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K2M Reports 9.9 Rise in First Quarter Revenue

By K2M Group Holdings Inc. | May 15, 2017

Company expects constant currency total revenue to swell 12 percent to 15 percent compared with 2016.

K2M Group Holdings Inc. experienced a lucrative start to 2017.

First-quarter revenue rose 9.9 percent to $61.9 million; total sales jumped 10.7 percent on a constant currency bases.  

Net loss totaled $10.9 million for the three months ended March 31, compared to a net loss of $10.2 million in the comparable period last year. Adjusted EBITDA loss was lower, totaling $300,000 million compared to an adjusted EBITDA loss of $1.1 million in the comparable period last year.

“We have made significant progress during the first four months of 2017, driving toward our fiscal year growth objectives and achieving multiple operational milestones, which together will enhance our ability to increase our share of the global spine market over time. We reported constant currency revenue growth of 10.7 percent year-over-year in the first quarter, driven by 10 percent growth in the U.S. and 14.4 percent constant currency growth in our international markets,” said President and CEO Eric Major. “We delivered strong revenue growth in the U.S. in the first quarter, which represents solid performance in light of the 20 percent U.S. growth we reported in the same period last year, and we continue to believe in our ability to grow U.S. revenue in the mid-teens in 2017. Outside the U.S., we continue to see progress in both Australia and Japan that is in line with our goal of creating a solid foundation for future growth in each of these markets. In April, we announced a new supply agreement with our Australian partner, LifeHealthcare. Later in April, we received product registrations in Japan, that we now control, for key products including our MESA and EVEREST systems. With these registrations, K2M will have an opportunity to implement a new distribution strategy in the entire spine surgery market in Japan.”     
 
Domestic first-quarter revenue was $46.2 million, up 9.5 percent year-over-year, comprised of:
  • U.S. complex spine growth of 7.6 percent
  • U.S. minimally invasive surgery (MIS) growth of 14.4 percent
  • U.S. degenerative growth of 9.4 percent

International first-quarter proceeds swelled 11 percent to $15.7 million, up 14.4 percent on a constant currency basis. Foreign currency exchange impacted first quarter international revenue by approximately $400,000, representing approximately 329 basis points of international growth year-over-year.
 
The increase in total first-quarter revenue was primarily driven by greater sales volume from primarily domestic new surgeon users and newer product offerings, offset partially by lower sales in certain international distributor markets as compared to last year.
 
By procedure category, U.S. revenue in the company’s complex spine, MIS and degenerative categories represented 37.1 percent, 17 percent and 45.9 percent of U.S. revenue, respectively, for the three months ended March 31.
 
Gross profit for the first quarter of 2017 increased 10.1 percent to $40.4 million, compared to $36.7 million for the first quarter 2016. Gross margin was 65.3 percent for the first quarter of 2017, compared to 65.2 percent last year. Gross profit includes amortization expense on investments in surgical instruments of $3.5 million, or 5.6 percent of sales, for the three months ended March 31, compared to $3.3 million, or 5.8 percent of sales, for the comparable period last year.
 
Operating expenses for the first quarter 2017 increased $2.9 million, or 6.1 percent, to $49.5 million, compared to $46.6 million for the first quarter 2016. The increase in operating expenses was driven primarily by a $2.7 million increase in sales and marketing expenses compared to the comparable period last year.
 
Loss from operations for the first quarter of 2017 improved  $800,000 million, to $9.1 million, compared to a loss from operations of $9.9 million for the comparable period last year. Loss from operations included intangible amortization of $2.4 million and $2.6 million for each of the first quarters of 2017 and 2016, respectively. 
 
Total other expenses for the first quarter of 2017 increased $1.6 million to $1.8 million, compared to $200,000 last year. The increase in other expense, net, was primarily attributable to interest expense incurred on the capital lease obligation related to K2M's headquarters and operations facilities as well as the Convertible Senior Notes issued in August 2016, and, to a lesser extent, an increase of $400,000 year-over-year in unrealized losses from foreign currency re-measurement on intercompany payable balances.  Foreign currency losses impacted operating results compared to last year due to changes in the average exchange rates of the U.S. dollar, pound sterling, and euro applied to intercompany balances in both periods. 
 
Net loss for the first quarter of 2017 was $10.9 million, or (26 cents) per diluted share, compared to a loss of $10.2 million, or (25 cents) per diluted share, for the first quarter of 2016. 
 
As of March 31, K2M reported cash and cash equivalents of $38.6 million as compared to $45.5 million as of Dec. 31, 2016. The company had working capital of $110.4 million as of March 31, as compared to $115.9 million as of Dec. 31, 2016.

Year-to-Date Highlights:
  • On Feb. 15, the company introduced Balance ACS, a comprehensive platform featuring products and services that apply three-dimensional solutions across the full continuum of care with the goal of facilitating quality outcomes for patients undergoing spinal surgery. BACS provides solutions focused on achieving balance of the spine by addressing each anatomical vertebral segment with a 360-degree approach of the axial, coronal and sagittal planes, emphasizing total body balance as an important component to surgical success.
  • On April 6, K2M and LifeHealthcare Group Limited announced a new distribution agreement for K2M's innovative spinal technologies in Australia and New Zealand. The K2M/LifeHealthcare distribution partnership dates back to 2010 and has yielded strong growth and a significant spine market position in ANZ. Looking to build on this success, K2M and LifeHealthcare entered into a new five-year agreement with the shared goal of establishing a number one spine market position in ANZ.
  • On April 21, K2M received key product registrations in Japan from the PMDA, which are now under its control, including the MESA and EVEREST product lines.
 
The company is reaffirming its fiscal 2017 guidance expectations. K2M expects total revenue on an as reported basis in the range of $263 million to $270 million, representing growth of 11 percent to 14 percent year-over-year, compared to total revenue of $236.6 million in fiscal year 2016. Total revenue on a constant currency basis is expected to increase 12 percent to 15 percent year-over-year in 2017. The company continues to expect mid-teens growth in its U.S. business in 2017. In addition, K2M forecasts a total net loss of approximately $31 million to $34 million, compared to a total net loss of $41.7 million in fiscal year 2016. Adjusted EBITDA is expected to fall between $6 million and $10 million, compared to adjusted EBITDA of $600,000 in fiscal 2016.
 
K2M Group Holdings Inc. develops complex spine and minimally invasive solutions focused on achieving three-dimensional total body balance. Since its inception, K2M has designed, developed, and commercialized innovative complex spine and minimally invasive spine technologies and techniques used by spine surgeons to treat some of the most complicated spinal pathologies. K2M has leveraged these core competencies into Balance ACS, a platform of products, services, and research to help surgeons achieve three-dimensional spinal balance across the axial, coronal, and sagittal planes, with the goal of supporting the full continuum of care to facilitate quality patient outcomes. The company is based in Leesburg, Va.
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