Paragon 28, Inc.

Good afternoon and welcome to Paragon 28th, second quarter, 2024 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. To enter the queue for questions, please dial star followed by one on your telephone keypad. As a reminder, this call is being recorded for replay purposes. And I would now like to hand the conference over to our host today, Mr. Matthew Brinkman, SVP of Strategy and Investor Relations. Mr. Brinkman, please go ahead.

Good afternoon and thank you for joining Paragon 28th, second quarter, 2024 financial results and earnings call. Presenting on today's call are Albert DeCosta, Chairman and Chief Executive Officer, and Chrissy Wright, Interim Chief Financial Officer. We are also pleased to have Shadi Shaheen, newly appointed Chief Financial Officer and EVP of Supply Chain Operations joining us. Before we begin, I would 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. Forward-looking statements include statements made as to the company's or management's intentions, hopes, beliefs, expectations or predictions of future events, results or performance. These forward-looking statements are subject to a number of risks, uncertainties, estimates and assumptions that may cause actual results to differ materially from these forward-looking statements. All forward-looking statements are based upon current available information, and Paragon 28 assumes no obligation, except as required by law, to update these statements. Additional information concerning certain risks and uncertainties that may impact these forward-looking statements is contained from time to time in the company's SEC filings and in the press release that was issued earlier today. During this presentation, we will refer to the non-GAAP financial measure of the Dusted EBITDA and Constant Currency Net Revenue Growth. A reconciliation to the most comparable GAAP financial measure, net income and reported net revenue growth, respectively, is contained in our press release issued earlier today. And with that, I will now turn the call over to Albert.

Thanks, Matt. Good afternoon and thank you for joining us for our second quarter 2024 earnings call. First, I'd like to welcome Shadi to the team. We are thrilled to have him joining us. Now, I want to kick this call off by thanking the entire Paragon 2018 for their enduring commitment to our mission. I am truly grateful for their efforts, which have enabled us to achieve impressive results on the top line, as well as the bottom line in the second quarter. This has been a critical quarter for the company, and we are coming out of it with strong commercial execution, improvements to operating expenses, and a rapid cadence of meaningful product launches. For all that, I thank the team. Now turning to our performance. Global revenue for the second quarter of 2024 was $61 million, representing .6% and .7% reported in constant currency growth, respectively. We continue to drive balanced growth across all our sub segments in the quarter. Looking at the U.S. business performance, revenue for the second quarter of 24 was $49.7 million, representing .6% reported growth. During the quarter, we grew our surgeon customer base to $2,271, which is 11% growth compared to the second quarter of 23. Over the same time period, we increased our U.S. producing sales rep roster by .1% to 277 reps, and saw a 7% increase in productivity across our rep base. Looking at the momentum across these commercial metrics, you can see that we've continued to execute on our commercial growth strategy, and we have laid the foundation for durable growth in the future. Importantly, we are continuing to expand our customer base and enabling our sales force to be increasingly productive, bolstered further by significant new product launches and continued investments in medical education. Second quarter international revenue was $11.3 million, representing .4% and .6% reported in constant currency growth, respectively. International growth was driven primarily by the United Kingdom, Australia, South Africa, and Spain. We look forward to continuing to bolster international growth as we clear and launch additional products in markets outside the United States. One final word on the commercial front. I want to reiterate that I truly believe we have the best reps in the foot and ankle business. I am so proud of our sales team and the many agencies that we work with, both in the U.S. and in the international markets. They are working every day to be the best possible partners to our surgeon customers while scaling their business to align with Paragon 28's vision. It isn't easy to do what they do, and I am impressed with the results they deliver every single day. Turning next to our product portfolio. We are setting a new pace of foot and ankle innovation, having fully launched six products in the first quarter, followed by another six products in different stages of market release. That makes 12 launches through the first seven months of the year, and many of those launches are in high growth or high impact indications, spanning nearly all of our subsegments. Our R&D engine is really firing on all cylinders, and we still have additional projects in the pipeline, which we expect to roll out later this year. As a reminder, our Q1 launches included the FJ2000, Precision MIS, and limited market release of Bunyomatic, which while early in the cycle, are performing nicely and expected to be significant growth drivers, particularly in forefoot in the future. We rounded those out with four soft tissue products that are highly complementary to our hardware portfolio. Looking at what's new for this earnings cycle, we have two line extensions in limited market release. First is the recently launched Bonobo ball joint strut, designed specifically for diabetic limb salvage, and increases the functionality of our Monkey Rings circular exit system. Second, we are preparing to launch a novel right angle drill designed to precisely drill vertical holes in the tibia to prepare the appropriate interface for our Apex 3D total ankle implant, streamlining implant implementation for the surgeon. There will be more updates coming soon on our recent launches, but I want to share an early preview of where we are, because we're getting into some truly groundbreaking areas, and this is what I personally live for. We are excited to change the world of foot and ankle with incredible innovation. First, we have the Reflex stabilization system on limited market release. The Reflex is planned to be the crown jewel of our syndesmotic injury repair portfolio, with novel features that give surgeons the ability for the first time to precisely adjust and visualize tension during a repair with a simple turn of the handle. That dynamic tensioning is incredibly important, and we believe it will help mitigate the arthritic response, which is a primary complication following these types of ankle fractures. The Reflex is highly complementary to our ankle fracture plating portfolio, and is expected to be a significant catalyst for our fracture business. Now turning to Smart 28, which rounds out the rest of our product updates for the quarter. I am pleased to say that our Smart 28 case management portal is now live. The portal will host all of our 3D preoperative planning modules and patient-specific implants, while also giving surgeons the ability to plan cases, coordinate surgery dates, and submit patient imaging. It will also serve as a direct line of communication with the Paragon 28 engineering and sales teams for real-time support, status updates, and surgical planning insights. Also, on the Smart 28 front, we launched our highly anticipated first module, the Smart Bunionmatic for Bunion Correction, which is FDA-cleared for both weight-bearing CT scans and x-rays, making it highly suitable for both acute and ASC settings. With the ability to leverage both CT scans and x-ray imaging, 3D planning will be widely available to all surgeons. The Smart Bunionmatic revolutionizes preoperative planning and correction for Hallux Valgus by creating plans tailored for the individual patient, utilizing AI-enabled algorithms and statistical models combined with the surgeon input to identify abnormalities and seamlessly export a surgical plan within only about 10 minutes. The ability to 3D plan a correction is groundbreaking, but perhaps what differentiates Smart Bunionmatic the most is the ability for surgeons to precisely implement the plan down to the millimeter with full intraoperative surgeon control. The Smart 28 ecosystem is a massive advancement in helping surgeons understand highly complex deformities and optimize multi-planar correction, which we believe will ultimately result in improved precision and reproducible outcomes. We will be sharing more on Smart 28 and the Smart Bunionmatic in the coming weeks ahead, but we could not wait to share a glimpse with you all now after completing our first cases in late July. Now, before I hand things over to Chrissy to walk through financials, I want to share an update on our strategy to drive improved operational efficiency. While we remain hyper-focused on top-line growth, we believe that it's crucial that we also maintain a sharp focus on operational efficiency and capital allocation. To that end, today we are announcing a comprehensive plan to foster operational excellence and drive discipline across all facets of our business, ensuring every dollar is strategically allocated to improve surgeon experience, patient outcomes, and maximize value for our shareholders. Elements of our operational efficiency plan include a reduction of current and planned workforce, a one-time realignment of 2024 executive compensation, and reductions in areas like travel, IT, professional services, and freight, to name a few. Further, we are implementing an inventory burndown plan that will improve our day's inventory on hand and preserve cash throughout 2025. These measures, combined with a rigorous focus on cost control, will result in durable savings and will enable us to sustain high growth while building a solid foundation for long-term success. In closing, we are positioning Paragon 28 for long-term sustainable growth and operational excellence, and we believe we are very well aligned to drive shareholder value with every dollar invested. With that, I will now turn it over to Chrissy.

