News Column

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

June 5, 2014

The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes included elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. You should review the cautionary statements under the heading "Part II; Item 1A. Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q and in our other Securities and Exchange Commission filings. Our actual results could differ materially from those contained in or implied by the forward-looking statements. See "Special Note Regarding Forward-Looking Statements" following the Table of Contents for further information regarding forward-looking statements. Certain amounts and percentages in this discussion and analysis have been rounded for convenience of presentation. Unless otherwise noted, the figures in the following discussions are unaudited. Overview We are a global medical device company focused on designing, developing and commercializing innovative and proprietary complex spine technologies and techniques. Our complex spine products are used by spine surgeons to treat some of the most difficult and challenging spinal pathologies, such as deformity (primarily scoliosis), trauma and tumor. We believe these procedures typically receive a higher rate of positive insurance coverage and often generate more revenue per procedure as compared to other spine surgery procedures. We have applied our product development expertise in innovating complex spine technologies and techniques to the design, development and commercialization of an expanding number of proprietary MIS products. These proprietary MIS products are designed to allow for less invasive access to the spine and faster patient recovery times compared to traditional open access surgical approaches. We have also leveraged these core competencies in the design, development and commercialization of an increasing number of products for patients suffering from degenerative spinal conditions. We categorize our revenue in the United States amongst revenue generated from treatment of complex spine pathologies, treatment using MIS approaches and the treatment of degenerative spinal conditions. We define our complex spine procedures as those that involve the treatment of the most difficult and challenging spinal pathologies, such as deformity (primarily scoliosis), trauma and tumor. We consider MIS procedures as those involving products designed to allow for less invasive access to the spine and faster patient recovery times as compared to traditional open access surgical approaches. We categorize degenerative procedures as those involving products treating degenerative spinal conditions such as traditional spinal fusions. We report revenue related to the sale of biomaterials as part of our complex spine, MIS and degenerative spine revenue categories. We expect our revenue to continue to be driven by aggregate sales growth in all categories. Our revenue classifications may evolve as we grow our business, continue to commercialize new products, adapt to surgeon preferences and surgical techniques and expand our sales globally. The primary market for our products has been the United States, where we sell our products through a hybrid sales organization consisting of direct sales employees and independent sales agencies. As of March 31, 2014, our U.S. sales force consisted of 114 direct sales employees and 55 independent sales agencies, who distribute our products and are compensated through a combination of base salaries, individual and company-based performance bonuses, commissions and stock options. We do not sell our products through or participate in physician-owned distributors (PODs). We also market and sell our products internationally in 28 countries. We sell our products directly in certain markets such as the United Kingdom and Germany and use independent distributors in other markets such as Australia, Japan and Spain. For the three months ended March 31, 2014, international sales accounted for approximately 30% of our revenue. As of March 31, 2014, our international sales force consisted of 39 direct sales employees, five independent agencies and 15 independent distributors. Our independent distributors manage the billing relationship with each hospital in their respective territories and are responsible for servicing the product needs of their surgeon customers. We believe there are significant opportunities for us to increase our presence through the expansion of our sales force and the commercialization of additional products. Components of our Results of Operations We manage our business globally within one reportable segment, which is consistent with how our management reviews our business, prioritizes investment and resource allocation decisions and assesses operating performance. Revenue 22



