UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 2)
(Mark One)
For the fiscal year ended December 31, 2016
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the Transition Period from ______ to _______.
Commission file number 001-36443
K2M GROUP HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
Delaware | 27-2977810 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
600 Hope Parkway SE, Leesburg, Virginia | 20175 | |
(Address of principal executive offices) | (Zip Code) | |
(703) 777-3155
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, $0.001 par value per share | The NASDAQ Global Select Market | |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933, as amended. Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
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 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 ý No o
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | o | Accelerated filer | ý | Non-accelerated filer | o | Smaller reporting company | o | Emerging growth company | ý | ||||
(Do not check if a smaller reporting company) | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The aggregate market value of the voting and non-voting common equity held by non-affiliates on June 30, 2016, the last business day of the Registrant’s most recently completed second fiscal quarter (based on the closing sale price of $15.52 of the Registrant’s common stock, as reported by the NASDAQ Stock Exchange on such date) was approximately $418 million.
The number of shares the Registrant's common stock outstanding on February 28, 2017 was 42,464,916.
DOCUMENTS INCORPORATED BY REFERENCE
Information included in our definitive proxy statement for our 2017 annual meeting of stockholders scheduled to be held on June 6, 2017 is incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this report.
EXPLANATORY NOTE
K2M Group Holdings, Inc. (the “Company”) is filing this Annual Report on Form 10-K/A, Amendment No. 2 (the “Amendment”) to replace the audit report of KPMG LLP, our Independent Registered Public Accounting Firm, which appeared on page F-2 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed on March 7, 2017 (the “Original Report”). The audit report of KPMG LLP, as replaced in the Amendment, does not modify the unqualified opinion previously expressed in the Original Report. Pursuant to Rule 12b-15 promulgated under the Securities Exchange Act of 1934, as amended, we have repeated the entire text of Item 8 and Item 15 of the Form 10-K in this Amendment No. 2, however, there have been no changes to such items other than to replace the audit report of KPMG LLP as described above.
Except as expressly set forth above, the Amendment does not, and does not purport to, amend, update or restate the information in any other item in the Original Report or reflect any events that have occurred after the filing of the Original Report. Accordingly, the Amendment should be read in conjunction with the Original Report and the Company’s other filings with the SEC subsequent to the filing of the Original Report, including any amendments thereto.
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K2M GROUP HOLDINGS, INC.
FORM 10-K
FOR THE PERIOD ENDED DECEMBER 31, 2016
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data required by this item are set forth at the pages indicated in Item 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as a part of this report:
(1) Financial Statements.
(2) Exhibits. See subsection (b) below.
(b) The following exhibits are filed as part of this report:
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.
Exhibit Number | Description | ||
2.1 | Agreement and Plan of Merger, dated as of July 2, 2010, by and among K2M Group Holdings, Inc. (formerly known as Altitude Group Holdings, Inc.), Altitude Merger Sub, Inc., K2M, Inc., and the Stockholders’ Committee (incorporated by reference to Exhibit 2.1 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
2.2 | Amendment No. 1 to Agreement and Plan of Merger, dated as of August 12, 2010, by and among K2M Group Holdings, Inc. (formerly known as Altitude Group Holdings, Inc.), and K2M, Inc., (incorporated by reference to Exhibit 2.2 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
2.3 | Amendment No. 2 to Agreement and Plan of Merger, dated as of December 21, 2012, by and among K2M Group Holdings, Inc. (formerly known as Altitude Group Holdings, Inc. and the Stockholders’ Committee (incorporated by reference to Exhibit 2.3 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
3.1 | Third Amended and Restated Certificate of Incorporation of K2M Group Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on May 13, 2014 (No. 001-36443)) | ||
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Exhibit Number | Description | ||
3.2 | Amended and Restated Bylaws of K2M Group Holdings, Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on May 13, 2014 (No. 001-36443)) | ||
4.1 | Indenture, dated August 11, 2016, between K2M Group Holdings, Inc. and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on August 11, 2016 (File No. 001-36443)) | ||
4.2 | Form of 4.125% Convertible Senior Notes (included as Exhibit A in Exhibit 4.1) (incorporated by reference to Exhibit A in Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed on August 11, 2016 (File No. 001-36443)) | ||
10.1 | Credit Agreement, dated as of October 29, 2012, among K2M Holdings, Inc., as a Guarantor, K2M, Inc. and K2M UK Limited, jointly and severally as Borrowers, the Guarantors from time to time parties thereto, the several lenders from time to time parties thereto and Silicon Valley Bank, as Administrative Agent, Issuing Lender and Swingline Lender (incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
10.2 | Waiver and First Amendment to Credit Agreement entered into as of May 20, 2013 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 10.2 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
10.3 | Second Amendment to Credit Agreement entered into as of February 26, 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 10.3 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
10.4 | Third Amendment to Credit Agreement entered into as of April 30, 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 10.34 to the Registrant’s Registration Statement on Form S-1 filed on May 2, 2014 (No. 333-194550)) | ||
10.5 | 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 Registrant’s Current Report on Form 8-K filed on October 24, 2014 (No. 001-36433)) | ||
10.6 | Fifth Amendment to Credit Agreement and First Amendment to Guarantee and Collateral Agreement entered into as of January 7, 2015, 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 Registrant’s Current Report on Form 8-K filed on January 9, 2015 (No. 001-36433)) | ||
10.7 | Sixth Amendment to Credit Agreement entered into as of May 8, 2015, 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 Registrant’s Current Report on Form 8-K filed on May 8, 2015 (No. 001-36433)) | ||
10.8 | Seventh Amendment to Credit Agreement entered into as of June 5, 2015, 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 Registrant’s Current Report on Form 8-K filed on June 5, 2015 (No. 001-36433)) | ||
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Exhibit Number | Description | ||
10.9 | Eighth Amendment dated October 29, 2015 to Credit Agreement dated October 29, 2012, by and among K2M Holdings, Inc., as the guarantor, K2M, Inc. and K2M UK Limited, as borrowers, and Silicon Valley Bank and Comerica Bank as lenders. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on November 3, 2015 (No. 001-36433)) | ||
10.10 | Ninth Amendment dated August 8, 2016 to Credit Agreement dated October 29, 2012, by and among K2M Holdings, Inc., as the guarantor, K2M, Inc. and K2M UK Limited, as borrowers, and Silicon Valley Bank and Comerica Bank as lenders (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on August 8, 2016 (File No. 001-36443)) | ||
10.11 | Guarantee and Collateral Agreement, dated as of October 29, 2012, made by K2M Holdings, Inc., K2M, Inc. and the other Grantors referred to herein in favor of Silicon Valley Bank, as Administrative Agent (incorporated by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
10.12 | Export Import Bank Credit Agreement, dated as of October 29, 2012, among K2M Holdings, Inc., as a Guarantor, the other Guarantors from time to time parties hereto, K2M Inc., as the Borrower, the several Exim Lenders from time to time parties hereto, and Silicon Valley Bank, as Administrative Agent (incorporated by reference to Exhibit 10.5 to the Registrant’s Registration Statement on Form S-1 fled on April 7, 2014 (No. 333-194550)) | ||
10.13 | Guarantee and Collateral Agreement for Export Import Bank Credit Facility, dated as of October 29, 2012, made by K2M Holdings, Inc., K2M, Inc. and the other Grantors referred to herein in favor of Silicon Valley Bank, as Administrative Agent (incorporated by reference to Exhibit 10.6 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
10.14 | † | Employment Agreement, effective as of August 12, 2010, by and between K2M, Inc. and Eric Major (incorporated by reference to Exhibit 10.7 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | |
10.15 | † | Amendment, dated as of January 20, 2014, to Employment Agreement, effective as of August 12, 2010, by and between K2M, Inc. and Eric Major (incorporated by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | |
10.16 | † | Second Amendment, dated as of February 21, 2017, to Employment Agreement, effective as of August 12, 2010, by and between K2M, Inc. and Eric Major (incorporated by reference to Exhibit 10.16 to the Registrant’s Annual Report on Form 10-K filed on March 7, 2017 (No. 001-36443)) | |
10.17 | † | Employment Agreement, effective as of August 12, 2010, by and between K2M, Inc. and Gregory Cole (incorporated by reference to Exhibit 10.9 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | |
10.18 | † | Amendment, dated as of January 20, 2014, to Employment Agreement, effective as of August 12, 2010, by and between K2M, Inc. and Gregory Cole (incorporated by reference to Exhibit 10.10 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | |
10.19 | † | Second Amendment, dated as of February 21, 2017, to Employment Agreement, effective as of August 12, 2010, by and between K2M, Inc. and Gregory Cole (incorporated by reference to Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K filed on March 7, 2017 (No. 001-36443)) | |
10.20 | † | Employment Agreement, effective as of August 12, 2010, by and between K2M, Inc. and Dr. John Kostuik (incorporated by reference to Exhibit 10.11 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | |
10.21 | † | Amendment, dated as of March 10, 2014, to Employment Agreement, effective as of August 12, 2010, by and between K2M, Inc. and Dr. John Kostuik (incorporated by reference to Exhibit 10.12 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | |
10.22 | † | Second Amendment, dated as of February 22, 2017, to Employment Agreement, effective as of August 12, 2010, by and between K2M, Inc. and Dr. John Kostuik (incorporated by reference to Exhibit 10.22 to the Registrant’s Annual Report on Form 10-K filed on March 7, 2017 (No. 001-36443)) | |
10.23 | † | Amended and Restated K2M, Inc. 2006 Stock Option and Grant Plan (incorporated by reference to Exhibit 10.13 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | |
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Exhibit Number | Description | ||
10.24 | † | Form of Incentive Stock Option Agreement under the Amended and Restated 2006 Stock Option and Grant Plan and Stock Restriction Agreement (incorporated by reference to Exhibit 10.40 to the Registrant’s Registration Statement on Form S-1 filed on January 28, 2015 (No. 333-201597)) | |
10.25 | † | K2M Group Holdings, Inc. 2010 Equity Award Plan (incorporated by reference to Exhibit 10.14 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | |
10.26 | † | Form of Stock Option Award Agreement for directors, under the K2M Group Holdings, Inc. 2010 Equity Award Plan (incorporated by reference to Exhibit 10.40 to the Registrant’s Registration Statement on Form S-1 filed on January 28, 2015 (No. 333-201597)) | |
10.27 | † | Form of Stock Option Award Agreement for employees and consultants, under the K2M Group Holdings, Inc. 2010 Equity Award Plan (incorporated by reference to Exhibit 10.41 to the Registrant’s Registration Statement on Form S-1 filed on January 28, 2015 (No. 333-201597)) | |
10.28 | † | K2M Group Holdings, Inc. 2014 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.15 to the Registrant’s Registration Statement on Form S-1 filed on January 28, 2015 (No. 333-194550)) | |
10.29 | † | K2M, Inc. 2014 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.42 to the Registrant’s Registration Statement on Form S-1 filed on March 14, 2014 (No. 333-194550)) | |
10.30 | † | Form of Option Agreement under the K2M Group Holdings, Inc. 2014 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.42 to the Registrant’s Registration Statement on Form S-1 filed on January 28, 2015 (No. 333-201597)) | |
10.31 | † | Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.32 to the Registrant’s Registration Statement on Form S-1 filed on April 22, 2014 (No. 333-194550)) | |
10.32 | † | K2M Group Holdings, Inc. 2016 Omnibus Incentive Plan (incorporated by reference to Exhibit 4.3 to the Registrant’s Registration Statement on Form S-8 filed on June 14, 2016 (File No. 001-36443)) | |
10.33 | † | Form of Option Agreement under the K2M Group Holdings, Inc. 2016 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.33 to the Registrant’s Annual Report on Form 10-K filed on March 7, 2017 ((No. 001-36443)) | |
10.34 | † | Form of Restricted Stock Agreement under the K2M Group Holdings, Inc. 2016 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.34 to the Registrant’s Annual Report on Form 10-K filed on March 7, 2017 (No. 001-36443)) | |
