Alphatec Holdings Inc (ATEC) 2015 Q3 法說會逐字稿

Welcome to Alphatec Spine's third quarter 2015 earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded. If you have any objections, you may disconnect at this time.

I would like to introduce you to your host, Christine Zedelmayer, Head of Investor Relations at Alphatec Spine.

Good afternoon, and welcome to Alphatec Spine's quarterly update conference call to discuss our third quarter 2015 financial and operating results, as well as provide an update on our outlook for the remainder of 2015. This afternoon, our comments will build on the press release we issued earlier today.

Before we begin, I would like to remind you that this conference call contains forward-looking statements that involve risks and uncertainties, including statements regarding the Company's expectations regarding its financial performance, strategies for revenue growth and operating improvements, development of new products, customer acceptance of the Company's products, and overall trends in economic conditions in the Company's market. The Company undertakes no obligation to update the information presented on the conference call.

Actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors. For more information about potential factors that could adversely affect our business and financial results, we suggest you review our filings with the Securities and Exchange Commission.

Throughout the conference call, the Company will reference some financial metrics that are derived in accordance with Generally Accepted Accounting Principles, or GAAP, while other metrics are not in accordance with GAAP. This approach is consistent with how management measures the Company's results internally.

However, non-GAAP results are not prepared in accordance with GAAP and may not be comparable to non-GAAP information provided by other companies. Non-GAAP information should be considered as supplement to, and not as a substitute for, financial statements prepared in accordance with GAAP.

Now, let me introduce the other members of the Alphatec management team that are here with me today: Jim Corbett, President and Chief Executive Officer; Mike O'Neill, Chief Financial Officer; and Ebun Garner, General Counsel.

I will now turn the call over to Jim. Jim?

Thank you, Christine, and good afternoon. Welcome to the Q3 2015 Alphatec conference call. I'm going to begin by an overview of worldwide revenue. Following that, I'm going to give an operational review within the context of our three pillars of transformation. Now, I'm going to reorder the pillars and I want to make a quick comment to why.

The first pillar is around the go-to product strategy and our product pipeline. That's going to stay the same, because that's the most fundamental competitive basis that we focus on.

The second pillar, that's what's going to be different. We're going to put the second pillar from now on to be manufacturing transformation and physical distribution transformation. Once we're able to make it, we have to sell it for a profit. Rather straightforward.

Third, we're going to take on this commercial transformation worldwide.

So, that will be the order from here out.

Let's step to the revenue. Worldwide revenue was $43 million for Q3 of 2015. Broken out geographically, the US was $27.4 million. That is consecutively up, which is very good news because we've had two consecutive down quarters. Underlying that is a lot of good progress, which I'll share with you later.

Internationally, sales were $15.6 million. That's 13% up in common currency. International continues to be strong. It is no accident. So, I'll share those details with you a little bit later.

Now, let's get to the three pillars. Product development and the go-to-market pipeline that we are developing at Alphatec. A couple of things. First, we have focused on the big market segments. That means stabilization, fixation. [Still the] third of all the money.

Arsenal is on the market. Arsenal Cortical Bone is now launched, clearly differentiating us from a significant number of competitors.

Arsenal Deformity, one of the two major R&D programs [that's] launching in Q1. This is really big. This is a big segment of the market. It's a program a year ago we thought would take two more years to come to market.

It's how we've changed Alphatec. It's part of how we're managing R&D differently: narrowing what we work on, choosing big market segments, and bringing them to market in a timely manner.

The next segment is interbody. It's the second largest segment in spine. There's two elements to it. The universal interbody, that's Battalion. It's the titanium-coated PEEK. We're doing cases. We're expanding our rollout. We'll hit Europe in Q1 2016.

The other element of the interbody segment, of course, is lateral. I have to tell you, our lateral retractor is awesome. You should see the physicians who see it and what they have to say about it. We've locked the design, and we're sending it off to manufacture. We expect to launch by the end of Q1. This will transform our competitiveness, without a doubt.

