Paragon 28, Inc.

Hello and welcome to the Paragon 28th Third Quarter 2021 Earnings Conference Call. My name is Alex and I will be your operator for today. If you'd like to ask a question at the end of the presentation, you can press star 1 on your telephone keypads. If you wish to withdraw your question, you can press star 2. I will now hand over to your host, Matt Baxo from the Gilmartin Group. Matt, over to you.

Good morning and welcome to Paragon 28's third quarter 2021 earnings conference call. Currently, participants are in a 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. Joining me from Paragon 28 are Albert DaCosta, Chairman and CEO, and Steve Deitch, CFO. Earlier today, Paragon 28 released financial results for the quarter ended September 30, 2021, and filed its third quarter Form 10-Q. Before we begin, I'd like to remind you that management will make statements during this call that 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 and 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 include, but not limited to those relating to our operating trends and future financial performance, including our revenue guidance for the fourth quarter of 2021, 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 and 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 under-reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of the public filings with the Securities and Exchange Commission, including the final prospectus filed with the SEC pursuant to Rule 424B4 on October 18, 2021, in connection with our initial public authoring. This conference call contains time-sensitive information and is accurate only as of the live broadcast on November 22, 2021. 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 will refer to a non-GAAP financial measure, adjusted EBITDA, a reconciliation of adjusted EBITDA to net income loss the most comparable GAAP financial measure is contained in our press release issued this morning. And with that, I'll turn the call over to Albert.

