10-Q

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, 2014

or

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

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):

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	x  (Do not check if a smaller reporting company)	Smaller reporting company	¨

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 23, 2014 was 37,138,499

K2M GROUP HOLDINGS, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2014

TABLE OF CONTENTS

	SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS	2
PART I: FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	5
	CONDENSED CONSOLIDATED BALANCE SHEETS	5
	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS	6
	CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS	7
	CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY	8
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	9
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	10
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	21
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	31
ITEM 4.	CONTROLS AND PROCEDURES	32
PART II: OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	33
ITEM 1A.	RISK FACTORS	33
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	33
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	33
ITEM 4.	MINE SAFETY DISCLOSURES	33
ITEM 5.	OTHER INFORMATION	33
ITEM 6.	EXHIBITS	34
SIGNATURES		35

1

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 Prospectus dated May 7, 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;

• our ability to successfully demonstrate the merits of our technologies and techniques compared to those of our competitors;

• pricing pressure from our competitors and hospitals and changes in third-party coverage and reimbursement impacting our ability to sell our products at prices necessary to support our current business strategies;

• competition and our ability to develop and commercialize new products;

• greater resources at our competitors;

• aggregation of hospital purchasing from collaboration and consolidation may lead to demands for price concessions or to the exclusion of some suppliers from certain market opportunities;

• hospitals and other healthcare providers may be unable to obtain adequate coverage and reimbursement for procedures performed using our products;

• the safety and efficacy of our products is not yet supported by long-term clinical data;

• our dependence on a limited number of third-party suppliers for most of our products and components;

• our inability to maintain and expand our network of direct sales employees, independent sales agencies and international distributors;

• the proliferation of physician-owned distributorships (PODs);

• concentration of sales from a limited number of spinal systems or products that incorporate these technologies;

• loss of the services of key members of our senior management, consultants or personnel;

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

• failure to properly manage our anticipated growth;

• acquisitions of or investments in new or complementary businesses, products or technologies, through the licensing of products or technologies from third parties or other strategic alliances, and the failure to manage acquisitions, investments, licenses or other strategic alliances, or the failure to integrate them with our existing business;

• inability to train surgeons on the safe and appropriate use of our products;

• requirements to maintain high levels of inventory;

• an impairment of our goodwill or intangible assets;

• disruptions in our information technology systems;

• any disruption in operations at our headquarters facility or an inability to ship a sufficient number of our products to meet demand;

• inability to strengthen our brand;

• fluctuations in insurance cost and availability;

• inability to secure and prepare new space for our corporate headquarters prior to the expiration of our lease;

• extensive governmental regulation in the United States;

• extensive governmental regulation in foreign jurisdictions, such as Europe;

• failure to maintain regulatory approvals and clearances, or our inability to obtain, or experience significant delays in obtaining, Food and Drug Administration (FDA) clearances or approvals for our future products or product enhancements;

• requirements for new 510(k) clearances, Premarket Approvals (PMA) or new or amended CE Certificates of Conformity;

• failure to obtain or maintain foreign regulatory approvals to market our products in other countries;

• extensive post-market regulation by the FDA and failure to meet strict regulatory requirements;

• medical device reporting regulations, voluntary corrective actions or agency enforcement actions if our products, or malfunction of our products, cause or contribute to a death or a serious injury;

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• a recall of our products, either voluntarily or at the direction of the FDA or another governmental authority, or the discovery of serious safety issues with our products;

• failure by us or our suppliers to comply with ongoing regulatory requirements;

• possible enforcement action if we engage in improper marketing or promotion of our products;

• the misuse or off-label use of our products may harm our image in the marketplace or result in injuries that lead to product liability suits;

• delays or failures in any future clinical trials will prevent us from commercializing any modified or new products associated with such trials;

• the third parties on which we rely to conduct our clinical trials and to assist us with pre-clinical development may not perform as contractually required or expected and we may not be able to obtain regulatory approval for or commercialize our products;

• the results of clinical trials may not support future product candidates or claims or may result in the discovery of adverse side effects;

• governmental regulation and limited sources and suppliers could restrict our procurement and use of allograft bone tissue;

• environmental laws and regulations can impose significant costs and expose us to potential financial liabilities;

• claims for non-compliance with FDA regulations in connection with the processing, manufacturing or distribution of our proposed allograft bone tissue or other biomaterials products;

• failure to comply by us or our sales representatives with fraud and abuse laws;

• U.S. legislative or FDA or other regulatory reforms may make it more difficult and costly for us to obtain regulatory approval of our product candidates and to manufacture, market and distribute our products after clearance or approval is obtained;

• medical device tax provisions in the healthcare reform laws;

• the need to generate significant sales to become profitable;

• sales volumes and our results of operations may fluctuate over the course of the year;

• our future capital needs are uncertain and we may need to raise additional funds in the future, and such funds may not be available on acceptable terms or at all;

• inability to extend the maturity date or obtain a new credit facility;

• continuing worldwide economic instability;

• we may be unable to protect our intellectual property rights;

• our reliance on patent rights that we either license from others or have obtained through assignments;

• patent litigation;

• claims that we, our employees, our independent sales agencies or our distributors have wrongfully used or disclosed alleged trade secrets of our competitors or are in breach of non-competition or non-solicitation agreements with our competitors;

• product liability lawsuits;

• operating risks relating to our international operations;

• failure to comply with the Foreign Corrupt Practices Act and similar laws associated with our activities outside the United States;

• control by and possible conflicts of interest with our sponsor;

• exemptions from corporate governance requirements due to being a “controlled company” under NASDAQ rules;

• increased costs and additional regulations and requirements as a result of becoming a public company;

• inability to implement and maintain effective internal control over financial reporting in the future;

• the market price of shares of our common stock may be volatile;

• dilution from the future issuance of additional common stock in connection with our incentive plans, acquisitions or otherwise;

• decline in the market price of our common stock from the sale by us or our existing investors of additional shares of our common stock;

• anti-takeover provisions in our organizational documents and Delaware law; and

• our status as an “emerging growth company”.

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

3

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 K2M when you enroll your e-mail address by visiting the “Email Alerts” section of our website at http://investors.k2m.com/alerts.cfm?. The contents of our website and social media channels are not, however, a part of this report.

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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)

	December 31,			September 30,
	2013			2014
ASSETS
Current assets:
Cash and cash equivalents	$	7,419		$	23,185
Accounts receivable, net	32,824			32,920
Inventory, net	39,223			53,624
Deferred income taxes	8,824			3,301
Prepaid expenses and other current assets	3,984			5,976
Total current assets	92,274			119,006
Property and equipment, net	2,978			3,279
Goodwill and intangible assets, net	186,270			166,156
Other assets, net	15,414			21,597
Total assets	$	296,936		$	310,038
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS’ EQUITY
Current liabilities:
Bank line of credit	$	23,500		$	—
Accounts payable	17,069			15,465
Accrued expenses	8,760			9,495
Accrued payroll liabilities	10,396			12,058
Total current liabilities	59,725			37,018
Notes to stockholders	19,650			—
Deferred income taxes	14,084			8,561
Other liabilities	211			123
Total liabilities	93,670			45,702
Commitments and contingencies
Series A redeemable convertible preferred stock, $0.001 par value	56,667			—
Series B redeemable convertible preferred stock, $0.001 par value	52,414			—
Stockholders’ equity:
Common stock, $0.001 par value, 100,000,000 and 750,000,000         shares authorized at December 31, 2013 and September 30, 2014,         respectively. 22,421,509 and 37,138,499 shares issued and         outstanding at December 31, 2013 and September 30, 2014, respectively	22			37
Additional paid-in capital	165,651			382,977
Accumulated other comprehensive loss	(920		)	460
Accumulated deficit	(70,568		)	(119,138		)
Total stockholders’ equity	94,185			264,336
Total liabilities, redeemable convertible preferred stock, and stockholders’ equity	$	296,936		$	310,038

See accompanying notes to condensed consolidated financial statements.

5

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,
	2013			2014			2013			2014
Revenue	$	39,776		$	47,624		$	114,975		$	137,363
Cost of revenue	11,782			16,135			34,892			46,583
Gross profit	27,994			31,489			80,083			90,780
Operating expenses:
Research, development and engineering	3,048			4,872			9,327			11,854
Sales and marketing	19,566			25,016			58,840			71,185
General and administrative	14,939			14,507			44,170			47,158
Total operating expenses	37,553			44,395			112,337			130,197
Loss from operations	(9,559		)	(12,906		)	(32,254		)	(39,417		)
Other income (expense):
Foreign currency transaction gain (loss)	2,134			(3,081		)	724			(2,131		)
Discount on prepayment of notes to stockholders	—			—			—			(4,825		)
Interest expense	(721		)	(116		)	(1,878		)	(2,115		)
Total other income (expense), net	1,413			(3,197		)	(1,154		)	(9,071		)
Loss before income tax (benefit) expense	(8,146		)	(16,103		)	(33,408		)	(48,488		)
Income tax (benefit) expense	(1,968		)	37			(7,467		)	82
Net loss	(6,178		)	(16,140		)	(25,941		)	(48,570		)
Accretion and adjustment of preferred stock to fair value	(129		)	—			(13,814		)	6,879
Net loss attributable to stockholders	$	(6,307	)	$	(16,140	)	$	(39,755	)	$	(41,691	)
Net loss per share attributable to common stockholders:
Basic and diluted	$	(0.28	)	$	(0.43	)	$	(1.79	)	$	(1.39	)
Weighted average shares outstanding:
Basic and diluted	22,289,216			37,127,155			22,195,935			30,084,010

See accompanying notes to condensed consolidated financial statements.

6

K2M GROUP HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(In Thousands)

	Three Months Ended   September 30,						Nine Months Ended   September 30,
	2013			2014			2013			2014
Net loss	$	(6,178	)	$	(16,140	)	$	(25,941	)	$	(48,570	)
Other comprehensive income (loss):
Foreign currency translation adjustment	(930		)	(1,650		)	(332		)	(1,380		)
Other comprehensive income (loss)	(930		)	(1,650		)	(332		)	(1,380		)
Comprehensive loss	$	(7,108	)	$	(17,790	)	$	(26,273	)	$	(49,950	)

See accompanying notes to condensed consolidated financial statements.

7

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 Loss			Accumulated Deficit			Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2013	22,421,509	$	22	$	165,651		$	(920	)	$	(70,568	)	$	94,185
Net loss	—	—		—			—			(48,570		)	(48,570		)
Other comprehensive loss	—	—		—			1,380			—			1,380
Stock-based compensation	—	—		3,830			—			—			3,830
Accretion of Series A and B redeemable convertible preferred stock	—	—		(1,158		)	—			—			(1,158		)
Accretion of Series A and B redeemable convertible preferred stock issuances costs	—	—		(22		)	—			—			(22		)
Issuances of common stock pursuant to securities purchase and other agreements	121,111	1		2,307			—			—			2,308
Adjustment of preferred stock to fair value prior to conversion	—	—		8,059			—			—			8,059
Common stock issued in conversion of Series A and B redeemable convertible preferred stock	5,577,016	6		83,650			—			—			83,656
Issuance of common stock from initial public offering, net of offering costs	8,825,000	8		118,862			—			—			118,870
Stock option modifications	—	—		2,077			—			—			2,077
Exercise of options	193,863	—		(279		)	—			—			(279		)
Balance at September 30, 2014	37,138,499	$	37	$	382,977		$	460		$	(119,138	)	$	264,336

See accompanying notes to unaudited condensed consolidated financial statements.

8

K2M GROUP HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In Thousands)

	Nine Months Ended   September 30,
	2013			2014
Operating activities
Net loss	$	(25,941	)	$	(48,570	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	27,248			27,339
Provision for allowance for doubtful accounts	71			351
Provision for inventory reserve	1,034			1,368
Stock-based compensation	1,737			3,830
Amortization of issuance and discount costs included in interest expense	61			4,928
Deferred income taxes	(7,565		)	—
Changes in operating assets and liabilities:
Accounts receivable	(4,065		)	(283		)
Inventory	(11,534		)	(17,190		)
Prepaid expenses and other assets	(138		)	(4,472		)
Accounts payable, accrued expenses, and accrued payroll liabilities	7,106			4,175
Net cash used in operating activities	(11,986		)	(28,524		)
Investing activities
Purchase of surgical instruments	(7,889		)	(9,111		)
Purchase of property and equipment	(753		)	(1,507		)
Purchase of intangible assets	(166		)	(20		)
Net cash used in investing activities	(8,808		)	(10,638		)
Financing activities
Proceeds from issuances of common stock, net of issuance costs	1,445			121,898
Proceeds from issuance of Series B redeemable convertible preferred stock, net of    issuance costs	11,574			—
Proceeds from issuance of notes to stockholders	9,866			14,634
Prepayment of notes to stockholders	—			(39,212		)
Borrowings on bank line of credit	1,500			—
Payments on bank line of credit	—			(23,500		)
Payment of dividends on Series A and Series B redeemable convertible preferred stock	—			(18,547		)
Proceeds from the exercise of options, net of payments to satisfy minimum tax withholdings	(685		)	(279		)
Net cash provided by financing activities	23,700			54,994
Effect of exchange rate changes on cash and cash equivalents	11			(66		)
Net increase in cash and cash equivalents	2,917			15,766
Cash and cash equivalents at beginning of period	7,011			7,419
Cash and cash equivalents at end of period	$	9,928		$	23,185
Significant noncash financing activities
Accretion of Series A redeemable convertible preferred stock	$	3,856		$	1,195
Accretion of Series B redeemable convertible preferred stock	$	—		$	(15	)
Adjustment of preferred stock to fair value	$	9,958		$	(8,059	)
Deferred public offering costs	$	—		$	720
Cash paid for:
Income taxes	$	92		$	36
Interest	$	1,217		$	1,736

See accompanying notes to unaudited condensed consolidated financial statements.

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K2M Group Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30,2013and2014

(Unaudited)

(In Thousands, Except Share and Per Share Data)

1.    GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

K2M Group Holdings, Inc. (the Company) was formed as a Delaware corporation on June 29, 2010. On July 2, 2010, K2M, Inc. (K2M), 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.

The Company is a global medical device company focused on designing, developing and commercializing innovative and proprietary complex spine technologies and techniques. The Company’s 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. The Company has applied its 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. The Company’s 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. The Company has also leveraged these core competencies in the design, development and commercialization of an increasing number of products for patients suffering from degenerative spinal conditions.

Reverse Stock Split and Initial Public Offering

On April 21, 2014, the Board of Directors approved a reverse stock split of the Company’s common stock such that each 2.43 shares of issued common stock were reclassified into one share of common stock. All common stock share and per-share amounts for all periods presented in these financial statements have been adjusted retroactively to reflect the reverse stock split.

On May 13, 2014, the Company completed an initial public offering (IPO) of 8,825,000 shares of common stock at a price of $15 per share. The IPO generated net proceeds of $118,826, after deducting underwriting commissions of $9,266 and expenses of approximately $4,283. The underwriting commissions and offering costs were reflected as a reduction to the IPO proceeds received in additional paid-in capital.

Concurrent with the closing of the IPO, the outstanding shares of the Series A redeemable convertible preferred stock (Series A Preferred) and Series B redeemable convertible preferred stock (Series B Preferred) were converted on a 2.43 -to-1 basis into 5,577,016 shares of common stock. Following the closing of the IPO, there were no shares of preferred stock outstanding.

The Company used proceeds from the IPO to pay cumulative dividends of approximately $11,932 to holders of Series A Preferred and $6,615 to holders of Series B Preferred following the conversion of the preferred stock. In addition, the Company paid approximately $23,500 to repay all outstanding indebtedness under its line of credit and $40,495 to prepay all outstanding aggregate principal and accrued interest of notes to stockholders.

Unaudited Interim Results

The accompanying condensed consolidated balance sheets as of September 30, 2014, the condensed consolidated statements of operations, the condensed consolidated statements of comprehensive loss for the three and nine months ended September 30, 2013 and 2014, the condensed consolidated statements of changes in stockholders' equity as of September 30, 2014, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2013 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 only normal recurring adjustments, necessary to present fairly the Company’s financial position and results of operations and cash flows for the periods presented. The results for the three and nine months ended September 30, 2014 are not

10

necessarily indicative of future results. All information as of September 30, 2014 and for the three and nine month periods ending September 30, 2013 and 2014 within these notes to the consolidated financial statements is unaudited.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries including K2M Holdings, Inc.; K2M Inc.; K2M UK Limited; and K2M Germany, GmbH. 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 (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 the Company’s stock option grants and the if-converted method is used to determine the dilutive effect of the Company’s Series A Preferred and the Series B Preferred. 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 the Company’s only component of accumulated comprehensive income (loss).

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

Recent Accounting Pronouncements

The Company qualifies as an “emerging growth company” (EGC) pursuant to the provisions of the JOBS Act and has 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 the Company continues to qualify as an EGC, it will not have to adopt or comply with new accounting standards until non-issuers are required to comply with such standards.