Now, that's the second biggest market segment. The third largest is biologics. As you recall, we've changed our biologics strategy significantly. We want to compete globally. That means the synthetic segment. That means -- and explain why we entered into a 10-year agreement with Haider Biologics. This comes in many form factors, but in fact we also have a cost-sharing agreement that allows us to flexibly compete across a very elastic biologics spine marketplace.

So, that's the third largest segment -- 70% of all the revenue in spine -- and we are poised and able and ready to compete. So, this is the Alphatec that has not been here before.

Now, let's get over to making things and moving them around. First, to remind you, our instrument cost initiative has stayed in place. We are achieving a 50% cost reduction versus our historical ability to manufacture instruments designed in-house at Alphatec. It's not only past a tipping point, it's a done methodology for us. We strive to get better, but we've already hit our cost goals and are continuing to refine them.

Let's go to implant manufacturing. That's the big outsourcing methodology for the Company. A year ago, we were at 90%-plus of implants manufactured in-house at Alphatec. By January, that will be zero.

We're gaining many benefits: it reduces our overhead; it reduces our inventory cost, including raw material and equipment manufacturing purchases that we would have had to make, that we will now avoid; the ability to scale up more rapidly and to transform to new product platforms without the cost and time barrier that normally exist.

The [multiple] benefits is way past that tipping point. January will be here before we know it and we're making great progress.

Let's go to the next piece, physical distribution. Physical distribution has two requirements: get it there perfectly on time and increased utilization per month. Straightforward. Hard to do from a single location in Carlsbad, California.

We've partnered with UPS. What systems they have. You ought to see it. It's really amazing. Their methodology that we are incorporating in our systems will use multiple elements of what makes them a great logistics company. We're starting the first region of the United States; it is underway.

That will be followed by the end of next year with multiple hubs for managing inventory and processing that are linked to the local market by a concept called forward-stocking locations. This will allow us to achieve that perfect delivery and increase our cycle time monthly -- we think by double.

So, think about that. We lower our instrument costs by half and increase utilization by two. Hard to believe that that won't be just great for us.

Imagine, we're going from "I have to ship it across the country and hope nothing bad happens when it goes through Memphis," which virtually everybody else has to do. Instead, we're developing a system that makes that possibly go to near zero.

I have a test for these kinds of implementations. When you're managing physical distribution, there's one thing you don't want to have: phone calls. I've received zero during the first 30 days of implementation. That means it's going extremely well. We're really excited about this program, and it will help transform our competitiveness.

So, product pipeline: going absolutely terrifically. Our manufacturing transportation: well past the tipping point, nearly complete. Physical distribution: past the tipping point, because it's the planning that takes the time; doing it, not as hard. Planning it and figuring it out, harder. So, that is well on the way.

I'd like to spend a few minutes now on a commercial transformation. This has two significant elements: international and US. And it has one overriding issue: it's that we don't reach the customers worldwide. We don't compete in all the markets.

Internationally, we've expanded distribution in Australia and an additional eight countries in Europe. We're going to choose to go direct in some countries. Principally, however, in 2015 that was through distributors.

Now, not only are we going to new markets, we're managing them with discipline, fundamentals of sales and marketing methodologies. It's yielding very obvious results. We've been in double-digit growth all year long and we expect that to continue.

Now, the US, just a different market; same fundamental problem. We cover 10% of the surgeons in the United States. Step back. 10% of the surgeons in the United States know an Alphatec sales person who has Alphatec products; 90% of the market doesn't. The way I look at that is 90% of those surgeons are opportunities for us, and therefore readily accessible. We just have to execute on that strategy.

Now, we're taking an approach that hits three different elements to expand that coverage and expand sell-through. The first is our existing distributors. We love these guys. They helped us build Alphatec. They do a great job. There's approximately 100, or so, of them to cover these 10% of the US market.

