K2M GROUP HOLDINGS, INC. - FORM 10-Q

K2M GROUP HOLDINGS, INC. - FORM 10-Q - November 13, 2015

Attached files

Attached files

K2M GROUP HOLDINGS, INC. Reports

file	filename
EX-31.1 - EXHIBIT 31.1 - K2M GROUP HOLDINGS, INC.	a3q2015exhibit311.htm
EX-32.1 - EXHIBIT 32.1 - K2M GROUP HOLDINGS, INC.	a3q2015exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - K2M GROUP HOLDINGS, INC.	a3q2015exhibit312.htm
EX-32.2 - EXHIBIT 32.2 - K2M GROUP HOLDINGS, INC.	a3q2015exhibit322.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



	x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2015



	¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from ______ to _______.

Commission file number 001-36443

K2M GROUP HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)



Delaware		27-2977810
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
751 Miller Drive SE, Leesburg, Virginia		20175
(Address of principal executive offices)		(Zip Code)

(703) 777-3155

Registrant’s telephone number, including area code:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares outstanding of Registrant’s Common Stock, par value $0.001 per share, on October 30, 2015 was 41,228,829.

K2M GROUP HOLDINGS, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015

TABLE OF CONTENTS



	SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS	2

PART I: FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	4
	CONDENSED CONSOLIDATED BALANCE SHEETS	4
	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS	5
	CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS	6
	CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY	7
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	8
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	9
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	18
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	29
ITEM 4.	CONTROLS AND PROCEDURES	29
PART II: OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	31
ITEM 1A.	RISK FACTORS	31
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	31
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	31
ITEM 4.	MINE SAFETY DISCLOSURES	31
ITEM 5.	OTHER INFORMATION	32
ITEM 6.	EXHIBITS	32
SIGNATURES		33

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by that section. These statements 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. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include but are not limited to those described under “Risk Factors” included in our Annual Report on Form 10-K dated December 31, 2014 accessible on the SEC website at www.sec.gov. These factors, including the following, should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this Form 10-Q:

•our inability to achieve or sustain profitability in the future;

• our inability to demonstrate to spine surgeons the merits of our products;


•	our inability to compete effectively;


•	collaboration and consolidation in hospital purchasing;


•	inadequate coverage and reimbursement for our products from third-party payors;


•	lack of long-term clinical data supporting safety and efficacy of our products;


•	dependence on a limited number of third-party suppliers;


•	our inability to maintain and expand our sales network;


•	proliferation of physician-owned distributorships (“PODs”) in the industry;


•	decline in the sale of certain key products;


•	loss of key personnel;


•	our inability to enhance new product offerings through research and development;


•	our inability to manage expected growth;


•	costs associated with high levels of inventory;


•	impairment of our goodwill and intangible assets;


•	disruptions in our main facility or information technology systems;


•	inability to strengthen our brand;


•	fluctuations in insurance cost and availability;


•	our inability to prepare and occupy our new corporate headquarters facilities;


•	our inability to comply with extensive governmental regulation;


•	our inability to maintain or obtain regulatory approvals and clearances;


•	recalls or serious safety issues with our products;


•	enforcement actions by regulatory agencies for improper marketing or promotion;


•	misuse or off-label use of our products;


•	delays or failures in clinical trials and results of clinical trials;


•	legal restrictions on our procurement, use, processing, manufacturing or distribution of allograft bone tissue;


•	negative publicity concerning methods of tissue recovery and screening of donor tissue;


•	costs and liabilities relating to environmental laws and regulations;


•	our failure or the failure of our agents to comply with fraud and abuse laws;


•	U.S. legislative or U.S. Food and Drug Administration regulatory reforms;


•	adverse effects of medical device tax provisions;


•	our inability to generate significant sales;


•	uncertainty in future capital needs;


•	availability of borrowings under our credit facility;


•	inability to protect our intellectual property rights;


•	patent litigation and product liability lawsuits;


•	damages relating to trade secrets or non-competition or non-solicitation agreements;


•	inability to operate internationally; and


•	inability to comply with the Foreign Corrupt Practices Act of 1977 and similar laws.

These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this filing.

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 Quarterly Report. 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 Quarterly Report 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.

Website and Social Media Disclosure

We use our website (www.k2m.com), our corporate Facebook page (www.facebook.com/K2MInc) and our corporate Twitter account (@K2MInc) as channels of distribution of company information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive e-mail alerts and other information about us when you enroll your e-mail address by visiting the “Email Alerts” section of our website http://investors.k2m.com/alerts.cfm. The contents of our website and social media channels are not, however, a part of this report.

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

K2M GROUP HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In Thousands, Except Share and Per Share Data)



	September 30,			December 31,
	2015			2014
ASSETS
Current assets:
Cash and cash equivalents	$	43,676		$	11,411
Accounts receivable, net	41,785			33,937
Inventory, net	61,102			52,617
Deferred income taxes	2,223			3,437
Prepaid expenses and other current assets	10,198			3,911
Total current assets	158,984			105,313
Property and equipment, net	5,125			4,220
Goodwill	121,814			121,814
Intangible assets, net	34,401			41,609
Other assets, net	23,873			29,672
Total assets	$	344,197		$	302,628

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	20,422		$	14,018
Accrued expenses	11,114			10,077
Accrued payroll liabilities	12,153			11,488
Total current liabilities	43,689			35,583
Deferred income taxes	7,265			8,479
Other liabilities	847			112
Total liabilities	51,801			44,174
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value, 750,000,000 shares authorized; 41,223,685 and 37,366,098 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively	41			37
Additional paid-in capital	450,736			386,795
Accumulated other comprehensive income	2,546			1,827
Accumulated deficit	(160,927		)	(130,205		)
Total stockholders’ equity	292,396			258,454
Total liabilities and stockholders’ equity	$	344,197		$	302,628

See accompanying notes to condensed consolidated financial statements.

K2M GROUP HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In Thousands, Except Share and Per Share Data)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Revenue	$	55,009		$	47,624		$	161,787		$	137,363
Cost of revenue	17,390			16,135			53,507			46,583
Gross profit	37,619			31,489			108,280			90,780
Operating expenses:
Research, development and engineering	5,154			4,872			14,808			11,854
Sales and marketing	26,808			25,016			79,588			71,185
General and administrative	15,667			14,507			42,575			47,158
Total operating expenses	47,629			44,395			136,971			130,197
Loss from operations	(10,010		)	(12,906		)	(28,691		)	(39,417		)
Other expense:
Foreign currency transaction loss	(12		)	(3,081		)	(1,552		)	(2,131		)
Discount on prepayment of notes to stockholders	—			—			—			(4,825		)
Interest expense	(110		)	(116		)	(354		)	(2,115		)
Total other expense, net	(122		)	(3,197		)	(1,906		)	(9,071		)
Loss before income tax expense	(10,132		)	(16,103		)	(30,597		)	(48,488		)
Income tax expense	83			37			125			82
Net loss	(10,215		)	(16,140		)	(30,722		)	(48,570		)
Accretion and adjustment of preferred stock to fair value	—			—			—			6,879
Net loss attributable to stockholders	$	(10,215	)	$	(16,140	)	$	(30,722	)	$	(41,691	)
Net loss per share attributable to common stockholders:
Basic and diluted	$	(0.25	)	$	(0.43	)	$	(0.77	)	$	(1.39	)
Weighted average shares outstanding:
Basic and diluted	41,074,245			37,127,155			39,892,068			30,084,010

See accompanying notes to condensed consolidated financial statements.

K2M GROUP HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(In Thousands)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Net loss	$	(10,215	)	$	(16,140	)	$	(30,722	)	$	(48,570	)
Other comprehensive (loss) income:
Foreign currency translation adjustment	(951		)	(1,650		)	719			(1,380		)
Other comprehensive (loss) income	(951		)	(1,650		)	719			(1,380		)
Comprehensive loss	$	(11,166	)	$	(17,790	)	$	(30,003	)	$	(49,950	)

See accompanying notes to condensed consolidated financial statements.

K2M GROUP HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(In Thousands, Except Share Data)



	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit			Total Stockholders’ Equity
	Shares	Amount		Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit			Total Stockholders’ Equity
Balance at December 31, 2014	37,366,098	$	37	$	386,795	$	1,827	$	(130,205	)	$	258,454
Net loss	—	—		—		—		(30,722		)	(30,722		)
Other comprehensive income	—	—		—		719		—			719
Stock-based compensation	—	—		8,863		—		—			8,863
Issuance of common stock, net of issuance costs	2,907,490	3		54,154		—		—			54,157
Issuances and exercise of stock-based compensation benefit plans, net of income tax	950,097	1		924		—		—			925
Balance at September 30, 2015	41,223,685	$	41	$	450,736	$	2,546	$	(160,927	)	$	292,396

See accompanying notes to unaudited condensed consolidated financial statements.

