Good afternoon and welcome to the Paragon 28 Fourth Quarter and Full Year 2021 Earnings Conference Call. Currently, participants are in listen-only mode. We will be facilitating a question-and-answer session at the end of today’s call. As a reminder, this call is being recorded for replay purposes.

[Operator Instructions] I will now pass the call over to your host, Matt Bacso, Gilmartin Group to begin. Matt, please go ahead..

Joining me from Paragon 28 are Alberta DaCosta, Chairman and CEO and Steve Deitsh, CFO. Earlier today Paragon 28 released financial results for the quarter ended December 31 2021, and filed its 2021 Form 10-K.

Before we begin, I'd like to remind you that management will make statements during this call and include forward looking statements within the meeting of federal securities laws which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Any statements contained in this call that relate to expectations or predictions of future events, results, or performance are forward-looking statements.

All forward-looking statements, including but not limited to those relating to our operating trends and future financial performance, including our revenue guidance for the first quarter and full year 2022.

The impact of COVID-19 on our business expense management expectations for hiring growth in our organization, market opportunity, revenue guidance, commercial expansion and product pipeline development are based upon our current estimates and various assumptions.

These statements involve material risks, uncertainties that could cause actual results or events to materially differ from those implied by these forward-looking statements. All forward-looking statements are based upon current available information and Paragon 28 assumes no obligation to update these statements.

Accordingly, you should not place undue reliance on these statements. For listed descriptions of the risks uncertainties associated with our business, please refer to the Risk Factors section of the public filings with the Securities and Exchange Commission, including our 2021 annual report filed on Form 10-K with the SEC earlier this morning.

This conference call contains time sensitive information and is accurate only as of the live broadcast on March 8, 2022. Paragon 28 disclaims any intention or obligation except as required by law to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise.

During this presentation, we refer to non-GAAP financial measures, adjusted EBITDA, a reconciliation of adjusted EBITDA to net income, the most comparable GAAP financial measure is contained in our press release issued this morning. And with that, I will now turn the call over to Albert..

Thank you, Matt. Good afternoon. And thank you for joining Paragon 28th fourth quarter 2021 investor earnings call, which is our second quarterly call as a publicly traded company.

I will provide an overview of our fourth quarter and 2021 revenue performance plus provide a business update highlighting new product development, commercial initiatives including medical education, and finally SMART 28 and our recently announced acquisition of Disior.

Steve will then provide additional detail regarding our fourth quarter and full year 2021 financial results plus provide an overview of our initial 2022 guidance. We will then open the call to Q&A.

Beginning with our fourth quarter and full year 2021 revenue performance, total revenue for the fourth quarter was $42.8 million just above the high end of the revenue range from our pre announcement on January 10 representing growth of 22% compared to the fourth quarter of 2020. U.S.

fourth quarter revenue was $38 million, a 19% increase over the prior year. Despite accelerated COVID-19 headwinds late in the quarter, U.S. revenue growth was driven by the continued expansion of our sales force combined with an increase in the average revenue per surgeon customer. Our U.S.

sales force will continue to expand and it's the destination of choice for passionate, exclusively focused foot and ankle sales specialists. Our comprehensive and innovative product line is also the output of our singularly focused mission, and true passion for foot and ankle.

Revenue per surgeon customer has and will continue to increase driven by our product suite combined with our best-in-class medical education programs. We trained over 800 U.S. surgeons in the second half of 2021, at our headquarters in Denver and around the country.

Our success in the quarter was not limited to the U.S., as international fourth quarter revenue was $5 million, representing growth of 51% and was also up 700,000 sequentially, compared to the third quarter, despite increased COVID-19 headwinds in our largest international markets.

Full year 2021 revenue was $147.5 million, representing growth of 32.9% compared to full year 2020. Given the numerous challenges resulting from the pandemic throughout the year, I'm extremely proud of our 2021 performance which continues to be driven by our amazing team. Moving to product development.

In the fourth quarter of 2021, we received FDA approval of three exciting new products; our Monkey Rings External Fixation System, a Patient Specific Talus Spacer and our R3ACT Syndesmosis Stabilization System. We launched the Monkey Bars Pin to Bar External Fixation system for trauma surgery in December of 2021.

Monkey Bars is our first External Fixation System, and we expect it to nicely complement our comprehensive internal fixation product line. The device can be used on fractures where soft tissue injury or infected fracture site may preclude the use of other fracture fixation treatments.

