Tram Bui - IR, Ruth Group Mark Throdahl - CEO Fred Hite - CFO.

Rick Wise - Stifel Ryan Zimmerman - BTIG Matt O'Brien - Piper Jaffray.

Good day, ladies and gentlemen and welcome to the Q1, 2018 OrthoPediatrics Corp. Earnings Conference Call. [Operator Instructions]. Now I’d like to turn the call over to Tram Bui, from the Ruth Group. Please go ahead..

Thanks Operator and thanks everyone for participating in today’s call. Joining me from the Company, are Mark Throdahl; Chief Executive Officer, and Fred Hite; Chief Financial Officer.

Before we begin, I like to caution listeners that comments made by management during this conference call will include forward-looking statements within the meaning of the Federal Securities Laws including the Safe Harbor Provisions of the Private Security Litigation Reform Act of 1995.

These forward-looking statements involved material risks and uncertainties and the company's actual results may differ materially.

For discussion of risk factors, I encourage you to review the company's Form 10-K filed with the Securities and Exchange Commission on March 15,2018 and its most recent quarterly report on Form 10-Q which will be filed later today.

During the call management will also discuss certain non-GAAP financial measures which are used as supplemental measures of the format. The company believes these measures provide useful information for investors in evaluating its operations period-over-period.

For each non-GAAP financial measures referenced on this call, the company has included a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures in its earnings release.

Please note that non-GAAP financial measures of limitations as a -- tool and should not be considered in isolation or as substitute for OrthoPediatric's financial results prepared in accordance with GAAP.

In addition, the contact of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast May 15, 2018 except as required by law, the company undertakes no obligation to revise or update any statements to reflect events or circumstances that take place after the date of this call.

With that said, I'd like to turn the call over to Mark. .

Good morning everyone and thank you for joining us today on our first quarter 2018 earnings conference call. I'll begin with an overview of our first quarter financial and operating highlights followed by Fred, who will provide detailed financial review. Afterwards I'll make some closing remarks and then open the call up for questions.

We are very pleased with our solid start to the year, first quarter revenue growth of 24% exceeded our expectations and all three product lines Trauma and Deformity, Scolios and Sports Medicine/Other contributed to the strong growth.

Within the scolios segment, we saw particularly dynamic domestic sales which continue to outpace the industry and further solidify our market leadership in pediatric Orthopedics. During the quarter we increased our deployment of consigned sets to $5.5 million.

As we distribute these sets across geographies and product lines, we remain on target to achieve our goal of increasing investment to $10 million of set deployment for the full year.

The 84 total sales representatives that now exclusively focus on OrthoPediatrics of which 9 were added to our domestic selling organization in the quarter will continue to play a critical role in our growth and expansion as we deploy more sets.

In addition, to deploying more sets with an expanded salesforce, we increased our investment in research and development by 77% during the quarter. This investment has strengthened our competitive position. We launched our 24th Surgical System a Novel Update to one of our largest products and significantly improved a legacy system in the quarter.

We also progressed 5 new surgical systems intended for launch throughout the year with recent FDA 510 clearance for our 25th Surgical system Pediatric Nailing Platform FEMUR. These organic investments in instrument sets, sales personnel and R&D position the company for strong growth throughout the remainder of this year and beyond.

With that summary, let me now describe the expansion of our already extensive product portfolio. In early January, we launched our Titanium PediPlates System, our 24th surgical system.

The Titanium implant system is designed for patients with a nickel allergy, or where MRI studies maybe specified, it further expands our comprehensive physeal tethering offering, and includes both Oplates and Iplates, as well as solid in [indiscernible] low profile screws.

In March, we completed another step in the expansion of our Intramedullary Nailing franchise, by introducing the next-generation elastic nailing platform, PediFlex Advanced. This legacy system upgrade provides physicians with a modified flexible nail implant design available in multiple diameters and links in both stainless steel and Titanium.

More importantly, the upgrade offers an innovative inserter instrument, that provides unprecedented control during flexible nail insertion, along with enhanced instruments for nail extraction.

These enhancements solved issues endemic to all flexible nailing systems and indicate our company’s commitment to continuous improvement of one of the most frequent pediatric implant procedures. The 77% increase in R&D investment has also allowed us to continue new product development on multiple fronts.

Late last week, we received FDA 510 clearance for our 25th surgical system, pediatric nailing platform seamer, which utilizes high precision innovative and best-in-class instruments to accompany two distinct pediatric specific nail offerings.

