K2M Group Holdings, Inc. (Nasdaq:KTWO) today reported financial
results for the three months ended March 31, 2014.
First Quarter Highlights:
- Total revenue of $42.3 million, up 20.4% year-over-year
- International revenue of $12.5 million, up 34.8%
year-over-year
- Domestic revenue of $29.8 million, up 15.2% year-over-year
- Expands Minimally Invasive Portfolio with 510(k) Clearance of
CAYMAN® Minimally Invasive
Highlights Subsequent to Quarter-End:
- May 13, 2014, completed initial public offering, receiving net
proceeds of approximately $120 million
- May 13, 2014, the Company repaid all outstanding amounts under
its Revolving Credit Agreement totaling $23.5 million and prepaid
all outstanding notes to stockholders of $39.2 million and accrued
interest of $1.3 million.
"We are pleased with our operating and financial performance in
the first quarter of 2014. We reported 20% revenue growth
year-over-year, with balanced contributions to growth from both our
United States and our international markets in the period," said
President and Chief Executive Officer, Eric Major. "In the U.S.,
our Complex Spine and Minimally Invasive product categories
together posted 11% growth compared to last year. Our initial
public offering in May brought approximately $120 million in net
proceeds to the Company, providing us with the capital resources to
improve our balance sheet and to fund our strategic growth
objectives. We believe K2M is well-positioned to become the market
leader in the $1.2 billion global complex spine market and continue
to take share in the $10 billion global spine surgery market."
First Quarter Financial Results
Revenue for the three months ended March 31, 2014 increased $7.2
million, or 20.4%, to $42.3 million, compared to $35.1 million in
the same period of the prior year. This increase was driven
primarily by greater sales volume in the United States due to
continued expansion of our customer base and changes in product mix
driven by pull-through of our degenerative product portfolio. Our
international business growth reflected continued penetration in
our direct and independent distributor markets.
Geographically, revenue in the United States increased $3.9
million, or 15.2% year-over-year, to $29.8 million, and our
international revenue increased $3.2 million, or 34.8%
year-over-year, to $12.5 million.
|
Three
Months Ended March 31, |
Increase / Decrease |
|
2013 |
2014 |
$
Change |
%
Change |
%
Change |
|
(in thousands) |
(in thousands) |
|
(as reported) |
(constant currency) |
United States |
$25,836 |
$29,765 |
$3,929 |
15.2% |
15.2% |
International |
9,262 |
12,486 |
3,224 |
34.8% |
32.4% |
Total
Revenue: |
$35,098 |
$42,251 |
$7,153 |
20.4% |
19.7% |
By product category, United States revenue in our Complex Spine,
Minimally Invasive Surgery (MIS) and degenerative categories
represented 34%, 22% and 44% of United States revenue,
respectively, for the three months ended March 31, 2014.
|
Three
Months Ended March 31, |
Increase / Decrease |
|
2013 |
2014 |
$
Change |
%
Change |
|
(in thousands) |
(in thousands) |
|
|
Complex Spine |
$9,306 |
$10,184 |
$878 |
9.4% |
Minimally Invasive |
5,706 |
6,485 |
779 |
13.7% |
Degenerative |
10,824 |
13,096 |
2,272 |
21.0% |
U.S
Revenue: |
$25,836 |
$29,765 |
$3,929 |
15.2% |
Gross profit for the first quarter of 2014 increased 14.2% to
$27.8 million, compared to $24.4 million for the same period last
year. Gross margin was 65.9% this quarter, down 360 basis points
year-over-year, compared to 69.5% in the first quarter of 2013. The
decrease in gross margin was primarily due to pricing pressures in
the United States and select International markets as well as
changes in the mix of sales between the United States and
International markets. In addition, amortization of
instruments sets increased $0.7 million to $1.7 million for the
three months ended March 31, 2014, reflecting increased inventory
purchases to support our revenue growth.
Operating expenses for the first quarter of 2014 increased 15.0%
to $41.5 million, compared to $36.1 million for the same period
last year. The increase in operating expenses was driven primarily
by an increase in sales commissions as a result of the increase in
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 first quarter of 2014 was $13.7
million, compared to $11.7 million for the first quarter of 2013.
Net loss attributable to stockholders for the first quarter of 2014
was $15.9 million, compared to $24.0 million for the first quarter
of 2013. Net loss attributable to stockholders includes the
accretion or write-up of preferred stock of approximately $1.2
million in the first quarter of 2014 and $13.1 million in the first
quarter of 2013. Adjusted EBITDA, a non-GAAP measure, was a loss of
$3.6 million for the first quarter of 2014.