Early market response to this system has been strong and we expect this product to be successful.

In December, we received approval for our Patient Specific Titanium Talus Spacer originally approved on February 17 of 2021 by the FDA under a humanitarian device exemption for treatment of avascular necrosis of the ankle joint in cobalt chromium metal alloy.

The implant is now available in titanium with a titanium nitride coating, which provides an additional option allowing the surgeon to select which material is best suited for the patient. Patient Specific Talus Spacer remains the first and only patient specific Total Talus replacement implant authorized for use in the United States.

The implant is designed to replace the Talus, and ankle bone that connects the leg and foot, providing patients access to a novel joint sparing alternative to amputation, or traditional ankle fusion therapies.

Finally, we received FDA clearance in late December for our R3ACT React syndesmotic stabilization system, which I believe is one of our most innovative products we have brought to market.

The addition of the R3ACT syndesmotic stabilization system bolsters our ankle fracture and soft tissue product offering, which includes the Gorilla Ankle Fracture Plating System, Gorilla Pilon Plating System, Mini-Monster Screw System, and Release Stabilization System.

With this comprehensive portfolio, we now offer customers a broad array of innovative solutions for fracture fixation and soft tissue stabilization. We are very excited about the eight products we launched in 2021 in addition to the assets acquired from Additive Orthopaedics.

We bolstered our growing total ankle portfolio with the MAVEN PSI Guides, and fast track laser alignment system added multiple biologic options to our already robust portfolio, added Straddle, Span, and many open plates to our Silverback Ankle Fusion Plating System and launched a comprehensive ankle fracture system in Ankle Fracture 360.

We expect to build on this momentum over the next 12 months with an even more robust wave of product launches. Specifically, we will expand our soft tissue offering with novel product launches such as the recently cleared R3ACT syndesmotic stabilization screw, which will greatly bolster our trauma portfolio.

Additionally, soft tissue products will become a larger focus for P28 with multiple planned product launches in 2022. Lastly, we are excited about our next generation Pianoteq product, which is a novel device to correct Hammertoe deformities.

Overall, we have more than 30 products currently in the pipeline and expect to launch 26 of them in 2022 and 2023. Moving to U.S. commercial initiatives, including medical education. We ended the year with 206 producing sales reps, up from 192 at the end of 2020. As a reminder, our U.S.

sales force consists primarily of independent sales representatives, the majority of which are exclusive. While the number of producing sales reps has increased significantly over the years, the percent of U.S. revenue generated by these reps has consistently been above 90%.

We enter 2022 with a strong commercial platform and will continue to expand the sales force to further deliver strong and sustainable growth in 2022 and beyond. In the U.S. we believe there are approximately 2400 Orthopedic surgeons who specialize in Foot and Ankle.

Approximately 2300 Pediatric and Trauma surgeons that treat foot and ankle and approximately 18,000 Podiatrists of which about half we believe are performing foot and ankle surgery. During the fourth quarter of 2021, approximately 1800 U.S. surgeons, including 575 producing surgeons perform surgeries utilizing P28 products.

We define producing surgeons as those surgeons who utilize P28 products each month of the quarter. With an estimated 15,000 surgeon call points in the U.S. we have a tremendous runway to add new customers and expand our relationships with existing customers.

During 2021, we also expanded our international sales and commercial leadership team to take advantage of the large international foot and ankle market opportunity. Since we began operating outside the U.S. in 2016 we have grown our international, annual revenue base to over 17 million.

However, we have great opportunities to gain more market share in our existing and new markets. Medical Education Events for existing surgeon customers and potential new surgeon customers have been and will continue to be a key strength and driver of growth for Paragon 28.

Our Medical Education team and infrastructure are best-in-class highlighted by our 250% auditorium and a 40 station cadaveric lab at our Denver headquarters, which opened late in 2019. This facility is now used almost every week for hands on training and learning with physicians and our commercial team. In the fourth quarter we trained over 200 U.S.

surgeons. As a reminder, the fourth quarter has fewer medical education events compared to the third quarter given the heavy concentration of Foot and Ankle procedures performed at the end of each calendar year. Finally, transitioning to our SMART 28 initiatives in the Disior acquisition.

We kicked off 2022 by acquiring Disior, a cutting edge three dimensional modeling and preoperative planning software company. Disior advances SMART 28 and our previously communicated strategy to target unique technologies designed to modernize all aspects of foot and ankle surgery and improve patient outcomes.

