10-K: Paragon 28 Announces Merger Agreement with Zimmer, Inc. in Annual 10-K Filing

Sentiment:

Annual Report 6 March 2025 4:01 PM

Paragon 28's 2024 10-K filing highlights a pending merger with Zimmer, Inc., alongside financial results and operational strategies.

Worse than expectedThe company's gross profit margin decreased from 76.0% in 2023 to 74.7% in 2024.The company has identified material weaknesses in its internal control over financial reporting.

Summary

Paragon 28, Inc. has filed its annual report on Form 10-K for the fiscal year ended December 31, 2024.
A key highlight is the announcement of a merger agreement with Zimmer, Inc., a subsidiary of Zimmer Biomet Holdings, Inc., where Zimmer will acquire all outstanding shares of Paragon 28 for $13.00 per share in cash plus one contingent value right (CVR) potentially worth up to $1.00 per share.
The merger is expected to close in the first half of 2025, pending stockholder and regulatory approvals.
The filing also details the company's financial performance, noting a net revenue of $256.2 million for 2024, an 18% increase from 2023.
Gross profit margin was 74.7% for 2024, a slight decrease from 76.0% in the previous year.
The company reported a net loss of $54.6 million for 2024.
The company's strategic focus remains on research and development, commercial infrastructure growth, medical education, and business development opportunities within the foot and ankle orthopedic market.
The company has identified material weaknesses in its internal control over financial reporting.
The company is taking steps to remediate these weaknesses.

Sentiment

Score: 6

Explanation: The announcement of the merger is positive, but the identified material weaknesses and decreased gross profit margin temper the overall sentiment.

Positives

The merger with Zimmer, Inc. provides shareholders with a defined exit strategy.
The company experienced significant revenue growth of 18% in 2024.
The company's international revenue increased by 34% compared to the prior year.
The company is actively investing in research and development to expand its product offerings.
The company is actively taking steps to remediate the material weaknesses in its internal control over financial reporting.

Negatives

The company reported a net loss of $54.6 million for 2024.
The company's gross profit margin decreased from 76.0% in 2023 to 74.7% in 2024.
The company has identified material weaknesses in its internal control over financial reporting.

Risks

The merger with Zimmer, Inc. is subject to various closing conditions and may not be completed.
The company operates in a competitive market and faces risks from larger competitors.
The company is subject to extensive government regulation.
The company's stock price may fluctuate substantially.
The company has identified material weaknesses in its internal control over financial reporting.

Future Outlook

The company expects to continue to capture market share in existing and new territories both in the United States and internationally. The company expects additional state and federal health care reform measures to be adopted in the future, some of which could limit the amounts that federal and state governments will pay for health care products and services, which could result in reduced demand for our products or additional pricing pressure.

Management Comments

The company strives to disrupt and transform the market by focusing exclusively on the foot and ankle to develop and commercialize differentiated, high quality orthopedic solutions, advanced procedural approaches and instrumentation that are collectively designed to enable surgeons to provide consistent, reproducible and effective outcomes.
The company believes its passion, expertise, and exclusive focus in the foot and ankle market has allowed it to better understand the needs of its patients and physicians, which has enabled it to create innovations and enhanced solutions that disrupt and transform the foot and ankle market.

Industry Context

The foot and ankle market is projected to grow at approximately 7% annually to reach $6.9 billion by 2028, representing the fastest growing market within orthopedics. The United States remains the largest market for foot and ankle procedures and is our largest market for product sales.

Comparison to Industry Standards

Revision rates for total ankle arthroplasty are approximately 22% after 5 years and 44% after 10 years irrespective of the implant compared to approximately 1% and 2% after three years for hip and knee procedures, respectively.
Revision rates across other foot and ankle procedures vary, but also are generally higher than other orthopedic markets.
The foot and ankle surgical implant and device market is dominated by a handful of incumbents who also operate across the broader medical technology and orthopedic markets including Stryker Corporation (Stryker), Arthrex, Inc. (Arthrex), Smith & Nephew plc (Smith and Nephew), Johnson & Johnson (J&J) and Zimmer Biomet Holdings, Inc. (Zimmer Biomet) as well as with companies with one or a limited number of foot and ankle products such as Enovis Medical (Enovis), Medline Industries, Inc. (Medline), Conmed Corporation (Conmed), and Treace Medical Concepts, Inc. (Treace).

Legal Proceedings

Two putative class action complaints were filed in the U.S. District Court for the District of Colorado alleging that the Company and certain current and former officers violated federal securities laws.

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 company paid professional services fees to a related party totaling $27, $327 and $405 for the years ended December 31, 2024, 2023 and 2022, respectively.

Stakeholder Impact

Shareholders will receive $13.00 per share plus a contingent value right of up to $1.00 per share upon completion of the merger.
Employees face uncertainty regarding their future employment following the merger.
Customers may experience changes in product offerings and service levels following the merger.
Suppliers may be affected by changes in purchasing decisions following the merger.
Creditors may be affected by changes in the company's financial structure following the merger.