10.35 | † | Form of Restricted Stock Unit Agreement under the K2M Group Holdings, Inc. 2016 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.35 to the Registrant’s Annual Report on Form 10-K filed on March 7, 2017 (No. 001-36443)) | |
10.36 | † | Form of Side Letter to Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.33 to the Registrant’s Registration Statement on Form S-1 filed on April 22, 2014 (No. 333-194550)) | |
10.37 | † | K2M Group Holdings, Inc. 2010 Independent Agent Stock Option Plan (incorporated by reference to Exhibit 10.17 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | |
10.38 | Deed of Lease, made as of December 10, 2014, by and between TC Oaklawn Owner, LLC and K2M Group Holdings, Inc. (incorporated by reference to Exhibit 10.1 to the Registrants' Current Report on Form 8-K filed on December 12, 2014 (No. 001-36443)) | ||
10.39 | Exclusive License Agreement, dated as of September 2, 2004, by and between Spinal LLC and K2M, LLC (incorporated by reference to Exhibit 10.20 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
10.40 | Amendment to Exclusive License Agreement, entered into as of February 17, 2010, by and between Spinal LLC and K2M, LLC (incorporated by reference to Exhibit 10.21 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
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Exhibit Number | Description | ||
10.41 | Asset Purchase Agreement, made and entered into as of November 21, 2011, by and between K2M, Inc. and Nexgen Spine, Inc. (incorporated by reference to Exhibit 10.22 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
10.42 | Royalty Agreement, made and effective as of April 1, 2007, between K2M, Inc. and Josef Gorek, M.D. (incorporated by reference to Exhibit 10.23 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
10.43 | Assignment and Earn-Out Agreement, made and entered into as of March 8, 2004, by and between K2 Medical, LLC, as assignee, and Fasteneix, LLC, Third Millenium Engineering, LLC, J7 Summit Medical Group, LLC, Techsys Medical, LLC, Bones Consulting, LLC and Josef Gorek (incorporated by reference to Exhibit 10.24 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
10.44 | Addendum, dated as of September 27, 2005, to the Assignment and Earn-out Agreement by and between K2 Medical, LLC and Fastenix, LLC, Third Millenium Engineering, LLC, J7 Summit Medical Group, LLC, Techsys Medical, LLC and Bones Consulting, LLC (incorporated by reference to Exhibit 10.25 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
10.45 | License Agreement, dated as of May 19/June 12, 2006, between Prof. Dr. Dietmar Wolter and K2M, LLC (incorporated by reference to Exhibit 10.26 to the Registrant’s Registration Statement on Form S-1 filed on April 7,2014 (No. 333-194550)) | ||
10.46 | Additional Agreement to License Agreement, dated as of June 14/June 12, 2006, between Prof. Dr. Dietmar Wolter and K2M, LLC (incorporated by reference to Exhibit 10.27 to the Registrant’s Registration Statement on Form S-1 April 7, 2014 (No. 333-194550)) | ||
10.47 | Addendum, dated as of February 20/February 22, 2008, to the License Agreement dated as of May 19/June 12, 2006 and the Additional Agreement to License Agreement dated as of May 19/June 12, 2006, between Prof. Dr. Dietmar Wolter and K2M, Inc. (formerly known as K2M, LLC) (incorporated by reference to Exhibit 10.28 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
10.48 | Asset Purchase and Earn Out Agreement, made and entered into as of February 12, 2010, by and between K2M, Inc. and John Carbone, MD (incorporated by reference to Exhibit 10.29 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
10.49 | First Amendment to Asset Purchase and Earn Out Agreement, made and entered into as of June 15, 2012, by and between K2M, Inc. and John Carbone, MD (incorporated by reference to Exhibit 10.30 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
10.50 | Registration Rights Agreement, dated August 12, 2010, by and among K2M Group Holdings, Inc., Welsh, Carson, Anderson & Stowe XI, L.P., FFC Partners III, L.P. and the other stockholders named therein (incorporated by reference to Exhibit 10.31 to the Registrant’s Registration Statement on Form S-1 April 22, 2014 (No. 333-194550)) | ||
21.1 | List of Subsidiaries (incorporated by reference to Exhibit 21.1 to the Registrant’s Annual Report on Form 10-K filed on March 7, 2017 (No. 001-36443)) | ||
23.1 | Consent of KPMG, LLP (filed herewith) | ||
23.2 | Consent of Ernst & Young LLP (filed herewith) | ||
23.3 | Consent of iData Research, Inc. (incorporated by reference to Exhibit 23.3 to the Registrant’s Annual Report on Form 10-K filed on March 7, 2017 (No. 001-36443)) | ||
24.1 | Power of Attorney (incorporated by reference to Exhibit 24.1 to the Registrant’s Annual Report on Form 10-K filed on March 7, 2017 (No. 001-36443)) | ||
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) | ||
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Exhibit Number | Description | ||
101.INS | XBRL Instance Document (A) | ||
101 SCH | XBRL Taxonomy Extension Schema Document (A) | ||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document (A) | ||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document (A) | ||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document (A) | ||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document (A) | ||
† | Identifies exhibits that consist of a management contract or compensatory plan or arrangement. | |
(A) | XBRL (Extensible Business Reporting Language) information is furnished and not filed for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. | |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
K2M Group Holdings, Inc. (Registrant) | ||||||||
Date: May 2, 2017 | By: | /s/ Eric D. Major | ||||||
Name: | Eric D. Major | |||||||
Title: | President and Chief Executive Officer (Authorized Signatory) | |||||||
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K2M GROUP HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
K2M Group Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of K2M Group Holdings, Inc. and subsidiaries (the Company) as of December 31, 2016, and the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of K2M Group Holdings, Inc. and subsidiaries as of December 31, 2016, and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
McLean, Virginia
March 7, 2017
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
K2M Group Holdings, Inc.
We have audited the accompanying consolidated balance sheet of K2M Group Holdings, Inc. (the Company) as of December 31, 2015, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of K2M Group Holdings, Inc. at December 31, 2015 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Tysons, Virginia
March 3, 2016
F-3
K2M GROUP HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)
December 31, | ||||||||
2016 | 2015 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 45,511 | $ | 34,646 | ||||
Accounts receivable, net | 46,430 | 38,773 | ||||||
Inventory, net | 61,897 | 62,002 | ||||||
Prepaid expenses and other current assets | 6,147 | 19,820 | ||||||
Total current assets | 159,985 | 155,241 | ||||||
Property, plant and equipment, net | 50,714 | 38,318 | ||||||
Goodwill | 121,814 | 121,814 | ||||||
Intangible assets, net | 22,758 | 33,123 | ||||||
Other assets, net | 28,254 | 26,016 | ||||||
Total assets | $ | 383,525 | $ | 374,512 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Current maturities under capital lease obligation | $ | 973 | $ | 284 | ||||
Accounts payable | 15,367 | 22,483 | ||||||
Accrued expenses | 15,673 | 13,559 | ||||||
Accrued payroll liabilities | 12,068 | 11,507 | ||||||
Total current liabilities | 44,081 | 47,833 | ||||||
Convertible senior notes | 36,894 | — | ||||||
Capital lease obligation, net of current maturities | 34,933 | 34,140 | ||||||
Deferred income taxes, net | 5,017 | 5,042 | ||||||
Other liabilities | 1,032 | 835 | ||||||
Total liabilities | 121,957 | 87,850 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Common stock, $0.001 par value, 750,000,000 shares authorized; 42,282,741 and 41,337,692 shares issued and 42,274,130 and 41,337,692 shares outstanding, respectively | 42 | 41 | ||||||
Additional paid-in capital | 474,512 | 454,153 | ||||||
Accumulated deficit | (211,081 | ) | (169,421 | ) | ||||
Accumulated other comprehensive (loss) income | (1,771 | ) | 1,889 | |||||
Treasury stock, at cost, 8,611 and 0 shares, respectively | (134 | ) | — | |||||
Total stockholders’ equity | 261,568 | 286,662 | ||||||
Total liabilities and stockholders’ equity | $ | 383,525 | $ | 374,512 | ||||
See accompanying notes to consolidated financial statements.
F-4
K2M GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share and Per Share Data)
Year Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Revenue | $ | 236,634 | $ | 216,007 | $ | 186,672 | ||||||
Cost of revenue | 82,178 | 71,791 | 62,800 | |||||||||
Gross profit | 154,456 | 144,216 | 123,872 | |||||||||
Operating expenses: | ||||||||||||
Research and development | 21,547 | 19,868 | 16,302 | |||||||||
Sales and marketing | 111,376 | 105,635 | 95,323 | |||||||||
General and administrative | 56,264 | 54,983 | 60,216 | |||||||||
Total operating expenses | 189,187 | 180,486 | 171,841 | |||||||||
Loss from operations | (34,731 | ) | (36,270 | ) | (47,969 | ) | ||||||
Other expense, net: | ||||||||||||
Foreign currency transaction loss | (2,430 | ) | (1,813 | ) | (4,752 | ) | ||||||
Discount on prepayment of notes to stockholders | — | — | (4,825 | ) | ||||||||
Interest expense | (4,425 | ) | (941 | ) | (2,205 | ) | ||||||
Total other expense, net | (6,855 | ) | (2,754 | ) | (11,782 | ) | ||||||
Loss before income taxes | (41,586 | ) | (39,024 | ) | (59,751 | ) | ||||||
Income tax expense (benefit) | 74 | 192 | (114 | ) | ||||||||
Net loss | (41,660 | ) | (39,216 | ) | (59,637 | ) | ||||||
Accretion and adjustment of preferred stock to fair value | — | — | 6,879 | |||||||||
Net loss attributable to common stockholders | $ | (41,660 | ) | $ | (39,216 | ) | $ | (52,758 | ) | |||
Net loss per share attributable to common stockholders: | ||||||||||||
Basic and diluted | $ | (1.00 | ) | $ | (0.97 | ) | $ | (1.65 | ) | |||
Weighted average common shares outstanding: | ||||||||||||
Basic and diluted | 41,729,013 | 40,237,848 | 31,887,246 | |||||||||
See accompanying notes to consolidated financial statements.
F-5
K2M GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In Thousands)
Year Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Net loss | $ | (41,660 | ) | $ | (39,216 | ) | $ | (59,637 | ) | |||
Other comprehensive loss (income): | ||||||||||||
Foreign currency translation adjustment | (3,660 | ) | 62 | 2,747 | ||||||||
Other comprehensive (loss) income | (3,660 | ) | 62 | 2,747 | ||||||||
Comprehensive loss | $ | (45,320 | ) | $ | (39,154 | ) | $ | (56,890 | ) | |||
See accompanying notes to consolidated financial statements.
F-6
K2M GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In Thousands, Except Share Data)
Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive (Loss) Income | Treasury Stock | Total Stockholders’ Equity | ||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||
Balance at December 31, 2013 | 22,421,509 | $ | 22 | $ | 165,651 | $ | (70,568 | ) | $ | (920 | ) | $ | — | $ | 94,185 | ||||||||||||
Net loss | — | — | — | (59,637 | ) | — | — | (59,637 | ) | ||||||||||||||||||
Other comprehensive income | — | — | — | — | 2,747 | — | 2,747 | ||||||||||||||||||||
Stock-based compensation | — | 5,807 | — | — | — | 5,807 | |||||||||||||||||||||
Accretion of Series A and B redeemable convertible preferred stock | — | — | (1,158 | ) | — | — | — | (1,158 | ) | ||||||||||||||||||
Accretion of Series A and B redeemable convertible preferred stock issuance costs | — | — | (22 | ) | — | — | — | (22 | ) | ||||||||||||||||||
Issuances of common stock pursuant to securities purchase and other agreements | 121,111 | — | 2,307 | — | — | — | 2,307 | ||||||||||||||||||||
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 | ||||||||||||||||||||
Issuance and exercise of stock-based compensation benefit plans, net of income tax | 421,462 | 1 | 1,562 | — | — | — | 1,563 | ||||||||||||||||||||
Balance at December 31, 2014 | 37,366,098 | 37 | 386,795 | (130,205 | ) | 1,827 | — | 258,454 | |||||||||||||||||||
Net loss | — | — | — | (39,216 | ) | — | — | (39,216 | ) | ||||||||||||||||||
Other comprehensive income | — | — | — | — | 62 | — | 62 | ||||||||||||||||||||
Stock-based compensation | — | — | 11,188 | — | — | — | 11,188 | ||||||||||||||||||||
Issuance of common stock, net of issuance costs | 2,907,490 | 3 | 54,154 | — | — | — | 54,157 | ||||||||||||||||||||
Issuance and exercise of stock-based compensation benefit plans, net of income tax | 1,064,104 | 1 | 2,016 | — | — | — | 2,017 | ||||||||||||||||||||
Balance at December 31, 2015 | 41,337,692 | 41 | 454,153 | (169,421 | ) | 1,889 | — | 286,662 | |||||||||||||||||||
Net loss | — | — | (41,660 | ) | — | — | (41,660 | ) | |||||||||||||||||||
Other comprehensive loss | — | — | — | — | (3,660 | ) | — | (3,660 | ) | ||||||||||||||||||
Stock-based compensation | — | — | 6,956 | — | — | — | 6,956 | ||||||||||||||||||||
Convertible senior notes equity conversion option | — | — | 11,666 | — | — | — | 11,666 | ||||||||||||||||||||
Debt issuance costs allocated to equity and other | — | — | (640 | ) | — | — | — | (640 | ) | ||||||||||||||||||
Issuance and exercise of stock-based compensation benefit plans, net of income tax | 945,049 | 1 | 2,377 | — | — | (134 | ) | 2,244 | |||||||||||||||||||
Balance at December 31, 2016 | 42,282,741 | $ | 42 | $ | 474,512 | $ | (211,081 | ) | $ | (1,771 | ) | $ | (134 | ) | $ | 261,568 | |||||||||||
See accompanying notes to consolidated financial statements.
