K2M Group Holdings, Inc.
Mar 6, 2017

K2M Group Holdings, Inc. Reports Fourth Quarter and Full Year 2016 Financial Results with U.S. Revenue Growth of 21.5% Year-over-year in Q4'16

LEESBURG, Va., March 06, 2017 (GLOBE NEWSWIRE) -- K2M Group Holdings, Inc. (Nasdaq:KTWO) (the "Company" or "K2M"), a global leader of complex spine and minimally invasive solutions focused on achieving three-dimensional Total Body BalanceTM, today reported financial results for the fourth quarter and fiscal year ended December 31, 2016.

Fourth Quarter 2016 Financial Summary:

Fourth Quarter 2016 Highlights:

Highlights Subsequent to Quarter-End:

"We reported constant currency revenue growth of 14.9% year-over-year in the fourth quarter, driven by U.S. constant currency revenue growth of 21.5% year-over-year," said President and Chief Executive Officer, Eric Major. "We delivered approximately 17% growth in the U.S. in calendar year 2016 and we believe this strong performance reflects the Company's success in executing our strategic plan to introduce differentiated spine technologies and expand our global distribution network. Our U.S. growth reflects the clearest indication yet of the increasing adoption of our innovative products by the spine surgeon community. Outside the U.S., we successfully navigated challenging market disruptions with our distributors in Australia and Japan earlier in 2016, and look forward to building on our improving results during 2017 without the expectation of these headwinds.  We continue to anticipate our ability to grow our U.S. revenue in the mid-teens in 2017 with improved profitability."     

Fourth Quarter 2016 Financial Results

  Three Months
Ended December 31,
 Increase / Decrease
($,thousands) 20162015 $ Change% Change% Change
      (as reported) (constant currency)
United States $47,669$39,236 $8,43321.5%21.5%
International $14,122$14,984 $(862)(5.8%)(2.8%)
Total Revenue: $61,791 $54,220  $7,571 14.0%14.9%

Total revenue for fourth quarter 2016 increased $7.6 million, or 14.0%, to $61.8 million, compared to $54.2 million in the fourth quarter of 2015. Total revenue increased 14.9% year-over-year on a constant currency basis. The increase in revenue was primarily driven by greater sales volume from primarily domestic new surgeon users and newer product offerings, offset by decreases in both international direct and distributor revenue compared to last year.

Revenue in the United States increased $8.4 million, or 21.5% year-over-year, to $47.7 million, and international revenue decreased $0.9 million, or 5.8% year-over-year, to $14.1 million. Fourth quarter 2016 international revenue decreased 2.8% year-over-year on a constant currency basis. Foreign currency exchange impacted fourth quarter international revenue by approximately $0.5 million, representing approximately 302 basis points of international growth year-over-year.

The following table represents domestic revenue by procedure category. 

  Three Months
Ended December 31,
 Increase / Decrease
($,thousands) 20162015 $ Change% Change
Complex Spine $17,934$15,194 $2,74018.0%
Minimally Invasive 8,0585,867 2,19137.3%
Degenerative 21,67718,175 3,50219.3%
U.S Revenue: $47,669 $39,236  $8,433 21.5%

By procedure category, U.S. revenue in the Company's complex spine, MIS and degenerative categories represented 37.6%, 16.9% and 45.5% of U.S. revenue, respectively, for the three months ended December 31, 2016.

Gross profit for fourth quarter of 2016 increased 6.7% to $38.4 million, compared to $35.9 million for fourth quarter 2015.  Gross margin was 62.1% for the fourth quarter of 2016, compared to 66.3% last year.  After adjusting for a medical device tax recovery of $0.7 million in 2015, Gross margin was 62.1% for the fourth quarter of 2016 as compared to 65.0% in the comparable period last year.  Gross profit includes amortization expense on investments in surgical instruments of $3.6 million, or 5.8% of sales, for the three months ended December 31, 2016, compared to $3.2 million, or 5.9% of sales, for the comparable period last year.

Operating expenses for fourth quarter 2016 increased $4.2 million, or 9.7%, to $47.7 million, compared to $43.5 million for fourth quarter 2015. The increase in operating expenses was driven primarily by a $2.5 million increase in general and administrative expenses, a $1.2 million increase in sales and marketing expenses and, to a lesser extent, a $0.5 million increase in research and development expenses compared to the comparable period last year.