In February 2013, the Financial Accounting Standards Board (FASB) issued guidance requiring new disclosures on items reclassified from Accumulated Other Comprehensive Income (AOCI). Companies will be required to disclose, in a single location, amounts reclassified from each component of AOCI based on its source and the statement of operations line items affected by the reclassification. The Company’s only component of AOCI is from foreign currency translation adjustments. To the extent there are such reclassifications, we plan to present such disclosure in a note to the consolidated financial statements. For public entities that do not qualify for the EGC extension, the new guidance is effective prospectively for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2012. For EGCs that have elected the EGC extension, including the Company, and non-public issuers, the guidance is effective prospectively for annual reporting periods beginning after December 15, 2013. The Company does not anticipate that this disclosure requirement will have a material impact on its consolidated financial statements.

In March 2013, the FASB issued guidance clarifying the accounting for the release of cumulative translation adjustment into net income when a parent either sells part or all of its investment in a foreign entity or no longer holds a controlling interest in a subsidiary or group of assets that is a nonprofit or a business within a foreign entity. For public entities that do not qualify for the EGC extension, the new guidance is effective prospectively for fiscal years, and interim periods within

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those fiscal years, beginning after December 15, 2013. For EGCs that have elected the EGC extension including the Company, and non-public issuers, the guidance is effective prospectively for the first annual period beginning after December 15, 2014, and interim and annual periods thereafter. Early adoption is permitted. The Company does not anticipate that this adoption will have a material impact on its financial position, results of operations or cash flows.

In July 2013, the FASB issued new guidance on the financial statement presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. For public entities that do not qualify for the EGC extension, the guidance was effective for fiscal years and interim periods within those years, beginning after December 15, 2013 and may be applied retrospectively. EGCs that have elected the EGC extension, including the Company, and non-public issuers will be required to comply with the guidance on a prospective basis in the first quarter of 2015. Early adoption is permitted. Although adoption of this new guidance may impact how such items are classified on the Company’s balance sheet, such change is not expected to be material. There will be no changes in the presentations of the Company’s other financial statements.

In May 2014, the 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. For public entities other than EGCs that have elected the EGC extension, the guidance will be effective for annual reporting periods beginning after December 15, 2016. EGCs that have elected the EGC extension, including the Company, and non-public entities will be required to comply with the guidance for annual reporting periods beginning after December 15, 2017. Early adoption is not permitted. 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. The Company is evaluating the impact of these amendments and the transition alternatives on its consolidated financial statements.

2.    ACCOUNTS RECEIVABLE

Receivables consist of the following:

	December 31, 2013			September 30, 2014
Accounts receivable	$	35,271		$	35,508
Allowances	(2,447		)	(2,588		)
Accounts receivable, net	$	32,824		$	32,920

3.    INVENTORY

The following table summarizes the Company’s inventory, net of allowances:

	December 31, 2013			September 30, 2014
Finished goods	$	64,539		$	79,376
Inventory allowances	(25,316		)	(25,752		)
Inventory, net	$	39,223		$	53,624

Inventory includes surgical instruments available for sale with a carrying value of $5,285 and $8,339 at December 31, 2013 and September 30, 2014, respectively.

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4.    GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets comprise the following:

	As of December 31, 2013
	Estimated Useful Lives	Gross		Accumulated Amortization			Net
Goodwill	—	$	121,814	$	—		$	121,814
Indefinite-lived intangible assets:
Trademarks	—	12,900		—			12,900
In-process research and development	—	1,500		—			1,500
Other	—	296		—			296
Subtotal		14,696		—			14,696
Subject to amortization
Developed technology	4 - 6 years	61,600		(36,466		)	25,134
Licensed technology	4 - 6 years	52,600		(43,947		)	8,653
Customer relationships	4 - 7 years	29,700		(14,320		)	15,380
Patents and other	2 - 17 years	1,313		(720		)	593
Subtotal		145,213		(95,453		)	49,760
Total		$	281,723	$	(95,453	)	$	186,270

	As of September 30, 2014
	Estimated Useful Lives	Gross		Accumulated Amortization			Net
Goodwill	—	$	121,814	$	—		$	121,814
Indefinite-lived intangible assets:
Trademarks	—	12,900		—			12,900
In-process research and development	—	1,500		—			1,500
Other	—	296		—			296
Subtotal		14,696		—			14,696
Subject to amortization
Developed technology	4 - 6 years	61,600		(45,019		)	16,581
Licensed technology	4 - 6 years	52,600		(52,138		)	462
Customer relationships	4 - 7 years	29,700		(17,502		)	12,198
Patents and other	2 - 17 years	1,326		(921		)	405
Subtotal		145,226		(115,580		)	29,646
Total		$	281,736	$	(115,580	)	$	166,156

Amortization expense was $7,597 and $5,038 for the three months ended September 30, 2013 and 2014, respectively, and $22,649 and $20,130 for the nine months ended September 30, 2013 and 2014, respectively.

As of September 30, 2014, the expected amortization expense for the remainder of 2014 and the following four years and thereafter is as follows:

	September 30, 2014
2014	$	2,554
2015	10,150
2016	10,138
2017	6,523
2018 and thereafter	281
Total	$	29,646

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5.    OTHER ASSETS

Other assets comprises the following:

	December 31, 2013		September 30, 2014
Surgical instruments, net	$	15,271	$	21,477
Other	143		120
Total	$	15,414	$	21,597

Surgical instruments are stated net of accumulated amortization of $15,007 and $17,214 at December 31, 2013 and September 30, 2014, respectively. Amortization expense was $1,021 and $1,726 for the three months ended September 30, 2013 and 2014, respectively, and $2,592 and $4,498 for the nine months ended September 30, 2013 and 2014, respectively.

6.    ACCRUED EXPENSES

Accrued expenses consist of the following:

	December 31, 2013		September 30, 2014
Accrued commissions	$	2,837	$	4,005
Accrued royalties	2,230		2,359
Stock option awards liability	2,076		—
Other	1,617		3,131
Total	$	8,760	$	9,495

7.    DEBT

Debt consists of the following:

	December 31, 2013			September 30, 2014
Bank line of credit	$	23,500		$	—
Notes to stockholders	22,270			—
Total debt	45,770			—
Less unamortized discounts	(2,620		)	—
Debt, net of discounts	$	43,150		$	—

Bank Line of Credit

In 2012, K2M and K2M UK Limited executed the Secured Credit Facilities Credit Agreement (the Credit Agreement). Under the Credit Agreement, there are amounts available under the facility of $30,000, which consists of a revolving loan facility in an aggregate principal amount of up to $30,000, sub-facilities under the revolving loan facility for letters of credit in the aggregate availability amount of $1,000, a swingline sub-facility in the aggregate availability amount of $5,000, and a line of credit from the Export-Import Bank of the United States, or the Export Import Bank sub-facility in the aggregate availability amount of $10,000.

Borrowings under the Credit Agreement are secured by a first priority lien in all the personal property assets of the Company, including intellectual property. The Credit Agreement contains various financial covenants and negative covenants with which the Company must maintain compliance. Additionally, as long as the Company maintains unrestricted cash at a specific lender’s bank, plus unused borrowing availability of at least $7,500, the Company may maintain a static loan balance and therefore, collections may be transferred to the Company’s operating cash account.

Borrowings under the revolving line of credit accrued interest at a rate of 4.25% at September 30, 2014. For the nine months ended September 30, 2013 and 2014, the Company incurred interest expense of $950 and $652, respectively, including amounts of $206 and $279, respectively, related to the amortization of the loan issuance fees.

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On May 13, 2014, the Company repaid all $23,500 outstanding under the bank line of credit and accrued interest of $38 using proceeds of the IPO. On October21,2014,the Company and its lenders amended the Credit Agreement. Please refer to Note 15, Subsequent Events.

Notes to Stockholders

In 2014, the Company issued 121,111 shares of its common stock to certain stockholders at $19.05 per share for proceeds of $2,308. In addition, K2M Holdings, Inc. issued these stockholders notes with an aggregate principal amount of $16,942 for cash consideration of $14,634. These notes bear interest at 10%. Following issuance of these notes, total aggregate principal amount outstanding of all notes payable to stockholders was $39,212.

On May 13, 2014, the Company pre-paid all $39,212 principal outstanding under the notes to stockholders and accrued interest of $1,283 using proceeds of the IPO. In connection with the prepayment, the Company recorded $4,825 representing the acceleration of the issuance discounts on the notes to stockholders. Interest expense for the nine months ended September 30, 2013 and 2014 was $889 and $1,324, respectively, and included amortization expense of $61 and $103, respectively.

8.    REDEEMABLE CONVERTIBLE PREFERRED STOCK

The following is a rollforward of activity in the Series A Preferred and Series B Preferred accounts from December 31, 2013 to September 30, 2014.

	Series A Preferred							Series B Preferred
	Shares							Shares
	Authorized		Outstanding		Amount			Authorized		Outstanding		Amount
Balance at December 31, 2013	7,300,000		7,250,885		$	56,667		6,500,000		6,301,291		$	52,414
Payment of dividend	—				(11,932		)					(6,615		)
Accretion of preferred stock to fair value	—		—		1,195			—		—		(15		)
Adjustment of preferred stock to fair value prior to conversion	—		—		(1,170		)	—		—		(6,889		)
Conversion to common stock	(7,300,000	)	(7,250,885	)	(44,760		)	(6,500,000	)	(6,301,291	)	(38,895		)
Balance at September 30, 2014	—		—		$	—		—		—		$	—

On May 13, 2014, the Company converted the Series A Preferred and Series B Preferred into 2,983,902 and 2,593,114 shares, respectively, of its common stock based on a 2.43:1 conversion ratio as a result of its IPO. In addition, cumulative unpaid dividends of $18,547 were paid in cash to holders of the preferred stock.

9.    STOCK-BASED COMPENSATION

As of September 30, 2014, the Company has four stock-based compensation plans: 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 is to provide incentives to employees, directors, agents and advisors of the Company. The Plans are administered by the Company’s board of directors or its delegates. The number, type of equity incentive, exercise or share purchase price, and vesting terms are determined in accordance with the Plans, as applicable. The Omnibus Incentive Plan and ESPP were adopted by the Company’s board of directors on May 7, 2014. At that time, 1,650,289 and 411,523 shares were reserved for issuance under the Omnibus Incentive Plan and ESPP, respectively. Following the adoption of these 2014 plans, no further incentive awards may be granted under the 2010 Equity Award Plan.

The Omnibus Incentive Plan

The Omnibus Incentive Plan was adopted to provide a means through which to attract and retain key personnel and to provide a means whereby the Company’s directors, officers, employees, consultants and advisors can acquire and maintain an equity interest in the Company. The Omnibus Incentive Plan is administered by the Compensation Committee of the Company’s board of directors. Incentive awards under the plan may take the form of incentive or non-qualified stock options, stock appreciation

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rights, restricted shares and restricted stock units (RSUs) and other stock-based awards, subject to certain limitations. The committee may also designate any award as a “performance compensation award” intended to qualify as “performance-based compensation” under Section 162(m) of the Internal Revenue Code.

The ESPP

The ESPP was established to provide employees and participating affiliates with an opportunity to purchase the Company’s common stock. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code.

Generally, all domestic employees are eligible to participate in the ESPP if they are employed by the Company or any participating affiliate, for at least 20 hours per week. Participants will be permitted to purchase shares of the Company’s common stock through payroll deductions of no less than 1% and no more than 10% of their eligible compensation. However, during the first offering period, which commenced on May 8, 2014 and ends on December 31, 2014, participants are limited to contributions of 2% of eligible compensation. Subsequent offerings will start after the end date of the first offering period on a schedule established by the committee appointed by our board of directors to administer the ESPP. Amounts deducted and accumulated by the participant will be used to purchase shares of the Company’s common stock at the end of each offering period. The purchase price of the shares will be equal to 85 percent of the lower of the fair value of the Company’s common stock on the first day of the offering period, or on the common stock purchase date at the end of each offering period. Participants may end their participation at any time during an offering period and will be paid their accrued contributions that have not yet been used to purchase shares of common stock. In addition, participation ends automatically upon termination of employment with the Company. The Company recognized approximately $50 and $80 of stock-based compensation expense on the ESPP for the three and nine months ended September 30, 2014.

The Company recognized the following stock-based compensation expense related to employees and non-employees which is inclusive of the amounts detailed below:

	Three Months Ended   September 30,				Nine Months Ended   September 30,
	2013 (1)		2014 (1)		2013 (1)		2014 (1)
Cost of revenue	$	72	$	156	$	222	$	267
Research, development, and engineering	24		156		70		299
Sales and marketing	211		749		593		1,382
General and administrative	269		1,010		852		1,882
	$	576	$	2,071	$	1,737	$	3,830
Employees	$	526	$	2,047	$	1,667	$	3,785
Non-employees	50		24		70		45
Total	$	576	$	2,071	$	1,737	$	3,830

(1) Stock-based compensation included $169 and $0 related to stock option liability awards for the three months ended September 30, 2013 and 2014, respectively, compared to $545 and $0 for the nine months ended September 30, 2013 and 2014, respectively.

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A summary of stock option plans activity during the nine months ended September 30, 2014 is as follows:

	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (1)
Outstanding at December 31, 2013	4,179,119		$	8.18	5.64	$	31,434
Granted	684,937		15.01
Exercised	(312,020	)	6.16
Expired	(31,888	)	4.41
Forfeited	(43,533	)	7.14
Outstanding at September 30, 2014(2)	4,476,615		$	9.40	5.96	$	22,800
Vested or expected to vest:
At September 30, 2014(3)	4,421,693		$	9.39	5.98	$	22,653
Vested:
At September 30, 2014	2,478,103		$	7.82	4.49	$	16,374

(1) Calculated using the estimated fair market value per-share of the Company’s common stock as on December 31, 2013 and actual per share fair market value at September 30, 2014, which was $15.70 and $14.43, respectively.

(2) The total includes 993,934 performance-based options at September 30, 2014.

(3) Outstanding options, net of forfeiture rate.

A summary of RSU activity for the nine months ended September 30, 2014 is as follows:

	Unvested RSUs
	Shares
Outstanding at December 31, 2013	576,132
Granted	188,891
Vested	—
Forfeited	—
Unvested at September 30, 2014	765,023

On April 21, 2014, the Company’s board of directors modified the vesting terms of the 576,132 RSUs issued to certain members of senior management in May 2013 to add time-vesting criteria. The modified vesting terms provides that the RSUs will vest in two equal installments on May 21, 2015 and 2016, subject to continued employment through the applicable vesting dates. In addition, the RSUs will continue to vest on an accelerated basis upon death, disability, or a change in control. The Company expects to recognize stock-based compensation expense of approximately $15.61 per share or $8,993 over the vesting period. The Company recognized stock-based compensation expense of $1,088 and $1,916 for the three and nine months ended September 30, 2014 related to these awards.

Effective May 7, 2014, the Company’s board of directors approved the issuance of 188,891 RSUs to certain of the Company’s officers. The RSUs will vest in three equal installments on the first, second and third anniversary of the grant date. The Company expects to recognize stock-based compensation expense of approximately $2,833 over the vesting period of the RSU. Stock-based compensation expense related to these awards recognized in the three and nine months ended September 30, 2014 was $238 and $378, respectively.

10.    COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company enters into agreements to obtain the rights to certain intellectual property. These agreements may require an up-front payment, milestone payments and/or royalties. Typically, the Company has 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, 2014, the aggregate amount of these future payments, assuming achievement of applicable milestones and non-cancellation, was $1,613 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.

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In November 2011, the Company entered into an agreement to purchase certain proprietary technology which could require it 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, 2014.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. The Company is not aware of any pending or threatened legal proceeding against it that the Company expects would have a material adverse effect on its business, operating results or financial condition. However, the Company is a party in multiple legal actions involving claimants seeking various remedies, including monetary damages, and none of the outcomes are certain or entirely within the Company's control.

11.    RELATED PARTIES

In connection with the Merger, the Company and K2M entered into a management agreement with the major stockholder of the Company. Under the terms of the agreement, as amended, the Company incurred fees to the stockholder of $263 and $0 for the three months ended September 30, 2013 and 2014, respectively and $513 and $373 for the nine months ended September 30, 2013 and 2014, respectively. The Company records such costs in general and administrative expense in its consolidated statements of operations. The management agreement was terminated in May 2014 following the Company's IPO.

In connection with the IPO, certain stockholders of the Company granted the underwriters an option to purchase from such selling shareholders additional shares of common stock at the public offering price, less underwriting discounts.   On June 10, 2014, the underwriters exercised this option and purchased 1,000,000 shares of common stock from selling shareholders at a price of $15 per share before underwriting discounts.  The Company received no proceeds from the sale of these shares.

12.    INCOME TAXES

The provision for income taxes for the three and nine months ended September 30, 2013 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, 2013 and 2014, the income tax (benefit) expense was $(1,968) and $37, resulting in an effective tax rate of 24.2% and (0.2)%, respectively. For the nine months ended September 30, 2013 and 2014, income tax (benefit) expense was $(7,467) and $82, resulting in an effective tax rate of 22.4% 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.

