K2M Group Holdings, Inc. Reports Fourth Quarter and Full Year 2017 Financial Results

LEESBURG, Va., Feb. 28, 2018 (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 Balance™, today reported financial results for its fourth quarter and fiscal year ended December 31, 2017.

Fiscal Year 2017 Financial Summary:

• Total fiscal year 2017 revenue of $258.0 million, up 9% year-over-year on both a reported basis and on a constant currency basis.
• Domestic fiscal year 2017 revenue of $197.3 million, up 9% year-over-year, comprised of:
  • U.S. Complex Spine growth of 8% year-over-year
  • U.S. Minimally Invasive Surgery (MIS) growth of 16% year-over-year
  • U.S. Degenerative growth of 8% year-over-year
• International fiscal year 2017 revenue of $60.7 million, up 9% year-over-year, or 10% on a constant currency basis.
• Net loss of $37.1 million for fiscal year 2017, compared to a net loss of $41.7 million in prior year.
• Adjusted EBITDA loss of $0.7 million for fiscal year 2017, compared to Adjusted EBITDA of $1.4 million in the prior year.

Fourth Quarter 2017 Financial Summary:

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• Total fourth quarter revenue of $67.8 million, up 10% year-over-year on a reported basis and 9% on a constant currency basis.
• Domestic fourth quarter revenue of $51.9 million, up 9% year-over-year, comprised of:
  • U.S. Complex Spine growth of 12% year-over-year
  • U.S. Minimally Invasive Surgery (MIS) growth of 11% year-over-year
  • U.S. Degenerative growth of 6% year-over-year
• International fourth quarter revenue of $15.9 million, up 13% year-over-year, and 10% on a constant currency basis.
• Net loss of $8.7 million for the fourth quarter, compared to a net loss of $12.5 million in the comparable quarter last year.
• Adjusted EBITDA loss of $1.9 million for the fourth quarter, compared to Adjusted EBITDA loss of $28,000 in the comparable quarter last year.

Fourth Quarter Product Introductions and Strategic Highlights:

• On October 4, 2017, the Company announced that President and Chief Executive Officer Eric Major had been elected Chairman of the Company’s Board of Directors, effective immediately. Major succeeded Dan Pelak, who assumed the role of Independent Lead Director after serving as Chairman since 2010.
• On October 23, 2017, the Company announced that it has acquired from Cardinal Spine, a privately held medical device company, the PALO ALTO^® Cervical Static Corpectomy Cage System. PALO ALTO, a cervical vertebral body replacement device, is the first and only static corpectomy cage in the world to receive a cervical 510(k) clearance from the FDA. In addition to PALO ALTO, K2M has also acquired the associated intellectual property and product inventory.
• On October 25, 2017, the Company announced a global compatibility and co-marketing agreement with Brainlab. The two companies will collaborate in the commercial release of future navigated K2M spinal systems, which would be compatible with Brainlab spinal navigation systems.
• On November 30, 2017, the Company announced the completion of 300 surgical cases using the RHINE™ Cervical Disc System*. The RHINE Cervical Disc System* is an artificial disc replacement that features a one-piece compressible polymer core design with dome-shaped, plasma-coated endplates and a central-split keel.
• On December 20, 2017, the Company announced that it received a CE Mark for its CAPRI® Cervical 3D Expandable Corpectomy Cage System* featuring Lamellar 3D Titanium Technology™ and the successful completion of its first surgical case.  * These products are intended for export and not sold or offered for sale in the United States.

“Our financial results for calendar year 2017 reflect total revenue growth of approximately 9% year-over-year, above the high-end of our guidance range,” said Chairman, President, and Chief Executive Officer, Eric Major. “We delivered approximately 9% growth in the United States in 2017—well above-market growth rates—driven by solid execution against our strategic goal of increasing market share by introducing new and innovative spinal implant solutions and expanding our distribution footprint. We have supplemented this organic growth activity with exciting product introductions in both the complex spine and degenerative categories.  Looking out to 2018, we are excited about the opportunity of our first-of-its-kind MOJAVE™ PL 3D Expandable Interbody System featuring Lamellar 3D Titanium Technology and our YUKON™ OCT Spinal System that can be used with the PALO ALTO Cervical Static Corpectomy Cage System, the first and only static corpectomy cage in the world to receive a cervical 510(k) clearance. We also announced an important strategic collaboration with Brainlab, one of the world’s leading imaging and navigation companies, that we believe will represent additional implant sales opportunities in the second half of 2018.  Our Brainlab collaboration will complement our recent launches of the BACS^® platform and the EVEREST^®Minimally Invasive XT Spinal System.”

Mr. Major continued, “We remain confident in our ability to drive above-market growth in the U.S., fueled by our continued focus on leading the spine market by introducing new and innovative spinal implant solutions to help surgeons care for patients around the world who suffer from debilitating spinal pathologies. We have introduced our 2018 guidance expectations for revenue growth of 9% to 10% with improved profitability.”

Fourth Quarter 2017 Financial Results

Total revenue for the fourth quarter of 2017 increased $6.0 million, or 9.7%, to $67.8 million, compared to $61.8 million for the fourth quarter of 2016. Total revenue increased 9% year-over-year on a constant currency basis. The increase in revenue was primarily driven by higher sales volume from domestic new surgeon users and newer product offerings, and increased set investments by our distribution partners in Australia and Denmark.