The platform is a significant upgrade to our legacy PD-nail system and another step in the evolution of the company's Intramedullary Nailing franchise. We anticipate commercially launching the new system in the coming months.

Additionally, our small stature BandLoc polyester sublaminar banding system are nearing FDA submission and both will broaden our offering to treat pediatrics final deformities in smaller patients. Other new systems planned for 2018, include an Osteogenesis Imperfecta Nail system and the first pediatric flip system.

We also continue to make encouraging progress, on our active growing implants and spinal tethering development programs.

A part from accelerating development, the increase investment in consigned sets will derive future sustainable growth and remove a historical growth constraint for the Company, we already we have invested $5.5 million in consigned sets during the first quarter compared with roughly $2.6 million in the first quarter of 2017, and as previously mentioned, we remain on target to invest $10 million in the full year.

We have a season sales team, consisting of 84 dedicated sales representatives in the United States, up from 75 in the fourth quarter of 2017, and 37 stocking distributors abroad up from 35 at year end 2017. The nine additional full time equivalent reps hired in the first quarter puts us well ahead of our goal of 18 additions for the full year.

These sales reps personally attend every surgery, our consultative resource for our surgeons and represent one of our greatest sources of competitive advantage. Our associates and our culture are the backbone of the company's success.

It is in that context that we were pleased OrthoPediatrics was recognized as one of the 100 best places to work in Indiana for a second year. This reinforces our goal of becoming of the Orthopedic industry employer of choice. And that recognition is not unrelated to being named to finalist in on -- of the year award.

The key to being an Entrepreneurial company is cultural in ceiling an entrepreneurial mindset in every associate. Furthermore, as the market leader in pediatric orthopedics, we remain dedicated to clinical education, which is vital to advancing the field of pediatric orthopedics.

In April, we continued our leading sponsorship of the annual meeting of the European Pediatric Orthopedic Society of EPOS one of the world's largest pediatric orthopedic scientific organizations.

We hosted a well-attended symposium entitled Management of Open Fractures in Children featuring a panel of European key opinion leaders who discussed the most frequent types of pediatric fractures, guidelines for antibiotic use, evidence based surgical treatment and management of soft tissue injuries in open fractures.

We just returned from the annual meeting of the pediatric orthopedic society of North America or POSNA where we again participated as a double-diamond sponsor.

At this event, we hosted two subspecialty sessions focused on pediatric trauma and Spinal Deformity correction, in addition the partially funding the international visiting scholars program, the program dedicated to ongoing medical education of physicians outside the United States.

Sponsoring EPOS and POSNA at these substantial levels and out of all proportion to our size allows us to prioritize everything we do in the context of our commitment to advancing the field of pediatric orthopedics. I think this demonstrates what it means to be a market leader. I'll now turn the call to Fred for a review of our financial results.

Fred?.

Thanks Mark. Total revenue for the first quarter 2018 was $12.1 million, up 24% when compared to $9.8 million for the same period in 2017. U.S. revenue in the first quarter of 2018 increased 18% to $8.7 million compared to $7.3 million in the same period last year representing almost 72% of our total revenue.

International revenue in the first quarter of 2018 was $3.4 million a 42% increase compared to $2.4 million in the same period last year representing a little over 28% of our total revenue.

Our first quarter revenue breakdown by product category was as follows Trauma and Deformity revenue in the first quarter of 2018 was $9.1 million, an 18% increase compared to $7.7 million in the same period last year.

Scolios revenue in the first quarter 2018 was $2.7 million a 40% increase compared to $1.9 million in the same period last year driven by strong product acceptance and customer adoptions supplemented with growing sales competency in the U.S. but also assisted by a favorable year-over-year comp.

Lastly, sports medicines/other revenue in the first quarter of 2018, was almost $300,000 representing a 186% increase when compared to about a $100,000 in the same period last year. Nearly all of our revenue growth continues to be driven by increased unit volume.

Moving down the income statement, gross profit in the first quarter of 2018, was $8.9 million a 20% increase to $7.4 million in the same period last year. Gross margin in the first quarter of 2018 was 74% compared to 76% in the first quarter of 2017, primarily driven by a higher mix of international revenue, including instrument set sales.

Sales and marketing expense in the first quarter 2018, increased 45% to $6.1 million when compared to $4.2 million in the same period last year, driven by the increased revenue growth of 24%, plus the addition of commissions being paid in the four international markets that we transition to the agency model during 2017 and ongoing marketing expenses.