F-7
K2M GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Year Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Operating activities | ||||||||||||
Net loss | $ | (41,660 | ) | $ | (39,216 | ) | $ | (59,637 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
Depreciation and amortization | 29,212 | 24,940 | 33,324 | |||||||||
Provision for inventory reserve | 5,572 | 1,680 | 583 | |||||||||
Provision for allowance for doubtful accounts | 68 | 319 | 469 | |||||||||
Stock-based compensation | 6,956 | 11,188 | 5,807 | |||||||||
Amortization of issuance and discount costs included in interest expense | — | — | 4,928 | |||||||||
Accretion of discounts and amortization of issuance costs of convertible senior notes | 1,604 | — | — | |||||||||
Deferred income taxes | (33 | ) | — | (218 | ) | |||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (9,381 | ) | (5,082 | ) | (2,860 | ) | ||||||
Inventory | (3,439 | ) | (8,766 | ) | (13,660 | ) | ||||||
Prepaid expenses and other assets | (10,256 | ) | (9,738 | ) | (8,450 | ) | ||||||
Accounts payable, accrued expenses, and accrued payroll liabilities | 8,059 | 6,365 | 9,552 | |||||||||
Net cash used in operating activities | (13,298 | ) | (18,310 | ) | (30,162 | ) | ||||||
Investing activities | ||||||||||||
Purchase of surgical instruments | (12,275 | ) | (10,905 | ) | (12,848 | ) | ||||||
Purchase of property, plant and equipment | (17,439 | ) | (2,787 | ) | (2,905 | ) | ||||||
Changes in cash restricted for leasehold improvements | 6,608 | — | (6,667 | ) | ||||||||
Purchase of intangible assets | (1,307 | ) | (588 | ) | (118 | ) | ||||||
Net cash used in investing activities | (24,413 | ) | (14,280 | ) | (22,538 | ) | ||||||
Financing activities | ||||||||||||
Borrowings on bank line of credit | 19,500 | 25,000 | — | |||||||||
Payments on bank line of credit | (19,500 | ) | (25,000 | ) | (23,500 | ) | ||||||
Proceeds from issuance of convertible senior notes, net of issuance costs | 47,108 | — | — | |||||||||
Proceeds from issuances of notes to stockholders | — | — | 14,634 | |||||||||
Prepayment of notes to stockholders | — | — | (39,212 | ) | ||||||||
Payment of dividends on Series A and Series B redeemable convertible preferred stock | — | — | (18,547 | ) | ||||||||
Proceeds from issuances of common stock, net of issuance costs | — | 54,209 | 121,898 | |||||||||
Principal payments under capital lease | (219 | ) | — | — | ||||||||
Issuances and exercise of stock-based compensation benefit plans, net of income tax | 2,244 | 2,017 | 1,563 | |||||||||
Net cash provided by financing activities | 49,133 | 56,226 | 56,836 | |||||||||
Effect of exchange rate changes on cash and cash equivalents | (557 | ) | (401 | ) | (144 | ) | ||||||
Net increase in cash and cash equivalents | 10,865 | 23,235 | 3,992 | |||||||||
Cash and cash equivalents at beginning of period | 34,646 | 11,411 | 7,419 | |||||||||
Cash and cash equivalents at end of period | $ | 45,511 | $ | 34,646 | $ | 11,411 | ||||||
Significant non-cash investing activities | ||||||||||||
Buildings under capital lease | $ | — | $ | 26,469 | $ | — | ||||||
Leasehold improvements, including property under capital lease | $ | 171 | $ | 6,884 | $ | — | ||||||
Significant non-cash financing activities | ||||||||||||
Capital lease obligation | $ | 1,708 | $ | 33,938 | $ | — | ||||||
Accretion of discount on convertible senior notes | $ | 807 | $ | — | $ | — | ||||||
Accretion of Series A and B redeemable convertible preferred stock | $ | — | $ | — | $ | 1,180 | ||||||
Adjustment of preferred stock to fair value | $ | — | $ | — | $ | (8,059 | ) | |||||
Common stock offering costs | $ | — | $ | 52 | $ | — | ||||||
Cash paid for: | ||||||||||||
Income taxes | $ | 159 | $ | 126 | $ | 132 | ||||||
Interest | $ | 382 | $ | 428 | $ | 6,690 | ||||||
See accompanying notes to consolidated financial statements.
F-8
K2M Group Holdings, Inc.
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Data)
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In the Annual Report on Form 10-K, unless the context otherwise requires, reference to “K2M,” “the Company,” “we,” “us,” and “our,” refer to K2M Group Holdings, Inc. together with its subsidiaries.
Description of Business
K2M Group Holdings, Inc. was formed as a Delaware corporation on June 29, 2010. On July 2, 2010, K2M, Inc., a company initially incorporated in 2004, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Altitude Group Holdings, Inc. (“Altitude”) and Altitude Merger Sub, Inc. (“Merger Sub”). Altitude was a newly formed corporation and an indirect wholly-owned subsidiary of Welsh, Carson, Anderson & Stowe XI, L.P., (“WCAS”). On August 12, 2010, upon the closing of the transactions under the Merger Agreement, Merger Sub merged with and into K2M, Inc. with K2M, Inc. being the surviving corporation of such merger (the “Merger”) and Altitude was renamed K2M Group Holdings, Inc.
We are a global medical device provider of complex spine and minimally invasive solutions focused on achieving three-dimensional Total Body Balance TM. Since our inception, we have designed, developed and commercialized innovative complex spine and minimally invasive spine technologies and techniques used by spine surgeons to treat some of the most complicated spinal pathologies. K2M has leveraged these core competencies into Balance ACS™, a platform of products, services, and research to help surgeons achieve three-dimensional spinal balance across the axial, coronal and sagittal planes, with the goal of supporting the full continuum of care to facilitate quality patient outcomes. The Balance ACS platform, in combination with our technologies, techniques and leadership in the 3D-printing of spinal devices, enable us to compete favorably in the global spinal surgery market.
Issuances of Common Stock and Use of Proceeds
On May 13, 2014, we 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 $118,862, 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.
Proceeds from the IPO were used 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, we paid approximately $23,500 to repay all outstanding indebtedness under our Bank Line of Credit and $40,495 to prepay all outstanding aggregate principal and accrued interest of notes to stockholders. In connection with the prepayment, we expensed $4,825 representing the acceleration of the issuance discounts on the notes to stockholders.
On June 10, 2014, the underwriters purchased an additional 1,000,000 shares of common stock offered by selling stockholders at a price of $15.00 per share before underwriting discounts. We did not receive any proceeds from the sale of these shares.
In February and July 2015, we completed additional public offerings of our common stock in which we sold 2,907,490 shares for proceeds of approximately $54,100 after deducting the underwriting discount and offering expenses. We used the proceeds from these offerings for working capital and general corporate purposes including the expansion of our global distribution network and the purchase of inventory to support sales efforts. These offerings were also used to facilitate the orderly distribution of shares by selling stockholders and to increase the public float of our shares. During this period, selling stockholders sold 9,219,248 shares of common stock. We did not receive any proceeds from shares of common stock sold by the selling stockholders.
Principles of Consolidation
The accompanying consolidated financial statements include our accounts and all of our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
F-9
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 revenue and expenses during the reporting period. Actual results could differ from those estimates.
Net Loss per Share
Basic net loss per common share is determined by dividing the net loss allocable to common stockholders by the weighted average number of common shares outstanding during the periods presented, without consideration of common stock equivalents. Diluted loss per share is computed by dividing the net loss allocable to common stockholders by the weighted average number of shares of common stock and common stock equivalents outstanding for the period. The treasury stock method is used to determine the dilutive effect of our stock option grants. The if-converted method is used to determine the dilutive effect of the convertible senior notes, and the Series A Preferred and Series B Preferred until their conversion into common stock in May 2014. The weighted average shares used to calculate both basic and diluted loss per share are the same because common stock equivalents were excluded in the calculation of diluted loss per share because their effect would be anti-dilutive. Although included in our outstanding shares total as of December 31, 2016 and 2015, shares of restricted stock contingently issuable until their restrictions lapse have been excluded from the weighted average shares outstanding.
Foreign Currency Translation and Other Comprehensive Loss
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Our reporting currency is the U.S. dollar, which is also the functional currency of our domestic entities, while the functional currency of our foreign subsidiaries are the British Pound, Euro and Swiss Franc. Assets and liabilities denominated in foreign currencies are translated at the rate of exchange on the balance sheet date. Revenues and expenses are translated using the average exchange rate for the period. Net gains and losses resulting from the translation of foreign financial statements are recorded in other comprehensive income (loss). Net foreign currency gains or losses resulting from transactions in currencies other than the functional currencies are included in other expense, net on the consolidated statements of operations.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Restricted Cash
We classify cash as restricted when cash is unavailable for withdrawal or usage. Restrictions may include legally restricted deposits, contract bids or other contractual requirements, or our statements of intention with regard to particular deposits.
Accounts Receivable
Accounts receivable are reported in the consolidated balance sheets at outstanding amounts, less the allowance for doubtful accounts. We perform ongoing credit evaluations of certain customers and generally extend credit without requiring collateral. We periodically assesses the collectability of accounts receivable considering factors such as the specific evaluation of collectability, historical collection experience and economic conditions in individual markets and record an allowance for doubtful accounts for the estimated uncollectible amount as appropriate.
Inventory
Inventory consists primarily of finished goods and surgical instruments available for sale and is stated at the lower of cost or market using a weighted-average cost method. We review our inventory on a periodic basis for excess, obsolete, and impaired inventory and record a reserve for the identified items.
Property, Plant and Equipment
Property, plant and equipment are stated at cost net of accumulated depreciation and amortization. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts, and any resulting gain or loss is credited or charged to the consolidated statements of operations. Repairs and maintenance costs are expensed as incurred.
Buildings under capital lease are recorded at the lower of the present value of the minimum lease payments under the lease agreement or the fair market value of the underlying assets under lease on the lease commencement date.
F-10
Depreciation and amortization of property, plant and equipment is recorded using the straight-line method over the estimated useful lives of the respective assets or the lease term for buildings under capital lease. Amortization of leasehold improvements is recorded over the shorter of the life of the improvement or the remaining term of the lease using the straight-line method.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the consideration transferred over the estimated fair value of assets acquired and liabilities assumed in connection with the Merger.
Goodwill is not amortized but evaluated annually or more frequently for impairment if impairment indicators exist. Such indicators include, but are not limited to (i) a significant adverse change in the business climate or environment, (ii) unanticipated competition, or (iii) adverse action or assessment by a regulator. Our annual impairment measurement date is November 1. We first assess qualitative factors before performing a quantitative assessment of the reporting unit. The qualitative assessment considers events and circumstances such as macroeconomic conditions, industry and market conditions, cost factors and overall financial performance, as well as company and specific reporting unit specifications. If after performing this assessment, we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we are required to perform a quantitative test. Our evaluation of goodwill completed during the years ended December 31, 2016, 2015, and 2014 resulted in no impairment loss and we have concluded that the Company allocates resources and operates with one reporting unit.
Our indefinite-lived intangible assets include trademarks and purchased in-process research and development projects, which originated from the Merger and were measured at their respective estimated fair values as of the acquisition date.
We also used a qualitative assessment for our indefinite lived intangible asset impairment testing. Our evaluation of indefinite-lived intangible assets completed during the years ended December 31, 2016, 2015 and 2014 resulted in no impairment losses.
Definite-lived intangible assets include licensed technology, developed technology, and customer relationships are amortized over estimated useful lives, which range from four to seven years. Patents and other are amortized over estimated useful lives which range from two to seventeen years. We recorded no impairment loss during the years ended December 31, 2016, 2015 and 2014.
Impairment of Long-Lived Assets
Long-lived assets, such as property, plant and equipment including the capital lease for our corporate headquarters and operations facilities and other definite lived intangible assets are reviewed for impairment whenever circumstances indicate that the carrying amount of the asset may not be recoverable. The carrying amount of a long-lived asset may not be recoverable if it exceeds the sum of undiscounted cash flows expected to be generated by the asset. If an asset is determined to be impaired, the loss is measured as the amount by which the carrying amount of the asset exceeds its estimated fair value. Considerable management judgment is necessary to estimate undiscounted future cash flows. Accordingly, actual results could differ from such estimates. Our evaluation of indicators for impairment or disposal of long-lived-assets indicates that no events have been identified that caused an evaluation of the recoverability of the long-lived assets.
Other Assets
Other long-term assets consist mainly of surgical instruments used primarily in the domestic and direct international distribution channels to implant our products. Surgical instruments are stated at cost less accumulated amortization. We amortize these instruments to cost of revenues over their estimated useful life.
We provide surgical instruments to our customers for use to implant our products during a surgical procedure. Following completion of the procedure, the instruments are returned to us upon which we will sanitize the instrument and provide it to another customer.
