SeaSpine Holdings Corporation
Q4 2017 Earnings Call Transcript

Published: 1 Mar 2018

[Operator:]

Welcome to SeaSpine's 2017 Fourth Quarter and Year End Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we'll hold a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded today, February 28, 2018. I would now like to turn the conference over to Carrie Mendivil, Investor Relations. Please go ahead.

[Carrie Mendivil:]

Thank you for participating in today's call. Joining me from SeaSpine is CEO, Keith Valentine; and CFO, John Bostjancic. Earlier today, SeaSpine released full financial results for the fourth quarter and year ended December 31, 2017. During this conference call, we will make forward-looking statements within the meaning of the federal securities laws in regard to our business strategy, expectations and plans, our future objectives for future operations and our future financial results and condition. All statements other than statements of historical facts are forward-looking statements. Such statements may include words such as believe, could, would, will, plan, intend and similar expressions. You are cautioned not to place undue reliance on forward-looking statements, which are only predictions and reflect our belief based on current information and speak only as of today, February 28, 2018. For a description of risks and uncertainties that could cause material differences between our actual results and those stated or implied by the forward-looking statements, please see our news release and periodic filings with the Securities and Exchange Commission, which are available on our corporate website, www.seaspine.com, and at www.sec.gov. I will now turn the call over to Keith Valentine. Keith?

[Keith Valentine:]

Thank you, Carrie. Good afternoon and thank you all for joining us. We are pleased with our performance in 2017 and we have started 2018 well positioned for continued success and accelerating our top-line growth rate. Driving this momentum is our strong cadence of upgrading and expanding our distributor base, strengthening our surgeon education and training, and launching innovative new products, particularly in the Orthobiologics franchise. We remain laser-focused on our strategic vision, developing surgeon-centric cost-effective solutions that combine innovative spinal implant systems with industry-leading orthobiologics, which together will drive improved procedural solutions and deliver clinical value to the surgeon, hospital and patient. We are steadfast in executing this vision and look forward to continued progress in 2018. Now, turning to our fourth quarter performance. Total revenue was $34 million, an increase of 5% versus the year-ago period. U.S. revenue increased 5% to $31.2 million with U.S. Orthobiologics revenue of $16.6 million, an increase of 10% over the fourth quarter of 2016. And U.S. spinal implants revenue of $14.6 million, essentially unchanged versus the prior year period. International revenue was $2.8 million, increasingly approximately 1% over the fourth quarter of 2016. This caps a solid year where, we grew international revenue by more than 11% annually, largely on the strength of recently added distributors in Latin America and Europe, and through effective reengagement with our largest distributor partner in Europe. In the U.S., we are continuing to realize the benefits of upgrading and expanding our distribution network and our product portfolio. Distributors that we have onboarded since late 2016 contributed 25% our U.S. revenue in the fourth quarter and nearly 20% of our U.S. revenue for the full year 2017. Similarly, recently launched products contributed almost 40% of our U.S. final implant revenue in the fourth quarter and 30% for the full year 2017. We are looking forward to additional contributions from our recently launched Orthobiologics products, which we expect to drive accelerating revenue growth in the second half of 2018, as we transition those products to full commercial launch in the next several months. We remain on track to meet our goal of generating more than 50% of our revenue from products launched within the past four years by the year end - by year-end 2018. We are building a solid and sustainable foundation for growth, by delivering the innovation, education and training that drives more loyal and increasingly exclusive distributor relationships, elevating the level of customer service that we provide to our surgeon customers and distributor partners and by investing in product development and the launch of innovative new products that focus on our surgeon customer needs. In the fourth quarter, we brought our new leadership to head our medical education and sales training organization, and we plan to invest significantly more in that area in 2018. With the new products