Loss from operations for the fourth quarter of 2016 was $9.4 million, compared to a loss from operations of $7.6 million for the comparable period last year. Loss from operations included intangible amortization of $2.6 million for each of the fourth quarters of 2016 and 2015. 

Total other expenses for the fourth quarter of 2016 increased $2.3 million to $3.1 million, compared to $0.8 million last year. The increase in other expense, net, was primarily attributable to interest expense incurred on the capital lease obligation related to our headquarters and operations facilities as well as the Convertible Senior Notes issued in August 2016, and an increase of $1.1 million 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 fourth quarter of 2016 was $12.5 million, or $(0.30) per diluted share, compared to a loss of $8.5 million, or $(0.21) per diluted share, for the fourth quarter of 2015. 

Twelve-Months 2016 Financial Results

  Twelve Months
Ended December 31,
 Increase / Decrease
($,thousands)  2016 2015 $ Change% Change% Change
      (as reported) (constant currency)
United States $181,078$155,291 $25,78716.6%16.6%
International $55,556$60,716 (5,160)(8.5%)(6.6%)
Total Revenue: $236,634 $216,007  $20,627 9.5% 10.2%

For the twelve months ended December 31, 2016, total revenue increased $20.6 million, or 9.5%, to $236.6 million, compared to $216.0 million for the twelve months ended December 31, 2015. Total revenue increased 10.2% year-over-year on a constant currency basis. U.S. revenue increased $25.8 million, or 16.6%, to $181.1 million in fiscal year 2016, compared to $155.3 million last year. International revenue decreased $5.1 million, or 8.5%, to $55.6 million in fiscal year 2016, compared to $60.7 million last year. International revenue decreased 6.6% year-over-year on a constant currency basis.

  Twelve Months
Ended December 31,
 Increase / Decrease
($,thousands) 20162015 $ Change% Change
Complex Spine $71,915$63,398 $8,51713.4%
Minimally Invasive 28,71123,633 5,07821.5%
Degenerative 80,45268,260 12,19217.9%
U.S Revenue: $181,078 $155,291  $25,787 16.6%

Sales in our complex spine, MIS and degenerative categories represented 39.7%, 15.9% and 44.4% of U.S. revenue, respectively, for the twelve months ended December 31, 2016.

As of December 31, 2016, we had cash and cash equivalents of $45.5 million as compared to $34.6 million as of December 31, 2015. We had working capital of $115.9 million as of December 31, 2016 as compared to $107.4 million as of December 31, 2015. At December 31, 2016, outstanding long-term indebtedness included the carrying value of the Convertible Senior Notes of $36.9 million and the capital lease obligation of $34.9 million. In addition, we had no borrowings outstanding under our credit facility.

2017 Outlook

The Company is introducing its fiscal year 2017 guidance expectations. The Company expects:

Conference Call

Management will host a conference call at 5:00 p.m. Eastern Time on March 6th to discuss the results of the quarter, and to host a question and answer session. Those who would like to participate may dial 888-208-1814 (719-457-2552 for international callers) and provide access code 4389380 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 4389380. 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 leader of 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 Balance ACS platform, in combination with the Company's technologies, techniques and leadership in the 3D-printing of spinal devices, enable K2M to compete favorably in the global spinal surgery market. For more information, visit www.K2M.com and connect with us on Facebook, Twitter, Instagram, LinkedIn, and YouTube.