Revenue in the United States increased $4.2 million, or 8.8% year-over-year, to $51.9 million, and international revenue increased $1.8 million, or 12.9% year-over-year, to $15.9 million. Fourth quarter 2017 international revenue increased 10% year-over-year on a constant currency basis. Foreign currency exchange positively impacted fourth quarter international revenue by $0.4 million, representing approximately 73 basis points of 2017 international growth year-over-year.

The following table represents domestic revenue by procedure category.

By procedure category, U.S. revenue in the Company’s complex spine, MIS and degenerative categories represented 38.6%, 17.2% and 44.2% of U.S. revenue, respectively, for the three months ended December 31, 2017.

Gross profit for the fourth quarter of 2017 increased 13.6% to $43.6 million, compared to $38.4 million for the fourth quarter of 2016.  Gross margin was 64.3% for the fourth quarter of 2017, compared to 62.1% for the prior year period. Gross profit includes amortization expense on investments in surgical instruments of $3.6 million, or 5.3% of sales, for the three months ended December 31, 2017, compared to $3.6 million, or 5.8% of sales, for the comparable period last year.

Operating expenses for the fourth quarter of 2017 increased $4.7 million, or 9.9%, to $52.5 million, compared to $47.7 million for the fourth quarter of 2016. The increase in operating expenses was driven primarily by a $4.9 million increase in sales and marketing expenses, compared to the comparable period last year.  The Company increased the number of domestic sales agencies who represent our products in the United States by nine agencies to a total of 109 independent sales agencies, an increase of 9% sequentially.  In addition, the Company’s U.S. and non-U.S. direct sales employees remained flat at 158 employees, despite active management of this group.

Loss from operations for the fourth quarter of 2017 decreased $0.5 million to $8.9 million compared to a loss from operations of $9.4 million for the comparable period last year. Loss from operations included intangible amortization of $0.2 million for the three months ended December 31, 2017, compared to $2.6 million for the comparable period last year.  The Company recorded approximately $1.4 million in non-recurring accruals primarily reflecting legal and administrative expenses updated in 2018 and inventory adjustments.

Total other expenses for the fourth quarter of 2017 decreased $1.6 million to $1.5 million, compared to $3.1 million last year. The decrease in other expense, net, was primarily attributable to a unrealized gain of $0.3 million from foreign currency remeasurement on intercompany payable balances, compared to unrealized loss of $1.3 million in the comparable period last year.

Net loss for the fourth quarter of 2017 was $8.7 million, or $0.20 per diluted share, compared to a loss of $12.5 million, or $0.30 per diluted share, for the fourth quarter of 2016.

Fiscal Year 2017 Financial Results

For the fiscal year 2017, total revenue increased $21.4 million, or 9.0%, to $258.0 million, compared to $236.6 million for the fiscal year 2016. Total revenue increased 9.1% year-over-year on a constant currency basis. U.S. revenue increased $16.2 million, or 9.0%, to $197.3 million, compared to $181.1 million last year. International revenue increased $5.2 million, or 9.3%, to $60.7 million, compared to $55.6 million last year. International revenue increased 9.7% year-over-year on a constant currency basis.

The following table represents domestic revenue by procedure category:

Sales in our complex spine, MIS and degenerative categories represented 39.3%, 16.9% and 43.9% of U.S. revenue, respectively, for the fiscal year 2017.

As of December 31, 2017, we had cash and cash equivalents of $24.0 million as compared to $45.5 million as of December 31, 2016. We had working capital of $99.6 million as of December 31, 2017 as compared to $115.9 million as of December 31, 2016.

At December 31, 2017, outstanding long-term indebtedness included the carrying value of the Convertible Senior Notes of $39.2 million and the capital lease obligation of $33.8 million. The Company had unused capacity on its revolving credit facility of $49.0 million and no borrowings outstanding as of December 31, 2017.

2018 Outlook

The Company is providing fiscal year 2018 revenue guidance expectations of:

• Total revenue on an as reported basis in the range of $280.0 million to $284.0 million, representing growth of 9% to 10% year-over-year, compared to total revenue of $258.0 million in fiscal year 2017.
  • The Company expects growth in its U.S. business of approximately 10% to 11% year-over-year in 2018.
  • The Company expects growth in its International business of approximately 5% to 7% year-over-year in 2018.
  • Assuming current currency rates remain similar for the rest of the year, the Company expects currency to have a positive impact on total revenue in 2018 of approximately $2 million.

The Company is providing fiscal year 2018 guidance expectations for net loss and Adjusted EBITDA. The Company expects:

• Total net loss of $34.0 million to $30.0 million, compared to net loss of $37.1 million in fiscal year 2017.
• Adjusted EBITDA benefit in the range of $4.0 million to $8.0 million, compared to Adjusted EBITDA loss of $740,000 in fiscal year 2017.

Conference Call

Management will host a conference call at 5:00 p.m. Eastern Time on February 28th to discuss the results of the fourth quarter and fiscal year 2017, and to host a question and answer session. Those who would like to participate may dial 844-579-6824 (734-385-2616 for international callers) and provide access code 3754359 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 855-859-2056 (404-537-3406 for international callers); access code 3754359. The webcast will be archived on the investor relations section of the Company’s website.

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