Fair Value Measurements
Fair value is defined in the fair value measurement accounting guidance as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, or exit price. Assets and liabilities subject to fair value measurements are required to be disclosed within a specified fair value hierarchy. The fair value hierarchy ranks the quality and reliability of inputs or assumptions used in the determination of fair value and requires assets and liabilities carried at fair value to be classified and disclosed in one of the following categories based on the lowest level input used that is significant to a particular fair value measurement:
Level 1 – Defined as observable inputs such as unadjusted quoted prices in active markets for identical assets.
F-11
Level 2 – Defined as observable inputs other than Level 1 prices, such as quoted prices for similar assets, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
Our cash and cash equivalents and convertible senior notes are subject to fair value measurements. In accordance with the hierarchy, the inputs used in measuring the fair value of the cash equivalents are considered to be Level 1 and convertible senior notes are considered to be Level 2.
We apply the fair value measurement accounting guidance to non-financial assets upon the acquisition of businesses or in conjunction with the measurement of an impairment loss of a long-lived asset, goodwill or other intangible asset under the accounting guidance for impairments.
Financial Instruments and Concentration of Credit Risk
We consider the recorded costs of certain financial assets and liabilities, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, to approximate their fair value because of relatively short maturities at December 31, 2016 and 2015. The fair value of convertible senior notes was determined using comparable market data for similar debt instruments.
Financial instruments that potentially subject us to a concentration of credit risk consist principally of cash and cash equivalents and accounts receivable. We maintain our cash balances with credit worthy financial institutions in the United States, and the balances may exceed, at times, the amount insured by the Federal Deposit Insurance Corporation. No single customer represented more than 10% of revenue for any period presented.
Revenue Recognition
Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or service has been rendered, the price to the buyer is fixed or determinable, and collectability is reasonably assured.
Revenue in our direct markets is generated by making its products available to hospitals that purchase specific products for use in surgery on a case-by-case basis. Revenue from sales generated by use of products is recognized upon receipt of a delivered order confirming that our products have been used in a surgical procedure or following shipment and transfer of title to a hospital that purchases products in advance of a surgery.
International sales outside of our direct markets are transacted with independent distributors, who then resell the products to their hospital customers. We recognize revenue upon shipment of our products to the international distributors, who accept title at point of shipment.
Shipping and Handling Costs
Shipping and handling costs are charged to sales and marketing expense in the consolidated statements of operations and amounted to $4,689, $4,199 and $3,403 for the years ended December 31, 2016, 2015 and 2014, respectively.
Advertising Costs
Advertising costs are charged to sales and marketing expense as incurred in the consolidated statements of operations and amounted to $187, $290 and $269 for the years ended December 31, 2016, 2015 and 2014, respectively.
Research and Development
We expense our research and development as incurred.
Stock-Based Compensation
We award stock-based compensation primarily in the form of stock options, restricted stock and RSUs. For stock options awarded, stock-based compensation is based on the fair value of such awards granted to employees using a Black-Scholes-Merton option pricing model and is expensed on a straight-line basis over the awards' vesting period, less awards expected to be forfeited using estimated forfeiture rates.
F-12
For stock options awarded that include performance and market conditions, stock-based compensation is based on the fair value of such awards granted to employees using a Monte Carlo Simulation model and expensed beginning when the performance condition is met over the service period. No such options were awarded to employees subsequent to 2011.
For restricted stock and restricted stock units (“RSUs”) awarded, stock-based compensation is based on the fair value using the closing market share price of our common stock on the date of award and is expensed on a straight-line basis over the awards vesting period.
We also recognize stock-based compensation for participation in our 2014 Employee Stock Purchase Plan (“ESPP”). The ESPP provides for a look-back option feature that gives an option to the participant to purchase our common stock at a discount to the market price for such stock. Our costs are recognized over the offering period based on the fair value of the option granted to participants as determined using a Black-Scholes-Merton option pricing model and the number of shares expected to be purchased at the end of the offering period.
Income Taxes
We account for income taxes using the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, their respective tax bases and operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce net deferred tax assets to the amount expected to be realized. Income tax expense (benefit) is the tax payable (receivable) for the period and the change during the period in deferred tax assets and liabilities.
As prescribed by the accounting guidance, we use a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax positions that meet the more-likely-than-not recognition threshold are measured at the largest amount of the tax benefits, as determined on a cumulative probability basis, that are more-likely-than-not to be realized upon ultimate settlement in the financial statements. We recognize interest and penalties related to income tax matters in income tax expense (benefit).
Redeemable Convertible Preferred Stock
Through their conversion in May 2014, we used the effective interest method to accrete the differences between the carrying value and the estimated redemption value of our preferred stock, such that the carrying value approximated the redemption value on the earliest possible redemption date.
Loss Contingencies
Evaluation of loss contingencies require significant judgment to estimate the amount and timing of recording a potential loss accrual in our consolidated financial statements. Such contingencies include, but are not limited to, product liability, intellectual property, litigation, regulatory proceedings; and other legal matters that arise from time to time in the ordinary course of business.
We regularly assess uncertainty to determine the degree of probability and range of possible loss that will ultimately be resolved when one or more future events occur or fail to occur. We disclose information regarding each material claim where the likelihood of a loss contingency is probable, or reasonably possible and accrue for the loss when a reasonable estimate can be made. Based on such evaluation management believes that there are no claims or pending actions threatened against us, that are expected to have a material adverse effect on our financial position for the period ended December 31, 2016.
Recent Accounting Pronouncements
We qualify as an “emerging growth company” (“EGC”) pursuant to the provisions of the Jumpstart Our Business Startups Act of 2012 and have elected to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act which permits EGCs to defer compliance with new or revised accounting standards (the “EGC extension”) until non-issuers are required to comply with such standards. Accordingly, so long as we continue to qualify as an EGC, we will not have to adopt or comply with new accounting standards until non-issuers are required to comply with such standards.
Revenue Recognition
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Between May 2014 and December 31, 2016, the Financial Accounting Standards Board, or FASB issued several updates related to revenue recognition for which we are still evaluating the impact:
In May 2014, ASU 2014-09, Revenue from Contracts with Customers (Topic 606): was first to amend the existing accounting standards for revenue recognition. The amendment is based on the principle that revenue should be recognized to depict the transfer of goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.
In March 2016, ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), was issued to address principal versus agent considerations, reporting revenue gross versus net in the new revenue recognition standard. The guidance clarifies how an entity should evaluate the unit of accounting to determine whether it is a specified good or service and how it should apply the control principle to certain types of arrangements.
In April 2016, ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, was issued and included final amendments to clarify the guidance on identifying performance obligations and accounting for licenses of intellectual property (“IP”). The amendment allows entities to disregard goods or services that are immaterial in the context of a contract, assess whether the performance obligation is separately identifiable and whether the shipping and handling activities are a promised service in a contract. This guidance also clarifies how an entity should evaluate the nature of its promise in granting an IP license and when a promised good or service is distinct within the context of a contract.
In May 2016, ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, was issued and clarifies that for a contract to be considered completed the entity should evaluate the collectability threshold or probability of collecting revenue. It provides that the fair value of noncash consideration such as equity should be measured at contract inception when determining the transaction price and any subsequent changes must be recorded as a gain or loss, not as revenue. In addition, the entity has the option to make an accounting policy election to exclude from the transaction price certain types of taxes such as sales tax, value-added tax and excise tax in lieu of evaluating such taxes they collect in all jurisdictions to determine whether a tax is levied to the entity or the customer.
In December 2016, ASU 2016-20, Revenue from Contracts with Customers (Topic 606): Technical Corrections and Improvements, was issued to make minor corrections or minor improvements to the codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. It affects narrow aspects of the revenue from contracts with customers’ guidance, including its scope, disclosure of remaining and prior-period performance obligation, contract modifications, contract asset vs receivables, refund liability and advertising costs.
The guidance included in these updates will be effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted for reporting periods beginning after December 15, 2016. All other entities, such as EGCs that have elected the EGC extension, including us, and non-public entities will be required to comply with the guidance for annual reporting periods beginning after December 15, 2018. The guidance may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of the initial application. We are currently assessing the impact of this guidance
Other Accounting Pronouncements
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. For public entities other than EGCs that have elected the EGC extension, the guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. For all other entities, EGCs that have elected the EGC extension, including us, and non-public entities will be required to comply with the guidance for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments in this guidance should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. We are presently evaluating the impact of this guidance.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The revised guidance must be applied on a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest
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comparative period presented in the financial statements. For public companies other than EGCs that have elected the EGC extension, including us, and non-public entities will be required to comply with the guidance in 2019, and interim periods within that year. EGC’s that have elected the EGC exemption, like us, or non-public companies will be required to comply with this guidance beginning in 2020 and interim periods in 2021. Early adoption is permitted for all entities. We are presently evaluating the impact of this guidance.
In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments, which addresses the accounting for embedded derivatives related to debt contracts. The update clarifies that determining whether the economic characteristics of a put or call are clearly and closely related to its debt host requires only an assessment of the four-step decision sequence. It also indicates that entities are not required to separately assess whether the contingency itself is clearly and closely related. For public entities the guidance will be effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2016. All other entities, such as EGCs that have elected the EGC extension, including us, and non-public entities will be required to comply with the guidance for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. The guidance may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of the initial application. Early adoption is permitted in any annual or interim period for which financial statements have not been issued or made available for issuance. We are currently assessing the impact of this guidance.
In March 2016, the FASB issued ASU No. 2016-09, Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which is intended to improve employee share-based payment accounting for companies that issue share-based awards to their employees. This guidance simplifies the accounting for share-based payment transactions, including consequences of income tax award, classification as either equity or liability, treatment of forfeitures, and classification on statement of cash flows. The recognition, measurement and reporting for share-based payments will be affected by this new guidance. For public entities other than EGCs that have elected the EGC extension, the guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. All other entities, such as EGCs that have elected the EGC extension, including us, and non-public entities will be required to comply with the guidance for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted in any annual or interim period for which financial statements have not been issued or made available for issuance, but all of the guidance must be adopted in the same period. We are currently evaluating the impact of this guidance.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayment or extinguishment costs, the maturing of a zero coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investees, and beneficial interests obtained in a financial asset securitization. It also provides clarifications related to separately identifiable cash-flows and application of the predominance principle based on evaluating the source and nature of the underlying cash flows when determining whether it is a financing, investing, operating or a combination of cash flow classifications. For public entities the guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. All other entities, such as EGCs that have elected the EGC extension, including us, and non-public entities will be required to comply with the guidance for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted in any annual or interim period for which financial statements have not been issued or made available for issuance, but all of the guidance must be adopted in the same period. We are currently assessing the impact of this guidance.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. These amounts should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This amendment does not provide a definition of restricted cash or restricted cash equivalents. For public entities the guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. All other entities, such as EGCs that have elected the EGC extension, including us, and non-public entities will be required to comply with the guidance for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted in any annual or interim period for which financial statements have not been issued or made available for issuance, but all of the guidance must be adopted in the same period. We are currently assessing the impact of this guidance.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, by eliminating the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. However, the loss recognized should not exceed the total amount of goodwill. For public entities the
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guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. All other entities, such as EGCs that have elected the EGC extension, including us, and non-public entities will be required to comply with the guidance for fiscal years beginning after December 15, 2020. Early adoption is permitted in any annual or interim period after January 1, 2017. An entity should apply the amendments in this Update on a prospective basis. We are currently assessing the impact of this guidance.
2. ACCOUNTS RECEIVABLE
The following table summarizes the accounts receivables, net of allowances:
December 31, | ||||||||
2016 | 2015 | |||||||
Accounts receivable | $ | 48,664 | $ | 41,210 | ||||
Allowances | (2,234 | ) | (2,437 | ) | ||||
Accounts receivable, net | $ | 46,430 | $ | 38,773 | ||||
The following table summarizes a rollforward of the accounts receivable allowances for the years ended December 31, 2016, 2015 and 2014:
December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Beginning | $ | (2,437 | ) | $ | (2,494 | ) | $ | (2,447 | ) | |||
Additions | — | (235 | ) | (436 | ) | |||||||
Write-offs | 203 | 292 | 389 | |||||||||
Ending | $ | (2,234 | ) | $ | (2,437 | ) | $ | (2,494 | ) | |||
3. INVENTORY
The following table summarizes inventory, net of allowances:
December 31, | ||||||||
2016 | 2015 | |||||||
Finished goods | $ | 96,619 | $ | 90,226 | ||||
Inventory allowances | (34,722 | ) | (28,224 | ) | ||||
Inventory, net | $ | 61,897 | $ | 62,002 | ||||
Inventory includes surgical instruments available for sale with a carrying value of $9,874 and $8,946 at December 31, 2016 and 2015, respectively.
