede any prior agreements between Lender and Borrower concerning the subject matter thereof.
Section 9.7 Conflict. If any term of any Loan Document or any other document entered into pursuant to this Agreement shall conflict with this Agreement, this Agreement shall govern to the extent of the conflict.
Section 9.8 Separability. If any provision in this Agreement or any Loan Document shall be held invalid, illegal, or unenforceable in any jurisdiction, the validity, legality, and enforceability of the remaining provisions of this Agreement shall not be impaired thereby, nor shall the validity, legality or enforceability of any such defective provisions be in any way affected or impaired in any other jurisdiction.
Section 9.9 Governing Law; Jurisdiction; Consent to Service of Process; Waiver of Special Damages. (a) This Agreement shall be construed in accordance with and governed by the law of the State of Colorado.
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(b) The Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the State and Federal courts in Denver County, Colorado, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such Colorado State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Lender may otherwise have to bring any action or proceeding relating to this Agreement against the Borrower or its properties in the courts of any jurisdiction.
(c) The Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.
(d) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 8.1. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law.
(e) THE BORROWER WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY APPLICABLE LAW, ANY RIGHT THE BORROWER MAY HAVE TO CLAIM OR RECOVER FROM THE LENDER IN ANY LEGAL ACTION OR PROCEEDING, ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES.
Section 9.10 WAIVER OF JURY TRIAL; CLASS ACTION WAIVER; ARBITRATION ALTERNATIVE. (a) EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
(b) EACH PARTY ALSO WAIVES THE RIGHT TO LITIGATE IN COURT OR AN ARBITRATION PROCEEDING ANY DISPUTE AS A CLASS ACTION, EITHER AS A MEMBER OF A CLASS OR AS A REPRESENTATIVE, OR TO ACT AS A PRIVATE ATTORNEY GENERAL.
(c) If a claim, dispute, or controversy arises between the parties with respect to this Agreement, related agreements, or any other agreement or business relationship between the parties whether or not related to the subject matter of this Agreement (all of the foregoing, a “Dispute”), and only if a jury trial waiver is not permitted by applicable law or ruling by a court, either party may require that the Dispute be resolved by binding arbitration before a single arbitrator at the request of any party. By agreeing to arbitrate a Dispute, each party gives up any right that party may have to a jury trial, as well as other rights that party
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would have in court that are not available or are more limited in arbitration, such as the rights to discovery and to appeal.
Arbitration shall be commenced by filing a petition with, and in accordance with the applicable arbitration rules of, JAMS or National Arbitration Forum (“Administrator”) as selected by the initiating party. If the parties agree, arbitration may be commenced by appointment of a licensed attorney who is selected by the parties and who agrees to conduct the arbitration without an Administrator. Disputes include matters (i) relating to a deposit account, application for or denial of credit, enforcement of any of the obligations of one party to the other, compliance with applicable laws and/or regulations, performance or services provided under any agreement by any party, (ii) based on or arising from an alleged tort, or (iii) involving any of the employees, agents, affiliates, or assigns of a party. However, Disputes do not include the validity, enforceability, meaning, or scope of this arbitration provision and such matters may be determined only by a court. If a third party is a party to a Dispute, Lender and Borrower each will consent to including the third party in the arbitration proceeding for resolving the Dispute with the third party. Venue for the arbitration proceeding shall be at a location determined by mutual agreement of the parties or, if no agreement, in the city and state where Lender is headquartered.
After entry of an Arbitration Order, the non-moving party shall commence arbitration. The moving party shall, at its discretion, also be entitled to commence arbitration but is under no obligation to do so, and the moving party shall not in any way be adversely prejudiced by electing not to commence arbitration. The arbitrator: (i) will hear and rule on appropriate dispositive motions for judgment on the pleadings, for failure to state a claim, or for full or partial summary judgment; (ii) will render a decision and any award applying applicable law; (iii) will give effect to any limitations period in determining any Dispute or defense; (iv) shall enforce the doctrines of compulsory counterclaim, res judicata, and collateral estoppel, if applicable; (v) with regard to motions and the arbitration hearing, shall apply rules of evidence governing civil cases; and (vi) will apply the law of the state specified in the agreement giving rise to the Dispute. Filing of a petition for arbitration shall not prevent any party from (i) seeking and obtaining from a court of competent jurisdiction (notwithstanding ongoing arbitration) provisional or ancillary remedies including but not limited to injunctive relief, property preservation orders, foreclosure, eviction, attachment, replevin, garnishment, and/or the appointment of a receiver, (ii) pursuing non-judicial foreclosure, or (iii) availing itself of any self-help remedies such as setoff and repossession. The exercise of such rights shall not constitute a waiver of the right to submit any Dispute to arbitration.
Judgment upon an arbitration award may be entered in any court having jurisdiction except that, if the arbitration award exceeds $4,000,000, any party shall be entitled to a de novo appeal of the award before a panel of three arbitrators. To allow for such appeal, if the award (including Administrator, arbitrator, and attorney’s fees and costs) exceeds $4,000,000, the arbitrator will issue a written, reasoned decision supporting the award, including a statement of authority and its application to the Dispute. A request for de novo appeal must be filed with the arbitrator within 30 days following the date of the arbitration award; if such a request is not made within that time period, the arbitration decision shall become final and binding. On appeal, the arbitrators shall review the award de novo, meaning that they shall reach their own findings of fact and conclusions of law rather than deferring in any manner to the original arbitrator. Appeal of an arbitration award shall be pursuant to the rules of the Administrator or, if the Administrator has no such rules, then the JAMS arbitration appellate rules shall apply. Arbitration under this provision concerns a transaction involving interstate commerce and shall be governed by the Federal Arbitration Act, 9 U.S.C. sec. 1 et seq. This arbitration provision shall survive any termination, amendment, or expiration of this Agreement. If the terms of this provision vary from the Administrator’s rules, this arbitration provision shall control.
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(d) Each party (i) certifies that no one has represented to such party that the other party would not seek to enforce jury and class action waivers in the event of suit, and (ii) acknowledges that it and the other party have been induced to enter into this Agreement by, among other things, the mutual waivers, agreements, and certifications in this section.
Section 9.11. Patriot Act. Lender is subject to the requirements of the USA PATRIOT Act and hereby notifies Borrower that pursuant to the requirements of the USA PATRIOT Act, it is required to obtain, verify and record information that identifies Borrower, which information includes the name and address of Borrower and other information that will allow Lender to identify Borrower in accordance with the USA PATRIOT Act.
Section 9.12 Electronic Execution of Assignments and Certain Other Documents. The words “execution,” “signed,” “signature,” and words of like import in any Loan Document or any amendment or other modification hereof (including waivers and consents) shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic Transactions Act.
Section 9.13 Time of the Essence. Time is of the essence hereof with respect to the dates, terms and conditions of this Agreement and the Loan Documents.
Section 9.14 Correction of Loan Documents; Document Imaging. Lender may correct patent errors and fill in any blanks in the Loan Documents consistent with the agreement of the parties. Lender shall be entitled, in its sole discretion, to image all or any selection of the Loan Documents (except for the Note), and items and records governing, arising from or relating to any of Borrower’s loans, and may destroy or archive the paper originals (except for the Note). Borrower waives any right to insist Lender produce paper originals, agree that such images shall be accorded the same force and effect as the paper originals, and further agree that Lender is entitled to use such images in lieu of destroyed or archived originals for any purpose, including as admissible evidence in any demand, presentment or proceedings.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, Borrower has executed this Agreement to be effective as of the date first above stated.
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a Delaware corporation |
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/s/ Jonathan Friedman |
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Jonathan Friedman |
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General Counsel and Secretary |
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Lender: |
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ZIONS BANCORPORATION, N.A. dba VECTRA BANK COLORADO |
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By: |
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/s/ Justin Carter |
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Justin Carter |
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Senior Vice President |
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DOCPROPERTY "CUS_DocIDChunk0" 4864-1678-9519.7
SCHEDULES
Schedule 4.15
Subsidiaries
Schedule 6.11
Indebtedness
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DOCPROPERTY "CUS_DocIDChunk0" 4864-1678-9519.7
EXHIBIT A
LAND
The Land referred to herein below is situated in the County of Douglas, State of Colorado, and is described as follows:
Lot 5a,
Compark Filing No. 2, 1st Amendment,
County of Douglas,
State of Colorado.
For informational purposes only: APN: 2233-060-01-023
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DOCPROPERTY "CUS_DocIDChunk0" 4864-1678-9519.7
EXHIBIT B
FORM OF COMPLIANCE CERTIFICATE
[Attached]
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DOCPROPERTY "CUS_DocIDChunk0" 4864-1678-9519.7
COMPLIANCE CERTIFICATE
To: Zions Bancorporation, N.A. dba Vectra Bank Colorado
This Compliance Certificate (“Certificate”), for the [fiscal quarter][fiscal year] ended __________, 20__, is furnished pursuant to that certain Business Loan Agreement, dated as of March [ ], 2022 (as amended, restated, modified, renewed or extended from time to time, the “Agreement”) by and between Paragon 28, Inc., a Delaware corporation (“Borrower”) and Zions Bancorporation, N.A. dba Vectra Bank Colorado, as Lender. Unless otherwise defined herein, capitalized terms used in this Certificate have the meanings ascribed thereto in the Agreement.
THE UNDERSIGNED HEREBY CERTIFIES THAT:
1. I am the [President][Chief Executive Officer][Chief Financial Officer] of Borrower and I am authorized to deliver this Certificate on behalf of Borrower;
[2. The financial statements of Borrower delivered to Lender in connection with this Certificate for the most recently ended fiscal quarter in accordance with Section 5.1(b) of the Agreement present fairly in all material respects the financial condition and results of operations of Borrower and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and the absence of footnotes;]29
3. Schedule I attached hereto sets forth financial calculations evidencing Borrower’s compliance with the Fixed Charge Coverage Ratio covenant set forth in Section 5.21 of the Agreement as of the last day of the Defined Period (as defined on Schedule I), all of which financial calculations are true, complete and correct; and
4. I have no knowledge of the existence as of the date hereof, of any Event of Default, except as set forth in Schedule II hereto, which includes a description of any such Event of Default and what action Borrower has taken or proposes to take with respect thereto.
The foregoing certifications, together with the financial calculations set forth in Schedule I hereto and the financial statements delivered with this Certificate in support hereof, are made and delivered this day of __________, 20__.
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PARAGON 28, INC. |
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______________________
[29] NOTE: Only include this Item 2 for Compliance Certificates delivered in connection with the quarterly financial statements for the first three (3) fiscal quarters of each fiscal year.
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DOCPROPERTY "CUS_DocIDChunk0" 4864-1678-9519.7
Schedule I to Compliance Certificate for Paragon 28, Inc.
Financial Covenants
Compliance for the four fiscal quarter period ending _________________, 20___ (the "Defined Period") with
Certain covenants contained in Section 5.21 of the Agreement and
Supporting calculations attached hereto
FIXED CHARGE COVERAGE RATIO
A. Consolidated EBITDA |
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Consolidated EBITDA for the applicable Defined Period is defined as follows: |
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Net income (or loss) for the Defined Period of Borrower and its Subsidiaries, determined on a consolidated basis in accordance with GAAP, minus (to the extent included in the determination of net income and without duplication): the sum of (i) the income (or minus the loss) of any Person accrued prior to the date it becomes a Subsidiary or is merged into or consolidated with Borrower or any other Subsidiary, plus (ii) notwithstanding consolidation under GAAP, the income (or loss) of any Person in which Borrower has an ownership interest unless received by Borrower in a cash distribution (“Consolidated Net Income”) |
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Plus (in each case below to the extent deducted in the determination of Consolidated Net Income for the Defined Period and without duplication):
Any provision for (minus any benefit from) Taxes based on federal, state, local and foreign income and franchise, property, foreign withholding, and unreimbursed value added Taxes and similar Taxes, interest and penalties included under GAAP in the determination of income Tax expenses
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Consolidated Interest Expense2 (net of interest income) |
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Depreciation of fixed assets and amortization of intangible assets determined in accordance with GAAP |
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____________________________________
[2] “Consolidated Interest Expense” means for any Defined Period, the sum of total interest expense (including that portion attributable to Capital Leases in accordance with GAAP and capitalized interest), premium payments, debt discount, fees, charges and related expenses with respect to all outstanding Indebtedness of Borrower and its Subsidiaries (including, all commissions, discounts and other fees and charges owed with respect to letters of credit and banker’s acceptances, but excluding net payments (less net credits) under swap contracts to the extent such net payments are allocable to such Defined Period in accordance with GAAP, in each case whether or not paid in cash during such Defined Period.
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DOCPROPERTY "CUS_DocIDChunk0" 4864-1678-9519.7
Other non-cash expenses, charges or losses included (minus non-cash income added) in the determination of Consolidated Net Income, including any write-offs or write-downs of Accounts reducing Consolidated Net Income for such period (in each case, of or by Borrower and its Subsidiaries) (provided the aggregate amount of such write-offs or write- downs with respect to such Accounts shall not exceed $500,000 for any Defined Period), and excluding amortization of a prepaid cash item that was paid in a prior period |
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Extraordinary, unusual or non-recurring losses included in the determination of Consolidated Net Income during the Defined Period in accordance with GAAP and unusual or non-recurring charges and other expenses, including severance costs and expenses and net of related Tax effects; provided that, such extraordinary, unusual or non-recurring losses, charges and other expenses shall not exceed $500,000 in the Defined Period |
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Expenses and fees included in the determination of Consolidated Net Income and paid or incurred by Borrower and its Subsidiaries during the Defined Period to consummate the transactions contemplated by the Loan Documents and the MidCap Financing Documents, but solely to the extent (i) in the case of the Loan Documents, disclosed to Lender prior to the date of payment, (ii) in the case of the MidCap Financing Documents, the aggregate amount of which being paid or incurred on or prior to May 6, 2021 shall not exceed $3,500,000, (iii) in the case of the MidCap Financing Documents, the aggregate amount of which being paid or incurred after May 6, 2021 shall not exceed $300,000 and (iv) such expenses and fees shall in any event be paid within ninety (90) days after (i) the Closing Date (in the case of the Loan Documents) and (ii) May 6, 2021 (in the case of the MidCap Financing Documents) |
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(i) Extraordinary, unusual and non-recurring costs, expenses and fees included in the determination of Consolidated Net Income and paid or incurred by Borrower or any of its Subsidiaries during the Defined Period in connection with any financing, acquisition, any public offering of Equity Interests or SAP implementation, (ii) costs, expenses and fees included in the determination of Consolidated Net Income and paid or incurred by Borrower or any of its Subsidiaries during such Defined Period in connection with litigation, and (iii) without duplication of clause (i), costs, expenses, fees and charges in connection with restructurings, facility openings and shut downs, severance, and integration costs in connection with acquisitions, in all cases, paid or incurred by Borrower or any of its Subsidiaries during such Defined Period; provided, that, (x) any such costs, expenses and fees added back to Consolidated Net Income pursuant to this paragraph shall not exceed $10,000,000 in the aggregate in the Defined Period and (y) without limitation of clause (x) of this proviso, any such costs, expenses and fees added back to Consolidated Net Income pursuant to clause (iii) of this paragraph shall not exceed $5,000,000 in the aggregate in the Defined Period |
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DOCPROPERTY "CUS_DocIDChunk0" 4864-1678-9519.7
Minus (in each case below to the extent included in the determination of Consolidated Net Income for the Defined Period and without duplication)
any non-cash additions to net income for the Defined Period |
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any amount (expressed as a positive number) of loan forgiveness of any loans incurred under the Paycheck Protection Program under the Cares Act included as a gain or income in the determination of Consolidated Net Income and recognized by Borrower during the Defined Period |
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any extraordinary, unusual or non-recurring gains, all calculated for the Borrowers on a consolidated basis in accordance with GAAP |
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Consolidated EBITDA for the Defined Period |
A. $ |
Minus:
Distributions made in cash (other than Distributions between Borrower and any Subsidiary) |
B. $ |
Total: A minus B |
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C. $ |
Divided By:
Debt Service: sum of all scheduled interest and principal payments paid in cash for the Defined Period (including that portion attributable to Capital Leases in accordance with GAAP), on account of long-term Indebtedness of the Borrower and its Subsidiaries, determined on a consolidated basis in accordance with GAAP (excluding (a) revolving loans incurred under the MidCap Revolving Credit Agreement and (b) net payments (less net credits) under Hedging Transactions to the extent such net payments are allocable to such Defined Period in accordance with GAAP, whether or not paid in cash during such Defined Period), and calculated net of interest income of Borrower and its Subsidiaries received in cash |
D. $ |
Fixed Charge Coverage Ratio (C divided by D) |
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_____: 1.00 |
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46 |
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DOCPROPERTY "CUS_DocIDChunk0" 4864-1678-9519.7
Exhibit 10.2
EXECUTION VERSION
AMENDMENT NO. 3 TO CREDIT AND SECURITY AGREEMENT (REVOLVING LOAN)
This AMENDMENT NO. 3 TO CREDIT AND SECURITY AGREEMENT
(REVOLVING LOAN) (this “Agreement”) is made as of the 24th day of March, 2022, by and among PARAGON 28, INC., a Delaware corporation (“Paragon 28”), PARAGON ADVANCED TECHNOLOGIES, INC., a Delaware corporation (“Paragon Advanced Technologies”, and Paragon Advanced Technologies, together with Paragon 28, each a “Borrower” and collectively, the “Borrowers”), MIDCAP FUNDING IV TRUST, a Delaware statutory trust, as Agent (in such capacity, together with its successors and assigns, “Agent”) and the Lenders (as defined in the Credit Agreement referenced below) party hereto.