Thank you, Matt, and thank you to everyone for joining us today for Paragon 28's first earnings call as a publicly traded company. Paragon 28 completed its IPO on October 19th, and we are proud to be listed as F&A on the New York Stock Exchange. Like our company name, Paragon 28, the ticker symbol FNA was selected to emphasize our company's exclusive focus on the large and fast-growing foot and ankle global orthopedic marketplace. I would like to take this opportunity to thank our investors who participated in the IPO, which raised $131 million in net proceeds. This capital is an important element of our company's strategy to continue the development of innovative new foot and ankle technologies, including Smart 28. which will improve patient outcomes and ultimately expand the foot and ankle market. P28 is just getting started in 2021. There are more opportunities available to us today as compared to when we started the company in late 2010 in a basement in Birmingham, Alabama. P28 now has greater financial strength, which complements its established team, culture, and the energy and passion required to redefine and vastly improve foot and ankle patient outcomes. Also, thank you to the early P28 investors, including my mother, who many of you know was our first investor. I look forward to the ongoing support from this group as we continue the mission that P28 set out to achieve since its inception. Finally, and most importantly, thank you to the entire P28 team and their families for their unwavering dedication and focus on our mission. The P28 team includes our amazing 331 employees in the United States and around the globe. our board of directors, our U.S. and international sales representatives who serve patients and surgeons every day in the field, and the clinicians around the world who use and put faith and trust in our solutions. Now I'd like to tell you more about P28, the foot and ankle market, and our growth strategies. Paragon 28 is exclusively focused on the foot and ankle orthopedic market, which is an estimated $4.3 billion in 2021, with approximately 55% of that amount in the U.S., growing approximately 7% per year through 2025. We have a full suite of innovative orthopedic solutions covering a wide range of foot and ankle ailments, including fracture fixation, bunions, hammer toe, ankle, flat foot, Charcot foot, and orthobiologics. Our broad suite of solutions comprises 72 product systems, including approximately 8,700 SKUs to help fit the specific needs of each patient and procedure. These solutions have enabled us to grow revenue above market growth rates and capture market share. From 2015 to 2019, our revenue CAGR was 52%. We have over 30 new products in development with 140 million of revenue for the trailing 12-month period ended September 30th, 2021. We believe we are the largest pure play foot and ankle orthopedic company. We compete with both large global diversified med tech companies as well as smaller and often single product foot and ankle businesses. At Paragon28, we eat, sleep, and breathe foot and ankle. We believe we can continue taking market share and over time expand the foot and ankle market by improving patient outcomes via new and innovative technologies and world-class medical education. Our strategy to drive durable long-term growth includes one, new product development, two, Smart28 initiatives, three, expanded sales distribution, four, advanced medical education and marketing initiatives, and five, business development opportunities. First, starting with the new product development, our proven ability to identify, develop, and launch innovative technologies combined with our foot-and-ankle-centric culture and passion is the cornerstone of the success and growth of Paragon 28. It has been the catalyst for us to grow our market share over the past several years. However, we believe the foot and ankle market growth has potential to accelerate further, driven by advancements in technology that will improve patient outcomes, increases in patient and clinician awareness, and the adoption of available treatments. Given that the foot and ankle market is a young and emerging orthopedic segment, we believe there is significant opportunity to improve outcomes to be on par with other more mature orthopedic specialties. as a result of increased innovation and new product launches. Paragon 28, with its exclusive focus on the foot and ankle patient and clinician, and a proven track record of launching innovative new products, will be a catalyst for improvements in foot and ankle clinical results. We also expect the market to benefit from favorable macro trends, including an aging population, increased incidence of obesity and diabetes, as well as the broader patient population's desire to pursue a more active lifestyle. Our SMART28 initiatives will also be an important driver of improving patient outcomes. We have branded our enabling technologies initiatives as SMART28. SMART28 is a key focus area for us and is a key element of our mission to improve foot and ankle outcomes in patients' lives. SMART28 has three elements, a preoperative planning element, intraoperative support, and postoperative evaluation. Within each category, we have or expect to have specialized products designed to improve overall patient outcomes and improve surgical efficiency. Within preoperative planning, we are developing patient-specific algorithms to provide surgeons a better understanding of the patient's needs before they even get to the surgical center. In intraoperative support, we have developed and continue to evaluate tools such as surgical guided technologies that can help improve reproducibility and assist with the live procedure. And finally, for post-operative support, we will continue to evaluate opportunities around AI solutions, data collection and aggregation, and tools to validate procedural outcomes. Additionally, we will continue to make significant investments to expand our global sales force. A leading and innovative product line combined with our entrepreneurial and clinically oriented culture has allowed us to attract, build, and retain a leading sales force exclusively focused on the foot and ankle market. Our US sales force has grown significantly over the last several years and consists primarily of independent sales representatives, the majority of whom are exclusive. As of September 30th, 2021, it included approximately 200 producing sales representatives, which accounted for most of our US revenue in the third quarter. We began selling outside the United States in late 2016, As of September 30th, 2021, we sell our products in 23 countries. In year-to-date through September 30th, 2021, our international business contributed approximately 12% of our revenue. Paragon 28, both in the U.S. and international markets, is well-positioned to be the company of choice for foot and ankle sales representatives looking for unlimited opportunities to grow with an exclusively focused foot and ankle company that boasts a full suite of innovative products and is not part of a larger multi-channel company. Continued excellence in medical education and new targeted marketing initiatives are also important parts of our growth agenda. Medical education is a strength of Paragon 28 and will continue to be a key part of our strategy to improve foot and ankle patient outcomes and grow our business. Our medical education team and infrastructure are best in class. Late in 2019, we opened a new dedicated 250-person auditorium and a 40-station cadaveric lab at our Denver headquarters. This facility is now used almost every week for hands-on training and learning with physicians and our commercial team. In addition, we offer many regional medical education programs and virtual seminars. Digital and direct-to-patient marketing initiatives are becoming a greater focus for Paragon 28, as certain subsegments of the foot and ankle market are well-suited for us to articulate the benefits of our products to patients and surgeons. We believe our marketing initiatives will raise patient awareness of the benefits of our solutions with an approach that keeps physicians as the ultimate and final arbiter of patient care. Finally, business development is an important part of our future growth plan. In the second quarter of this year, Paragon 28 completed the acquisition of the assets of additive orthopedics. This is a good example of the type of acquisitions that we look for to complement our portfolio with unique technology. Additive gave us the first in the world and only FDA-approved patented Total Tailor Spacer. This product can change the lives of certain foot and ankle patients, patients who otherwise would require either a complicated fusion procedure or possibly even foot amputation. In summary, Paragon28 is exclusively and passionately focused on the large and fast-growing foot and ankle market. We will develop technologies enabled by Smart28 initiatives that we expect will deliver better clinical outcomes and drive market share gains via our best-in-class sales channel and potentially accelerate growth in the foot and ankle orthopedic market. I am more excited now than I have ever been about the future of Paragon 28 and its potential to shape a better future for foot and ankle patients. I will now turn it over to Steve, who will provide a summary of our third quarter financial performance and provide revenue guidance for the fourth quarter of 2021. Steve? Thank you, Albert.