13.    NET LOSS PER SHARE

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2014			2013			2014
Net loss per common share:
Net loss	$	(6,178	)	$	(16,140	)	$	(25,941	)	$	(48,570	)
Less: accretion and adjustment of Series A Preferred and Series B Preferred	(129		)	—			(13,814		)	6,879
Net loss attributable to common stockholders	$	(6,307	)	$	(16,140	)	$	(39,755	)	$	(41,691	)
Basic and diluted loss per common share
Basic and diluted weighted average common shares outstanding	22,289,216			37,127,155			22,195,935			30,084,010
Basic and diluted loss per common share	$	(0.28	)	$	(0.43	)	$	(1.79	)	$	(1.39	)

Diluted loss per share for the three and nine months ended September 30, 2013 and 2014 does not reflect the following weighted average potential common shares, as the effect would be antidilutive:

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	Three Months Ended September 30,		Nine Months Ended September 30,
	2013	2014	2013	2014
Series A Preferred and Series B Preferred	5,576,955	—	5,576,955	—
Stock options	4,247,737	4,476,615	4,247,737	4,476,615
Restricted stock units	576,131	765,023	576,132	765,023

14.    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. The Company globally manages the business 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 27.8% and 29.1% of total revenue for the three and nine months ended September 30, 2014; however, revenue earned in any individual foreign country is below 10% of the Company’s 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,
	2013		2014		2013		2014
United States	$	27,491	$	34,385	$	83,091	$	97,371
International	12,285		13,239		31,884		39,992
Total	$	39,776	$	47,624	$	114,975	$	137,363

The Company classifies sales within the United States into three categories: complex spine pathologies, minimally invasive procedures and degenerative and other conditions. A significant portion of the Company’s international revenue is derived from the Company’s 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 the Company ships the product to the agent.

The following table represents domestic revenue by procedure category. To further align its procedure categorizations, beginning in the second quarter of 2014, the Company began to report MIS sales attributable to complex spine procedures, which were historically reported in the minimally invasive category, within the complex spine category.  Accordingly, the complex spine category presented below includes MIS sales attributable to complex spine procedures of $1,355 for the three months ended September 30, 2013 and $4,114 and $3,865 for the nine months ended September 30, 2013 and 2014, respectively, which was historically reported in the minimally invasive category.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2014		2013		2014
Complex spine	$	11,330	$	14,585	$	35,111	$	40,375
Minimally invasive	4,946		5,258		13,945		15,138
Degenerative	11,215		14,542		34,035		41,858
	27,491		34,385		83,091		97,371
International	12,285		13,239		31,884		39,992
Total	$	39,776	$	47,624	$	114,975	$	137,363

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15. SUBSEQUENT EVENTS

On October 21, 2014, subsidiaries of the Company entered into an amendment (the “Fourth 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 Fourth Amendment, among other things, extends the maturity date of the revolving credit facility to October 2015, increases the total revolving commitments from $30,000 to $40,000 and increases the letter of credit sub-facility from $1,000 to $10,000. In addition, the Fourth Amendment removes the sub-facility provided by the Export-Import Bank of the United States, which had been a party to the prior loan agreements. 

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 the greater of (i) LIBOR, plus 2.50% or (ii) 3.75%.  The total obligations under the amended credit facility cannot exceed (i) the lesser of the total revolving commitment of $40,000 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) 35% of the value of the eligible inventory provided that the contribution of the value of the eligible inventory not exceed the less of 40% of the borrowing base or $10,000.  Borrowings under the revolving credit facility remain secured by a first priority lien on all of the Borrower’s personal property assets, including intellectual property.    

The existing financial covenants were deleted in their entirety and replaced with a quick ratio financial covenant, calculated as the ratio of (i) the sum of all unrestricted cash and cash equivalents, accounts or accounts receivable and inventory (to the extent not in excess of 50% of the foregoing) to (ii) the consolidated liabilities plus outstanding letters of credit minus deferred revenue, which cannot exceed 1.20:1.00 on the last day of any month. 

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. Basket sizes and thresholds applicable to the negative covenants have also been added and/or modified. Certain additional modifications to the revolving credit facility are consistent with the Company becoming a public company in April 2014.

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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 II: Item 1A. Risk Factors” 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 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, 2014, our U.S. sales force consisted of 121 direct sales employees and 66 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 physician-owned distributors (PODs).

We also market and sell our products internationally in 29 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, 2014, international sales accounted for approximately 27.8% and 29.1%, respectively, of our revenue. As of September 30, 2014, our international sales force consisted of 37 direct sales employees, eight independent agencies and 19 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.

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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 distributorships, 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.

In our international markets where we utilize independent distributorships, 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 30.9% and 27.8% of total revenue for the three months ended September 30, 2013 and 2014, respectively, and 27.7% and 29.1% during the nine months ended September 30, 2013 and 2014, respectively. We anticipate that sales in international markets will grow faster than sales in the United States in the near term.

In addition, we generated 59.2% and 57.7% of our U.S. revenue for the three months ended September 30, 2013 and 2014, respectively, from the sale of our complex spine and MIS products and 59.0% and 57.0% for the nine months ended September 30, 2013 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. Beginning in 2013, our cost of revenue included 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.

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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; and

• the impact of industry consolidation on the overall market.

Results of Operations

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

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	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2014			2013			2014
	(In thousands)
Revenue	$	39,776		$	47,624		$	114,975		$	137,363
Cost of revenue	11,782			16,135			34,892			46,583
Gross profit	27,994			31,489			80,083			90,780
Operating expenses:
Research, development and engineering	3,048			4,872			9,327			11,854
Sales and marketing	19,566			25,016			58,840			71,185
General and administrative	14,939			14,507			44,170			47,158
Total operating expenses	37,553			44,395			112,337			130,197
Loss from operations	(9,559		)	(12,906		)	(32,254		)	(39,417		)
Other income (expense):
Foreign currency transaction (loss) gain	2,134			(3,081		)	724			(2,131		)
Discount on prepayment of stockholder notes	—			—			—			(4,825		)
Interest expense	(721		)	(116		)	(1,878		)	(2,115		)
Total other expense, net	1,413			(3,197		)	(1,154		)	(9,071		)
Loss before income tax (benefit) expense	(8,146		)	(16,103		)	(33,408		)	(48,488		)
Income tax (benefit) expense	(1,968		)	37			(7,467		)	82
Net loss	(6,178		)	(16,140		)	(25,941		)	(48,570		)
Accretion and adjustment of preferred stock to fair value	(129		)	—			(13,814		)	6,879
Net loss attributable to common stockholders	$	(6,307	)	$	(16,140	)	$	(39,755	)	$	(41,691	)

Three Months Ended September 30, 2014 Compared to the Three Months Ended September 30, 2013

The following table sets forth, for the periods indicated, our revenue by geography expressed as dollar amounts and the changes in such revenue between the specified periods expressed in dollar amounts and as percentages:

	Three Months Ended September 30,
	2013		2014		$ Increase		% Change
	(In thousands)
United States	$	27,491	$	34,385	$	6,894	25.1	%
International	12,285		13,239		954		7.8	%
Total revenue	$	39,776	$	47,624	$	7,848	19.7	%

Total revenue increased $7.8 million, or 19.7%, from $39.8 million for the three months ended September 30, 2013 to $47.6 million for the three months ended September 30, 2014. The increase in revenue was primarily driven by $7.0 million in greater sales volume in the United States due to continued expansion of our customer base and $0.6 million in growth in our international distributor markets, primarily Australia and the Netherlands. The increases in the United States were offset in part by a decrease in revenue from our existing customer base and changes in the mix of products sold.

U.S. Revenue

The following table sets forth, for the periods indicated, our U.S. revenue by product category expressed as dollar amounts and the changes in such revenue between the specified periods expressed in dollar amounts and percentages. To further align its procedure categorizations, beginning in the second quarter of 2014, the Company began to report MIS sales attributable to complex spine procedures, which were historically reported in the minimally invasive product category, within the complex spine category.  Accordingly, the complex spine category presented below includes MIS sales attributable to complex spine procedures which were historically reported in the minimally invasive procedure category of $1.4 million for the three months ended September 30, 2013. The financial information for the three months ended September 30, 2014 do not reflect a change to the complex spine category because we now include MIS sales attributable to complex spine procedures within the complex spine category.

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	Three Months Ended September 30,
	2013		2014		$ Increase		% Change
	(In thousands)
Complex spine	$	11,330	$	14,585	$	3,255	28.7	%
Minimally invasive	4,946		5,258		312		6.3	%
Degenerative	11,215		14,542		3,327		29.7	%
Total U.S. revenue	$	27,491	$	34,385	$	6,894	25.1	%

U.S. revenue increased $6.9 million, or 25.1%, from $27.5 million for the three months ended September 30, 2013 to $34.4 million for the three months ended September 30, 2014. Sales in our complex spine, MIS and degenerative categories represented 41.2%, 18.0% and 40.8% of U.S. revenue, respectively, for the three months ended September 30, 2013, 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 $7.0 million of revenue, offset in part, by unfavorable changes in price, a decrease in existing customer usage and mix of products sold. The complex spine category growth of $3.3 million reflects increased surgeon usage of our MESA and EVEREST systems of $2.3 million, an initial stocking order of implants of $0.5 million, which has been categorized based on experienced surgical implant usage patterns to date of such order, and increased usage of our biomaterials offering of $0.2 million. The MIS category growth of $0.3 million primarily reflects increased surgeon usage of our EVEREST^(R) minimally invasive products. The degenerative category growth of $3.3 million primarily reflects increased surgeon usage of our EVEREST^(R) product line of $0.9 million and increased usage of our biomaterials offering of $0.7 million.

International Revenue

International revenue increased $0.9 million, or 7.8%, from $12.3 million for the three months ended September 30, 2013 to $13.2 million for the three months ended September 30, 2014. International revenue increased as a result of expanded customer usage of $0.4 million in our Italian, United Kingdom and German markets. The revenue growth from these markets includes a $0.2 million increase in revenue resulting from favorable foreign currency fluctuations, due to a strengthening of the Pound Sterling and the Euro as compared to the U.S. Dollar. International revenue also reflects growth of $0.6 million from our international distributor partners, primarily in Australia and the Netherlands, as our partners continue to invest in new surgical sets and their market penetration continues to grow.

Cost of Revenue

Cost of revenue increased $4.3 million, or 36.9%, from $11.8 million for the three months ended September 30, 2013 to $16.1 million for the three months ended September 30, 2014. The increase was primarily due to increased sales volume, increasing utilization of our custom designed instruments, and increased inventory reserve expense. Amortization expense, increased $0.9 million, or 63.7%, from $1.4 million in the three months ended September 30, 2013 to $2.3 million for the three months ended September 30, 2014. The increase in amortization expense is primarily a result of increased investment in surgical instruments and the absence of the one-time benefit realized in 2013 from the change in useful life of our surgical instruments from three years to five years. In addition, the cost of revenue associated with the medical device excise tax in the United States was approximately $0.5 million for each of the three months ended September 30, 2013 and 2014.

Gross Profit

Gross profit decreased as a percentage of revenue from 70.4% for the three months ended September 30, 2013 to 66.1% for the three months ended September 30, 2014. The decrease in gross profit as a percentage of revenue is primarily due to changes in the mix of products sold in the United States, pricing declines in the United States. and select international markets, higher instrument amortization expense, and increased inventory reserve expense.

Research, Development and Engineering

Research, development and engineering expenses increased $1.9 million, or 59.8%, from $3.0 million for the three months ended September 30, 2013 to $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 development activities of products in our pipeline.

Sales and Marketing

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Sales and marketing expenses increased $5.4 million, or 27.9%, from $19.6 million for the three months ended September 30, 2013 to $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, 2013. The increase was also due in part to increased costs associated with travel, marketing, advertising, and shipping expense.

General and Administrative

General and administrative expenses decreased $0.4 million, or 2.9%, from $14.9 million for the three months ended September 30, 2013 to $14.5 million for the three 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 and other consulting expenses. General and administrative expenses includes amortization of intangible assets of $7.5 million and $5.0 million for the three months ended September 30, 2013 and September 30, 2014, respectively.

Other Income (Expense)

Other Income (Expense), decreased $4.6 million, from $1.4 million in income for the three months ended September 30, 2013 to $(3.2) million of expense for the three months ended September 30, 2014. The decrease in other income (expense) was primarily attributable to an increase in loss on foreign currency transactions of $5.2 million with our subsidiaries, partially offset by a reduction in interest expense of $0.6 million.

Income Tax (Benefit) Expense

Benefit from income taxes decreased $2.0 million, to an expense of $37,000 for the three months ended September 30, 2014. Our effective tax rate calculated as a percentage of loss before income tax benefit was 24.2% for the three months ended September 30, 2013 and (0.2)% for the three months ended September 30, 2014. The change in the effective tax rate was due to the effect of an increase in the valuation allowance on our deferred tax assets as of September 30, 2014.

Nine Months Ended September 30, 2014Compared to the Nine Months Ended September 30, 2013

The following table sets forth, for the periods indicated, our revenue by geography expressed as dollar amounts and the changes in such revenue between the specified periods expressed in dollar amounts and as percentages:

	Nine Months Ended September 30,
	2013		2014		$ Increase		% Change
	(In thousands)
United States	$	83,091	$	97,371	$	14,280	17.2	%
International	31,884		39,992		8,108		25.4	%
Total revenue	$	114,975	$	137,363	$	22,388	19.5	%

Total revenue increased $22.4 million, or 19.5%, from $115.0 million for the nine months ended September 30, 2013 to $137.4 million for the nine months ended September 30, 2014. The increase in revenue was primarily driven by $21.6 million in greater sales volume in the United States due to continued expansion of our customer base and changes in our mix of products sold, $1.4 million in growth in our direct international markets, primarily Germany and the United Kingdom including $0.8 million of favorable foreign currency exchange and $5.3 million in growth in our international distributor markets, primarily Australia, Spain and Denmark. 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 expressed as dollar amounts and the changes in such revenue between the specified periods expressed in dollar amounts and percentages. To further align its procedure categorizations, beginning in the second quarter of 2014, the Company began to report MIS sales attributable to complex spine procedures, which were historically reported in the minimally invasive product category, within the complex

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spine category.  Accordingly, the complex spine category presented below includes MIS sales attributable to complex spine procedures which were historically reported in the minimally invasive procedure category of $4.1 million and $3.9 million for the nine months ended September 30, 2013 and 2014, respectively.

	Nine Months Ended September 30,
	2013		2014		$ Increase		% Change
	(In thousands)
Complex spine	$	35,111	$	40,375	$	5,264	15.0	%
Minimally invasive	13,945		15,138		1,193		8.6	%
Degenerative	34,035		41,858		7,823		23.0	%
Total U.S. revenue	$	83,091	$	97,371	$	14,280	17.2	%

U.S. revenue increased $14.3 million, or 17.2%, from $83.1 million for the nine months ended September 30, 2013 to $97.4 million for the nine months ended September 30, 2014. Sales in our complex spine, MIS and degenerative categories represented 42.3%, 16.8% and 40.9% of U.S. revenue, respectively, for the nine months ended September 30, 2013, 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 $13.0 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 $5.3 million reflects increased surgeon usage of our EVEREST^(R) system of $2.3 million, an initial stocking order of implants of $0.5 million, which has been categorized based on experienced surgical implant usage patterns to date of such order, and increased usage of our biomaterials offering of $1.0 million. The MIS category growth of $1.2 million primarily reflects increased surgeon usage of our minimally invasive products in the evaluation phase for adult complex spine patients. The degenerative category growth of $7.8 million primarily reflects increased surgeon usage of our EVEREST^(R) product line of $2.2 million, and increased usage of our biomaterials offering of $2.0 million.

International Revenue

International revenue increased $8.1 million, or 25.4%, from $31.9 million for the nine months ended September 30, 2013 to $40.0 million for the nine months ended September 30, 2014. International revenue increased significantly as a result of expanded customer usage of $2.3 million in our Italian, United Kingdom and German markets. The revenue growth from these markets includes a $0.8 million increase in revenue resulting from foreign currency fluctuations, due to a strengthening of the Pound Sterling and the Euro as compared to the U.S. Dollar. International revenue also reflects growth of $5.3 million from our international distributor partners, primarily in Australia, Spain and Denmark, as our partners continue to invest in new surgical sets and their market penetration continues to grow.

Cost of Revenue

Cost of revenue increased $11.7 million, or 33.5%, from $34.9 million for the nine months ended September 30, 2013 to $46.6 million for the nine months ended September 30, 2014. The increase was primarily due to increased sales volume, increasing utilization of our custom designed instruments, higher instrument amortization expense, and increased inventory reserve expense. Amortization expense increased $2.5 million, or 69.6%, from $3.5 million in the nine months ended September 30, 2013 to $6.0 million for the nine months ended September 30, 2014. The increase in amortization expense is primarily a result of increased investment in surgical instruments and the absence of the one-time benefit realized in 2013 from the change in useful life of our surgical instruments from three years to five years. In addition, the cost of revenue associated with the medical device excise tax in the United States was approximately $1.5 million and $1.6 million for the nine months ended September 30, 2013 and 2014, respectively.

Gross Profit

Gross profit decreased as a percentage of revenue from 69.7% for the nine months ended September 30, 2013 to 66.1% for the nine months ended September 30, 2014. The decrease in gross profit as a percentage of revenue is primarily due to changes in the mix of sales between the United States and international markets, pricing declines in the United States and select international markets, and increased inventory reserve expenses. International revenue reimbursements from insurers vary widely in each international region and are typically lower than revenue reimbursements from insurers in the United States. Additional contributors to the decreased gross profit as a percentage of revenue include a higher instrument amortization expense and the gross profit impact of $3.8 million of increased biomaterials sales which have a lower selling price relative to their cost than our existing implant products.

