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spk00: Good afternoon and welcome to the Paragon 28's fourth quarter and full year 2021 earnings conference call. Currently participants are in listen only mode. We'll 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. If you would like to register a question during the presentation you may do so by pressing star followed by one on your telephone keypad. I'll now pass the call over to your host Matt Baxo, Gill Martin Group to begin. Matt please go ahead.
spk07: 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 December 31st, 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 that include forward-looking statements within the meaning 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 and certainties 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 a list of descriptions of the risks and uncertainties associated with our business, please refer to the risk factors section of the public filings with the Securities 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 will 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.
spk06: Thank you, Matt. Good afternoon, and thank you for joining Paragon 28's 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 SMART28 and our recently announced acquisition of Vizior. 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 in 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 10th, 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 am 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 titanium talus spacer, and our REACT syndesmotic 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 the 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 17th 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, an 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 REACT syndesmotic stabilization system, which I believe is one of our most innovative products we have brought to market. The addition of the REACT 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 Orthopedics. 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 REACT 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 TenoTac product, which is a novel device to correct hammer toe 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 US 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 US revenue generated by these reps has consistently been above 90%. We entered 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 2,400 orthopedic surgeons who specialize in foot and ankle, approximately 2,300 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 1,800 U.S. surgeons, including 575 producing surgeons, performed 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 US 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-person 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 SMART28 initiatives and the DSYOR acquisition, we kicked off 2022 by acquiring DSYOR. a cutting-edge three-dimensional modeling and preoperative planning software company. Dizior advances SMART28 in our previously communicated strategy to target unique technologies designed to modernize all aspects of foot and ankle surgery and improve patient outcomes. Dizior'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 selection of an optimal implant for each patient and better prediction and evaluation of patient outcomes. The initial focus of the DSIOR integration into SMaR28 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 DSIOR platform to the broader surgical community. which we believe will lead to future revenue synergies. Our goal and the reason for the DSIOR 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 post-surgical evaluation through further enabling technologies. including artificial intelligence. Dizior and Smart28 are critical components of our plan to improve patient outcomes. We believe that Dizior acquisition will bolster our producing surgeon base, drive further commercial productivity, and ultimately improve patient outcomes, expanding the foot and ankle market and P28's 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 went public and listed our F&A common stock on the New York Stock Exchange. However, the best is yet to come. I will now turn it over to Steve. Steve?
spk10: Thank you, Albert. Moving to our fourth quarter and full year 2021 financial results. Paragon's revenue for the fourth quarter of 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 representatives. 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 in 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 31st, 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 P-28 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 increased sequentially from January. We view these trends as an indication of progress towards a more normalized operating environment. Our 2022 annual revenue guidance range is $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.
spk00: Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. And when preparing to ask your question, please ensure your line is unmuted locally. Our first question comes from Matthew O'Brien of Piper Sandler. Matthew, your line is now open. Please go ahead.
spk08: Oh, great. Good afternoon. Thanks for taking my questions. I guess 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 But what really drove a lot of that Q4 strength, you know, that you saw here and especially in the U.S.?
spk05: Well, I'll take that one, Matt. How are you doing? Thanks for the question. The reality is that, you know, we've always mentioned that we try to give ourselves multiple shots on goals. 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 sales rep expansion, medical education, which you highlighted. We trained over 800 surgeons in the second half of the year. I think we really started to see some of that manifest 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 incredibly 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?
spk10: Yeah, 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 entered 2022, as I mentioned in my prepared remarks, we really saw headwinds pretty significantly increase because of Omicron in January. But we still grew double digits in January. And we did the same in February. And, you know, we did see the headwinds lessen as a lot of our other MedTech peers have starting sort of, you know, the 9th or 10th of February to be pretty precise. And so February grew sequentially to January and March were off to a terrific start. What I would tell you is our guidance as we positioned ourselves, you know, 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, you know, Albert and I's expectation is that we do better than that.
spk08: 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 guide, 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 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 a fair assessment?
spk10: Yeah, no, that is. And I would characterize it this way. 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 could continues, even though we aren't seeing it today because of the unpredictable nature of COVID. Nobody anticipated Omicron coming in, for example. We certainly don't hope, or like everyone else, hope that that doesn't happen. But we've provided us some revenue guidance for the rest of this quarter and as well as for the full year that accounts for that potential risk.