K2M GROUP HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In Thousands)



	Nine Months Ended September 30,
	2015			2014
Operating activities
Net loss	$	(30,722	)	$	(48,570	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	18,396			27,339
Provision for allowance for doubtful accounts	177			351
Provision for inventory allowances	1,128			1,368
Stock-based compensation	8,863			3,830
Amortization of issuance and discount costs included in interest expense	—			4,928
Changes in operating assets and liabilities:
Accounts receivable	(7,729		)	(283		)
Inventory	(6,839		)	(17,190		)
Prepaid expenses and other assets	(5,262		)	(4,472		)
Accounts payable, accrued expenses, and accrued payroll liabilities	8,795			4,175
Net cash used in operating activities	(13,193		)	(28,524		)
Investing activities
Purchase of surgical instruments	(6,595		)	(9,111		)
Purchase of property and equipment	(2,424		)	(1,507		)
Purchase of intangible assets	(538		)	(20		)
Net cash used in investing activities	(9,557		)	(10,638		)
Financing activities
Borrowings on bank line of credit	25,000			—
Repayments on bank line of credit	(25,000		)	(23,500		)
Proceeds from issuances of notes to stockholders	—			14,634
Prepayment of notes to stockholders	—			(39,212		)
Payment of dividends on Series A and Series B redeemable convertible preferred stock	—			(18,547		)
Proceeds from issuances of common stock, net of issuance costs	54,401			121,898
Issuances and exercise of stock-based compensation benefit plans, net of income tax	925			(279		)
Net cash provided by financing activities	55,326			54,994
Effect of exchange rate changes on cash and cash equivalents	(311		)	(66		)
Net increase in cash and cash equivalents	32,265			15,766
Cash and cash equivalents at beginning of period	11,411			7,419
Cash and cash equivalents at end of period	$	43,676		$	23,185

Significant noncash financing activities
Accretion of Series A redeemable convertible preferred stock	$	—		$	1,195
Accretion of Series B redeemable convertible preferred stock	$	—		$	(15	)
Adjustment of preferred stock to fair value	$	—		$	(8,059	)
Deferred offering costs	$	244		$	720
Cash paid for:
Income taxes	$	93		$	36
Interest	$	91		$	1,736

See accompanying notes to unaudited condensed consolidated financial statements.

K2M Group Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2015 and 2014

(Unaudited)

(In Thousands, Except Share and Per Share Data)

1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

In this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to “K2M,” “the Company,” “we,” “us” and “our,” refer to K2M Group Holdings, Inc. together with its consolidated subsidiaries.

K2M Group Holdings, Inc. was formed as a Delaware corporation on June 29, 2010. On July 2, 2010, K2M, Inc., a company initially incorporated in 2004, entered into an Agreement and Plan of Merger (the Merger Agreement) with Altitude Group Holdings, Inc. (Altitude) and Altitude Merger Sub, Inc. (Merger Sub). Altitude was a newly formed corporation and an indirect wholly-owned subsidiary of Welsh, Carson, Anderson & Stowe XI, L.P. On August 12, 2010 (the Merger Date), upon the closing of the transactions under the Merger Agreement, Merger Sub merged with and into K2M with K2M being the surviving corporation of such merger (the Merger) and Altitude was renamed K2M Group Holdings, Inc.

We are a global medical device company focused on designing, developing and commercializing innovative and proprietary complex spine technologies and techniques. Our complex spine products are used by spine surgeons to treat some of the most difficult and challenging spinal pathologies, such as deformity (primarily scoliosis), trauma, and tumor. We have applied our product development expertise in innovating complex spine technologies and techniques to the design, development, and commercialization of an expanding number of proprietary Minimally Invasive surgery, or MIS products. Our MIS products are designed to allow for less invasive access to the spine and faster patient recovery times as compared to traditional open access surgical approaches for both complex spine and degenerative spine pathologies. We have leveraged these core competencies in the design, development and commercialization of an increasing number of products for patients suffering from degenerative spinal conditions.

Unaudited Interim Results

The accompanying condensed consolidated balance sheets as of September 30, 2015 and December 31, 2014, the condensed consolidated statements of operations, the condensed consolidated statements of comprehensive loss for the three and nine months ended September 30, 2015 and 2014, the condensed consolidated statements of changes in stockholders’ equity as of September 30, 2015, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2015 and 2014 are unaudited. The unaudited interim financial statements have been prepared on the same basis of accounting as the annual financial statements and, in the opinion of management, reflect all adjustments, which include normal recurring adjustments, necessary to present fairly our financial position and results of operations and cash flows for the periods presented. The results for the three and nine months ended September 30, 2015 are not necessarily indicative of future results. All information as of September 30, 2015 and for the three and nine month periods ending September 30, 2015 and 2014 within these notes to the condensed consolidated financial statements is unaudited.

We have changed our presentation of goodwill and intangible assets, net on our condensed consolidated balance sheets to present each separately. Formerly, these were presented and included in the line item goodwill and intangible assets, net.

Out-of-Period Adjustments

During the third quarter of fiscal year 2015, we recorded out-of-period adjustments impacting stock-based compensation and net inventories of which a majority related to stock-based compensation. The out-of-period adjustment related to stock-based compensation was to correct an error in the recognition of stock-based compensation expense related to performance based stock options we granted primarily in 2010 and 2011. Previously, we had deferred such recognition since the market condition associated with the grants had not been met but we now believe that, consistent with accounting guidance, the expense recognition should have commenced as of the date of our IPO in May, 2014. The net impact of the adjustments to the nine months ended September 30, 2015 was to increase our net loss before taxes and net loss attributable to K2M by approximately $2,100 resulting in an increase in net loss per share of $0.05. The Company has determined that the impact of the error on the originating periods was immaterial and does not believe that the impact of correcting the error in fiscal 2015 will be material. Accordingly, a restatement of prior period amounts was not considered necessary.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States or US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Net Loss per Share

Basic net loss per common share is determined by dividing the net loss allocable to common stockholders by the weighted average number of common shares outstanding during the periods presented, without consideration of common stock equivalents. Diluted loss per share is computed by dividing the net loss allocable to common stockholders by the weighted average number of shares of common stock and common stock equivalents outstanding for the period. The treasury stock method is used to determine the dilutive effect of our stock option grants and the if-converted method is used to determine the dilutive effect of our Series A redeemable convertible preferred stock or Series A Preferred and Series B redeemable convertible preferred stock or Series B Preferred, until their conversion into common stock in May 2014. The weighted average shares used to calculate both basic and diluted loss per share are the same because common stock equivalents were excluded in the calculation of diluted loss per share because their effect would be anti-dilutive.

Foreign Currency Translation and Other Comprehensive Loss

The account balances of foreign subsidiaries are translated into U.S. dollars using exchange rates for assets and liabilities at the balance sheet date and average prevailing exchange rates for the period for revenue and expense accounts. Adjustments resulting from translation are included in other comprehensive income (loss), which is our only component of accumulated other comprehensive loss.

Remeasurement gains and losses from foreign currency transactions are included in the consolidated statements of operations in the period in which they occur.

Issuance of Common Stock

On February 2, 2015, we completed a second public offering of 6,044,990 shares of our common stock at a price of $18.75 per share. We sold 2,044,990 shares of common stock in the offering and selling stockholders sold 4,000,000 shares of common stock in the offering. We received net proceeds from the offering of approximately $35,400 after deducting the underwriting discount and offering expenses.

In connection with the offering, certain of the selling stockholders granted the underwriters an option to purchase from them additional shares of common stock at the public offering price, less underwriting discounts. On February 12, 2015, the underwriters exercised this option and purchased 906,748 shares of common stock from the selling stockholders at a price of $18.75 per share before underwriting discounts. We did not receive any proceeds from the sale of these shares.

On July 13, 2015, we completed an additional public offering of 4,500,000 shares of our common stock at a price to the public of $22.60 per share. We sold 750,000 shares of common stock in the offering and selling stockholders sold 3,750,000 shares of common stock. We received net proceeds from the offering of approximately $16,300 after deducting the underwriting discount and estimated offering costs. We did not receive any proceeds from shares of common stock sold by the selling stockholders.

On July 17, 2015, the underwriters purchased an additional 112,500 shares offered by us and 562,500 shares of common stock offered by the selling stockholders, at an offering price of $22.60 per share. We received net proceeds of approximately $2,400 after deducting underwriting discounts and estimated offering costs. We did not receive any proceeds from shares of common stock sold by the selling stockholders.

We expect to use proceeds of the primary portion of these offerings for working capital and general corporate purposes which is expected to include the expansion of our global distribution network and the purchase of inventory to support sales efforts. Use of proceeds may also include the acquisition of or investment in complementary products, technologies or businesses. The principal purposes of the offerings were to facilitate an orderly distribution of shares by the selling stockholders and to increase the public float of our shares.

Recent Accounting Pronouncements

We qualify as an “emerging growth company” (EGC) pursuant to the provisions of the JOBS Act and elected to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act which permits EGCs to defer compliance with new or revised accounting standards (the EGC extension) until non-issuers are required to comply with such standards. Accordingly, so long as we continue to qualify as an EGC, we will not have to adopt or comply with new accounting standards until non-issuers are required to comply with such standards.

In May 2014, the Financial Accounting Standards Board, or FASB, amended the existing accounting standards for revenue recognition. The amendments are based on the principle that revenue should be recognized to depict the transfer of goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. In July 2015, the FASB issued guidance on deferral of the effective date by one year for public entities, other than EGCs that have elected the EGC extension. The guidance will now be effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted for reporting periods beginning after December 15, 2016. EGCs that have elected the EGC extension, including us, and non-public entities will be required to comply with the guidance for annual reporting periods beginning after December 15, 2018. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of the initial application. We are evaluating the impact of these amendments and the transition alternatives on our consolidated financial statements.

In April 2015, the FASB issued guidance to simplify the presentation of debt issuance costs by requiring them to be presented as a deduction from the corresponding debt liability, rather than reported as an asset. This will make the presentation of debt issuance costs consistent with the presentation of debt discounts and premiums. The recognition and measurement guidance for debt issuance costs are not affected by this new guidance. In August 2015, the FASB issued further guidance to clarify that the SEC staff would not object to an entity presenting debt issuance costs relating to line-of-credit arrangements as an asset that is subsequently amortized ratably over the terms of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the arrangement. For public entities other than EGCs that have elected the EGC extension, this guidance will be effective for annual reporting periods beginning after December 15, 2015, and interim periods within those fiscal years. EGCs that have elected the EGC extension, including us, and non-public entities will be required to comply with the guidance on a retrospective basis for fiscal years beginning after December 15, 2015, and interim periods within the fiscal years beginning after December 15, 2016. Although adoption of this new guidance may impact how such items are classified on our balance sheet, we do not anticipate that the adoption of this guidance will have a material impact on our financial position, results of operations or cash flows. There will be no changes to the presentations of our other consolidated financial statements.