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Research, Development and Engineering

Research, development and engineering expenses increased $2.6 million, or 27.1%, from $9.3 million for the nine months ended September 30, 2013 to $11.9 million for the nine months ended September 30, 2014. The increase was primarily due to higher payroll expenses, including stock based compensation, and increased development activities of products in our pipeline.

Sales and Marketing

Sales and marketing expenses increased $12.4 million, or 21.0%, from $58.8 million for the nine months ended September 30, 2013 to $71.2 million for the nine months ended September 30, 2014. The increase was primarily due to increased 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, 2013. The increase is also due in part to increased spending on travel and higher shipping costs.

General and Administrative

General and administrative expenses increased $3.0 million, or 6.8%, from $44.2 million for the nine months ended September 30, 2013 to $47.2 million for the nine months ended September 30, 2014. The increase was primarily due to 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 RSUs issued in 2013 and increased third-party legal and other consulting expenses. General and administrative expenses includes amortization of intangible assets of $22.6 million and $20.1 million in the nine months ended September 30, 2013 and the nine months ended September 30, 2014, respectively.

Other Income (Expense)

Other Income (Expense), increased $7.9 million from $(1.2) million for the nine months ended September 30, 2013 to $(9.1) million for the nine months ended September 30, 2014. The increase in other income (expense) was attributable to the acceleration of discount expense on notes to stockholders of $4.8 million as a result of their prepayment and higher interest expense of $0.2 million attributable to higher average debt balances during the period and a $2.9 million increase in loss from foreign currency transactions.

Income Tax (Benefit) Expense

Benefit from income taxes decreased $7.5 million, to an expense of $82,000 for the nine months ended September 30, 2014. Our effective tax rate calculated as a percentage of loss before income tax benefit was 22.4% for the nine months ended September 30, 2013 and (0.2)% for the nine months ended September 30, 2014. The change in the effective tax rate was due to the effect of an increase in the valuation allowance on our deferred tax assets as of September 30, 2014.

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 and penetrate further into existing markets and enter 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 had 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 the 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.

As of September 30, 2014, we had cash and cash equivalents of $23.2 million as compared to $7.4 million of cash and cash equivalents as of December 31, 2013. As of September 30, 2014, we had no outstanding indebtedness and we had working capital of $82.0 million, compared to $32.5 million as of December 31, 2013.

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 development and commercialization of new products through our research and development efforts. We are currently in negotiations to relocate our corporate headquarters and enter into a new lease to occupy such location when our existing lease expires in 2016. The new lease is expected to result in an increase in annual rent expense of

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approximately $2.0 million to $2.5 million. We expect to fund our long-term capital needs with the IPO proceeds, 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, 2013 and 2014:

	Nine Months Ended September 30,
	2013			2014
	(In thousands)
Net cash used in operating activities	$	(11,986	)	$	(28,524	)
Net cash used in investing activities	(8,808		)	(10,638		)
Net cash provided by financing activities	23,700			54,994
Effect of exchange rate on cash	11			(66		)
Net change in cash and cash equivalents	$	2,917		$	15,766

Cash Used in Operating Activities

Net cash used in operating activities increased $16.5 million from $12.0 million for the nine months ended September 30, 2013 to $28.5 million for the nine months ended September 30, 2014. The increase in net cash used in operations was due primarily due to increases in inventory purchases to support future sales activities and a decrease of accounts payable and accrued expenses from the nine months ended September 30, 2013 to the nine months ended September 30, 2014.

    Cash Used in Investing Activities

Net cash used in investing activities increased $1.8 million from $8.8 million for the nine months ended September 30, 2013 to $10.6 million for the nine months ended September 30, 2014. The increase in net cash used in investing activities was primarily attributable to increased purchases of surgical instruments for use within our global distribution network and greater software development activities to support our internal systems.

Cash Provided by Financing Activities

Net cash provided by financing activities increased $31.3 million from $23.7 million for the nine months ended September 30, 2013 to $55.0 million for the nine months ended September 30, 2014. For the nine months ended September 30, 2014 cash provided by financing activities included approximately $121.9 million received from issuances of common stock, net of expenses, and $14.6 million of proceeds from notes to stockholders. In 2013, we received $13.0 million from issuances of our preferred and common stock in private placements and $9.9 million of proceeds from the issuance of notes to stockholders.  Cash used in financing activities during the nine months ended September 30, 2014, included prepayments of notes to stockholders of $39.2 million, payments on the bank line of credit of $23.5 million and dividends paid on preferred stock of

29

$18.5 million from use of the proceeds of our IPO.  In 2013, such activities used in financing activities totaled approximately $1.5 million.

Capital Expenditures

Our capital expenditures increased $2.0 million from $8.6 million for the nine months ended September 30, 2013 to $10.6 million for the nine months ended September 30, 2014. Of the increase, $1.2 million was the result of an increase in purchases of instrumentation to support surgical sales and $0.8 million was due to an increase in property and equipment mainly as a result of greater software development activities undertaken to support our internal systems.

For the remainder of 2014, we expect capital expenditures to increase from 2013 levels as we continue to expand our global distribution network and purchase of additional inventory to support that expansion. We intend to use a portion of the IPO proceeds and cash flows from our operations to fund our additional future capital expenditures through the end of 2014.

Indebtedness

Revolving Credit Facility

On October 21, 2014, we amended our senior secured asset-backed revolving credit facility with Silicon Valley Bank and Comerica Bank (the lenders). The amended credit facility consists of a revolving credit facility of $40.0 million with a sub-facility for letters of credit in the aggregate availability amount of $10.0 million and a swingline sub-facility in the aggregate availability amount of $5.0 million. The amendment removed the sub-facility provided by the Export-Import Bank of the United States, which had been party to prior agreements. The credit facility is secured by a first priority lien on all of our personal property assets, including intellectual property, and matures in October 2015.

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 the greater of (i) LIBOR, plus 2.50% or (ii) 3.75%. The total obligations under the amended credit facility cannot exceed (i) the lesser of the total revolving commitment of $40 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) 35% of the value of the eligible inventory provided that the contribution of the value of the eligible inventory not exceed the less of 40% of the borrowing base or $10 million. Borrowings under the revolving credit facility remain secured by a first priority lien on all of the Borrower’s personal property assets, including intellectual property.

The revolving credit facility contains various financial covenants and negative covenants with which the Company must maintain compliance, including a consolidated adjusted quick ratio for K2M, Inc., K2M UK Limited and select subsidiaries 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,

Notes to Stockholders

In January and March 2014, we executed securities purchase agreements and note agreements with certain existing stockholders. Pursuant to such securities purchase agreements, such existing stockholders agreed to purchase 121,111 shares of our common stock from us at $19.05 per share, resulting in cash proceeds of $2.3 million. Pursuant to the note agreements, we issued notes to such stockholders in an aggregate principal amount of $16.9 million at a discount for cash consideration of $14.6 million. Following these note issuances, the outstanding aggregate principal amount of notes to stockholders was $39.2 million. On May 13, 2014, we prepaid the principal balance of notes to stockholders, along with accrued interest with proceeds from our IPO.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in conformity with U.S. GAAP, which requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. The Company’s critical accounting estimates are described in "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical

30

Accounting Policies and Estimates" in our Prospectus dated May 7, 2014.  An accounting estimate is considered critical if the estimate requires management to make an assumption about matters that were highly uncertain at the time the estimate was made, different estimates reasonably could have been used, or if changes in the estimate that would have a material impact on the Company’s financial condition or results of operations are reasonably likely to occur from period to period. 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. The Company has reviewed these 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, 2014.

Recently Issued Accounting Pronouncements

The Company qualifies as an “emerging growth company” (EGC) pursuant to the provisions of the JOBS Act and has 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 the Company continues to qualify as an EGC, it will not have to adopt or comply with new accounting standards until non-issuers are required to comply with such standards.

Deformity Business Seasonality and Other Quarterly Fluctuations in Revenue

Although our revenue in the third quarter of 2014 was higher than the revenue in the second quarter of 2014, our revenue is typically higher in the second and fourth quarters 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 registrations, 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, 2014, revenue denominated in currencies other than U.S. Dollars represented less than 15% 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 gain (loss) of $2.1 million and $(3.1) million in the three months ended September 30, 2013 and 2014, respectively, compared to $0.7 million and $(2.1) million during the nine months ended September 30, 2013 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. We recorded foreign currency translation income (losses) of $(0.9) million and $(1.7) million in the three months ended September 30, 2013 and 2014, respectively, compared to $(0.3) million and $(1.4) million during the nine months ended September 30, 2013 and 2014, respectively.

31

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 (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.

32

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 our Prospectus dated May 7, 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

None

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.    MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.    OTHER INFORMATION

None.

33

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.

3.1 Amended and Restated Certificate of Incorporation of K2M Group Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Securities Exchange and Commission on May 13, 2014).

3.2      Amended and Restated Bylaws of K2M Group Holdings, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 13, 2014).

10.1    Fourth Amendment to Credit Agreement entered into as of October 21, 2014, by and among K2M Holdings, Inc., K2M, Inc. and K2M UK Limited, as borrowers, the several banks and other financial institutions or entities party thereto, Silicon Valley Bank, as the Issuing Lender and the Swingline Lender, and Silicon Valley Bank, as administrative agent and collateral agent for the lenders (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed with the Securities Exchange and Commission on October 24, 2014).

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).

34

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: October 30, 2014	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

35

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Eric D. Major, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of K2M Group Holdings, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 30, 2014

/s/ ERIC D. MAJOR

Name: Eric D. Major

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Gregory S. Cole, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of K2M Group Holdings, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 30, 2014                          

/s/ GREGORY S. COLE

Name: Gregory S. Cole

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF PERIODIC FINANCIAL REPORTS

I, Eric D. Major, President and Chief Executive Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, (the “Periodic Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of K2M Group Holdings, Inc.

Date: October 30, 2014

/s/ ERIC D. MAJOR

Name: Eric D. Major

President and Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION OF PERIODIC FINANCIAL REPORTS

I, Gregory S. Cole, Chief Financial Officer , certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 (the “Periodic Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of K2M Group Holdings, Inc.

Date: October 30, 2014

/s/ GREGORY S. COLE

Name: Gregory S. Cole

Chief Financial Officer

XML

OTHER ASSETS - (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]
Surgical instruments, net	$ 21,477		$ 21,477		$ 15,271
Other	120		120		143
Total	21,597		21,597		15,414
Surgical instruments accumulated amortization	17,214		17,214		15,007
Amortization expense	$ 1,726	$ 1,021	$ 4,498	$ 2,592

XML

NET LOSS PER SHARE - Antidilutive Shares (Details)	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Series A and B Convertible Preferred Stock [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive Securities Excluded from Earnings Per Share (in shares)	0	5,576,955	0	5,576,955
Stock options [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive Securities Excluded from Earnings Per Share (in shares)	4,476,615	4,247,737	4,476,615	4,247,737
Restricted Stock Units (RSUs) [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive Securities Excluded from Earnings Per Share (in shares)	765,023	576,131	765,023	576,132

XML

STOCK-BASED COMPENSATION - Schedule of Restricted Stock and Restricted Stock Units Activity (Details) (Restricted Stock Units (RSUs) [Member])	9 Months Ended
	Sep. 30, 2014
Restricted Stock Units (RSUs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Number of Shares [Roll Forward]
Beginning Outstanding Shares	576,132
Granted Shares	188,891
Vested Shares	0
Forfeited Shares	0
Ending Outstanding Shares	765,023

XML

SEGMENT AND GEOGRAPHICAL CONCENTRATION - Narrative (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014 Segment	Sep. 30, 2013
Segment Reporting Information [Line Items]
Number of reportable segments			1
Revenue	$ 47,624	$ 39,776	$ 137,363	$ 114,975
International [Member]
Segment Reporting Information [Line Items]
Revenue	13,239	12,285	39,992	31,884
United States [Member]
Segment Reporting Information [Line Items]
Revenue	34,385	27,491	97,371	83,091
Sales Revenue, Net [Member]
Segment Reporting Information [Line Items]
Revenue	47,624	39,776	137,363	114,975
Sales Revenue, Net [Member] | International [Member]
Segment Reporting Information [Line Items]
Revenue	13,239	12,285	39,992	31,884
Sales Revenue, Net [Member] | United States [Member]
Segment Reporting Information [Line Items]
Revenue	34,385	27,491	97,371	83,091
Sales Revenue, Net [Member] | Geographic Concentration Risk [Member] | International [Member]
Segment Reporting Information [Line Items]
International revenue as a percentage of total revenue	27.80%		29.10%
Complex Spine Attributable to Minimally Invasive Surgery [Member] | United States [Member]
Segment Reporting Information [Line Items]
Revenue		$ 1,355	$ 3,865	$ 4,114

XML

STOCK-BASED COMPENSATION - Allocation of Share-based Compensation (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended				9 Months Ended
	Sep. 30, 2014		Sep. 30, 2013		Sep. 30, 2014		Sep. 30, 2013
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Allocated stock-based compensation expense	$ 2,071	[1]	$ 576	[1]	$ 3,830	[1]	$ 1,737	[1]
Stock-based compensation for stock option liability awards	0		169		0		545
Cost of Revenue [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Allocated stock-based compensation expense	156	[1]	72	[1]	267	[1]	222	[1]
Research and Development Expense [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Allocated stock-based compensation expense	156	[1]	24	[1]	299	[1]	70	[1]
Selling and Marketing Expense [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Allocated stock-based compensation expense	749	[1]	211	[1]	1,382	[1]	593	[1]
General and Administrative Expense [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Allocated stock-based compensation expense	1,010	[1]	269	[1]	1,882	[1]	852	[1]
Employee [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Allocated stock-based compensation expense	2,047	[1]	526	[1]	3,785	[1]	1,667	[1]
Nonemployee [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Allocated stock-based compensation expense	$ 24	[1]	$ 50	[1]	$ 45	[1]	$ 70	[1]

[1] Stock-based compensation included $169 and $0 related to stock option liability awards for the three months ended September 30, 2013 and 2014, respectively, compared to $545 and $0 for the nine months ended September 30, 2013 and 2014, respectively.

XML

SEGMENT AND GEOGRAPHICAL CONCENTRATION - (Tables)

9 Months Ended

Sep. 30, 2014

Segment Reporting [Abstract]

Schedule of Revenue by Geographic Area

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,
	2013		2014		2013		2014
United States	$	27,491	$	34,385	$	83,091	$	97,371
International	12,285		13,239		31,884		39,992
Total	$	39,776	$	47,624	$	114,975	$	137,363

Schedule of Revenue by Products

The following table represents domestic revenue by procedure category. To further align its procedure categorizations, beginning in the second quarter of 2014, the Company began to report MIS sales attributable to complex spine procedures, which were historically reported in the minimally invasive category, within the complex spine category.  Accordingly, the complex spine category presented below includes MIS sales attributable to complex spine procedures of $1,355 for the three months ended September 30, 2013 and $4,114 and $3,865 for the nine months ended September 30, 2013 and 2014, respectively, which was historically reported in the minimally invasive category.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2014		2013		2014
Complex spine	$	11,330	$	14,585	$	35,111	$	40,375
Minimally invasive	4,946		5,258		13,945		15,138
Degenerative	11,215		14,542		34,035		41,858
	27,491		34,385		83,091		97,371
International	12,285		13,239		31,884		39,992
Total	$	39,776	$	47,624	$	114,975	$	137,363

XML

SEGMENT AND GEOGRAPHICAL CONCENTRATION - Revenues by Product (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Revenue from External Customer [Line Items]
Revenue	$ 47,624	$ 39,776	$ 137,363	$ 114,975
United States [Member]
Revenue from External Customer [Line Items]
Revenue	34,385	27,491	97,371	83,091
United States [Member] | Complex Spine [Member]
Revenue from External Customer [Line Items]
Revenue	14,585	11,330	40,375	35,111
United States [Member] | Minimally Invasive [Member]
Revenue from External Customer [Line Items]
Revenue	5,258	4,946	15,138	13,945
United States [Member] | Degenerative [Member]
Revenue from External Customer [Line Items]
Revenue	14,542	11,215	41,858	34,035
International [Member]
Revenue from External Customer [Line Items]
Revenue	$ 13,239	$ 12,285	$ 39,992	$ 31,884

XML

INVENTORY - (Tables)

9 Months Ended

Sep. 30, 2014

Inventory Disclosure [Abstract]

Schedule of Current Inventory

The following table summarizes the Company’s inventory, net of allowances:

	December 31, 2013			September 30, 2014
Finished goods	$	64,539		$	79,376
Inventory allowances	(25,316		)	(25,752		)
Inventory, net	$	39,223		$	53,624