Disior’s Foot and Ankle surgical modules will provide surgeons the objective data needed to better measure and visualize each patient's deformity.

Through further development, we aim to incorporate the use of patient specific surgical plans to ensure a selection of an optimal implant for each patient, and better prediction and evaluation of patient outcomes.

The initial focus of the Disior integration into SMART 28 will be to accelerate internal research and development efforts to expand and enhance surgical preoperative planning capabilities. Following this phase, our plan is to launch the Disior platform to the broader surgical community, which we believe will lead to future revenue synergies.

Our goal and the reason for the Disior acquisition is to improve patient outcomes by providing surgeons with more information about the patient's anatomy and measuring planned to actual surgical outcomes.

Using this data, we plan to continuously refine preoperative plans, perform surgeries with optimal implants for the patient, and perform postsurgical evaluation through further enabling technologies, including artificial intelligence. Disior in SMART 28 are critical components of our plan to improve patient outcomes.

We believe that Disior acquisition will bolster our producing surgeon base, drive further commercial productivity and ultimately improve patient outcomes expanding the foot and ankle market and P28 market share.

In summary, I am thrilled with the team's execution in 2021 including receiving approvals for eight new products, expanding our commercial teams and customer base, answering the strong demand for more surgeon education by training a record number of surgeons and building critical corporate infrastructures to scale with our growth.

We also completed two important acquisitions in the past year and also when public unlisted our FNA common stock on the new York Stock Exchange, however the best is yet to come. I will now turn it over to Steve.

Steve?.

Thank you, Albert. Moving to our fourth quarter and full year 2021 financial results. Paragon’s revenue for the fourth quarter 2021 was $42.8 million representing growth of 22% above the fourth quarter of 2020. Fourth quarter 2021 revenue was also 19% sequentially higher than the third quarter of 2021. U.S.

revenue for the fourth quarter of 2021 was $38.1 million, representing growth of 19% above the fourth quarter of 2020. Fourth quarter 2021 U.S. revenue was 20% sequentially higher than the third quarter of 2021. Our U.S. revenue growth was driven by an increase in the number of producing U.S.

sales representatives and a higher amount of revenue generated per producing sales representative. New product offerings, medical education for both surgeons and sales representatives and higher surgical volumes due to lesser COVID-19, surgical deferrals or cancellations, all contributed to increased revenue producing sales representative.

International revenue for the fourth quarter of 2021 was $4.7 million, representing growth of 51% above the fourth quarter of 2020. This growth was led by strong performances in South Africa and the United Kingdom. Gross profit margin for the fourth quarter of 2021 was 81.7%, compared to 72.3% in the fourth quarter of 2020.

The increase was primarily due to lower excess and obsolete inventory expense in the fourth quarter of 2021, as the fourth quarter of 2020 included a $3.7 million excess and obsolete inventory expense, resulting from disruption in supply chain purchasing processes during the COVID-19 pandemic.

Research and Development expense was $4.9 million or 11% of revenue for the fourth quarter of 2021 compared to $3.0 million or 9% of revenue in the fourth quarter of 2020. The R&D expense increase was driven by our 30 new products and development plus our three products receiving FDA clearance in the fourth quarter of 2021.

Selling, General and Administrative expense was $35.1 million, or 82% of revenue for the fourth quarter of 2021 compared to $21.7 million, or 62% of revenue in the fourth quarter of 2020. Selling and marketing expenses increased driven by more in-person U.S.

marketing and medical education events, increased variable sales agent commission expense, and investments in U.S. and international commercial teams. On an annual basis going forward, we do expect S&M investments to increase in dollar terms, but over time to decrease as a percentage of revenue.

2021 as compared to 2020 was a year of significantly increased S&M investment, driven by a less restricted COVID environment and more demand for our marketing and medical education events.

G&A expenses increased primarily due to additional costs related to Paragon 28, becoming a publicly traded company, including personnel and third party consultant expenses, including Legal, Finance, Accounting and Information Technology.

On an annual basis going forward, we do expect G&A expenses to increase in dollar terms, but to decrease as a percentage of revenue. Net loss was $6.2 million for the fourth quarter of 2021 compared to net income of $4.2 million in the fourth quarter of 2020.

Adjusted EBITDA for the fourth quarter of 2021 was $0.1 million, compared to $6.3 million in the fourth quarter of 2020. Net Cash used in operating activities for the fourth quarter of 2021 was $2.1 million, consisting primarily of net loss of $6.2 million, plus non-cash expenses of $7.3 million, less increased working capital of $3.2 million.