In July 2015, the FASB issued authoritative guidance to simplify the subsequent measurement of inventory. Under this new standard, an entity should measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. For public entities other than EGCs that have elected the EGC extension, the guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. For all other entities, EGCs that have elected the EGC extension, including us, and non-public entities will be required to comply with the guidance for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments in this guidance should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. We are currently evaluating the impact of this guidance.

2. ACCOUNTS RECEIVABLE

The following table summarizes the accounts receivables, net of allowances:



	September 30, 2015			December 31, 2014
Accounts receivable	$	44,411		$	36,431
Allowances	(2,626		)	(2,494		)
Accounts receivable, net	$	41,785		$	33,937

3. INVENTORY

The following table summarizes the inventory, net of allowance:



	September 30, 2015			December 31, 2014
Finished goods	$	89,333		$	78,331
Inventory allowances	(28,231		)	(25,714		)
Inventory, net	$	61,102		$	52,617

Inventory includes surgical instruments available for sale with a carrying value of $9,244 and $8,491 at September 30, 2015 and December 31, 2014, respectively.

4. PREPAID EXPENSES AND OTHER CURRENT ASSETS

The following table summarizes prepaid expenses and other current assets:



	September 30, 2015		December 31, 2014
Restricted cash	$	6,669	$	—
Prepaid expenses	2,015		2,385
Other	1,514		1,526
Total	$	10,198	$	3,911

As of September 30, 2015, restricted cash consisted of amounts held in escrow for tenant improvement costs for our new corporate headquarters, which we expect to incur in the first half of 2016.

5. INTANGIBLE ASSETS, NET

Intangible assets, net comprise the following:



	September 30, 2015
	Estimated Useful Lives	Gross		Accumulated Amortization			Net
Indefinite-lived intangible assets:
Trademarks	—	$	12,900	$	—		$	12,900
In-process research and development	—	900		—			900
Other	—	272		—			272
Subtotal		14,072		—			14,072
Subject to amortization
Developed technology	4 - 6 years	62,000		(50,797		)	11,203
Licensed technology	4 - 6 years	52,600		(52,287		)	313
Customer relationships	4 - 7 years	29,700		(21,745		)	7,955
Patents and other	2 - 17 years	1,945		(1,087		)	858
Subtotal		146,245		(125,916		)	20,329
Total Intangible Assets, net		$	160,317	$	(125,916	)	$	34,401



	December 31, 2014
	Estimated Useful Lives	Gross		Accumulated Amortization			Net
Indefinite-lived intangible assets:
Trademarks	—	$	12,900	$	—		$	12,900
In-process research and development	—	900		—			900
Other	—	278		—			278
Subtotal		14,078		—			14,078
Subject to amortization
Developed technology	4 - 6 years	62,000		(46,460		)	15,540
Licensed technology	4 - 6 years	52,600		(52,175		)	425
Customer relationships	4 - 7 years	29,700		(18,563		)	11,137
Patents and other	2 - 17 years	1,414		(985		)	429
Subtotal		145,714		(118,183		)	27,531
Total Intangible Assets, net		$	159,792	$	(118,183	)	$	41,609

Amortization expense of intangible assets was $2,560 and $5,038 for the three months ended September 30, 2015 and 2014, respectively, and $7,733 and $20,130 for the nine months ended September 30, 2015 and 2014, respectively.

As of September 30, 2015, the expected amortization expense for the remainder of 2015 and the following four years and thereafter is as follows:



	September 30, 2015
2015	$	2,562
2016	10,249
2017	6,634
2018	140
2019 and thereafter	744
Total	$	20,329

6. OTHER ASSETS

Other assets consist of the following:



	September 30, 2015		December 31, 2014
Surgical instruments, net	$	22,090	$	21,392
Restricted cash	1,337		8,114
Other	446		166
Total	$	23,873	$	29,672

Surgical instruments are stated net of accumulated amortization of $24,235 and $18,610 at September 30, 2015 and December 31, 2014, respectively. Amortization expense was $2,304 and $1,726 for the three months ended September 30, 2015 and 2014, respectively, and $6,688 and $4,498 for the nine months ended September 30, 2015 and 2014, respectively.

As of December 31, 2014, restricted cash included amounts placed in escrow for tenant improvement costs of approximately $6,700 for our new corporate headquarters. These amounts included as restricted cash were reclassed to prepaid expenses and other current assets in June 2015, because we believe such tenant improvements will be incurred by June 30, 2016. Restricted cash also includes deposits made on pending bids or contracts with customers of $1,337 and $1,447 as of September 30, 2015 and December 31, 2014, respectively.

7. ACCRUED EXPENSES

Accrued expenses consist of the following:



	September 30, 2015		December 31, 2014
Accrued commissions	$	5,096	$	4,942
Accrued royalties	2,328		2,464
Other	3,690		2,671
Total	$	11,114	$	10,077

8. STOCK-BASED COMPENSATION

We have four stock-based compensation plans including the 2014 Employee Omnibus Incentive Plan (Omnibus Incentive Plan), the 2014 Employee Stock Purchase Plan (ESPP), the 2010 Equity Award Plan and the 2010 Independent Agent Plan, collectively, “the Plans”. The purpose of the Plans are to provide incentives to employees, directors, agents and advisors. The Plans are administered by our board of directors or their delegates. The number, type of equity incentive, exercise or share purchase price, and vesting terms are determined in accordance with the Plans, as applicable. As of September 30, 2015, there was a total of 745,101 shares of common stock available for future grants under the plans.

In the three months ended September 30, 2015, stock-based compensation expense included previously unrecognized compensation expense related to performance-based options that had been subject to a performance target measurement event, which was met as of the date of our IPO. Although the measurement event has occurred for purposes of accounting expense recognition, such options are not yet exercisable until our Sponsor achieves the internal rate of return performance criteria defined in the underlying Non-Qualified Stock Option Award Agreement under the 2010 Equity Award Plan.

Stock-based compensation expense by financial statement line item, employees and non-employees and type of award for the respective period is as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Cost of revenue	$	200	$	156	$	517	$	267
Research, development, and engineering	374		156		673		299
Sales and marketing	1,672		749		3,143		1,382
General and administrative	2,709		1,010		4,530		1,882
	$	4,955	$	2,071	$	8,863	$	3,830

Employees	$	4,907	$	2,047	$	8,638	$	3,785
Non-employees	48		24		225		45
Total	$	4,955	$	2,071	$	8,863	$	3,830



	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Stock options	$	3,279	$	694	$	4,388	$	1,456
Restricted stock and restricted stock units	1,590		1,326		4,259		2,294
ESPP	86		51		216		80
Total	$	4,955	$	2,071	$	8,863	$	3,830

A summary of stock option plans activity during the nine months ended September 30, 2015 is as follows:



	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (years)	Aggregate Intrinsic Value ⁽¹⁾
Outstanding at December 31, 2014	4,277,229		$	9.55	5.83	$	48,418
Granted	377,826		23.01
Exercised	(818,840	)	7.27
Expired	(12,403	)	5.57
Forfeited	(72,982	)	13.49
Outstanding at September 30, 2015⁽²⁾	3,750,830		$	11.34	6.11	$	28,880
Vested or expected to vest:
At September 30, 2015⁽³⁾	3,131,416		$	10.14	5.72	$	26,508
Vested:
At September 30, 2015	1,853,537		$	9.45	4.87	$	21,170


(1)	Calculated using the estimated per-share fair market value of our common stock on September 30, 2015 and December 31, 2014, which was $18.60, and $20.87, respectively.


(2)	The total includes 979,927 vested and 14,841 unvested performance-based options at September 30, 2015 which are not exercisable until a market condition is met.


(3)	Outstanding options, net of forfeiture rate.

A summary of restricted stock and restricted stock units activity during the nine months ended September 30, 2015 is as follows:



	Unvested Restricted stock and Restricted Stock Units
Unvested at December 31, 2014	765,023
Grants of restricted stock	79,940
Vested ⁽¹⁾	(351,022	)
Unvested at September 30, 2015	493,941

⁽¹⁾ Represents restricted stock units which vested in 2015. The restricted stock units were net settled, which resulted in the forfeiture of 155,494 units in lieu of withholding taxes during the nine months ended September 30, 2015, which are included in this total.

9. COMMITMENTS AND CONTINGENCIES

On December 11, 2014, we entered into a Deed of Lease (the “Lease Agreement”) with TC Oaklawn Owner, LLC (the “Landlord”) with respect to our new corporate headquarters to be located in two adjacent buildings in Leesburg, Virginia (the “Buildings”). On March 13, 2015 we received $790 of cash grant incentives from several government originators, which were included in cash and cash equivalents. There are no restrictions on the use of the cash proceeds. Pursuant to the grant agreements, we or the Landlord are required to make certain investments in the Buildings and we are required to increase our workforce in Leesburg by 96 full-time employees no later than by December 31, 2017. As a result of these commitments, we have recorded a long-term liability within other liabilities of $790 at September 30, 2015 until such conditions are met.