Moving to our third quarter 2021 financial results. Paragon's revenue for the third quarter of 2021 was $35.9 million, representing growth of 18% above the third quarter of 2020 and 45% above the third quarter of 2019. U.S. revenue for the third quarter of 2021 was $31.9 million, representing growth of 16% above the third quarter of 2020 and 43% above the third quarter of 2019. Our U.S. revenue in the third quarter of 2021 was also 2% sequentially above the second quarter of 2021, despite COVID headwinds experienced in August and September. Our U.S. revenue growth was driven by the strategies previously outlined by Albert, including new products, outstanding medical education, and expansion of our sales force. International revenue for the third quarter of 2021 was $4 million, representing growth of 42% above the third quarter of 2020 and 68% above the third quarter of 2019. This growth was achieved despite COVID-related surgery deferrals and our largest international markets served, including Australia, South Africa, and the United Kingdom. Gross profit margin for the third quarter of 2021 was 80.2% compared to 76.7% in the third quarter of 2020. Karagon 28 sold a greater mix of higher gross profit margin products and had decreased excess and obsolete inventory expenses during the third quarter of 2021, which both contributed to the improvement in gross profit margin. During the three months ended September 30th, 2020, The company incurred a $500,000 or 1.7% of net revenue excess and obsolete inventory adjustment resulting from disruptions in the supply chain purchasing processes during the COVID-19 pandemic. Research and development expense was $4.1 million or 11.4% of revenue for the third quarter of 2021 compared to $2.3 million or 7.8% of revenue in the third quarter of 2020. The increase in research and development expenses was due to additional investments in new product development efforts and our quality management system, including increased personnel expenses. Kelling general and administrative expense was $29 million or 80.8% of revenue for the third quarter of 2021 compared to 17 million or 56% of revenue in the third quarter of 2020. The company was able to return to a more normalized level of sales and marketing activities during the third quarter of 2021, including making additional investments in the expansion of our U.S. sales force and increased medical education and trade show activity. Additionally, during 2021, the company made investments in its administrative functions, including people, processes, and systems in preparation to be a publicly traded company. The company also incurred additional third-party legal expenses during 2021. Adjusted EBITDA for the third quarter of 2021 was negative $1 million, compared to 6.3 million in the third quarter of 2020. The decrease was driven primarily by the previously mentioned increases in operating expenses, offset partially by an increased gross profit driven by higher revenue. Net loss was $5.1 million for the third quarter of 2021, compared to net income of $3.8 million in the third quarter of 2020. This $8.9 million decrease reflected the previously discussed $7.3 million decrease in adjusted EBITDA plus a $700,000 increase in stock-based compensation and a $900,000 increase in depreciation and amortization expense. Cash flow from operations was negative $5.1 million for the third quarter of 2021, compared to negative $5.3 million for the third quarter of 2020. The third quarter of 2021 operating cash flow was driven by the net loss of $5.1 million and working capital usage of $4.8 million, including inventory purchases of 3.3 million, offset partially by non-cash expenses of $4.8 million. Free cash flow was negative $9 million for the third quarter of 2021, compared to negative $7.8 million for the third quarter of 2020, primarily driven by increased purchases of surgical instrumentation during the third quarter of 2021. Our cash balance on September 30th, 2021 was $7.9 million. With a total of 26 million of borrowings outstanding on our senior credit facility, Paragon 28 has approximately $44 million of additional borrowing capability under its senior credit facilities on September 30th, 2021. Our IPO, completed on April 19th, 2021, provided the company with $131 million of net cash proceeds. Finally, turning to our financial outlook for the remainder of 2021, our estimated fourth quarter 2021 revenue guidance range is $38 to $39 million. representing 10% year-over-year growth at the midpoint. COVID-19 patient deferrals and surgical disruptions from staffing shortages have been taken into account in our fourth quarter revenue guidance. That's the end of our prepared remarks. Operator, please open the lines for questions and answers.