Now, we're of course going to keep them long term, but we're going to feed them with all our new products and we're going to do so more efficiently for them. They'll be very happy.

Secondly, we've identified earlier in the year our initiative to hire some direct sales people. It's a different activity to hire direct sales people and manage them and go into completely virgin marketplaces and grow the business. To put your head around this idea very clearly, it's like planting a kernel of corn. You have to water it, fertilize it. It grows up. It bears corn.

We're in that process now. Many of these territories have started to produce; more of them will in the future. They will continue to build their territories but it will take time.

The third is when we want to do this expansion and we realize that some geographies required more experienced spine distributor type approach, rather than a virgin planting of a seed.

So, we've gone to those experienced spine distributors and recruited many of them to join Alphatec as our selling agent in some of these new geographies. You ask yourself, why would they come? It's actually rather simple. It's back to the basics. It's our product line. They love it, and they want to extend their careers by having a product line with legs in a company that has a clear vision around how to compete in the majority of the revenue of the spine market. We have that. We're doing that. They want it. So, very straightforward why they're coming.

The most tangible way to understand how we're doing with that initiative is in Q3. Although we were marginally up in revenue, we signed new distribution between our direct and our new distributors that will result in at least $3 million of new revenue in new geographies with new doctors in Q4. I know you can do the math. That's $12 million annually. That is significant progress from where we were in Q2 and Q1.

By the way, this will be great progress in any quarter. We're going to continue this three-legged initiative with expanding our US commercial operation throughout 2016. We're going forward to 2016 with momentum, and it's a momentum we're building to carry forward from Q4. The products will continue. Our expansion will continue. We're going to cover more of the market. And 2016 is going to be a great year for us. It will be a year when the transformation takes full effect at Alphatec.

Now, I'm going to turn the call over to Mike. Mike?

Thank you, Jim.

I'm going to focus a majority of my remarks on the reported operating performance for the third quarter that ended September 30, 2015. We are actively executing against our strategy with operational discipline and are focused on driving overall improvements in our return on invested capital and cash position. We believe that the progress we have seen in our US commercial execution from Q2 to Q3 gives us confidence that our transformation is beginning to take hold.

As such, my commentary today will be primarily focused on core operating results for the quarter, including some comments comparing Q3 sequentially to Q2. For more details regarding our Q3 financial results, please refer to the press release we issued earlier today. I will then provide an update on our full-year 2015 guidance.

Our consolidated revenues were $43 million, compared to $51 million in Q3 of 2014. And as Jim has previously noted, international revenues were up 13.2% operationally over prior year.

In the US, we are encouraged by the sequential improvement in revenue from Q3 over Q2, as well as our expansion efforts during the quarter which we believe will drive new revenue in Q4 and beyond from new surgeons, new distribution, and new geographies, laying a stronger foundation for future growth for us.

Consolidated gross margin was 66.2% in Q3, compared to 71.2% prior year. The decline over prior year is primarily attributable to unfavorable variation in global, regional, and product mix, as well as foreign currency effects and lower milestones and royalties in the prior year.

It's also worth noting that in Q3 our fixed costs were spread across a lower volume base that impacted our gross margin in the US. In the longer term, our manufacturing and distribution outsourcing initiatives should help reduce our overhead and fixed costs, which we expect to help drive improvements in our overall margin profile.

Before I discuss operating expenses, I'd like to provide some context regarding the "Impairment of goodwill and intangibles" line listed in our Statement of Operations. Goodwill and other intangible assets are accounted for in accordance with specific accounting standards, and we are required to test for goodwill impairment annually or on an interim basis in the case of specific events and circumstances.

During the quarter, we experienced a significant decrease in our share price and market cap, which forced us to assess our goodwill earlier than the annual assessment at the completion of our fiscal year. The valuation exercise, which was driven primarily by the substantial decline in market capitalization, produced results that ultimately required us to eliminate goodwill and certain intangible assets from our balance sheet and take a $165.2 million non-cash charge for impairment to the Statement of Operations.