Intellectual Property

In the normal course of business, we enter into agreements to obtain the rights to certain intellectual property. These agreements may require an up-front payment, milestone payments and/or royalties. Typically, we have certain rights to cancel these agreements, with notice, without additional payments due other than the amount due at the time of cancellation. As of September 30, 2015, the aggregate amount of these future payments, assuming achievement of applicable milestones and non-cancellation, was $1,420 over a period not less than five years. Royalties ranging from 2% to 10% of net sales may be due on the sales of related products. Some of the agreements contain minimum annual royalty amounts.

In November 2011, we entered into an agreement to purchase certain proprietary technology which could require us to make additional aggregate payments of up to $13,350 should certain milestones be met, including milestones related to regulatory

applications and approvals. Cumulative payments under this agreement totaled $100 through September 30, 2015. In addition, milestone payments of $500, $2,000 and $4,000 are due upon the achievement of net sales of related products of $10,000, $25,000 and $50,000, respectively. A royalty payment of 7% of net sales of related products may be due until such sales reaches $20,000. The product related to this agreement has not yet been commercialized.

The medical device industry is characterized by frequent claims and litigation, including claims regarding patent and other

intellectual property rights, as well as, improper hiring practices. We are not aware of any pending or threatened legal proceeding against us that would have a material adverse effect on our business, operating results or financial condition. However, we are a party in multiple legal actions involving claimants seeking various remedies, including monetary damages, and none of the outcomes are certain or entirely within our control.

10. RELATED PARTIES

In connection with the 2010 Merger, we and our subsidiary K2M Inc. entered into a management agreement with our major stockholder. This agreement terminated in May 2014; we incurred general and administrative expenses of $0 and $373 for the nine months ended September 30, 2015 and 2014, respectively.

11. INCOME TAXES

The provision for income taxes for the three and nine months ended September 30, 2015 and 2014 includes both domestic and foreign income taxes at applicable statutory rates adjusted for permanent differences and valuation allowances. For the three months ended September 30, 2015 and 2014, the income tax expense was $83 and $37, resulting in an effective tax rate of (0.8)% and (0.2)%, respectively. For the nine months ended September 30, 2015 and 2014, income tax expense was $125 and $82, resulting in an effective tax rate of (0.4)% and (0.2)%, respectively. The effective tax rate differs from the statutory rate due to permanent differences, an increase to the valuation allowance and foreign tax rate differentials.

12. NET LOSS PER SHARE

The following table sets forth the computation of basic and diluted loss per share attributable to our common stockholders:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Net loss per common share:
Net loss	$	(10,215	)	$	(16,140	)	$	(30,722	)	$	(48,570	)
Less: accretion and adjustment of Series A Preferred and Series B Preferred	—			—			—			6,879
Net loss attributable to common stockholders	$	(10,215	)	$	(16,140	)	$	(30,722	)	$	(41,691	)
Basic and diluted loss per common share
Basic and diluted weighted average common shares outstanding	41,074,245			37,127,155			39,892,068			30,084,010
Basic and diluted loss per common share	$	(0.25	)	$	(0.43	)	$	(0.77	)	$	(1.39	)

Diluted loss per share for the three and nine months ended September 30, 2015 and 2014 does not reflect the following weighted average potential common shares, as the effect would be antidilutive:



	Three Months Ended September 30,		Nine Months Ended September 30,
	2015	2014	2015	2014
Stock options	3,750,830	4,476,615	3,750,830	4,476,615
Restricted stock and restricted stock units	493,941	765,023	493,941	765,023

13. SEGMENT AND GEOGRAPHICAL CONCENTRATION

Operating segments are defined as components of an enterprise for which separate discrete financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. We manage the business globally within one reporting segment. Segment information is consistent with how management reviews the business, makes investing and resource allocation decisions and assesses operating performance. Products are sold principally in the United States. International revenue represented 28.3% of total

revenue for both the three and nine months ended September 30, 2015; however, revenue earned in any individual foreign country is below 10% of our consolidated revenue.

The following table represents total revenue by geographic area, based on the location of the customer:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
United States	$	39,459	$	34,385	$	116,055	$	97,371
International	15,550		13,239		45,732		39,992
Total	$	55,009	$	47,624	$	161,787	$	137,363

We classify sales within the United States into three categories: complex spine pathologies, minimally invasive procedures and degenerative and other conditions. A significant portion of our international revenue is derived from our distributor partners who do not report their product usage at the surgeon or hospital level, which prevents us from providing a specific breakdown for our international revenue among our three product categories. These sales transactions are settled when we ship the product to the distributor.

The following table represents domestic revenue by procedure category:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Complex spine	$	16,852	$	14,585	$	48,204	$	40,375
Minimally invasive	7,401		5,258		20,124		15,138
Degenerative	15,206		14,542		47,727		41,858
	39,459		34,385		116,055		97,371
International	15,550		13,239		45,732		39,992
Total	$	55,009	$	47,624	$	161,787	$	137,363

14. SUBSEQUENT EVENTS

On October 29, 2015, certain of our subsidiaries entered into an amendment (the “Eighth Amendment”) to the Company’s senior secured credit facilities credit agreement, dated as of October 29, 2012 (as amended from time to time), by and among K2M Holdings, Inc. as the guarantor (“Guarantor”), K2M, Inc. and K2M UK Limited as the borrower (“Borrower”), and Silicon Valley Bank and Comerica Bank as lenders. The Eighth Amendment, among other things, extended the maturity date of the revolving credit facility to October 29, 2017 and increases the total revolving commitments from $40,000 to $55,000.

ABR loans under the revolving credit facility bear interest at a rate per annum equal to ABR, plus 0.75%. LIBOR loans under

the revolving credit facility bear interest at a rate per annum equal to LIBOR plus 3.00%. The total obligations under the amended credit facility cannot exceed (i) the lesser of the total revolving commitment of $55,000 or (ii) the borrowing base, which is calculated as (x) 85% of accounts receivable so long as certain of those accounts receivable do not exceed, in the aggregate, 50% of the borrowing base plus (y) 50% of the value of the eligible inventory provided that the contribution of the value of the eligible inventory not exceed the lesser of 40% of the borrowing base or $15,000 plus (z) up to $7,500 to the extent the Borrower and its subsidiaries maintain at least $12,500 on deposit with a lender or an

affiliate of a lender. Borrowings under the revolving credit facility remain secured by a first priority lien on substantially all of

the Borrower’s personal property assets, including intellectual property.

The revolving credit facility also continues to contain other restrictive covenants with which the Guarantor and/or Borrower

must comply, including restrictive covenants which limit the ability to pay dividends on common stock and make certain

investments.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes included elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. You should review the cautionary statements under the heading “Part I: Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 and elsewhere in this Quarterly Report on Form 10-Q and in our other Securities and Exchange Commission filings. Our actual results could differ materially from those contained in or implied by the forward-looking statements. See “Special Note Regarding Forward-Looking Statements” following the Table of Contents for further information regarding forward-looking statements. Certain amounts and percentages in this discussion and analysis have been rounded for convenience of presentation. Unless otherwise noted, the figures in the following discussions are unaudited.

Overview

We are a global medical device company focused on designing, developing and commercializing innovative and proprietary complex spine and minimally invasive spine technologies and techniques. Our complex spine products are used by spine surgeons to treat some of the most difficult and challenging spinal pathologies, such as deformity (primarily scoliosis), trauma and tumor. We believe these procedures typically receive a higher rate of positive insurance coverage and often generate more revenue per procedure as compared to other spine surgery procedures. We have applied our product development expertise in innovating complex spine technologies and techniques to the design, development and commercialization of an expanding number of proprietary MIS products. These proprietary MIS products are designed to allow for less invasive access to the spine and faster patient recovery times compared to traditional open access surgical approaches. We have also leveraged these core competencies in the design, development and commercialization of an increasing number of products for patients suffering from degenerative spinal conditions.

We categorize our revenue in the United States amongst revenue generated from the treatment of complex spine pathologies, treatment using MIS approaches and the treatment of degenerative spinal conditions. We define our complex spine procedures as those that involve the treatment of the most difficult and challenging spinal pathologies, such as deformity (primarily scoliosis), trauma and tumor. We consider MIS procedures as degenerative procedures done through minimally invasive approaches designed to allow for less invasive access to the spine and faster patient recovery times as compared to traditional open access surgical approaches. We categorize degenerative procedures as those involving products treating degenerative spinal conditions such as traditional spinal fusions. We report revenue related to the sale of biomaterials as part of our complex spine, MIS and degenerative spine revenue categories. We expect our revenue to continue to be driven by aggregate sales growth in all categories. Our revenue classifications may evolve as we grow our business, continue to commercialize new products, adapt to surgeon preferences and surgical techniques and expand our sales globally.

The primary market for our products has been the United States, where we sell our products through a hybrid sales organization consisting of direct sales employees and independent sales agencies. As of September 30, 2015, our U.S. sales force consisted of 125 direct sales employees and 78 independent sales agencies, who distribute our products and are compensated through a combination of base salaries, individual and company-based performance bonuses, commissions and stock options. We do not sell our products through or participate in PODs.

We also market and sell our products internationally in 33 countries. We sell our products directly in certain markets such as the United Kingdom and Germany and use independent distributors in other markets such as Australia, Japan and Spain. For the three and nine months ended September 30, 2015, international sales accounted for approximately 28.3% of our revenue. As of September 30, 2015, our international sales force consisted of 39 direct sales employees, 12 independent agencies and 25 independent distributors. Our independent distributors manage the billing relationship with each hospital in their respective territories and are responsible for servicing the product needs of their surgeon customers. We believe there are significant opportunities for us to increase our presence through the expansion of our sales force and the commercialization of additional products.