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We market and sell spinal implants, disposables and instruments, primarily to hospitals, for use by surgeons to treat patients with spinal pathologies. In the United States and international markets where we have direct employee sales locations, which include the United Kingdom, Ireland, Germany, Austria and Switzerland, we manage and maintain the sales relationships with our hospital customers. In those international markets where we utilize independent distributorships, we do not manage or maintain the sales relationships with the hospital customers. We do, however, support our distributor partners by providing product training, medical education, and engineering expertise to surgeons practicing in these markets. In markets where we have a direct presence, we generally assign our surgical sets to our direct sales employees. A surgical set typically contains the instruments, including any disposables, and spinal implants necessary to complete a successful surgery. With our support, the direct sales employee maintains the surgical sets and places them with our hospital customers for use by surgeons. We recognize revenue upon receipt of a delivered order confirming that our products have been used in a surgical procedure. In our international markets where we utilize independent distributorships, we generally sell our surgical sets and the related spinal implant replenishments to our distributors on pre-agreed business terms. We recognize revenue when the title to the goods and the risk of loss related to those goods are transferred. All such sales to distributors are not subject to contingencies and are, therefore, final. International revenue was 26.4% and 29.6% of total revenue for the three months ended March 31, 2013 and 2014, respectively. We anticipate that sales in international markets will grow faster than sales in the United States in the near term. In addition, we generated 58.1% and 56.0% of our U.S. revenue from the sale of our complex spine and MIS products for the three months ended March 31, 2013 and 2014, respectively, and we expect that these core product categories will continue to be a significant contributor to our revenue growth in the future. While we believe the proportion of our international revenue from complex spine and MIS is even higher than in the United States, a significant portion of our international revenue is derived from our distributor partners who do not report their product usage at the surgeon or hospital level, which prevents us from providing a specific breakdown for our international revenue among our three product categories. Cost of Revenue Except for certain specialty products that we manufacture in-house, our instruments, spinal implants and related offerings are manufactured to our specifications by third-party suppliers who meet our manufacturer qualification standards. Our third-party manufacturers meet U.S. Food and Drug Administration (FDA), International Organization for Standardization (ISO) and other country-specific quality standards supported by our internal specifications and procedures. Substantially all of our suppliers manufacture our products in the United States. Our cost of revenue consists primarily of costs of products purchased from our third-party suppliers, amortization of surgical instruments, inventory reserves, royalties, shipping, inspection and related costs incurred in making our products available for sale or use. Cost of revenue also includes related personnel and consultants' compensation and stock-based compensation expense. Beginning in 2013, our cost of revenue included the effect of a 2.3% excise tax on the sale of medical devices sold in the United States. We expect our cost of revenue to increase in absolute terms due primarily to increased sales volume and changes in the geographic mix of our sales as our international operations tend to have a higher cost of revenue as a percentage of sales. Research, Development and Engineering Our research, development and engineering expenses primarily consist of research and development, engineering, product development, clinical expenses, regulatory expenses, related consulting services, third-party prototyping services, outside research activities, materials production and other costs associated with the design and development of our products. Research, development and engineering expenses also include related personnel and consultants' compensation and stock-based compensation expense. We expense research, development and engineering costs as they are incurred. We expect to incur additional research, development and engineering costs as we continue to design and commercialize new products. While our research, development and engineering expenses fluctuate from period to period based on the timing of specific research, development and testing initiatives, we generally expect these costs will increase in absolute terms over time as we continue to expand our product portfolio and add related personnel. Sales and Marketing Sales and marketing expenses primarily consist of commissions to our independent distributors, as well as compensation, commissions, benefits and other related costs, including stock-based compensation, for personnel employed in our sales, 23