spk08: Got it. Thanks so much. Sure. Thank you, Matt. Thank you.
spk00: Thank you. Our next question comes from Craig from Bank of America. Craig, your line is now open. Please go ahead.
spk03: Great. Thanks for taking questions, guys, and congrats on a strong finish to the year. Maybe just wanted to start with kind of looking at 22 and putting aside the guidance, but We would love to see if you'd provide any color on kind of the subsegments and maybe even products within some of the subsegments, just to get a feel for where that growth is coming from or which subsegments you may 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.
spk05: You got it. How are you doing, Craig? Thanks for the question. I'll try to answer this the best I can. First off, I think we mentioned to you that, you know, 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 2020, second half, we launched our total ankle product line. With the acquisition of Additive Orthopedics, we had an introduction with the Total Tailor 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, XFIX. 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 market's 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 even ankle, the ankle market or portfolio there. And then on the soft tissue side, we've got the clearance and we expect to launch the REACT syndesmotic 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 us nicely. Plus, we have some additional soft tissue products hitting the market in 2022. 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 complimentary to the products we've got in play 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, you know, Ankle to contribute nicely again in 22. Does that answer your question, Craig?
spk03: yes very helpful albert thank you um your second question you want to ask on surgeon training and obviously um very impressive number in the second half the number of surgeons that you trained and obviously you know as you alluded to that helped some of the growth in in q4 so i guess i wanted to ask about what's 22 look like from a surgeon training perspective? How should we think about the cadence or the numbers of surgeon training that you plan to do? Or I guess, how does it compare to what you did in the second half of 21?
spk05: You got a 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. The reality is, you know, our product, I'll start off by saying our product portfolio is really balanced across all the segments of foot and ankle. There's 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 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 facility that we're proud of. It's a 250 person 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 in medical education is really looking at how we structure medical education to provide the biggest impact to 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, et cetera. 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're not limited to on-site 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 surgeons. setting up regional courses with the same philosophy is something we're focusing on. So 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.
spk10: Yeah. 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, you know, on average, we typically are doing business with somewhere around 1800 docs. So, so that is, you know, what, what Albert and I are really starting to think, you know, get focused on the sales and the commercial team and our medical education teams. 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, you know, the company and, and, and improving, uh, foot and ankle outcomes. So a lot of opportunity to expand that, um, with our existing docs that aren't producing by getting them more exposure to our products. So, so we expect a big year in surgeon training, not only in the U S but also internationally is also what I would add. We've added a team there. Um, 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.
spk03: Got it. Great. Thanks for all the detail, guys. Thanks.
spk08: You got it.
spk03: Thanks, Greg.
spk00: Thank you. Our next question comes from Carl Rhodes of Canaccord. Carl, your line is now open. Please proceed.
spk01: Good afternoon, everybody. I hope you're doing well. So I wanted to kind of follow up a bit on Craig's question there and just get a little bit more color about, you know, maybe what the differences you're seeing with your, you know, producing reps and then, you know, the broader cohort of reps, not reps, you're producing surgeons and the broader cohort of surgeons that are doing cases, you know, 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 a course to trialing the products to then becoming a predictable producing surgeon.
spk05: You got it. Hey Kyle, how are 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. So for example, if we're doing some midfoot 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 book there. Some of the reasons why we might have surgeons that a discrepancy between our producing and active surgeons, what we call active surgeons, could be the salesperson, 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 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.
spk10: And I would just add, Kyle, that different than spine market, hips and knees, et cetera, 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, you know, they have a lot of other aspects of their practice. And so part of our vision for the growth of this company is, is going to be, you know, providing better education to these surgeons and also better products that give them more confidence in performing more procedures. And so, you know, that's a big part of the vision for, uh, smart 28 in our recent acquisition of dizzy or. 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.
spk01: That's very helpful. And just the other follow-up that I had was, look, you've been prolific from an R&D and a product development standpoint. You're going to fill some pretty big gaps in the portfolio this year with XFIX 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 SMART28 initiative? Thank you.