Components of our Results of Operations

We manage our business globally within one reportable segment, which is consistent with how our management reviews our business, prioritizes investment and resource allocation decisions and assesses operating performance.

Revenue

We market and sell spinal implants, disposables and instruments, primarily to hospitals, for use by surgeons to treat patients with spinal pathologies. In the United States and international markets where we have direct employee sales locations, which include the United Kingdom, Ireland, Germany, Austria and Switzerland, we manage and maintain the sales relationships with our hospital customers. In those international markets where we utilize independent distributors, we do not manage or maintain the sales relationships with the hospital customers. We do, however, support our distributor partners by providing product training, medical education and engineering expertise to surgeons practicing in these markets.

In markets where we have a direct presence, we generally assign our surgical sets to our direct sales employees. A surgical set typically contains the instruments, including any disposables, and spinal implants necessary to complete a successful surgery. With our support, the direct sales employee maintains the surgical sets and places them with our hospital customers for use by surgeons. We recognize revenue upon receipt of a delivered order confirming that our products have been used in a surgical procedure or when title has passed.

In our international markets where we utilize independent distributors, we generally sell our surgical sets and the related spinal implant replenishments to our distributors on pre-agreed business terms. We recognize revenue when the title to the goods and the risk of loss related to those goods are transferred. All such sales to distributors are not subject to contingencies and are, therefore, final.

International revenue was 28.3% and 27.8% of total revenue for the three months ended September 30, 2015 and 2014, respectively, compared to 28.3% and 29.1% of total revenue for the nine months ended September 30, 2015 and 2014, respectively.

In addition, we generated 61.5% and 57.7% of our U.S. revenue for the three months ended September 30, 2015 and 2014, respectively, from the sale of our complex spine and MIS products and 58.9% and 57.0% for the nine months ended September 30, 2015 and 2014, respectively. We expect that these core product categories will continue to be a significant contributor to our revenue growth in the future.

While we believe the proportion of our international revenue from complex spine and MIS is even higher than in the United States, a significant portion of our international revenue is derived from our distributor partners who do not report their product usage at the surgeon or hospital level, which prevents us from providing a specific breakdown for our international revenue among our three product categories.

Cost of Revenue

Except for certain specialty products that we manufacture in-house, our instruments, spinal implants and related offerings are manufactured to our specifications by third-party suppliers who meet our manufacturer qualification standards. Our third-party manufacturers meet FDA, International Organization for Standardization (ISO) and other country-specific quality standards supported by our internal specifications and procedures. Substantially all of our suppliers manufacture our products in the United States. Our cost of revenue consists primarily of costs of products purchased from our third-party suppliers, amortization of surgical instruments, inventory reserves, royalties, inbound shipping, inspection and related costs incurred in making our products available for sale or use. Cost of revenue also includes related personnel and consultants' compensation and stock-based compensation expense. Our cost of revenue also includes the effect of a 2.3% excise tax on the sale of medical devices sold in the United States. We expect our cost of revenue to increase in absolute terms due primarily to increased sales volume and changes in the geographic mix of our sales as our international operations tend to have a higher cost of revenue as a percentage of sales.

Research, Development and Engineering

Our research, development and engineering expenses primarily consist of research and development, engineering, product development, clinical expenses, regulatory expenses, related consulting services, third-party prototyping services, outside research activities, materials production and other costs associated with the design and development of our products. Research, development and engineering expenses also include related personnel and consultants’ compensation and stock-based compensation expense. We expense research, development and engineering costs as they are incurred. We expect to incur additional research, development and engineering costs as we continue to design and commercialize new products. While our research, development and engineering expenses fluctuate from period to period based on the timing of specific research, development and testing initiatives, we generally expect these costs will increase in absolute terms over time as we continue to expand our product portfolio and add related personnel.

Sales and Marketing

Sales and marketing expenses primarily consist of commissions to our independent distributors, as well as compensation, commissions, benefits and other related costs, including stock-based compensation, for personnel employed in our sales, marketing and clinical sales support departments. Sales and marketing also includes the costs of medical education, training, sales related shipping and corporate communications activities. We expect our sales and marketing expenses will increase in absolute terms due to increased sales volume, the continued expansion of our sales force and the continued design and commercialization of new products.

General and Administrative

General and administrative expenses include compensation, benefits and other related costs, including stock-based compensation for personnel employed in our executive management, finance, regulatory, information technology and human resource departments, as well as facility costs and costs associated with consulting and other finance, legal, information technology and human resource services provided by third-parties. We include legal and litigation expenses as well as costs related to the development and protection of our intellectual property (IP) portfolio in general and administrative expenses. We expect our general and administrative expenses to continue to increase in absolute dollars as we hire additional personnel to support the growth of our business. In addition, we expect to incur increased expenses as a result of being a public company. General and administrative expenses also include amortization expense of certain of our intangible assets. However, the amortization of such assets is expected to decline over the next several years as such assets subject to amortization become fully amortized based on their estimated useful lives.

Income Tax Provision

We are taxed at the rates applicable within each jurisdiction in which we operate and/or generate revenue. The effective income tax rate, tax provisions, deferred tax assets and deferred tax liabilities will vary according to the jurisdiction in which profits arise. Tax laws are complex and subject to different interpretations by management and the respective governmental taxing authorities, and require us to exercise judgment in determining our income tax provision, our deferred tax assets and liabilities and the valuation allowance recorded against our net deferred tax assets. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized. A valuation allowance is established when it is more likely than not that the future realization of all or some of the deferred tax assets will not be achieved.

Material Trends and Uncertainties

The global spinal surgery industry has been growing as a result of:


•	the increased accessibility of healthcare to more people worldwide;


•	advances in technologies for treating conditions of the spine, which have increased the addressable market of patients; and


•	overall population growth, aging patient demographics and an increase in life expectancies around the world.

Nonetheless, we face a number of challenges and uncertainties, including:


•	ongoing requirements from our hospital partners related to pricing and operating procedures;


•	continued market acceptance of our new product innovations;


•	the unpredictability of government regulation over healthcare in the worldwide markets;


•	competitive threats in the future displacing current surgical treatment protocols;


•	the impact of industry consolidation on the overall market;


•	the unpredictability of foreign currency exchange rates and the exchange impact on independent distributors outside the United States who pay for our products in U.S. dollars; and


•	competitive threats to our existing distribution and surgeon network.

Results of Operations

The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(In thousands)
Revenue	$	55,009		$	47,624		$	161,787		$	137,363
Cost of revenue	17,390			16,135			53,507			46,583
Gross profit	37,619			31,489			108,280			90,780
Operating expenses:
Research, development and engineering	5,154			4,872			14,808			11,854
Sales and marketing	26,808			25,016			79,588			71,185
General and administrative	15,667			14,507			42,575			47,158
Total operating expenses	47,629			44,395			136,971			130,197
Loss from operations	(10,010		)	(12,906		)	(28,691		)	(39,417		)
Other income (expense):
Foreign currency transaction loss	(12		)	(3,081		)	(1,552		)	(2,131		)
Discount on prepayment of stockholder notes	—			—			—			(4,825		)
Interest expense	(110		)	(116		)	(354		)	(2,115		)
Total other expense, net	(122		)	(3,197		)	(1,906		)	(9,071		)
Loss before income tax expense	(10,132		)	(16,103		)	(30,597		)	(48,488		)
Income tax expense	83			37			125			82
Net loss	(10,215		)	(16,140		)	(30,722		)	(48,570		)
Accretion and adjustment of preferred stock to fair value	—			—			—			6,879
Net loss attributable to common stockholders	$	(10,215	)	$	(16,140	)	$	(30,722	)	$	(41,691	)

Three Months Ended September 30, 2015 Compared to the Three Months Ended September 30, 2014

The following table sets forth, for the periods indicated, our revenue by geography and the changes in such revenue:



	Three Months Ended September 30,
	2015		2014		$ Increase		% Change
	(In thousands)
United States	$	39,459	$	34,385	$	5,074	14.8	%
International	15,550		13,239		2,311		17.5	%
Total revenue	$	55,009	$	47,624	$	7,385	15.5	%

Total revenue increased $7.4 million, or 15.5%, to $55.0 million for the three months ended September 30, 2015 from $$47.6 million million for the three months ended September 30, 2014. The increase in revenue was primarily driven by $6.6 million in greater sales volume from new surgeon users in the United States, a $3.7 million increase in the United States resulting from surgeons upgrading to our newer product offerings, and $1.5 million in growth in our international distributor markets, primarily Denmark, Saudi Arabia, Japan, and South Africa. The increases in the United States were offset in part by a decrease in revenue from our existing customer base.

U.S. Revenue

The following table sets forth, for the periods indicated, our U.S. revenue by product category and the changes in such revenue:



	Three Months Ended September 30, 2015
	2015		2014		$ Increase		% Change
	(In thousands)
Complex spine	$	16,852	$	14,585	$	2,267	15.5	%
Minimally invasive	7,401		5,258		2,143		40.8	%
Degenerative	15,206		14,542		664		4.6	%
Total U.S. revenue	$	39,459	$	34,385	$	5,074	14.8	%

U.S. revenue increased $5.1 million, or 14.8%, to $39.5 million for the three months ended September 30, 2015 from $34.4 million for the three months ended September 30, 2014. Sales in our complex spine, MIS and degenerative categories represented 42.7%, 18.8% and 38.5% of U.S. revenue, respectively, for the three months ended September 30, 2015, compared to 42.4%, 15.3% and 42.3% of U.S. revenue, respectively, for the three months ended September 30, 2014. The overall U.S. revenue growth was driven by new surgeon users representing $6.6 million of the revenue change, offset in part, by unfavorable changes in price and a decrease in existing customer usage. The complex spine category the growth of $2.3 million primarily reflects increased surgeon usage of our EVEREST^(R)systems of $1.7 million and increased usage of our occipital fixation system of $0.6 million. The MIS category growth of $2.1 million primarily reflects increased surgeon usage of our EVEREST^(R) minimally invasive products of $1.3 million and our ALEUTIAN^(R)interbody products of $0.6 million. The degenerative category growth of $0.7 million primarily reflects increased surgeon usage of our biomaterials offerings of $0.5 million and the introduction of our new CASCADIA^(R) 3-D printed lamellar titanium interbody device of $0.2 million.