As of March 31, 2014, cash and cash equivalents were $11.1
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 $120 million, after deducting
underwriting discounts and commissions and offering expenses of
approximately $3.6 million. As of March 31, 2014, we had
outstanding indebtedness of $34.4 million from notes to
stockholders, net of unamortized discount of $4.9 million, and
outstanding borrowings of $23.5 million under our revolving credit
facility all of which was retired from proceeds of the IPO in May
2014. Information on the use of proceeds of the Company's IPO was
contained in the prospectus filed with the SEC on May 9, 2014.
2014 Outlook
The Company anticipates 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 expects full year 2014
Adjusted EBITDA will be in the range of $(9.0) million to $(11.0)
million.
K2M Announces Launch of Cayman Minimally
Invasive
In January, 2014, we announced 510(k) clearance from the U.S.
Food and Drug Administration (FDA) to market CAYMAN Minimally
Invasive (MI), the latest addition to our CAYMAN product
family. Used in conjunction with K2M's RAVINE® Lateral Access
System, the CAYMAN MI design provides surgeons the ability to
insert the CAYMAN plate to stabilize the spine without
repositioning the RAVINE® retractor which is intended to help
simplify this important step in the Lateral procedure.
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 (800) 479-9001 for
domestic callers or (719) 325-2313 for international callers and
provide access code 1937099, 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.
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.
Forward-Looking Statements
This press release contains forward-looking statements that
reflect our current views with respect to, among other things, our
operations and financial performance. Forward-looking
statements include all statements that are not historical
facts. In some cases, you can identify these forward-looking
statements by the use of words such as "outlook," "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 inability 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 inability to maintain and expand our
network of direct sales employees, independent sales agencies and
international distributors; 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; inability 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; inability to train surgeons on the safe and
appropriate use of our products; requirements to maintain high
levels of inventory; an impairment of our goodwill or intangible
assets; disruptions in our information technology systems; any
disruption in operations at our headquarters facility or an
inability to ship a sufficient number of our products to meet
demand; inability to strengthen our brand; fluctuations in
insurance cost and availability; extensive governmental regulation;
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, voluntary
corrective actions or agency enforcement actions; a recall of 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; failure
to comply by us or our sales representatives with fraud and abuse
laws; U.S. legislative or regulatory healthcare reforms;
medical device tax provisions in the healthcare reform laws;
we will need to generate significant sales to become profitable;
sales volumes and our results of operations may fluctuate over the
course of the year; our future capital needs are uncertain;
continuing worldwide economic instability; inability to protect our
intellectual property rights; reliance on patent rights that we
either license from others or have obtained through
assignments; patent litigation; 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; product liability lawsuits; operating risks relating
to our international operations; failure to comply with the FCPA
and similar laws associated with our activities outside the United
States; control by and possible conflicts of interest with our
controlling shareholder; increased costs and additional regulations
and requirements as a result of becoming a public company; and
inability to implement and maintain effective internal control over
financial reporting in the future; and other risks and
uncertainties, including those described under the section entitled
"Risk Factors" in our prospectus dated May 7, 2014, filed with the
SEC pursuant to Rule 424(b) of the Securities Act on May 9, 2014,
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. 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.