RECITALS
1
MidCap / Paragon 28 / Amendment No. 3 to Credit Agreement (Revolving Loan)
Collateral (as the same may be amended, restated, amended and restated, supplemented or otherwise modified from time to time in accordance with Section 6(b) of this Agreement, the “Zions Assignment of Leases and Rents”).
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, the terms and conditions set forth in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Agent, the Lenders party hereto and Borrowers hereby agree as follows:
“Acquired Real Property” has the meaning set forth in the Third Amendment. “Assigned Leases and Rents” means the leases in respect of the Acquired Real Property
and such other property related thereto and described in Section 1 of the Zions Assignment of Leases and Rents delivered to the Agent, and as in effect, on the Third Amendment Effective Date.
“Third Amendment” means that certain Amendment No. 3 to Credit and Security Agreement (Revolving Loan), dated as the Third Amendment Effective Date, by and among the Borrowers, Agent and Lenders.
“Third Amendment Effective Date” means March 24, 2022.
“Zions Assignment of Leases and Rents” has the meaning set forth in the Third Amendment.
2
MidCap / Paragon 28 / Amendment No. 3 to Credit Agreement (Revolving Loan)
“Zions Collateral” means (a) the Acquired Real Property, (b) Improvements (as defined in the Zions Deed of Trust, as the same is in effect on the Third Amendment Effective Date), (c) the Assigned Leases and Rents, and (d) all awards made for the taking by eminent domain, or by any proceeding of purchase in lieu thereof, of the whole or any part of the Acquired Real Property.“Zions Loan Agreement” has the meaning set forth in the Third Amendment.
“Zions Loan Documents” means “Loan Documents” (as such term is defined in the Zions Loan Agreement) as in effect on the Third Amendment Effective Date to the extent such documents are delivered to Agent pursuant to Section 4(c) of the Third Amendment (as the same may be amended, restated, amended and restated, supplemented or otherwise modified from time to time in accordance with Section 6(b) of the Third Amendment).
“Defined Period” means for any given fiscal quarter or date of determination, the immediately preceding twelve (12) month period ending on the last day of such fiscal quarter or if such date of determination is not the last day of a fiscal quarter, the twelve
(12) month period immediately preceding any such date of determination.
therein:
“(g) the Zions Collateral;”
“Material Real Property” means any real property located in the United States that is owned in fee by any Credit Party with a fair market value (as reasonably determined by Agent) in excess of $5,000,000 individually or in the aggregate together with all other real property that is owned by the Credit Parties; provided that Material Real Property shall not include the Acquired Real Property.
“(k) disposition of the Assigned Leases and Rents in connection with the Debt permitted pursuant to clause (u) of the definition of Permitted Debt; and”
3
MidCap / Paragon 28 / Amendment No. 3 to Credit Agreement (Revolving Loan)
“(u) Debt under Zions Loan Agreement and the other Zions Loan Documents in an aggregate principal amount not to exceed $16,000,000 and any Permitted Refinancing thereof; and”
“(t) Liens granted on any Zions Collateral securing the Debt permitted pursuant to clause (u) of the definition of Permitted Debt, and Liens granted on any Zions Collateral securing a Permitted Refinancing of such Debt secured by such Liens; and”
follows:
“(a) as soon as available, but no later than thirty (30) days after the last day of each fiscal quarter, a company prepared consolidated and consolidating balance sheet, cash flow and income statement (including year-to-date results) covering Borrowers’ and its Consolidated Subsidiaries’ consolidated and consolidating operations during the period, prepared under GAAP in all material respects (subject to normal year-end adjustments and the absence of footnote disclosures), consistently applied, setting forth in comparative form the corresponding figures as at the end of the corresponding fiscal quarter of the previous fiscal year and the projected figures for such period based upon the projections required hereunder, all in reasonable detail, certified by a Responsible Officer and in a form reasonably acceptable to Agent (provided that the form of the financial statements delivered to Agent prior to the Closing Date shall be deemed reasonably acceptable to Agent);”
as follows:
4
MidCap / Paragon 28 / Amendment No. 3 to Credit Agreement (Revolving Loan)
“(b) upon Agent’s reasonable request, together with the financial reporting package described in (a) above, evidence of payment and satisfaction of all payroll,
withholding and similar taxes due and owing by all Borrowers with respect to the payroll period(s) occurring during such fiscal quarter;”
follows:
“(i) (x) within thirty (30) days after the last day of each fiscal quarter, deliver to Agent, a duly completed Compliance Certificate signed by a Responsible Officer (a) setting forth the cash and Cash Equivalents of (i) Borrowers, (ii) Borrowers and their Consolidated Subsidiaries, (iii) the Restricted Foreign Subsidiaries, in each case, as of the close of business on the date that is five (5) Business Days prior to date on which such Compliance Certificate is delivered, and (b) demonstrating compliance with the financial covenants set forth in this Agreement and (y) within thirty (30) days after the last day of each month, deliver to Agent a duly completed Compliance Certificate signed by a Responsible Officer, setting forth the cash and Cash Equivalents of (i) Borrowers, (ii) Borrowers and their Consolidated Subsidiaries, (iii) the Restricted Foreign Subsidiaries, in each case, as of the close of business on the date that is five (5) Business Days prior to date on which such Compliance Certificate is delivered;”
as follows:
“(d) If, at the end of any Defined Period, Consolidated Net Revenue attributable solely to the Borrowers and Guarantors (and not, for the avoidance of doubt, to any Restricted Foreign Subsidiary) for such Defined Period is less than seventy-five percent (75%) of the aggregate Consolidated Net Revenue for such Defined Period, then Borrowers shall promptly (and in any event with thirty (30) days (or such longer period as Agent may agree in writing in its discretion) of the date on which the quarterly Compliance Certificate was delivered in respect of such Defined Period pursuant to Section 4.1(i)) cause certain Restricted Foreign Subsidiaries designated by Agent, in its Permitted Discretion and in consultation with Borrower Representative, to become Credit Parties in accordance with the Joinder Requirements (as though such designated Subsidiaries were new Subsidiaries and no longer Restricted Foreign Subsidiaries) pursuant to documentation (including any foreign law governed documentation as may be necessary or reasonably desirable) such that, following such joinder, the Consolidated Net Revenue attributable solely to the Borrowers and Guarantors for such Defined Period is greater than or equal to seventy-five percent (75%) of the aggregate Consolidated Net Revenue for such Defined Period. Following any such joinder, such designated foreign Subsidiaries shall no longer be Restricted Foreign Subsidiary and shall be Credit Parties for all purposes hereunder and under the other Financing Documents and shall not be re-designated as Restricted Foreign Subsidiaries without Agent’s prior written consent (which may be given or withheld in its sole discretion).”
as follows:
5
MidCap / Paragon 28 / Amendment No. 3 to Credit Agreement (Revolving Loan)
“(a) Together with each Compliance Certificate required to be delivered pursuant to Section 4.1(i) with respect to the last month of a calendar quarter, to the extent (i) Borrower acquires and/or develops any new Registered Intellectual Property, (ii) Borrower enters into or becomes bound by any additional material in-bound license or sublicense agreement, any additional exclusive out-bound license or sublicense agreement (other than
over-the-counter software, software that is commercially available to the public, open source licenses and enabling licenses in the Ordinary Course of Business), or (iii) there occurs any other material change in Borrower’s Registered Intellectual Property, material in-bound licenses or sublicenses or exclusive out-bound licenses or sublicenses from that listed on Schedule 3.19, together with such Compliance Certificate, deliver to Agent an updated Schedule 3.19 reflecting such updated information. With respect to any updates to Schedule 3.19 involving exclusive out-bound licenses or sublicenses, such licenses shall be consistent with the definitions of and limitations herein pertaining to Permitted Licenses.”
as follows:
“(b) If Borrower obtains any Registered Intellectual Property (other than any foreign registered Intellectual Property constituting Excluded Perfection Assets), Borrower shall (together with the next Compliance Certificate required to be delivered pursuant to Section 4.1(i) with respect to the last month of a calendar quarter) notify Agent and execute such documents and provide such other information (including, without limitation, copies of applications) and take such other actions as Agent shall request in its good faith business judgment to perfect and maintain a first priority perfected security interest in favor of Agent, for the ratable benefit of Lenders, in such Registered Intellectual Property.”
follows:
“Restrictive Agreements. No Borrower will, or will permit any Subsidiary to, directly or indirectly (a) enter into or assume any agreement (other than the Financing Documents, the Affiliated Financing Documents, and solely with respect to the Zions Collateral, the Zions Loan Documents and any Permitted Refinancing thereof) prohibiting the creation or assumption of any Lien upon its properties or assets, whether now owned or hereafter acquired, or (b) create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind (except as provided by the Financing Documents and the Affiliated Financing Documents) on the ability of any Subsidiary to: (i) pay or make Distributions to any Borrower or any Subsidiary; (ii) pay any Debt owed to any Borrower or any Subsidiary; (iii) make loans or advances to any Borrower or any Subsidiary; or (iv) transfer any of its property or assets to any Borrower or any Subsidiary, in each case under this Section 5.4 other than (1) customary restrictions and conditions contained in agreements relating to the sale of assets of any Subsidiary pending such sale, provided that such restrictions and conditions apply only to the Subsidiary to be sold and such sale is permitted hereunder, (2) restrictions or conditions imposed by any agreement relating to purchase money Debt, Capital Leases and other secured Debt permitted by this Agreement if such restrictions or conditions apply only to the property or assets securing such Debt, (3) customary anti-assignment provisions contained in leases, licenses, contracts and other agreements to the extent not otherwise prohibited under the terms of this Agreement, and (4) restrictions existing on the Closing Date and expressly set forth on Schedule 5.4 on the Closing Date.”
6
MidCap / Paragon 28 / Amendment No. 3 to Credit Agreement (Revolving Loan)
as follows:
“(b) Borrowers represent and warrant that Schedule 5.14 (as updated by the
monthly and quarterly Compliance Certificates delivered to Agent pursuant to Section 4.1(i) from time to time after the Closing Date) lists all of the Deposit Accounts and Securities Accounts of each Borrower as of the Closing Date and as of the date on which each Compliance Certificate is delivered. The provisions of this Section requiring Deposit Account Control Agreements shall not apply to Excluded Accounts.”
follows:
“Minimum Net Product Sales. Borrowers shall not permit their consolidated Net Product Sales for any applicable Defined Period, as tested quarterly on the last day of the applicable Defined Period, to be less than the Minimum Net Product Sales Threshold for such Defined Period. For the avoidance of doubt, in no event shall any Net Product Sales attributable to any entity or assets acquired pursuant to or in connection with a Permitted Acquisition and that was received or accrued prior to the date of such Permitted Acquisition be counted for purposes of determining Borrower’s compliance with the financial covenant set forth in Section 6.1.”
follows:
“Minimum Consolidated EBITDA. Borrowers shall not permit Consolidated EBITDA for any applicable Defined Period, as tested quarterly on the last day of such Defined Period, to be less than Seven Million Dollars ($7,000,000).”
follows:
“Evidence of Compliance. Borrowers shall furnish to Agent, as required by Section 4.1(i), a Compliance Certificate as evidence (a) of the cash and Cash Equivalents of Borrowers and Borrowers and their Consolidated Subsidiaries as of the close of business on the date that is five (5) Business Days prior to the date on which the Compliance Certificate is delivered, (b) for each quarterly Compliance Certificate delivered pursuant to Section 4.1(i)(x), of Borrowers’ compliance with the covenants in this Article, and (c) that no Event of Default specified in this Article has occurred. The Compliance Certificate shall include, without limitation, (x) a statement and report detailing Borrowers’ calculations, and (y) if reasonably requested by Agent, back-up documentation (including, without limitation, bank statements (which may be redacted, as necessary, to protect confidential account information), invoices, receipts and other evidence of costs incurred during such quarter as Agent shall reasonably require) evidencing the propriety of the calculations.”
as follows:
“(b) (i) Schedule 9.2(b) (as updated by each quarterly Compliance Certificate
7
MidCap / Paragon 28 / Amendment No. 3 to Credit Agreement (Revolving Loan)
required to be delivered pursuant to Section 4.1(i)(x) from time to time after the Closing Date) sets forth each chief executive office and principal place of business of each Borrower and each of their respective Subsidiaries, and (ii) Schedule 9.2(b) (as updated by each quarterly Compliance Certificate required to be delivered pursuant to Section 4.1(i)(x)) sets forth all of the addresses (including all warehouses) at which any of the
Inventory or Equipment with a fair market value in excess of $1,000,000 is located and/or books and records of Borrowers regarding any Collateral are kept, which such Schedule 9.2(b) indicates in each case which Borrower(s) have Inventory or Equipment with a fair market value in excess of $1,000,000 and/or books and records located at such address, and, in the case of any such address not owned by one or more of the Borrower(s), indicates the nature of such location (e.g., leased business location operated by Borrower(s), third party warehouse, consignment location, processor location, etc.) and the name and address of the third party owning and/or operating such location.”
as follows:
“(d) As of the Closing Date, except as set forth on Schedule 9.2(d), no Borrower has any ownership interest in any Chattel Paper (as defined in Article 9 of the UCC), Letter-of-Credit Rights, Commercial Tort Claims, Instruments, Documents or Investment Property (in each case, other than Excluded Perfection Assets or Equity Interests in any Subsidiaries of such Borrower disclosed on Schedule 3.4), and Borrowers shall give notice to Agent promptly (but in any event not later than the delivery by Borrowers of the next quarterly Compliance Certificate required pursuant to Section 4.1(i)(x) above) upon the acquisition by any Borrower of any such Chattel Paper, letter of credit rights, commercial tort claims, Instruments, documents, investment property, in each case, other than Excluded Perfection Assets). Subject to the terms of the Affiliated Intercreditor Agreement, no Person other than Agent or (if applicable) any Lender has “control” (as defined in Article 9 of the UCC) over any Deposit Account, investment property (including Securities Accounts and commodities account), letter of credit rights or electronic chattel paper in which any Borrower has any interest (except for such control arising by operation of law in favor of any bank or securities intermediary or commodities intermediary with whom any Deposit Account, Securities Account or commodities account of Borrowers is maintained).”