that we have launched in the past three years, coupled with those we plan to launch in 2018, we are creating a more comprehensive product support and sales training platform that is scaled commensurably with our product expansion. The platform provides incremental tools and competitive selling mechanisms to our distributor partners to ultimately improve interactions with our surgeon customers. Our global sales meeting was earlier this month. It was open, collaborative and energetic, which resulted in an enormously successful [few date] [ph] and a roadmap for ongoing commercial momentum. Our senior leadership in sales, marketing and product development teams welcomed many of our global distributor partners to Carlsbad for a series of interactive sessions to share our plans for continued investment in growth and customer supporting initiatives. We also provided training at our many new spinal implant and orthobiologics products and systems. The great information sharing and candid dialog generated by this meeting created a lot of excitement and positive energy that we believe will translate into continuing and accelerating commercial momentum and success for our overall organization. Lastly, we also gained valuable insights to meet the needs of our distributor partners as we continue to strive for a better overall customer experience. Turning to our product launches, 2017 was a transformational year for the Orthobiologics franchise, as we introduced our first internally developed orthobiologics products in almost eight years. We launched four new products in 2017, in which three were introduced via limited commercial launch in the fourth quarter, including the OsteoStrand and OsteoStrand Plus Demineralized Bone Fibers and OsteoBallast Demineralized Bone Matrix in Resorbable Mesh. The OsteoStrand products are based upon fibers rather than the standard particulate DBM, and are designed to maximize the osteoinductive content while providing an improved conductive matrix. The fibers were developed through a disciplined R&D process that evaluated a variety of fiber geometries to deliver improved intraoperative handling and controlled expansion, facilitate surgical placement and maintain position, it allows the fiber to better fill the surgical defect. OsteoStrand Plus incorporates our proprietary Accell Bone Matrix technology. The OsteoBallast product, which consists of a resorbable mesh containing 100% DBM without a carrier, simplifies graft placement and helps prevent graft migration while maximizing the DBM content. OsteoBallast is designed to provide surgeons with a simple means for delivering bone graft in posterior spine surgery that contours to the local anatomy, while maintaining shape and volume under compression. The simplified technique is particularly valuable in MIS procedures, where placing the graft accurately through the tubes and small incisions can be challenging. These new orthobiologics products, which we expect to transition the full commercial launch by mid-year, provide a platform for growth as payors and hospitals increasingly seek more cost effective orthobiologic solutions. They also allow us to further leverage manufacturing capacity at our Irvine facility. We also recently transition from the initial alpha launch of our reusable RAPID Graft Delivery System to full commercial launch. As a reminder, the RAPID system is designed to provide surgeons a cost-effective and controlled method to predictably deliver a broad range of orthobiologic grafts efficiently to the spine. This innovation was in part opportunistically derived from the intellectual property we acquired from NLT Spine. On the spinal implants side, we have expanded our Ventura NanoMetalene posterior interbody device portfolio by introducing new size offerings to accommodate a larger range of posterior procedures and a wider variety of patient anatomies. These new sizes include additional lengths and oblique placement options with sagittally oriented lordosis. Our recently launched produced coupled with our pipeline across both portfolios address attractive commercial opportunities in the United States. As I've stated in the past, our surgeon-centric product development helps ensure our products meet the needs of surgeons and their patients. Our focus on innovation and clinical value coupled with our increasing investment in medical education and training is further positioning SeaSpine as the spine company of choice among both surgeons and distributors. We are seeing progress in this regard, and we are optimistic that the expanding loyalty and exclusivity amongst our distribution network will translate into sustainable long-term revenue growth. I'll now turn the call over to John to provide more details on our financials and our financial outlook. Then, I'll wrap up. John?