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
The following table summarizes prepaid expenses and other current assets:
December 31, | ||||||||
2016 | 2015 | |||||||
Restricted cash | $ | 61 | $ | 6,669 | ||||
Landlord incentives for leasehold improvements | — | 6,454 | ||||||
Prepaid expenses | 2,666 | 2,408 | ||||||
Other | 3,420 | 4,289 | ||||||
Total | $ | 6,147 | $ | 19,820 | ||||
Restricted cash represents funds designated for tenant improvements related to the new headquarters and operations facilities. Landlord incentives for leasehold improvements represents incentives provided by the landlord of our new headquarters and operations facilities under the capital lease agreement, which commenced in October 2015. Such incentives were received during 2016 from our landlord upon the completion of actual improvements.
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5. PROPERTY, PLANT AND EQUIPMENT
The following table summarizes property, plant and equipment:
Estimated | December 31, | ||||||||
Useful Lives | 2016 | 2015 | |||||||
Buildings under capital lease | 16 years | $ | 26,469 | $ | 26,469 | ||||
Leasehold improvements, including property under capital lease | 15 years | 20,051 | 9,717 | ||||||
Equipment | 3-5 years | 3,817 | 3,054 | ||||||
Software | 3 years | 4,989 | 4,231 | ||||||
Computer equipment | 3 years | 1,070 | 1,493 | ||||||
Furniture and office equipment | 5-7 years | 3,696 | 1,050 | ||||||
Vehicles and other | 3 years | 832 | 795 | ||||||
Total | 60,924 | 46,809 | |||||||
Less accumulated depreciation and amortization | (10,210 | ) | (8,491 | ) | |||||
Property, plant and equipment, net | $ | 50,714 | $ | 38,318 | |||||
As of December 31, 2016 and 2015, we had leasehold improvements of approximately $19,053 and $8,242, respectively for our new headquarters and operations facilities which were completed and placed in service in May 2016, following our occupancy of the new premises.
Depreciation and amortization expense was $5,107, $2,297 and $1,626 for the years ended December 31, 2016, 2015 and 2014, respectively. Included in this total is amortization expense for buildings and leasehold improvements under capital lease, for which occupancy commenced in October 2015, of $1,663, $346 and $0 for the years ended December 31, 2016, 2015 and 2014, respectively.
6. INTANGIBLE ASSETS
The following table summarizes intangible assets:
As of December 31, 2016 | ||||||||||||||
Estimated Useful Lives | Gross | Accumulated Amortization | Net | |||||||||||
Indefinite-lived intangible assets: | ||||||||||||||
Trademarks | — | $ | 12,900 | $ | — | $ | 12,900 | |||||||
In-process research and development | — | 900 | — | 900 | ||||||||||
Other | — | 220 | — | 220 | ||||||||||
Subtotal | 14,020 | — | 14,020 | |||||||||||
Subject to amortization | ||||||||||||||
Developed technology | 4 - 6 years | 62,000 | (58,026 | ) | 3,974 | |||||||||
Licensed technology | 4 - 6 years | 52,600 | (52,475 | ) | 125 | |||||||||
Customer relationships | 4 - 7 years | 29,700 | (27,048 | ) | 2,652 | |||||||||
Patents and other | 2 - 17 years | 3,302 | (1,315 | ) | 1,987 | |||||||||
Subtotal | 147,602 | (138,864 | ) | 8,738 | ||||||||||
Total | $ | 161,622 | $ | (138,864 | ) | $ | 22,758 | |||||||
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As of December 31, 2015 | ||||||||||||||
Estimated Useful Lives | Gross | Accumulated Amortization | Net | |||||||||||
Indefinite-lived intangible assets: | ||||||||||||||
Trademarks | — | $ | 12,900 | $ | — | $ | 12,900 | |||||||
In-process research and development | — | 900 | — | 900 | ||||||||||
Other | — | 266 | — | 266 | ||||||||||
Subtotal | 14,066 | — | 14,066 | |||||||||||
Subject to amortization | ||||||||||||||
Developed technology | 4 - 6 years | 62,000 | (52,243 | ) | 9,757 | |||||||||
Licensed technology | 4 - 6 years | 52,600 | (52,325 | ) | 275 | |||||||||
Customer relationships | 4 - 7 years | 29,700 | (22,805 | ) | 6,895 | |||||||||
Patents and other | 2 - 17 years | 3,245 | (1,115 | ) | 2,130 | |||||||||
Subtotal | 147,545 | (128,488 | ) | 19,057 | ||||||||||
Total | $ | 161,611 | $ | (128,488 | ) | $ | 33,123 | |||||||
Amortization expense was $10,377, $10,305 and $22,946 for the years ended December 31, 2016, 2015 and 2014, respectively.
As of December 31, 2016, the expected amortization expense for each of the next five years and thereafter is as follows:
2017 | $ | 6,772 | ||
2018 | 276 | |||
2019 | 258 | |||
2020 | 233 | |||
2021 | 1,199 | |||
Thereafter | — | |||
Total | $ | 8,738 | ||
7. OTHER ASSETS
The following table summarizes other assets:
December 31, | ||||||||
2016 | 2015 | |||||||
Surgical instruments, net | $ | 24,810 | $ | 23,945 | ||||
Restricted cash | 2,262 | 1,298 | ||||||
Other | 1,182 | 773 | ||||||
Total | $ | 28,254 | $ | 26,016 | ||||
Surgical instruments are stated net of accumulated amortization and allowances of $34,191 and $26,609 at December 31, 2016 and 2015, respectively. Amortization expense was $10,049, $9,015 and $6,494 for the years ended December 31, 2016, 2015 and 2014, respectively.
Restricted cash balances represent deposits made on pending bids or contracts with customers.
8. ACCRUED EXPENSES
The following table summarizes accrued expenses:
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December 31, | ||||||||
2016 | 2015 | |||||||
Accrued commissions | $ | 6,607 | $ | 5,336 | ||||
Accrued royalties | 3,495 | 2,704 | ||||||
Other | 5,571 | 5,519 | ||||||
Total | $ | 15,673 | $ | 13,559 | ||||
9. DEBT
Convertible Senior Notes
On August 11, 2016, we issued $50,000 aggregate principal amount of convertible senior notes (the “Notes”). The Notes pay interest at an annual rate of 4.125%, payable semi-annually in arrears on February 15 and August 15 of each year beginning on February 15, 2017, and mature on August 15, 2036, unless earlier converted, redeemed or repurchased by us. We received net proceeds from the sale of the Notes of $47,091, after deducting underwriting discounts and commissions and offering expenses of $2,909. The Notes are governed by an indenture (the “Indenture”) between the Company and the Bank of New York Mellon.
The Notes are senior, unsecured obligations of the Company and are equal in right of payment with our existing and future senior, unsecured indebtedness, senior in right of payment to our existing and future indebtedness that is expressly subordinated to the Notes, and effectively subordinated to our existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness. The Notes are structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent we are not a holder thereof) preferred equity, if any, of our subsidiaries.
Noteholders may convert their notes at their option only in the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2016, if the last reported sale price per share of our common stock for each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter exceeds 130% of the conversion price on such trading day; (2) during the five consecutive business days immediately after any five consecutive trading day period (such five consecutive trading day period, the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of our common stock on such trading day and the conversion rate on such trading day; (3) upon the occurrence of certain corporate events or distributions on our common stock; (4) if we call the Notes for redemption; and (5) at any time from, and including, February 15, 2036 until the close of business on the second scheduled trading day immediately before the maturity date. We will settle conversions by paying or delivering, as applicable, cash, shares of our common stock or a combination of cash and shares of $1,000 our common stock, at our election, based on the applicable conversion rate. The initial conversion rate is 45.7603 shares per $1,000 principal amount of Notes, which represents an initial conversion price of approximately $21.85 per share, and is subject to adjustment. If a “make-whole fundamental change” occurs on or before August 15, 2021, then we will in certain circumstances increase the conversion rate for a specified period of time.
The Notes are redeemable, in whole or in part, at our option at any time, and from time to time, on or after August 15, 2021, at a cash redemption price equal to the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any. If a “fundamental change” occurs prior to the stated maturity date, then noteholders may require us to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any. The Indenture contains customary terms and covenants and events of default with respect to the Notes.
Pursuant to ASC 470, Debt, we have bifurcated the debt and equity components of the Notes. The separation was performed by determining the fair value of a similar debt instrument without the associated equity component. That amount was then deducted from the initial gross proceeds of the Notes to arrive at a residual amount which was allocated to the conversion feature that is classified as equity. The difference between the principal amount of the Notes and estimated fair value of the liability component without the embedded equity component (representing the fair value of the embedded equity component) is recorded as a debt discount and an increase to additional paid in capital on the issuance date of the Notes.
The initial fair value of the indebtedness and the embedded conversion option was $38,334 and $11,666 , respectively. The embedded conversion option was recorded in stockholders’ equity and as debt discount, to be subsequently accreted to interest expense over the term of the Notes. The initial purchaser discounts and commissions and offering expenses totaled $2,909 and were allocated between the liability and the equity component in proportion to the allocation of proceeds and accounted for as debt issuance costs and equity issuance costs, respectively. As a result, $2,228 attributable to the indebtedness was recorded as
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a reduction to the carrying value of the Notes, and will be amortized as interest expense over the term of Notes, and $680 attributable to the equity component was recorded a reduction to additional paid-in-capital in stockholders’ equity.
For the year ended December 31, 2016, we recognized $1,604 of interest expense related to the Notes, of which $796 was accrued and will be paid in cash and $807 was non-cash accretion of the debt discounts recorded. The Notes have been classified as long-term debt on our consolidated balance sheet. As of December 31, 2016, the fair value of the Notes was $39,949.
Revolving Credit Facility
We maintain a senior secured credit facilities credit agreement (as amended from time to time) with Silicon Valley Bank and Comerica Bank as Lenders, which is secured primarily by the assets of our operating subsidiaries in the United States and United Kingdom.
On August 8, 2016, we entered into an amendment to the credit agreement, which extended its maturity date to April 26, 2018. As amended, the credit facility consists of a revolving credit facility (“Bank Line of Credit”) of $55,000 with a sub-facility for letters of credit in the aggregate availability amount of $10,000 and a swingline sub-facility in the aggregate availability amount of $5,000. In addition, the agreement was amended to permit us to make certain cash distributions for interest and other payments due under the Notes, distribute up to $4,000 in aggregate for interest payments on the Notes and up to $1,500 in aggregate for cash payments in connection with any conversions of the Notes.
The revolving credit facility contains various financial covenants and negative covenants with which we must maintain compliance, including a consolidated adjusted quick ratio for K2M, Inc., K2M UK Limited and select subsidiaries not less than 1.20:1.00 as of the last day of any month, restrictive covenants which limits our ability to pay dividends on common stock and make certain investments, and the provision of certain financial reporting and company information as required. We were in compliance with all the financial and other covenants of the credit facility at December 31, 2016.
On August 31, 2016, we used a portion of the proceeds from the Notes offering to prepay all $19,500 aggregate principal amounts outstanding under the Bank Line of Credit. As of December 31, 2016 and 2015, we had no outstanding borrowings on the revolving credit facility.
For the years ended December 31, 2016, 2015 and 2014, we recorded interest expense of $263, $22 and $373, respectively, under the credit agreement and amounts of $201, $318 and $338, respectively, related to the amortization of the loan issuance fees. Our average interest rate on borrowings under the Bank Line of Credit was 4.25%.
As of December 31, 2016, we had $46,715 of unused borrowing capacity under the revolving credit facility which is net of an issued but undrawn letter of credit for $6,000 representing a security deposit on the corporate headquarters and operations facilities lease.
Capital Lease
On December 11, 2014, we entered into a Deed of Lease (the “Lease Agreement”) with respect to our new corporate headquarters and operations facilities to be located in two adjacent buildings in Leesburg, Virginia (the “Buildings”) for an initial term of 186 calendar months beginning on March 15, 2016, the lease commencement date, which is approximately five months following our control of the Buildings to commence the construction of our leasehold improvements referred to as the lease commencement date.
From December 2014 until October 2015, the Buildings were under construction. In October 2015, we gained access and control of the Buildings to commence the construction of our leasehold improvements. In May 2016, we began to conduct our operations from the Buildings. Under the accounting guidance, we are required to account for the Lease Agreement as a capital lease. The related capital lease obligation is amortized over 191 calendar months beginning in October 2015 under the effective interest method.
Under the terms of the Lease Agreement, from the lease commencement date, we are required to (subject to an initial abatement described below) pay an annual base rent of approximately $3,201, which will increase by 2.50% per year (without regard to the initial abatement) commencing upon the first anniversary of the lease commencement date. We have the option to renew the lease for three additional terms of five years each at the then-current market rate. We bear the cost for real estate taxes, utilities, maintenance, repairs and insurance. In October 2016, monthly cash rent payments commenced.