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marketing and clinical sales support departments. Sales and marketing also includes the costs of medical education, training and corporate communications activities. We expect our sales and marketing expenses will increase in absolute terms due to increased sales volume, the continued expansion of our sales force and the continued design and commercialization of new products. General and Administrative General and administrative expenses include compensation, benefits and other related costs, including stock-based compensation for personnel employed in our executive management, finance, regulatory, information technology and human resource departments, as well as facility costs and costs associated with consulting and other finance, legal, information technology and human resource services provided by third-parties. We include legal and litigation expenses as well as costs related to the development and protection of our intellectual property (IP) portfolio in general and administrative expenses. We expect our general and administrative expenses to continue to increase in absolute dollars as we hire additional personnel to support the growth of our business. In addition, we expect to incur increased expenses as a result of being a public company. General and administrative expenses also include amortization expense of certain of our intangible assets. However, the amortization of such assets is expected to decline over the next several years as as the intangibles subject to amortization become fully amortized based on their estimated useful lives. Income Tax Provision We are taxed at the rates applicable within each jurisdiction in which we operate and/or generate revenue. The composite income tax rate, tax provisions, deferred tax assets and deferred tax liabilities will vary according to the jurisdiction in which profits arise. Tax laws are complex and subject to different interpretations by management and the respective governmental taxing authorities, and require us to exercise judgment in determining our income tax provision, our deferred tax assets and liabilities and the valuation allowance recorded against our net deferred tax assets. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized. A valuation allowance is established when it is more likely than not that the future realization of all or some of the deferred tax assets will not be achieved. Material Trends and Uncertainties The global spinal surgery industry has been growing as a result of: • the increased accessibility of healthcare to more people worldwide; • advances in technologies for treating conditions of the spine, which have increased the addressable market of patients; and • overall population growth, aging patient demographics and an increase in life expectancies around the world.



Nonetheless, we face a number of challenges and uncertainties, including: • ongoing requirements from our hospital partners related to pricing and

operating procedures;

• continued market acceptance of our new product innovations;

• the unpredictability of government regulation over healthcare in the worldwide markets; and • competitive threats in the future displacing current surgical treatment protocols. Results of Operations



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

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Table of Contents Three Months Ended March 31, 2013 2014 (dollars in thousands) Revenue $ 35,098$ 42,251 Cost of revenue 10,720 14,414 Gross profit 24,378 27,837 Operating expenses: Research, development and engineering 3,197 3,197 Sales and marketing 18,620 22,448 General and administrative 14,300 15,890 Total operating expenses 36,117 41,535 Loss from operations (11,739 ) (13,698 ) Other income (expense): Foreign currency transaction gain (loss) (1,579 ) 222 Interest expense (474 ) (1,247 ) Total other expense, net (2,053 ) (1,025 ) Loss before income tax (benefit) expense (13,792 ) (14,723 ) Income tax (benefit) expense (2,913 ) 24 Net loss (10,879 ) (14,747 ) Accretion or write-up of preferred stock (13,115 ) (1,180 )



Net loss attributable to common stockholders $ (23,994 )$ (15,927 )

Three Months Ended March 31, 2014 Compared to the Three Months Ended March 31, 2013

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

Three Months Ended March 31, Increase/Decrease 2013 2014 $ change % change (dollars in thousands) United States $ 25,836$ 29,765$ 3,929 15.2 % International 9,262 12,486 3,224 34.8 % Total revenue $ 35,098$ 42,251$ 7,153 20.4 %



Total revenue increased $7.2 million, or 20.4%, from $35.1 million for the three months ended March 31, 2013 to $42.3 million for the three months ended March 31, 2014. The increase in revenue was primarily driven by $7.8 million in greater sales volume in the United States due to continued expansion of our customer base and changes in our mix of products sold, $0.8 million in growth in our direct international markets, primarily Ireland and the United Kingdom, and $1.7 million in growth in our international distributor markets, primarily Australia, Spain and Scandinavia. The increases in the United States were offset in part by a decrease in revenue from our existing customer base.