[John Bostjancic:]

Thanks, Keith, and good afternoon, everyone. As Keith noted earlier, total revenue for the fourth quarter of 2017 was $34 million, an increase of 4.5% compared to the prior year. U.S. revenue increased 4.8% to $31.2 million, while international revenue increased just under 1% to $2.8 million. U.S. Orthobiologics revenue increased 10.1% or $1.5 million year-over-year to $16.6 million, driven by growth across multiple product lines and generated primarily by recently added distributors. While, we don't expect to see similar double-digit revenue growth in the first half of 2018, we are excited about the potential for accelerating revenue growth in the second half of 2018, as we combine the benefits of the stronger distribution footprint with the full commercial launches of the OsteoStrand and OsteoBallast products. U.S. Spinal Implant revenue was $14.6 million, essentially unchanged versus the prior year period. Revenue growth from recently launched products was offset by continuing low-single-digit price declines and decrease usage of our legacy systems. In the fourth quarter of 2017, 37% of the U.S. Spinal Implants revenue came from recently launched products with our modular Mariner and Shoreline systems leading the way following our full commercial launches in the second half of 2017. In 2018, we expect growth from these recently introduced products and those that we plan to launch in 2018 to outpace continuing declines in price and usage of our legacy systems. However, for the first half of 2018, we continue to expect the shift to be somewhat muted by further revenue declines from certain lowering performing legacy distributors that is a byproduct of the strategic and more committed distribution adds we've made in the past 24 months. We continue to generate the anticipated gross margin expansion that reflects the return on the investments we made at about Irvine, California manufacturing facility. Gross margin for the fourth quarter 2017 improved 470 basis points to 63.3% compared to 58.6% for the same period in 2017 and was the fifth consecutive sequential quarter of this expansion. The increase was mainly driven by lower raw material and manufacturing costs for orthobiologics products manufactured at our Irvine facility, and lower provisions for excess and obsolete inventory in the fourth quarter of 2017. Operating expenses for the fourth quarter of 2017 were $29.2 million, a slight increase compared to $28.6 million for the same period of the prior year. R&D expense was relatively flat at $3 million for the fourth quarter of 2017 or 8.7% of revenue and is in line with our expectations as we continue to invest in product development resources and programs, and in clinical evidence to differentiate our complementary DBM and NanoMetalene platforms. Selling, general and administrative expenses increased approximately $500,000 to $25.4 million for the fourth quarter of 2017. The net increase was driven by higher selling commissions and marketing costs. These increases were mostly offset by $1.5 million non-cash gain recorded in the fourth quarter of 2017 from the release of a foreign capital tax liability, lower consulting expenses and operating cost savings resulting from the shutdown of our Vista, California facility in late 2016. While, we expect total SG&A expense in 2018 to decrease as a percentage of revenue compared to 2017, we expect to invest substantially more in marketing, product management, and medical education and sales training, both in absolute dollars and as a percentage of revenue. Net loss for the fourth quarter of 2017 was $7.5 million compared to a net loss of $9.8 million for the fourth quarter of 2016. Cash and cash equivalents at December 31, 2017 were $10.8 million and we had no amounts outstanding under our $30 million credit facility. While, we do not issue any shares of common stock under our at-the-market equity program during the fourth quarter of 2017, we did raise $8.6 million in net proceeds through the sale of approximately 882,000 shares of our common stock under the ATM program in February, which closes out the $25 million capacity of that program. We plan to deploy a portion of these proceeds in the first half of 2018 to ramp-up production of our recently launched orthobiologics products and to support the launch of additional spinal implant products. With cash currently on hand, including the proceeds from the recent ATM sale and our access to additional cash via our unused credit facility, we continue to have well over two years of expected liquidity. This positions us well to continue to invest in initiatives that we expect will lead to accelerating revenue growth in the second half of 2018 without the need to tap into the equity markets via a new ATM program for the remainder of 2018. Our net cash burn, which excludes financing inflows and outflows, was $6.4 million in the fourth quarter of 2017, and $16.3 million for the full year 2017. Similar to the second quarter of 2017, the higher cash burn in the fourth quarter was due in part to greater investments we've made in inventory to support the recent and upcoming Orthobiologics and Spinal Implant product launches. We consistently reduce cash-based general and administrative expenses throughout 2017 and redeploy those savings towards the sales, marketing and R&D initiatives that supported the many product launches in 2017 and other activities that are so critical to driving future revenue growth. Turning to our financial outlook for 2018, we continue to expect full year revenue to be in the range of $135 million to $139 million, reflecting growth of 2.5% to 5.5% over full-year 2017 revenue. While, we are not providing quarterly guidance, we anticipate that revenue growth in the second half of 2018 will far outpace the first half. We expect low-single-digit revenue growth in the first half of the year and to exit 2018 approaching double-digit revenue growth. Moving down to P&L, we expect gross margin for 2018 to increase to within a range of 61% to 62%. R&D to approximate 8% to 10% of revenue, and SG&A excluding non-cash stock based compensation charges and any non-cash gains or expenses related to changes in the fair value of NLT contingent liabilities to approximate 67% to 70% of revenue. We plan to continue to reinvest expected G&A cost efficiencies in the sales and marketing activities in 2018. At this point, I'd like to turn the call back over to Keith for closing comments.

[Keith Valentine:]

Thank you, John. We are pleased with our accomplishments over the past year, and our strategy to reposition SeaSpine for growth is on track. As we move further into 2018, our momentum continues across both product portfolios. With the planned full commercial launches our new DBM technologies later this year, we are well positioned to create better procedural revenue opportunities with the combination of our orthobiologics and spinal implants in one surgical setting. Looking ahead, progress will be defined by continued execution of product launches and investment in medical education and training for our surgeon and distributor customers, in order to further facilitate revenue growth in 2018 and beyond. We look forward to updating you on these initiatives on future calls. With that, we will now open it up to questions. Operator?