Cash used in investing activities was $9.6 million, including net purchases of plant property and equipment to $7.8 million, primarily surgical instrumentation of $4.7 million and capitalized patent costs of $1.8 million.

Cash provided by financing activities was $113.3 million during the fourth quarter of 2021, consisting primarily of net IPO proceeds of $129.4 million offset partially by the repayment of $16.1 million of senior credit facility debt. Our cash on hand at December 31, 2021 was $109.4 million compared to $17.5 million at the end of 2020.

This cash on hand combined with our ability to borrow up to a total of $70 million on our senior credit facility, which we entered into during 2021 puts P28 in a position of financial strength. Turning to our first quarter and full year 2022 revenue guidance.

Despite strong COVID-19 headwinds during January and the first part of February, we generated double digit year-over-year revenue growth in both months, demonstrating the strength and resiliency of our business.

Surgical volumes during the second part of February, and the first part of March improved from January trends, and total February revenue increase sequentially from January. We view these trends as an indication of progress towards a more normalized operating environment.

Our 2022 annual revenue guidance ranges $167.0 million to $171 million, representing growth of approximately 13% to 16%. For the first quarter of 2022, we also expect revenue growth of approximately 13% to 16%. Today, Paragon 28 is not experiencing significant COVID-19 revenue headwinds.

However, given the unpredictable nature of COVID-19, our revenue guidance incorporates the risk of COVID-19 headwinds, similar to those experienced first quarter of 2022 to date. With respect to the supply chain, the environment has become incrementally more difficult.

But we are confident our team and vendors will continue to effectively manage the challenge. Consistent with remarks from our third quarter 2021 earnings call, we may opportunistically increase inventory and instrument purchases for certain components to ensure that we have adequate product on hand to meet demand.

While we will not be providing specific adjusted EBITDA or cash flow guidance for 2022, we expect to continue to report positive annual adjusted EBITDA and given this fact combined with the strength of our balance sheet, we do not expect to raise additional capital to fund operations within the currently difficult capital market environment.

That is the end of our prepared remarks. Operator, please open up the lines for questions and answers..

Operator:.

Thank you. [Operator Instructions] Our first question comes from Matthew O'Brien of Piper Sandler. Matthew, your line is now open. Please go ahead..

Great. Good afternoon. Thanks for taking my questions. I guess one, one, retrospective one and then one, prospective one. And I'm not sure if it's for Albert or Steve. But the Q4 performance was particularly strong. I would love to hear a little bit more about what really drove that strength. It sounds like new surgeon training was a big piece of that.

But what really drove a lot of that Q4 strength, that you saw here and especially in the U.S.?.

Well, I'll take that one Matt. How are you doing? Thanks for the question. The reality is that, we've always mentioned that we try to give ourselves multiple shots on goal. So first-off, I'll say that I'm really proud of the team for executing on those growth opportunities. We invested heavy in 2021, just focusing on driving growth.

And we do that through rep sales rep expansion, medical education, which highlighted. We trained over 800 surgeons in the second half of the year. I think we really started to see some of that manifests itself in Q4, new product introductions and new product development, marketing activities.

I think those things coming together in Q4 really helped us weather through some of those headwinds that we were experiencing in Q4. And despite those headwinds, we still performed really well. So I'm credibly proud of the team.

I will say that we believe that we have a 20% growth business here and absent the market dynamics right now that are a little bit abnormal. Our expectation is to return to that performance. And I think these investments we're making right now, and looking at these growth, drivers are really going to help us in the future.

Steve, do you have any color for that?.

Yes. I would just reiterate, Matt, what Albert was saying the fourth quarter, we really hit on all cylinders, expanding our rep base, expanding the dollars per rep and great contributions from new products.

And as we as we entered 2022 as I mentioned in my prepared remarks, we really saw headwinds pretty significantly increased because of Omicron in January, but we still grew double digits in January. And we did the same in February.

And, we did see the headwinds lesson as a lot of our other med tech peers have starting sort of, and the 9th or 10th of February to be pretty precise. And, and so February grew sequentially to January and March, we're off to a terrific start.

What I would tell you is our guidance, as we positioned ourselves, from the start becoming or preparing to be a public company, we like to prepare guidance and forward looking views that are conservative.