Forward-Looking Statements

This press release contains forward-looking statements that reflect current views with respect to, among other things, operations and financial performance.  Forward-looking statements include all statements that are not historical facts such as our statements about our expected financial results and guidance and our expectations for future business prospects, including with respect to our international distribution partners in Australia and Japan.  In some cases, you can identify these forward-looking statements by the use of words such as "outlook," "guidance," "believes," "expects," "potential," "continues," "may," "will," "should," "could," "seeks," "predicts," "intends," "plans," "estimates," "anticipates" or the negative version of these words or other comparable words.  Such forward-looking statements are subject to various risks and uncertainties including, among other things: our ability to achieve or sustain profitability; our ability to successfully demonstrate the merits of our technologies; pricing pressure from our competitors, hospitals and changes in third-party coverage and reimbursement; competition and our ability to develop and commercialize new products; aggregation of hospital purchasing from collaboration and consolidation; hospitals and other healthcare providers may be unable to obtain adequate coverage and reimbursement for procedures performed using our products; the safety and efficacy of our products is not yet supported by long-term clinical data; our dependence on a limited number of third-party suppliers; our ability to maintain and expand our network of direct sales employees, independent sales agencies and international distributors and their level of sales or distribution activity with respect our products; the proliferation of physician-owned distributorships; concentration of sales from a limited number of spinal systems or products that incorporate these technologies; loss of the services of key members of our senior management, consultants or personnel; ability to enhance our product offerings through our research and development efforts; failure to properly manage our anticipated growth; acquisitions of or investments in new or complementary businesses, products or technologies; ability to train surgeons on the safe and appropriate use of our products; requirements to maintain high levels of inventory; impairment of our goodwill or intangible assets; disruptions in our information technology systems; any disruption or delays in operations at our facilities, including our new headquarter facility; or an ability to ship a sufficient number of our products to meet demand; ability to strengthen our brand; fluctuations in insurance cost and availability; extensive governmental regulation; in the United States and foreign jurisdictions; failure to obtain or maintain regulatory approvals and clearances; requirements for new 510(k) clearances, premarket approvals or new or amended CE Certificates of Conformity; medical device reporting regulations in the United States and foreign jurisdictions; voluntary corrective actions by us or our distribution or other business partners or agency enforcement actions; a recall of our products; withdrawal or restrictions on our products or the discovery of serious safety issues with our products; possible enforcement action if we engage in improper marketing or promotion of our products; the misuse or off-label use of our products; delays or failures in any future clinical trials;  the results of clinical trials; procurement and use of allograft bone tissue; environmental laws and regulations; compliance by us or our sales representatives with FDA regulations or fraud and abuse laws; U.S. legislative or regulatory healthcare reforms; medical device tax provisions in the healthcare reform laws; our need to generate significant sales to become profitable; potential fluctuations in sales volumes and our results of operations may fluctuate over the course of the year; uncertainty in our future capital needs; failure to comply with restrictions in our revolving credit facility; continuing worldwide economic instability; our inability to protect our intellectual property rights; our reliance on patent rights that we either license from others or have obtained through assignments; our patent litigation; the outcome of potential claims that we, our employees, our independent sales agencies or our distributors have wrongfully used or disclosed alleged trade secrets or are in breach of non-competition or non-solicitation agreements with our competitors; potential product liability lawsuits; operating risks relating to our international operations; foreign currency fluctuations; our ability to comply with the Foreign Corrupt Practices Act and similar laws associated with our activities outside the United States; possible conflicts of interest with our large shareholders; increased costs and additional regulations and requirements as a result of becoming a public company; our ability to implement and maintain effective internal control over financial reporting in the future; the potential impact of any future acquisitions, mergers, dispositions, joint ventures, investments or other strategic transactions we may make; and other risks and uncertainties, including those described under the section entitled "Risk Factors" in our most recent Annual Report on Form 10-K filed with the SEC, as such factors may be updated from time to time in our periodic filings with the SEC, which are accessible on the SEC's website at www.sec.gov.  Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements.  These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this release and our filings with the SEC.

We operate in a very competitive and challenging environment.  New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this release.  We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this press release relate only to events as of the date on which the statements are made.  We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.  We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Unless specifically stated otherwise, our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, investments or other strategic transactions we may make.

(In Thousands, Except Share and Per Share Data)
  December 31,
  2016 2015
Current assets:    
Cash and cash equivalents $45,511  $34,646 
Accounts receivable, net 46,430  38,773 
Inventory, net 61,897  62,002 
Prepaid expenses and other current assets 6,147  19,820 
Total current assets 159,985  155,241 
Property, plant and equipment, net 50,714  38,318 
Goodwill 121,814  121,814 
Intangible assets, net 22,758  33,123 
Other assets, net 28,254  26,016 
Total assets $383,525  $374,512 
Current liabilities:    
Current maturities under capital lease obligation $973  $284 
Accounts payable 15,367  22,483 
Accrued expenses 15,673  13,559 
Accrued payroll liabilities 12,068  11,507 
Total current liabilities 44,081  47,833 
Convertible senior notes 36,894   
Capital lease obligation, net of current maturities 34,933  34,140 
Deferred income taxes, net 5,017  5,042 
Other liabilities 1,032  835 
Total liabilities 121,957  87,850 
Stockholders' equity:    
Common stock, $0.001 par value, 750,000,000 shares authorized; 42,282,741 and 41,337,692 shares issued and 42,274,130 and 41,337,692 shares outstanding, respectively 42  41 
Additional paid-in capital 474,512  454,153 
Accumulated deficit (211,081) (169,421)
Accumulated other comprehensive (loss) income (1,771) 1,889 
Treasury stock, at cost, 8,611 and 0 shares, respectively (134)  
Total stockholders' equity 261,568  286,662 
Total liabilities and stockholders' equity $383,525  $374,512 