G&A expenses in the first quarter 2018 was $6.0 million, an increase of 78% compared to $3.4 million in the first quarter of 2017. First quarter 2018, G&A expense increased was primarily driven by $2.2 million in non-cash stock compensation reflecting restricted stock accelerated [best in] six months after our IPO.

This compares to $300,000 a non-cash stock compensation in the first quarter of 2017. Additionally, the cost associating with being a public Company, coupled with additional personal resources to support of our growth of our business and higher legal expenses contributed to this increase.

Research and development expenses increased 77% to $1.2 million in the first quarter of 2018, when compared to $687,000 in the same period last year. The increase was due to the addition of experienced engineer personnel, product launches as well as incremental projects to accelerate the product development and future pipeline.

Total operating expenses in the first quarter of 2018, were $13.3 million an increase of 61% compared to $8.3 million in the first quarter of 2017.

Operating loss in the first quarter of 2018 was $4.4 million as compared to a loss of $0.8 million in the first quarter of 2017, primarily as a result of the increased operating expenses just discussed, including the $2.2 million in non-cash stock compensation reflecting the accelerated best in six months post IPO.

I’ll also note that we’ll have another $300,000 of accelerated non-cash restricted stock expense in the second quarter of 2018. That will now finalize all of our accelerated investing six months post IPO.

Adjusted EBITDA for the first quarter of 2018, was negative $1.2 million compared to $0 for the first quarter of 2017, primarily driven by higher R&D and legal expenses. Net interest expense in the first quarter of 2018 was $0.6 million a 24% increase compared to $0.4 million in the same period last year.

The increase in interest expense was due to the use of incremental debt to support the growth of the company during 2017. Net loss during in the first quarter of 2018 was $5.0 million compared to a net loss of $1.3 million in the same period last year.

Net loss per share attributable to common stockholders in the first quarter of 2018 was $0.41 per basic and diluted share versus $1.55 per basic and diluted share in the same period last year. Turning to our balance sheet. As of March 31, 2018, our cash balance was $34.6 million compared to $42.6 million as of December 31, 2017.

Net purchases of property and equipment during the first quarter of 2018 were $2.8 million a 108% increase compared to $1.3 million during the same period last year.

The primary driver of the increase in purchases of property and equipment was the deployment of the consigned sets which includes products specific instruments as well as [cases in trace].

As of March 31, 2018, total debt was $25.4 million including $3.9 million outstanding under our revolving credit facility slightly down from $25.5 million as of December 31, 2017.

As a reminder, during the fourth quarter of 2017 we signed an amendment to our current debt agreement with Squadron Capital, our largest shareholder to modify and extend the terms of our term note and revolving credit facility.

We were able to consolidate the majority of the term note amounts into a $20 million term loan and reestablish a $15 million revolver. Both of those notes expired January 2023. Now let me turn the call back to Mark for closing remarks. .

Thanks Fred. OrthoPediatrics entered the new year with strong momentum from the fourth quarter. And sales grew 24% because of highly effective execution. This solid first quarter sets the stage for delivering our guidance of 22% annual revenue growth. This is the third quarter in a row that we have beat expectations.

And 2018 is our first full year as a public company and will constitute the foundation for future high performance and strong shareholders returns.

Our focus remains on systematically strengthening our industry leading position which requires execution on three fronts; the first is innovation, by increasing investment in R&D to 10% of sales we will expand our already extensive portfolio of surgical technologies and further improve the effectiveness of surgeries performed in the 38 countries where we operate.

We launched our 24th Surgical System and received FDA 510 clearance on our 25th in addition to introducing a major system upgrade in PediFlex Advanced. we also remain committed to developing the remaining 4 new systems for expected launch by year-end.

The second front is confine sets targeting $10 million of new investment for the full year 2018 of which $5.5 million have already been invested in the first quarter.

With the expanding salesforce, we anticipate that these set investments will have a modest impact on the second quarter but build momentum throughout the year keeping us on targeted guidance.

The third front is clinical education, as market leader, our surgeons have challenged us to train the next generation of pediatric orthopedic surgeons by providing sophisticated non-commercial clinical education.

To that end, we welcome the formation of the Orthopediatric's Foundation for Education and Research which has led by our Chief Medical Officer and whose Board consists of the company’s clinical education advisory committee. I am very confident that the team we have assembled will execute these initiatives.

They were the best-in-class corporate culture and they share the cause of transforming the lives of children around the world with orthopedic conditions. And with that, we’ll take any questions you might have..