And so we've considered COVID impacts, potentially continuing on, like we've experienced so far first quarter to date, for the full year 2022 revenue guidance, and also for the first quarter. But absent headwinds re-emerging, Albert now his expectation is that we do better than that..

Got it. Very helpful. And I'm doing well, Albert, thanks for asking. And I guess that kind of dovetails into the prospective one, which was just on the Q1 guidance. And I think, Steve, you're kind of touching on it.

It seems like you're kind of guiding in the low teens low-to-mid teens kind of area for Q1 and then for the full year being conservative because this you still have those headwinds that you're facing, but you're just taking so much market share that if there's, back to normalcy, there's upside, is that -- is that a fair assessment?.

Yes, no, I think that is, and I would characterize it this way that the headwinds we've experienced quarter to date through today, its impact on the first quarter. We've assumed that that kind of a headwind continues, even though we aren't seeing it today, because of the unpredictable nature of COVID.

We know that nobody anticipated Omicron coming in, for example, we certainly don't hope or like everyone else, hope that that doesn't happen. But we're we provided a some revenue guidance for the rest of this quarter, and as well as for the full year that accounts for that potential risk..

Got it. Thanks so much..

Sure, thank you, Matt. Thank you..

Thank you. Our next question comes from Craig Bijou from Bank of America. Craig your line is now open. Please go ahead..

Great, thanks for taking the questions, guys. And congrats on on strong finish to the year. Maybe just wanted to start with, kind of looking at 22.

And putting aside the guidance, but we'd love to see if you'd provide any color on kind of the sub segments, and maybe even products within some of the sub segments just to get a feel for where that growth is coming from or which sub segments you may I expect more growth from than others. I know you don't like to separate them.

But we're just hoping to get a little bit of color..

You got it. How you doing, Craig? Thanks for the question..

Good, Albert? How are you?.

I'll try to answer this as best I can. First off, I think we mentioned to you that 20, late 2019 and 2020 was sort of the year of the ankle for us. Right, that's where we launched a lot of our ankle fusion products. In 20, second half we launched our total ankle product line.

With the acquisition of Additive Orthopedics, we had an introduction with a total Talus Spacer. And so I would say generally speaking, in 2021, we saw a lot of boost to our growth from the ankle portfolio in total. And we attribute that to being a market we hadn't traditionally participated in, we're excited to see it contributing.

I do want to emphasize that it's no more important than any of our core products, our plates and screws and all the other products that got us here, but as a newer product, we tend to see a bit more contribution there on the growth side.

In 2022 there was a few areas that I mentioned, we either didn't participate like external fixation, or we had early participation like soft tissue. We've got some new products launching this year that we think are going to really impact those nicely. For example, [Indiscernible].

We just recently launched our Pin to Bar External fixator that's primarily used in fracture fixation, and we're blown away by its performance early on the reception in the markets been great. So it's really boosting our fracture fixation side. Q2, late Q2, we expect to launch a circular fixator another external fixation device.

We expect that one to contribute nicely to areas like Charcot and, and even ankle, the ankle market portfolio there. So and then on the soft tissue side, we've got the clearance and we expect to launch the R3ACT Syndesmosis Stabilization System later in Q2, that is another fracture fixation product.

It's one that I touted in my recorded comments that I think is one of our most innovative developments to date, or one of our most innovative developments to date, we really expect that to foray as nicely. Plus, we have some additional soft tissue products hitting the market in 22 that will contribute nicely.

And since those are two areas we haven't traditionally participated, we see huge upside potential there. But they're also very complementary to the products we've gotten played today. So generally speaking, we're really excited about the whole portfolio.

I think, I highlighted a few areas that we might see some disproportionate impact with some of those new product launches, and even some of the recent ones expecting, ankle to contribute nicely again in 22. Then it's your question, Craig..

Yes, that’s very helpful, Albert. Thank you. Second question wanted to ask on surgeon training and the obviously, very impressive number in the second half the number of surgeons that you trained. And obviously, as you alluded to, that helped some of the growth in Q4.

So I guess I wanted to ask about what 22 look like from a surgeon training perspective? How should we think about the cadence or the numbers of surgeon training or surgeon training that you plan to do? Or I guess, how does it compare to what you did in the second half of 21?.

You got it. A great, great question. And I'll take a stab at it. And then maybe Steve, if he has some additional color can come over the top there. But the reality is, our product. I'll start off by saying our product portfolio is, is really balanced across all the segments of foot and ankle.