It's important to note that this is a non-cash charge that does not affect the ongoing operations of the Company in any way.

During Q3, we also incurred approximately $335,000 of restructuring expenses associated with the outsourcing of our manufacturing operations from our Carlsbad facility.

Additionally in Q3, we incurred approximately $274,000 of IPR&D expenses. Please refer to the non-GAAP reconciliation tables provided with our press release earlier today for more information.

When adjusted for the items specifically referenced previously, total operating expenses for Q3 2015 were $27.6 million, representing an improvement of 18.7% compared to the third quarter of 2014, as well as a 9.2% sequential improvement over Q2.

Our overall operational improvement in operating expenses is the result of our continued fiscal discipline across the organization, with savings in R&D and sales, marketing, and G&A. Q3 was another clear example of our focus and attention to diligently managing our operating expense profile.

Adjusted EBITDA was $5.3 million in the third quarter of 2015, or 12.2% of revenues, reflecting the lower contribution of US revenues when compared to the prior-year quarter.

Looking sequentially, US sales in Q3 represented 64% of total revenue, compared to 58% in Q2. This sequential improvement in regional mix helped contribute to a 40%-plus improvement in adjusted EBITDA over Q2 of 2015.

As of September 30, 2015, unrestricted cash and cash equivalents were $10.5 million, compared to the $8.9 million reported at June 30, 2015. Additionally, the Company has $3.5 million of restricted cash which must be used for the future payment obligations associated with the Orthotec settlement.

Our credit facilities are approximately $82 million: approximately $56 million from MidCap Financial and $26 from Deerfield. We expect to continue to incur approximately $1.5 million to $2 million in cash interest expense throughout the remainder of 2015, and the Company is actively engaged in discussions related to the refinancing of its credit facilities. We anticipate communicating more definitive information prior to the end of the calendar year.

With that, I would now like to provide an update on our forward-looking guidance for the remainder of 2015. We've made steady progress on our corporate transformation this year. Through the execution of our three strategic pillars, we are building a foundation for our future and we continue to expect momentum to build as we exit 2015 and head into 2016.

However, given our US revenue results for the first nine months of the year, we believe it's prudent to adjust our annual guidance based on our expectations for our commercial expansion.

As a reminder, given the foreign currency headwinds, we previously issued revenue guidance in constant currency versus 2014. On a year-to-date basis, we have incurred approximately $9 million of negative foreign currency impact. Using prevailing exchange rates, we expect to incur an additional $2 million to $2.5 million of foreign currency impact in the fourth quarter.

Based on this and assuming exchange rates hold near current levels, we expect full-year, as-reported revenue of approximately $188.7 million, which implies as-reported fourth quarter revenue of approximately $50.4 million.

Additionally, we are amending our guidance for non-GAAP adjusted EBITDA and expect it to be approximately $22 million, representing approximately 11.7% of annual revenue.

In summary, during Q3 we stabilized our US revenues. As we continue our US commercial transformation that Jim discussed earlier, we should continue to see a pickup in our top line momentum. We anticipate that this will improve regional mix as well as our overall gross profit and gross margin profile.

Operationally, we are also making strides with our strategic decision to outsource manufacturing and physical distribution. For example, in Q3 we have achieved our target of a 50% reduction in our Arsenal instrument costs and are seeking to extend that to Battalion, our new titanium-coated interbody platform.

Our manufacturing restructuring is on schedule and as we roll out our distribution through UPS, we should begin to see improvements in the management of our instrument sets.

We are making progress and we remain focused on our objectives of accelerating revenue growth and generating free cash flow and improving the return on our invested capital.

With that, I'd now like to turn the call over to the Operator, who can open up the line for any questions you may have. Thank you.