U.S. Revenue

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

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Table of Contents Three Months Ended March 31, Increase/Decrease 2013 2014 $ Change % Change (dollars in thousands) Complex spine $ 9,306 $ 10,184$ 878 9.4 % Minimally invasive 5,706 6,485 779 13.7 % Degenerative 10,824 13,096 2,272 21.0 % Total U.S. revenue $ 25,836$ 29,765$ 3,929 15.2 % U.S. revenue increased $3.9 million, or 15.2%, from $25.8 million for the three months ended March 31, 2013 to $29.8 million for the three months ended March 31, 2014. Sales in our complex spine, MIS and degenerative categories represented 36%, 22% and 42% of U.S. revenue, respectively, for the three months ended March 31, 2013, compared to 34%, 22% and 44% of U.S. revenue, respectively, for the three months ended March 31, 2014. The overall U.S. revenue growth was driven by new surgeon users representing $6.8 million of revenue and from the mix of products sold, offset, in part, by a decrease in existing customer usage. The degenerative category growth of $2.3 million primarily reflects increased surgeon usage of our EVEREST(R) product line of $0.6 million, offset, in part, by declines in sales of other degenerative products. The MIS category growth of $0.8 million primarily reflects increased surgeon usage of our minimally invasive products in the evaluation phase for adult complex spine patients. The complex spine category growth of $0.9 million reflects increased surgeon usage of our EVEREST system, of $0.9 million. For the three months ended March 31, 2014, 26.8% of our MIS sales were attributable to complex spine procedures while 73.2% were attributable to degenerative procedures, as compared to 23.9% and 76.1%, respectively, for the three months ended March 31, 2013. International Revenue International revenue increased $3.2 million, or 34.8%, from $9.3 million for the three months ended March 31, 2013 to $12.5 million for the three months ended March 31, 2014. International revenue increased as a result of expanded customer usage of $1.3 million in our Italian, United Kingdom and German markets. The revenue growth from these markets includes a $0.2 million increase in revenue resulting from foreign currency fluctuations, due to a strengthening of the Pound Sterling and the Euro as compared to the U.S. Dollar. Sales of our MESA (R) deformity spinal system were the primary product driver of this revenue growth. International revenue also reflects growth of $1.7 million from our international distributor partners, primarily in Australia, Spain and Scandinavia, as our partners continue to invest in new surgical sets and their market penetration continues to grow. Cost of Revenue Cost of revenue increased $3.7 million, or 34.5%, from $10.7 million for the three months ended March 31, 2013 to $14.4 million for the three months ended March 31, 2014. The increase was primarily due to increased sales volume and changes in the mix of U.S. and international revenue. Amortization expense, a component of cost of revenue, increased $0.7 million, or 72.4%, from $1.0 million in the three months ended March 31, 2013 to $1.7 million for the three months ended March 31, 2014. The increase in amortization expense is primarily a result of increased investment in surgical instruments and the absence of the one-time benefit realized in 2013 from the change in useful life of our surgical instruments from 3 years to 5 years. In addition, total expense included in cost of sales associated with the medical device tax was approximately $0.5 million for each of the three months ended March 31, 2013 and 2014, respectively. Gross Profit Gross profit or gross margin decreased as a percentage of revenue from 69.5% for the three months ended March 31, 2013 to 65.9% for the three months ended March 31, 2014. The decrease in gross profit as a percentage of revenue is primarily due to changes in the mix of sales between the United States and international markets and pricing declines in the U.S. and select international markets. International revenue reimbursements from insurers vary widely in each international region and are typically lower than revenue reimbursements from insurers in the United States. Additional contributors to the decreased gross profit as a percentage of revenue include a higher royalty expense that ends in March 2015 of $0.2 million per quarter associated with one product line and the gross margin impact of $1.3 million in increased biologic sales which have a lower selling price relative to their cost than our existing implant products. Research, Development and Engineering 26