“(iii) Borrowers shall promptly (but in any event not later than the delivery of the next quarterly Compliance Certificate required pursuant to Section 4.1(i)(x) above) advise Agent upon any Borrower becoming aware that it has any interests in any Commercial Tort Claim (other than Excluded Perfection Assets or Excluded Property), which such notice shall include descriptions of the events and circumstances giving rise to such Commercial Tort Claim and the dates such events and circumstances occurred, if available, the potential defendants with respect to such Commercial Tort Claim and any court proceedings that have been instituted with respect to such Commercial Tort Claims, and Borrowers shall, with respect to any such Commercial Tort Claim, execute and deliver to Agent such documents as Agent shall request to perfect the Liens, rights and remedies of Agent with respect to any such Commercial Tort Claim.”
8
MidCap / Paragon 28 / Amendment No. 3 to Credit Agreement (Revolving Loan)
“(vi) As of the Closing Date, no Borrower holds, and, after the Closing Date, Borrowers shall promptly (but in any event not later than the delivery of the next quarterly Compliance Certificate required pursuant to Section 4.1(i)(x) above) notify Agent in
writing upon creation or acquisition by any Borrower of, any Collateral which constitutes a claim against any Governmental Authority in excess of $1,000,000 individually or the aggregate with all other such claims, including, without limitation, the federal government of the United States or any instrumentality or agency thereof, the assignment of which claim is restricted by any applicable Law, including, without limitation, the federal Assignment of Claims Act and any other comparable Law. Upon the reasonable request of Agent, Borrowers shall take such steps as may be necessary or desirable, or that Agent may reasonably request, to comply with any such applicable Law; provided, however, the requirement to comply with the Federal Assignment of Claims Act or any similar statute, shall be limited to the obligation of the applicable Credit Parties to execute and deliver to Agent such forms as necessary to comply with the Federal Assignment of Claims Act or any similar statute (but for the avoidance of doubt, shall not require that such Credit Parties obtain the signatures from any Governmental Authority.”
9
MidCap / Paragon 28 / Amendment No. 3 to Credit Agreement (Revolving Loan)
10
MidCap / Paragon 28 / Amendment No. 3 to Credit Agreement (Revolving Loan)
Effective Date. Each Borrower acknowledges that the foregoing release is a material inducement to Agent’s and Required Lender’s decision to enter into this Agreement and agree to the modifications contemplated hereunder, and has been relied upon by Agent and Required Lenders in connection therewith.
11
MidCap / Paragon 28 / Amendment No. 3 to Credit Agreement (Revolving Loan)
[SIGNATURES APPEAR ON FOLLOWING PAGES]
12
MidCap / Paragon 28 / Amendment No. 3 to Credit Agreement (Revolving Loan)
IN WITNESS WHEREOF, intending to be legally bound, the undersigned have executed this Agreement as of the day and year first hereinabove set forth.
AGENT: |
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MIDCAP FUNDING IV TRUST |
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By: |
Apollo Capital Management, L.P., its |
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investment manager |
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By: |
Apollo Capital Management, GP, LLC, its |
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general partner |
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By: |
/s/ Maurice Amsellem |
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Name: |
Maurice Amsellem |
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Title: |
Authorized Signatory |
13
MidCap / Paragon 28 / Amendment No. 3 to Credit Agreement (Revolving Loan)
LENDER: |
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MIDCAP FUNDING IV TRUST |
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By: |
Apollo Capital Management, L.P., its |
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investment manager |
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By: |
Apollo Capital Management, GP, LLC, its |
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general partner |
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By: |
/s/ Maurice Amsellem |
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Name: |
Maurice Amsellem |
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Title: |
Authorized Signatory |
14
MidCap / Paragon 28 / Amendment No. 3 to Credit Agreement (Revolving Loan)
LENDER: |
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APOLLO INVESTMENT CORPORATION |
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By: |
Apollo Investment Management, L.P., as Advisor |
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By: |
ACC Management, LLC, as its General Partner |
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By: |
/s/ Joseph D. Glatt |
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Name: |
Joseph D. Glatt |
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Title: |
Vice President |
15
MidCap / Paragon 28 / Amendment No. 3 to Credit Agreement (Revolving Loan)
BORROWERS: |
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PARAGON 28, INC. |
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By: |
/s/ Steve Deitsch |
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Name: |
Steve Deitsch |
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Title: |
Chief Financial Officer |
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PARAGON ADVANCED TECHNOLOGIES, INC. |
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By: |
/s/ Steve Deitsch |
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Name: |
Steve Deitsch |
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Title: |
Secretary and Treasurer |
16
MidCap / Paragon 28 / Amendment No. 3 to Credit Agreement (Revolving Loan)
Schedule 1 – Description of Real Property
LEGAL DESCRIPTION
The Land referred to herein below is situated in the County of Douglas, State of Colorado, and is described as follows:
Lot 5a,
Compark Filing No. 2, 1st Amendment, County of Douglas,
State of Colorado, and all appurtenances thereto, and all rights, if any, to after-acquired title related to the Land.
For informational purposes only: APN: 2233-060-01-023
17
MidCap / Paragon 28 / Amendment No. 3 to Credit Agreement (Revolving Loan)
Exhibit A – Compliance Certificate
Exhibit B to Credit Agreement (Form of Compliance Certificate)
COMPLIANCE CERTIFICATE (REVOLVING LOAN)
This Compliance Certificate is given by____________, a Responsible Officer of____________ (the “Borrower Representative”), pursuant to that certain Credit and Security Agreement (Revolving Loan), dated as of May 6, 2021, among the Borrower Representative, ______________ and any additional Borrower that may hereafter be added thereto (collectively, “Borrowers”), MidCap Financial Trust, individually as a Lender and as Agent, and the financial institutions or other entities from time to time parties hereto, each as a Lender (as such agreement may have been amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”). Capitalized terms used herein without definition shall have the meanings set forth in the Credit Agreement.
[NOTE: Include OPTION 1 below only for quarterly compliance certificates delivered pursuant to Section 4.1(i)(x) of the Credit Agreement. Include OPTION 2 below only for monthly compliance certificates delivered pursuant to Section 4.1(i)(y) of the Credit Agreement]
[OPTION 1 – (Use for Quarterly Compliance Certificates):]
The undersigned Responsible Officer hereby certifies to Agent and Lenders that:
18
MidCap / Paragon 28 / Amendment No. 3 to Credit Agreement (Revolving Loan)
19
MidCap / Paragon 28 / Amendment No. 3 to Credit Agreement (Revolving Loan)
The foregoing certifications and computations are made as of____________, 202__(end of fiscal quarter).
[OPTION 2 – (Use for Monthly Compliance Certificates):]
The undersigned Responsible Officer hereby certifies to Agent and Lenders that:
The foregoing certifications and computations are made as of ____________, 202__ (end of month).
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Sincerely, |
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PARAGON 28, INC. |
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20
MidCap / Paragon 28 / Amendment No. 3 to Credit Agreement (Revolving Loan)
CONSOLIDATED EBITDA1
Consolidated EBITDA for the applicable Defined Period is defined as follows: |
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Net income (or loss) for the Defined Period of Paragon 28, Inc. and its Subsidiaries, determined on a consolidated basis in accordance with GAAP, minus (to the extent included in the determination of net income and without duplication): the sum of (i) the income (or minus the loss) of any Person accrued prior to the date it becomes a Subsidiary or is merged into or consolidated with Paragon 28, Inc., any other Credit Party or any other Subsidiary, plus (ii) notwithstanding consolidation under GAAP, the income (or loss) of any Person (other than a Credit Party) in which Borrower or any of the other Credit Parties has an ownership interest unless received by Borrower or such Credit Party in a cash distribution (“Consolidated Net Income”) |
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Plus (in each case below to the extent deducted in the determination of Consolidated Net Income for such Defined Period and without duplication):
Any provision for (minus any benefit from) Taxes based on federal, state, local and foreign income and franchise, property, foreign withholding, and unreimbursed value added Taxes and similar Taxes, interest and penalties included under GAAP in the determination of income Tax expenses |
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Consolidated Interest Expense* (net of interest income) |
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Depreciation of fixed assets and amortization of intangible assets determined in accordance with GAAP |
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Other non-cash expenses, charges or losses included (minus non-cash income added) in the determination of Consolidated Net Income, including any write-offs or write-downs of Accounts reducing Consolidated Net Income for such period (in each case, of or by Paragon 28, Inc. and its Subsidiaries) (provided the aggregate amount of such write-offs or write-downs with respect to such Accounts shall not exceed$500,000 for any Defined Period), and excluding amortization of a prepaid cash item that was paid in a prior period |
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___________________________
1 Include only in quarterly compliance certificates delivered pursuant to Section 4.1(i)(x) of the Credit Agreement.
21
MidCap / Paragon 28 / Amendment No. 3 to Credit Agreement (Revolving Loan)
Extraordinary, unusual or non-recurring losses included in the determination of Consolidated Net Income during such Defined Period in accordance with GAAP and unusual or non-recurring charges and other expenses, including severance costs and expenses and net of related Tax effects; provided that, such extraordinary, unusual or non-recurring losses, charges and other expenses shall not exceed $500,000 in any Defined Period |
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Expenses and fees included in the determination of Consolidated Net Income and paid or incurred by Paragon 28, Inc. and its Subsidiaries during such Defined Period to consummate the transactions contemplated by the Financing Documents and the Affiliated Financing Documents, but solely to the extent (i) disclosed to Agent prior to the date of payment, (ii) the aggregate amount of which being paid or incurred on or prior to the Closing Date shall not exceed $3,500,000, (iii) the aggregate amount of which being paid or incurred after the Closing Date shall not exceed $300,000 and (iv) such expenses and fees shall in any event be paid within ninety (90) days after the Closing Date |
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(i) Extraordinary, unusual and non-recurring costs, expenses and fees included in the determination of Consolidated Net Income and paid or incurred by the Credit Parties or any of their Subsidiaries during such Defined Period in connection with any financing, acquisition, any public offering of Equity Interests or SAP implementation, (ii) costs, expenses and fees included in the determination of Consolidated Net Income and paid or incurred by the Credit Parties or any of their Subsidiaries during such Defined Period in connection with litigation, and (iii) without duplication of clause (i), costs, expenses, fees and charges in connection with restructurings, facility openings and shut downs, severance, and integration costs in connection with acquisitions, in all cases, paid or incurred by the Credit Parties or any of their Subsidiaries during such Defined Period; provided, that, (x) any such costs, expenses and fees added back to Consolidated Net Income pursuant to this paragraph shall not exceed $10,000,000 in the aggregate in any Defined Period and (y) without limitation of clause (x) of this proviso, any such costs, expenses and fees added back to Consolidated Net Income pursuant to clause (iii) of this paragraph shall not exceed $5,000,000 in the aggregate in any Defined Period |
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Minus (in each case below to the extent included in the determination of Consolidated Net Income for such Defined Period and without duplication)
any non-cash additions to net income for such Defined Period |
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any amount (expressed as a positive number) of loan forgiveness of any loans incurred under the Paycheck Protection Program under the Cares Act included as a gain or income in the determination of Consolidated Net Income and recognized by any Borrower during such Defined Period |
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any extraordinary, unusual or non-recurring gains, all calculated for the Borrowers on a consolidated basis in accordance with GAAP |
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Consolidated EBITDA for the Defined Period |
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$ |
22
MidCap / Paragon 28 / Amendment No. 3 to Credit Agreement (Revolving Loan)
* “Consolidated Interest Expense” means for any Defined Period, the sum of total interest expense (including that portion attributable to Capital Leases in accordance with GAAP and capitalized interest), premium payments, debt discount, fees, charges and related expenses with respect to all outstanding Debt of Paragon 28, Inc. and its Subsidiaries (including, all commissions, discounts and other fees and charges owed with respect to letters of credit and banker’s acceptances, but excluding net payments (less net credits) under swap contracts to the extent such net payments are allocable to such Defined Period in accordance with GAAP, in each case whether or not paid in cash during such Defined Period.
23
MidCap / Paragon 28 / Amendment No. 3 to Credit Agreement (Revolving Loan)
Exhibit B – Schedule 6.1
Schedule 6.1 – Minimum Net Product Sales Schedule
Defined Period Ending |
Minimum Net Product Sales Threshold |
June 30, 2021 |
$105,000,000 |
September 30, 2021 |
$107,500,000 |
December 31, 2021 |
$110,000,000 |
March 31, 2022 |
$112,500,000 |
June 30, 2022 |
$115,000,000 |
September 30, 2022 |
$117,500,000 |
December 31, 2022 |
$120,000,000 |
March 31, 2023 |
$121,250,000 |
June 30, 2023 |
$122,500,000 |
September 30, 2023 |
$123,750,000 |
December 31, 2023 |
$125,000,000 |
March 31, 2024 |
$126,250,000 |
June 30, 2024 |
$127,500,000 |
September 30, 2024 |
$128,750,000 |
December 31, 2024 |
$130,000,000 |
March 31, 2025 |
$131,250,000 |
June 30, 2025 |
$132,500,000 |
September 30, 2025 |
$133,750,000 |
December 31, 2025 |
$135,000,000 |
March 31, 2026 |
$136,250,000 |
24
MidCap / Paragon 28 / Amendment No. 3 to Credit Agreement (Revolving Loan)
Exhibit 10.3
EXECUTION VERSION
AMENDMENT NO. 2 TO CREDIT AND SECURITY AGREEMENT (TERM LOAN)
This AMENDMENT NO. 2 TO CREDIT AND SECURITY AGREEMENT (TERM LOAN) (this “Agreement”) is made as of the 24th day of March, 2022, by and among PARAGON 28, INC., a Delaware corporation (“Paragon 28”), PARAGON ADVANCED TECHNOLOGIES, INC., a Delaware corporation (“Paragon Advanced Technologies”, and Paragon Advanced Technologies, together with Paragon 28, each a “Borrower” and collectively, the “Borrowers”), MIDCAP FINANCIAL TRUST, a Delaware statutory trust, as Agent (in such capacity, together with its successors and assigns, “Agent”) and the Lenders (as defined in the Credit Agreement referenced below) party hereto.
RECITALS
1
MidCap / Paragon 28 / Amendment No. 2 to Credit Agreement (Term Loan)
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, the terms and conditions set forth in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Agent, the Lenders party hereto and Borrowers hereby agree as follows:
“Acquired Real Property” has the meaning set forth in the Second Amendment. “Assigned Leases and Rents” means the leases in respect of the Acquired Real Property
and such other property related thereto and described in Section 1 of the Zions Assignment of Leases and Rents delivered to the Agent, and as in effect, on the Second Amendment Effective Date.
“Second Amendment” means that certain Amendment No. 2 to Credit and Security Agreement (Term Loan), dated as the Second Amendment Effective Date, by and among the Borrowers, Agent and Lenders.
“Second Amendment Effective Date” means March 24, 2022.
“Zions Assignment of Leases and Rents” has the meaning set forth in the Second Amendment.
“Zions Collateral” means (a) the Acquired Real Property, (b) Improvements (as defined in the Zions Deed of Trust, as the same is in effect on the Second Amendment Effective Date), (c) the Assigned Leases and Rents, and (d) all awards made for the taking by eminent domain, or by any proceeding of purchase in lieu thereof, of the whole or any part of the Acquired Real Property.
“Zions Loan Agreement” has the meaning set forth in the Second Amendment.