Thank you, Albert. Before we dive into the rest of the P&L, I will first share an update regarding our recent 8K filing from July 30th, as well as the 10KA and 10QA filed earlier today. As noted in that 8K filing, during the second quarter of 2024, we identified errors in the calculation of excess and obsolete inventory, as well as errors in accounting for inventory variances, which resulted in a net overstatement of inventory and a net understatement of cost of goods sold for the year ended 2023 and for Q1 2024. The correction of these errors resulted in cost of goods sold being understated by $8.4 million for the 2023 fiscal year and $1.7 million for the first quarter of 2024. Consequently, net inventory balance was overstated by $8 million for 2023 and $9.7 million for the first quarter of 2024. These errors did not have an impact on revenue or reported cash and cash equivalents for the restated period. Additionally, we disclosed in our amended filings that management concluded that our internal control over financial reporting was not effective due to material weaknesses in our control environment and monitoring. Over the past several weeks, management has begun developing a remediation plan. This plan includes hiring resources with appropriate accounting and internal controls expertise, evaluating the organization design of the finance and accounting function, and enhancing the design of our monitoring and management review controls and internal controls over financial reporting. The company will continue to share progress updates on the status of our remediation efforts in future quarters. Now turning to the rest of the P&L. For -over-year comparisons and references to 2023, we will reference the restated figures noted in our 10-Ka and 10-Qa filed earlier today, beginning with gross margin. Gross profit margin for the quarter was .0% compared to .3% in the second quarter of 2023. The decrease in gross profit margin is primarily the result of higher prices from suppliers, higher non-cash expense for excess and obsolete inventory, and higher revenue from international, which has lower average selling prices, partially offset by lower freight expense as a percentage of revenue. At this time, we believe gross margin has stabilized. We have several initiatives in place to drive improvements to gross profit, including ongoing actions to reduce pricing of legacy SKUs to pre-COVID levels. We expect a tailwind over time as we sell through the high-cost inventory purchased in 2023. Second quarter R&D expense was $7.1 million, or .6% of revenue, compared to $7.7 million, or .1% of revenue in the prior year period. The improvement is driven by the implementation of cost savings initiatives to lower outsourced consulting services, partially offset by increased investments in personnel. SG&A spends in a quarter with $49.4 million, a $5.6 million, or .8% increase, compared to the second quarter of 2023. As a percentage of revenue, SG&A improved 490 basis points to 81% compared to the prior year period. The increase in SG&A expense was primarily driven by increased variable commission expense, increased personnel costs, and depreciation expense. Adjusted EBITDA for the second quarter of 2024 was a $3 million loss, an improvement of $2.4 million compared to the second quarter of 2023. The improvement in adjusted EBITDA is driven by a $6.3 million increase in growth profit, offset by a $4.2 million increase in operating expense, excluding non-cash depreciation and amortization and stock-based compensation. Now turning to our cash flow and liquidity. Operating cash flow for the second quarter of 2024 was negative $10.2 million, compared to negative $6.3 million in the prior year period after adjusting for the $13 million legal settlement payment made in the second quarter of 2023. The increase in cash use is primarily attributed to changes in networking capital items, namely accounts payable, and is offset by lower inventory purchases in the second quarter of 2024 compared to the second quarter of 2023. Looking at the rest of 2024, we expect improvement to operating cash flows driven by our broader operational efficiency plan, particularly in the fourth quarter of 2024 and into 2025. We ended the second quarter of 2024 with $97 million of total liquidity, consisting of $47 million of cash on the balance sheet and $50 million available through our credit facility. I will pass it back over to Albert to share updates on our guidance and future outlook.