Thank you. We will now proceed with the Q&A. If you would like to ask a question, you can press star 1 on your telephone keypad. If you would like to withdraw your question, you can press star 2. Please ensure you are unmuted locally when asking your question. Our first question for today comes from Craig Bijou from Bank of America. Craig, your line is now open.

Good morning, guys. Thanks for taking the questions and congrats on a very strong first quarter. Let me start with just the Q4 guidance and how you got to where you did. Maybe if you can talk a little bit about the trends that you saw August, September, and then October, and then maybe even into November, and what the underlying assumptions for your guidance are for the rest of the year. Is it status quo? Does it get a little bit better? Just any color on that would be great.

Great. Thank you, Craig. As you know, our guidance for the fourth quarter is $38 to $39 million. And what we've incorporated into that guidance is the COVID headwinds that we've experienced in the fourth quarter to continue on. And, you know, similar to the third quarter where we experienced headwinds, we've forecasted those to continue into the fourth quarter. And what we know though is our business is resilient and performs well despite these challenges from the COVID headwinds. With our 18% growth in the third quarter, we were able to pivot and continue to make progress and drive growth with many of our product lines and train a number of new surgeons to use our products as well. So we've continued to assess the market, assess the headwinds. It's a dynamic environment, as you know. And three of our largest markets outside the United States are in South Africa, the United Kingdom, and Australia, which really have sort of stop and go environments from time to time with COVID. So we take a tempered approach when we're looking at our growth prospects for the fourth quarter. And we've continued to assume, you know, a significant, fairly significant amount of headwinds, similar to what we've seen the last three or four months.

Great. That's helpful. And, um, maybe kind of taking a step back and a little bit of a bigger picture or a longer term, uh, question. Um, obviously you guys have highlighted the growth of the foot and ankle market. Um, there are several different categories, uh, within that market as, as you guys have laid out. Um, so yeah, with, with different growth rates and different dynamics, um, each of them. So maybe if the, if there's any color you can provide on kind of where you see strong opportunities within the foot and ankle market, places where you're poised to either take share or grow above the market, just trying to understand kind of your focus areas, your target areas, and where you guys think you can really drive the growth.

Thanks for that question, Craig. It's Albert, and I'll happily answer that portion of it as much as I can. The reality is we define the market as pretty broad and diverse, which is one of the things that excites us the most. We've classified it really as six different sub-segments, seven if you include biologics, which really is blended across all the six. And each of those have different opportunities and different indications for us to address. I'll tell you one of the things that's really benefited Paragon 28 is our approach to the market has been really balanced across all those sub-segments. And moving forward, we expect to continue to do the same. I would tell you there's different levels of complexity and considerations for some of these segments that are definitely attractive for a company who's had a really nice cadence for product development. Things like ankle is really maybe in a younger phase versus some of the more traditional segments like flat foot reconstruction might be. And so our approach is going to be very similar. We're going to look at all of those in a blended fashion. I'll tell you that we're excited about the market and what it presents to us in terms of opportunities for product development. If I look at our pipeline of development, I can tell you it's really nicely blended across all of those sub-segments. And we've got 30 projects in development today, of which we expect around 22 of those projects to be launching in the next two years. And again, I'll repeat that those projects that we're going to be launching are blended across all the sub-segments pretty nicely.

Got it. Helpful. And thanks for that. I'll hop back in queue, but congrats again on a strong first quarter. Thank you. Thanks, Craig.

Thank you, Craig. Our next question comes from Matthew O'Brien from Piper Sandler. Matthew, your line is now open.

Thanks, and appreciate you guys taking the questions. I'm not sure if this is for Albert or Steve, but just in looking at the Q3 results domestically, And, you know, the growth sequentially is not something we're seeing across most of surgical med tech and especially not in orthopedic. So can you talk a little bit more about what drove that growth sequentially? I know Stevie sort of touched on the doc training a little bit, but again, it was surprising to see, great to see what really drove that sequential improvement.