2
MidCap / Paragon 28 / Amendment No. 2 to Credit Agreement (Term Loan)
“Zions Loan Documents” means “Loan Documents” (as such term is defined in the Zions Loan Agreement) as in effect on the Second Amendment Effective Date to the extent such documents are delivered to Agent pursuant to Section 4(c) of the Second Amendment (as the same may be amended, restated, amended and restated, supplemented or otherwise modified from time to time in accordance with Section 6(b) of the Second Amendment).
“Defined Period” means for any given fiscal quarter or date of determination, the immediately preceding twelve (12) month period ending on the last day of such fiscal quarter or if such date of determination is not the last day of a fiscal quarter, the twelve
(12) month period immediately preceding any such date of determination.
therein:
“(g) the Zions Collateral;”
“Material Real Property” means any real property located in the United States that is owned in fee by any Credit Party with a fair market value (as reasonably determined by Agent) in excess of $5,000,000 individually or in the aggregate together with all other real property that is owned by the Credit Parties; provided that Material Real Property shall not include the Acquired Real Property.
“(k) disposition of the Assigned Leases and Rents in connection with the Debt permitted pursuant to clause (u) of the definition of Permitted Debt; and”
3
MidCap / Paragon 28 / Amendment No. 2 to Credit Agreement (Term Loan)
“(u) Debt under Zions Loan Agreement and the other Zions Loan Documents in an aggregate principal amount not to exceed $16,000,000 and any Permitted Refinancing thereof; and”
“(t) Liens granted on any Zions Collateral securing the Debt permitted pursuant to clause (u) of the definition of Permitted Debt, and Liens granted on any Zions Collateral securing a Permitted Refinancing of such Debt secured by such Liens; and”
“(a) as soon as available, but no later than thirty (30) days after the last day of each fiscal quarter, a company prepared consolidated and consolidating balance sheet, cash flow and income statement (including year-to-date results) covering Borrowers’ and its Consolidated Subsidiaries’ consolidated and consolidating operations during the period, prepared under GAAP in all material respects (subject to normal year-end adjustments and the absence of footnote disclosures), consistently applied, setting forth in comparative form the corresponding figures as at the end of the corresponding fiscal quarter of the previous fiscal year and the projected figures for such period based upon the projections required hereunder, all in reasonable detail, certified by a Responsible Officer and in a form reasonably acceptable to Agent (provided that the form of the financial statements delivered to Agent prior to the Closing Date shall be deemed reasonably acceptable to Agent);”
“(b) upon Agent’s reasonable request, together with the financial reporting package described in (a) above, evidence of payment and satisfaction of all payroll, withholding and similar taxes due and owing by all Borrowers with respect to the payroll period(s) occurring during such fiscal quarter;”
4
MidCap / Paragon 28 / Amendment No. 2 to Credit Agreement (Term Loan)
“(i) (x) within thirty (30) days after the last day of each fiscal quarter, deliver to Agent, a duly completed Compliance Certificate signed by a Responsible Officer (a) setting forth the cash and Cash Equivalents of (i) Borrowers, (ii) Borrowers and their Consolidated Subsidiaries, (iii) the Restricted Foreign Subsidiaries, in each case, as of the close of business on the date that is five (5) Business Days prior to date on which such Compliance Certificate is delivered, and (b) demonstrating compliance with the financial covenants set forth in this Agreement and (y) within thirty (30) days after the last day of each month, deliver to Agent a duly completed Compliance Certificate signed by a Responsible Officer, setting forth the cash and Cash Equivalents of (i) Borrowers, (ii) Borrowers and their Consolidated Subsidiaries, (iii) the Restricted Foreign Subsidiaries, in each case, as of the close of business on the date that is five (5) Business Days prior to date on which such Compliance Certificate is delivered;”
“(d) If, at the end of any Defined Period, Consolidated Net Revenue attributable solely to the Borrowers and Guarantors (and not, for the avoidance of doubt, to any Restricted Foreign Subsidiary) for such Defined Period is less than seventy-five percent (75%) of the aggregate Consolidated Net Revenue for such Defined Period, then Borrowers shall promptly (and in any event with thirty (30) days (or such longer period as Agent may agree in writing in its discretion) of the date on which the quarterly Compliance Certificate was delivered in respect of such Defined Period pursuant to Section 4.1(i)) cause certain Restricted Foreign Subsidiaries designated by Agent, in its Permitted Discretion and in consultation with Borrower Representative, to become Credit Parties in accordance with the Joinder Requirements (as though such designated Subsidiaries were new Subsidiaries and no longer Restricted Foreign Subsidiaries) pursuant to documentation (including any foreign law governed documentation as may be necessary or reasonably desirable) such that, following such joinder, the Consolidated Net Revenue attributable solely to the Borrowers and Guarantors for such Defined Period is greater than or equal to seventy-five percent (75%) of the aggregate Consolidated Net Revenue for such Defined Period. Following any such joinder, such designated foreign Subsidiaries shall no longer be Restricted Foreign Subsidiary and shall be Credit Parties for all purposes hereunder and under the other Financing Documents and shall not be re-designated as Restricted Foreign Subsidiaries without Agent’s prior written consent (which may be given or withheld in its sole discretion).”
“(a) Together with each Compliance Certificate required to be delivered pursuant to Section 4.1(i) with respect to the last month of a calendar quarter, to the extent (i) Borrower acquires and/or develops any new Registered Intellectual Property, (ii) Borrower enters into or becomes bound by any additional material in-bound license or sublicense agreement, any additional exclusive out-bound license or sublicense agreement (other than over-the-counter software, software that is commercially available to the public, open source licenses and enabling licenses in the Ordinary Course of Business), or (iii) there occurs any other material change in Borrower’s Registered Intellectual Property, material in-bound licenses or sublicenses or exclusive out-bound licenses or sublicenses from that listed on Schedule 3.19, together with such Compliance Certificate, deliver to Agent an updated Schedule 3.19 reflecting such updated information. With respect to any updates
5
MidCap / Paragon 28 / Amendment No. 2 to Credit Agreement (Term Loan)
to Schedule 3.19 involving exclusive out-bound licenses or sublicenses, such licenses shall be consistent with the definitions of and limitations herein pertaining to Permitted Licenses.”
“(b) If Borrower obtains any Registered Intellectual Property (other than any foreign registered Intellectual Property constituting Excluded Perfection Assets), Borrower shall (together with the next Compliance Certificate required to be delivered pursuant to Section 4.1(i) with respect to the last month of a calendar quarter) notify Agent and execute such documents and provide such other information (including, without limitation, copies of applications) and take such other actions as Agent shall request in its good faith business judgment to perfect and maintain a first priority perfected security interest in favor of Agent, for the ratable benefit of Lenders, in such Registered Intellectual Property.”
“Restrictive Agreements. No Borrower will, or will permit any Subsidiary to, directly or indirectly (a) enter into or assume any agreement (other than the Financing Documents, the Affiliated Financing Documents, and solely with respect to the Zions Collateral, the Zions Loan Documents and any Permitted Refinancing thereof) prohibiting the creation or assumption of any Lien upon its properties or assets, whether now owned or hereafter acquired, or (b) create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind (except as provided by the Financing Documents and the Affiliated Financing Documents) on the ability of any Subsidiary to: (i) pay or make Distributions to any Borrower or any Subsidiary; (ii) pay any Debt owed to any Borrower or any Subsidiary; (iii) make loans or advances to any Borrower or any Subsidiary; or (iv) transfer any of its property or assets to any Borrower or any Subsidiary, in each case under this Section 5.4 other than (1) customary restrictions and conditions contained in agreements relating to the sale of assets of any Subsidiary pending such sale, provided that such restrictions and conditions apply only to the Subsidiary to be sold and such sale is permitted hereunder, (2) restrictions or conditions imposed by any agreement relating to purchase money Debt, Capital Leases and other secured Debt permitted by this Agreement if such restrictions or conditions apply only to the property or assets securing such Debt, (3) customary anti-assignment provisions contained in leases, licenses, contracts and other agreements to the extent not otherwise prohibited under the terms of this Agreement, and (4) restrictions existing on the Closing Date and expressly set forth on Schedule 5.4 on the Closing Date.”
“(b) Borrowers represent and warrant that Schedule 5.14 (as updated by the monthly and quarterly Compliance Certificates delivered to Agent pursuant to Section 4.1(i) from time to time after the Closing Date) lists all of the Deposit Accounts and Securities Accounts of each Borrower as of the Closing Date and as of the date on which each Compliance Certificate is delivered. The provisions of this Section requiring Deposit Account Control Agreements shall not apply to Excluded Accounts.”
6
MidCap / Paragon 28 / Amendment No. 2 to Credit Agreement (Term Loan)
“Minimum Net Product Sales. Borrowers shall not permit their consolidated Net Product Sales for any applicable Defined Period, as tested quarterly on the last day of the applicable Defined Period, to be less than the Minimum Net Product Sales Threshold for such Defined Period. For the avoidance of doubt, in no event shall any Net Product Sales attributable to any entity or assets acquired pursuant to or in connection with a Permitted Acquisition and that was received or accrued prior to the date of such Permitted Acquisition be counted for purposes of determining Borrower’s compliance with the financial covenant set forth in Section 6.1.”
“Minimum Consolidated EBITDA. Borrowers shall not permit Consolidated EBITDA for any applicable Defined Period, as tested quarterly on the last day of such Defined Period, to be less than Seven Million Dollars ($7,000,000).”
“Evidence of Compliance. Borrowers shall furnish to Agent, as required by Section 4.1(i), a Compliance Certificate as evidence (a) of the cash and Cash Equivalents of Borrowers and Borrowers and their Consolidated Subsidiaries as of the close of business on the date that is five (5) Business Days prior to the date on which the Compliance Certificate is delivered, (b) for each quarterly Compliance Certificate delivered pursuant to Section 4.1(i)(x), of Borrowers’ compliance with the covenants in this Article, and (c) that no Event of Default specified in this Article has occurred. The Compliance Certificate shall include, without limitation, (x) a statement and report detailing Borrowers’ calculations, and (y) if reasonably requested by Agent, back-up documentation (including, without limitation, bank statements (which may be redacted, as necessary, to protect confidential account information), invoices, receipts and other evidence of costs incurred during such quarter as Agent shall reasonably require) evidencing the propriety of the calculations.”
“(b) (i) Schedule 9.2(b) (as updated by each quarterly Compliance Certificate required to be delivered pursuant to Section 4.1(i)(x) from time to time after the Closing Date) sets forth each chief executive office and principal place of business of each Borrower and each of their respective Subsidiaries, and (ii) Schedule 9.2(b) (as updated by each quarterly Compliance Certificate required to be delivered pursuant to Section 4.1(i)(x)) sets forth all of the addresses (including all warehouses) at which any of the Inventory or Equipment with a fair market value in excess of $1,000,000 is located and/or books and records of Borrowers regarding any Collateral are kept, which such Schedule 9.2(b) indicates in each case which Borrower(s) have Inventory or Equipment with a fair market value in excess of $1,000,000 and/or books and records located at such address, and, in the case of any such address not owned by one or more of the Borrower(s), indicates the nature of such location (e.g., leased business location operated by Borrower(s), third
party warehouse, consignment location, processor location, etc.) and the name and address of the third party owning and/or operating such location.”
7
MidCap / Paragon 28 / Amendment No. 2 to Credit Agreement (Term Loan)
“(d) As of the Closing Date, except as set forth on Schedule 9.2(d), no Borrower has any ownership interest in any Chattel Paper (as defined in Article 9 of the UCC), Letter-of-Credit Rights, Commercial Tort Claims, Instruments, Documents or Investment Property (in each case, other than Excluded Perfection Assets or Equity Interests in any Subsidiaries of such Borrower disclosed on Schedule 3.4), and Borrowers shall give notice to Agent promptly (but in any event not later than the delivery by Borrowers of the next quarterly Compliance Certificate required pursuant to Section 4.1(i)(x) above) upon the acquisition by any Borrower of any such Chattel Paper, letter of credit rights, commercial tort claims, Instruments, documents, investment property, in each case, other than Excluded Perfection Assets). Subject to the terms of the Affiliated Intercreditor Agreement, no Person other than Agent or (if applicable) any Lender has “control” (as defined in Article 9 of the UCC) over any Deposit Account, investment property (including Securities Accounts and commodities account), letter of credit rights or electronic chattel paper in which any Borrower has any interest (except for such control arising by operation of law in favor of any bank or securities intermediary or commodities intermediary with whom any Deposit Account, Securities Account or commodities account of Borrowers is maintained).”
“(iii) Borrowers shall promptly (but in any event not later than the delivery of the next quarterly Compliance Certificate required pursuant to Section 4.1(i)(x) above) advise Agent upon any Borrower becoming aware that it has any interests in any Commercial Tort Claim (other than Excluded Perfection Assets or Excluded Property), which such notice shall include descriptions of the events and circumstances giving rise to such Commercial Tort Claim and the dates such events and circumstances occurred, if available, the potential defendants with respect to such Commercial Tort Claim and any court proceedings that have been instituted with respect to such Commercial Tort Claims, and Borrowers shall, with respect to any such Commercial Tort Claim, execute and deliver to Agent such documents as Agent shall request to perfect the Liens, rights and remedies of Agent with respect to any such Commercial Tort Claim.”
“(vi) As of the Closing Date, no Borrower holds, and, after the Closing Date, Borrowers shall promptly (but in any event not later than the delivery of the next quarterly Compliance Certificate required pursuant to Section 4.1(i)(x) above) notify Agent in writing upon creation or acquisition by any Borrower of, any Collateral which constitutes a claim against any Governmental Authority in excess of $1,000,000 individually or the aggregate with all other such claims, including, without limitation, the federal government of the United States or any instrumentality or agency thereof, the assignment of which claim is restricted by any applicable Law, including, without limitation, the federal Assignment of Claims Act and any other comparable Law. Upon the reasonable request
of Agent, Borrowers shall take such steps as may be necessary or desirable, or that Agent may reasonably request, to comply with any such applicable Law; provided, however, the requirement to comply with the Federal Assignment of Claims Act or any similar statute, shall be limited to the obligation of the applicable Credit Parties to execute and deliver to Agent such forms as necessary to comply with the Federal Assignment of Claims Act or any similar statute (but for the avoidance of doubt, shall not require that such Credit Parties
8
MidCap / Paragon 28 / Amendment No. 2 to Credit Agreement (Term Loan)
obtain the signatures from any Governmental Authority.”
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MidCap / Paragon 28 / Amendment No. 2 to Credit Agreement (Term Loan)
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MidCap / Paragon 28 / Amendment No. 2 to Credit Agreement (Term Loan)
11
MidCap / Paragon 28 / Amendment No. 2 to Credit Agreement (Term Loan)
12
MidCap / Paragon 28 / Amendment No. 2 to Credit Agreement (Term Loan)
[SIGNATURES APPEAR ON FOLLOWING PAGES]
13
MidCap / Paragon 28 / Amendment No. 2 to Credit Agreement (Term Loan)
IN WITNESS WHEREOF, intending to be legally bound, the undersigned have executed this Agreement as of the day and year first hereinabove set forth.