Thanks, Chrissy. Before I get into guidance, I want to thank you for your incredible leadership as interim CFO. I cannot understate how critical this quarter has been, and we couldn't ask for a better partner. Now turning to revenue guidance. For the full year of 2024, we are narrowing our revenue guidance range to $249 million to $255 million, representing reported growth of .1% to 17.8%, which assumes no change in current foreign exchange rates. Looking at the back half of the year, we remain highly confident in our commercial strategy led by growth and sales reps and our continued cadence of significant product launches, and we continue to monitor how the underlying macro environment may impact the foot and ankle market. We have the strategy, the people, and the products to be a long-term growth company, but we don't stop at growth. We want to be the best company possible in all ways, and that includes improving operations, managing costs, preserving cash, and building an incredible, highly competent team at all levels in all functions. That's how we will drive shareholder value, by making smart investments and taking the right steps to achieve success in all these areas. Now I want to hand it over to Shadi to share a few words, but before I do, I want to tell you a little bit about why we are so excited to have him on board. Outside of being a heck of a nice guy, Shadi stood out from the pack during our CFO search for his wealth of experience in the orthopedic markets, finance, and operations. He has a track record of fostering strong business partnerships, and we believe he is going to be a huge asset to Paragon 28 and, importantly, a great partner for me. He's only a few days in, and he's already rolled up his sleeves, working closely with Chrissy and me to prepare for this transition. Now, turning to Shadi.

Thanks, Albert. No pressure at all. Good afternoon, everyone. I'm incredibly excited to join Paragon 28 at such an important inflection point. Albert and the team have built an incredible company as a leader in the foot and ankle market, with a strong reputation within orthopedics, and I'm impressed with the business potential for sustainable and profitable growth. My goal is to help scale the business to the next level, and I'm eager to start making an impact immediately. I'm ramping up quickly and spending a lot of time getting to know the team and understanding all the unique opportunities ahead of us. From day one, I'm focused on executing the strategic initiatives and priorities that Albert laid out earlier on the call to drive sustainable growth, improve profitability, and deliver shareholder value. I look forward to working closely with the entire Paragon 2018 to build on the company's strong momentum and help take us to the next level. With that, I will now turn it back over to Matt.

Thanks, Shadi. We will now start our Q&A session. Operator, may we have our first question, please?

Certainly, the first question today is from the line of Craig Bichow of Bank of America. Please go ahead. Your line is open.

Thanks, guys, for taking the questions. I want to start with the revenue guidance. So obviously the guidance for the year comes down at the midpoint, and I believe that implies 14 to 15 percent gross in the second half, which is less than the first half, despite easier comps. So I guess the question is we keep moving away from the 20 percent growth that we had attached to you guys for the last couple of years. And I want, I was hoping that you guys could help us understand exactly the reason why that growth rate keeps coming down. So is it the market growth? I know we've heard from some other companies that maybe the foot and ankle market was a little bit softer in the first half. Is it paragon specific, either product-wise or maybe when you look at some of the cost savings that you're implementing that may have an impact? And then just how should we think about that growth level or what should we expect going forward?