(In Thousands, Except Share and Per Share Data)
  Three Months Ended
 December 31,
 Year Ended
 December 31,
Revenue $61,791  $54,220  $236,634  $216,007 
Cost of revenue  23,431   18,284   82,178   71,791 
Gross profit  38,360   35,936   154,456   144,216 
Operating expenses:        
Research and development  5,558   5,060   21,547   19,868 
Sales and marketing  27,244   26,047   111,376   105,635 
General and administrative  14,921   12,408   56,264   54,983 
Total operating expenses  47,723   43,515   189,187   180,486 
Loss from operations  (9,363)  (7,579)  (34,731)  (36,270)
Other expense, net:        
Foreign currency transaction loss  (1,331)  (261)  (2,430)  (1,813)
Interest expense  (1,720)  (587)  (4,425)  (941)
Total other expense, net  (3,051)  (848)  (6,855)  (2,754)
Loss before income taxes  (12,414)  (8,427)  (41,586)  (39,024)
Income tax expense  53   67   74   192 
Net loss $(12,467) $(8,494) $(41,660) $(39,216)
Net loss per share attributable to common stockholders:        
Basic and diluted $(0.30) $(0.21) $(1.00) $(0.97)
Weighted average shares outstanding:        
Basic and diluted  41,995,284   41,263,912   41,729,013   40,237,848 


(In Thousands)
  Year Ended
 December 31,
Operating Activities 2016 2015
Net loss $(41,660) $(39,216)
Adjustments to reconcile net loss to net cash used in operating activities:    
Depreciation and amortization 29,212  24,940 
Provision for inventory reserve 5,572  1,680 
Provision for allowance for doubtful accounts 68  319 
Stock-based compensation 6,956  11,188 
Accretion of discounts and amortization of issuance costs of convertible senior notes 1,604   
Deferred income taxes (33)  
Changes in operating assets and liabilities:    
Accounts receivable (9,381) (5,082)
Inventory (3,439) (8,766)
Prepaid expenses and other assets (10,256) (9,738)
Accounts payable, accrued expenses, and accrued payroll liabilities 8,059  6,365 
Net cash used in operating activities (13,298) (18,310)
Investing activities    
Purchase of surgical instruments (12,275) (10,905)
Purchase of property, plant and equipment (17,439) (2,787)
Changes in cash restricted for leasehold improvements 6,608   
Purchase of intangible assets (1,307) (588)
Net cash used in investing activities (24,413) (14,280)
Financing activities    
Borrowings on bank line of credit 19,500  25,000 
Payments on bank line of credit (19,500) (25,000)
Proceeds from issuance of convertible senior notes, net issuance of costs 47,108   
Proceeds from issuances of common stock, net of issuance costs   54,209 
Principal payments under capital lease (219)  
Issuances and exercise of stock-based compensation benefit plans, net of income tax 2,244  2,017 
Net cash provided by financing activities 49,133  56,226 
Effect of exchange rate changes on cash and cash equivalents (557) (401)
Net increase in cash and cash equivalents 10,865  23,235 
Cash and cash equivalents at beginning of period 34,646  11,411 
Cash and cash equivalents at end of period $45,511  $34,646 
Significant non-cash investing activities    
Buildings under capital lease $  $26,469 
Leasehold improvements, including property under capital lease $171  $6,884 
Significant non-cash financing activities    
Capital lease obligation $1,708  $33,938 
Accretion of convertible senior notes  807    
Common stock offering costs    52 
Cash paid for:    
Income taxes $159  $126 
Interest $382  $428 


Reconciliation of GAAP to Non-GAAP Measures
(In Thousands)

Use of Non-GAAP Financial Measures

This press release includes the non-GAAP financial measures of revenue in constant currency, Adjusted Gross Profit, and Adjusted EBITDA.