AGENT: |
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MIDCAP FINANCIAL TRUST |
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By: |
Apollo Capital Management, L.P., its |
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investment manager |
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By: |
Apollo Capital Management, GP, LLC, its |
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general partner |
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By: |
/s/ Maurice Amsellem |
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Name: |
Maurice Amsellem |
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Title: |
Authorized Signatory |
MidCap / Paragon 28 / Amendment No. 2 to Credit Agreement (Term Loan)
LENDER: |
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MIDCAP FINANCIAL TRUST |
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By: |
Apollo Capital Management, L.P., its |
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investment manager |
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By: |
Apollo Capital Management, GP, LLC, its |
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general partner |
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By: |
/s/ Maurice Amsellem |
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Name: |
Maurice Amsellem |
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Title: |
Authorized Signatory |
MidCap / Paragon 28 / Amendment No. 2 to Credit Agreement (Term Loan)
LENDER: |
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APOLLO INVESTMENT CORPORATION |
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By: |
Apollo Investment Management, L.P., as Advisor |
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By: |
ACC Management, LLC, as its General Partner |
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By: |
/s/ Joseph D. Glatt |
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Name: |
Joseph D. Glatt |
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Title: |
Vice President |
MidCap / Paragon 28 / Amendment No. 2 to Credit Agreement (Term Loan)
LENDERS: |
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ELM 2020-3 TRUST |
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By: |
MidCap Financial Services Capital Management, |
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LLC, as Servicer |
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By: |
/s/ John O’Dea |
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Name: |
John O’Dea |
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Title: |
Authorized Signatory |
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ELM 2020-4 TRUST |
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By: |
MidCap Financial Services Capital Management, |
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LLC, as Servicer |
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/s/ John O’Dea |
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John O’Dea |
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Authorized Signatory |
MidCap / Paragon 28 / Amendment No. 2 to Credit Agreement (Term Loan)
BORROWERS: |
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PARAGON 28, INC. |
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By: |
/s/ Steve Deitsch |
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Name: |
Steve Deitsch |
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Title: |
Chief Financial Officer |
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PARAGON ADVANCED TECHNOLOGIES, INC. |
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By: |
/s/ Steve Deitsch |
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Name: |
Steve Deitsch |
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Title: |
Secretary and Treasurer |
MidCap / Paragon 28 / Amendment No. 2 to Credit Agreement (Term Loan)
MidCap / Paragon 28 / Amendment No. 2 to Credit Agreement (Term Loan)
Schedule 1 – Description of Real Property
LEGAL DESCRIPTION
The Land referred to herein below is situated in the County of Douglas, State of Colorado, and is described as follows:
Lot 5a,
Compark Filing No. 2, 1st Amendment, County of Douglas,
State of Colorado, and all appurtenances thereto, and all rights, if any, to after-acquired title related to the Land.
For informational purposes only: APN: 2233-060-01-023
MidCap / Paragon 28 / Amendment No. 2 to Credit Agreement (Term Loan)
Exhibit A – Compliance Certificate
Exhibit B to Credit Agreement (Form of Compliance Certificate)
COMPLIANCE CERTIFICATE (TERM LOAN)
This Compliance Certificate is given by______________, a Responsible Officer of______________ (the “Borrower Representative”), pursuant to that certain Credit and Security Agreement (Term Loan), dated as of May 6, 2021, among the Borrower Representative,______________ and any additional Borrower that may hereafter be added thereto (collectively, “Borrowers”), MidCap Financial Trust, individually as a Lender and as Agent, and the financial institutions or other entities from time to time parties hereto, each as a Lender (as such agreement may have been amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”). Capitalized terms used herein without definition shall have the meanings set forth in the Credit Agreement.
[NOTE: Include OPTION 1 below only for quarterly compliance certificates delivered pursuant to Section 4.1(i)(x) of the Credit Agreement. Include OPTION 2 below only for monthly compliance certificates delivered pursuant to Section 4.1(i)(y) of the Credit Agreement]
[OPTION 1 – (Use for Quarterly Compliance Certificates):]
The undersigned Responsible Officer hereby certifies to Agent and Lenders that:
MidCap / Paragon 28 / Amendment No. 2 to Credit Agreement (Term Loan)
$[_______];
MidCap / Paragon 28 / Amendment No. 2 to Credit Agreement (Term Loan)
The foregoing certifications and computations are made as of ____________, 202__(end of fiscal quarter).
[OPTION 2 – (Use for Monthly Compliance Certificates):]
The undersigned Responsible Officer hereby certifies to Agent and Lenders that:
The foregoing certifications and computations are made as of ____________, 202__(end of month).
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Sincerely, |
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PARAGON 28, INC. |
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MidCap / Paragon 28 / Amendment No. 2 to Credit Agreement (Term Loan)
CONSOLIDATED EBITDA1
Consolidated EBITDA for the applicable Defined Period is defined as follows: |
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Net income (or loss) for the Defined Period of Paragon 28, Inc. and its Subsidiaries, determined on a consolidated basis in accordance with GAAP, minus (to the extent included in the determination of net income and without duplication): the sum of (i) the income (or minus the loss) of any Person accrued prior to the date it becomes a Subsidiary or is merged into or consolidated with Paragon 28, Inc., any other Credit Party or any other Subsidiary, plus (ii) notwithstanding consolidation under GAAP, the income (or loss) of any Person (other than a Credit Party) in which Borrower or any of the other Credit Parties has an ownership interest unless received by Borrower or such Credit Party in a cash distribution (“Consolidated Net Income”) |
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Plus (in each case below to the extent deducted in the determination of Consolidated Net Income for such Defined Period and without duplication):
Any provision for (minus any benefit from) Taxes based on federal, state, local and foreign income and franchise, property, foreign withholding, and unreimbursed value added Taxes and similar Taxes, interest and penalties included under GAAP in the determination of income Tax expenses |
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Consolidated Interest Expense* (net of interest income) |
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Depreciation of fixed assets and amortization of intangible assets determined in accordance with GAAP |
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Other non-cash expenses, charges or losses included (minus non-cash income added) in the determination of Consolidated Net Income, including any write-offs or write-downs of Accounts reducing Consolidated Net Income for such period (in each case, of or by Paragon 28, Inc. and its Subsidiaries) (provided the aggregate amount of such write-offs or write-downs with respect to such Accounts shall not exceed $500,000 for any Defined Period), and excluding amortization of a prepaid cash item that was paid in a prior period |
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Extraordinary, unusual or non-recurring losses included in the determination of Consolidated Net Income during such Defined Period in accordance with GAAP and unusual or non-recurring charges and other expenses, including severance costs and expenses and net of related Tax effects; provided that, such extraordinary, unusual or non-recurring losses, charges and other expenses shall not exceed $500,000 in any Defined Period |
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___________________________
1 Include only in quarterly compliance certificates delivered pursuant to Section 4.1(i)(x) of the Credit Agreement.
MidCap / Paragon 28 / Amendment No. 2 to Credit Agreement (Term Loan)
Expenses and fees included in the determination of Consolidated Net Income and paid or incurred by Paragon 28, Inc. and its Subsidiaries during such Defined Period to consummate the transactions contemplated by the Financing Documents and the Affiliated Financing Documents, but solely to the extent (i) disclosed to Agent prior to the date of payment, (ii) the aggregate amount of which being paid or incurred on or prior to the Closing Date shall not exceed $3,500,000, (iii) the aggregate amount of which being paid or incurred after the Closing Date shall not exceed $300,000 and (iv) such expenses and fees shall in any event be paid within ninety (90) days after the Closing Date |
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(i) Extraordinary, unusual and non-recurring costs, expenses and fees included in the determination of Consolidated Net Income and paid or incurred by the Credit Parties or any of their Subsidiaries during such Defined Period in connection with any financing, acquisition, any public offering of Equity Interests or SAP implementation, (ii) costs, expenses and fees included in the determination of Consolidated Net Income and paid or incurred by the Credit Parties or any of their Subsidiaries during such Defined Period in connection with litigation, and (iii) without duplication of clause (i), costs, expenses, fees and charges in connection with restructurings, facility openings and shut downs, severance, and integration costs in connection with acquisitions, in all cases, paid or incurred by the Credit Parties or any of their Subsidiaries during such Defined Period; provided, that, (x) any such costs, expenses and fees added back to Consolidated Net Income pursuant to this paragraph shall not exceed $10,000,000 in the aggregate in any Defined Period and (y) without limitation of clause (x) of this proviso, any such costs, expenses and fees added back to Consolidated Net Income pursuant to clause (iii) of this paragraph shall not exceed $5,000,000 in the aggregate in any Defined Period |
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Minus (in each case below to the extent included in the determination of Consolidated Net Income for such Defined Period and without duplication)
any non-cash additions to net income for such Defined Period |
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any amount (expressed as a positive number) of loan forgiveness of any loans incurred under the Paycheck Protection Program under the Cares Act included as a gain or income in the determination of Consolidated Net Income and recognized by any Borrower during such Defined Period |
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any extraordinary, unusual or non-recurring gains, all calculated for the Borrowers on a consolidated basis in accordance with GAAP |
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Consolidated EBITDA for the Defined Period |
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MidCap / Paragon 28 / Amendment No. 2 to Credit Agreement (Term Loan)
* “Consolidated Interest Expense” means for any Defined Period, the sum of total interest expense (including that portion attributable to Capital Leases in accordance with GAAP and capitalized interest), premium payments, debt discount, fees, charges and related expenses with respect to all outstanding Debt of Paragon 28, Inc. and its Subsidiaries (including, all commissions, discounts and other fees and charges owed with respect to letters of credit and banker’s acceptances, but excluding net payments (less net credits) under swap contracts to the extent such net payments are allocable to such Defined Period in accordance with GAAP, in each case whether or not paid in cash during such Defined Period.
MidCap / Paragon 28 / Amendment No. 2 to Credit Agreement (Term Loan)
Exhibit B – Schedule 6.1
Schedule 6.1 – Minimum Net Product Sales Schedule
Defined Period Ending |
Minimum Net Product Sales Threshold |
June 30, 2021 |
$105,000,000 |
September 30, 2021 |
$107,500,000 |
December 31, 2021 |
$110,000,000 |
March 31, 2022 |
$112,500,000 |
June 30, 2022 |
$115,000,000 |
September 30, 2022 |
$117,500,000 |
December 31, 2022 |
$120,000,000 |
March 31, 2023 |
$121,250,000 |
June 30, 2023 |
$122,500,000 |
September 30, 2023 |
$123,750,000 |
December 31, 2023 |
$125,000,000 |
March 31, 2024 |
$126,250,000 |
June 30, 2024 |
$127,500,000 |
September 30, 2024 |
$128,750,000 |
December 31, 2024 |
$130,000,000 |
March 31, 2025 |
$131,250,000 |
June 30, 2025 |
$132,500,000 |
September 30, 2025 |
$133,750,000 |
December 31, 2025 |
$135,000,000 |
March 31, 2026 |
$136,250,000 |
MidCap / Paragon 28 / Amendment No. 2 to Credit Agreement (Term Loan)
Exhibit 31.1
CERTIFICATION 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
I, Albert DaCosta, certify that:
Date: May 9, 2022 |
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By: |
/s/ Albert DaCosta |
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Albert DaCosta |
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Chief Executive Officer |
Exhibit 31.2
CERTIFICATION 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
I, Stephen M. Deitsch, certify that:
Date: May 9, 2022 |
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By: |
/s/ Stephen M. Deitsch |
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Stephen M. Deitsch |
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Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Paragon 28, Inc. (the “Company”) on Form 10-Q for the period ending March 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
Date: May 9, 2022 |
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By: |
/s/ Albert DaCosta |
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Albert DaCosta |
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Chief Executive Officer |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Paragon 28, Inc. (the “Company”) on Form 10-Q for the period ending March 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
Date: May 9, 2022 |
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By: |
/s/ Stephen M. Deitsch |
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Stephen M. Deitsch |
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Chief Financial Officer |
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) - USD ($) $ in Thousands |
Mar. 31, 2022 |
Dec. 31, 2021 |
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Allowance for doubtful accounts | $ 1,310 | $ 1,032 |
Common stock par value | $ 0.01 | $ 0.01 |
Common stock share authorized | 300,000,000 | 300,000,000 |
Common stock share issued | 77,362,681 | 77,360,806 |
Common stock shares, outstanding | 76,449,162 | 76,447,287 |
Treasury stock share issued | 913,519 | 913,519 |
Business and Basis of Presentation |
3 Months Ended |
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Mar. 31, 2022 | |
Accounting Policies [Abstract] | |
Business and Basis of Presentation | NOTE 1. BUSINESS AND BASIS OF PRESENTATION Business Paragon 28, Inc. (collectively with its subsidiaries, “we”, “us”, “our”, “P28” or the “Company”) develops, distributes, and sells medical devices in the foot and ankle segment of the orthopedic implant marketplace. Our approach to product development is procedurally focused, resulting in a full range of procedure-specific foot and ankle products designed specifically for foot and ankle anatomy. Our products and product families include plates and plating systems, screws, staples, and nails aimed to address all major foot and ankle procedures including ankle, charcot, fracture fixation, hallux valgus, hammertoe, and flatfoot. P28 is a United States (“U.S.”) based company incorporated in the State of Colorado, with headquarters in Englewood, Colorado. Our sales representatives and distributors are located globally with the majority concentrated in the U.S. and Europe. Initial Public Offering In October, 2021, the Company completed its initial public offering (“IPO”), in which it issued and sold 8,984,375 shares of its common stock at the public offering price of $16.00 per share, including 1,171,875 shares of its common stock upon the exercise of the underwriters’ option to purchase additional shares. The Company received net proceeds after deducting underwriting discounts and commissions and offering expenses of $129,118. In connection with the IPO, all of the shares of the Company’s outstanding convertible preferred stock automatically converted into an aggregate of 20,421,200 shares of the common stock. Basis of Presentation and Consolidation The accompanying Condensed Consolidated Financial Statements include the accounts of Paragon 28, Inc. and its subsidiaries, all of which are wholly-owned. The accompanying Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information required by U.S. GAAP for complete financial statements. The interim Condensed Consolidated Financial Statements reflect all adjustments that are of a normal recurring nature and that are considered necessary for a fair representation of the results for the periods presented and should be read in conjunction with the audited Consolidated Financial Statements and notes thereto for the year ended December 31, 2021, which include a complete set of footnote disclosures, including our significant accounting policies. The audited Consolidated Financial Statements and notes thereto for the year ended December 31, 2021 are included in the Company’s Annual filing on Form 10-K filed with the SEC on March 8, 2022. The results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year or for any other future period. All intercompany balances and transactions have been eliminated in consolidation. |
Summary of Significant Accounting Policies |
3 Months Ended |
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Mar. 31, 2022 | |
Accounting Policies [Abstract] | |
Summary of Significant Accounting Policies | NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Because future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Any changes in these estimates will be reflected in the Company’s Condensed Consolidated Financial Statements. Significant items subject to such estimates and assumptions include the determination of the collectability of trade receivables, inventory obsolescence, impairment of long-lived assets, recoverability of goodwill and intangible assets, contingent earn-out liabilities, income taxes and stock-based compensation. Foreign Currency Translation The Condensed Consolidated Financial Statements are presented in U.S. dollars. The Company’s non-U.S. subsidiaries have a functional currency (i.e., the currency in which operational activities are primarily conducted) that is other than the U.S. dollar, generally the currency of the country in which such subsidiaries are domiciled. Such subsidiaries’ assets and liabilities are translated into U.S. dollars at quarter-end exchange rates, while revenue and expenses are translated at average exchange rates during the quarter based on the daily closing exchange rates. Adjustments that result from translating amounts from a subsidiary’s functional currency to U.S. dollars are reported in Accumulated Other Comprehensive (Loss) Income, net of tax. 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. Trade Receivables, Less Allowance for Doubtful Accounts The Company estimates an allowance for doubtful accounts based upon an evaluation of the current status of receivables, historical experience, and other factors as necessary. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change. The allowance for doubtful accounts was $1,310 and $1,032 as of March 31, 2022 and December 31, 2021, respectively. Inventories, Net The Company estimates a reserve for obsolete and slow-moving inventory based on current inventory levels, historical sales and future projected demand. Charges (benefit) for excess and obsolete inventory are included in Cost of goods sold and were $(643) and $977 for the three months ended March 31, 2022 and 2021, respectively. The inventory reserve was $16,002 and $19,374 as of March 31, 2022 and December 31, 2021, respectively. 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 seventeen years. Costs associated with capitalized patents include third-party attorney fees and other third-party fees as well as costs related to the following: the preparation of patent applications, government filings and registration fees, drawings, computer searches, and translations related to specific patents. Trademarks that are anticipated to be renewed every ten years have an indefinite life and are not amortized but tested for impairment annually. Once it is determined a trademark will no longer be renewed, the trademark is amortized over the remainder of the trademark’s registration period. Customer relationships are amortized over an estimated useful life of 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 were recorded in any of the periods presented. 