K2M GROUP HOLDINGS,
INC. |
CONDENSED CONSOLIDATED
BALANCE SHEETS |
(Unaudited) |
(In Thousands, Except
Share and Per Share Data) |
|
|
|
|
December
31, |
March
31, |
|
2013 |
2014 |
ASSETS |
|
|
Current assets: |
|
|
Cash and cash equivalents |
$ 7,419 |
$ 11,146 |
Accounts receivable, net |
32,824 |
33,226 |
Inventory, net |
39,223 |
43,925 |
Deferred income taxes |
8,824 |
6,736 |
Prepaid expenses and other
current assets |
3,984 |
8,320 |
Total current
assets |
92,274 |
103,353 |
Property and equipment,
net |
2,978 |
3,233 |
Goodwill and intangible assets,
net |
186,270 |
178,739 |
Other assets, net |
15,414 |
16,529 |
Total assets |
$ 296,936 |
$ 301,854 |
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED |
|
|
STOCK, AND STOCKHOLDERS'
EQUITY |
|
|
Current liabilities: |
|
|
Bank line of credit |
$ 23,500 |
$ 23,500 |
Accounts payable |
17,069 |
22,770 |
Accrued expenses |
8,760 |
8,118 |
Accrued payroll
liabilities |
10,396 |
8,694 |
Total current
liabilities |
59,725 |
63,082 |
Notes to stockholders |
19,650 |
34,351 |
Deferred income taxes |
14,084 |
11,996 |
Other liabilities |
211 |
174 |
Total
liabilities |
93,670 |
109,603 |
|
|
|
Series A redeemable convertible preferred
stock, $0.001 par value, 7,300,000 shares authorized; 7,250,885
shares issued and outstanding at December 31, 2013 and March 31,
2014, respectively and no shares issued at Pro forma March 31,
2014 |
56,667 |
57,862 |
Series B redeemable convertible preferred
stock, $0.001 par value, 6,500,000 shares authorized; 6,301,290
issued and outstanding at December 31, 2013 and March 31, 2014,
respectively and no shares issued at Pro forma March 31, 2014 |
52,414 |
52,399 |
Stockholders' equity: |
|
|
Common stock, $0.001 par value,
100,000,000 shares authorized; 22,421,509, 22,664,310 and
37,066,337 shares issued and outstanding at December 31, 2013,
March 31, 2014, and Pro forma March 31, 2014, respectively |
22 |
23 |
Additional paid-in capital |
165,651 |
168,288 |
Accumulated other comprehensive
loss |
(920) |
(1,006) |
Accumulated deficit |
(70,568) |
(85,315) |
Total
stockholders' equity |
94,185 |
81,990 |
Total
liabilities, redeemable convertible preferred stock, and
stockholders' equity |
$ 296,936 |
$ 301,854 |
|
|
|
|
|
|
K2M GROUP HOLDINGS,
INC. |
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS |
(Unaudited) |
(In Thousands, Except
Per Share Data) |
|
|
|
|
Three
Months Ended March 31, |
|
2013 |
2014 |
Revenue |
$ 35,098 |
$ 42,251 |
Cost of revenue |
10,720 |
14,414 |
Gross profit |
24,378 |
27,837 |
Operating expenses: |
|
|
Research, development and
engineering |
3,197 |
3,197 |
Sales and marketing |
18,620 |
22,448 |
General and administrative |
14,300 |
15,890 |
Total operating
expenses |
36,117 |
41,535 |
Loss from
operations |
(11,739) |
(13,698) |
Other income (expense): |
|
|
Foreign currency transaction
(loss) gain |
(1,579) |
222 |
Interest expense |
(474) |
(1,247) |
Total other expense, net |
(2,053) |
(1,025) |
Loss before income tax (benefit) expense |
(13,792) |
(14,723) |
Income tax (benefit) expense |
(2,913) |
24 |
Net loss |
(10,879) |
(14,747) |
Accretion or write-up of preferred stock |
(13,115) |
(1,180) |
Net loss attributable to stockholders |
$ (23,994) |
$ (15,927) |
Net loss per share attributable to common
stockholders: |
|
|
Basic and diluted |
$ (1.09) |
$ (0.71) |
Weighted average shares outstanding: |
|
|
Basic and diluted |
22,087 |
22,523 |
Pro forma net loss per share: |
|
|
Basic and diluted |
|
$ (0.37) |
Weighted average number of shares used in
computing pro forma net loss per share: |
|
|
Basic and diluted |
|
36,925 |
|
|
|
|
|
|
K2M GROUP HOLDINGS,
INC. |
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS |
(Unaudited) |
(In
Thousands) |
|
|
|
|
Three
Months Ended March 31, |
|
2013 |
2014 |
Operating activities |
|
|
Net loss |
$ (10,879) |
$ (14,747) |
Adjustments to reconcile net loss to net cash
used in operating activities: |
|
|
Depreciation and
amortization |
8,895 |
9,705 |
Provision for allowance for
doubtful accounts |
95 |
137 |
Provision for inventory
reserve |
721 |
721 |
Stock-based compensation |
491 |
375 |
Amortization of issuance and
discount costs included in interest expense |
9 |
67 |
Deferred income taxes |
(2,946) |
— |
Changes in operating assets and
liabilities: |
|
|
Accounts
receivable |
(582) |
(508) |
Inventory |
(2,270) |
(6,075) |
Prepaid expenses
and other assets |
2 |
(4,305) |
Accounts payable,
accrued expenses, and accrued payroll liabilities |
2,497 |
5,447 |
Net cash used in operating activities |
(3,967) |
(9,183) |
Investing activities |
|
|