[Operator:]

Thank you. [Operator Instructions] And the first question will come from the line of Matt O'Brien with Piper Jaffray. Your line is now open.

[Unidentified Analyst:]

Hi, thanks for taking the question. This is Will on for Matt. I guess, first off, I was wondering with the great quarter in osteobiologics, were there certain products that really stood out especially with OsteoStrand and OsteoBallast in the initial launch, aside from the expanded distribution?

[Keith Valentine:]

The fourth quarter, we really had just started doing just a few surgeries with the new product. So that revenue lift and opportunity is from the traditional product line and we saw strength in the DBM portfolio, especially in the fourth quarter of the year. Obviously, there were more surgeries being performed, but we had a greater participation in those surgeries. And I think it goes down to some of the dynamics we've been talking about in that biologics market. We were seeing more and more pushback from insurance providers on premium priced orthobiologics and the request, and certainly, the demand from surgeons that still want to use something that is more proven. And so, we feel like it's a great opportunity not only with our existing DBM portfolio, but even more so as we started now fully launching the new DBM products.

[Unidentified Analyst:]

Great. Thank you. And then, as far as your procedural share with biologics, are there any gaps that you have in your portfolio right now, such as with degen versus deformity, MIS, et cetera?

[Keith Valentine:]

The new launching, not only the strands, but also the OsteoBallast that we discussed are really great opportunities for all those procedures you just mentioned, especially having a compression resistant graph that stays contained is certainly something of high demand, especially for MIS procedures. If you look at the portfolio itself though, yes, we do not have - we do not participate in the premium orthobiologics space, so we have focused our energies and our innovation on staying with that, that DBM area of the marketplace, as well as the synthetic. We still do have a very active synthetic product line as well.

[Unidentified Analyst:]

Great. And then, lastly, just with the broader domestics, spinal hardware market, are there any trends that you're seeing out there aside from pricing pressures or preauthorization, that kind of explains the broader weakness? And then, how do you think about the hardware market in 2018?

[Keith Valentine:]

Yeah. You know what, I think that, certainly, Q4 especially was a robust quarter with procedural based. Obviously, there was some pushback on pricing. There has been pushback on the use of premium products and whether that's - those degenerative products that are at a higher price-point or the orthobiologics that are at a higher price-point. I think we saw some pushback in the fourth quarter. I would envision that to continue. I still - there is still a good deal of insurance momentum, keeping track and watching the orthobiologic market, specifically on the premium side. And I think that will continue in 2018 and continue to spell opportunity for us. I also think that the pricing pressure will continue. So our opportunity for us, obviously, is getting into these new accounts, getting into larger group buying opportunities as well that we haven't participated fully in before. So for us, it's still new store opportunities versus I think a lot of the larger players are seeing same-store cost reduction.

[Unidentified Analyst:]

Great. Thank you very much.

[Operator:]

Thank you. And the next question will come from the line of Jeffrey Cohen with Ladenburg Thalmann. Your line is now open.

[Jeffrey Cohen:]

Hi, Keith and John. How are you?

[Keith Valentine:]

Good. How are you?

[John Bostjancic:]

How are you doing, Jeff?

[Jeffrey Cohen:]

Good. Just a couple of issues I wanted to discuss. So, firstly, you talk a little bit on margins. I heard, John, you talked about 61% to 62% for 2018. So, I guess, a couple of follow-up here. First, is it safe to say that hardware, one should assume would be relatively flat and then orthobiologics has more share to take? And how much more share is there? Do you plan on some decent premium pricing on the strands and the ballast products?

[John Bostjancic:]

Yeah, I think with the upside opportunity in 2018 it's in both portfolios. But we're being intentionally cautious, because as we transition new customers to the fiber-based technology in the OsteoBallast products, we think there is upside margin opportunity there. But 2018 is going to be a year of transition, where we got to balance, having enough product of the legacy particulate DBM to balance with the demand that's created for the new fibers-based technology in the OsteoBallast, which like I said, long-term and commercially scalable production volume that we anticipate to get this year. We think that represents greater gross margin opportunity. But we want to play it cautious, because 2018 is a year of transition as we move customers to the legacy particulate DBM to the newer technologies.