Hey Matt, thank you. This is Albert. I'll tackle that one as well. You know, it's really the basics of Paragon 28's business that it's almost reminiscent of the 2020 year where we made some investments in sales rep training, medical education as a whole with surgeons, looking at some of the marketing aspects, new product development, and really Salesforce expansion would be areas that I'd highlight. Earlier this year, we made an acquisition. We acquired the assets of additive orthopedics. That product line complements so nicely with our portfolio. And some of that also contributed to the tailwinds that we saw going into Q3 to really offset some of the headwinds that we were seeing with COVID out in the marketplace. So we're proud of that sequential quarter over quarter growth. We're also really proud of the growth that we achieved in 2020, given the abnormal year that we were experiencing there. And it really proved to us that the fundamentals were in place. To highlight, even last weekend here, we had three different courses being conducted at our medical education facility on site. So we had around 25 sales reps that were present for a week of training here on site. During the weekend, we actually had two separate courses going on simultaneously where one was called Pushing the Limits. We had surgeons in from all over, and we believe there's around 30 surgeons attending that course, really successful covering really complicated areas of foot and ankle surgery. And then in tandem, we had eight surgeons being trained on our new total ankle replacement system, Apex 3D, in our lab. So one, we're making use of the medical education facility. We're really aggressive looking at sales rep expansion, people that match us clinically and can represent the line well and service these cases best. And I think you're seeing a lot of those things support the growth that we were able to see in Q3 as well.

Okay, that's great. Appreciate that. And then, Albert, you started touching on this. there in the last few sentences of what you were saying. But as far as the Salesforce goes, there's a big competitor that consolidated about a year ago, I think last week. You just finished the IPO. Can you talk about the response you've seen? I know it's early from turning into a public company. in terms of sales rep interest in P28 and then your ability to add these folks. I know it's challenging for some folks or some companies in Ortho right now to add reps, but just the response you've seen so far since the IPO and then the ability to continue adding reps over the next several quarters. Thanks.

Absolutely, and thanks for the question. You know, the reality is that Paragon 28 has a few key attributes that make us a really attractive landing spot for salespeople. One, the company was really founded by salespeople and specifically foot and ankle salespeople. So the culture of sales, the way we support our sales force, the way we infuse that passion of standing in the operating room representing a product line when we recognize that someone's family member sitting on the table is really important to us and it shapes the culture here at P28. So for a salespeople to look at Paragon 28's culture, it's really an attractive landing spot for people, right? They want to go to a company that understands the needs of standing in the operating room and represents that in high quality product, differentiated product, product that really addresses, meaningfully addresses needs and options to service these cases best. So we happen to be a great landing spot. And our culture is also a lot of fun. You know, we enjoy what we do here. We We love the team. We really work well together, and we have a lot of fun doing what we do. So all of those things make us a natural attraction for salespeople out in the industry. The reality is that transitions have been happening almost since the beginning of Paragon 28. We've seen a lot of movement in the industry that's pushed people our way. I would tell you that one of the biggest concerns salespeople have had at looking at Paragon 28 is the fear that we were going to be acquired. And I think the IPO really did an amazing transformation of that perception. And now I think people realize that we're looking at a long-term vision of what Paragon 28 can accomplish. And that's given salespeople a newfound comfort at looking at Paragon 28 as a potential landing spot. So I think that's really helped us in regards to Salesforce expansion, I think it's been a real positive for P28.

Thank you.

Thank you, Matthew. Our next question comes from Kyle Rose from Canaccord. Kyle, your line is now open.

Great. Thank you very much for taking the call. So I had just one more big picture question. Albert, I think you've spoken a lot about the Smart28 ecosystem and just kind of bringing enabling technologies and what you want to build at the organization. Maybe can you kind of help frame for us when you expect some of those initiatives to start showing through from a commercial perspective and maybe if there's any milestones we should have on our calendar over the course of the next 12 months to kind of monitor some of the progress and work that's being done from a development perspective?