There is also so much passion and energy that goes into every consideration of the entire system. So the optionality, the product design, the research that goes into the development process. And so it's, I think it's critical medical education is an absolutely critical component to communicate that to the surgeon users, right.

And so what we've done recently is we brought on a new leadership team in the medical education area. And I mentioned also that we have on site here, a really amazing a facility that we're proud of. It's a 250% auditorium. And it's adjacent to a 40 station cadaveric facility, so it's ideal for medical education.

What we've been doing lately with this new leadership and medical education is really looking at how we structure medical education to provide the biggest impact of surgeons. The foot and ankle market is pretty diverse.

So you have some surgeons who get really excited about ankle, you get some surgeons who get excited about forefoot, some who really light up about charcot reconstruction, etcetera.

And so I think what we're looking at now is more focused medical education, that targets specific areas that we can bring surgeons in and really effectively communicate all the design considerations. We can have key opinion leaders from around the world communicating tips and tricks in those very specific areas.

And so generally speaking, we've been refining our medical education format, to best cater to the needs and desires of those surgeons that attend those. The other thing is we are not limited to onsite training. We also bring training to surgeons. So we want to make sure that we make these as effective, but also as convenient as possible to the surgeon.

So setting up regional courses with the same philosophy is something we're focusing on some. I'm not quite giving you a number, I can tell you that we're overhauling the entire consideration there. And we're really excited about what we're coming up with to maximize medical education and the impact that has on revenue..

Yes, and Craig, I would just add. We've got really an amazing opportunity to expand our surgeon base. We've got 575 what we characterize as producing surgeons today, and those are surgeons who use our product every month of the quarter, but during the quarter, on average, we typically are doing business with somewhere around 1800 Docs.

So that is what, what Albert and I are really starting to think get focused on in the sales in the commercial team and our medical education teams, where we have a third of our surgeon users are producing, so we have an opportunity to let them be introduced to our other products as well.

Get them let them know P28 better, have them have an opportunity to spend some time with Albert and understand his vision for the company and improving foot and ankle outcomes. So a lot of opportunity to expand that with our existing Docs that are producing by getting them more exposure to our products.

So, so we expect a big year in surgeon trading not only in the U.S., but also internationally is also when I would add. We've added a team there. We've added -- we're putting in the process of putting in a new facility. And so we're getting really focused on not just the U.S. opportunity, but outside the United States as well..

Got it. Great. Thanks for all the detail, guys. Thanks..

Got it. Thanks, Craig..

Thank you. Our next question comes from Kyle Rhodes of Cannacord. Carl, your line is now open. Please proceed..

Good afternoon, everybody. I hope you're doing well.

I wanted to kind of follow up a bit on Craig's question there in just get a little bit more color about, maybe what the difference is you're seeing with your producing reps, and then the broader cohort of net reps, you're producing surgeons and in the broader cohort of surgeons that are doing cases over the course of a quarter.

Is there something different is it just that they're earlier in the adoption profile, just would love to know, what you're seeing and maybe the timeline to productivity to get a surgeon from course, to trialing the product to then becoming a predictable producing surgeon..

You got it. Hey, Kyle, how you doing? So I'll take a shot at that one, too. There really are a lot of tentacles related to surgeon adoption and medical education, right. For example, the product that we're training can really impact the timeline for a surgeon to try the first case, right.

So, for example, if we're doing some mid foot or forefoot type courses, we might see a more immediate impact there versus say, a total ankle replacement or complex ankle fusion type products, we might see a couple of weeks in between training. And the first surgery we booked there.

Some of the reasons why we might have surgeons, that discrepancy between our producing and active surgeons, what we call active surgeons could be the sales person, right, some salespeople get really comfortable talking or become really educated on a key area.

And they tend to focus there and sometimes they don't communicate some of the other technology we have.

And that's another opportunity for medical education, when, when we're working with a surgeon, we have surgeons communicating different techniques and tips and tricks and our own technology, often those surgeons will get exposed to products that they didn't even know we had.

So that is an opportunity for us to convert active surgeons into more of the producing pool..

And I would just add, Kyle, that, that different than, spine market hips and knees, etcetera. A lot of the surgeons in that base that Albert mentioned in his prepared remarks are lower volume surgeons, and some of them may only do one or two cases a quarter in some cases. They have a lot of other aspects of their practice.

And so part of our vision for the growth of this company is going to be, providing better education to the surgeons and also better products that give them more confidence in performing more procedures.

