Financial

K2M Group Holdings, Inc. Reports Third Quarter Revenue Growth of 16.7% in Constant Currency and Increases Fiscal Year 2015 Revenue Guidance Range

LEESBURG, Va., Nov. 3, 2015 (GLOBE NEWSWIRE) — K2M Group Holdings, Inc. (Nasdaq:KTWO) (the “Company” or “K2M”), a global medical device company focused on designing, developing and commercializing innovative and proprietary complex spine and minimally invasive technologies and techniques, today reported financial results for the third quarter ended September 30, 2015.

Third Quarter Financial Summary:

  • Total reported revenue of $55.0 million, up 15.5% year-over-year. Total revenue increased 16.7% year-over-year on a constant currency basis.
  • Domestic revenue of $39.5 million, up 14.8% year-over-year
    • U.S. Complex Spine growth of 15.5% year-over-year
    • U.S. Minimally Invasive Surgery (MIS) growth of 40.8% year-over-year
    • U.S. Degenerative growth of 4.6% year-over-year
  • International revenue of $15.6 million, up 17.5% year-over-year. International revenue increased 22.0% year-over-year on a constant currency basis.

Third Quarter Highlights:

  • On July 8, 2015, the Company announced the launch of six of its spinal systems in Singapore and Hong Kong. The offerings include K2M’s flagship complex spine offering, the MESA® Deformity Spinal System, and two minimally invasive offerings, the EVEREST® Minimally Invasive Spinal System and the TERRA NOVA® Minimally Invasive Access System. The Company will also launch three of its degenerative spinal systems in the region: the EVEREST® Degenerative Spinal System, the ALEUTIAN® Transforaminal-Lumbar (TLIF) 2 Interbody System and the ALEUTIAN® Anatomically-Narrow (AN) Interbody System.
  • On September 3, 2015, the Company announced it had received 510(k) clearance from the U.S. Food and Drug Administration (FDA) to market the PYRENEES®Mono Cervical Plate System, the Company’s latest addition to the family of PYRENEES products. In addition to U.S. regulatory clearance, K2M also received a CE Mark for the system, which allows the Company to expand the global availability of the product.
  • On September 30, 2015, the Company announced the U.S. commercial launch of the EVEREST® Deformity Spinal System at the Scoliosis Research Society (SRS) 50th Annual Meeting in Minneapolis, Minnesota. EVEREST Deformity is an expansion of the EVEREST family of products, which includes the EVEREST Degenerative and EVEREST Minimally Invasive Spinal Systems.
  • On October 13, 2015, the Company announced it had received 510(k) clearance from the U.S. Food and Drug Administration (FDA) and CE Mark for CASCADIA(TM) AN & TL Interbody Systems, featuring Lamellar Titanium Technology™, the Company’s new and proprietary technology that uses 3D printing with the goal of allowing for bony integration throughout an implant.

“Third quarter financial and operating results represent strong evidence of K2M successfully executing its growth strategy,” said President and Chief Executive Officer, Eric Major. “We continue to gain market share in the global spine market—posting 17% revenue growth on a constant currency basis this quarter—and we continue to enhance our foundation for future growth by leveraging our development pipeline into new and innovative technology introductions and expanding our distribution capabilities around the world.”

Major continued, “We were very pleased with our performance during the 2015 deformity season, both in terms of the strong sales of our portfolio of innovative complex spine products, and in terms of the continued positive feedback from the spine surgeon community regarding K2M’s six differentiated new product introductions in 2015. We look forward to continued strength in our financial results over the balance of fiscal 2015 as we continue to execute against our strategic growth objectives.”

Third Quarter Financial Results

Total revenue for the third quarter ended September 30, 2015 increased 16.7% year-over-year on a constant currency basis. Total reported revenue increased $7.4 million, or 15.5%, to $55.0 million, compared to $47.6 million in the same period of the prior year. The increase was primarily driven by greater sales volume from new surgeon customers in the U.S., existing surgeon customers upgrading to newer product offerings and growth in international distributor markets, primarily Denmark, Saudi Arabia, Japan and South Africa.

Geographically, revenue in the United States increased $5.1 million, or 14.8% year-over-year, to $39.5 million, and international revenue increased $2.3 million, or 17.5% year-over-year, to $15.6 million. Foreign currency exchange impacted third quarter international revenue by approximately $0.5 million, representing approximately 450 basis points of growth year-over-year.

Three Months Ended September 30, Increase / Decrease
2015 2014 $ Change % Change % Change
($ in thousands) (as reported) (constant currency)
United States $ 39,459 $ 34,385 $ 5,074 14.8% 14.8%
International 15,550 13,239 2,311 17.5% 22.0%
Total Revenue: $ 55,009 $ 47,624 $ 7,385 15.5% 16.7%
Nine Months Ended September 30, Increase / Decrease
2015 2014 $ Change % Change % Change
($ in thousands) (as reported) (constant currency)
United States $ 116,055 $ 97,371 $ 18,684 19.2% 19.2%
International 45,732 39,992 5,740 14.4% 19.3%
Total Revenue: $ 161,787 $ 137,363 $ 24,424 17.8% 19.2%

By procedure category, U.S. revenue in our Complex Spine, MIS and degenerative categories represented 42.7%, 18.8% and 38.5% of U.S. revenue, respectively, for the three months ended September 30, 2015; and 41.6%, 17.3% and 41.1% of U.S. revenue, respectively, for the nine months ended September 30, 2015.

