K2M Reports Second Quarter 2014 Financial Results

LEESBURG, Va., Aug. 6, 2014 (GLOBE NEWSWIRE) -- K2M Group Holdings, Inc. (Nasdaq:KTWO) today reported financial results for the three months ended June 30, 2014.

Second Quarter Highlights:

• Total revenue of $47.5 million, up 18.4% year-over-year
• Domestic revenue of $33.2 million, up 11.6% year-over-year
• International revenue of $14.3 million, up 38.1% year-over-year
• Complex Spine represents 42% of U.S. quarterly revenue
• 510(k) clearance from the U.S. Food and Drug Administration (FDA) to market the CASPIAN® Occipital Anchor Spinal System
• Introduction of the SERENGETI® Minimally Invasive Retractor System in Japan
• Launch of the CAYMAN® Minimally Invasive Plate System in the United States, the United Kingdom and Australia.

"We achieved 18% revenue growth during the second quarter of 2014, with strong performance in both our international and domestic markets," said President and Chief Executive Officer, Eric Major. "Our growth was particularly encouraging considering our strong performance in the second quarter of 2013. We are pleased with our financial results in the first half of 2014 and continue to expect full-year 2014 revenue growth to be in the range of 14% - 16%. We remain focused on increasing our share of the $2.6 billion global complex spine and minimally invasive surgery markets and we believe the combination of product innovation, sales execution and the continued expansion of our global distribution network will drive shareholder value creation going forward."

Second Quarter Financial Results

Revenue for the three months ended June 30, 2014 increased $7.4 million, or 18.4%, to $47.5 million, compared to $40.1 million in the same period of the prior year. The increase was largely attributable to $7.2 million in greater sales volume in the United States due to continued expansion of our customer base and a $2.9 million increase in sales in our international distributor markets, primarily Spain, Denmark and Japan.

Geographically, revenue in the United States increased $3.5 million, or 11.6% year-over-year, to $33.2 million, and our international revenue increased $3.9 million, or 38.1% year-over-year, to $14.3 million. Second quarter 2014 international revenue increased 35.2% year-over-year on a constant-currency basis.

	Three Months Ended June 30,			Increase
	2013	2014		$ Change	% Change		% Change
($ in thousands)					(as reported)	(constant currency)
United States	$29,764	$33,217		$3,453	11.6%	11.6%
International	10,337	14,271		3,934	38.1%	35.2%
Total Revenue:	$40,101	$47,488		$7,387	18.4%	17.7%

By procedure category, U.S. revenue in our Complex Spine, Minimally Invasive Surgery (MIS) and degenerative categories represented 41.7%, 15.5% and 42.8% of U.S. revenue, respectively, for the three months ended June 30, 2014.

The following table represents domestic revenue by procedure category.  To further align its procedure categorizations, beginning in the second quarter of 2014, the Company began to report MIS sales attributable to complex spine procedures, which were historically reported in the minimally invasive category, within the complex spine category.  Accordingly, the Complex Spine category presented below includes complex spine procedures performed through minimally invasive technologies and techniques of $1.4 million and $2.1 million for the three months ended June 30, 2014 and June 30, 2013, respectively.

	Three Months Ended June 30,			Increase
	2013	2014		$ Change	% Change
($ in thousands)
Complex Spine	$13,107	$13,858		$751	5.7%
Minimally Invasive	4,660	5,141		481	10.3%
Degenerative	11,997	14,218		2,221	18.5%
U.S Revenue:	$29,764	$33,217		$3,453	11.6%

Gross profit for the second quarter of 2014 increased 13.5% to $31.5 million, compared to $27.7 million for the same period last year. Gross margin was 66.2% this quarter, down 287 basis points year-over-year, compared to 69.1% in the second quarter of 2013. The decrease in gross margin was primarily due to changes in the mix of sales between the United States and international markets and pricing declines in the U.S. and select international markets. Additionally, amortization of instruments sets increased $0.8 million, or 71.3%, to $1.9 million for the three months ended June 30, 2014, reflecting increased instrument purchases to support our revenue growth.

Operating expenses for the second quarter of 2014 increased $5.6 million, or 14.5%, to $44.3 million, compared to $38.7 million for the same period last year. The increase in operating expenses was driven primarily by the expansion of the sales team. This investment has driven an increase in sales commissions as a result of increased sales volumes and increased employee compensation costs due to incremental direct sales employees compared to the same period last year.

Loss from operations for the second quarter of 2014 was $12.8 million, compared to $11.0 million for the second quarter of 2013. Net loss attributable to stockholders for the second quarter of 2014 was $9.6 million, or $(0.32) per diluted share, compared to a net loss of $9.5 million, or $(0.43) per diluted share, for the second quarter of 2013. Net loss attributable to stockholders includes the accretion and adjustments of preferred stock to fair value of approximately $8.1 million in the second quarter of 2014 and adjustments of $(0.6) million in the second quarter of 2013. All outstanding shares of preferred stock were converted into common stock in connection with the May IPO. Pro-forma net loss was $12.2 million, or $(0.33) per basic and diluted share in the second quarter of fiscal 2014. Adjusted EBITDA was a loss of $1.5 million for the second quarter of 2014.

As of June 30, 2014, cash and cash equivalents were $36.2 million compared to $7.4 million as of December 31, 2013. In May 2014, the Company completed its initial public offering raising net proceeds of approximately $119 million, after deducting underwriting discounts and commissions and offering expenses of approximately $13.5 million.  With the proceeds of its IPO, the Company added approximately $36.5 million of cash to its balance sheet and repaid all outstanding amounts under its Revolving Credit Agreement totaling $23.5 million and all outstanding notes to stockholders of $39.2 million plus accrued interest of $1.3 million. Additionally, as of June 30, 2014, we had no outstanding indebtedness. 

2014 Outlook

The Company continues to expect full year 2014 revenue will be in the range of $180 million to $183 million, representing an increase of 14% to 16% year-over-year. The Company continues to expect full year 2014 Adjusted EBITDA will be in the range of $(11.0) million to $(9.0) million. 

New Product Approvals, Introductions and Launches

The K2M Complex Spine product offering continues to grow with the issuance of a 510(k) clearance from the U.S. Food and Drug Administration (FDA) to market the CASPIAN^® Occipital Anchor Spinal System. This system offers surgeons a uniquely flexible intraoperative solution for occipital fixation which can be a challenging component of complex spinal procedures. The design of the CASPIAN Occipital Anchor includes a technique that may be of particular interest to the growing number of neurosurgeons performing complex spinal procedures.

K2M also continued the global expansion of its minimally invasive technologies with the introduction of SERENGETI in Japan and the launch of CAYMAN Minimally Invasive in the United States, the United Kingdom and Australia.

SERENGETI is an existing K2M flagship minimally invasive product, featuring one-step placement of screws and retractors thereby reducing the number of surgical steps, while allowing for direct visualization and improved access to the spine. The Pharmaceuticals and Medical Devices Agency (PMDA) clearance of SERENGETI in Japan follows K2M's 2009 entrance into the Japanese market via its MESA® Spinal Systems. Similar to 510(k) clearance in the United States, the PMDA clearance allows for sale and distribution of SERENGETI and MESA in Japan.

Conference Call

Management will host a conference call for analysts and investors today beginning at 5:00 p.m. ET. Individuals interested in listening to the conference call may dial (888) 364-3108 for domestic callers or (719) 457-2627 for international callers and provide access code 9016637, or access the webcast on the "Investors Relations" section of the Company's Web site at: http://investors.k2m.com. The webcast will be available on the Company's Web site for 14 days following the completion of the call.

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