And so, that's a big part of the vision for smart 28 In our recent acquisition of Disior enabling surgeons to potentially do more procedures and get comfortable doing more procedures and also patients getting more comfortable with going into a procedure for their foot or ankle..

That's very helpful. And just the other follow up that I had was looking; you've been prolific from an R&D and product development standpoint. You're going to fill some pretty big gaps in the portfolio this year with Xfix [ph] and some soft tissue focus.

I guess just from a high level, where do you still see the gaps in the portfolio, both from a hardware perspective and then also on the SMART 28 initiative? Thank you..

I'll try to hit that one. I'll tell you I think the biggest opportunity for us is, is the enabling technology side of it. That's where we're really focusing our energy on looking at new technologies.

We're really excited about things like Disior and additive orthopedics because we feel like it's going to give surgeons better visibility to what the patient's deformity is the true deformity bringing in a whole category of different research parameters.

So soft tissue impact, specifics about a patient that might influence the types of procedures so it's going to give them better visibility to the deformity itself. But that's going to likely convert into better intraoperative tools, things like patient specific instruments, even patient specific implants.

And then lastly it's going to it's going to track these patients and ultimately give us better visibility to which procedures are performing well in which patients right. And so I think that's our biggest opportunity to significantly impact the foot and ankle market.

And you know from previous conversations that the foot and ankle market is really exciting because there's still so much opportunity to improve outcomes for patients. Paragon is investing there because we think that's the biggest opportunity we have to really provide a service to our surgeons and ultimately impact patients..

Thank you for taking the question..

You got it. Thanks..

[Operator Instructions] Our next question comes from David Turkaly from JMP Securities. Dave, your line is now open. Please go ahead..

Great, thanks a lot. Maybe one for Steve here. Obviously, a nice bump on the gross margin line.

I’m curious if you might comment on that how sustainable or unsustainable that is, I know you called out some new high margin products, but any color there?.

Yes hey, Turk, how you doing? So we did have a nice step up in the third quarter gross margin, as you mentioned 81.7%. Part of that, as we mentioned in our prepared remarks was a higher mix of higher margin products, which we expect to continue. We also saw lower overall excess and obsolete inventory expense.

It's through just better I think management of procurement cycles. But, in terms of guidance for margin. I don't, I wouldn't count on 82% or 81.7% going forward. I think our overall average for 2021 is probably a better way for you to think about it as you put your models together..

Got it. Thanks for that. And you've mentioned the goal to continue expanding the sales force.

As we look at that, 206 like, do you think 15 to 20 is a reasonable sort of guesstimate what you might add in a year, like, like in 2022? Or would it be even more substantial, given the cash that you have?.

Yes, that's an area that without giving exact numbers guidance, because it you know, we're really we will hire as we talked about in when we've talked in the past, where we've got either experienced reps that want to join Paragon. We certainly are interested in them.

But we're also interested in reps that are have the right characteristics, but may not have experience selling foot and ankle.

So, we will add and continue to adding both of those types of folks and takes a little bit more money usually to hire experienced reps because of different commission rates and things of that nature as they enter our distributor ships. But we expect to grow that producing rep number significantly.

And that's really the output of hiring, a lot of experienced people and getting them trained and, and comfortable with our product lines and introducing our products to new surgeon.

So, we've grown our producing rep numbers pretty significantly over the last three or four years, as you know and we expect that to continue and to be a big part of our driver of growth. And one other piece of information for 21, just from an overall growth perspective, in the U.S.

about half of the growth was driven by the number of producing reps, and about half of the growth was driven by more dollars per producing. And we like that we think that's a nice algorithm.

We will hire as many as we can who can contribute, and then we'll work to drive the dollars per up in our -- with our existing base and with new people we hire as well..

Thank you. That's great detail. Oh, go ahead. I'm sorry..

No, that's okay. I was just going to add to that. I feel like that's where our cadence of product development and the types of products that we introduce really help. Right? There's, there's always been discussions like we would love to come on board, but you're missing aspects.

So as we introduce more and more of these key products, and we keep the energy of our development and tax, right, we're not going to, we're not going to make something unless we feel like we can make it better, right? We have the right sales culture, we launched great product. And we launched lots of it, right.

And we've got great medical education and marketing to support that. I think this is an awesome landing spot for salespeople looking for better opportunities or just looking for a great home. And so I think that attention is only going to grow with our portfolio and where we are as a company and I think also going public help that a lot..