International Revenue

International revenue increased $2.4 million, or 17.5%, to $15.6 million for the three months ended September 30, 2015 from $13.2 million for the three months ended September 30, 2014. International revenue primarily increased as a result of new instrument set purchases by our distributor partners, primarily in Denmark, Saudi Arabia, Japan, and South Africa, as they invested in new surgical sets and their market penetration continues to grow.

Cost of Revenue

Cost of revenue increased $1.3 million, or 7.8%, to $17.4 million for the three months ended September 30, 2015 from $16.1 million for the three months ended September 30, 2014. The increase was primarily due to increased sales volume and higher instrument amortization expense associated with our continued investment in inventory, partially offset by decreased expense associated with our custom instruments and a reduction in our medical device excise tax due to prior period recoveries. Instrument amortization expense, increased $0.8 million, or 34.8%, to $3.1 million for the three months ended September 30, 2015 from $2.3 million in the three months ended September 30, 2014. In addition, the cost of revenue associated with the medical device excise tax, net of recoveries, in the United States was approximately $(51) thousand for the three months ended September 30, 2015 compared to $0.5 million in the three months ended September 30, 2014.

Gross Profit

Gross profit increased as a percentage of revenue to 68.4% for the three months ended September 30, 2015 from 66.1% for the three months ended September 30, 2014. The increase in gross profit as a percentage of revenue is primarily due to decreased expenses associated with our custom instruments and a reduction in our medical device excise tax due to prior period recoveries.

Research, Development and Engineering

Research, development and engineering expenses increased $0.3 million, or 5.8%, to $5.2 million for the three months ended September 30, 2015 from $4.9 million for the three months ended September 30, 2014. The increase was primarily due to higher payroll expenses, including stock based compensation, and increased spending on third-party research.

Sales and Marketing

Sales and marketing expenses increased $1.8 million, or 7.2%, to $26.8 million for the three months ended September 30, 2015 from $25.0 million for the three months ended September 30, 2014. The increase was primarily due to an increase in sales commissions as a result of increased sales volume and employee compensation costs, including stock-based compensation, resulting from our continued hiring of direct sales employees since September 30, 2014.

General and Administrative

General and administrative expenses increased $1.2 million, or 8.0%, to $15.7 million for the three months ended September 30, 2015 from $14.5 million for the three months ended September 30, 2014. The increase was primarily due to increased stock-based compensation and increased third-party legal expenses. General and administrative expenses includes amortization of intangible assets of $2.5 million and $5.0 million for the three months ended September 30, 2015 and September 30, 2014, respectively.

Other Income (Expense)

Other expense, net, decreased $3.1 million, to $0.1 million for the three months ended September 30, 2015 from $3.2 million for the three months ended September 30, 2014. The decrease in other expense, net was primarily attributable to a reduction of $3.1 million in unrealized losses from foreign currency translation on intercompany payable balances.

Net Loss

Net loss decreased $5.9 million, or 36.7%, to $10.2 million for the three months ended September 30, 2015 from $16.1 million for the three months ended September 30, 2014. The decrease in our net loss was primarily attributable to lower intangible amortization expense, the absence of our discount on prepayment of stockholder notes incurred in 2014 and decreases in our foreign currency translation losses in 2015, partially offset by increased stock-based compensation and higher operating expenses attributable to greater sales activity.

Nine Months Ended September 30, 2015 Compared to the Nine Months Ended September 30, 2014

The following table sets forth, for the periods indicated, our revenue by geography and the changes in such revenue:



	Nine Months Ended September 30, 2015
	2015		2014		$ Increase		% Change
	(In thousands)
United States	$	116,055	$	97,371	$	18,684	19.2	%
International	45,732		39,992		5,740		14.4	%
Total revenue	$	161,787	$	137,363	$	24,424	17.8	%

Total revenue increased $24.4 million, or 17.8%, to $161.8 million for the nine months ended September 30, 2015 from $137.4 million for the nine months ended September 30, 2014. The increase in revenue was primarily driven by $13.7 million in greater sales volume from new surgeon users in the United States and $5.4 million in growth in our international distributor markets, primarily Australia, Saudi Arabia, South Africa, and Spain. The increases in the United States were offset in part by a decrease in revenue from our existing customer base.

U.S. Revenue

The following table sets forth, for the periods indicated, our U.S. revenue by product category and the changes in such revenue:



	Nine Months Ended September 30, 2015
	2015		2014		$ Increase		% Change
	(In thousands)
Complex spine	$	48,204	$	40,375	$	7,829	19.4	%
Minimally invasive	20,124		15,138		4,986		32.9	%
Degenerative	47,727		41,858		5,869		14.0	%
Total U.S. revenue	$	116,055	$	97,371	$	18,684	19.2	%

U.S. revenue increased $18.7 million, or 19.2%, to $116.1 million for the nine months ended September 30, 2015 from $97.4 million for the nine months ended September 30, 2014. Sales in our complex spine, MIS and degenerative categories represented 41.6%, 17.3% and 41.1% of U.S. revenue, respectively, for the nine months ended September 30, 2015, compared to 41.5%, 15.5% and 43.0% of U.S. revenue, respectively, for the nine months ended September 30, 2014. The overall U.S. revenue growth was driven by new surgeon users representing $13.7 million of revenue and from the mix of products sold, offset, in part, by unfavorable changes in price, and a decrease in existing customer usage. The complex spine category growth of $7.8 million reflects increased surgeon usage of our EVEREST system of $4.1 million, increased surgeon usage of our occipital fixation system of $1.6 million, and initial usage of our new CAPRI^™ thoraco-lumbar corpectomy device of $0.6 million. The MIS category growth of $5.0 million primarily reflects increased surgeon usage of our EVEREST^(R) minimally invasive products of $3.6 million and our RAVINE^(R)lateral interbody product of $1.0 million. The degenerative category growth of $5.9 million primarily reflects increased surgeon usage of our stand-alone CHESAPEAKE^(R) interbody device of $1.2 million, increased surgeon usage of our biomaterials offering of $1.7 million, and increased usage of our EVEREST^(R) product line of $0.9 million.

During the nine months ended September 30, 2015 we had a stocking order of implants and disposables to a U.S. based hospital system in the amount of $2.0 million, contributing to an increase in revenue of $1.5 million over the prior year-to-date period. This order has been included in the U.S. product category figures reported in the table above. We have used our U.S. year-to-date actual surgical experience by product line to determine the product category allocation for this specific order. Based on the products purchased and our allocation methodology the following amounts are included in the each of the following product categories reported for the nine months ended September 30, 2015, $0.4 million, $0.7 million and $0.9 million in complex, minimally invasive, and degenerative, respectively.

International Revenue

International revenue increased $5.7 million, or 14.4%, to $45.7 million for the nine months ended September 30, 2015 from $40.0 million for the nine months ended September 30, 2014. International revenue increased as a result of our distributor partners, primarily in Australia, Saudi Arabia, South Africa, and Spain, as our partners invested in new surgical sets and their market penetration continues to grow.

Cost of Revenue

Cost of revenue increased $6.9 million, or 14.9%, to $53.5 million for the nine months ended September 30, 2015 from $46.6 million for the nine months ended September 30, 2014. The increase was primarily due to increased sales volume and higher instrument amortization expense associated with our continued investment in inventory, partially offset by decreased expense associated with our custom instruments and decreased inventory allowances. Instrument amortization expense increased $3.1 million, or 51.7%, to $9.1 million in the nine months ended September 30, 2015 from $6.0 million for the nine months ended September 30, 2014. In addition, the cost of revenue associated with the medical device excise tax, net of recoveries, in the United States was approximately $1.2 million and $1.6 million for the nine months ended September 30, 2015 and 2014, respectively.

Gross Profit

Gross profit increased as a percentage of revenue to 66.9% for the nine months ended September 30, 2015 from 66.1% for the nine months ended September 30, 2014. The increase in gross profit as a percentage of revenue is primarily due to decreased expenses associated with our custom instruments, a reduction in our medical device excise tax due to prior period recoveries, and decreased inventory allowances.

Research, Development and Engineering

Research, development and engineering expenses increased $2.9 million, or 24.9%, to $14.8 million for the nine months ended September 30, 2015 from $11.9 million for the nine months ended September 30, 2014. The increase was primarily due to higher payroll expense, including stock-based compensation, and increased development of products in our pipeline.

Sales and Marketing

Sales and marketing expenses increased $8.4 million, or 11.8%, to $79.6 million for the nine months ended September 30, 2015 from $71.2 million for the nine months ended September 30, 2014. The increase was primarily due to an increase in sales commissions as a result of the increased sales volume and increased employee compensation costs resulting from our continued hiring of direct sales employees since September 30, 2014. The increase is also due in part to higher shipping costs.