Three Months Ended September 30, Increase / Decrease
2015 2014 $ Change % Change
($ in thousands)
Complex Spine $ 16,852 $ 14,585 $ 2,267 15.5%
Minimally Invasive 7,401 5,258 2,143 40.8%
Degenerative 15,206 14,542 664 4.6%
U.S Revenue: $ 39,459 $ 34,385 $ 5,074 14.8%
   
Nine Months Ended September 30, Increase / Decrease
2015 2014 $ Change % Change
($ in thousands)
Complex Spine $ 48,204 $ 40,375 $ 7,829 19.4%
Minimally Invasive 20,124 15,138 4,986 32.9%
Degenerative 47,727 41,858 5,869 14.0%
U.S Revenue: 116,055 97,371 18,684 19.2%

Gross profit for the third quarter of 2015 increased $6.1 million, or 19.5% year-over-year, to $37.6 million, or 68.4% of sales, compared to $31.5 million, or 66.1% of sales last year. The increase in gross profit as a percentage of revenue is primarily due to decreased expenses associated with our custom instruments and a reduction in our medical device excise tax due to prior period recoveries. Gross profit includes amortization expense on investments in surgical instruments and the U.S. medical device excise tax. Instrument amortization expense increased $0.8 million to $3.1 million, or 5.6% of sales, for the three months ended September 30, 2015, compared to $2.3 million, or 4.8% of sales, last year. Third quarter of fiscal 2014 cost of goods included medical device excise tax of $0.5 million, or 1.05% of total Company sales.

Operating expenses for the third quarter of 2015 increased $3.2 million, or 7.3% year-over-year, to $47.6 million, compared to $44.4 million for the same period last year. The increase in operating expenses in the current period as compared to the same period last year was primarily driven by a 7.2% increase in sales and marketing expenses, a 5.8% increase in research and development expenses and an 8.0% increase in general and administrative expenses largely as a result of previously deferred stock-based compensation expense recognized in the current period.

Loss from operations for the third quarter of 2015 was $10.0 million, compared to a loss of $12.9 million last year. Loss from operations included intangible amortization of $2.5 million and $5.0 million for the third quarters of 2015 and 2014, respectively. Net loss attributable to common stockholders for the third quarter of 2015 was $10.2 million, or $(0.25) per diluted share, compared to $16.1 million, or $(0.43) per diluted share, for the third quarter of 2014. Net loss attributable to common stockholders in the third quarter of fiscal 2014 included the impact of foreign currency transaction losses of $3.1 million, or $(0.08) per diluted share compared to an immaterial amount in the third quarter of 201, due to significantly lower intercompany balances in 2015. Foreign currency losses impacted operating results last year due to changes in the average exchange rates of the U.S. Dollar, Pound Sterling and Euro applied to intercompany transactions in both periods. Loss per share in the third quarter of 2015 benefitted in part due to the increased number of shares outstanding resulting from the Company’s follow-on public offerings in February 2015 and July 2015 which represented approximately $0.02 per share compared to last year.

As of September 30, 2015, cash and cash equivalents were $43.7 million compared to $11.4 million as of December 31, 2014 and we had no outstanding indebtedness. Working capital was $115.3 million, compared to working capital of $69.7 million as of December 31, 2014.

2015 Outlook

For the full year 2015, the Company now expects:

  • Total revenue on a constant currency basis in the range of $218 million to $220 million, representing growth of 17% to 18% year-over-year. This compares to the Company’s previous guidance range of full year 2015 constant currency revenue in the range of $214 million to $218 million, representing growth of 15% to 17% year-over-year on a constant currency basis. The Company continues to expect total revenue on a reported basis for the full year 2015 period to be impacted by approximately $2 million as a result of foreign exchange fluctuations. Total revenue on a reported basis is estimated in a range of $216 million to $218 million, representing growth of approximately 16% to 17% year-over-year as compared to the Company’s previous guidance range of $213 million to $217 million, or 14% to 16% growth year over year.
  • Total net loss of approximately $39.5 million to $40.5 million, compared to a total net loss of $59.6 million in fiscal year 2014.
  • Adjusted EBITDA in a range of $(2.0) million to $0.0 million, compared to Adjusted EBITDA of ($8.8) million in fiscal year 2014.

Conference Call

Management will host a conference call at 5:00 p.m. Eastern Time today to discuss the results of the quarter and to host a question and answer session. Those who would like to participate may dial 888-430-8705 (719-325-2402 for international callers) and provide access code 376216 approximately 10 minutes prior to the start of the call. A live webcast of the call will also be provided on the investor relations section of the Company’s website at http://Investors.K2M.com.

For those unable to participate, a replay of the call will be available for two weeks at 888-203-1112 (719-457-0820 for international callers); access code 376216. The webcast will be archived on the investor relations section of the Company’s website.

About K2M Group Holdings, Inc.

K2M Group Holdings, Inc. is a global medical device company focused on designing, developing and commercializing innovative complex spine and minimally invasive spine technologies and techniques used by spine surgeons to treat some of the most difficult and challenging spinal pathologies. K2M has leveraged these core competencies to bring to market an increasing number of products for patients suffering from degenerative spinal conditions. These technologies and techniques, in combination with a robust product pipeline, enable the Company to favorably compete in the global spinal surgery market. Additional information is available online at www.K2M.com.

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