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. Goodwill Goodwill represents the excess of the purchase price as compared to the fair value of net assets acquired and liabilities assumed. Goodwill is not amortized, but is tested for impairment annually or when indications of impairment exist. We can elect to qualitatively assess goodwill for impairment if it is more likely than not that the fair value of a reporting unit exceeds its carrying value. Impairment exists when the carrying amount, including goodwill, of the reporting unit exceeds its fair value, resulting in an impairment charge for this excess (not to exceed the carrying amount of the goodwill). Our annual impairment testing date is October 1. The impairment, if determined, is recorded within Operating expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) in the period the determination is made. There were no impairments recorded during the periods presented. Contingent Earn-out Consideration Business combinations may include contingent earn-out consideration as part of the purchase price under which the Company will make future payments to the seller upon the achievement of certain milestones. The fair value of the contingent earn-out consideration is estimated as of the acquisition date at the present value of the expected contingent payments and is subsequently remeasured at each balance sheet date. Two methodologies may be considered in the valuation: the scenario-based model (“SBM”) and Monte Carlo simulation. The SBM relies on multiple outcomes to estimate the likelihood of future payoff of the contingent consideration. The resulting earnout payoff is then probability-weighted and discounted at an appropriate risk adjusted rate in order to arrive at the present value of the expected earnout payment. The Monte Carlo simulation is used to value the non-linear contingent considerations based on projected financial metrics. Each trial of the Monte Carlo simulation draws a value from the assumed distribution for the underlying metric. The earnout payoff for each simulation trial is calculated based on that particular simulated path for the underlying metrics and then discounted to present value using the risk-free rate, adjusted for counterparty credit risk. The value of the earnout is estimated as the average value from all simulation trials. The fair value estimates use unobservable inputs that reflect our own assumptions as to the ability of the acquired business to meet the targeted benchmarks and discount rates used in the calculations. The unobservable inputs are defined in ASC Topic 820, “Fair Value Measurements and Disclosures,” as Level 3 inputs. We review the probabilities of achievement of the earnout milestones to determine impact on the fair value of the earnout consideration on a quarterly basis over the earn-out period. Actual results are compared to the estimates and probabilities of achievement used in our forecasts. Should actual results of the acquired business increase or decrease as compared to our estimates and assumptions, the estimated fair value of the contingent earn-out consideration liability will increase or decrease, up to the contractual limit, as applicable. Changes in the estimated fair value of the contingent earn-out consideration are recorded in other (expense) income in the Consolidated Statements of Operations and Comprehensive (Loss) Income 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. Revenue Recognition Revenue is recorded when our performance obligation is satisfied which is when our customers take title of the product, and typically when the product is used in surgery. As such, the timing of revenue recognition may differ from the timing of invoicing to our customers. We have recorded unbilled accounts receivable related to this timing difference of $3,382 and $3,637 as of March 31, 2022 and December 31, 2021, respectively. Accounting Pronouncements Issued Not Yet Adopted In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. ASU 2016-02 supersedes the previous leases standard, ASC 840, Leases. ASU 2016-02, as subsequently amended for various technical issues, is effective for emerging growth companies following private company adoption dates in fiscal years beginning after December 15, 2021, and interim periods with fiscal years beginning after December 15, 2022. The Company is currently evaluating the new guidance, but does not believe it will have a material impact on the Consolidated Financial Statements. In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires entities to estimate all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The updated guidance also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses over the entire contractual term of the instrument from the date of initial recognition of that instrument. ASU 2016-13, as subsequently amended for various technical issues, is effective for emerging growth companies following private company adoption dates for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the new guidance to determine the impact it will have on the Consolidated Financial Statements. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) (“ASU 2019-12”), which is part of the FASB’s overall simplification initiative to reduce the costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. ASU 2019-12 simplifies accounting guidance for intra-period allocations, deferred tax liabilities, year-to-date losses in interim periods, franchise taxes, step-up in tax basis of goodwill, separate entity financial statements, and interim recognition of tax laws or rate changes. ASU 2019-12 is effective for emerging growth companies following private company adoption dates in fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. The adoption of this guidance is not expected to have a significant impact on the Company's Consolidated Financial Statements and related disclosures. |
Business Combinations |
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Business Combinations [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Business Combinations | 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"). Disior is a leading three-dimensional analytics pre-operative planning software company based in Helsinki, Finland, focused on the complex foot and ankle anatomy. The Disior Acquisition allowed the Company to broaden its capabilities within the pre-operative and intra-operative stages of the foot and ankle care and expand the Company's Smart 28 ecosystem. The aggregate purchase price of the Disior Acquisition was approximately $25,943 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 receivable of $81. 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. 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 Condensed Consolidated Financial Statements beginning after January 10, 2022, the Disior Acquisition Date. The following table summarizes the purchase price:
Acquisition-related costs, which consisted of fees incurred for advisory, legal, and accounting services, were $743 and were included in Selling, general and administrative expenses in the Company’s Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2022. Certain amounts recorded in connection with the Disior Acquisition are still considered preliminary as we continue to gather the necessary information to finalize our fair value estimates and provisional amounts. Provisional amounts include items related to working capital adjustments, identified intangibles, and earnout consideration. During the measurement period, which is up to one year from the Disior Acquisition Date, we may adjust provisional amounts that were recognized at the Disior Acquisition Date to reflect new information obtained about facts and circumstances that existed as of the Disior Acquisition Date. The preliminary purchase price allocation for Disior, which may be adjusted by material amounts as we finalize our fair value estimates and provisional amounts, was as follows:
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 purchase consideration and its allocation are preliminary and may be adjusted to reflect new information obtained about facts and circumstances that existed as of the acquisition date. The excess of the fair value of the purchase consideration over the fair value of the identifiable assets and liabilities, if any, was recorded as goodwill. The goodwill is attributable to the expected synergies with the Company’s existing operations. The useful life on intangible assets was determined by management to be in line with the Company’s policy on intangible assets. Both determinations are outlined in the table below:
The entire amount of the purchase price allocated to goodwill will not be deductible for income tax purposes under the Finnish Income Tax Act. There is no supplemental proforma presentation of operating results of the acquisition of Disior due to the immaterial impact on the Company’s Consolidated operations for the three months ended March 31, 2021. Additive Orthopaedics On May 28, 2021 (“Closing Date”), the Company entered into an Asset Purchase Agreement (“APA”) with Additive Orthopaedics, LLC (“Additive” or “Seller”) and completed an acquisition of substantially all of the operating and intangible assets of Additive, for total cash consideration of $15,000 at closing. The APA also provided for potential earn-out consideration to the Seller in connection with the achievement of certain milestones, including both project-based and revenue-based milestones, with various expiration dates through the fourth anniversary of the Closing Date. The earn-out has a maximum payment not to exceed $9,500, in the aggregate. If an individual milestone is not met by the specified milestone expiration date, the earn-out related to that specific milestone will not be paid. The contingent earn-out consideration had an estimated fair value of $2,870 as of the Closing Date. Acquisition related costs were approximately $822 during the year ended December 31, 2021 and were included in Selling, general, and administrative expenses in the Consolidated Statements of Operations and Comprehensive (Loss) Income. No acquisition related costs were incurred in the three months ended March 31, 2022 and 2021. Additive’s 3D-printed Patient Specific Talus Spacer is the only U.S. Food and Drug Administration-approved patient-specific total talus replacement implant authorized in the U.S. for the treatment of avascular necrosis. The acquisition of Additive allowed the Company to further expand into the patient specific implant market. The Company has accounted for the acquisition of Additive under ASC Topic 805, Business Combinations (“ASC 805”). Additive’s results of operations are included in the Condensed Consolidated Financial Statements beginning after May 28, 2021, the acquisition date. The following table summarizes the purchase consideration transferred in connection with the acquisition of Additive and consists of the following:
The following table summarizes the fair values of the assets acquired and liabilities assumed as of the Closing Date:
Identified intangible assets consist of noncompete arrangements, customer relationships, and developed technology. The fair value of each were determined with the assistance of an external valuation specialist using a combination of the income, market, and asset approach, 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. As of March 31, 2022, the purchase consideration and its allocation are final. 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 entire amount of the purchase price allocated to goodwill will be deductible for income tax purposes pursuant to Internal Revenue Code Section 197 over a 15-year period. The useful life determination was made by management in line with the Company’s policy on assets. Both determinations are outlined in the table below:
There is no supplemental proforma presentation of operating results of the acquisition of Additive due to the immaterial impact on the Company’s Consolidated operations for the three months ended March 31, 2021. |
Goodwill and Intangible Assets |
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Goodwill and Intangible Assets Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Goodwill and Intangible Assets | NOTE 4. GOODWILL AND INTANGIBLE ASSETS Goodwill As of March 31, 2022 and December 31, 2021, goodwill was $26,672 and $6,329, respectively; the activity is as follows:
Intangibles Intangible assets as of March 31, 2022 are as follows:
Intangible assets, excluding the Disior intangible assets, increased $704 during the three months ended March 31, 2022 due to the purchase of new patents and additional legal fees associated with our patents and trademarks. Intangible assets as of December 31, 2021, are as follows:
Amortization expense is included in Selling, general, and administrative expenses and was $771 and $30 for the three months ended March 31, 2022 and 2021, respectively. Expected future amortization expense is as follows:
No impairment charges related to intangibles and goodwill were recorded for the three months ended March 31, 2022 and 2021. |
Contingent Earn-Out Consideration |
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Business Combinations [Abstract] | |||||||||||||||||||||
Contingent Earn-Out Consideration | NOTE 5. CONTINGENT EARN-OUT CONSIDERATION The following table provides a reconciliation of our Level 3 earn-out liabilities for the three months ended March 31, 2022:
The current portion of contingent earn-out liability is included in Other-current liabilities and the non-current portion is included in Other long-term liabilities on the Condensed Consolidated Balance Sheets. As of March 31, 2022, the current portion was $7,422. During the three months ended March 31, 2022, we reassessed the estimate of the earn-out liabilities which resulted in an increase of $80 classified as other expense within the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss). We made no cash payments for contingent earn-out consideration during the three months ended March 31, 2022. |
Debt |
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Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt | NOTE 6. DEBT Long-term debt as of March 31, 2022 and December 31, 2021 consists of the following:
MidCap Credit Agreements On May 6, 2021, the Company entered into a new credit agreement with MidCap Financial Trust to provide a total of $70,000 including up to a $30,000 revolving loan (“MidCap Revolving Loan”) and up to a $40,000 term loan (“MidCap Term Loan”), secured by substantially all the Company’s assets, debt, and equity (“MidCap Credit Agreements”). The MidCap Term Loan is comprised of two tranches, the first of which provides a commitment amount of $10,000, and the second a commitment of $30,000. The MidCap Term Loan and Midcap Revolving Loan bear a variable interest rate of LIBOR plus 6% and LIBOR plus 3%, respectively, and mature on the earlier of May 1, 2026 or a change in control event (the "Termination Date"). The entire principal balances of the MidCap Revolving Loan and MidCap Term Loan are due on the Termination Date. Interest payments are payable monthly, with optional principal prepayments allowed under the MidCap Credit Agreements. The Midcap Loan Agreements require us to maintain minimum net product sales and minimum consolidated EBITDA, (each term as defined in the Midcap Loan Agreements), for the preceding twelve month period. On March 24, 2022, in connection with the Zions Facility discussed below, the Company amended the Midcap Credit Agreements changing the covenant requirements from a monthly to a quarterly test. As of March 31, 2022, we were in compliance with all financial covenants under the Midcap Credit Agreements. Total debt issuance costs associated with the MidCap Credit Agreements was $2,799. Amortization expense associated with such debt issuance costs totaled $71 for the three months ended March 31, 2022, and is included in Interest expense on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. Vectra Bank Colorado Loan Agreements On March 27, 2020, the Company entered into an Amended and Restated Loan Agreement (the “Vectra Loan Agreement”) with Vectra Bank Colorado. The Vectra Loan Agreement refinanced the Company's existing Term Loan and existing Buyout Loan into a single term loan in the aggregate principal amount of $6,802 (the “2020 Term Loan”) and increased the maximum principal amount of the existing Revolving Loan to $15,000 (the 2020 Revolving Loan and together with the 2020 Term Loan, “2020 Loans”). The maturity date for both loans was September 30, 2020 and it was subsequently extended to October 5, 2023. The Vectra Loan Agreement was secured by substantially all the Company’s assets. The Vectra Loan Agreement contained financial and other customary covenants and bore an interest rate of 3%. The Company repaid the 2020 Loans in 2021 in connection with entering into the Midcap Term Loan Agreement described above. 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. The Zions Facility includes a financial covenant requiring the Company to maintain a minimum fixed charge coverage ratio of 1.15 to 1.00, measured on a trailing four quarter basis as of the last day of each fiscal quarter. As of March 31, 2022, the Company was in compliance with this covenant. Total debt issuance costs associated with the Zions Facility was $152. Amortization expense associated with such debt issuance costs totaled $0 for the three months ended March 31, 2022, due to the timing of the closing date of the loan. Bank of Ireland Note Payable On June 12, 2020, the Company entered a term loan with Bank of Ireland in a principal amount of $474 (the “Bank of Ireland Note Payable”). The Bank of Ireland Note Payable bears an annual interest rate of 4% and is due in equal monthly installments over a 36-month period, including interest. The Bank of Ireland Note Payable contains financial and other customary covenants. |
Convertible Preferred Series Equity and Stockholders' Equity |
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Stockholders' Equity Note [Abstract] | |
Convertible Preferred Series Equity And Stockholders' Equity | NOTE 7. CONVERTIBLE PREFERRED SERIES EQUITY AND STOCKHOLDERS’ EQUITY On October 8, 2021, the Company filed a certificate of amendment with the Secretary of State of the State of Delaware, pursuant to which, the Company effected a 5-for-1 forward stock split of the Company’s authorized, issued and outstanding common stock, the Company’s authorized, issued and outstanding Series A convertible preferred stock, and the Company’s authorized, issued and outstanding Series B convertible preferred stock (the “Stock Split”). All share amounts and per share data presented in the accompanying Consolidated Financial Statements have been retrospectively adjusted to reflect the forward stock split for all periods presented. Under its Amended and Restated Certificate of Incorporation, the Company has a total of 310,000,000 shares of capital stock authorized for issuance, consisting of 300,000,000 shares of common stock, par value of $0.01 per share, and 10,000,000 new shares of convertible preferred stock, par value of $0.0001 per share. Common Stock In October 2021, the Company completed its initial public offering ("IPO"), in which it issued and sold 8,984,375 shares of its common stock at the public offering price of $16.00 per share, including 1,171,875 shares of its common stock upon exercise of the underwriters' option to purchase additional shares. Series A Convertible Preferred Stock In December 2011, the Company issued an aggregate of 3,250,005 shares of its Series A convertible preferred stock at a price of $0.30769 per share, resulting in total proceeds of approximately $1,000. In February and November 2012, the Company issued an aggregate of 10,562,495 shares of its Series A convertible preferred stock at a price of $0.30769 per share, resulting in total proceeds of approximately $3,250. In connection with the IPO, all of the shares of the Company’s outstanding Series A convertible preferred stock automatically converted into an aggregate of 13,812,500 shares of the common stock. Convertible Series B Preferred Stock In July 2020, the Company issued an aggregate of 6,608,700 shares of its Series B convertible preferred stock at a price of $5.75 per share, resulting in total net proceeds of approximately $36,030, net of issuance costs of $1,970. In connection with the IPO, all of the shares of the Company’s outstanding Series B convertible preferred stock automatically converted into an aggregate of 6,608,700 shares of the common stock. Pursuant to the terms of the Series B convertible preferred stock offering, the $2,328 of cash dividends accrued as of October 19, 2021 were cancelled upon conversion of the Series B preferred stock into common stock. Treasury Stock The Company purchased a total of 0 and 85,050 shares of its common stock during the three months ended March 31, 2022 and 2021, respectively, for $0 and $561, respectively. All repurchased shares were recorded in Treasury stock at cost. |
Earnings (loss) Per Share |
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Earnings (Loss) Per Share | NOTE 8. EARNINGS (LOSS) PER SHARE Basic net (loss) income per share is computed by dividing net (loss) income attributable to common stockholders (the numerator) by the weighted average number of common stock outstanding for the period (the denominator). Diluted net income per common stock attributable to common stockholders is computed by dividing net income by the weighted average number of common stocks outstanding during the period adjusted for the dilutive effects of common stock equivalents using the treasury stock method or the method based on the nature of such securities. In periods when losses from continuing operations are reported, the weighted-average number of common stock outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. The computation of net loss per share for the three months ended March 31, 2022 and 2021, respectively was as follows:
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:
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Stock-Based Compensation |
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Share-based Payment Arrangement [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-Based Compensation | NOTE 9. STOCK-BASED COMPENSATION Employee Stock Purchase Plan The Employee Stock Purchase Plan (“ESPP”) was adopted by the Company’s Board of Directors on October 8, 2021. The 2021 Plan was 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. The ESPP initially provides participating employees with the opportunity to purchase up to an aggregate of 1,329,040 shares of the Company’s common stock. 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. On January 1, 2022, the number of shares reserved and available for issuance for the ESPP was increased by 764,473 shares. As of March 31, 2022, no shares have been issued under the ESPP and 2,093,513 shares remained available for issuance. 2021 Incentive Award Plan The 2021 Incentive Award Plan (“2021 Plan”) was adopted by the Company’s Board of Directors on October 8, 2021. The 2021 Plan was 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. The 2021 Plan authorizes 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. On January 1, 2022, the number of shares reserved and available for issuance for the 2021 Plan was increased by 3,822,364 shares. As of March 31, 2022, the Company had reserved 10,802,073 shares of common stock for future grants. Stock Options There were 154,500 and 401,250 options granted during the three months ended March 31, 2022 and 2021, respectively. During the three months ended March 31, 2022 and 2021, the Company recognized $2,014 and $858, respectively, of compensation expense related to stock options. Stock-based compensation expenses are recorded in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Loss. The Company received cash in the amount of $12 and $98 from the exercise of stock options for the three months ended March 31, 2022 and 2021, respectively. The tax benefit from equity options exercised was $3 and $22 for the three months ended March 31, 2022 and 2021, respectively. During the three months ended March 31, 2022, the Company granted certain officers and contractors of the Company an aggregate of 154,500 time-based options at a weighted average strike price of $15.05. During the three months ended March 31, 2021, the Company granted certain officers and contractors of the Company an aggregate of 401,250 time-based options at a weighted average strike price of $6.49. Below are the assumptions used for the three months ended March 31, 2022 and 2021 in determining the fair value of each option award:
The aggregate intrinsic value of the options outstanding as of March 31, 2022 is $60,865. The aggregate intrinsic value of vested and exercisable options as of March 31, 2022 is $45,892. The weighted average fair value of options granted during the three months ended March 31, 2022 and 2021 was $8.25 and $3.22, respectively, on the dates of grant. As of March 31, 2022, there was approximately $25,391 total unrecognized compensation cost related to non-vested stock-based compensation arrangements, which is expected to be recognized over a weighted average period of 2.75 years. The following summarizes the Company’s stock option plan and the activity for the three months ended March 31, 2022:
Restricted Stock Units During the three months ended March 31, 2022, no Restricted Stock Units (“RSUs”) were granted, vested or forfeited resulting in 79,886 unvested RSUs outstanding as of March 31, 2022. The grant date fair value for RSUs is the market price of the common stock on the date of grant. The total fair value of RSUs vested during the three months ended March 31, 2022 and 2021 was $0 for both periods. During the three months ended March 31, 2022 and 2021, the Company recognized $108 and $0, respectively, of compensation expense related to RSUs. Stock-based compensation expenses are recorded in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Loss. As of March 31, 2022, there was approximately $1,232 total unrecognized compensation cost related to non-vested RSUs, which is expected to be recognized over a weighted average period of 3.59 years. |
Employee Benefit Plan |
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Mar. 31, 2022 | |
Retirement Benefits [Abstract] | |
Employee Benefit Plan | NOTE 10. EMPLOYEE BENEFIT PLAN The Company sponsors a defined contribution plan for eligible employees who are 21 years of age with three months of service can voluntarily contribute up to 100% of their eligible compensation. The Company has elected a Safe Harbor plan in which the Company must contribute 3% of eligible compensation. In addition, the Company may make discretionary contributions which are determined and authorized by the Board of Directors each plan year. The Company made matching contributions to its employee benefit plan of $912 and $632 for the three months ended March 31, 2022 and 2021, respectively. |
Income Taxes |
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Income Tax Disclosure [Abstract] | |||||||||||||||||||||||||||||||||
Income Taxes | NOTE 11. INCOME TAXES The effective tax rates for the three months ended March 31, 2022 and 2021 are as follows:
For the three months ended March 31, 2022 and 2021, the Company recorded tax expense of $32 and $154, respectively. The Company’s 2022 and 2021 income tax expense and rates differed from the amount of income tax determined by applying the U.S. Federal income tax rate to pre-tax income primarily as a result of the U.S. jurisdiction that has a full valuation allowance recorded on U.S. and Finnish deferred tax assets. In addition, the tax rate is lower than the U.S. statutory federal tax rate as a result of foreign earnings that are taxed at lower tax rates. The Company continues to monitor the realization of its deferred tax assets and assesses the need for a valuation allowance. The Company analyzes available positive and negative evidence to determine if a valuation allowance is needed based on the weight of the evidence. This objectively verifiable evidence includes the current & prior two years' profit and loss positions after considering pre-tax book income plus or minus permanent adjustments as well as other positive & negative evidence available. This process requires management to make estimates, assumptions, and judgments that are uncertain in nature. The Company has established a valuation allowance with respect to deferred tax assets in the U.S. and Finland and continues to monitor and assess potential valuation allowances in all its jurisdictions. |
Commitments And Contingencies |
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Mar. 31, 2022 | |
Commitments and Contingencies Disclosure [Abstract] | |
Commitments and Contingencies | NOTE 12. COMMITMENTS AND CONTIGENCIES Legal Proceedings We are 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 our exposure be materially different from our estimates or should liabilities be incurred that were not previously accrued. Potential insurance reimbursements are not offset against potential liabilities. During 2018 Wright Medical Technology, Inc. (“Wright Medical”) sued the Company, claiming patent infringement targeting essentially all of our patents. The case was subsequently updated to include trade secret misappropriations. We have filed motions to dismiss all allegations. We currently believe that we have substantial and meritorious defenses to Wright Medical’s claims and intend to vigorously defend our position, including through the trial and appellate stages if necessary. As the case is ongoing, we are unable to determine the likelihood of an outcome or estimate a range of reasonably possible settlement, if any. Accordingly, we have not made an accrual for any possible loss. The outcome of any litigation, however, is inherently uncertain, and an adverse judgment or settlement in the Wright Medical proceeding, if any, could materially and adversely affect our business, financial position and results of operations or cash flows. In addition to Wright Medical’s claims set forth above, we received in December 2021 an additional complaint from Wright Medical covering patents different than the Wright Asserted Patents. While the proceedings in connection with such complaint are in early stages, we do not at this time believe they represent a material liability to our company. We have incurred, and expect that we will continue to incur, significant expense in defending against the allegations made by Wright Medical. |
Related Party Transactions |
3 Months Ended |
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Mar. 31, 2022 | |
Related Party Transactions [Abstract] | |
Related Party Transactions | NOTE 13. 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 $163 and $139 for the three months ended March 31, 2022 and 2021, respectively. Amounts payable to this entity as of March 31, 2022 and December 31, 2021 were $63 and $163, respectively. The Company paid professional services fees to a related party totaling $125 and $154 for the three months ended March 31, 2022 and 2021, respectively, and are included in Selling, general, and administrative expense in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Amounts payable as of March 31, 2022 and December 31, 2021 to this related party were $83 and $66, respectively. |
Segment and Geographic Information |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Segment Reporting [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Segment and Geographic Information | NOTE 14. SEGMENT AND GEOGRAPHIC INFORMATION The following table represents total net revenue by geographic area, based on the location of the customer for the three months ended March 31, 2022 and 2021, respectively.
No individual country with net revenue originating outside of the United States accounted for more than 10% of consolidated net revenue for three months ended March 31, 2022 and 2021. The following table represents total non-current assets, excluding deferred taxes, by geographic area as of March 31, 2022 and December 31, 2021, respectively.
No individual country with total non-current assets outside of the United States accounted for more than 10% of consolidated total assets as of March 31, 20221 and December 31, 2021. |
Summary of Significant Accounting Policies (Policies) |
3 Months Ended |
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Mar. 31, 2022 | |
Accounting Policies [Abstract] | |
Basis of Presentation and Consolidation | Basis of Presentation and Consolidation The accompanying Condensed Consolidated Financial Statements include the accounts of Paragon 28, Inc. and its subsidiaries, all of which are wholly-owned. The accompanying Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information required by U.S. GAAP for complete financial statements. The interim Condensed Consolidated Financial Statements reflect all adjustments that are of a normal recurring nature and that are considered necessary for a fair representation of the results for the periods presented and should be read in conjunction with the audited Consolidated Financial Statements and notes thereto for the year ended December 31, 2021, which include a complete set of footnote disclosures, including our significant accounting policies. The audited Consolidated Financial Statements and notes thereto for the year ended December 31, 2021 are included in the Company’s Annual filing on Form 10-K filed with the SEC on March 8, 2022. The results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year or for any other future period. All intercompany balances and transactions have been eliminated in consolidation. |
Use of Estimates | Use of Estimates The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Because future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Any changes in these estimates will be reflected in the Company’s Condensed Consolidated Financial Statements. Significant items subject to such estimates and assumptions include the determination of the collectability of trade receivables, inventory obsolescence, impairment of long-lived assets, recoverability of goodwill and intangible assets, contingent earn-out liabilities, income taxes and stock-based compensation. |
Foreign Currency Translation | Foreign Currency Translation The Condensed Consolidated Financial Statements are presented in U.S. dollars. The Company’s non-U.S. subsidiaries have a functional currency (i.e., the currency in which operational activities are primarily conducted) that is other than the U.S. dollar, generally the currency of the country in which such subsidiaries are domiciled. Such subsidiaries’ assets and liabilities are translated into U.S. dollars at quarter-end exchange rates, while revenue and expenses are translated at average exchange rates during the quarter based on the daily closing exchange rates. Adjustments that result from translating amounts from a subsidiary’s functional currency to U.S. dollars are reported in Accumulated Other Comprehensive (Loss) Income, net of tax. |
Business Combinations | 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. |
Trade Receivables, Less Allowance for Doubtful Accounts | Trade Receivables, Less Allowance for Doubtful Accounts The Company estimates an allowance for doubtful accounts based upon an evaluation of the current status of receivables, historical experience, and other factors as necessary. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change. The allowance for doubtful accounts was $1,310 and $1,032 as of March 31, 2022 and December 31, 2021, respectively. |
Inventories, Net | Inventories, Net The Company estimates a reserve for obsolete and slow-moving inventory based on current inventory levels, historical sales and future projected demand. Charges (benefit) for excess and obsolete inventory are included in Cost of goods sold and were $(643) and $977 for the three months ended March 31, 2022 and 2021, respectively. The inventory reserve was $16,002 and $19,374 as of March 31, 2022 and December 31, 2021, respectively. |
Intangibles | 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 seventeen years. Costs associated with capitalized patents include third-party attorney fees and other third-party fees as well as costs related to the following: the preparation of patent applications, government filings and registration fees, drawings, computer searches, and translations related to specific patents. Trademarks that are anticipated to be renewed every ten years have an indefinite life and are not amortized but tested for impairment annually. Once it is determined a trademark will no longer be renewed, the trademark is amortized over the remainder of the trademark’s registration period. Customer relationships are amortized over an estimated useful life of 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 were recorded in any of the periods presented. 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. |
Goodwill | Goodwill Goodwill represents the excess of the purchase price as compared to the fair value of net assets acquired and liabilities assumed. Goodwill is not amortized, but is tested for impairment annually or when indications of impairment exist. We can elect to qualitatively assess goodwill for impairment if it is more likely than not that the fair value of a reporting unit exceeds its carrying value. Impairment exists when the carrying amount, including goodwill, of the reporting unit exceeds its fair value, resulting in an impairment charge for this excess (not to exceed the carrying amount of the goodwill). Our annual impairment testing date is October 1. The impairment, if determined, is recorded within Operating expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) in the period the determination is made. There were no impairments recorded during the periods presented. |
Contingent Earn-Out Consideration | 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 may be considered in the valuation: the scenario-based model (“SBM”) and Monte Carlo simulation. The SBM relies on multiple outcomes to estimate the likelihood of future payoff of the contingent consideration. The resulting earnout payoff is then probability-weighted and discounted at an appropriate risk adjusted rate in order to arrive at the present value of the expected earnout payment. The Monte Carlo simulation is used to value the non-linear contingent considerations based on projected financial metrics. Each trial of the Monte Carlo simulation draws a value from the assumed distribution for the underlying metric. The earnout payoff for each simulation trial is calculated based on that particular simulated path for the underlying metrics and then discounted to present value using the risk-free rate, adjusted for counterparty credit risk. The value of the earnout is estimated as the average value from all simulation trials. The fair value estimates use unobservable inputs that reflect our own assumptions as to the ability of the acquired business to meet the targeted benchmarks and discount rates used in the calculations. The unobservable inputs are defined in ASC Topic 820, “Fair Value Measurements and Disclosures,” as Level 3 inputs. We review the probabilities of achievement of the earnout milestones to determine impact on the fair value of the earnout consideration on a quarterly basis over the earn-out period. Actual results are compared to the estimates and probabilities of achievement used in our forecasts. Should actual results of the acquired business increase or decrease as compared to our estimates and assumptions, the estimated fair value of the contingent earn-out consideration liability will increase or decrease, up to the contractual limit, as applicable. Changes in the estimated fair value of the contingent earn-out consideration are recorded in other (expense) income in the Consolidated Statements of Operations and Comprehensive (Loss) Income 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. |
Revenue Recognition | Revenue Recognition Revenue is recorded when our performance obligation is satisfied which is when our customers take title of the product, and typically when the product is used in surgery. As such, the timing of revenue recognition may differ from the timing of invoicing to our customers. We have recorded unbilled accounts receivable related to this timing difference of $3,382 and $3,637 as of March 31, 2022 and December 31, 2021, respectively. |
Accounting Pronouncements Issued Not Yet Adopted | Accounting Pronouncements Issued Not Yet Adopted In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. ASU 2016-02 supersedes the previous leases standard, ASC 840, Leases. ASU 2016-02, as subsequently amended for various technical issues, is effective for emerging growth companies following private company adoption dates in fiscal years beginning after December 15, 2021, and interim periods with fiscal years beginning after December 15, 2022. The Company is currently evaluating the new guidance, but does not believe it will have a material impact on the Consolidated Financial Statements. In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires entities to estimate all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The updated guidance also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses over the entire contractual term of the instrument from the date of initial recognition of that instrument. ASU 2016-13, as subsequently amended for various technical issues, is effective for emerging growth companies following private company adoption dates for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the new guidance to determine the impact it will have on the Consolidated Financial Statements. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) (“ASU 2019-12”), which is part of the FASB’s overall simplification initiative to reduce the costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. ASU 2019-12 simplifies accounting guidance for intra-period allocations, deferred tax liabilities, year-to-date losses in interim periods, franchise taxes, step-up in tax basis of goodwill, separate entity financial statements, and interim recognition of tax laws or rate changes. ASU 2019-12 is effective for emerging growth companies following private company adoption dates in fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. The adoption of this guidance is not expected to have a significant impact on the Company's Consolidated Financial Statements and related disclosures. |
Business Combinations (Tables) |
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Business Acquisition [Line Items] | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of Purchase Consideration Transferred | The following table summarizes the purchase price:
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Summary of Fair Values of Assets Acquired and Liabilities Assumed | The preliminary purchase price allocation for Disior, which may be adjusted by material amounts as we finalize our fair value estimates and provisional amounts, was as follows:
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Useful Life Determination of Assets | 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:
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Additive Orthopaedics, LLC | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Business Acquisition [Line Items] | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of Purchase Consideration Transferred | The following table summarizes the purchase consideration transferred in connection with the acquisition of Additive and consists of the following:
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Summary of Fair Values of Assets Acquired and Liabilities Assumed | The following table summarizes the fair values of the assets acquired and liabilities assumed as of the Closing Date:
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Useful Life Determination of Assets | The useful life determination was made by management in line with the Company’s policy on assets. Both determinations are outlined in the table below:
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Goodwill And Intangible Assets (Tables) |
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Goodwill and Intangible Assets Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Goodwill | As of March 31, 2022 and December 31, 2021, goodwill was $26,672 and $6,329, respectively; the activity is as follows:
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Intangible Assets | Intangible assets as of March 31, 2022 are as follows:
Intangible assets as of December 31, 2021, are as follows:
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Schedule of Expected Future Amortization Expense | Expected future amortization expense is as follows:
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Contingent Earn-Out Consideration (Tables) |
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Schedule of Reconciliation Level 3 Earn-out Liabilities | The following table provides a reconciliation of our Level 3 earn-out liabilities for the three months ended March 31, 2022:
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Debt (Tables) |
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Schedule of Long-term Debt Instruments | Long-term debt as of March 31, 2022 and December 31, 2021 consists of the following:
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Earnings (Loss) Per Share (Tables) |
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Summary of Computation of Net Loss Per Share | The computation of net loss per share for the three months ended March 31, 2022 and 2021, respectively was as follows:
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Summary of Potentially Dilutive Securities Excluded from Calculation of Diluted Net Loss Per Share Attributable to Common Stockholders | 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:
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Stock-Based Compensation (Tables) |
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Share-based Payment Arrangement [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Assumptions used in Determining Fair Value | Below are the assumptions used for the three months ended March 31, 2022 and 2021 in determining the fair value of each option award:
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Summary of Stock Option Activity | The following summarizes the Company’s stock option plan and the activity for the three months ended March 31, 2022:
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Income Taxes (Tables) |
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Income Tax Disclosure [Abstract] | |||||||||||||||||||||||||||||||||
Schedule of Effective Tax Rates | The effective tax rates for the three months ended March 31, 2022 and 2021 are as follows:
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Segment and Geographic Information (Tables) |
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Segment Reporting [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Total Net Revenue by Geographic Area | The following table represents total net revenue by geographic area, based on the location of the customer for the three months ended March 31, 2022 and 2021, respectively.