(Operator Instructions) Glenn Novarro, RBC Capital Markets.

I'm wondering if you can provide us with a bridge from the 3Q revenue reported of $43 million to the $50 million that you expect in the fourth quarter? I know there's $3 million that you're calling out from these new distributors. But historically, if we look back in the past, you've only been able to sequentially go up only a few million from 3Q to 4Q. So, maybe provide a bridge as to how we get from 3Q to 4Q?

Well, of course, a precise bridge is rather difficult to do, but what I can share with you is the bridge that you're seeking I think will be -- is readily seeable in the international revenue line. So, if you look at four quarters, you'll note that with a third-party distributor model, which is, excluding Japan, our predominant method of distribution, Q3 is always our lowest revenue quarter internationally.

So, without precisely hitting it, the gap you're looking for -- for example, in Q2 we were near $19 million internationally. And so, the $15.6 million in Q3 seasonally was expected by us and in fact was 13% over prior year.

So, I think what you're looking for, Glenn, is you need to match the US gross with what seasonally happens internationally, as well.

Okay. And then, the $3 million that you called out of the new revenue, that's from the US. So, we've got $3 million coming from the US. We've got another sequential uptick coming from International. So, between US and the $3 million and the US internationally, that comfortably is going to get you to that $50 million?

Yes, that's what we believe.

Okay. And then, just maybe talk a little bit about your R&D spend, because it was only $2 million in 3Q, which was below our expectation. Is that just timing, given that you've kind of finished a lot of the R&D projects right now that you called out on the call, and it will ramp, going forward? Maybe talk about the R&D spend and where you are in the timing of some of your projects?

Glenn, it's Mike. So, one of the components that hits through the R&D line is a mark-to-market adjustment for some of our consulting costs. And so, that was really a credit adjustment based upon the decline in the stock price in Q3.

The underlying R&D spend in Q3 is not dissimilar to what we saw in Q2.

Okay. And then, just lastly on the bank debt refinancing, Mike, you talked about having something to announce by the end of the year. I'm assuming you will expect the refinancing to get announced and that will be in the form of a press release by the end of the year. Is that accurate?

That would be correct, and an 8-K as well, obviously.

Okay. Great.

Lin Yu, Cowen and Company.

I wonder if you guys can provide, first of all, an update on the FDA warning letter? Any updates on that front, that would be appreciated.

Sure. As you recall -- this is Jim -- one of the requirements from the FDA is for us to look backward to validate that the methodology of incorporating purchased technology would not be solely confined to the one issue that arose during the audit. And we've completed virtually all of that work that they asked us to do, and our reply to them is in the very short, near term.

Great. And one product, I think, real interesting is the biologics Neocore product. Can you talk about the rollout progress and any early feedback from physicians and how it's received?

Yes. So, we're not out in all form factors. The form factors we were -- that we've launched are in the 12cc strip size. There's a series of different sizes: 5- and 20-strip sizes. Then, of course we'll be launching putty and granules and some other form factors here by Q1. So, we're out in the strips now.

The response from the customers has been very positive. They find it very easy to work with. We're able to react to what I mentioned earlier is a very dynamic and very elastic price point in terms of how biologics functions in the marketplace.

So, so far, it's going very well. It's early, but we're quite pleased with the customer response so far.

Great. And just last one from me, you kind of mentioned a little bit about the lateral and Deformity programs. Very exciting products. Can you just give us a little more details about the timing of launch and what kind of products or what kind of program -- detail about the programs or products that involve with lateral and Deformity?

Well, let me take Deformity first. Deformity is coming first. We're in complete lock on the whole system.

To give you some perspective, although you could find a way with our Zodiac system to do close to 50% of the cases that you might come across in a deformity world, it was somewhat of a stretch to do that. So, we really didn't cover as broad of an application as we would like.

With Arsenal, we designed it to be over 90% of the deformity cases. So, it is a very -- one word would be, complex -- but also very thorough design system.