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COMMITMENTS AND CONTINGENCIES - (Details) (USD $)	9 Months Ended					1 Months Ended	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014 Licensed technology [Member]	Sep. 30, 2014 Licensed technology [Member] Minimum [Member]	Sep. 30, 2014 Licensed technology [Member] Maximum [Member]	Nov. 30, 2011 In Process Research and Development [Member]	Sep. 30, 2014 In Process Research and Development [Member]	Nov. 30, 2011 In Process Research and Development [Member] Maximum [Member]
Long-term Purchase Commitment [Line Items]
Other Commitment			$ 1,613,000					$ 13,350,000
Minimum contractual term			5 years
Future maximum royalty payments				2.00%	10.00%	7.00%
Initial payment to acquire proprietary technology	20,000	166,000					100,000
Milestone payment one						500,000
Milestone payment two						2,000,000
Milestone payment three						4,000,000
Milestone for milestone payment one						10,000,000
Milestone for milestone payment two						25,000,000
Milestone for milestone payment three						50,000,000
Milestone for ending royalty payments, cumulative sales						$ 20,000,000

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DEBT - Bank Line of Credit Narrative (Details) (USD $)	3 Months Ended		9 Months Ended		0 Months Ended	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	May 13, 2014 Credit Agreement 2012 [Member] Revolving Credit Facility [Member]	Sep. 30, 2014 Credit Agreement 2012 [Member] Revolving Credit Facility [Member]	Sep. 30, 2013 Credit Agreement 2012 [Member] Revolving Credit Facility [Member]	Dec. 31, 2012 Credit Agreement 2012 [Member] Revolving Credit Facility [Member]	Dec. 31, 2012 Credit Agreement 2012 [Member] Revolving Credit Facility [Member] Minimum [Member]	Dec. 31, 2012 Credit Agreement 2012 [Member] Letter of Credit [Member]	Dec. 31, 2012 Credit Agreement 2012 [Member] Revolving Credit Facility, Swing Line Loan [Member]	Dec. 31, 2012 Credit Agreement 2012 [Member] Export-Import Bank [Member]
Debt Instrument [Line Items]
Amounts available under credit agreement								$ 30,000,000		$ 1,000,000	$ 5,000,000	$ 10,000,000
Minimum unused borrowing capacity									7,500,000
Line of credit accrued interest rate						4.25%
Interest expense	116,000	721,000	2,115,000	1,878,000		652,000	950,000
Amortization of issuance and discount costs included in interest expense						279,000	206,000
Repayments of Lines of Credit			23,500,000	0	23,500,000
Interest Payable					$ 38,000

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GOODWILL AND INTANGIBLE ASSETS - (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended																	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013	Sep. 30, 2014 Developed Technology Rights [Member]	Dec. 31, 2013 Developed Technology Rights [Member]	Sep. 30, 2014 Licensed technology [Member]	Dec. 31, 2013 Licensed technology [Member]	Sep. 30, 2014 Customer Relationships [Member]	Dec. 31, 2013 Customer Relationships [Member]	Sep. 30, 2014 Patents and other [Member]	Dec. 31, 2013 Patents and other [Member]	Sep. 30, 2014 Trademarks [Member]	Dec. 31, 2013 Trademarks [Member]	Sep. 30, 2014 In-process research and development [Member]	Dec. 31, 2013 In-process research and development [Member]	Sep. 30, 2014 Other [Member]	Dec. 31, 2013 Other [Member]	Sep. 30, 2014 Minimum [Member] Developed Technology Rights [Member]	Dec. 31, 2013 Minimum [Member] Developed Technology Rights [Member]	Sep. 30, 2014 Minimum [Member] Licensed technology [Member]	Dec. 31, 2013 Minimum [Member] Licensed technology [Member]	Sep. 30, 2014 Minimum [Member] Customer Relationships [Member]	Dec. 31, 2013 Minimum [Member] Customer Relationships [Member]	Sep. 30, 2014 Minimum [Member] Patents and other [Member]	Dec. 31, 2013 Minimum [Member] Patents and other [Member]	Sep. 30, 2014 Maximum [Member] Developed Technology Rights [Member]	Dec. 31, 2013 Maximum [Member] Developed Technology Rights [Member]	Sep. 30, 2014 Maximum [Member] Licensed technology [Member]	Dec. 31, 2013 Maximum [Member] Licensed technology [Member]	Sep. 30, 2014 Maximum [Member] Customer Relationships [Member]	Dec. 31, 2013 Maximum [Member] Customer Relationships [Member]	Sep. 30, 2014 Maximum [Member] Patents and other [Member]	Dec. 31, 2013 Maximum [Member] Patents and other [Member]
Schedule of Intangible Asset by Major Class [Line Items]
Estimated Useful Lives																				4 years	4 years	4 years	4 years	4 years	4 years	2 years	2 years	6 years	6 years	6 years	6 years	7 years	7 years	17 years	17 years
Goodwill	$ 121,814		$ 121,814		$ 121,814
Indefinite-lived intangible assets	14,696		14,696		14,696									12,900	12,900	1,500	1,500	296	296
Subject to amortization, Gross	145,226		145,226		145,213	61,600	61,600	52,600	52,600	29,700	29,700	1,326	1,313
Accumulated Amortization	(115,580)		(115,580)		(95,453)	(45,019)	(36,466)	(52,138)	(43,947)	(17,502)	(14,320)	(921)	(720)
Total	29,646		29,646		49,760	16,581	25,134	462	8,653	12,198	15,380	405	593
Intangible Assets, Gross	281,736		281,736		281,723
Intangible Assets, Net	166,156		166,156		186,270
Amortization expense	$ 5,038	$ 7,597	$ 20,130	$ 22,649

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INCOME TAXES - (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Income Tax Disclosure [Abstract]
Income tax (benefit) expense	$ 37	$ (1,968)	$ 82	$ (7,467)
Effective income tax rate, percent	(0.20%)	24.20%	(0.20%)	22.40%

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STOCK-BASED COMPENSATION - Summary of Stock Option Activity (Details) (USD $) In Thousands, except Share data, unless otherwise specified	9 Months Ended		12 Months Ended
	Sep. 30, 2014		Dec. 31, 2013
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward]
Outstanding Beginning Balance, Shares	4,179,119
Granted, Shares	684,937
Exercised, Shares	(312,020)
Expired, Shares	(31,888)
Forfeited, Shares	(43,533)
Outstanding Ending Balance, Shares	4,476,615	[1]	4,179,119
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price [Abstract]
Beginning, Weighted-Average Exercise Price (in usd per share)	$ 8.18
Granted, Weighted-Average Exercise Price (in usd per share)	$ 15.01
Exercised, Weighted-Average Exercise Price (in usd per share)	$ 6.16
Expired, Weighted-Average Exercise Price (in usd per share)	$ 4.41
Forfeited, Weighted-Average Exercise Price (in usd per share)	$ 7.14
Ending, Weighted-Average Exercise Price (in usd per share)	$ 9.40		$ 8.18
Share-based Compensation Arrangement by Share-based Payment Award, Options, Additional Disclosures [Abstract]
Outstanding, Weighted- Average Remaining Contractual Term (years)	5 years 11 months 16 days		5 years 7 months 20 days
Outstanding, Weighted- Average Remaining Contractual Term (years)	5 years 11 months 16 days		5 years 7 months 20 days
Outstanding, Aggregate Intrinsic Value	$ 31,434	[2]
Outstanding, Aggregate Intrinsic Value	22,800	[2]	31,434	[2]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest [Abstract]
Vested or expected to vest, shares	4,421,693	[3]
Vested or expected to vest, Weighted-Average Exercise Price (in usd per share)	$ 9.39
Vested or expected to vest, Weighted-Average Remaining Contractual Term	5 years 11 months 23 days
Vested or expected to vest, Aggregate Intrinsic Value	22,653	[2]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested [Abstract]
Vested, shares	2,478,103
Vested, Weighted-Average Exercise Price (in usd per share)	$ 7.82
Vested, Weighted-Average Remaining Contractual Term	4 years 5 months 26 days
Vested, Aggregate Intrinsic Value	$ 16,374	[2]
Fair value valuation, estimated fair market value of stock (in dollars per share)	$ 14.43		$ 15.70
Performance Shares [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward]
Outstanding Ending Balance, Shares	993,934

[1] The total includes 993,934 performance-based options at September 30, 2014.

[2] Calculated using the estimated fair market value per-share of the Company’s common stock as on December 31, 2013 and actual per share fair market value at September 30, 2014, which was $15.70 and $14.43, respectively.

[3] Outstanding options, net of forfeiture rate.

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ACCOUNTS RECEIVABLE

9 Months Ended

Sep. 30, 2014

Receivables [Abstract]

ACCOUNTS RECEIVABLE

ACCOUNTS RECEIVABLE

Receivables consist of the following:

	December 31, 2013			September 30, 2014
Accounts receivable	$	35,271		$	35,508
Allowances	(2,447		)	(2,588		)
Accounts receivable, net	$	32,824		$	32,920

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DEBT - Notes to Stockholders (Details) (USD $) In Thousands, except Share data, unless otherwise specified	0 Months Ended	3 Months Ended		9 Months Ended
	May 13, 2014	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013
Debt Instrument [Line Items]
Stock issued during the period (in shares)	8,825,000
Notes to stockholders		$ 0		$ 0		$ 19,650
Proceeds from issuance of notes to stockholders				14,634	9,866
Related Party Discount on Prepayment of Debt	4,825	0	0	4,825	0
Interest expense		116	721	2,115	1,878
Accretion of preferred stock to fair value			129		13,814
Notes to Stockholders [Member]
Debt Instrument [Line Items]
Notes to stockholders		0		0		22,270
Notes to Stockholders [Member] | Major Stockholder [Member]
Debt Instrument [Line Items]
Notes to stockholders		16,942		16,942
Proceeds from issuance of notes to stockholders				14,634
Stated interest rate		10.00%		10.00%
Amount outstanding of all note payable to stockholders	39,212
Accrued interest	1,283
Interest expense				1,324	889
Accretion of preferred stock to fair value				103	61
Common Stock [Member]
Debt Instrument [Line Items]
Stock issued during the period (in shares)				121,111
Share Price (in usd per share)		$ 19.05		$ 19.05
Sale of common stock pursuant to securities purchase agreements				$ 2,308

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DEBT - (Tables)

9 Months Ended

Sep. 30, 2014

Debt Disclosure [Abstract]

Schedule of Debt

Debt consists of the following:

	December 31, 2013			September 30, 2014
Bank line of credit	$	23,500		$	—
Notes to stockholders	22,270			—
Total debt	45,770			—
Less unamortized discounts	(2,620		)	—
Debt, net of discounts	$	43,150		$	—

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ACCRUED EXPENSES - (Tables)

9 Months Ended

Sep. 30, 2014

Payables and Accruals [Abstract]

Schedule of Accrued Expenses

Accrued expenses consist of the following:

	December 31, 2013		September 30, 2014
Accrued commissions	$	2,837	$	4,005
Accrued royalties	2,230		2,359
Stock option awards liability	2,076		—
Other	1,617		3,131
Total	$	8,760	$	9,495

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SEGMENT AND GEOGRAPHICAL CONCENTRATION - Revenues by Geographic Area (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Segment Reporting Information [Line Items]
Revenue	$ 47,624	$ 39,776	$ 137,363	$ 114,975
Sales Revenue, Net [Member]
Segment Reporting Information [Line Items]
Revenue	47,624	39,776	137,363	114,975
United States [Member]
Segment Reporting Information [Line Items]
Revenue	34,385	27,491	97,371	83,091
United States [Member] | Sales Revenue, Net [Member]
Segment Reporting Information [Line Items]
Revenue	34,385	27,491	97,371	83,091
International [Member]
Segment Reporting Information [Line Items]
Revenue	13,239	12,285	39,992	31,884
International [Member] | Sales Revenue, Net [Member]
Segment Reporting Information [Line Items]
Revenue	$ 13,239	$ 12,285	$ 39,992	$ 31,884

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REDEEMABLE CONVERTIBLE PREFERRED STOCK - Rollforward of Convertible Preferred Stock (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Redeemable Convertible Preferred Stock [Roll Forward]
Accretion of preferred stock to fair value	$ (129)		$ (13,814)
Conversion to common stock, Value		83,656
Series A Redeemable Convertible Preferred Stock [Member]
Redeemable Convertible Preferred Stock [Roll Forward]
Preferred stock, Shares Authorized, Beginning		7,300,000
Preferred Stock, Shares Outstanding, Beginning		7,250,885
Preferred Stock, Value, Beginning		56,667
Payment of dividend		(11,932)
Accretion of preferred stock to fair value		1,195
Adjustment of preferred stock to fair value prior to conversion		(1,170)
Conversion to common stock, Shares Authorized		(7,300,000)
Conversion to common stock, Shares Outstanding		(7,250,885)
Conversion to common stock, Value		(44,760)
Preferred stock, Shares Authorized, Ending		0
Preferred Stock, Shares Outstanding, Ending		0
Preferred Stock, Value, Ending		0
Series B Redeemable Convertible Preferred Stock [Member]
Redeemable Convertible Preferred Stock [Roll Forward]
Preferred stock, Shares Authorized, Beginning		6,500,000
Preferred Stock, Shares Outstanding, Beginning		6,301,291
Preferred Stock, Value, Beginning		52,414
Payment of dividend		(6,615)
Accretion of preferred stock to fair value		(15)
Adjustment of preferred stock to fair value prior to conversion		(6,889)
Conversion to common stock, Shares Authorized		(6,500,000)
Conversion to common stock, Shares Outstanding		(6,301,291)
Conversion to common stock, Value		(38,895)
Preferred stock, Shares Authorized, Ending		0
Preferred Stock, Shares Outstanding, Ending		0
Preferred Stock, Value, Ending		$ 0

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REDEEMABLE CONVERTIBLE PREFERRED STOCK (Tables)

9 Months Ended

Sep. 30, 2014

Equity [Abstract]

Schedule of Activity in Series A and B Convertible Preferred Stock

The following is a rollforward of activity in the Series A Preferred and Series B Preferred accounts from December 31, 2013 to September 30, 2014.

	Series A Preferred							Series B Preferred
	Shares							Shares
	Authorized		Outstanding		Amount			Authorized		Outstanding		Amount
Balance at December 31, 2013	7,300,000		7,250,885		$	56,667		6,500,000		6,301,291		$	52,414
Payment of dividend	—				(11,932		)					(6,615		)
Accretion of preferred stock to fair value	—		—		1,195			—		—		(15		)
Adjustment of preferred stock to fair value prior to conversion	—		—		(1,170		)	—		—		(6,889		)
Conversion to common stock	(7,300,000	)	(7,250,885	)	(44,760		)	(6,500,000	)	(6,301,291	)	(38,895		)
Balance at September 30, 2014	—		—		$	—		—		—		$	—

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STOCK-BASED COMPENSATION - (Tables)

9 Months Ended

Sep. 30, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Schedule of stock-based compensation expense

The Company recognized the following stock-based compensation expense related to employees and non-employees which is inclusive of the amounts detailed below:

	Three Months Ended   September 30,				Nine Months Ended   September 30,
	2013 (1)		2014 (1)		2013 (1)		2014 (1)
Cost of revenue	$	72	$	156	$	222	$	267
Research, development, and engineering	24		156		70		299
Sales and marketing	211		749		593		1,382
General and administrative	269		1,010		852		1,882
	$	576	$	2,071	$	1,737	$	3,830
Employees	$	526	$	2,047	$	1,667	$	3,785
Non-employees	50		24		70		45
Total	$	576	$	2,071	$	1,737	$	3,830

(1) Stock-based compensation included $169 and $0 related to stock option liability awards for the three months ended September 30, 2013 and 2014, respectively, compared to $545 and $0 for the nine months ended September 30, 2013 and 2014, respectively.

Schedule of employee stock option plan activity

A summary of stock option plans activity during the nine months ended September 30, 2014 is as follows:

	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (1)
Outstanding at December 31, 2013	4,179,119		$	8.18	5.64	$	31,434
Granted	684,937		15.01
Exercised	(312,020	)	6.16
Expired	(31,888	)	4.41
Forfeited	(43,533	)	7.14
Outstanding at September 30, 2014(2)	4,476,615		$	9.40	5.96	$	22,800
Vested or expected to vest:
At September 30, 2014(3)	4,421,693		$	9.39	5.98	$	22,653
Vested:
At September 30, 2014	2,478,103		$	7.82	4.49	$	16,374

(1) Calculated using the estimated fair market value per-share of the Company’s common stock as on December 31, 2013 and actual per share fair market value at September 30, 2014, which was $15.70 and $14.43, respectively.

(2) The total includes 993,934 performance-based options at September 30, 2014.

(3) Outstanding options, net of forfeiture rate.

Schedule of Restricted Stock Units Activity

A summary of RSU activity for the nine months ended September 30, 2014 is as follows:

	Unvested RSUs
	Shares
Outstanding at December 31, 2013	576,132
Granted	188,891
Vested	—
Forfeited	—
Unvested at September 30, 2014	765,023

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GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2014

Accounting Policies [Abstract]

GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

K2M Group Holdings, Inc. (the Company) was formed as a Delaware corporation on June 29, 2010. On July 2, 2010, K2M, Inc. (K2M), 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.

The Company is a global medical device company focused on designing, developing and commercializing innovative and proprietary complex spine technologies and techniques. The Company’s 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. The Company has applied its 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. The Company’s 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. The Company has also leveraged these core competencies in the design, development and commercialization of an increasing number of products for patients suffering from degenerative spinal conditions.