Yeah, thanks for the question, Craig. I'll take this one. Maybe to start, what I'll say is, you know, we definitely felt some of the choppiness as well in the second quarter and honestly some of that lingering into the third quarter as well. So that was a consideration for us. Given some of that choppiness that we experienced in the second quarter, we were thrilled to put up 19.7 kinds of currency growth. And a lot of that was fueled by some of the new product launches that definitely drove some energy for us, disproportionate to maybe what some of the others were communicating. We felt a lot of energy in the second quarter, despite some of that choppiness. What I will say, you know, looking at this is we've factored all of that in. We've got some exciting products hitting the market. We have a lot of confidence in our commercial strategy. And when we set kind of within that range there, we kind of brought the range to 249 to 255 based on our confidence to hit that. While we're also carefully monitoring some of the macroeconomic noise that we're seeing there, we're also carefully monitoring some of that choppiness to see if it's just a short-term effect or if there could be some lingering effects into the second half. So all of that is factored into our guide where we feel really confident, again, in that range from 249 to 255. And that implies .1% to .8% on the high end. And we want to make sure when we set something with you that we've got the commitment to execute on that, Craig, and that's our plan here. I will refrain from commenting further out than that. We'll certainly look at some of the numbers going into next year, but for now our confidence level, again, is high on the commercial strategy. A lot of new product launch energy, but carefully monitoring the macroeconomic conditions there just to make sure that we get a good understanding of where that's going to end up.

Got it. Okay, thanks for that, Albert. And maybe I think the other thing that investors are focused on is obviously EBITDA, cash flow. And I heard Chrissy's comments and appreciate the fact that you guys are implementing a new cost savings program. So is there any way to quantify or maybe just talk about how we should expect the progression of EBITDA, of cash flow in the second half and then even into 25 to the extent that you can talk about it? And will these programs and some of the other steps that you're taking be enough to where your needs for capital, where you have enough capital to move forward?

Yeah, and Craig, your second question actually reminded me of part of your first question that I didn't get to hit. The impact of the operational efficiency is to enhance our business. We were really careful when we were looking at areas that we could target, looking at simplification of roles and headcount, really understanding the things that we could influence that wouldn't have any effect on our growth opportunities. And so we were very careful. That was in front of us. And so we anticipate that those are going to be supportive of the business and just enhance our operational efficiency. So we don't anticipate that affecting our ability to grow and hit top line numbers. On the other side of that is, and forgive me, I'll preface this answer by saying, I hope that I repeat this a few times on the call today because I just want to emphasize how important this is. Going forward and based on that operational efficiency project that we're working on, it's really important that I emphasize that my absolute top priority right now is the leader of RepairGon 28 and the entire team around me is simple. To achieve EBITDA positivity in the year 2025 and to achieve cash flow positivity in 26. That is our absolute target. And again, I'm going to emphasize that all the things that we're talking about are going to move us in that direction and that's going to be our priority. The other part of that may be some of the things that I can quantify. Some of the improvements that we've already kicked off, we believe, have contributed to about 840 basis points to OPEX. So we're starting to see some improvement there. And this year, what I can quantify for you is that the impact of some of the headcount optimizations, we anticipate to be about 8 million with about a million dollars of severance committed to achieving that 8 million. So that is hopefully that answered your question.

Yeah, thanks Albert. Appreciate it.

Our next question today is from the line of Matthew O'Brien of Piper Sandler. Please go ahead. Your line is open.

Hey, this is Phil on for Matt. Thanks for taking our questions and congrats on the quarter despite the headwinds. It still looks like you outgrew a lot of your competition and I feel like that's going to get lost in the weeds today. But as I look at the operational strategy, you unrolled, what part of the organization might see the biggest loss here? And in the past, you've mentioned SG&A is a big part of the growth story as you scale. So curious to hear your take on how you expect SG&A to move through the balance of this year and into 2025.

Yeah, thank you for the question and thank you for recognizing the performance on the quarter. We are very proud of that, especially given some of the commentary around the foot and ankle market. To start, I want to just maybe re-emphasize that we were really, really careful to look at every aspect of the business. When we went public, we made some significant investments, one to be a public company, but really to accelerate some opportunities to position the company the best way to move forward. Our aspiration has always been to be a billion dollar foot and ankle business, but to balance that with good financial performance. What we were doing now is just looking at every dollar of spend and analyzing the return on that dollar, the anticipated investment, and making sure that we're putting those dollars not being stingy on growth. We don't want to affect our ability to grow this business. We don't want to impact the structure in a way that's going to compromise our ability to move this thing forward, but we do want to optimize every dollar of investment to make sure it's going to the right places. And that's really the target of this. So looking at things like travel, freight, professional services, looking at maybe some of our marketing presence, the amount and optimization of where we're positioning some of those dollars, looking at medical education, spend, just looking at every dollar, really putting a lot of emphasis too on inventory and working capital. So from a networking capital perspective, you all know that last year and the year before we had some significant headwinds because of the supply chain, and that forced us to build some excess inventory to manage through that. Well, we did that at less than perfect pricing, right? And so that's an area for us to eyeball and target is how do we leverage some of that inventory, help burn some of that down and create a tailwind for us moving forward. And so all of those things are target areas for us. What I hope I'm answering for you is that we are absolutely obsessed with making sure that we don't compromise this company, the ability to do what we need to do, which is bringing the best technology to patients to improve outcomes, to keep growing this business in a meaningful way, but to make sure that we get that fiscal responsibility that was honestly our trademark going into the IPO. So we were the unicorn for that, and we know how to manage that in an effective way without compromising growth, and we're going to do that.