Under the terms of the Lease Agreement, the landlord also provided a tenant improvement allowance to us of $6,454 for the construction of leasehold improvements, which were reflected within prepaid expenses and other current assets as of December
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31, 2015. In addition, the Lease Agreement required us to provide a security deposit in the form of an uncollaterized letter of a credit in the amount of $6,000, which letter of credit may be reduced from time to time upon the satisfaction of certain conditions as set forth in the Lease Agreement. Interest expense on the capital lease obligation was $2,290, $480 and $0 for the years ended December 31, 2016, 2015 and 2014, respectively.
Operating Leases
As of December 31, 2016, we lease space for our offices located in the United Kingdom, Italy and Germany.
The following table summarizes our future minimum lease payments under a non-cancelable capital lease and operating leases agreements, including payments for costs directly associated with the facility leases:
Capital Lease | Operating Leases | |||||||
Year ending December 31: | ||||||||
2017 | $ | 3,268 | $ | 568 | ||||
2018 | 3,350 | 534 | ||||||
2019 | 3,434 | 377 | ||||||
2020 | 3,519 | 351 | ||||||
2021 | 3,607 | 311 | ||||||
Thereafter | 40,265 | 9 | ||||||
Total minimum lease payments | 57,443 | $ | 2,150 | |||||
Less: interest | (21,537 | ) | ||||||
Capital lease obligations | 35,906 | |||||||
Less current portion | (973 | ) | ||||||
Long-term capital lease obligations | $ | 34,933 | ||||||
10. PREFERRED STOCK
Preferred Stock
As of December 31, 2016 and 2015, we had 100,000,000 authorized shares of preferred stock of which no shares were issued or outstanding.
Redeemable Convertible Preferred Stock
On May 13, 2014, we converted all 7,250,885 and 6,301,290 outstanding shares of Series Series A and Series B Preferred into 2,983,902 and 2,593,114 shares, respectively, of our common stock concurrent with the IPO. In addition, we paid cumulative cash dividends of $18,547 to holders of the preferred stock.
11. STOCK-BASED COMPENSATION
We have a number of stock-based compensation plans including an ESPP. The purpose of these plans is to provide incentives to employees, directors, agents and our advisors and these Plans as determined and administered by the compensation committee of our 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 respective plan, as applicable. Depending on the particular plan, incentive or other awards may take the form of incentive or non-qualified stock options, stock appreciation rights, shares of restricted stock, RSUs or other stock-based awards, subject to certain limitations. Under certain of these plans, 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. As of December 31, 2016, there was a total of 1,960,679 shares of common stock available for future grants under the plans.
The following table summarizes the stock-based compensation expense by financial statement line item, employees and non-employees and type of award:
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Year Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Cost of revenue | $ | 168 | $ | 705 | $ | 424 | ||||||
Research and development | 532 | 844 | 439 | |||||||||
Sales and marketing | 1,581 | 4,045 | 2,146 | |||||||||
General and administrative | 4,675 | 5,594 | 2,798 | |||||||||
$ | 6,956 | $ | 11,188 | $ | 5,807 | |||||||
Year Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Stock options | $ | 2,985 | $ | 5,116 | $ | 2,107 | ||||||
Restricted stock | 1,052 | 313 | — | |||||||||
Restricted stock units | 2,527 | 5,460 | 3,620 | |||||||||
ESPP | 392 | 299 | 80 | |||||||||
Total | $ | 6,956 | $ | 11,188 | $ | 5,807 | ||||||
Stock Options
The following table summarizes stock option plans activity:
Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (years) | Aggregate Intrinsic Value (1) | ||||||||||
Outstanding at December 31, 2015 (2) | 3,682,019 | $ | 11.51 | 5.98 | $ | 31,586 | |||||||
Granted | 470,353 | 14.45 | |||||||||||
Exercised | (411,785 | ) | 6.62 | ||||||||||
Expired | (5,771 | ) | 5.73 | ||||||||||
Forfeited | (49,691 | ) | 10.42 | ||||||||||
Outstanding at December 31, 2016 (2) | 3,685,125 | $ | 12.45 | 6.05 | $ | 29,142 | |||||||
Vested: | |||||||||||||
At December 31, 2016 | 1,743,949 | $ | 11.73 | 5.76 | $ | 11,205 | |||||||
Vested or expected to vest: | |||||||||||||
At December 31, 2016 (2) (3) | 3,417,641 | $ | 12.62 | 6.14 | $ | 26,501 | |||||||
(1) | Calculated using the fair market value per share of our common stock as of December 31, 2016 and 2015 of $20.04 and $19.74, respectively. |
(2) | The total includes 980,671 and 994,768 performance-based options at December 31, 2016 and 2015, respectively. |
(3) | Outstanding options, net of forfeiture rate. |
The total fair value of employee stock options that vested was approximately $3,062, $1,791 and $1,386 during the years ended December 31, 2016, 2015 and 2014, respectively.
The weighted-average fair value per share of options granted by us was $5.08, $8.73 and $5.54 during the years ended December 31, 2016, 2015 and 2014, respectively. The fair value was determined by applying the Black-Scholes-Merton option pricing model, utilizing the following weighted-average assumptions:
Year Ended December 31, | |||||||||
2016 | 2015 | 2014 | |||||||
Expected dividend yield | — | % | — | % | — | % | |||
Expected volatility | 34.16-36.54 | 36.31-41.33% | 35.19-37.47% | ||||||
Risk-free interest rate | 1.20-1.64 | 1.42-2.18% | 1.79-2.18% | ||||||
Expected average life of options | 6-7 years | 7 years | 6-7 years | ||||||
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A discussion of management’s methodology for developing each of the assumptions used in the valuation model follows:
• | Dividend Yield – We have never declared or paid dividends and has no plans to do so in the foreseeable future. |
• | Risk-Free Interest Rate – This is the U.S. Treasury rate for the week of each option grant during the year that has a term that most closely resembles the expected life of the option. |
• | Expected Life of the Option Term – This is the period of time that the options granted are expected to remain unexercised. For options granted during the years ended December 31, 2016, 2015 and 2014, we derived the expected life of the option based on the average midpoint between vesting and the contractual term, as we have little exercise history. |
• | Expected Volatility – Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. We use an estimated volatility based on the volatility of a number of similarly situated public companies, along with other factors deemed relevant by management. |
As of December 31, 2016 and 2015, there was approximately $4,170 and $5,030, respectively of total unrecognized compensation expense less estimated forfeitures, related to nonvested employee stock options under our stock-based compensation plans. As of December 31, 2016 and 2015, this expense is expected to be recognized over a weighted-average period of 1.98 and 1.92 years, respectively. The expected forfeiture rate is the estimated percentage of options granted that is expected to be forfeited or canceled on an annual basis before becoming fully vested. We estimate the forfeiture rate based on past turnover data, with further consideration given to the class of employees to whom the options were granted. The forfeiture rate used during the years ended December 31, 2016, 2015 and 2014, was 3.1%, 3.1% and 3.1%.
Certain stock options granted by us subsequent to the Merger through 2011 cannot be exercised until certain performance conditions are met. Such options are subject to both a four-year time-based vesting schedule, and vesting upon the satisfaction of performance and market-based criteria, based on WCAS's internal rate of return on their investment in the Company as measured following their sale of at least 75% of their total holdings in K2M. As of December 31, 2016, there were 978,614 options that had time vested but were still subject to the performance vesting condition. On February 1, 2017, following the cumulative sale of at least 75% of their investment in K2M, WCAS informed us that rate of return performance criteria underlying these awards had been met and such options had become vested and were exercisable.
The intrinsic value of options exercised during the years ended December 31, 2016, 2015 and 2014 approximated $2,301, $11,643 and $5,191, respectively.
Restricted Stock and Restricted Stock Units
In April 2014, our 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 provided that the RSUs will vest in two equal installments on May 21, 2015 and 2016, subject to continued employment through the applicable vesting dates. We recognized stock-based compensation expense of $1,507, $4,503 and $3,004 for the years ended December 31, 2016, 2015 and 2014, respectively, related to these awards.
Restricted stock and RSUs awarded after April 2014 have a three-year vesting schedule and vest in one-third increments over the three-year period. For the years ended December 31, 2016, 2015 and 2014, restricted stock and RSUs issued had a grant date fair value equal to the closing price of the our common stock on the grant date. The weighted average grant date fair values of restricted stock and RSUs granted to employees during the years ended December 31, 2016, 2015 and 2014 is as follows:
Year Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Weighted-average grant date fair value per share - restricted stock | $ | 14.38 | $ | 23.46 | $ | — | ||||||
Weighted-average grant date fair value per share or unit - RSUs | $ | 16.05 | $ | — | $ | 15.06 | ||||||
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A summary of restricted stock and RSU activity during the year ended December 31, 2016 is as follows:
Restricted Stock | Restricted Stock Units | |||||||||||||||||||
Number of Shares | Weighted-Average Grant Date Fair Value | Weighted-Average Remaining Term (years) | Number of Shares | Weighted-Average Grant Date Fair Value | Weighted-Average Remaining Term (years) | |||||||||||||||
Non-vested at December 31, 2015 | 79,940 | $ | 23.46 | 2.50 | 414,001 | $ | 15.42 | 0.68 | ||||||||||||
Vested | (26,652 | ) | $ | 23.46 | — | (351,032 | ) | $ | 15.50 | — | ||||||||||
Granted | 165,217 | $ | 14.38 | — | 16,488 | $ | 16.05 | — | ||||||||||||
Non-vested at December 31, 2016 | 218,505 | $ | 16.59 | 2.35 | 79,457 | $ | 15.22 | 0.81 | ||||||||||||
Vested: | ||||||||||||||||||||
At December 31, 2016 | — | $ | — | — | — | $ | — | — | ||||||||||||
Vested or expected to vest: | ||||||||||||||||||||
At December 31, 2016 | 218,505 | $ | 16.59 | 2.35 | 79,457 | $ | 15.22 | 0.81 | ||||||||||||
Employee Stock-Purchase Plan
The ESPP was established to provide employees and participating affiliates with an opportunity to purchase our common stock. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. As of December 31, 2016 and 2015, 255,262 and 333,753 shares were available for issuance under the ESPP.
Generally, all domestic employees are eligible to participate in the ESPP if they are employed by us or any participating affiliate, for at least 20 hours per week. Participants are permitted to purchase our shares of common stock through payroll deductions of no less than 1% and no more than 10% of their eligible compensation. Amounts deducted and accumulated by the participant are used to purchase shares of our common stock at the end of each offering period. The purchase price of the shares will be equal to 85% of the lower of the fair value of our 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.
We issued 78,491, 50,586 and 27,184 shares of common stock to ESPP participants for proceeds of $1,047, $871 and $346 during the years ended December 31, 2016, 2015 and 2014, respectively.
12. DEFINED CONTRIBUTION PLAN
We have a 401(k) plan which is a defined contribution plan (the “Contribution Plan”) covering substantially all employees meeting certain eligibility requirements. Participants may elect to contribute a specified portion of their compensation to the Contribution Plan on a tax-deferred basis. We make non-discretionary matches based on the participant's contribution using a predetermined basis as defined in the Contribution Plan. Additionally, we may also elect to make discretionary contributions. We made contributions to the Contribution Plan of $1,855, $1,677 and $1,458 for the years ended December 31, 2016, 2015 and 2014, respectively, all of which were non-discretionary.
13. COMMITMENTS AND CONTINGENCIES
In the normal course of business, we enter into agreements to obtain the rights to certain intellectual property. These agreements may require an up-front payment, milestone payments and/or royalties. Typically, we have certain rights to cancel these agreements, with notice, without additional payments due other than the amount due at the time of cancellation. As of December 31, 2016, the aggregate amount of these future payments, assuming achievement of applicable milestones and non-cancellation, was $1,563 over a period of not less than five years. Royalties ranging from 2% to 10% of net sales may be due on the sales of related products. Some of the agreements contain minimum annual royalty amounts.
In November 2011, we entered into an agreement to purchase certain proprietary technology which could require us to make additional aggregate payments of up to $13,350 should certain milestones be met, related to regulatory applications and approvals in the event we seek such in the United States. Cumulative payments under the agreement totaled $1,350 through December 31, 2016. 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.
F-24
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.
Incentive grants
In connection with the relocation to our new headquarters and operations facilities, we received proceeds of $790 of unrestricted cash incentives in 2015 from several local and state government originators. Pursuant to the grant agreements, we or the Landlord were required to make certain investments in the Buildings and we are required to increase our workforce in Leesburg, Virginia by 96 full-time employees no later than by December 31, 2017. As a result of these commitments, these proceeds have been reflected as a long-term liability within other liabilities on the accompanying balance sheets until such conditions are met.
14. RELATED PARTIES
We incurred general and administrative expenses of $372 for the year ended December 31, 2014 related to a management agreement with our major stockholder, which was terminated in May 2014 following our IPO.