Reverse Stock Split and Initial Public Offering

On April 21, 2014, the Board of Directors approved a reverse stock split of the Company’s common stock such that each 2.43 shares of issued common stock were reclassified into one share of common stock. All common stock share and per-share amounts for all periods presented in these financial statements have been adjusted retroactively to reflect the reverse stock split.

On May 13, 2014, the Company completed an initial public offering (IPO) of 8,825,000 shares of common stock at a price of $15 per share. The IPO generated net proceeds of $118,826, after deducting underwriting commissions of $9,266 and expenses of approximately $4,283. The underwriting commissions and offering costs were reflected as a reduction to the IPO proceeds received in additional paid-in capital.

Concurrent with the closing of the IPO, the outstanding shares of the Series A redeemable convertible preferred stock (Series A Preferred) and Series B redeemable convertible preferred stock (Series B Preferred) were converted on a 2.43 -to-1 basis into 5,577,016 shares of common stock. Following the closing of the IPO, there were no shares of preferred stock outstanding.

The Company used proceeds from the IPO to pay cumulative dividends of approximately $11,932 to holders of Series A Preferred and $6,615 to holders of Series B Preferred following the conversion of the preferred stock. In addition, the Company paid approximately $23,500 to repay all outstanding indebtedness under its line of credit and $40,495 to prepay all outstanding aggregate principal and accrued interest of notes to stockholders.

Unaudited Interim Results

The accompanying condensed consolidated balance sheets as of September 30, 2014, the condensed consolidated statements of operations, the condensed consolidated statements of comprehensive loss for the three and nine months ended September 30, 2013 and 2014, the condensed consolidated statements of changes in stockholders' equity as of September 30, 2014, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2013 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 only normal recurring adjustments, necessary to present fairly the Company’s financial position and results of operations and cash flows for the periods presented. The results for the three and nine months ended September 30, 2014 are not necessarily indicative of future results. All information as of September 30, 2014 and for the three and nine month periods ending September 30, 2013 and 2014 within these notes to the consolidated financial statements is unaudited.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries including K2M Holdings, Inc.; K2M Inc.; K2M UK Limited; and K2M Germany, GmbH. 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 (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 the Company’s stock option grants and the if-converted method is used to determine the dilutive effect of the Company’s Series A Preferred and the Series B Preferred. 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 the Company’s only component of accumulated comprehensive income (loss).

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

Recent Accounting Pronouncements

The Company qualifies as an “emerging growth company” (EGC) pursuant to the provisions of the JOBS Act and has 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 the Company continues to qualify as an EGC, it will not have to adopt or comply with new accounting standards until non-issuers are required to comply with such standards.

In February 2013, the Financial Accounting Standards Board (FASB) issued guidance requiring new disclosures on items reclassified from Accumulated Other Comprehensive Income (AOCI). Companies will be required to disclose, in a single location, amounts reclassified from each component of AOCI based on its source and the statement of operations line items affected by the reclassification. The Company’s only component of AOCI is from foreign currency translation adjustments. To the extent there are such reclassifications, we plan to present such disclosure in a note to the consolidated financial statements. For public entities that do not qualify for the EGC extension, the new guidance is effective prospectively for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2012. For EGCs that have elected the EGC extension, including the Company, and non-public issuers, the guidance is effective prospectively for annual reporting periods beginning after December 15, 2013. The Company does not anticipate that this disclosure requirement will have a material impact on its consolidated financial statements.

In March 2013, the FASB issued guidance clarifying the accounting for the release of cumulative translation adjustment into net income when a parent either sells part or all of its investment in a foreign entity or no longer holds a controlling interest in a subsidiary or group of assets that is a nonprofit or a business within a foreign entity. For public entities that do not qualify for the EGC extension, the new guidance is effective prospectively for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2013. For EGCs that have elected the EGC extension including the Company, and non-public issuers, the guidance is effective prospectively for the first annual period beginning after December 15, 2014, and interim and annual periods thereafter. Early adoption is permitted. The Company does not anticipate that this adoption will have a material impact on its financial position, results of operations or cash flows.

In July 2013, the FASB issued new guidance on the financial statement presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. For public entities that do not qualify for the EGC extension, the guidance was effective for fiscal years and interim periods within those years, beginning after December 15, 2013 and may be applied retrospectively. EGCs that have elected the EGC extension, including the Company, and non-public issuers will be required to comply with the guidance on a prospective basis in the first quarter of 2015. Early adoption is permitted. Although adoption of this new guidance may impact how such items are classified on the Company’s balance sheet, such change is not expected to be material. There will be no changes in the presentations of the Company’s other financial statements.

In May 2014, the 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. For public entities other than EGCs that have elected the EGC extension, the guidance will be effective for annual reporting periods beginning after December 15, 2016. EGCs that have elected the EGC extension, including the Company, and non-public entities will be required to comply with the guidance for annual reporting periods beginning after December 15, 2017. Early adoption is not permitted. 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. The Company is evaluating the impact of these amendments and the transition alternatives on its consolidated financial statements.

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NET LOSS PER SHARE - (Tables)

9 Months Ended

Sep. 30, 2014

Earnings Per Share [Abstract]

Schedule of Basic and Diluted Earnings Per Share

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2014			2013			2014
Net loss per common share:
Net loss	$	(6,178	)	$	(16,140	)	$	(25,941	)	$	(48,570	)
Less: accretion and adjustment of Series A Preferred and Series B Preferred	(129		)	—			(13,814		)	6,879
Net loss attributable to common stockholders	$	(6,307	)	$	(16,140	)	$	(39,755	)	$	(41,691	)
Basic and diluted loss per common share
Basic and diluted weighted average common shares outstanding	22,289,216			37,127,155			22,195,935			30,084,010
Basic and diluted loss per common share	$	(0.28	)	$	(0.43	)	$	(1.79	)	$	(1.39	)

Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share

Diluted loss per share for the three and nine months ended September 30, 2013 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,
	2013	2014	2013	2014
Series A Preferred and Series B Preferred	5,576,955	—	5,576,955	—
Stock options	4,247,737	4,476,615	4,247,737	4,476,615
Restricted stock units	576,131	765,023	576,132	765,023

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ACCRUED EXPENSES - (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Payables and Accruals [Abstract]
Accrued commissions	$ 4,005	$ 2,837
Accrued royalties	2,359	2,230
Stock option awards liability	0	2,076
Other	3,131	1,617
Total	$ 9,495	$ 8,760

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NET LOSS PER SHARE - (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Earnings Per Share [Abstract]
Net loss	$ (16,140)	$ (6,178)	$ (48,570)	$ (25,941)
Less: accretion and adjustment of Series A Preferred and Series B Preferred		(129)		(13,814)
Less: accretion and adjustment of Series A Preferred and Series B Preferred	0		6,879
Net loss attributable to stockholders	$ (16,140)	$ (6,307)	$ (41,691)	$ (39,755)
Basic and diluted weighted average common shares outstanding	37,127,155	22,289,216	30,084,010	22,195,935
Basic and diluted loss per common share (in dollars per share)	$ (0.43)	$ (0.28)	$ (1.39)	$ (1.79)

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CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Current assets:
Cash and cash equivalents	$ 23,185	$ 7,419
Accounts receivable, net	32,920	32,824
Inventory, net	53,624	39,223
Deferred income taxes	3,301	8,824
Prepaid expenses and other current assets	5,976	3,984
Total current assets	119,006	92,274
Property and equipment, net	3,279	2,978
Goodwill and intangible assets, net	166,156	186,270
Other assets, net	21,597	15,414
Total assets	310,038	296,936
Current liabilities:
Bank line of credit	0	23,500
Accounts payable	15,465	17,069
Accrued expenses	9,495	8,760
Accrued payroll liabilities	12,058	10,396
Total current liabilities	37,018	59,725
Notes to stockholders	0	19,650
Deferred income taxes	8,561	14,084
Other liabilities	123	211
Total liabilities	45,702	93,670
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value, 100,000,000 and 750,000,000 shares authorized at December 31, 2013 and September 30, 2014, respectively. 22,421,509 and 37,138,499 shares issued and outstanding at December 31, 2013 and September 30, 2014, respectively	37	22
Additional paid-in capital	382,977	165,651
Accumulated other comprehensive loss	460	(920)
Accumulated deficit	(119,138)	(70,568)
Total stockholders’ equity	264,336	94,185
Total liabilities, redeemable convertible preferred stock, and stockholders’ equity	310,038	296,936
Series A Redeemable Convertible Preferred Stock [Member]
Current liabilities:
Redeemable convertible preferred stock	0	56,667
Series B Redeemable Convertible Preferred Stock [Member]
Current liabilities:
Redeemable convertible preferred stock	$ 0	$ 52,414

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REDEEMABLE CONVERTIBLE PREFERRED STOCK - Narrative (Details) (USD $) In Thousands, except Share data, unless otherwise specified	9 Months Ended		0 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	May 13, 2014 Common Stock [Member]	May 13, 2014 Redeemable Convertible Preferred Stock [Member]	May 13, 2014 Conversion of Series A Redeemable Convertible Preferred Stock [Member] Common Stock [Member]	May 13, 2014 Conversion of Series B Redeemable Convertible Preferred Stock [Member] Common Stock [Member]
Class of Stock [Line Items]
Shares of common stock issued upon conversion of convertible preferred stock			5,577,016		2,983,902	2,593,114
Convertible Preferred Stock, Shares Issued upon Conversion			2.43
Payments of dividends	$ 18,547	$ 0		$ 18,547

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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited) (USD $) In Thousands, except Share data, unless otherwise specified	Total USD ($)	Series A and B Convertible Preferred Stock [Member] USD ($)	Common Stock [Member] USD ($)	Common Stock [Member] Redeemable Convertible Preferred Stock [Member]	Additional Paid-in Capital [Member] USD ($)	Additional Paid-in Capital [Member] Series A and B Convertible Preferred Stock [Member] USD ($)	Accumulated Other Comprehensive Loss [Member] USD ($)	Accumulated Deficit [Member] USD ($)	Security Purchases and Other [Member] USD ($)	Security Purchases and Other [Member] Common Stock [Member] USD ($)	Security Purchases and Other [Member] Additional Paid-in Capital [Member] USD ($)	IPO [Member] USD ($)	IPO [Member] Common Stock [Member] USD ($)	IPO [Member] Additional Paid-in Capital [Member] USD ($)
Beginning Balance at Dec. 31, 2013	$ 94,185		$ 22		$ 165,651		$ (920)	$ (70,568)
Beginning Balance (in shares) at Dec. 31, 2013	22,421,509		22,421,509
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net loss	(48,570)							(48,570)
Other comprehensive loss	1,380						(1,380)
Stock-based compensation	3,830				3,830
Accretion of Series A and B redeemable convertible preferred stock		(1,158)				(1,158)
Accretion of Series A and B redeemable convertible preferred stock issuances costs		(22)				(22)
Issuances of common stock (in shares)										121,111			8,825,000
Issuances of common stock									2,308	1	2,307	118,870	8	118,862
Adjustment of preferred stock to fair value prior to conversion	8,059
Common stock issued in conversion of Series A and B redeemable convertible preferred stock (in shares)				5,577,016
Common stock issued in conversion of Series A and B redeemable convertible preferred stock	83,656		6		83,650
Stock option modifications	2,077				2,077
Exercise of options (in shares)	312,020		193,863
Exercise of options	(279)				(279)
Ending Balance at Sep. 30, 2014	$ 264,336		$ 37		$ 382,977		$ 460	$ (119,138)
Ending Balance (in shares) at Sep. 30, 2014	37,138,499		37,138,499

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ACCOUNTS RECEIVABLE - (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Receivables [Abstract]
Accounts receivable	$ 35,508	$ 35,271
Allowances	(2,588)	(2,447)
Accounts receivable, net	$ 32,920	$ 32,824

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SUBSEQUENT EVENTS

9 Months Ended

Sep. 30, 2014

Subsequent Events [Abstract]

SUBSEQUENT EVENTS

SUBSEQUENT EVENTS

On October 21, 2014, subsidiaries of the Company entered into an amendment (the “Fourth 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 Fourth Amendment, among other things, extends the maturity date of the revolving credit facility to October 2015, increases the total revolving commitments from $30,000 to $40,000 and increases the letter of credit sub-facility from $1,000 to $10,000. In addition, the Fourth Amendment removes the sub-facility provided by the Export-Import Bank of the United States, which had been a party to the prior loan agreements. 

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 the greater of (i) LIBOR, plus 2.50% or (ii) 3.75%.  The total obligations under the amended credit facility cannot exceed (i) the lesser of the total revolving commitment of $40,000 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) 35% of the value of the eligible inventory provided that the contribution of the value of the eligible inventory not exceed the less of 40% of the borrowing base or $10,000.  Borrowings under the revolving credit facility remain secured by a first priority lien on all of the Borrower’s personal property assets, including intellectual property.    

The existing financial covenants were deleted in their entirety and replaced with a quick ratio financial covenant, calculated as the ratio of (i) the sum of all unrestricted cash and cash equivalents, accounts or accounts receivable and inventory (to the extent not in excess of 50% of the foregoing) to (ii) the consolidated liabilities plus outstanding letters of credit minus deferred revenue, which cannot exceed 1.20:1.00 on the last day of any month. 

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. Basket sizes and thresholds applicable to the negative covenants have also been added and/or modified. Certain additional modifications to the revolving credit facility are consistent with the Company becoming a public company in April 2014.

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INVENTORY - (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Inventory [Line Items]
Finished goods	$ 79,376	$ 64,539
Inventory allowances	(25,752)	(25,316)
Inventory, net	53,624	39,223
Surgical and Medical Instruments [Member]
Inventory [Line Items]
Inventory, net	$ 8,339	$ 5,285

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ACCOUNTS RECEIVABLE - (Tables)

9 Months Ended

Sep. 30, 2014

Receivables [Abstract]

Schedule of Accounts Receivable

Receivables consist of the following:

	December 31, 2013			September 30, 2014
Accounts receivable	$	35,271		$	35,508
Allowances	(2,447		)	(2,588		)
Accounts receivable, net	$	32,824		$	32,920

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013
Operating activities
Net loss	$ (48,570)	$ (25,941)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	27,339	27,248
Provision for allowance for doubtful accounts	351	71
Provision for inventory reserve	1,368	1,034
Stock-based compensation	3,830	1,737
Amortization of issuance and discount costs included in interest expense	4,928	61
Deferred income taxes	0	(7,565)
Changes in operating assets and liabilities:
Accounts receivable	(283)	(4,065)
Inventory	(17,190)	(11,534)
Prepaid expenses and other assets	(4,472)	(138)
Accounts payable, accrued expenses, and accrued payroll liabilities	4,175	7,106
Net cash used in operating activities	(28,524)	(11,986)
Investing activities
Purchase of surgical instruments	(9,111)	(7,889)
Purchase of property and equipment	(1,507)	(753)
Purchase of intangible assets	(20)	(166)
Net cash used in investing activities	(10,638)	(8,808)
Financing activities
Proceeds from issuances of common stock, net of issuance costs	121,898	1,445
Proceeds from issuance of Series B redeemable convertible preferred stock, net of issuance costs	0	11,574
Proceeds from issuance of notes to stockholders	14,634	9,866
Prepayment of notes to stockholders	(39,212)	0
Borrowings on bank line of credit	0	1,500
Payments on bank line of credit	(23,500)	0
Payment of dividends on Series A and Series B redeemable convertible preferred stock	(18,547)	0
Proceeds from the exercise of options, net of payments to satisfy minimum tax withholdings	(279)	(685)
Net cash provided by financing activities	54,994	23,700
Effect of exchange rate changes on cash and cash equivalents	(66)	11
Net increase in cash and cash equivalents	15,766	2,917
Cash and cash equivalents at beginning of period	7,419	7,011
Cash and cash equivalents at end of period	23,185	9,928
Significant noncash financing activities
Adjustment of preferred stock to fair value	(8,059)	9,958
Deferred public offering costs	720	0
Cash paid for:
Income taxes	36	92
Interest	1,736	1,217
Series A Redeemable Convertible Preferred Stock [Member]
Significant noncash financing activities
Accretion of redeemable convertible preferred stock	1,195	3,856
Series B Redeemable Convertible Preferred Stock [Member]
Significant noncash financing activities
Accretion of redeemable convertible preferred stock	$ (15)	$ 0

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CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) (USD $)	Sep. 30, 2014	Dec. 31, 2013
Common stock, par value per share (in usd per share)	$ 0.001	$ 0.001
Common stock, shares authorized	750,000,000	100,000,000
Common stock, shares issued	37,138,499	22,421,509
Common stock, shares outstanding	37,138,499	22,421,509
Series A Redeemable Convertible Preferred Stock [Member]
Preferred stock, par value per share (in usd per share)		$ 0.001
Preferred stock, par value per share (in usd per share)	$ 0.001
Series B Redeemable Convertible Preferred Stock [Member]
Preferred stock, par value per share (in usd per share)		$ 0.001
Preferred stock, par value per share (in usd per share)	$ 0.001

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COMMITMENTS AND CONTINGENCIES

9 Months Ended

Sep. 30, 2014

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company enters into agreements to obtain the rights to certain intellectual property. These agreements may require an up-front payment, milestone payments and/or royalties. Typically, the Company has 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, 2014, the aggregate amount of these future payments, assuming achievement of applicable milestones and non-cancellation, was $1,613 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, the Company entered into an agreement to purchase certain proprietary technology which could require it 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, 2014.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. The Company is not aware of any pending or threatened legal proceeding against it that the Company expects would have a material adverse effect on its business, operating results or financial condition. However, the Company is a party in multiple legal actions involving claimants seeking various remedies, including monetary damages, and none of the outcomes are certain or entirely within the Company's control.