Thank you. That's helpful. And then not to get too far ahead of myself here, but again, you clearly took share this quarter. What does the back half guide assume as far as share taking goes? And then any thoughts on at least growing, call it mid-teens next year? And when might we finally get back to a more level of end growth and market growth? Thanks so much for taking the questions.

Yeah, you got it. And thanks for the questions. One thing I apologize when I mentioned the $8 million of potential savings from the headcount simplification, the one thing that I missed there is the word annualized, right? So our anticipated savings, there's an annualized number of $8 million, not what we would expect for the second half of this year. So I just wanted to make that correction to myself. I should have caught that when I was saying it. On the second part of that is, this was a really interesting first half of the year because despite some of the choppiness that we've communicated, we had such positive energy from the product launches. We launched six pretty key products in Q1, mostly around the forefoot space. Those carried a ton of momentum for us in the second quarter. So in one sense, there's this sense of choppiness. On the other sense, there's all this excitement around product launches. Well, we anticipate that carrying forward, right? As you all can expect when we launch products, there's a several quarter lag before you start seeing meaningful contributions. And despite the excitement, we would expect in the second half, those first quarter launches to really start being more meaningful for us. So on the high end of our range, that's certainly what's implied there is that we feel a lot of that momentum carrying forward into the second half and honestly, even being more meaningful into 25. The other part of this is we want to be clear and transparent, but we also want to be cautious because with Shadi on the team now, we want to make sure he's got time to really understand the financial statement and look at where we are as a company. It helps us with the optimization strategy and really get a handle on all the things that are important for us. But keeping in mind that priority number one for us, EBITDA positivity in 25, cash flow positivity in 26. And so I'm thrilled to be working with Shadi to look at all of that information. We'll be communicating our sense for 25 when we get closer to 25. But for right now, what we're really focusing on is executing in the second half on all these things. The operational efficiency, getting the remediation plan in place and execute it for the corrections. And then looking at all of the exciting things that we've got in front of us, which is our Salesforce execution and productivity increases, product launches.

We've got a really exciting second half. Thank you. Our next question today is from

the line of Dave Turkely of CitizensGMP. Please go ahead. Your line is open.

Hey, good afternoon, Albert. You mentioned the 7% increase in Salesforce productivity. Did you quantify where that stands today and maybe where you think that's going?

Yeah, hey, Dave, great to get the question from you and Bill Gators. Sorry. To answer that question, productivity for us is something that we're always looking at balancing productivity, headcount increases. Productivity comes from a few different places. One, it comes from new product introductions, right? So as we launch new products, that certainly helps to bring the productivity level up. But also a lot of our investments in medical education really contribute to that. We've referenced in the past that about half of our attendees at medical education courses are existing users looking at additional products that they might not be utilizing yet. Half of the attendees are brand new to the story. So we've got a really nice mix there. And that definitely influences not only the efficiency or effectiveness for the sales reps and productivity, but it also really impacts the surgeon's awareness of the products that we're bringing to the market, etc. So that's a number that we really do look at. The one confusing point to that, if I can be transparent on that, is as new people funnel into the sales producing rep sales area, they're lower in the curve. And so we tend to see that productivity fluctuate just a little bit, but then we see that momentum just carrying forward. So that's something to keep in mind as people funnel in on the lower end, we can bring that productivity number down a little bit, but then we expect that certainly to ramp up. And there's also a little bit of seasonality to the productivity piece as well.

Thanks. A quick follow up. Was there any day impact in the quarter and is there any in the back half? Chris, you want to hit that

one?

Yeah, thanks for the question. So no day impact in the second quarter versus second quarter last year. I think on last earnings call I implied that there might be a couple days change. There was no change. Same days this quarter and next quarter. And for the back half of the year, there is one day more in Q3 versus Q3 last year.

Great. Thank you very much.

You

got it.

Thanks for the question.

And our next question is from the line of Mike Mattson of Needham. Please go ahead. Your line is open.

Yeah, thanks. So just in terms of this choppiness that you're talking about seeing the second quarter and you're kind of anticipated slash worried about continuing in the second half of the year. Yeah, I was just wondering is it affecting some areas of the business more than others? Like, for example, maybe like bunions, which tend to be more elective and maybe affecting things like trauma less. In other words, is it like some kind of love? Does it seem to be some sort of economic impact to the business?

Yeah, Mike. Thanks for the question. You know, honestly, I looked at that and I didn't see it. And one thing I looked carefully and to brag a little bit, I'm really proud again of the diversity of our portfolio that we have enough of. We, you know, we're president every segment and each of those five segments, we reported pretty strong balance growth across the entire foot and ankle spectrum. So really excited about that. And again, I'm thrilled that we took that diverse approach because it did give us some balance. When I looked at the elective and non elective, I really saw nice momentum across both. So and I was looking to see exactly what you asked there, Mike. Was there some kind of influence on the elective piece? But the one caveat that I'll say is we launched a lot of four foot products in the Q1 timeframe that really boosted us in the second quarter. And so that might have muted a little bit of what we were seeing there. But to the best that I could see, the choppiness was more week to week choppiness and less product specific choppiness.