On November 14, 2016, pursuant to an underwritten public offering, WCAS and certain of its affiliates completed the sale of 4,500,000 shares of our common stock. We incurred underwriting commissions and transaction fees of approximately $338 which are relected as general and administrative expenses for the three and twelve months ended December 31, 2016. We did not receive any proceeds from the sale of these shares.
On January 30, 2017, pursuant to an underwritten public offering, WCAS and certain of its affiliates completed the sale of an additional 4,000,000 shares of our common stock. We incurred underwriting commissions and transaction fees of approximately $225 which will be reflected as general and administrative expenses for the three months ended March 31, 2017. We did not receive any proceeds from the sale of these shares.
15. INCOME TAXES
The following table summarizes the loss before income tax expense (benefit):
Year Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
United States | $ | (29,885 | ) | $ | (28,830 | ) | $ | (45,392 | ) | |||
Foreign | (11,701 | ) | (10,194 | ) | (14,359 | ) | ||||||
Total | $ | (41,586 | ) | $ | (39,024 | ) | $ | (59,751 | ) | |||
The income taxes expense (benefit) is as follows:
Year Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Current: | ||||||||||||
Federal | $ | — | $ | — | $ | — | ||||||
State | 106 | 166 | 105 | |||||||||
Foreign | (8 | ) | 26 | — | ||||||||
Deferred: | ||||||||||||
Federal | (6,572 | ) | (10,179 | ) | (16,636 | ) | ||||||
State | (772 | ) | (963 | ) | (975 | ) | ||||||
Foreign | (1,273 | ) | (536 | ) | (3,042 | ) | ||||||
Change in valuation allowance | 8,593 | 11,678 | 20,434 | |||||||||
Income taxes expense (benefit) | $ | 74 | $ | 192 | $ | (114 | ) | |||||
The following table summarizes net deferred liability which consists of the following:
F-25
December 31, | ||||||||
2016 | 2015 | |||||||
Net operating loss (“NOL”) carryforwards | $ | 38,234 | $ | 32,104 | ||||
Capital lease obligations | 13,600 | 12,991 | ||||||
Income tax credits | 3,030 | 2,450 | ||||||
Inventory | 8,080 | 6,570 | ||||||
Stock-based compensation | 4,668 | 5,117 | ||||||
Intellectual property agreements | 3,123 | 3,198 | ||||||
Other deferred temporary differences | 3,055 | 2,988 | ||||||
Deferred tax assets | 73,790 | 65,418 | ||||||
Valuation allowance | (55,223 | ) | (46,630 | ) | ||||
Total deferred tax assets, net of valuation allowance | 18,567 | 18,788 | ||||||
Capital lease assets | (11,949 | ) | (12,677 | ) | ||||
Intangible assets | (7,472 | ) | (11,153 | ) | ||||
Discount on convertible notes | (4,163 | ) | — | |||||
Deferred tax liability | (23,584 | ) | (23,830 | ) | ||||
Net deferred tax liability | $ | (5,017 | ) | $ | (5,042 | ) | ||
Approximately $7,981 of the NOL carryforward of $38,234 for the year ended December 31, 2016, is related to operations outside the United States and will begin to expire in 2019. The remaining NOL starts to expire in 2030. Tax credit carryforwards of $3,030 begin to expire in 2027. Under Section 382 of the Internal Revenue Code of 1986, as amended (the “IRC”), certain significant changes in ownership may restrict the future utilization of our tax loss carry forwards and tax credit carry forwards.
The following table summarizes a reconciliation of the U.S. statutory federal income tax rate to our effective tax rate, as a percentage of loss before income tax (expense) benefit for the years ended December 31, 2016, 2015 and 2014:
Year Ended December 31, | |||||||||
2016 | 2015 | 2014 | |||||||
Federal tax at statutory rates | 34.0 | % | 34.0 | % | 34.0 | % | |||
State taxes, net of federal benefit | 2.1 | 1.9 | 2.3 | ||||||
Tax credits | 1.4 | 1.2 | 0.6 | ||||||
Permanent difference | (0.6 | ) | (0.9 | ) | 1.7 | ||||
Foreign income taxes | (2.9 | ) | (2.2 | ) | (2.0 | ) | |||
Change in valuation allowance | (30.7 | ) | (29.9 | ) | (34.2 | ) | |||
Tax rate adjustment and other | (3.5 | ) | (4.5 | ) | (2.2 | ) | |||
Income tax (expense) benefit | (0.2 | )% | (0.5 | )% | 0.2 | % | |||
The effective tax rate differs from the statutory rate due to minimum income taxes, permanent differences and changes in valuation allowances. The provision for income taxes for the years ended December 31, 2016, 2015 and 2014 includes both domestic and foreign minimum income taxes and changes in the valuation allowance.
The following reflects a rollforward of the deferred tax asset valuation allowance for the years ended December 31, 2016, 2015 and 2014:
Year Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Beginning | $ | (46,630 | ) | $ | (34,952 | ) | $ | (14,518 | ) | |||
Increase to allowance | (8,593 | ) | (11,678 | ) | (20,434 | ) | ||||||
Ending | $ | (55,223 | ) | $ | (46,630 | ) | $ | (34,952 | ) | |||
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We are subject to income taxes in the United States and certain foreign jurisdictions. Significant judgment is required in determining the consolidated provision for income taxes and recording the related deferred tax assets and liabilities. In the ordinary course of business, there are transactions and calculations where the ultimate tax determination is uncertain.
As of December 31, 2016 and 2015, we did not have uncertain tax positions. Our tax returns are not currently under examination by the Internal Revenue Service or other taxing authorities. We are subject to income tax examinations for our U.S. federal tax returns and foreign examinations for years 2013 and subsequent; and U.S., state and local returns for years 2012 and subsequent. Although we believe that the estimates and assumptions supporting its tax positions are reasonable, the final determination of tax audits and any related litigation could be materially different from that which is reflected in historical income tax provisions and recorded assets and liabilities. Based on the results of an audit or litigation, there could be a material effect on our benefit from income taxes, net loss or cash flows in the period or periods for which that determination is made.
16. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per share attributable to our common stockholders:
Year Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Net loss per common share: | ||||||||||||
Net loss | $ | (41,660 | ) | $ | (39,216 | ) | $ | (59,637 | ) | |||
Less: accretion and adjustment of Series A Preferred and Series B Preferred | — | — | 6,879 | |||||||||
Net loss attributable to common stockholders | $ | (41,660 | ) | $ | (39,216 | ) | $ | (52,758 | ) | |||
Basic and diluted loss per common share | ||||||||||||
Basic and diluted weighted average common shares outstanding | 41,729,013 | 40,237,848 | 31,887,246 | |||||||||
Basic and diluted loss per common share | $ | (1.00 | ) | $ | (0.97 | ) | $ | (1.65 | ) | |||
Diluted loss per share for the years ended December 31, 2016, 2015 and 2014 does not reflect the following weighted average potential common shares, as the effect would be antidilutive:
Year Ended December 31, | |||||||||
2016 | 2015 | 2014 | |||||||
Stock options | 3,685,125 | 3,682,019 | 4,277,229 | ||||||
RSUs | 79,457 | 414,001 | 765,023 | ||||||
Restricted stock | 218,505 | 79,940 | — | ||||||
As discussed in Note 9, we issued $50,000 aggregate principal amount of Notes in August 2016. The Notes may be settled, at our election, in cash, shares of our common stock or combination of cash and shares of our common stock. For purposes of calculating the maximum dilutive impact, it is presumed that the Notes will be settled in common stock with the resulting potential common shares included in diluted earnings per share if the effect is more dilutive. The effect of the conversion of the Notes is excluded from the calculation of diluted loss per share because the net loss for the year ended December 31, 2016 causes such securities to be antidilutive.
The potential dilutive effect of these securities is shown in the table below:
Year Ended December 31, | |||||||||
2016 | 2015 | 2014 | |||||||
Conversion of Notes | 2,768,657 | — | — | ||||||
17. 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
F-27
and in assessing performance. We globally manage 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 23.5% of total revenue for the year ended December 31, 2016; however, revenue earned in any individual foreign country is below 10% of our consolidated revenue.
The following table represents total revenue by geographic area, based on the location of the customer:
Year Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
United States | $ | 181,078 | $ | 155,291 | $ | 133,110 | ||||||
International | 55,556 | 60,716 | 53,562 | |||||||||
Total | $ | 236,634 | $ | 216,007 | $ | 186,672 | ||||||
We classify sales within the United States into three categories: complex spine pathologies, minimally invasive procedures and degenerative and other conditions. A significant portion of our international revenue is derived from our distributor partners who do not report their product usage at the surgeon or hospital level, which prevents us from providing a specific breakdown for our international revenue among its three product categories. These sales transactions are settled when we ship the product to the customer.
Year Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Complex spine | $ | 71,915 | $ | 63,398 | $ | 54,030 | ||||||
Minimally invasive | 28,711 | 23,633 | 18,194 | |||||||||
Degenerative | 80,452 | 68,260 | 60,886 | |||||||||
181,078 | 155,291 | 133,110 | ||||||||||
International | 55,556 | 60,716 | 53,562 | |||||||||
Total | $ | 236,634 | $ | 216,007 | $ | 186,672 | ||||||
The following table represents long-lived assets (1) by geographic area:
December 31, | ||||||||
2016 | 2015 | |||||||
United States | $ | 72,742 | $ | 57,958 | ||||
International | 2,782 | 4,305 | ||||||
Total | $ | 75,524 | $ | 62,263 | ||||
(1) Long-lived assets include property, plant and equipment including the capital lease for our corporate headquarters and operations facilities and surgical instruments in U.S.
18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables summarize the unaudited quarterly statements of operations for 2016 and 2015. The tables include all necessary adjustments, consisting only of normal recurring adjustments necessary in the opinion of management for a fair statement of the results for interim periods.