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Schedule of Total Non-current Assets, Excluding Deferred Taxes, by Geographic Area | The following table represents total non-current assets, excluding deferred taxes, by geographic area as of March 31, 2022 and December 31, 2021, respectively.
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Business and Basis of Presentation - Additional Information (Details) - Common Stock $ / shares in Units, $ in Thousands |
Oct. 19, 2021
USD ($)
$ / shares
shares
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Initial Public Offering | |
Subsidiary, Sale of Stock [Line Items] | |
Number of shares issued and sold | 8,984,375 |
Public offering price per share | $ / shares | $ 16.00 |
Net proceeds after deducting underwriting discounts and commissions | $ | $ 129,118 |
Number of shares issued upon conversion of convertible securities | 20,421,200 |
Underwriters Option to Purchase Additional Shares | |
Subsidiary, Sale of Stock [Line Items] | |
Number of shares issued and sold | 1,171,875 |
Business Combinations - Summary of Purchase Consideration Transferred (Details) - USD ($) $ in Thousands |
3 Months Ended | |||
---|---|---|---|---|
Jan. 10, 2022 |
May 28, 2021 |
Mar. 31, 2022 |
Mar. 31, 2021 |
|
Consideration Paid | ||||
Cash consideration | $ 18,201 | $ 0 | ||
Disior | ||||
Consideration Paid | ||||
Cash consideration | $ 19,393 | |||
Contingent consideration | 6,550 | $ 6,550 | ||
Total consideration | $ 25,943 | |||
Additive Orthopaedics, LLC | ||||
Consideration Paid | ||||
Cash consideration | $ 15,000 | |||
Contingent consideration | 2,870 | |||
Total consideration | $ 17,870 |
Business Combinations - Summary of Fair Values of Assets Acquired and Liabilities Assumed (Details) - USD ($) $ in Thousands |
Mar. 31, 2022 |
Jan. 10, 2022 |
Dec. 31, 2021 |
May 28, 2021 |
---|---|---|---|---|
Assets acquired: | ||||
Goodwill | $ 26,672 | $ 6,329 | ||
Disior | ||||
Assets acquired: | ||||
Cash and cash equivalents | $ 1,192 | |||
Other current assets | 410 | |||
Intangible assets | 4,900 | |||
Goodwill | 20,343 | |||
Total assets acquired | 26,845 | |||
Liabilities assumed: | ||||
Accruals and other current liabilities | 615 | |||
Deferred tax liabilities, net | 287 | |||
Total liabilities assumed | 902 | |||
Net assets acquired | $ 25,943 | |||
Additive Orthopaedics, LLC | ||||
Assets acquired: | ||||
Accounts receivable | $ 761 | |||
Inventory | 113 | |||
Intangible assets | 11,560 | |||
Goodwill | 6,329 | |||
Total assets acquired | 18,763 | |||
Liabilities assumed: | ||||
Accounts payable | 796 | |||
Accrued expenses | 97 | |||
Total liabilities assumed | 893 | |||
Net assets acquired | $ 17,870 |
Business Combinations - Useful Life Determination of Assets (Details) $ in Thousands |
3 Months Ended |
---|---|
Mar. 31, 2022
USD ($)
| |
Disior | |
Business Acquisition [Line Items] | |
Fair Value | $ 4,900 |
Additive Orthopaedics, LLC | |
Business Acquisition [Line Items] | |
Fair Value | 11,560 |
Noncompete Arrangements | Additive Orthopaedics, LLC | |
Business Acquisition [Line Items] | |
Fair Value | $ 30 |
Estimated Useful Life (in years) | 3 years |
Customer Relationships | Additive Orthopaedics, LLC | |
Business Acquisition [Line Items] | |
Fair Value | $ 240 |
Estimated Useful Life (in years) | 3 years |
Developed Technology | Disior | |
Business Acquisition [Line Items] | |
Fair Value | $ 4,500 |
Estimated Useful Life (in years) | 12 years |
Developed Technology | Additive Orthopaedics, LLC | |
Business Acquisition [Line Items] | |
Fair Value | $ 11,290 |
Estimated Useful Life (in years) | 12 years |
Tradenames | Disior | |
Business Acquisition [Line Items] | |
Fair Value | $ 400 |
Goodwill and Intangible Assets - Additional Information (Details) - USD ($) |
3 Months Ended | 12 Months Ended | |
---|---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
Dec. 31, 2021 |
|
Finite-Lived Intangible Assets [Line Items] | |||
Goodwill | $ 26,672,000 | $ 6,329,000 | |
Impairment charges related to intangibles | 0 | $ 0 | |
Impairment charges related to goodwill | 0 | 0 | $ 0 |
Patents and Trademarks | |||
Finite-Lived Intangible Assets [Line Items] | |||
Intangible assets acquired excluding Additive intangible assets | 704,000 | ||
Selling, General, and Administrative Expenses | |||
Finite-Lived Intangible Assets [Line Items] | |||
Amortization expense | $ 771,000 | $ 30,000 |
Goodwill and Intangible Assets - Schedule of Goodwill (Details) $ in Thousands |
3 Months Ended |
---|---|
Mar. 31, 2022
USD ($)
| |
Goodwill and Intangible Assets Disclosure [Abstract] | |
Balance, December 31, 2021 | $ 6,329 |
Acquisitions | 20,343 |
Balance, March 31, 2022 | $ 26,672 |
Goodwill and Intangible Assets - Schedule of Expected Future Amortization Expense (Details) $ in Thousands |
Mar. 31, 2022
USD ($)
|
---|---|
Goodwill and Intangible Assets Disclosure [Abstract] | |
2022 (Remaining) | $ 1,926 |
2023 | 1,707 |
2024 | 1,657 |
2025 | 1,616 |
2026 | 1,616 |
2027 | $ 1,615 |
Contingent Earn-Out Consideration - Schedule of Reconciliation of Level 3 Earn-Out Liabilities (Details) - USD ($) $ in Thousands |
3 Months Ended | |
---|---|---|
Jan. 10, 2022 |
Mar. 31, 2022 |
|
Business Acquisition [Line Items] | ||
Beginning Balance | $ 2,310 | |
Change in fair value of earn-out liabilities | 80 | |
Ending Balance | 8,940 | |
Disior | ||
Business Acquisition [Line Items] | ||
Acquisition date fair value of earn-out liabilities | $ 6,550 | $ 6,550 |
Contingent Earn-Out Consideration - Additional Information (Details) - USD ($) |
3 Months Ended | |
---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
|
Business Combinations [Abstract] | ||
Contingent earn-out liability, current | $ 7,422,000 | |
Increase in estimate of earn-out liabilities | 80,000 | $ 0 |
Payment for contingent earn-out consideration liability | $ 0 |
Debt - Schedule of Long-term Debt Instruments (Details) - USD ($) $ in Thousands |
Mar. 31, 2022 |
Dec. 31, 2021 |
---|---|---|
Debt Instrument [Line Items] | ||
Debt, gross amount | $ 46,203 | $ 10,245 |
Less: deferred issuance costs | (2,951) | (2,616) |
Total debt, net of issuance costs | 43,252 | 7,629 |
Less: current portion | (781) | (153) |
Long-term debt net, less current maturities | 42,471 | 7,476 |
Bank of Ireland Note Payable | ||
Debt Instrument [Line Items] | ||
Debt, gross amount | 203 | 245 |
MidCap Term Loan | ||
Debt Instrument [Line Items] | ||
Debt, gross amount | 30,000 | 10,000 |
Vectra Term Loan Facility | ||
Debt Instrument [Line Items] | ||
Debt, gross amount | $ 16,000 | $ 0 |
Debt - Bank of Ireland Note Payable - Additional Information (Details) - Bank of Ireland Note Payable |
Jun. 12, 2020
USD ($)
|
---|---|
Debt Instrument [Line Items] | |
Principal amount | $ 474,000 |
Interest rate | 4.00% |
Debt, frequency of payment | monthly |
Debt instrument term | 36 months |
Earnings (Loss) Per Share - Summary of Computation of Net Loss Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands |
3 Months Ended | |
---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
|
Net loss attributable to common stockholders | ||
Net loss attributable to Paragon 28, Inc. | $ (9,236) | $ (527) |
Less: Dividends on Series B convertible preferred stock | 0 | (469) |
Net loss attributable to common stockholders | $ (9,236) | $ (996) |
Weighted-average common stock outstanding: | ||
Basic | 76,447,454 | 46,852,175 |
Diluted | 76,447,454 | 46,852,175 |
Loss per share: | ||
Basic | $ (0.12) | $ (0.02) |
Diluted | $ (0.12) | $ (0.02) |
Earnings (Loss) Per Share - Summary of Potentially Dilutive Securities Excluded from Calculation of Diluted Net Loss Per Share Attributable to Common Stockholders (Details) - shares |
3 Months Ended | |
---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
|
Stock Options | ||
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
Potentially dilutive securities excluded from computation of dilutive net loss per share | 7,955,083 | 5,063,987 |
Restricted Stock Units | ||
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
Potentially dilutive securities excluded from computation of dilutive net loss per share | 79,886 | 0 |
Stock Based Compensation - Assumptions used in Determining Fair Value (Details) |
3 Months Ended | |
---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
|
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||
Expected volatility | 57.00% | 54.00% |
Expected dividends | 0.00% | 0.00% |
Expected term (in years) | 6 years 3 months | 5 years 9 months |
Risk-free rate | 1.69% | 0.47% |
Employee Benefit Plan - Additional Information (Details) - USD ($) $ in Thousands |
3 Months Ended | |
---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
|
Retirement Benefits [Abstract] | ||
Defined contribution plan, description | The Company sponsors a defined contribution plan for eligible employees who are 21 years of age with three months of service can voluntarily contribute up to 100% of their eligible compensation. | |
Defined contribution plan minimum annual contributions per employee percent | 3.00% | |
Defined benefit plan, plan assets, contributions by employer | $ 912 | $ 632 |
Defined contribution plan, maximum voluntarily contributions percent | 100.00% |
Income Taxes - Schedule of Effective Tax Rates (Details) |
3 Months Ended | |
---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
|
Income Tax Disclosure [Abstract] | ||
Effective tax rate | (0.356%) | (42.628%) |
Income Taxes - Additional Information (Details) - USD ($) $ in Thousands |
3 Months Ended | |
---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
|
Income Tax Disclosure [Abstract] | ||
Income tax expense | $ 32 | $ 154 |
Related Party Transactions - Additional Information (Details) - USD ($) $ in Thousands |
3 Months Ended | ||
---|---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
Dec. 31, 2021 |
|
Related Party Transaction [Line Items] | |||
Due to related parties | $ 83 | $ 66 | |
Selling, general and administrative expenses from transactions with related party | $ 125 | $ 154 | |
Director | License Agreement | |||
Related Party Transaction [Line Items] | |||
Percentage of revenue paid as royalty | 4.00% | ||
Royalty estimated useful life | 15 years | ||
Related party transaction term of agreement | 20 years | ||
Related party transaction, agreement renewal term | 5 years | ||
Due to related parties | $ 63 | $ 163 | |
Payments to related party | 163 | $ 139 | |
Minimum | Director | License Agreement | |||
Related Party Transaction [Line Items] | |||
Related party transaction to related party | $ 250 |
Segment and Geographic Information - Schedule of Total Net Revenue by Geographic Area (Details) - USD ($) $ in Thousands |
3 Months Ended | |
---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
|
Segment Reporting Information [Line Items] | ||
Total net revenue | $ 41,371 | $ 33,104 |
United States | ||
Segment Reporting Information [Line Items] | ||
Total net revenue | 36,023 | 29,134 |
International | ||
Segment Reporting Information [Line Items] | ||
Total net revenue | $ 5,348 | $ 3,970 |
Segment and Geographic Information - Schedule of Total Non-current Assets, Excluding Deferred Taxes, by Geographic Area (Details) - USD ($) $ in Thousands |
Mar. 31, 2022 |
Dec. 31, 2021 |
---|---|---|
Segment Reporting Information [Line Items] | ||
Total assets | $ 99,872 | $ 55,015 |
United States | ||
Segment Reporting Information [Line Items] | ||
Total assets | 71,203 | 51,809 |
International | ||
Segment Reporting Information [Line Items] | ||
Total assets | $ 28,669 | $ 3,206 |
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