Okay, understand. And then as far as this inventory burn down plan, so how will that work? And what sort of implications does any of that have for the cash flow and margins? I mean, I'd imagine it's probably positive for cash flow, but I don't know if it's maybe negative for gross margin. I don't know.

Yeah, our baseline of gross margin today, as we stand with the corrected statements is our baseline is around 75%. Right. And so we don't anticipate that 75% accounts for the increased pricing for some of the inventory build in 23. And that will take us a little bit of time to burn that inventory down to where we can start to get to pre-code the inventory. And so we're looking at the inventory today, which we've mentioned on previous calls in part of that stockpiling that we communicated was essential to try to manage through the inventory shortage or capacity shortage issues in 23 and 22. We've got the opportunity now to position that inventory, burn some of that down without the need to replenish just yet. So that's essentially what we're communicating when we anticipate in the second half to see some modest effect from that burn down.

Okay, got it. And just looking at the company and kind of what's happened since the IPO, I mean, it seems like you've done a great job from an R&D perspective, innovation perspective, but clearly there's been some issues on kind of the operational side. And I know that's part of Shadi's new title. But I'm just wondering, does it make sense to have kind of the CFO doing both or would it maybe make more sense to bring in kind of a fully dedicated person just given the degree of trouble that you've had in this area?

Yeah, let me take a stab at that one first. And then I might even have Shadi say a few words on that. But one, maybe to start, one of the real attractions to us about Shadi was how diverse his background is. Tons of experience in all of these things, finance, building partnerships within the organization, managing aspects of operational efficiency. And I think that was the, just his history and experience was so perfect for what we were looking for. So that was part of the marriage there. On the other side of it is, when we went public, we made some investments, aggressive investments to make sure we were positioning ourselves, as I mentioned, on two fronts. One, to take advantage of the opportunity and enhance some of our growth opportunities. But two, really to set us up to be a public company. There is some significant operational expense associated with that and building that team out to support future stages was something we really looked at building quickly in our post IPO phase. Now to that end, looking at those pieces are what we're analyzing today. Just making sure that one, we don't over complicate things. Like I think some of the 8K announcement found some areas where errors were being made just because of the complexity there. And that's a real opportunity for us to simplify that process and put some controls there to ensure we don't make those kinds of errors. So when we talk about simplification, there's tons of areas where we can improve. Now that we've got the team, we've got the infrastructure, we've always had the product development pipeline, we've always had the commercial engine. Those things, I'm happy to say, have been a strength of ours. But one thing I've always communicated is we don't want to be a lopsided company. We don't want to be the best product development or with very little commercial organization or the strongest sales force with no product pipeline. We really want to be balanced across the full spectrum of a company. And that means that finance and operations and IT and regulatory compliance and healthcare compliance, we want every single part of this business, honestly, to be optimized. And that's something we're always going to mature as a company and always enhance moving forward. So and then the last piece to that question is, I don't want to give the impression that Shadi is going to be working alone to improve operations. This is a priority for the entire company. Every single aspect of this company right now is looking at freight, travel, SG&A, OpEx. We're analyzing every dollar of spend and the feedback we've gotten from the team has been incredibly positive. Everybody is on board. Everybody's working to find the most optimized way to move this thing forward. So anything to add to

that, Shadi? Hi, Albert. I think I really understand. And as I said in my prepared remarks, I'm very excited about being able to have that responsibility because I firmly believe that moving us from goals to deliverables through talent, process and systems, through strengthening our operating mechanism, so we have the visibility. So we are not in a reactive mode and instead we are in a proactive mode. So I have no doubt that I have the trust of the organization and the support to make these deliverables a reality. And I look forward for it.

Okay, great.

Thank you. Our next question today is from the line of Caitlin Cronin of Canna Fortunity. Please go ahead. Your line is open.

Okay, great. Thanks for taking the questions and congrats on the growth this quarter. Just would love a little more color on what you mean by the choppiness from a macro perspective and whether this is a phenomenon you're seeing both in the US and also internationally.

Yeah. Hey Caitlin, thanks for the question. And thanks for the compliment again. We felt like it was a really strong quarter, all things considered. On the choppiness, you know, we mentioned last year that we felt a return to a more normal seasonality. And part of that seasonality was people taking holidays, vacations that honestly weren't able to take them in the years prior. We mentioned that because of COVID and the years following COVID, hospitals had some pretty significant restrictions on surgeons leaving, especially trips out of the country. And so we felt like last year we felt a more return to normal there where people were actually taking some vacation during those summer months. Sometimes those summer months continue on in the beginning half of Q3. And so that's what we're carefully looking at is to see, is it just a seasonal piece or is there something other macroeconomic piece there, you know, inflation or something else influencing that. But again, I want to point out, at least in our early glance here, we didn't see much of a difference between the elective and non-elective pieces of our business, both of them marching strong. So it felt like maybe there was some choppiness associated with vacations in that quarter and certainly lingering a little bit in the Q3. But we're going to carefully monitor that before we make any definitive comments about what the second half might look like just to see how the rest of this quarter shapes up.