General and Administrative

General and administrative expenses decreased $4.6 million, or 9.7%, to $42.6 million for the nine months ended September 30, 2015 from $47.2 million for the nine months ended September 30, 2014. The decrease was primarily due to lower amortization expense on intangible assets, partially offset by increased employee compensation and benefit costs associated with the increase in personnel to support the expansion of our business, amortization of the compensation cost of restricted stock units issuances, and increased third-party legal expenses. General and administrative expenses included amortization of intangible assets of $7.7 million and $20.1 million in the nine months ended September 30, 2015 and 2014, respectively.

Other Income (Expense)

Other expense, net decreased $7.2 million, or 79.0% to $1.9 million for the nine months ended September 30, 2015 from $9.1 million for the nine months ended September 30, 2014. The decrease in other expense was attributable to the acceleration of

discount expense on notes to stockholders of $4.8 million as a result of their prepayment, a decrease in interest expense of $1.8 million, and a $0.6 million decrease in unrealized losses from foreign currency translation on intercompany payable balances.

Net Loss

Net loss decreased $17.9 million or 36.7% to $30.7 million for the nine months ended September 30, 2015 from $48.6 million for the nine months ended September 30, 2014. The significant decrease in our net loss was primarily attributable to lower intangible amortization expense and the absence of our discount on prepayment of stockholder notes incurred in 2014, partially offset by higher operating expenses attributable to greater sales activity.

Non-GAAP Financial Measures

Adjusted EBITDA represents net loss plus interest expense, discount on prepayment of notes to stockholders, income tax expense, depreciation and amortization, stock-based compensation expense and foreign currency transaction gain (loss).

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 for planning purposes, including the preparation of our annual operating budget and financial projections. We believe 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 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 September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(In thousands)
Net loss	$	(10,215	)	$	(16,140	)	$	(30,722	)	$	(48,570	)
Interest expense	110			116			354			2,115
Discount on prepayment of notes to stockholders	—			—			—			4,825
Income tax expense	83			37			125			82
Depreciation and amortization	6,126			7,735			18,396			27,339
Stock-based compensation expense	4,954			2,072			8,863			3,830
Foreign currency transaction loss	12			3,081			1,552			2,131
Adjusted EBITDA	$	1,070		$	(3,099	)	$	(1,432	)	$	(8,248	)

Liquidity and Capital Resources

Since our inception in 2004, we have incurred significant operating losses and anticipate that our losses will continue in the near term. We expect our operating expenses will continue to grow as we expand our product portfolio, penetrate further into existing markets and enter into new markets. We will need to generate significant revenue to achieve profitability as we grow our business. Prior to our IPO in May 2014, we funded our operations primarily with proceeds from the sales of preferred and common stock, notes to stockholders, a revolving credit facility and cash flow from operations.

On May 13, 2014, we completed our IPO of 8,825,000 shares of our common stock for $15 per share for gross proceeds of $132.4 million, or approximately $118.8 million of net proceeds after consideration of underwriting commissions and offering expenses. With these proceeds, we retired all amounts outstanding under our revolving credit facility and notes to stockholders and satisfied our commitment to pay cumulative dividends outstanding on our preferred stock upon its conversion to common stock in connection with the IPO.

Through July 2015, we have completed additional public offerings of our common stock issuing approximately 2.9 million additional shares of stock for net proceeds of $54.2 million after deducting underwriter discounts and offering costs. With these additional offerings, selling stockholders sold a total of 9.2 million shares of stock for which we received no proceeds:



	Number of Shares Sold		Net Proceeds	Issuance or
Date	K2M Issued	Selling Stockholders	to K2M (millions)	Sale Price per share
February 2015	2,044,990	4,906,758	$35.4	$18.75
July 2015	862,500	4,312,500	$18.8	$22.60
Total	2,907,490	9,219,258	$54.2

We expect to use the proceeds raised from the 2015 offerings for working capital and general corporate purposes to include the expansion of our global distribution network and the purchase of inventory to support sales efforts. In addition, use of proceeds may also include the acquisition of or investment in complementary products, technologies or businesses. The principal purposes of the offerings were to facilitate an orderly distribution of shares by the selling stockholders and to increase the public float of our shares.

As of September 30, 2015, we had cash and cash equivalents of $43.7 million as compared to $11.4 million as of December 31, 2014. As of September 30, 2015, we had no outstanding indebtedness and we had working capital of $115.3 million as compared to $69.7 million as of December 31, 2014.

We are actively exploring acquisition, investment or strategic partnership opportunities to further enhance our product portfolio or development pipeline for future products. We expect these opportunities may result in additional expense or an increase in intellectual property assets when any such agreements are completed or over the period of development of such technologies. In some cases, the development period of the technologies and related expense may extend multiple years in advance of revenue generation.

We expect to incur approximately $1.3 million in the three months ended December 31, 2015 as a milestone payment following the clearance of our CE Marking from the Notified Body with respect to our RHINE™ cervical arthroplasty solution intended for several markets outside the U.S.

Our principal long-term liquidity need is working capital to support the continued growth of our business through the hiring of direct sales employees and independent sales agencies to expand our global sales force, purchases of additional inventory to support future sales activities and the development and commercialization of new products through our research and development efforts. We expect to fund our long-term capital needs with the proceeds from our stock offerings, availability under our revolving credit facility (which may vary due to changes in our borrowing base) and cash flow from operations. To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds.

Although we believe that these sources will provide sufficient liquidity for us to meet our long-term capital needs, our liquidity and our ability to fund these needs will depend to a significant extent on our future financial performance, which will be subject in part to general economic, competitive, financial, regulatory and other factors that are beyond our control. In addition to these general economic and industry factors, the principal factors determining whether our cash flows will be sufficient to meet our long-term liquidity requirements will be our ability to provide attractive products to our customers, changes in our customers’ ability to obtain third-party coverage and reimbursement for procedures that use our products, increased pricing pressures resulting from intensifying competition, cost increases and slower product development cycles resulting from a changing regulatory environment. If those factors change significantly or other unexpected factors adversely affect us, our business may not generate sufficient cash flow from operations and future financings may not be available on terms acceptable to us or at all to meet our liquidity needs.

In assessing our liquidity, management reviews and analyzes our current cash-on-hand, the average number of days our accounts receivable are outstanding, payment terms that we have established with our vendors, inventory turns, foreign exchange rates, capital expenditure commitments and income tax rates.

Cash Flows

The following table shows our cash flows from operating, investing and financing activities for the nine months ended September 30, 2015 and 2014, respectively:



	Nine Months Ended September 30,
	2015			2014
	(In thousands)
Net cash used in operating activities	$	(13,193	)	$	(28,524	)
Net cash used in investing activities	(9,557		)	(10,638		)
Net cash provided by financing activities	55,326			54,994
Effect of exchange rate on cash	(311		)	(66		)
Net change in cash and cash equivalents	$	32,265		$	15,766

Cash Used in Operating Activities

Net cash used in operating activities decreased $15.3 million to $13.2 million for the nine months ended September 30, 2015 from $28.5 million for the nine months ended September 30, 2014. The decrease in net cash used in operations was primarily due to increased revenue and decreased inventory purchases in 2015, partially offset by an increase in accounts receivable due to higher revenue, and the timing of payments of accounts payable and accrued liabilities.

Cash Used in Investing Activities

Net cash used in investing activities decreased $1.1 million to $9.5 million for the nine months ended September 30, 2015 from $10.6 million for the nine months ended September 30, 2014. The decrease in net cash used in investing activities was primarily attributable to decreased purchases of surgical instruments, partially offset by an increase in fixed assets and purchases of intellectual property rights (patents) during 2015.

Cash Provided by Financing Activities

Net cash provided by financing activities increased $0.3 million to $55.3 million for the nine months ended September 30, 2015 from $55.0 million for the nine months ended September 30, 2014. During 2015, we generated net proceeds from the issuances of common stock including exercises under benefit plans, of approximately $55.3 million. In 2014, we generated net proceeds from common stock issuances including exercises under benefit plans of $121.6 million. We used proceeds from such issuances to retire debt and borrowings of $48.1 million and dividend payments of $18.5 million in 2014.

During the three months ended June 30, 2015, we borrowed $25.0 million on our bank line of credit or revolving credit facility. These funds were used to increase our investments in our European subsidiaries. Following these investments, the subsidiaries used these funds to repay foreign currency denominated payables owed to our U.S. operating subsidiary. The borrowings from the line of credit were repaid using the remittances from the foreign subsidiaries. We believe the pay down of these foreign intercompany balances owed to the U.S. subsidiary will help reduce our volatility to foreign exchange rates in the future.

Capital Expenditures

Our capital expenditures decreased $1.6 million to $9.0 million for the nine months ended September 30, 2015 from $10.6 million for the nine months ended September 30, 2014. The decrease in capital expenditures was driven by lower purchases of surgical instruments during the nine months ended September 30, 2015. For the remainder of 2015, we expect capital expenditures to decrease from 2014 levels. We intend to use a portion of the proceeds from our offerings and cash flows from our operations to fund future capital expenditures.

We expect to move our headquarters and operations center into new facilities in the Spring of 2016. We expect to incur approximately $7.5 million of leasehold improvements, excluding allowances that will be provided by the landlord in the first two quarters of 2016 to prepare the facilities for our occupancy. Of this amount, approximately $6.7 million of these improvements will be funded with restricted cash and cash equivalents, which are classified as other current assets on our Balance Sheet as of September 30, 2015.

Indebtedness

Revolving Credit Facility

As of September 30, 2015, we had no outstanding borrowings from the revolving credit facility and approximately $33.9 million of unused borrowing availability.