F-28
Quarter Ended | ||||||||||||||||
December 31, 2016 | September 30, 2016 | June 30, 2016 | March 31, 2016 | |||||||||||||
Revenue | $ | 61,791 | $ | 59,310 | $ | 59,227 | $ | 56,306 | ||||||||
Gross profit | 38,360 | 39,798 | 39,596 | 36,702 | ||||||||||||
Loss from operations | (9,363 | ) | (6,097 | ) | (9,342 | ) | (9,929 | ) | ||||||||
Net loss | (12,467 | ) | (7,910 | ) | (11,098 | ) | (10,185 | ) | ||||||||
Net loss per common share | (0.30 | ) | (0.19 | ) | (0.27 | ) | (0.25 | ) | ||||||||
Quarter Ended | ||||||||||||||||
December 31, 2015 | September 30, 2015 | June 30, 2015 | March 31, 2015 | |||||||||||||
Revenue | $ | 54,220 | $ | 55,009 | $ | 56,354 | $ | 50,424 | ||||||||
Gross profit | 35,936 | 37,619 | 37,734 | 32,927 | ||||||||||||
Loss from operations | (7,579 | ) | (10,010 | ) | (8,636 | ) | (10,045 | ) | ||||||||
Net loss | (8,494 | ) | (10,215 | ) | (6,222 | ) | (14,285 | ) | ||||||||
Net loss per common share | (0.21 | ) | (0.25 | ) | (0.16 | ) | (0.37 | ) | ||||||||
F-29
EXHIBIT INDEX
Exhibit Number | Description | ||
2.1 | Agreement and Plan of Merger, dated as of July 2, 2010, by and among K2M Group Holdings, Inc. (formerly known as Altitude Group Holdings, Inc.), Altitude Merger Sub, Inc., K2M, Inc., and the Stockholders’ Committee (incorporated by reference to Exhibit 2.1 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
2.2 | Amendment No. 1 to Agreement and Plan of Merger, dated as of August 12, 2010, by and among K2M Group Holdings, Inc. (formerly known as Altitude Group Holdings, Inc.), and K2M, Inc., (incorporated by reference to Exhibit 2.2 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
2.3 | Amendment No. 2 to Agreement and Plan of Merger, dated as of December 21, 2012, by and among K2M Group Holdings, Inc. (formerly known as Altitude Group Holdings, Inc. and the Stockholders’ Committee (incorporated by reference to Exhibit 2.3 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
3.1 | Third Amended and Restated Certificate of Incorporation of K2M Group Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on May 13, 2014 (No. 001-36443)) | ||
3.2 | Amended and Restated Bylaws of K2M Group Holdings, Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on May 13, 2014 (No. 001-36443)) | ||
4.1 | Indenture, dated August 11, 2016, between K2M Group Holdings, Inc. and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on August 11, 2016 (File No. 001-36443)) | ||
4.2 | Form of 4.125% Convertible Senior Notes (included as Exhibit A in Exhibit 4.1) (incorporated by reference to Exhibit A in Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed on August 11, 2016 (File No. 001-36443)) | ||
10.1 | Credit Agreement, dated as of October 29, 2012, among K2M Holdings, Inc., as a Guarantor, K2M, Inc. and K2M UK Limited, jointly and severally as Borrowers, the Guarantors from time to time parties thereto, the several lenders from time to time parties thereto and Silicon Valley Bank, as Administrative Agent, Issuing Lender and Swingline Lender (incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
10.2 | Waiver and First Amendment to Credit Agreement entered into as of May 20, 2013 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 10.2 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
10.3 | Second Amendment to Credit Agreement entered into as of February 26, 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 10.3 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
10.4 | Third Amendment to Credit Agreement entered into as of April 30, 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 10.34 to the Registrant’s Registration Statement on Form S-1 filed on May 2, 2014 (No. 333-194550)) | ||
Exhibit Number | Description | ||
10.5 | 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 Registrant’s Current Report on Form 8-K filed on October 24, 2014 (No. 001-36433)) | ||
10.6 | Fifth Amendment to Credit Agreement and First Amendment to Guarantee and Collateral Agreement entered into as of January 7, 2015, 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 Registrant’s Current Report on Form 8-K filed on January 9, 2015 (No. 001-36433)) | ||
10.7 | Sixth Amendment to Credit Agreement entered into as of May 8, 2015, 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 Registrant’s Current Report on Form 8-K filed on May 8, 2015 (No. 001-36433)). | ||
10.8 | Seventh Amendment to Credit Agreement entered into as of June 5, 2015, 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 Registrant’s Current Report on Form 8-K filed on June 5, 2015 (No. 001-36433)). | ||
10.9 | Eighth Amendment dated October 29, 2015 to Credit Agreement dated October 29, 2012, by and among K2M Holdings, Inc., as the guarantor, K2M, Inc. and K2M UK Limited, as borrowers, and Silicon Valley Bank and Comerica Bank as lenders. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on November 3, 2015 (No. 001-36433)). | ||
10.10 | Ninth Amendment dated August 8, 2016 to Credit Agreement dated October 29, 2012, by and among K2M Holdings, Inc., as the guarantor, K2M, Inc. and K2M UK Limited, as borrowers, and Silicon Valley Bank and Comerica Bank as lenders (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on August 8, 2016 (File No. 001-36443)) | ||
10.11 | Guarantee and Collateral Agreement, dated as of October 29, 2012, made by K2M Holdings, Inc., K2M, Inc. and the other Grantors referred to herein in favor of Silicon Valley Bank, as Administrative Agent (incorporated by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
10.12 | Export Import Bank Credit Agreement, dated as of October 29, 2012, among K2M Holdings, Inc., as a Guarantor, the other Guarantors from time to time parties hereto, K2M Inc., as the Borrower, the several Exim Lenders from time to time parties hereto, and Silicon Valley Bank, as Administrative Agent (incorporated by reference to Exhibit 10.5 to the Registrant’s Registration Statement on Form S-1 fled on April 7, 2014 (No. 333-194550)) | ||
10.13 | Guarantee and Collateral Agreement for Export Import Bank Credit Facility, dated as of October 29, 2012, made by K2M Holdings, Inc., K2M, Inc. and the other Grantors referred to herein in favor of Silicon Valley Bank, as Administrative Agent (incorporated by reference to Exhibit 10.6 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
10.14 | † | Employment Agreement, effective as of August 12, 2010, by and between K2M, Inc. and Eric Major (incorporated by reference to Exhibit 10.7 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | |
10.15 | † | Amendment, dated as of January 20, 2014, to Employment Agreement, effective as of August 12, 2010, by and between K2M, Inc. and Eric Major (incorporated by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | |
Exhibit Number | Description | ||
10.16 | † | Second Amendment, dated as of February 21, 2017, to Employment Agreement, effective as of August 12, 2010, by and between K2M, Inc. and Eric Major (incorporated by reference to Exhibit 10.16 to the Registrant’s Annual Report on Form 10-K filed on March 7, 2017 (No. 001-36443)) | |
10.17 | † | Employment Agreement, effective as of August 12, 2010, by and between K2M, Inc. and Gregory Cole (incorporated by reference to Exhibit 10.9 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | |
10.18 | † | Amendment, dated as of January 20, 2014, to Employment Agreement, effective as of August 12, 2010, by and between K2M, Inc. and Gregory Cole (incorporated by reference to Exhibit 10.10 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | |
10.19 | † | Second Amendment, dated as of February 21, 2017, to Employment Agreement, effective as of August 12, 2010, by and between K2M, Inc. and Gregory Cole (incorporated by reference to Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K filed on March 7, 2017 (No. 001-36443)) | |
10.20 | † | Employment Agreement, effective as of August 12, 2010, by and between K2M, Inc. and Dr. John Kostuik (incorporated by reference to Exhibit 10.11 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | |
10.21 | † | Amendment, dated as of March 10, 2014, to Employment Agreement, effective as of August 12, 2010, by and between K2M, Inc. and Dr. John Kostuik (incorporated by reference to Exhibit 10.12 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | |
10.22 | † | Second Amendment, dated as of February 22, 2017, to Employment Agreement, effective as of August 12, 2010, by and between K2M, Inc. and Dr. John Kostuik ((incorporated by reference to Exhibit 10.22 to the Registrant’s Annual Report on Form 10-K filed on March 7, 2017 (No. 001-36443)) | |
10.23 | † | Amended and Restated K2M, Inc. 2006 Stock Option and Grant Plan (incorporated by reference to Exhibit 10.13 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | |
10.24 | † | Form of Incentive Stock Option Agreement under the Amended and Restated 2006 Stock Option and Grant Plan and Stock Restriction Agreement (incorporated by reference to Exhibit 10.40 to the Registrant’s Registration Statement on Form S-1 filed on January 28, 2015 (No. 333-201597)) | |
10.25 | † | K2M Group Holdings, Inc. 2010 Equity Award Plan (incorporated by reference to Exhibit 10.14 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | |
10.26 | † | Form of Stock Option Award Agreement for directors, under the K2M Group Holdings, Inc. 2010 Equity Award Plan (incorporated by reference to Exhibit 10.40 to the Registrant’s Registration Statement on Form S-1 filed on January 28, 2015 (No. 333-201597)) | |
10.27 | † | Form of Stock Option Award Agreement for employees and consultants, under the K2M Group Holdings, Inc. 2010 Equity Award Plan (incorporated by reference to Exhibit 10.41 to the Registrant’s Registration Statement on Form S-1 filed on January 28, 2015 (No. 333-201597)) | |
10.28 | † | K2M Group Holdings, Inc. 2014 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.15 to the Registrant’s Registration Statement on Form S-1 filed on January 28, 2015 (No. 333-194550)) | |
10.29 | † | K2M, Inc. Omnibus Incentive Plan (incorporated by reference to Exhibit 10.42 to the Registrant’s Registration Statement on Form S-1 filed on March 14, 2014 (No. 333-194550)) | |
10.30 | † | Form of Option Agreement under the K2M Group Holdings, Inc. 2014 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.42 to the Registrant’s Registration Statement on Form S-1 filed on January 28, 2015 (No. 333-201597)) | |
Exhibit Number | Description | ||
10.31 | † | Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.32 to the Registrant’s Registration Statement on Form S-1 filed on April 22, 2014 (No. 333-194550)) | |
10.32 | † | K2M Group Holdings, Inc. 2016 Omnibus Incentive Plan (incorporated by reference to Exhibit 4.3 to the Registrant’s Registration Statement on Form S-8 filed on June 14, 2016 (File No. 001-36443)) | |
10.33 | † | Form of Option Agreement under the K2M Group Holdings, Inc. 2016 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.33 to the Registrant’s Annual Report on Form 10-K filed on March 7, 2017 (No. 001-36443)) | |
10.34 | † | Form of Restricted Stock Agreement under the K2M Group Holdings, Inc. 2016 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.34 to the Registrant’s Annual Report on Form 10-K filed on March 7, 2017 (No. 001-36443)) | |
10.35 | † | Form of Restricted Stock Unit Agreement under the K2M Group Holdings, Inc. 2016 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.35 to the Registrant’s Annual Report on Form 10-K filed on March 7, 2017 (No. 001-36443)) | |
10.36 | † | Form of Side Letter to Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.33 to the Registrant’s Registration Statement on Form S-1 filed on April 22, 2014 (No. 333-194550)) | |
10.37 | † | K2M Group Holdings, Inc. 2010 Independent Agent Stock Option Plan (incorporated by reference to Exhibit 10.17 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | |
10.38 | Deed of Lease, made as of December 10, 2014, by and between TC Oaklawn Owner, LLC and K2M Group Holdings, Inc. (incorporated by reference to Exhibit 10.1 to the Registrants' Current Report on Form 8-K filed on December 12, 2014 (No. 001-36443)) | ||
10.39 | Exclusive License Agreement, dated as of September 2, 2004, by and between Spinal LLC and K2M, LLC (incorporated by reference to Exhibit 10.20 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
10.40 | Amendment to Exclusive License Agreement, entered into as of February 17, 2010, by and between Spinal LLC and K2M, LLC (incorporated by reference to Exhibit 10.21 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
10.41 | Asset Purchase Agreement, made and entered into as of November 21, 2011, by and between K2M, Inc. and Nexgen Spine, Inc. (incorporated by reference to Exhibit 10.22 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
10.42 | Royalty Agreement, made and effective as of April 1, 2007, between K2M, Inc. and Josef Gorek, M.D. (incorporated by reference to Exhibit 10.23 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
10.43 | Assignment and Earn-Out Agreement, made and entered into as of March 8, 2004, by and between K2 Medical, LLC, as assignee, and Fasteneix, LLC, Third Millenium Engineering, LLC, J7 Summit Medical Group, LLC, Techsys Medical, LLC, Bones Consulting, LLC and Josef Gorek (incorporated by reference to Exhibit 10.24 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
10.44 | Addendum, dated as of September 27, 2005, to the Assignment and Earn-out Agreement by and between K2 Medical, LLC and Fastenix, LLC, Third Millenium Engineering, LLC, J7 Summit Medical Group, LLC, Techsys Medical, LLC and Bones Consulting, LLC (incorporated by reference to Exhibit 10.25 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
10.45 | License Agreement, dated as of May 19/June 12, 2006, between Prof. Dr. Dietmar Wolter and K2M, LLC (incorporated by reference to Exhibit 10.26 to the Registrant’s Registration Statement on Form S-1 filed on April 7,2014 (No. 333-194550)) | ||
10.46 | Additional Agreement to License Agreement, dated as of June 14/June 12, 2006, between Prof. Dr. Dietmar Wolter and K2M, LLC (incorporated by reference to Exhibit 10.27 to the Registrant’s Registration Statement on Form S-1 April 7, 2014 (No. 333-194550)) | ||
Exhibit Number | Description | ||
10.47 | Addendum, dated as of February 20/February 22, 2008, to the License Agreement dated as of May 19/June 12, 2006 and the Additional Agreement to License Agreement dated as of May 19/June 12, 2006, between Prof. Dr. Dietmar Wolter and K2M, Inc. (formerly known as K2M, LLC) (incorporated by reference to Exhibit 10.28 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
10.48 | Asset Purchase and Earn Out Agreement, made and entered into as of February 12, 2010, by and between K2M, Inc. and John Carbone, MD (incorporated by reference to Exhibit 10.29 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
10.49 | First Amendment to Asset Purchase and Earn Out Agreement, made and entered into as of June 15, 2012, by and between K2M, Inc. and John Carbone, MD (incorporated by reference to Exhibit 10.30 to the Registrant’s Registration Statement on Form S-1 filed on April 7, 2014 (No. 333-194550)) | ||
10.50 | Registration Rights Agreement, dated August 12, 2010, by and among K2M Group Holdings, Inc., Welsh, Carson, Anderson & Stowe XI, L.P., FFC Partners III, L.P. and the other stockholders named therein (incorporated by reference to Exhibit 10.31 to the Registrant’s Registration Statement on Form S-1 April 22, 2014 (No. 333-194550)) | ||
21.1 | List of Subsidiaries (incorporated by reference to Exhibit 21.1 to the Registrant’s Annual Report on Form 10-K filed on March 7, 2017 (No. 001-36443)) | ||
23.1 | Consent of KPMG, LLP (filed herewith) | ||
23.2 | Consent of Ernst & Young LLP (filed herewith) | ||
23.3 | Consent of iData Research, Inc. (incorporated by reference to Exhibit 23.3 to the Registrant’s Annual Report on Form 10-K filed on March 7, 2017 (No. 001-36443)) | ||
24.1 | Power of Attorney (incorporated by reference to Exhibit 24.1 to the Registrant’s Annual Report on Form 10-K filed on March 7, 2017 (No. 001-36443)) | ||
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 (A) | ||
101 SCH | XBRL Taxonomy Extension Schema Document (A) | ||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document (A) | ||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document (A) | ||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document (A) | ||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document (A) | ||
† | Identifies exhibits that consist of a management contract or compensatory plan or arrangement. | |
(A) | XBRL (Extensible Business Reporting Language) information is furnished and not filed for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. | |