Sorry, that's super helpful. And also congrats on the pilot launch of Smart 28 with Boniomatic. I guess when do you think you'll move into more of a full launch with that module and when do you plan to add additional modules?

Caitlin, I can't thank you enough for that question. You know, my face is smiling right now and I'm blushing because I get so excited about some of the Smart 28 initiatives. I'm certainly thrilled about the launch of that first module, which we've been really talking about for a year and a half or almost since the acquisition of DizzyOr. We also launched the portal for the case management system, which is really exciting. I don't mean to overshadow that piece because of Smart Boniomatic, but just really excited about where that type of technology is going to take us in the future. When we talk about launching that more fulsome, we're having some of our key surgeons taking a look at the system. Early feedback is really good and there's something there that it's worth pointing out. When we're 3D planning surgeries and we're trying to replicate those surgeries in the operating room with some sort of patient specific guide system, the surgeon loses some intraoperative flexibility. If there's anything they see that they're not comfortable with, it's hard to make those adjustments. By guiding the Smart Boniomatic with the plan, it gives them all that sophistication and pre-op planning, but it gives them complete intraoperative versatility to make those adjustments as they see fit. The surgeon's feedback on that part has been really positive. One more point to brag about here is we worked really hard to develop an AI algorithm using some statistical shape models, etc. to have the ability to not only model CTs into three dimensional plans, but to do the same with X-ray. We are aware that we think the future of pre-op planning is definitely going to be enhanced with CT capability, but for at least now not everybody has access to that. It was really important that we gave that access to the world. We're really, really excited to report that we also have an FDA clearance for X-ray to 3D planning. The Smart Boniomatic, we're expecting the second half of this year to be moving forward nicely. One more point to add there, I'd like to say it's better to be lucky than good, but it just so happens that bunion reimbursement is being considered by CMS in primarily surgery center settings and outpatient settings. That timing with us launching these four foot solutions, I think, couldn't be any better. It opens some really interesting avenues for us to look at more of the surgery center options. Anyways, just all around excitement on that. Thank you for asking about Smart Boniomatic. I really hope to give you more visibility to what the sophistication of that planning is. Last part of your question, sorry, I just realized I hadn't answered yet. Our goal is to bring that pre-operative planning, intraoperative tool, post-operative evaluation to essentially all aspects of the foot and ankle. That complexity exists in almost all of our procedures, and we think it's really going to help to identify some patterns and improve outcomes. Our goal is to bring that to the entire foot and ankle.

Great, Kelly. Thank you. We'll

see you next week, by the way, at your conference.

Excited for it, thanks.

Thank you. And our next question today is from the line of George Sellers of Stevens, Inc. Please go ahead. Your line is open.

Hey, good afternoon, and thanks for taking the question. Maybe just to follow up on that Smart 28 discussion, I'm just curious if you could give us some additional color on that sort of business model. How does that system and platform generate revenue? Is there an associated licensing fee for access to that platform? What's sort of the business model and how should we think about that impacting revenue and growth?

You got it. Hey, George, and thanks for the question. To start, let me say that the model will be very similar to what we do today, really, for total ankle replacement, what we call the MAVEN system, where we're converting CT scans into a pre-operative plan, giving surgeons the ability to guide that correction, plan that correction, and then turn that into an intraoperative tool. There is a fee associated with that service, and that includes the guide systems for the intraoperative piece. It also includes the planning part of that. There are a few situations where there could be just the plan used alone without the intraoperative tools. There's also a situation where there might be some enhanced engineering support to handle some really difficult cases. There are a few exceptions that might go outside of that, but generally speaking, we expect that to be similar to what we do today for the MAVEN for total ankle replacement. The other part of that is we expect some pull through of all of our other products. We've got a multitude of fixation options for addressing the first TMT or what's known as a lapidus. We have nails, we have plates, we've got staples, so a surgeon can really customize the solution based on the needs of that patient. The planning part of that is certainly going to give them visibility to that.

Okay, that's really all I'm working on.

Sorry for the delayed part of that, but it takes a few months to get these things up and running, right? Medical education, hospital contracting, etc. etc. So we would anticipate more meaningful contributions in 2025, a little bit less, a lot of excitement in 2024, but we would expect to see some real contributions in 2025 and 26 and beyond.

Okay, got it. And then maybe shifting gears back to focusing on the quarter, could you give us a little bit of maybe some quantitative detail on how some of the new devices that you launched early in the first quarter, how those have progressed and what contribution those devices had to revenue growth here this quarter?