[Operator Instructions]. Our first question is from Rick Wise with Stifel. Your line is now open..

Good morning Mark, good morning Alfred. Let me start off after what can only viewed as an excellent quarter, thank you for that. Maybe just start right at the top and talk about guidance.

You didn’t really -- I don’t think I heard you comment on guidance if remembering correctly you’ve guided to 22% topline growth for the year, you’ve clearly exceeded that in the first quarter at 24%, not your seasonally strongest quarter.

As I reflect on it, I mean just to take your words you know more incremental sets in the field, more reps, more new products.

How do we think about that full year guidance and the potential for further upside?.

Yeah, Mark mentioned in his comments that we are maintaining our total year 2018 guidance of 22% at this time. .

Feel free to expand on that..

So, we’re very pleased with the first quarter and it came in a little higher than even we had in our model but not enough at this time that we’re to change our full year guidance. So, we’re maintaining our 22% growth for the full year..

If I might make an impressionistic comment we know that we’re doing all the right things.

But this is unchartered water for us in terms of having this amount of resource to invest in sets, in research and development, in clinical education programs and so predicting the acceleration beyond 22% is something we’re simply unprepared to do at the moment Rick. .

Yes, as do we all, one concern for me a little bit the gross margin, fell below our modeling and if I heard you correctly Fred, you alluded to the better than expected international sales as a major driver there. A couple of questions around that and having to an international and tied back to gross margin. Maybe it’s a three-point question, actually.

Talk about the sustainability of the kind of growth we saw in first quarter internationally.

I know some of it is that transition, talk to us about it did FX have an impact here help us understand that, and if this gross is going to continue, I mean is this 73%, 74% range, the right way to think about gross margins going forward for our models?.

So, several questions in there. The first would be that obviously 42% growth in the first quarter for the OUS is very strong. As we had talked earlier, we ordered sets, quite a few sets both to deploy domestically and to our agencies in the four countries overseas.

We also ordered sets to sell through our stocking distributors, which is really starting to fulfill a backlog of demand that they had put on us starting last year. So, in that 42% increase is a lot of set sales, those set sales as you may recall go out at 0% and so that’s drags drawn our overall margin for the business.

On top of that, our international stocking distributor margin is about 30%, so as we had increased international sales much higher than the domestic growth and within that a lot of set sales at zero margin, that did drive down the margin for the overall business.

We would not expect to have 42% growth going forward in the next several three quarters for this year, we expect strong growth internationally, but not at that rate and I would expect that the overall mix of the international sales would not be so heavily weighted to set and so that should not carry forward with a negative impact on the gross margin line.

.

So, a return more to that mid-70s range, maybe that we might have thought originally. .

Correct. .

Last for me, I had 25 questions, I only had 16. As you know we attended the [indiscernible] meeting last week and two follow-up questions, met with a bunch of docs, there seems to be a lot of interest in the spine surgeons in your new upcoming small stature response system.

Just curious, was that the general reaction across the community and you might want to expand on the rollout of that and help us understand that and another dock we spoke with search thing, it's to his hospital and his peers are doing it, are suggesting he is hearing more about multiple hospitals now going a 100% to OrthoPediatric separator instrumentation.

Is that a trend, are there a lot of 100% accounts now. Again, any color around those two areas would be very welcome. Thanks so much. .

Thank you, Rick. Those are marvelous questions. The small stature system is something that I think, we and a number of scoliosis experts that we deal with are looking forward to gaining FDA approval on. The Regulatory submission should go out very, very soon and then we will keep our fingers crossed for an expeditious approval by the agency.

We might just mention that, we estimate that in this country no more than 20% of the cases requires a small stature system perhaps even somewhat lower percentage, but not having that system is a key and very reasonable objection that an institution might have or not converting completing to OrthoPediatrics.

So, I think it's going to be a new product that will outpunch its weight in that sense. With regard to institutions converting 100% of OP, there is still are relatively few that have done that. But we are definitely seeing a gathering sense of momentum as our product line continues to expand and as we become more relevant.

And more and more institutions are realizing that we should be the primary supplier and then they'll fill in with other even major company suppliers for things that we still do not have. These being small facture adult systems which surgeons have become a custom to utilizing for certain cases.

By the same modulus trend and in fact as your colleague within -- visited and cause might have observed there is a comparable and gathering sense of momentum that the company has and you feel like that shows like POSNA. .