Yes. And one last one, if I could just sneak it in. I know, you may not want to get into all the specifics about EBITDA guidance, but you've obviously put a ton into inventory last couple of years.

I mean, should we expect things similar build something in that $10 million to $15 million range in 2022 given some the new products and sets and things that you're going to have out in the market? Thank you so much..

You got it. As we think about next year, we expect to keep a pretty consistent level of days of inventory on hand, without giving you an exact number, Dave, we do have a lot of the inventory balances, a lot of it has to do, and also procurement of sets that you see in CapEx, a lot of that has to do the timing of new products.

Like, for example, when we launched the ankle, we in 2021, we purchased a pretty significant amount of inventory and instruments to support that launch. And those are pretty capital intensive products. So it overall, it depends on the sequence of products as they come to market.

But overall, we expect to maintain or improve our overall DIOH as we go forward into 2022 and beyond..

Thank you very much..

You got it. Thanks..

And our next question comes from Mike Mattson of Needham & Company. Mike, your line is now open. Please go ahead..

Yes, thanks. Just a couple on Disior. So I don't know if you can tell us anything about the sort of timing you're expecting before you can watch at least some initial applications there for different procedures. And maybe what's required to kind of get to that point where you can launch it commercially..

You got it. How you doing, Mike? So I’m looking to get a shot at that. Yes. So we're really considering a few phases of introduction here for Disior and I'll start off by saying how excited we are about that alignment, that partnership that acquisition was really meaningful in our aspirations for SMART 28.

That being said, I think immediately where we're focusing is on our internal research and development. So we always start our development projects with tons of research to better understand the limitations of each environment, right? And I think Disior we're hoping is going to accelerate some of those answers.

It's going to give us better visibility at the start of these projects, which will create an efficiency that we're going to enjoy early on.

The second piece of it is that the platform's being used today as a diagnostic tool around the world, we've got some really amazing foot and ankles, focused surgeons using this platform, they tend to be surgeons who are already in tune with three dimensional modeling.

And usually they're surgeons that are affiliated with some kind of weight bearing CT unit. And so we might have some beta surgeons that we launch early, that are that same category here in the United States, surgeons that are affiliated again, with a weight bearing CT people that are already looking at some sort of three dimensional modeling.

We think that's key. Now for this to be more commercially available, to have modules surrounding things like Charcot Reconstruction. and ankle and bunion. We're going to be building that out over the next year, including inputting our own implants so people can have visibility to different constructs, given different patient considerations.

And we're anticipating that we'll see more of a commercial launch in the second half of 2023..

Okay, got it. That's, that's helpful. And then just just a couple in the international business.

So, do you have plans to any enter any additional countries this year? And also, I was just wondering about how you're doing the training for the international customers? Do they have to? Do they have to fly into your headquarters there somewhere in the U.S., or do you offer training in any of the international locations?.

Yes, no. Hey, Mike, this is Steve and we absolutely we have plans to enter some new markets this year. And we're looking at Western Europe and we're actually opening a few subsidiaries there, including Germany and Italy. Also looking at Canada as a nice expansion market for us.

We've got a lot of really good people that know those markets very well, that are helping with our expansion opportunities. And from a training perspective, we're able to train those physicians in, in their home markets, usually, by doing labs locally, if they're a German surgeon. A lot of our business currently is in the U.K.

and, and we're planning on multiple labs and training opportunities this year, which is something really that we haven't done in the past.

It's concentrated as focused as we have, because we haven't had, we haven't invested until now in terms of the leadership teams to drive those programs in a way that's consistently meets the standards of Paragon 28.

So it's going to be a bigger emphasis for us as we move into 2022 and beyond and, and new markets definitely are part of that, but also expanding in our, in our big three markets already today that we're in South Africa, Australia in the U.K..

One thing I'll add to that, if I can. Our facility here on site has webinar capabilities, so we can actually, televise trainings here at our facility.

So while we're building our international facility to structure around these medical education opportunities, I think in the interim, we can support some of the international training programs right here in our headquarters in Denver, and we've got such great surgeons surrounding us that we've got some neat opportunities there as well..

Okay, great, thanks..

Thank you..

And there are no further questions. So I'd now like to turn the call back to Albert DaCosta, Chief Executive Officer for any closing remarks..

Thank you again for your time today. Steve and I look forward to seeing many of you at future investor and industry conferences as well as individual meetings. Have a great day..

This concludes today's call. Thank you for joining. You may now disconnect your lines..