We expect launch sometime in January/February time frame. We're in production preparation and ramp-up now. It will require a very technical-focused rollout which will incorporate cadaver training, and we'll have a sales team that will be specifically targeted to make those presentations and help early cases.

So, it's on the forefront, and the first one will hit.

Lateral has a slightly less defined time frame. We currently estimate that around the end of Q1. It will be characterized by two differentiating elements. One is that we'll have the titanium-coated PEEK cages as we've designed for Battalion.

And secondarily, we have a lateral retractor system we actually think is best-in-class in the marketplace. And the physicians we show it to remark very expressively about how it helps -- they believe it will help them treat the patients much more efficiently and more safely.

So, it is just a few months behind Deformity, but right behind it. The retractor, which is the most complex instrument we've ever designed, is in virtual lock-down now in terms of design, and we're moving to manufacturing.

Great.

(Operator Instructions) Mark Landy, Northland Capital Markets.

So, Jim, just following on Deformity, which part of the markets are you planning on targeting? Is it going after the degenerative portion of deformity to begin with? Or, are you planning on rolling out into both the degenerative part of deformity and the scoliosis part?

This system will be applicable to both.

Okay. But in terms of the rollout, are you going to go after the footprint first with your current base and then enter into the scoliosis portion? Or, are you going to cover it both at the same time? Because they are a different -- it is a different call point, correct?

It's a different call point because the surgeons tend to specialize in one or the other; they're some who specialize in both.

Our design team was actually made up of both classes, if you want to define them that way. And if you look forward to how we are going to roll it out, our system is designed to encompass the full range. So, it will be physician by physician how we approach it. We'll run cadaver labs obviously that won't overlap in the -- as you're describing.

But we'll be taking on the full breadth immediately. We'll be prepared to do that.

Okay. So, you currently have the footprint in scoliosis? Is it fair to assume that it will be a step-wise approach, first in the degenerative and then grow then into scoliosis?

Well, our footprint I would not describe as significant. It's significant for us, but it's not significant in terms of the market competitiveness.

So, I think you're trying to -- I'm trying to read your question a little bit better. Are you asking if we're going to separately pace degenerative to scoliosis?

Well, they are two call points, right?

Yes, (multiple speakers).

And in some respects, it's maybe even a slightly different selling approach, as well.

So, you have a footprint in the degenerative market. So, one would assume that you would tackle where your footprint is, going to the three and four levels. And then, with time you will build out the capability into the more specialized scoliosis part of the market. So, I'm just trying to understand how you enter that market.

Yes. I follow. I follow your question.

So, yes, we have a footprint in degenerative. We also have a small one in scoliosis. Our design team was made up of physicians from both backgrounds. So, for us, we're preparing that as we approach the market we will target the physicians of course based on what they do and of course train the cadaver training on either the degen or scoliosis, as you describe.

Our footprint isn't of such magnitude that I can define, depending on our current conversion of our base, as being that relevant. It's all going to be -- it's going to be fundamentally new business for us.

And so, we'll be taking a two-step approach, but simultaneously. They are different and so we'll approach them differently, but we'll have the product line to do both classes of patients.

Okay. Just moving on to your opening comments and the changing of the pillars. There was a lot in that. Is it possible just to perhaps give us the three -- rank the top three that we should focus on or call out the three top bullet points that you would like us to walk away from this call with kind of getting our arms around?

Absolutely. The reformatting of the pillars is really to help see the sequence in which we've approached them.

So, the first is being competitive. We have to have a product pipeline customers will find relevant. So, our progress there has been incredibly significant. Year over year, our go-to product strategy and our product pipeline are both rich. And the fact that we're already here is one of the takeaways. That's the first one.

The second is we described how we're going to transform the fundamental use of capital and cost structure of the Company. And that was going to be a manufacturing reduction of instrument cost by 50%; outsourcing manufacturing -- all of it -- of implants; and outsourcing physical distribution.