[Jeffrey Cohen:]

Okay. Got it. Then on your SG&A you spoke about for 2018 as far as guidance as well. So I guess, firstly, what was the net after a number of the special items for the fourth quarter? Is it around 23-ish for spend for Q4. And then, I guess, how does that relate to 2018? You talked about 67% to 70%, so if my math is correct that's about 92% to 97% off of your guidance on your top-line with the midpoint at 137, is that a good way to think about it?

[John Bostjancic:]

So your first question was what was the SG&A spend excluding the non-cash components?

[Jeffrey Cohen:]

Yeah.

[John Bostjancic:]

Yeah, total is about just under $26 million if you back out stock-based comp and the non-cash gain we got from the release of that foreign capital tax liability.

[Jeffrey Cohen:]

Okay. Got it. And then, am I thinking about it right way as far as your 2018 guidance on the SG&A spend?

[Keith Valentine:]

Can you go through those numbers one more time? What…

[Jeffrey Cohen:]

Yeah. Sure. You had mentioned 67% to 70% as a percent of revenues and just using the mid-point revenues that would get the 92% to 97%. I'm assuming maybe there is some type of heavier weight on the backend than the frontend for the year?

[John Bostjancic:]

And is that again, backing out any type of non-cash - are you talking about GAAP numbers, right?

[Jeffrey Cohen:]

Correct, correct.

[John Bostjancic:]

Yeah. I think, you are on the right ballpark with the numbers you put out there based on our expected spend. And I just want to reiterate the point that we continued in 2017 to reduce the G&A side of that spend, there is more opportunities to reduce the G&A side of that spend, as a percentage of revenue in 2018, which - as I said in the scripted comments, we plan to substantially invest most of that in the sales, marketing and product developments are going to drive revenue growth. So there will be some efficiency in the SG&A line as a percentage of revenue, but we expect to continue to redeploy the savings on the G&A side into the sales marketing and product development.

[Jeffrey Cohen:]

Okay. Got it. One more for me, could you walk us through the different lordosis angles that you're selling now for Ventura as well as give us a little bit of color on NLT Skipjack and how that's going now commercially and then maybe talk to us about R&D and some new products coming down the pipe?

[Keith Valentine:]

Yeah. So the opportunity was to gain greater size range both width and length. In addition, that some of the approaches for posterior and for TLIF are kind of off angel. And so that approach if you put in a standard lordotic cage your - what's the word I want to use, your off angle on - you build your lordosis - if you lordosis from front to back evenly, then if your off angle, you are not getting the appropriate sagittal alignment. So what I was referring to in the notes was the fact that this accounts for the fact that you are putting it in crosswise. You're putting it in whatever the angulation is 30 degree angle off of center. And gives you an easier ability to get the right kind of sagittal alignment. Now in Skipjack, we - in the alpha trial it demonstrated that we have to do some small changes not only to the implant for the attachment of the inserter. But also make it more robust in addition to changing the some of the instrumentation to make it easier to insert and easier to expand. So from our perspective, the alpha was successful and identifying what changes need to be made for full commercial launch, and we're in process of getting those changes fully completed and driving towards a full launch for those products.

[Jeffrey Cohen:]

Okay. Got it. And then lastly, Keith. New products, R&D, M&A, anything we should about?

[Keith Valentine:]

Yeah, we'll be giving more detail on the full new product launch and process for 2018 on our first quarter call. But for the perspective of the largest revenue producing opportunities coming forward, we'll continue to be how Mariner, in addition to mariner get launched. We're doing really well with the launch and success of Shoreline. And the new orthobiologics are going to continue to gain momentum. There is a lot of excitement in and around the strand technology both within, without the additional Accell, ABM with the Plus. And also the Ballast, the Ballast product has a real opportunity for just creating a more elegant way to do posterior surgery and a quicker way to put in an all DBM material in the posterior gutters and being compression-resistant. So it really works well with MIS procedures and even open procedures with pedicle screw. That's what we're talking about kind of the procedural solution, the ability to continue to get expansion with our Mariner usage and in the process with the expansion getting more biologics used in that same procedure.

[Jeffrey Cohen:]

Perfect. Guys, thanks a lot for taking the questions.

[Keith Valentine:]

Sure.

[John Bostjancic:]

Yeah, thank you.

[Operator:]

Thank you. [Operator Instructions] And the next question will come from the line of Swayampakula Ramakanth with H.C. Wainwright. Your line is now open.

[Swayampakula Ramakanth:]

Thank you. Good afternoon, Keith and John.

[Keith Valentine:]

Hi.