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DOCUMENT AND ENTITY INFORMATION DOCUMENT AND ENTITY INFORMATION	9 Months Ended
	Sep. 30, 2014	Oct. 23, 2014
Entity [Abstract]
Entity Registrant Name	K2M Group Holdings, Inc.
Entity Central Index Key	0001499807
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Document Type	10-Q
Document Period End Date	Sep. 30, 2014
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q3
Amendment Flag	false
Entity Common Stock, Shares Outstanding		37,138,499

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RELATED PARTIES

9 Months Ended

Sep. 30, 2014

Related Party Transactions [Abstract]

RELATED PARTIES

RELATED PARTIES

In connection with the Merger, the Company and K2M entered into a management agreement with the major stockholder of the Company. Under the terms of the agreement, as amended, the Company incurred fees to the stockholder of $263 and $0 for the three months ended September 30, 2013 and 2014, respectively and $513 and $373 for the nine months ended September 30, 2013 and 2014, respectively. The Company records such costs in general and administrative expense in its consolidated statements of operations. The management agreement was terminated in May 2014 following the Company's IPO.

In connection with the IPO, certain stockholders of the Company granted the underwriters an option to purchase from such selling shareholders additional shares of common stock at the public offering price, less underwriting discounts.   On June 10, 2014, the underwriters exercised this option and purchased 1,000,000 shares of common stock from selling shareholders at a price of $15 per share before underwriting discounts.  The Company received no proceeds from the sale of these shares.

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Income Statement [Abstract]
Revenue	$ 47,624	$ 39,776	$ 137,363	$ 114,975
Cost of revenue	16,135	11,782	46,583	34,892
Gross profit	31,489	27,994	90,780	80,083
Operating expenses:
Research, development and engineering	4,872	3,048	11,854	9,327
Sales and marketing	25,016	19,566	71,185	58,840
General and administrative	14,507	14,939	47,158	44,170
Total operating expenses	44,395	37,553	130,197	112,337
Loss from operations	(12,906)	(9,559)	(39,417)	(32,254)
Other income (expense):
Foreign currency transaction gain (loss)	(3,081)	2,134	(2,131)	724
Discount on prepayment of notes to stockholders	0	0	(4,825)	0
Interest expense	(116)	(721)	(2,115)	(1,878)
Total other income (expense), net	(3,197)	1,413	(9,071)	(1,154)
Loss before income tax (benefit) expense	(16,103)	(8,146)	(48,488)	(33,408)
Income tax (benefit) expense	37	(1,968)	82	(7,467)
Net loss	(16,140)	(6,178)	(48,570)	(25,941)
Accretion and adjustment of preferred stock to fair value		(129)		(13,814)
Accretion and adjustment of preferred stock to fair value	0		6,879
Net loss attributable to stockholders	$ (16,140)	$ (6,307)	$ (41,691)	$ (39,755)
Net loss per share attributable to common stockholders:
Basic and diluted (in dollars per share)	$ (0.43)	$ (0.28)	$ (1.39)	$ (1.79)
Weighted average shares outstanding:
Basic and diluted (in shares)	37,127,155	22,289,216	30,084,010	22,195,935

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OTHER ASSETS

9 Months Ended

Sep. 30, 2014

Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]

OTHER ASSETS

OTHER ASSETS

Other assets comprises the following:

	December 31, 2013		September 30, 2014
Surgical instruments, net	$	15,271	$	21,477
Other	143		120
Total	$	15,414	$	21,597

Surgical instruments are stated net of accumulated amortization of $15,007 and $17,214 at December 31, 2013 and September 30, 2014, respectively. Amortization expense was $1,021 and $1,726 for the three months ended September 30, 2013 and 2014, respectively, and $2,592 and $4,498 for the nine months ended September 30, 2013 and 2014, respectively.

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GOODWILL AND INTANGIBLE ASSETS

9 Months Ended

Sep. 30, 2014

Goodwill and Intangible Assets Disclosure [Abstract]

GOODWILL AND INTANGIBLE ASSETS

GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets comprise the following:

	As of December 31, 2013
	Estimated Useful Lives	Gross		Accumulated Amortization			Net
Goodwill	—	$	121,814	$	—		$	121,814
Indefinite-lived intangible assets:
Trademarks	—	12,900		—			12,900
In-process research and development	—	1,500		—			1,500
Other	—	296		—			296
Subtotal		14,696		—			14,696
Subject to amortization
Developed technology	4 - 6 years	61,600		(36,466		)	25,134
Licensed technology	4 - 6 years	52,600		(43,947		)	8,653
Customer relationships	4 - 7 years	29,700		(14,320		)	15,380
Patents and other	2 - 17 years	1,313		(720		)	593
Subtotal		145,213		(95,453		)	49,760
Total		$	281,723	$	(95,453	)	$	186,270

	As of September 30, 2014
	Estimated Useful Lives	Gross		Accumulated Amortization			Net
Goodwill	—	$	121,814	$	—		$	121,814
Indefinite-lived intangible assets:
Trademarks	—	12,900		—			12,900
In-process research and development	—	1,500		—			1,500
Other	—	296		—			296
Subtotal		14,696		—			14,696
Subject to amortization
Developed technology	4 - 6 years	61,600		(45,019		)	16,581
Licensed technology	4 - 6 years	52,600		(52,138		)	462
Customer relationships	4 - 7 years	29,700		(17,502		)	12,198
Patents and other	2 - 17 years	1,326		(921		)	405
Subtotal		145,226		(115,580		)	29,646
Total		$	281,736	$	(115,580	)	$	166,156

Amortization expense was $7,597 and $5,038 for the three months ended September 30, 2013 and 2014, respectively, and $22,649 and $20,130 for the nine months ended September 30, 2013 and 2014, respectively.

As of September 30, 2014, the expected amortization expense for the remainder of 2014 and the following four years and thereafter is as follows:

	September 30, 2014
2014	$	2,554
2015	10,150
2016	10,138
2017	6,523
2018 and thereafter	281
Total	$	29,646

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GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Policies)

9 Months Ended

Sep. 30, 2014

Accounting Policies [Abstract]

Principles of Consolidation

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries including K2M Holdings, Inc.; K2M Inc.; K2M UK Limited; and K2M Germany, GmbH. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States (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

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 the Company’s stock option grants and the if-converted method is used to determine the dilutive effect of the Company’s Series A Preferred and the Series B Preferred. 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

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 the Company’s only component of accumulated comprehensive income (loss).

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

Recent Accounting Pronouncements

Recent Accounting Pronouncements

The Company qualifies as an “emerging growth company” (EGC) pursuant to the provisions of the JOBS Act and has 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 the Company continues to qualify as an EGC, it will not have to adopt or comply with new accounting standards until non-issuers are required to comply with such standards.

In February 2013, the Financial Accounting Standards Board (FASB) issued guidance requiring new disclosures on items reclassified from Accumulated Other Comprehensive Income (AOCI). Companies will be required to disclose, in a single location, amounts reclassified from each component of AOCI based on its source and the statement of operations line items affected by the reclassification. The Company’s only component of AOCI is from foreign currency translation adjustments. To the extent there are such reclassifications, we plan to present such disclosure in a note to the consolidated financial statements. For public entities that do not qualify for the EGC extension, the new guidance is effective prospectively for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2012. For EGCs that have elected the EGC extension, including the Company, and non-public issuers, the guidance is effective prospectively for annual reporting periods beginning after December 15, 2013. The Company does not anticipate that this disclosure requirement will have a material impact on its consolidated financial statements.

In March 2013, the FASB issued guidance clarifying the accounting for the release of cumulative translation adjustment into net income when a parent either sells part or all of its investment in a foreign entity or no longer holds a controlling interest in a subsidiary or group of assets that is a nonprofit or a business within a foreign entity. For public entities that do not qualify for the EGC extension, the new guidance is effective prospectively for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2013. For EGCs that have elected the EGC extension including the Company, and non-public issuers, the guidance is effective prospectively for the first annual period beginning after December 15, 2014, and interim and annual periods thereafter. Early adoption is permitted. The Company does not anticipate that this adoption will have a material impact on its financial position, results of operations or cash flows.

In July 2013, the FASB issued new guidance on the financial statement presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. For public entities that do not qualify for the EGC extension, the guidance was effective for fiscal years and interim periods within those years, beginning after December 15, 2013 and may be applied retrospectively. EGCs that have elected the EGC extension, including the Company, and non-public issuers will be required to comply with the guidance on a prospective basis in the first quarter of 2015. Early adoption is permitted. Although adoption of this new guidance may impact how such items are classified on the Company’s balance sheet, such change is not expected to be material. There will be no changes in the presentations of the Company’s other financial statements.

In May 2014, the 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. For public entities other than EGCs that have elected the EGC extension, the guidance will be effective for annual reporting periods beginning after December 15, 2016. EGCs that have elected the EGC extension, including the Company, and non-public entities will be required to comply with the guidance for annual reporting periods beginning after December 15, 2017. Early adoption is not permitted. 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. The Company is evaluating the impact of these amendments and the transition alternatives on its consolidated financial statements.

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INCOME TAXES

9 Months Ended

Sep. 30, 2014

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

The provision for income taxes for the three and nine months ended September 30, 2013 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, 2013 and 2014, the income tax (benefit) expense was $(1,968) and $37, resulting in an effective tax rate of 24.2% and (0.2)%, respectively. For the nine months ended September 30, 2013 and 2014, income tax (benefit) expense was $(7,467) and $82, resulting in an effective tax rate of 22.4% 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.

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REDEEMABLE CONVERTIBLE PREFERRED STOCK

9 Months Ended

Sep. 30, 2014

Equity [Abstract]

REDEEMABLE CONVERTIBLE PREFERRED STOCK

REDEEMABLE CONVERTIBLE PREFERRED STOCK

The following is a rollforward of activity in the Series A Preferred and Series B Preferred accounts from December 31, 2013 to September 30, 2014.

	Series A Preferred							Series B Preferred
	Shares							Shares
	Authorized		Outstanding		Amount			Authorized		Outstanding		Amount
Balance at December 31, 2013	7,300,000		7,250,885		$	56,667		6,500,000		6,301,291		$	52,414
Payment of dividend	—				(11,932		)					(6,615		)
Accretion of preferred stock to fair value	—		—		1,195			—		—		(15		)
Adjustment of preferred stock to fair value prior to conversion	—		—		(1,170		)	—		—		(6,889		)
Conversion to common stock	(7,300,000	)	(7,250,885	)	(44,760		)	(6,500,000	)	(6,301,291	)	(38,895		)
Balance at September 30, 2014	—		—		$	—		—		—		$	—

On May 13, 2014, the Company converted the Series A Preferred and Series B Preferred into 2,983,902 and 2,593,114 shares, respectively, of its common stock based on a 2.43:1 conversion ratio as a result of its IPO. In addition, cumulative unpaid dividends of $18,547 were paid in cash to holders of the preferred stock.

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ACCRUED EXPENSES

9 Months Ended

Sep. 30, 2014

Payables and Accruals [Abstract]

ACCRUED EXPENSES

ACCRUED EXPENSES

Accrued expenses consist of the following:

	December 31, 2013		September 30, 2014
Accrued commissions	$	2,837	$	4,005
Accrued royalties	2,230		2,359
Stock option awards liability	2,076		—
Other	1,617		3,131
Total	$	8,760	$	9,495

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DEBT

9 Months Ended

Sep. 30, 2014

Debt Disclosure [Abstract]

DEBT

DEBT

Debt consists of the following:

	December 31, 2013			September 30, 2014
Bank line of credit	$	23,500		$	—
Notes to stockholders	22,270			—
Total debt	45,770			—
Less unamortized discounts	(2,620		)	—
Debt, net of discounts	$	43,150		$	—

Bank Line of Credit

In 2012, K2M and K2M UK Limited executed the Secured Credit Facilities Credit Agreement (the Credit Agreement). Under the Credit Agreement, there are amounts available under the facility of $30,000, which consists of a revolving loan facility in an aggregate principal amount of up to $30,000, sub-facilities under the revolving loan facility for letters of credit in the aggregate availability amount of $1,000, a swingline sub-facility in the aggregate availability amount of $5,000, and a line of credit from the Export-Import Bank of the United States, or the Export Import Bank sub-facility in the aggregate availability amount of $10,000.

Borrowings under the Credit Agreement are secured by a first priority lien in all the personal property assets of the Company, including intellectual property. The Credit Agreement contains various financial covenants and negative covenants with which the Company must maintain compliance. Additionally, as long as the Company maintains unrestricted cash at a specific lender’s bank, plus unused borrowing availability of at least $7,500, the Company may maintain a static loan balance and therefore, collections may be transferred to the Company’s operating cash account.

Borrowings under the revolving line of credit accrued interest at a rate of 4.25% at September 30, 2014. For the nine months ended September 30, 2013 and 2014, the Company incurred interest expense of $950 and $652, respectively, including amounts of $206 and $279, respectively, related to the amortization of the loan issuance fees.

On May 13, 2014, the Company repaid all $23,500 outstanding under the bank line of credit and accrued interest of $38 using proceeds of the IPO. On October21,2014,the Company and its lenders amended the Credit Agreement. Please refer to Note 15, Subsequent Events.

Notes to Stockholders

In 2014, the Company issued 121,111 shares of its common stock to certain stockholders at $19.05 per share for proceeds of $2,308. In addition, K2M Holdings, Inc. issued these stockholders notes with an aggregate principal amount of $16,942 for cash consideration of $14,634. These notes bear interest at 10%. Following issuance of these notes, total aggregate principal amount outstanding of all notes payable to stockholders was $39,212.

On May 13, 2014, the Company pre-paid all $39,212 principal outstanding under the notes to stockholders and accrued interest of $1,283 using proceeds of the IPO. In connection with the prepayment, the Company recorded $4,825 representing the acceleration of the issuance discounts on the notes to stockholders. Interest expense for the nine months ended September 30, 2013 and 2014 was $889 and $1,324, respectively, and included amortization expense of $61 and $103, respectively.

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STOCK-BASED COMPENSATION

9 Months Ended

Sep. 30, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

STOCK-BASED COMPENSATION

STOCK-BASED COMPENSATION

As of September 30, 2014, the Company has four stock-based compensation plans: 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 is to provide incentives to employees, directors, agents and advisors of the Company. The Plans are administered by the Company’s board of directors or its delegates. The number, type of equity incentive, exercise or share purchase price, and vesting terms are determined in accordance with the Plans, as applicable. The Omnibus Incentive Plan and ESPP were adopted by the Company’s board of directors on May 7, 2014. At that time, 1,650,289 and 411,523 shares were reserved for issuance under the Omnibus Incentive Plan and ESPP, respectively. Following the adoption of these 2014 plans, no further incentive awards may be granted under the 2010 Equity Award Plan.

The Omnibus Incentive Plan

The Omnibus Incentive Plan was adopted to provide a means through which to attract and retain key personnel and to provide a means whereby the Company’s directors, officers, employees, consultants and advisors can acquire and maintain an equity interest in the Company. The Omnibus Incentive Plan is administered by the Compensation Committee of the Company’s board of directors. Incentive awards under the plan may take the form of incentive or non-qualified stock options, stock appreciation rights, restricted shares and restricted stock units (RSUs) and other stock-based awards, subject to certain limitations. The committee may also designate any award as a “performance compensation award” intended to qualify as “performance-based compensation” under Section 162(m) of the Internal Revenue Code.

The ESPP

The ESPP was established to provide employees and participating affiliates with an opportunity to purchase the Company’s common stock. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code.

Generally, all domestic employees are eligible to participate in the ESPP if they are employed by the Company or any participating affiliate, for at least 20 hours per week. Participants will be permitted to purchase shares of the Company’s common stock through payroll deductions of no less than 1% and no more than 10% of their eligible compensation. However, during the first offering period, which commenced on May 8, 2014 and ends on December 31, 2014, participants are limited to contributions of 2% of eligible compensation. Subsequent offerings will start after the end date of the first offering period on a schedule established by the committee appointed by our board of directors to administer the ESPP. Amounts deducted and accumulated by the participant will be used to purchase shares of the Company’s common stock at the end of each offering period. The purchase price of the shares will be equal to 85 percent of the lower of the fair value of the Company’s common stock on the first day of the offering period, or on the common stock purchase date at the end of each offering period. Participants may end their participation at any time during an offering period and will be paid their accrued contributions that have not yet been used to purchase shares of common stock. In addition, participation ends automatically upon termination of employment with the Company. The Company recognized approximately $50 and $80 of stock-based compensation expense on the ESPP for the three and nine months ended September 30, 2014.