Purchase of surgical instruments |
(1,344) |
(2,058) |
Purchase of property and equipment |
(96) |
(658) |
Purchase of intangible assets |
(17) |
(18) |
Net cash used in investing activities |
(1,457) |
(2,734) |
Financing activities |
|
|
Borrowings on bank line of credit |
1,500 |
— |
Proceeds from issuance of notes to
stockholders |
— |
14,634 |
Proceeds from issuance of Series B redeemable
convertible preferred stock, net of issuance costs |
11,574 |
— |
Proceeds from issuance of common stock |
— |
2,308 |
Payment of public offering costs |
— |
(369) |
Payments to satisfy minimum tax withholding
related to exercise of options |
(339) |
(942) |
Net cash provided by financing
activities |
12,735 |
15,631 |
Effect of exchange rate changes on cash and
cash equivalents |
(36) |
13 |
Net increase in cash and cash
equivalents |
7,275 |
3,727 |
Cash and cash equivalents at beginning of
period |
7,011 |
7,419 |
Cash and cash equivalents at end of
period |
$ 14,286 |
$ 11,146 |
Significant noncash financing
activities |
|
|
Accretion of Series A redeemable convertible
preferred stock |
$ 1,245 |
$ 1,195 |
Accretion of Series B redeemable convertible
preferred stock |
$ (2,165) |
$ (15) |
Adjustment of preferred stock to fair
value |
$ 14,035 |
$ — |
Deferred public offering costs |
$ — |
$ 2,291 |
Cash paid for: |
|
|
Interest |
$ 250 |
$ 255 |
|
|
|
K2M GROUP HOLDINGS, INC.
Reconciliation of GAAP Net Loss to Adjusted EBITDA
(Unaudited) (In Thousands)
Use of Non-GAAP Financial Measures
This press release includes the non-GAAP financial measure of
Adjusted EBITDA. Adjusted EBITDA represents net income (loss) plus
interest expense, income tax expense (income tax benefit),
depreciation and amortization, stock-based compensation expense and
foreign currency transaction loss (foreign currency transaction
gain). We present Adjusted EBITDA because we believe it is a useful
indicator of our operating performance. Our management uses
Adjusted EBITDA principally as a measure of our operating
performance and believes that Adjusted EBITDA is useful to
investors because it is frequently used by analysts, investors and
other interested parties to evaluate companies in our industry. We
also believe Adjusted EBITDA is useful to our management and
investors as a measure of comparative operating performance from
period to period.
Adjusted EBITDA is a non-GAAP financial measure and should not
be considered as an alternative to net income (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 our 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 our 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 we may incur expenses that are the same as or
similar to some of the adjustments in this presentation. Our
presentation of Adjusted EBITDA should not be construed to imply
that our future results will be unaffected by any such adjustments.
Management compensates for these limitations by primarily relying
on our GAAP results in addition to using Adjusted EBITDA
supplementally. Our 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 a reconciliation of net loss to
Adjusted EBITDA for the periods presented.
|
Three
Months Ended March 31, |
|
2013 |
2014 |
Net loss |
$ (10,879) |
$ (14,747) |
Interest expense |
474 |
1,247 |
Income tax (benefit)
expense |
(2,913) |
24 |
Depreciation and
amortization |
8,895 |
9,705 |
Stock-based compensation
expense |
491 |
375 |
Foreign currency transaction
(gain) loss |
1,579 |
(222) |
Adjusted EBITDA |
$ (2,353) |
$ (3,618) |
|
|
|
|
K2M GROUP HOLDINGS,
INC. |
Reconciliation of GAAP
Net Loss Per Share to Pro Form Net Loss Per Share |
(Unaudited) |
(In Thousands, Except
Per Share Data) |
|
|
|
Three Months Ended |
|
March 31,
2014 |
Numerator |
|
GAAP net loss attributable to common
stockholders |
$ (15,927) |
Reversal of accretion or write-up of
preferred stock converted into common stock upon the IPO |
1,180 |
Interest expense for notes to stockholders
and revolving credit facility which were repaid with proceeds from
the IPO |
1,153 |
Pro forma net loss |
$ (13,594) |
Denominator |
|
GAAP weighted average shares outstanding -
basic and diluted |
$ 22,523 |
Conversion of preferred stock upon the
IPO |
5,577 |
Common shares issued in the IPO |
8,825 |
Weighted average number of
shares used in computing pro forma net loss per share - basic and
diluted |
36,925 |
Pro forma net loss per share -
basic and diluted |
$ (0.37) |
|
|
CONTACT: Investor Contact:
Westwicke Partners on behalf of K2M Group Holdings, Inc.
Mike Piccinino, CFA or Mark Klausner
443-213-0500
K2M@westwicke.com
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