Our next question is from Ryan Zimmerman with BTIG. Your line is now open. .

Wanted to just touch on the instrument sets a little bit and your distributor base. You've deployed number of systems now $5.5 million as you said in the quarter.

How do you think about who amongst your distributor base gets those sets? Will distributors have to do a certain amount of business before they can get more? Help us understand how you're thinking about that? And then I have a follow up. Thank you. .

Well Ryan, we have a vetting process that allows us to make a collective judgement typically with the sales agency involved. And beyond that, we have a very rigorous strategic planning system, which we take our business grew from stem to stem every summer. So, our strategic priorities are very clear in our minds.

But in the final analysis this is a government call that we make. And we are also in the mode of still clearing up a lot of pent up demand.

And so, from that standpoint we are attempting to be fair minded and not blindly led by strategic priorities to say we'll only invest in certain areas of the country or with certain products or with certain geographies internationally.

But it's an interesting sort of cleaning up process of pend up demand and we expect that to go on throughout the balance of the year. .

Understood. Thank you, Mark. And then we also attended the POSNA conference and came away positively. You spoke with a few of your distributors in fact and you mentioned on the call that they were tracking ahead of your expectations in terms of the number of [reps]. Certainly, consistent with what we learned from distributors.

Just giving your previous plans does the rep hiring changed at all or does it shift forward in terms of hiring could we see that number potentially increased beyond what you're expected to do or what you're originally expected to do this year. Thank you for taking the questions. .

It's entirely possible that it would shift above 18, but at this point that is a goal of we set and that's the goal that we are shooting for. I do need to stress again and as you appreciate I'm sure Ryan, this is a decision we do not making unilaterally. And in fact, our distributors don't make it unilaterally. It is a consensus judgement.

But the confidence that the sales agents have with regard to more sets and broader product line is being felt in they're taking the initiative to hire additional reps that they sent to us for training.

And I think we have 25 sales reps in a couple of weeks ago for a week of this trauma and formative training and they were a very, very aggressive and impressive group and by far the largest group that we’ve had in for training sessions like that and it went very, very well.

I might also say that obviously this is something we’ve been talking about for some time working with our partners to get ahead of this knowing we’re going to have $5.5 million worth of sets, we got to have the sales reps to support that and we did support that in several ways on the compensation expenses to help them get ahead of this curve which did drive some higher cost in the commissions line in the first quarter of ’18 but we feel very good about where we’re at given both sales force that is now in place as well as the sets to go with it.

.

Our next question is from [indiscernible] with William Blair. Your line is now open..

Hi guys, thanks for taking our questions. First, out of nine incremental US sales reps in the quarter, can you just talk to us about further what prompted you to lift that number in the first quarter or are these opportunistic hires and then how are you determining in what geographies to add additional reps..

Well the nine at least my feeling is that keeping asked questions with regards to how we see the expansion of the sales force. So, in the spirit of transparency we simply threw the number out there.

I think that with regard to how we make these decisions in terms of geographic judging from the group that was here several weeks ago these people are all over the United States and the business literally is growing in all major markets.

So, there is no priority we place on hiring more with one exception and we’ve spoken about the enormous opportunity we face in Southern California which is a particularly challenging market geographically because it's so widespread and so there we continue to work with our sales agent on recruiting more sales reps.

But beyond that there is no probably I am aware of in regard to how we position these people geographically. .

I think the biggest priority came out of the strategic planning that we did last fall in looking at 2018 and knowing the sets are coming and identifying early the needs for these reps and getting the process started early on. So, we are very pleased to see plans being executed as we laid them out. .

Got it, okay that’s helpful and then I your increased R&D you mentioned it allows you to roll out the pediatric nailing [indiscernible] but still I mean the increase is pretty substantial.

So, can you just speak to -- I know you touched on this briefly but if you can speak to in a bit more detail about how you’re other pipeline initiatives are progressing. And I guess specifically fine tethering and active growing in the portfolio. Thank you. .

Well the two that you mentioned are of course that you mentioned longer term in nature. We are delighted by how they are progressing and the partnership that we have on the growing implants have proven to be exceptional. This entity has deep technology that we can capitalize on and very disciplined approach of product development with our people.

The tethering remains still at an early stage but we had a tethering team together at [Plasma] to talk about different design alternatives and it was a very exciting meeting. So those two are going well.