The Company presents these non-GAAP measures because it believes these measures are useful indicators of the Company's operating performance.  Management uses these non-GAAP measures principally as a measure of the Company's operating performance and believes that these measures are useful to investors because they are frequently used by analysts, investors and other interested parties to evaluate companies in the Company's industry.  The Company also believes that these measures are useful to its management and investors as a measure of comparative operating performance from period to period.

Constant currency information compares results between periods as if exchange rates had remained constant period-to-period.  We calculate constant currency by converting the prior-year results using current-year foreign currency exchange rates.

Adjusted Gross Profit represents Gross Profit less amortization expense of surgical instruments and medical device excise tax expense (recovery).  The Company presented Adjusted Gross Profit because it believes it is a useful measure of the Company's gross profit and operating performance because the measure is not burdened by the timing impact of instrument purchases and related amortization as well as the medical device tax. 

Adjusted EBITDA represents net loss plus interest expense, income tax (benefit) expense, depreciation and amortization, stock-based compensation expense, foreign currency transaction loss and a deduction for cash payments made for rent on the capital lease of the Company's new headquarters and operations facilities, which commenced in October 2016.

The Company presents Adjusted EBITDA because it believes it is a useful indicator of the Company's operating performance.  Management uses Adjusted EBITDA principally as a measure of the Company's operating performance and for planning purposes, including the preparation of the Company's annual operating budget and financial projections. 

Adjusted EBITDA is a non-GAAP financial measure and should not be considered as an alternative to net loss as a measure of financial performance or cash flows from operations as a measure of liquidity, or any other performance measure derived in accordance with GAAP and it should not be construed as an inference that the Company's future results will be unaffected by unusual or non-recurring items.  In addition, Adjusted EBITDA is not intended to be a measure of free cash flow for management's discretionary use, as it does not reflect certain cash requirements such as tax payments, debt service requirements, capital expenditures and certain other cash costs that may recur in the future.  Adjusted EBITDA contains certain other limitations, including the failure to reflect the Company's cash expenditures, cash requirements for working capital needs and cash costs to replace assets being depreciated and amortized.  In evaluating Adjusted EBITDA, you should be aware that in the future the Company may incur expenses that are the same as or similar to some of the adjustments in this presentation.  The Company's presentation of Adjusted EBITDA should not be construed to imply that the Company's future results will be unaffected by any such adjustments.  Management compensates for these limitations by primarily relying on its GAAP results in addition to using Adjusted EBITDA supplementally.  The Company's definition of Adjusted EBITDA is not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.

The following table presents reconciliations of gross profit to adjusted gross profit and net loss to Adjusted EBITDA for the periods presented.

$ in thousands Three Months Ended December 31,  Year Ended December 31,
  2016 2015 2016 2015
Reconciliation from Gross Profit to Adjusted Gross Profit        
Gross Profit $38,360  $35,936  $154,456  $144,216 
Surgical instrument amortization 3,575  3,188  13,725  12,334 
Medical device excise tax 12  (694) (854
) 514 
Adjusted Gross Profit (a Non-GAAP Measure) $41,947  $38,430  $167,327  $157,064 

$ in thousands Three Months Ended December 31, Year Ended December 31,
  2016 2015 2016 2015
Reconciliation from Net Loss to Adjusted EBITDA        
Net loss $(12,467) $(8,494) $(41,660)  $(39,216)
Interest expense 1,720  587  4,425   941 
Income tax expense 53  67  74   192 
Depreciation and amortization 7,760  6,544  29,212   24,940 
Stock-based compensation expense 1,575  2,325  6,956   11,188 
Foreign currency transaction loss 1,331  261  2,430   1,813 
Cash-based rent payments (801)   (801)   
Adjusted EBITDA (a Non-GAAP Measure) $(829) $1,290  $636   $(142)

The following table presents a reconciliation of net loss to Adjusted EBITDA for our 2017 guidance ($ in thousands):

 Year Ended
December 31,
Net loss$(32,450)
Interest expense6,700 
Income tax expense100 
Depreciation and amortization27,500 
Stock-based compensation expense6,150 
Foreign currency transaction loss 
Adjusted EBITDA$8,000 

The reconciliation assumes the mid-point of the Adjusted EBITDA range and the midpoint of each component of the reconciliation, corresponding to guidance of $6.0 million to $10.0 million for 2017.

Investor Contact:
Westwicke Partners on behalf of K2M Group Holdings, Inc.
Mike Piccinino, CFA