Yeah, hey, thanks for the question. The reality is that the foot and ankle market is a relatively young segment of orthopedics, and it's broad and diverse. There's some really complicated areas, three-dimensional complexity in considering some of these deformities for patients, not to mention the soft tissue contributions and other patient profile type demographics that could influence the procedural outcomes. what I'm describing really is a perfect environment for enabling technologies. Paragon's also invested over the years into non-product related research, research that we believe is going to help contribute to a better understanding of some of the ailments of foot and ankle surgery. And what we think is that the enabling technologies environment enables us to really bring in dozens of inputs from different research parameters, things like CT weight-bearing assessments, looking at FEA analysis, finite element analysis models, mathematical models, looking at MRI data, looking at all of these, even psychological information relative to a patient that can help us shape these procedural considerations and help give different visibility to our surgeon users. And so the SMART28 ecosystem was branded really to identify our opportunity there. And we're really excited about what that means in terms of improving patient outcomes, really accelerating those improvements. Even our research considerations are accelerated with some of these tools. So we're really excited about it. And we've broken SMART28 into three different buckets. There's a preoperative bucket, which would be like your software planning algorithm, looking at a software platform that can help give the surgeon visibility to that three-dimensional deformity and plan that surgery and even understand what the outcome might be from that predictive plan. And then create from that assessment tools that might be useful in the operating room setting. So things like patient-specific instruments or patient-specific implants. We could look at things like laser alignment guides or robotics or navigation-type systems or sensors and different tools that can reproduce that plan in a reproducible setting. And then lastly, looking at the postoperative bucket, that would be evaluating how well we recreated the three-dimensional position of that foot and, frankly, how satisfied the patient is with the outcomes. and then feed that back into the preoperative plan with some sort of AI tools. What I've just described was really the premise for the acquisition of the assets of additive orthopedics that we did earlier this year. They have the first in the world FDA approved total tail of spacer. And now we can actually take a CT scan from a patient and evaluate that deformity and reconstruct a talus and provide an option to a patient that really didn't exist years ago. An option that really avoids complex ankle fusions, because these are pretty big spaces, or even amputation in some cases. So what I'm describing is both our SMART28 initiative, but also the fact that we've got some of these tools already at play and commercial for us. The Maven PSI system, which we licensed that from Conformis earlier. And we can now do the same for total ankle replacement, where we can take a CT scan of a patient, plan the case, and create patient-specific instruments to create reproducible outcomes for our Apex 3D total ankle patients. We've also got the first-ever laser alignment that we designed for total ankle replacement. So now surgeons in an operating room setting can look at both tibial alignment, they could also look at hip alignment. Very simply, we could also set IE rotation. And so we're looking at those types of tools, some of which you've seen commercial, but we're just getting started really in the SMART28 initiative. And we're excited about other opportunities that exist in that area.

Great. Thank you for that. That's very helpful. And then just the other question I have is just, I think when I think about the market, one of the things that's impressed me over the last several years is just the ability to drive patient awareness. I know some of your competitors have done that very well. Can you maybe just talk about what plans you have or if there's any product lines or any specific segments of the market that you think you can drive patient awareness in and really try to drive more procedural growth?

Yeah, I'll take that one too. You know, if you break up the foot and ankle market by its six sub-segments, you really see different personalities in each of those, right? Different patient types and different atmosphere for each. I would highlight two areas that I think are relatively prone to direct-to-patient type marketing campaigns, patients that are really scouring the internet looking for better options and solutions, looking for the best surgeons to treat their conditions, are the ankle so for ankle fusion and total ankle replacement, and I would say the bunion market as well. Those are two areas that we've seen a lot of patient activity for better solutions, looking for better outcomes, looking for better surgeons. So I would see some investments in marketing related to those two segments. It's not to say that the other segments aren't opportunities as well, just not maybe to the extent of the two that I highlighted. Great. Thank you very much.

Of course. Thanks, Kyle. Thank you.

Thank you, Kyle. Our next question for today comes from Dave Kirkley from JMP Securities. Dave, your line is now open.

Hey, good morning, and congrats as well. You mentioned the OUS expansion, and you surely highlighted a bunch of places that you may look to go in your filings, Brazil, Colombia, Japan. As you look at some of these more near-term targets, I guess just to get your thoughts on timing of those and which are the most important, any sort of details there would be appreciated.

Yeah. Hey, Turk, how you doing? This is Steve. So as you mentioned, we are focused on those markets, but we're also focused on some markets that are much closer to us here in the U.S. and Canada, for example. We're starting to look very closely at that market. We're looking at expansion into Western Europe. Our team in the international market has done a terrific job of bringing in really strong leadership with great knowledge of our Western European market opportunities. So that's going to be an area of focus for us. Japan is a longer term area because of the regulatory requirements there. And then when we look to South America and Central America, you know, we also focus on making sure that we get into markets with distributors and partners there that we trust and believe that they have the same kind of focus on doing things the right way, the way that Paragon 28 does it every day. So I would say the nearest term opportunities would be Western Europe, Canada, South America, and then on a selective basis, South America, Central America, and then more longer term, the Asian markets.