All of that is out over the tipping point. The instrument manufacturing costs, we've already proven and have demonstrated we can continue it into the next-generation instrumentation. The implant manufacturing outsourcing will be complete in January. And the physical distribution has been reduced from the very complex elements of planning it to our first regional rollout, and we'll be moving to the next one shortly.

So, the idea of we have a rich product pipeline that we can now make more profitably and use less total cash in managing the manufacturing of it and the reduction in cost and the more effective physical distribution -- those are all foundational to be competitive in this market. And those are all very close to completion. So, that's the second point.

So, the first two pillars are, really, way underway.

The third takeaway is our commercial transformation has turned the corner. When we look out at 2016 and we look at the progress we made in gaining new distribution in the United States, establishing new customers in new geographies, rolling out our new products, we really feel terrifically positive about how our commercial expansion is going to go.

We have 90% of the market -- it took us a while to develop the 10% part of the coverage in the US. Going after that 90% is, on one hand, a lot of opportunity, and we're getting traction in it. Internationally, the same is true.

So, I think the takeaway here around the three pillars of transformation is we've moved to the third, where now that traction we expect to show in Q4.

Okay. Fair enough. So, I guess just to maybe go back to the second quarter, is it fair to assume that from the distribution point of view that you've now basically nailed everything down, that the strategy that you wanted in place, the people that you wanted in place -- obviously, some of those people have been trial and error; some of the distributors have been trial and error -- but that's now all in place, that you can start thinking more broadly in terms of how do we make that distribution more efficient, rather than how do we just get to where we need to be from our existing footprint?

I'd like to say that's true but I think, Mark, it is a place where we are focusing on the effectiveness. But we didn't actually close the gap on that 10% to 90% gap of coverage. I think we're going to be in the expansion mode simultaneous with the effectiveness mode for some time to come -- probably years, in reality -- because you can only take on so much expansion at a time.

And what we want to focus on is making sure that we grow our net surgeons every quarter, in new geographies, having them use these newly designed and exciting products that we've developed. So, that's how we're thinking about it.

And that's true globally. It's not just an US issue; it's also international.

So, there will be -- we've still got a lot of opportunity to grow, and I think we'll be constantly expanding and refining how we do it.

Okay. Just my last one on that, in terms of focus, I guess part of the point that I'm trying to make is that there was a lot being done in the second quarter there. I think to quote you -- but I could have got it wrong -- is that you kind of bit off a lot and it was a lot to chew.

I just kind of want to get my arms around, moving forward, that what was focused on in the second quarter and in the third quarter, as in the original pillar that you spoke with distribution, has been -- is pretty much done. It's now turning the page and basically expanding that. So, there aren't going to be any more missteps relative to the amount that has to be chewed, right?

It's now incremental from quarter to quarter, whereas in the second quarter you basically had to get everything done at once?

I think if I lived in a world where no missteps ever happened, it would be absolutely awesome. But I will say this. In Q2, we were really focused on what we called the -- I referred to in the call the planting of the corn, that type of expansion.

What we changed in Q3 is we recognized that in some of those markets we will be better suited to find an experienced spine distributor partner. And what changed for us is -- we remain committed to our base. We remain committed in the right markets to having a direct sales rep. And we also remain committed as part of our expansion portfolio to choose an experienced spine distributor.

So, it's a broader perspective than I think we had in Q1 and 2, and it's proving out that it's going to be a supplement to how we go forward, where we always look at a market and think about what's best in terms of how we approach it and draw from those choices and do what we think will be most effective long term.

Okay.

(Operator Instructions) I'm showing no further questions at this time. I'd like to turn the call back over to Jim Corbett for closing remarks.

Thank you very much, and thank you for joining us today. I think that concludes the questions. Thank you, all, for joining. Good evening.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation and have a wonderful day.