On October 29, 2015, we entered into an amendment of our senior secured credit facilities credit agreement as of October 29, 2012. The amendment among other things, extends the maturity date of the revolving credit facility to October 29, 2017 and increases the total revolving commitments from $40.0 million to $55.0 million. ABR loans under the revolving credit facility bear interest at a rate per annum equal to ABR, plus 0.75% whereas LIBOR loans under the revolving credit facility bear interest at a rate per annum equal to LIBOR, plus 3.00%.

Total obligations under the amended credit facility cannot exceed (i) the lesser of the total revolving commitment of $55.0 million or (ii) the borrowing base, which is calculated as (x) 85% of accounts receivable so long as certain of those accounts receivable do not exceed, in the aggregate, 50% of the borrowing base plus (y) 50% of the value of the eligible inventory provided that the contribution of the value of the eligible inventory not exceed the lesser of 40% of the borrowing base or $15.0 million plus (z) up to $7.5 million to the extent the Borrower and its subsidiaries maintain at least $12.5 million on deposit with a lender or an affiliate of a lender. Borrowings under the revolving credit facility remain secured by a first priority lien on substantially all of the Borrower’s personal property assets, including intellectual property.

The revolving credit facility, as amended, contains various financial covenants and negative covenants with which we must maintain compliance, including a consolidated adjusted quick ratio for K2M, Inc., K2M UK Limited and select subsidiaries of not less than 1.20:1.00 as of the last day of any month, as well as the provision of certain financial reporting and company information as required. In addition, there are restrictive covenants that limit our ability to pay dividends on common stock and make certain investments.

Off-Balance Sheet Arrangements

As of September 30, 2015, we had $6.1 million available under two issued but undrawn letters of credit, with one letter of credit representing a $6.0 million security deposit on the new corporate headquarters lease.

Critical Accounting Policies and Estimates

The preparation of our condensed consolidated financial statements requires us to make assumptions, estimates and judgments that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities as of the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We use historical experience and other assumptions as the basis for our judgments and making these estimates. Because future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Any changes in those estimates will be reflected in our condensed consolidated financial statements as they occur.

Management believes that the accounting estimates employed are appropriate and resulting balances are reasonable; however, actual results could differ from the original estimates, requiring adjustments to these balances in future periods. Our critical accounting policies and estimates are described under Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates - of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014. We have reviewed our policies and determined that those policies remain the Company’s critical accounting policies as of and for the three and nine months ended September 30, 2015.

Recently Issued Accounting Pronouncements

We qualify as an “emerging growth company” (EGC) pursuant to the provisions of the JOBS Act and have elected to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act which permits EGCs to defer compliance with new or revised accounting standards (the EGC extension) until non-issuers are required to comply with such standards. Accordingly, so long as we continue to qualify as an EGC, we will not have to adopt or comply with new accounting standards until non-issuers are required to comply with such standards.

Please see "Note 1 - General and Summary of Significant Accounting Policies - Recent Accounting Pronouncements" for additional information.

Deformity Business Seasonality and Other Quarterly Fluctuations in Revenue

Our revenue is typically higher in the late Spring and Summer and in the fourth quarter of our fiscal year, driven by higher sales of our complex spine products, which is influenced by the higher incidence of adolescent surgeries during these periods to coincide with the beginning of summer vacation and holiday periods. In addition, our international revenue fluctuates quarterly based on the timing of product registration, expansion to new markets and product orders from our exclusive international distribution partners.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Overview Regarding Market Risks

We are exposed to various market risks, which may result in potential losses arising from adverse changes in market rates, such as interest rates and foreign exchange rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes and do not believe we are exposed to material market risk with respect to our cash and cash equivalents.

Interest Rate Risk

We are exposed to interest rate risk in connection with any future borrowings under our revolving credit facility, which bears interest at floating rates. For variable rate debt, interest rate changes do not affect the fair value of the debt instrument, but do impact future earnings and cash flows, assuming other factors are held constant. We do not believe that a 10% change in interest rates would have a significant impact on our net loss for the period or on cash flow.

Foreign Exchange Risk

We operate in countries other than the United States, and, therefore, we are exposed to foreign currency risks. In the European markets where we manage billing relationships, we transact our business in local currencies, which are comprised primarily of Pounds Sterling and the Euro. As of September 30, 2015, revenue denominated in currencies other than U.S. Dollars represented less than 10% of our total revenue. Operating expenses related to these sales are largely denominated in the same respective currency, thereby limiting our transaction risk exposure. We therefore believe that the risk of an impact on our operating income from foreign currency fluctuations is not significant. In addition, we have intercompany foreign transactions between our subsidiaries, which are denominated in currencies other than their functional currency. Fluctuations from the beginning to the end of any given reporting period result in the re-measurement of our intercompany foreign transactions generating transaction gains or losses in the respective period and are reported in total other income (expense), net in our consolidated financial statements.

We recorded a foreign currency transaction loss of $12 thousand and $3.1 million in the three months ended September 30, 2015 and 2014, respectively, compared to $1.6 million and $2.1 million during the nine months ended September 30, 2015 and 2014, respectively. The monetary assets and liabilities of our foreign subsidiaries denominated in other currencies are translated into U.S. dollars at each balance sheet date resulting in a foreign currency translation adjustment reflected in accumulated other comprehensive loss. Within other comprehensive loss, we recorded foreign currency translation adjustment income (losses) of $(1.0) million and $(1.7) million in the three months ended September 30, 2015 and 2014, respectively, compared to $0.7 million and $(1.4) million during the nine months ended September 30, 2015 and 2014, respectively.

Our contracts with foreign distributors are denominated and settled in U.S. dollars. Such foreign distributors are impacted by foreign currency fluctuations which in turn may impact their ability to pay us in a timely manner. Revenue from such customers approximated 19.1% of our revenue for the nine months ended September 30, 2015 and represented 32.0% of our net outstanding accounts receivable at September 30, 2015.

ITEM 4. CONTROLS AND PROCEDURES

Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP. We are currently in the process of reviewing, documenting and testing our internal control over financial reporting.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief

Executive Officer (CEO) and our Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d - 15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO have concluded that as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the three month period covered by this Quarterly Report on Form 10-Q that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The medical device industry is characterized by frequent claims and litigation, including claims regarding patent and other intellectual property rights as well as improper hiring practices. We are not aware of any pending or threatened legal proceeding against us that we expect would have a material adverse effect on our business, operating results or financial condition. However, we are a party in multiple legal actions involving claimants seeking various remedies, including monetary damages and none of the outcomes are certain or entirely within our control.

ITEM 1A. RISK FACTORS

There have been no material changes to the Risk Factors as previously disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 which is accessible on the SEC's website at www.SEC.gov.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) Sales of Unregistered Securities

None

(b) Use of Proceeds

On July 13, 2015, we completed a public offering of 4,500,000 shares of our common stock at an offering price to the public of $22.60 per share. We sold 750,000 shares of common stock in the offering and selling stockholders sold 3,750,000 shares of common stock. The selling stockholders included affiliates of Welsh, Carson, Andrews & Stowe XI, L.P. and Ferrer Freeman & Company, LLC. The primary underwriter of the offering was Barclays Capital Inc.

As a result of the offering, we received total net proceeds of approximately $16.3 million, after deducting total expenses of $0.5 million, consisting of underwriting discounts and commissions of $0.2 million and offering related expenses of approximately $0.3 million. No payments for such expenses were made directly or indirectly to (i) any of our officers or directors or their associates, (ii) any persons owning 10% or more of any class of our equity securities, or (iii) any of our affiliates.

We will use the proceeds of the primary portion of the offering for working capital and general corporate purposes, which is expected to include the expansion of our global distribution network and the purchase of inventory to support sales efforts. Our use of proceeds may also include the acquisition of or investment in complementary products, technologies or businesses. We did not receive any proceeds from shares of common stock sold by the selling stockholders.

In connection with this offering, we and certain selling stockholders granted the underwriters an option to purchase an additional 675,000 shares of our common stock at the public offering price, less underwriting discounts. On July 17, 2015, the underwriters exercised this option and purchased 112,500 shares offered by us and 562,500 shares of common stock offered by the selling stockholders, at the public offering price of $22.60 per share. We received net proceeds of approximately $2.4 million after deducting underwriting discounts and estimated offering costs. We did not receive any proceeds from shares of common stock sold by the selling stockholders. Following these sales, Welsh, Carson, Andrews & Stowe XI, L.P. held approximately 33.3% of our outstanding shares of common stock as of September 30, 2015.

There have been no material changes in the planned use of proceeds from our offering from that described in the prospectus supplement filed with the SEC pursuant to Rule 424(b) on July 7, 2015.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.

31.1 Certification of Periodic Report by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

31.2 Certification of Periodic Report by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).


101.INS	XBRL Instance Document (filed herewith).

101.SCH XBRL Taxonomy Extension Schema Document (filed herewith).

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).

101.DEF XBRL Taxonomy Extension Definition Linkbase Document (filed herewith).

101.LAB XBRL Taxonomy Extension Label Linkbase Document (filed herewith).

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




	K2M Group Holdings, Inc. (Registrant)

Date: November 13, 2015	By:	/s/ ERIC D. MAJOR
		Name:	Eric D. Major
		Title:	President and Chief Executive Officer

	By:	/s/ GREGORY S. COLE
		Name:	Gregory S. Cole
		Title:	Chief Financial Officer

EXHIBIT INDEX

31.1 Certification of Periodic Report by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

31.2 Certification of Periodic Report by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).


101.INS	XBRL Instance Document (filed herewith).

101.SCH XBRL Taxonomy Extension Schema Document (filed herewith).

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).

101.DEF XBRL Taxonomy Extension Definition Linkbase Document (filed herewith).

101.LAB XBRL Taxonomy Extension Label Linkbase Document (filed herewith).

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith).

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