Got it. Thank you for that. And congrats on your recent 510K clearance. I guess as we look at sort of X-Fix, I was kind of surprised that was your first offering there. I know you have, I think, something like over 20 internal fix fracture products. But given that that's the largest part of your product mix, I'd love to get your thoughts on that product and then sort of the opportunity there. Should we expect more external products? products coming down the pipeline. Thank you.

So maybe I'll take that one as well. Look, one of the things that I think is really exciting right now is as our portfolio expands into other indications, we're really able to become the premier foot and ankle provider for our surgeons and ultimately for our customers and the patients here. External fixation was an area that we were a bit delayed in addressing as a company. One of our internal philosophies is that if we can't make it better, we're not going to develop it, right? And so we were really looking at the external fixation market. It's an important complement to the rest of the portfolio. And I've mentioned that the foot and ankle market really is – every procedure we do tends to be a combination of three and four different procedures in one surgery. So the ability to address all of those possible indications in a single surgery, I think, gives us a really nice position in the market. It gives us great conversations with hospital systems. The surgeons get a level of comfort and like being able to have a single company there to service all the needs of any one particular surgery. And so I think XFICS does that really nicely. Circular fixation was the beginning of that focus for us. I would expect to see maybe some of the pin to bar activity there and mini rail would be another interesting area both for the forefoot and bunion type indications as well as trauma in some of those cases. The external fixation was a missing piece for us in the portfolio and we're excited that we've got the attention now and products hitting the market here in the near future.

And I would just add, Turk, on that particular product line, I think it really speaks to the ability of our company to bring products to market that are differentiated in a short period of time. You know, when I joined back at the end of September last year. This was a product line in an area that the team had outlined as we need to get into this space, and here we are just over 12 months later with a product on the market, our first offering, and a differentiated product that we expect to do well. Thank you.

Thank you, Dave. As a reminder, if you would like to ask a question, you can press star one on your telephone keypad. Our next question comes from Mike Mattson from Needham. Mike, your line is now open.

Hi, good morning. This is David on for my congrats on the first earnings call and thanks for taking the questions. Maybe another product question for you guys. I mean, it seems like maybe one of the last product apps at Paragon currently is soft tissue repair. So maybe you can talk about, you know, what you have going on there and maybe timing on a potential soft tissue repair launch.

Yeah, thanks for the question, David. This is Albert again. I would tell you that soft tissue is really an exciting aspect of foot and ankle surgery. It's really a missing piece in terms of our consideration. We tend to think of the bony deformity aspect of some of these ailments, but the soft tissue is a really critical driver of that deformity. And so soft tissue is a focus for us. We've got a lot of activity in that particular arena. That's part of the 22 projects that we're expecting to hit the market here in the next two years and we're really excited just like external fixation wanted our ability to Identify the real needs of that particular indication and develop differentiated products to address those needs but then also we're really excited about what that means in terms of complementing our portfolio in the cases that we service today and with additional products to, again, be the premier foot and ankle spot. So soft tissue, you're right, was a piece that we were desperately looking at, just like external fixation. And we're really excited about what we've been developing there, and we'll be hitting the market here soon.

Great. Thanks for that. And then maybe one for Steve. You called out some of these higher margin products benefiting the gross margin. I mean, would it be safe to assume that those continue and maybe in the fourth quarter in 2022 we see some continued gross margin improvement? Thanks for taking the questions.

Well, thanks for that, David. Without giving specifics on what we expect our future gross profit margins to be, I would tell you that we're comfortable in the 80% gross product margin range that we've been in the last two years. And what we saw in this particular quarter compared to last year was we did have some new products that come to market, including many different ankle offerings that we have that, in many cases, have a higher overall gross profit margin. So that was a contributing factor year over year in that regard. But all of our products, by and large, have pretty solid gross profit margins. There just happens to be a few that do a bit better than others, and some of the ankle products are those, and we saw a nice contribution from those in the third quarter.

Thank you. Thank you. That concludes the Q&A for today. I will hand back over to Albert DaCosta for any closing remarks.

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

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