[Swayampakula Ramakanth:]

Hi. Two or three questions. So going to your revenue guidance for the year and just on the high level, what potentially are the pushes and pulls on this number? So that we can get a feel for like how your year is progressing. And what sort of metrics should we be following, so that we know your operations could come to the higher-end, top end of your guidance rather than on the lower-end?

[Keith Valentine:]

Yeah, I think, there is going to be two primary drivers of that, RK. It's the launch of the - full commercial launch of the orthobiologics products that we launched an initial launch at the end of 2017. Those are obviously high priority for us, and the expectation is we'll have them all into full commercial launch before mid-year 2018. So hence, that's where we think we get the upside acceleration on the orthobiologics portfolio. On the hardware side, I think with the products we introduced in 2017 again highlighting Mariner and Shoreline as the leaders of that growth opportunity. The products we plan to launch 2018 coupled with the distributors we onboarded since late 2016, right. A lot of those are starting to gain a lot of traction, we've historically said it takes 9 to 12 months for them to be fully onboarded to move the revenue needle, and we're starting to see that progress. And it's also a pipeline of opportunities that we get to manage in 2018 of new distribution to bring onboard that we want to be well positioned, would have enough inventory to hit the ground running, as those distributors come onboard. So a combination of new products, highlighted on orthobiologics side, but then continuing to onboard the existing distributors that we brought onboard recently and the opportunities we have to continue to bring on new distribution in 2018.

[Swayampakula Ramakanth:]

Okay. Thank you very much for that. The next question is on gross margin. Obviously, it is done really well on the gross margin. You guys have done really well on the gross margin, front - starting from the first quarter 2017 of 59 or so percent, gaining it all the way to 63.3% as you just reported for the fourth quarter. So - but at the same time, if I heard it correctly, your final comment, John, was the gross margin expectation for the year is somewhere between 61% and 62%. If that is correct why that conservative stance? Is there something that we need to be looking out for so that it may actually be better than what your guidance is?

[John Bostjancic:]

Yeah, and consistent with the previous comments, right, 2018 is a year of transition from the legacy particulate DBM technology, which we're going to continue to sell going forward, right? But we do want to transition customers to the new fibers based technology which has clinical benefits and gross margin upside benefits to us. But as I said earlier, we want to be cautious in the gross margin acceleration we commit to for 2018, because in a year transition the ability to hit the top end or exceed that guidance is dependent on how the transition to the new products goes. So we're really confident in that ability to transition the products and the upside opportunity that presents for the gross margin. But we want to be cautious, because in a year of transition we don't want to get ahead of ourselves. But we know longer term it creates gross margin opportunity as we continue to transition to the fibers based technology.

[Swayampakula Ramakanth:]

Okay. So my last question is probably a little bit on this transitioning, maybe that's the issue here, but I'm just trying to understand this. So on your operating expenses the - you had higher commission expense in the fourth quarter is what you say is the factor. Is this a fact - is this is a factor of having more exclusive distributors onboard at this point? And does that mean as you try to increase that pool of exclusive distributors we could potentially see that commission expense grow. And how does that play along with what you're trying to do on getting new products on - into the selling as well?

[John Bostjancic:]

Yes, now, good question. So there are two things at play with the commissions. Yes, the increasing commissions is a function of higher revenue, of course, but also the rates that we are paying for the increasing exclusive distributors early on in our relationship with them, right, as they continue to accelerate revenue growth that creates opportunities to lower the overall commission rate. But the expectation is we continue to onboard more distributors in 2018 and we like the idea of onboarding the more exclusive distributors. And the premium that carries in terms of commission rates early on is why we're looking to continue to reduce our G&A spend, so we can redeploy that in the investments we're going to make in the new distributors in 2018 and beyond. But we still think long-term there is an opportunity to bring those rates down as we move into the second and third year of the contracts with the more exclusive distributors. But looking to reduce our G&A spend in 2018 frees up cash to make the investments in new distributors we may want to onboard in 2018 that come with that same level of exclusivity.

[Swayampakula Ramakanth:]

Okay. Thank you very much for that.

[Keith Valentine:]

Yeah.

[Operator:]

Thank you. And this does conclude our question-and-answer session today. I would now like to turn the conference back over to Mr. Keith Valentine for any further remarks.

[Keith Valentine:]

Sure. Thank you, everyone, for joining us today. We look forward to updating you on Q1 in a couple of months. Have a great evening.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude your program. You may all disconnect. Everyone, have a wonderful day.