Yeah, thanks. We try not to get too granular on the contribution amount just for obviously for some competitive reasons, but I can tell you we've exceeded our expectations on the performance of some of those Q1 launches. We've had some real excitement around a lot of the four foot solutions, including the Power Console, the SJ2000. The Precision MIS Bunion system has been doing incredibly well. There's a real patient demand for that right now, and it's really good timing there. We've had a great response on our Bunionmatic alone, even absent of the Smart Bunionmatic algorithm, and we were expecting a more fulsome launch of just the Bunionmatic right now as well. So great momentum there. And then the other piece is we had several soft tissue products that are really contributing nicely. So all around really positive momentum there. The feedback has been great. I don't want to be hyperbolic, but we're thrilled. We expect to see more meaningful contribution from those Q1 launches in the second half of this year, where some of the more recent launches like Reflex, although it's off to a great start, and Smart Bunionmatic, we would anticipate more of a 25 contribution, but also really exciting there from feedback and performance so far. We've got a few products upcoming. Sorry, I keep interrupting you. I keep forgetting more, but we do have several other exciting launches coming in the second half of this year, and we've had a lot of line extensions with our right angle drill, our ball joint strut for our X-Fix line. So we've got a lot of excitement around all five subsegments, which is it's been pretty balanced for us.

Okay, great. Great to hear. Thank you all again for the time.

And our next question today is from the line of Brandon Busquets of William Blair. Please go ahead. Your line is open.

Everyone, thanks for taking the question. I also wanted to kind of stay on Smart 28 for a second, just given, as you were saying, Albert, this is kind of one of the things you've been talking about since the IPO. I have a couple of questions I'll kind of list off, and then I have an unrelated follow up. But on Smart 28, can you talk a little bit about what training is like? This is a new technology in the space. So what's the upfront lift kind of like for new surgeons on this? Is this going to be an open or a closed platform to your hardware specifically? And then any plans you can share to build clinical data over the coming years to kind of demonstrate the benefits of these modules?

Brandon, thank you very much for the question. And great to hear from you. Yes. Let me address the first part of this, where it's the complexity. So one of the things we were really careful when designing this first module, one of our real leading three dimensional thinking surgeon advisors is Dr. Dr. Cesar de Neto out of Duke. And when he gives his presentations, we've always noticed that everybody in the room is in ooze and odds that the three dimensional complexity that he's able to analyze with tools like this. But there's a general fear that they're not as technically savvy as Dr. Cesar is. And so our goal when we were designing this was to make it as as streamlined and easy for people to use as Instagram or Facebook, potentially even easier, right? So the ability to upload a DICOM image, the ability, less than 10 minutes to convert that into a plan, then the flexibility surgeons have to manipulate that plan and see different configurations and rerun it. To turn that into some preoperative tool that they can even use to communicate with the patient. What's really important here is that planning is giving them so much sophistication three dimensionally to not just what they're correcting, but to the deformity that exists within that particular patient. And sometimes when you look at a three dimensional plan, you see things that you wouldn't see just on a simple view, right? On the 2D view. And so we're really excited that surgeons are going to be armed with a lot more information to make better decisions for their patients. But then to have all that flexibility that I described. So one really easy to use platform. We focused on that so that everybody didn't have to be a Dr. Caesar to do this to we wanted to make sure that we gave surgeons really good information to help them in diagnosing the deformity in the first place. And I've mentioned this on previous calls that a bunion is a really complex three dimensional deformity. And there's a multitude of pathways that are really unique, right? There's at least five different pathways that we know of today. That should have different considerations when surgeons are determining how to fix that. So if we're going to customize treatment options for a patient, truly patient specific, we have to give surgeons those tools and better diagnostic capabilities to make those decisions. So all of that was a consideration for us when we were developing this. Another reason why we're so excited as we're launching this.

Okay, great.

And then maybe as a follow up, switching gears a little bit might be for either Chadi or Chrissy. But now with cash flow positivity pushed out to 2026, how are you guys thinking about just kind of the balance sheet and the capital that you have? Do you feel comfortable where you are? Just talk to us about that given push out and cash flow positivity. Thanks.

So one thing I'll say just again, focusing on cash flow positivity in 2026, this might be one of the first times we're communicating that formally. That our top priority is to be cash flow positive by 2026. All of the moves that we're making right now are going to enhance and create an opportunity for us to achieve that. We've taken all of this into account. We've got again a top priority on everything we're doing right now to make sure we're EBITDA positive in 25 and then cash flow breakeven or positive in 26. Any color you want to add to that Chrissy or Chadi? No,

I guess I would just add that we're looking at acceleration and EBITDA in the back half of the year as well as acceleration of cash flow. And that is contributing to our confidence and our ability to hit those two performance metrics that Albert has mentioned.

And I want to reiterate as the CFO, this is my number one priority to roll up my sleeves and have deliverables that make that happen.

Thank you, and with no further questions in the queue at this time, I would like to hand back to

management for any closing remarks.

Yeah, thanks everybody for joining us on our call today. We look forward to seeing you all at upcoming investor conferences. We'll be at the Canaccord conference next week and other industry conferences over the next couple of months. Thanks again. That concludes our remarks.

Thank you everyone. This concludes the Paragon 28th, second quarter, 2024 Earnings Call. You may now disconnect your lines.