Next Steps

Obtain stockholder approval for the merger with Zimmer, Inc.
Obtain required regulatory approvals for the merger.
Continue to execute on strategic initiatives to drive growth and improve profitability.
Implement remediation plan to address material weaknesses in internal control over financial reporting.

Key Dates

Date	Description
May 28, 1976	Date before which a medical device was legally marketed (pre-amendments device) and for which a PMA is not required.
August 2010	Paragon 28 formed in Colorado as a limited liability company.
March 2011	Paragon 28 converted to a Colorado corporation.
April 1, 2013	Effective date of Medicare payment reductions to providers under the Budget Control Act of 2011.
March 16, 2013	Effective date of the first-to-file provisions of the Leahy-Smith America Invents Act.
April 5, 2017	EU Medical Devices Regulation was adopted.
July 2017	Paragon 28 entered into the license agreement with Biedermann Technologies GmbH & Co. KG.
November 2017	FDA released a guidance document entitled Regulatory Considerations for Human Cells, Tissues, and Cellular and TissueBased Products: Minimal Manipulation and Homologous UseGuidance for Industry and Food and Drug Administration Staff.
May 2018	European Union General Data Protection Regulation (GDPR) went into effect.
September 2019	FDA issued revised final guidance describing an optional safety and performance based premarket review pathway for manufacturers of certain, well-understood device types.
January 1, 2020	California Consumer Privacy Act (CCPA) went into effect.
May 1, 2020	Temporary suspension of Medicare payment reductions to providers began.
July 2020	FDA extended its period of enforcement discretion to May 31, 2021.
January 1, 2021	End of the Brexit transition period.
June 1, 2021	FDA resumed enforcement of IND and premarket approval requirements with respect to certain HCT/Ps.
June 17, 2021	U.S. Supreme Court dismissed the most recent judicial challenge to the ACA.
May 26, 2021	EU Medical Devices Regulation became effective.
July 1, 2021	Establishments based in Great Britain which either import or export human tissues or cells for human application between Great Britain and a country in the EEA, have been required to obtain a license from the HTA.
October 2021	Paragon 28 reincorporated as a Delaware corporation.
October 15, 2021	Paragon 28 common stock began trading on The New York Stock Exchange under the symbol FNA.
November 2021	Paragon 28 entered into the Extremity License Agreement.
December 2021	Regulation No 2021/2282 on Health Technology Assessment (HTA) amending Directive 2011/24/EU, was adopted in the EU.
January 2022	Paragon 28 purchased its headquarters facility in Englewood, CO.
January 10, 2022	Paragon 28 entered into a Securities Purchase Agreement (SPA) with Disior LTD. (Disior) and acquired 100% of the outstanding equity of Disior (the Disior Acquisition).
January 2025	Regulation No 2021/2282 on Health Technology Assessment (HTA) amending Directive 2011/24/EU, was adopted in the EU.
March 24, 2022	Paragon 28 entered into a secured term loan facility (the Zions Facility) with Zions Bancorporation, N.A. dba Vectra Bank Colorado.
April 1, 2022	Medicare payment reductions to providers were temporarily suspended.
June 26, 2022	MHRA published its response to a 10-week consultation on the post-Brexit regulatory framework for medical devices and diagnostics.
November 10, 2022	Paragon 28 entered into the First Amendment to the Zions Facility.
January 30, 2023	Paragon 28 completed the Offering of 6,500,000 shares of its common stock at an offering price of $17.00 per share.
March 31, 2022	Temporary suspension of Medicare payment reductions to providers ended.
February 17, 2023	The underwriters exercised in full their option to purchase an additional 562,500 shares and 412,500 shares of common stock from the Company and the selling securityholders, respectively.
November 2, 2023	Paragon 28 entered into a new credit agreement with Ares Capital Corporation.
November 2, 2023	Paragon 28 entered into the Second Amendment to the Zions Facility.
September 30, 2024	A putative class action complaint was filed in the U.S. District Court for the District of Colorado.
October 1, 2024	The Company performed a qualitative analysis for its indefinite-lived intangible assets.
October 18, 2024	A putative class action complaint was filed in the U.S. District Court for the District of Colorado.
December 31, 2024	Paragon 28 had 525 employees worldwide.
January 28, 2025	Paragon 28 entered into an Agreement and Plan of Merger with Zimmer, Inc.
March 3, 2025	The number of shares of Registrants common stock outstanding was 83,894,974.
First half of 2025	Expected closing of the merger with Zimmer, Inc.
November 28, 2025	Outside Date for Merger Agreement, subject to extension to January 28, 2026.
August 7, 2027	The SoHO Regulation will apply as from August 7, 2027, with an extra year for certain provisions.

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