The Company recognized the following stock-based compensation expense related to employees and non-employees which is inclusive of the amounts detailed below:

	Three Months Ended   September 30,				Nine Months Ended   September 30,
	2013 (1)		2014 (1)		2013 (1)		2014 (1)
Cost of revenue	$	72	$	156	$	222	$	267
Research, development, and engineering	24		156		70		299
Sales and marketing	211		749		593		1,382
General and administrative	269		1,010		852		1,882
	$	576	$	2,071	$	1,737	$	3,830
Employees	$	526	$	2,047	$	1,667	$	3,785
Non-employees	50		24		70		45
Total	$	576	$	2,071	$	1,737	$	3,830

(1) Stock-based compensation included $169 and $0 related to stock option liability awards for the three months ended September 30, 2013 and 2014, respectively, compared to $545 and $0 for the nine months ended September 30, 2013 and 2014, respectively.

A summary of stock option plans activity during the nine months ended September 30, 2014 is as follows:

	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (1)
Outstanding at December 31, 2013	4,179,119		$	8.18	5.64	$	31,434
Granted	684,937		15.01
Exercised	(312,020	)	6.16
Expired	(31,888	)	4.41
Forfeited	(43,533	)	7.14
Outstanding at September 30, 2014(2)	4,476,615		$	9.40	5.96	$	22,800
Vested or expected to vest:
At September 30, 2014(3)	4,421,693		$	9.39	5.98	$	22,653
Vested:
At September 30, 2014	2,478,103		$	7.82	4.49	$	16,374

(1) Calculated using the estimated fair market value per-share of the Company’s common stock as on December 31, 2013 and actual per share fair market value at September 30, 2014, which was $15.70 and $14.43, respectively.

(2) The total includes 993,934 performance-based options at September 30, 2014.

(3) Outstanding options, net of forfeiture rate.

A summary of RSU activity for the nine months ended September 30, 2014 is as follows:

	Unvested RSUs
	Shares
Outstanding at December 31, 2013	576,132
Granted	188,891
Vested	—
Forfeited	—
Unvested at September 30, 2014	765,023

On April 21, 2014, the Company’s board of directors modified the vesting terms of the 576,132 RSUs issued to certain members of senior management in May 2013 to add time-vesting criteria. The modified vesting terms provides that the RSUs will vest in two equal installments on May 21, 2015 and 2016, subject to continued employment through the applicable vesting dates. In addition, the RSUs will continue to vest on an accelerated basis upon death, disability, or a change in control. The Company expects to recognize stock-based compensation expense of approximately $15.61 per share or $8,993 over the vesting period. The Company recognized stock-based compensation expense of $1,088 and $1,916 for the three and nine months ended September 30, 2014 related to these awards.

Effective May 7, 2014, the Company’s board of directors approved the issuance of 188,891 RSUs to certain of the Company’s officers. The RSUs will vest in three equal installments on the first, second and third anniversary of the grant date. The Company expects to recognize stock-based compensation expense of approximately $2,833 over the vesting period of the RSU. Stock-based compensation expense related to these awards recognized in the three and nine months ended September 30, 2014 was $238 and $378, respectively.

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GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Details) (USD $) In Thousands, except Share data, unless otherwise specified	0 Months Ended		9 Months Ended
	May 13, 2014	Apr. 21, 2014 Rate	Sep. 30, 2014	Sep. 30, 2013
Significant Accounting Policies [Line Items]
Reverse stock split ratio		0.41152263374
Stock issued during the period (in shares)	8,825,000
Repayments of Lines of Credit			$ 23,500	$ 0
Repayments of Related Party Debt			39,212	0
Notes Payable, Other Payables [Member]
Significant Accounting Policies [Line Items]
Repayments of Related Party Debt	40,495
Pro Forma [Member]
Significant Accounting Policies [Line Items]
Repayments of Lines of Credit	23,500
Common Stock [Member]
Significant Accounting Policies [Line Items]
Stock issued during the period (in shares)			121,111
Share Price (in usd per share)			$ 19.05
Convertible Preferred Stock, Shares Issued upon Conversion	2.43
Shares of common stock issued upon conversion of convertible preferred stock	5,577,016
Common Stock [Member] | IPO [Member]
Significant Accounting Policies [Line Items]
Share Price (in usd per share)	$ 15
Proceeds from Issuance Initial Public Offering	118,826
Payments for Commissions	9,266
Payments of Stock Issuance Costs	4,283
Series A Redeemable Convertible Preferred Stock [Member]
Significant Accounting Policies [Line Items]
Shares of common stock issued upon conversion of convertible preferred stock			(7,250,885)
Temporary Equity, Cumulative Dividends	11,932
Series B Redeemable Convertible Preferred Stock [Member]
Significant Accounting Policies [Line Items]
Shares of common stock issued upon conversion of convertible preferred stock			(6,301,291)
Temporary Equity, Cumulative Dividends	6,615

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RELATED PARTIES - (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended		0 Months Ended
	Sep. 30, 2014 Major Stockholder [Member] Related Party Transaction, Management Service Fee [Member]	Sep. 30, 2013 Major Stockholder [Member] Related Party Transaction, Management Service Fee [Member]	Sep. 30, 2014 Major Stockholder [Member] Related Party Transaction, Management Service Fee [Member]	Sep. 30, 2013 Major Stockholder [Member] Related Party Transaction, Management Service Fee [Member]	Jun. 10, 2014 Underwriters [Member]	Jun. 10, 2014 Underwriters [Member]
Related Party Transaction [Line Items]
General and administrative	$ 0	$ 263	$ 373	$ 513
Stock Issued During Period, Shares, Issued for Services					1,000,000
Stock Issued During Period, Value, Issued for Services (in usd per share)						$ 15

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SEGMENT AND GEOGRAPHICAL CONCENTRATION

9 Months Ended

Sep. 30, 2014

Segment Reporting [Abstract]

SEGMENT AND GEOGRAPHICAL CONCENTRATION

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. The Company globally manages the business 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 27.8% and 29.1% of total revenue for the three and nine months ended September 30, 2014; however, revenue earned in any individual foreign country is below 10% of the Company’s 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,
	2013		2014		2013		2014
United States	$	27,491	$	34,385	$	83,091	$	97,371
International	12,285		13,239		31,884		39,992
Total	$	39,776	$	47,624	$	114,975	$	137,363

The Company classifies sales within the United States into three categories: complex spine pathologies, minimally invasive procedures and degenerative and other conditions. A significant portion of the Company’s international revenue is derived from the Company’s 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 the Company ships the product to the agent.

The following table represents domestic revenue by procedure category. To further align its procedure categorizations, beginning in the second quarter of 2014, the Company began to report MIS sales attributable to complex spine procedures, which were historically reported in the minimally invasive category, within the complex spine category.  Accordingly, the complex spine category presented below includes MIS sales attributable to complex spine procedures of $1,355 for the three months ended September 30, 2013 and $4,114 and $3,865 for the nine months ended September 30, 2013 and 2014, respectively, which was historically reported in the minimally invasive category.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2014		2013		2014
Complex spine	$	11,330	$	14,585	$	35,111	$	40,375
Minimally invasive	4,946		5,258		13,945		15,138
Degenerative	11,215		14,542		34,035		41,858
	27,491		34,385		83,091		97,371
International	12,285		13,239		31,884		39,992
Total	$	39,776	$	47,624	$	114,975	$	137,363

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GOODWILL AND INTANGIBLE ASSETS - (Tables)

9 Months Ended

Sep. 30, 2014

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of Intangible Assets and Goodwill

Goodwill and intangible assets comprise the following:

	As of December 31, 2013
	Estimated Useful Lives	Gross		Accumulated Amortization			Net
Goodwill	—	$	121,814	$	—		$	121,814
Indefinite-lived intangible assets:
Trademarks	—	12,900		—			12,900
In-process research and development	—	1,500		—			1,500
Other	—	296		—			296
Subtotal		14,696		—			14,696
Subject to amortization
Developed technology	4 - 6 years	61,600		(36,466		)	25,134
Licensed technology	4 - 6 years	52,600		(43,947		)	8,653
Customer relationships	4 - 7 years	29,700		(14,320		)	15,380
Patents and other	2 - 17 years	1,313		(720		)	593
Subtotal		145,213		(95,453		)	49,760
Total		$	281,723	$	(95,453	)	$	186,270

	As of September 30, 2014
	Estimated Useful Lives	Gross		Accumulated Amortization			Net
Goodwill	—	$	121,814	$	—		$	121,814
Indefinite-lived intangible assets:
Trademarks	—	12,900		—			12,900
In-process research and development	—	1,500		—			1,500
Other	—	296		—			296
Subtotal		14,696		—			14,696
Subject to amortization
Developed technology	4 - 6 years	61,600		(45,019		)	16,581
Licensed technology	4 - 6 years	52,600		(52,138		)	462
Customer relationships	4 - 7 years	29,700		(17,502		)	12,198
Patents and other	2 - 17 years	1,326		(921		)	405
Subtotal		145,226		(115,580		)	29,646
Total		$	281,736	$	(115,580	)	$	166,156

Schedule of Expected Amortization Expense

As of September 30, 2014, the expected amortization expense for the remainder of 2014 and the following four years and thereafter is as follows:

	September 30, 2014
2014	$	2,554
2015	10,150
2016	10,138
2017	6,523
2018 and thereafter	281
Total	$	29,646

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STOCK-BASED COMPENSATION - Narrative (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended				9 Months Ended				3 Months Ended	9 Months Ended			3 Months Ended	9 Months Ended			0 Months Ended	3 Months Ended	9 Months Ended	0 Months Ended
	Sep. 30, 2014 plan		Sep. 30, 2013		Sep. 30, 2014 plan		Sep. 30, 2013		Sep. 30, 2014 Restricted Stock Units (RSUs) [Member]	Sep. 30, 2014 Restricted Stock Units (RSUs) [Member]	Apr. 21, 2014 Restricted Stock Units (RSUs) [Member] Installment	May 07, 2014 Omnibus Incentive Plan [Member]	Sep. 30, 2014 Omnibus Incentive Plan [Member] Restricted Stock Units (RSUs) [Member]	Sep. 30, 2014 Omnibus Incentive Plan [Member] Restricted Stock Units (RSUs) [Member]	May 07, 2014 Omnibus Incentive Plan [Member] Restricted Stock Units (RSUs) [Member] Installment	May 07, 2014 Omnibus Incentive Plan [Member] Employee Stock Option [Member] Immediately Vested [Member]	May 07, 2014 Employee Stock [Member]	Sep. 30, 2014 Employee Stock [Member]	Sep. 30, 2014 Employee Stock [Member]	May 07, 2014 Employee Stock [Member] Minimum [Member]	May 07, 2014 Employee Stock [Member] Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of Stock Plans	4				4
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized												1,650,289			188,891		411,523
Employee Stock Purchase Plan, Prerequisite for Participation, Minimum Hours Per Week of Employed																	20 hours
Employee Stock Purchase Plan, Common Stock Purchase, Payroll Deduction, Percentage																				1.00%	10.00%
Share-based Compensation Arrangement by Share-based Payment Award, Maximum Employee Subscription Rate																	2.00%
Share-based Compensation Arrangement by Share-based Payment Award, Purchase Price of Common Stock, Percent																	8500.00%
Allocated stock-based compensation expense	$ 2,071	[1]	$ 576	[1]	$ 3,830	[1]	$ 1,737	[1]	$ 1,088	$ 1,916			$ 238	$ 378				$ 50	$ 80
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Modification, Modified Number											576,132
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Installments											2				3
Allocated Share-based Compensation Expense, Amount Per Unit										$ 15.61
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized									$ 8,993	$ 8,993
Vested or expected to vest, shares	4,421,693	[2]			4,421,693	[2]										2,833,000

[1] Stock-based compensation included $169 and $0 related to stock option liability awards for the three months ended September 30, 2013 and 2014, respectively, compared to $545 and $0 for the nine months ended September 30, 2013 and 2014, respectively.

[2] Outstanding options, net of forfeiture rate.

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DEBT - Debt Summary (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Schedule of Long-term and Short-term Debt [Line Items]
Bank line of credit	$ 0	$ 23,500
Notes to stockholders	0	19,650
Total debt	0	45,770
Less unamortized discounts	0	(2,620)
Debt, net of discounts	0	43,150
Line of Credit [Member]
Schedule of Long-term and Short-term Debt [Line Items]
Bank line of credit	0	23,500
Notes to Stockholders [Member]
Schedule of Long-term and Short-term Debt [Line Items]
Notes to stockholders	$ 0	$ 22,270

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Statement of Comprehensive Income [Abstract]
Net loss	$ (16,140)	$ (6,178)	$ (48,570)	$ (25,941)
Other comprehensive income (loss):
Foreign currency translation adjustment	(1,650)	(930)	(1,380)	(332)
Other comprehensive income (loss)	(1,650)	(930)	(1,380)	(332)
Comprehensive loss	$ (17,790)	$ (7,108)	$ (49,950)	$ (26,273)

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INVENTORY

9 Months Ended

Sep. 30, 2014

Inventory Disclosure [Abstract]

INVENTORY

INVENTORY

The following table summarizes the Company’s inventory, net of allowances:

	December 31, 2013			September 30, 2014
Finished goods	$	64,539		$	79,376
Inventory allowances	(25,316		)	(25,752		)
Inventory, net	$	39,223		$	53,624

Inventory includes surgical instruments available for sale with a carrying value of $5,285 and $8,339 at December 31, 2013 and September 30, 2014, respectively.

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SUBSEQUENT EVENTS (Details) (Credit Agreement 2012 [Member], USD $)						0 Months Ended
	Dec. 31, 2012 Revolving Credit Facility [Member]	Dec. 31, 2012 Revolving Credit Facility [Member] Silicon Valley Bank and Comerica Bank [Member]	Dec. 31, 2012 Letter of Credit [Member]	Dec. 31, 2012 Letter of Credit [Member] Silicon Valley Bank and Comerica Bank [Member]	Oct. 21, 2014 Subsequent Event [Member] Revolving Credit Facility [Member] Silicon Valley Bank and Comerica Bank [Member]	Oct. 21, 2014 Subsequent Event [Member] Revolving Credit Facility [Member] Silicon Valley Bank and Comerica Bank [Member] Alternative Base Rate [Member]	Oct. 21, 2014 Subsequent Event [Member] Revolving Credit Facility [Member] Silicon Valley Bank and Comerica Bank [Member] London Interbank Offered Rate (LIBOR) [Member] Minimum [Member]	Oct. 21, 2014 Subsequent Event [Member] Revolving Credit Facility [Member] Silicon Valley Bank and Comerica Bank [Member] London Interbank Offered Rate (LIBOR) [Member] Maximum [Member]	Oct. 21, 2014 Subsequent Event [Member] Letter of Credit [Member] Silicon Valley Bank and Comerica Bank [Member]
Subsequent Event [Line Items]
Amounts available under credit agreement	$ 30,000,000	$ 30,000,000	$ 1,000,000	$ 1,000,000	$ 40,000,000				$ 10,000,000
Debt Instrument, Basis Spread on Variable Rate						0.75%	2.50%	3.75%
Borrowing base calculated as a percentage of accounts receivable, percentage					85.00%
Borrowing base limitation calculation , percentage of borrowing case plus percentage of value of eligible inventory, percentage of borrowing base					50.00%
Borrowing base limitation calculation , percentage of borrowing case plus percentage of value of eligible inventory, percentage of eligible inventory					35.00%
Borrowing base limitation calculation threshold, threshold percentage of borrowing rate					40.00%
Borrowing base limitation calculation threshold, threshold amount					$ 10,000,000
Debt Instrument, Covenant, Quick Ratio, Maximum Inventory as a Percentage of Accounts Receivable, Percentage					0.5
Debt Instrument, covenant, minimum required quick ratio					1.20

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OTHER ASSETS - (Tables)

9 Months Ended

Sep. 30, 2014

Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]

Schedule of Other Assets

Other assets comprises the following:

	December 31, 2013		September 30, 2014
Surgical instruments, net	$	15,271	$	21,477
Other	143		120
Total	$	15,414	$	21,597

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GOODWILL AND INTANGIBLE ASSETS Schedule of Expected Amortization Expense (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Goodwill and Intangible Assets Disclosure [Abstract]
2014	$ 2,554
2015	10,150
2016	10,138
2017	6,523
2018 and thereafter	281
Total	$ 29,646	$ 49,760

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NET LOSS PER SHARE

9 Months Ended

Sep. 30, 2014

Earnings Per Share [Abstract]

NET LOSS PER SHARE

NET LOSS PER SHARE

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2014			2013			2014
Net loss per common share:
Net loss	$	(6,178	)	$	(16,140	)	$	(25,941	)	$	(48,570	)
Less: accretion and adjustment of Series A Preferred and Series B Preferred	(129		)	—			(13,814		)	6,879
Net loss attributable to common stockholders	$	(6,307	)	$	(16,140	)	$	(39,755	)	$	(41,691	)
Basic and diluted loss per common share
Basic and diluted weighted average common shares outstanding	22,289,216			37,127,155			22,195,935			30,084,010
Basic and diluted loss per common share	$	(0.28	)	$	(0.43	)	$	(1.79	)	$	(1.39	)

Diluted loss per share for the three and nine months ended September 30, 2013 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,
	2013	2014	2013	2014
Series A Preferred and Series B Preferred	5,576,955	—	5,576,955	—
Stock options	4,247,737	4,476,615	4,247,737	4,476,615
Restricted stock units	576,131	765,023	576,132	765,023