Its specifically that the 77%, that is accelerated obviously from where it was in the fourth quarter and the third quarter, it not only supports the five product launches that we’re going to do in 2018 specifically the small stature system, finalizing that prior to the submission of the FDA, that Pedi-Nail platform system, which is a big deal for us finalizing that as we submitted it sometime ago and got approval from the FDA as well as the other three systems we’ll be launching in 2018.

On top of that accelerating the growing [rod] has been another priority for us and I think you saw some of that expense come through in the first quarter as well. .

The next question is from Matt O'Brien with Piper Jaffray. Your line is now open. .

Great, thanks so much for taking the questions. Three for me and I don’t want to pick on anything here too much because this is a good revenue quarter. But just the domestic growth number in the quarter was below of we have seen over the past four quarters.

Is there anything to point to there of note, I mean your competitor is getting more aggressive now that you’re starting to really taken share from them they try and deformity, or did you have a bunch of reps in for training along those lines to point to. .

No, as probably the biggest thing is just say a stronger comp on the C&D side in the first quarter of last year. So that would be the one thing I would point to and we don’t see that repeating going forward.

So, we see the growth rate particularly on the C&D side with more sets being placed out into the field, accelerating throughout the rest of this year. So, it came in as we expected it to and we’re very pleased with our turned out, but we did have a tougher comp in the first quarter of last year. .

And if I might comment Matt on the competitive dynamic here. It is both our observation and it is what we are told by a number of thought leading pediatric surgeons with whom we work, that none of the major orthopedic companies are doing any meaningful development in pediatric orthopedics.

In fact, some have even announced to sub-surgeons they have no interest in developing products in this field and had discontinued with programs they may have had several years ago, that is different in the case of focused smaller spine companies, such as Nuwasive that recently launched its own small stature system, which in fact we have yet to really run into in the marketplace, but it is there.

So, I think in a way this whole concept of mustering some huge response by big ortho, we do not see and our customers do not see. .

Got it, helpful. Switching over to the international side, I mean looking at the numbers here in the quarter, I know there is a little bit of FX benefit, but pretty meaningful jump Q4 to Q1.

Is that entirely instrument set purchases that drove a majority of that growth and what do that suggests for your international business this year?.

No, not the majority of the growth, obviously 42% is significant, we had also the benefit of the four countries that we converted starting in April, May, June, July of last year, so we had the benefit of that in the first quarter of this year as a favorable comp, we had significantly increased replenishment sales with our stocking distributors so that drove very favorable growth on the international business, but then when you layer on top of that, the set sales increased that's where you get the 42% growth which obviously is not something we expect to continue that rate.

.

Fred are you able to use that system of the components there of this 42% growth just to kind a think about organically whatever look like ex the distributor conversions?.

I would say that the first quarter performed similar to the third and fourth quarter on the international side. So, the organic growth continued. And then there was maybe 10 points of incremental growth driven by incremental set sales. .

Got it okay. And last one for me. The [G&A] commentary is completely self-explanatory as far as that's going to drop pretty meaningfully I think in Q2 and Q3? Sales and marketing is a little bit higher than what we were expecting but understandable given the conversion here.

So, this sales and marketing level is this roughly what we should be expecting going forward as we're adding more reps for the next several quarters. And then is there a big inflection and then I think you mentioned also more expense on the litigation side, is there any kind of K2 update or next steps we should be thinking about? Thank you. .

So specifically, on the sales and marketing spend, I think as a percentage of sales, it's probably going to be in that range, maybe in the second quarter, maybe a little bit of favorability in third and fourth. But that line item is really driven by sales volume as appose to just spending dollars. So as a percentage of sales probably in that range. .

And with regard to the K2M matter, Matt. I think it's a simple to say that we continue to believe that suite is without merit. And we are now vigorously defending the claims that are asserted against us. And we are very confident in the outcome. .

[Operator Instructions]. And I'm showing no further questions. I would now like to turn the call back to CEO Mark Throdahl for any further remarks. .

Well first off, I like to thank all of you for bearing with us here and going through this announcement. We are very proud of a strong first quarter, which is the third in a row since going public in which we have beat expectations. The final point I think I'd make is there is simply no change here in our strategy.

This is all about more R&D, more sets more reps more clinical education. And all of these things continue to build barriers to hypothetical competitive intrusion in this area. And more importantly all of these things continue to advance the field of pediatric orthopedics which is our mission.

So, thank you very much and we look forward to talking with you next quarter. .

Ladies and gentlemen, thank you for participating in today's conference. You may now disconnect. Everyone have a good day..