spk05: I'll try to hit that one. I'll tell you, I think the biggest opportunity for us is the enabling technology side of it, right? That's where we're really focusing our energy on looking at new technologies. We're really excited about things like Dizior 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 track these patients and ultimately give us better visibility to which procedures are performing well and which patients, right? And so I think that's our biggest opportunity to significantly impact the foot and ankle market. 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.
spk08: Thank you for taking the question.
spk05: You got it. Thanks, Kyle.
spk00: As a reminder, if you'd like to ask any further questions, please press star followed by one on your telephone keypad. Our next question comes from Dave Turkley from JMP Securities. Dave, your line is now open. Please go ahead.
spk04: 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?
spk10: Yeah. Hey, Turk, how you doing? So we did have a nice step up in the third quarter gross margin, as you mentioned, 81.7%. You know, 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 through just better, I think, management of procurement cycles. But, you know, in terms of guidance for, you know, margin, 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.
spk04: Got it. Thanks for that. And, you know, you mentioned the goal to continue expanding the sales force. As we look at that, you know, 206,
spk10: 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 yeah that's an area that you know without giving exact number guidance because it you know we're really we will hire as we've talked about when we've talked in the past where we've got either experienced reps that want to join paragon You know, we certainly are interested in them, but we're also interested in reps that have the right characteristics but may not have experience selling foot and ankle. So, you know, we will add and continue to adding both of those types of folks. And it takes a little bit more money usually to hire experienced reps because of, you know, different commission rates and things of that nature as they enter our distributorships. But we expect to grow that producing rep number significantly, and that's really the output of hiring, you know, a lot of experienced people and getting them trained and comfortable with our product lines and introducing our products to new surgeons. So, you know, 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, you know, one other piece of information for 21, you know, 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 web. 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 with our existing base and with new people we hire as well.
spk06: No, thank you.
spk10: That's great detail. Go ahead, Albert. I'm sorry.
spk05: 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 always been discussions like we would love to come on board, but you're missing aspects, right? So as we introduce more and more of these key products and we keep the energy of our development intact, we're not going to make something unless we feel like we can make it better, right? We have the right sales culture. We launch great product and we launch 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 helped that a lot.
spk04: 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 the last couple of years. Should we expect a similar build, something in that $10 to $15 million range in 2022, given some of the new products and sets and things that you're going to have out in the market? Thank you so much.
spk10: You got it. As we think about next year, we expect to keep you know, a pretty consistent level of days of inventory on hand without giving you an exact number, Dave. You know, we do have, you know, 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, you know, 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 22 and beyond.
spk04: Thank you very much.
spk05: You got it. You got it. Thanks.
spk00: And our next question comes from Mike Mattson of Needham Company. Mike, your line is now open. Please go ahead.
spk09: Yeah, thanks. Just a couple on Vizior. So I don't know if you can tell us anything about the sort of timing you're expecting before you can launch 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.
spk05: You got it. How you doing, Mike? So I'll take a shot at that. Yeah. So we're really considering a few phases of introduction here for Dizior, 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 SMART28. That being said, I think immediately where we're focusing is on our internal research and development. So, you know, we always start our development projects with tons of research to better understand the limitations of each environment, right? And I think DSIOR, 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 is 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.
spk09: Okay, got it. That's helpful. And then just a couple on the international business. So, you know, do you have plans to 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 fly into your headquarters there somewhere in the U.S., or do you offer training in any of the international locations?
spk10: Yeah. 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 their home markets usually. by doing labs locally if they're a German surgeon, by doing, you know, a lot of our business currently is in the UK and we're planning on, you know, multiple labs and training opportunities this year, which is something really that we haven't done in the past as concentrated and 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 22 and beyond. And new markets definitely are part of that, but also expanding in our big three markets already today that we're in South Africa, Australia, and the UK.
spk05: 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 structured 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.
spk09: Okay, great.
spk05: Thanks. Thank you.
spk00: And there are no further questions. I'd now like to turn the call back to Albert DaCosta, Chief Executive Officer, for any closing remarks.
spk05: 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.
spk00: This concludes today's call. Thank you for joining. You may now disconnect your lines.
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