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Research, development and engineering expenses remained constant at $3.2 million for the three months ended March 31, 2013 and 2014. Increases were primarily due to increased development of products in our pipeline which were offset by lower travel and IP related expenses. Sales and Marketing Sales and marketing expenses increased $3.8 million, or 20.6%, from $18.6 million for the three months ended March 31, 2013 to $22.4 million for the three months ended March 31, 2014. The increase was primarily due to an increase in sales commissions as a result of the increase in sales volume and increased employee compensation costs associated with the hiring of 56 direct sales employees on a net basis since March 31, 2013, and increased costs for training and marketing related expenses. General and Administrative General and administrative expenses increased $1.6 million, or 11.1%, from $14.3 million for the three months ended March 31, 2013 to $15.9 million for the three months ended March 31, 2014. The increase was primarily due to increased employee compensation and benefit costs associated with the increase in personnel to support the expansion of our business, and increased third-party legal and other consulting expenses. General and administrative expenses included amortization of intangible assets of $7.4 million in each of the three months ended March 31, 2013 and 2014. Other Income (Expense) Other expenses decreased $1.0 million from $2.0 million for the three months ended March 31, 2013 to $1.0 million for the three months ended March 31, 2014. The decrease was driven by lower losses on foreign currency transactions, partially offset by increased interest expense related to higher average debt balances. Benefit from Income Taxes Benefit from income taxes decreased $2.9 million, to an expense of $24,000 for the three months ended March 31, 2014. Our effective tax rate calculated as a percentage of loss before income tax benefit was 21.1% for the three months ended March 31, 2013 and (0.02)% for the three months ended March 31, 2014. The change in the effective tax rate was due to the effect of an increase in the valuation allowance on our deferred tax assets as of March 31, 2014. Liquidity and Capital Resources Since our inception in 2004, we have incurred significant operating losses and anticipate that our losses will continue in the near term. We expect our operating expenses will continue to grow as we expand our product portfolio and penetrate further into new and existing markets. We will need to generate significant revenue to achieve profitability. Prior to our IPO in May 2014, we had funded our operations primarily with proceeds from the sales of preferred and common stock, notes from stockholders and our revolving credit facility and cash flow from operations. As of March 31, 2014, our cash and cash equivalents was $11.1 million as compared to cash and cash equivalents as of December 31, 2013 of $7.4 million. As of March 31, 2014, we had outstanding indebtedness of $39.2 million under the Shareholder Notes, and outstanding borrowings of $23.5 million under our revolving credit facility. As of March 31, 2014, we had working capital of $40.3 million, compared to $32.5 million as of December 31, 2013. On May 13, 2014, we completed our IPO of 8,825,000 shares of our common stock for $15 per share or gross proceeds of $132.4 million or approximately $120.0 million of net proceeds after consideration of underwriting commissions and offering expenses. With the proceeds, we retired all amounts outstanding under our revolving credit facility and Shareholder Notes and satisfied our commitment to pay cumulative dividends outstanding on our preferred stock upon its conversion to common stock in connection with the IPO. As of March 31, 2014, after giving pro forma effect the net proceeds of the IPO, repayment of amounts outstanding under the revolving credit facility, Shareholder Notes and payment of cumulative dividends on the preferred stock, our cash and cash equivalents, indebtedness and working capital would have been $53.9 million, $0 and $106.5 million, respectively. Our principal long-term liquidity need is working capital to support the continued growth of our business through the hiring of direct sales employees and independent agencies to expand our global sales force, purchases of additional inventory to support future sales activities and development and commercialization of new products through our research and development function. We are currently in negotiations to relocate our corporate headquarters and enter into a new lease for such location when our existing lease expires in 2016. This new lease is expected to result in an increase of approximately $2.0 million to 27



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$2.5 million in our annual rent for our headquarters. We expect to fund our long-term capital needs with the IPO proceeds, availability under our revolving credit facility (which may vary due to changes in our borrowing base) and cash flow from operations. To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds. Although we believe that these sources will provide sufficient liquidity for us to meet our long-term capital needs, our liquidity and our ability to fund these needs will depend to a significant extent on our future financial performance, which will be subject in part to general economic, competitive financial, regulatory and other factors that are beyond our control. In addition to these general economic and industry factors, the principal factors determining whether our cash flows will be sufficient to meet our long-term liquidity requirements will be our ability to provide attractive products to our customers, changes in our customers' ability to obtain third-party coverage and reimbursement for procedures that use our products, increased pricing pressures resulting from intensifying competition and cost increases and slower product development cycles resulting from a changing regulatory environment. If those factors change significantly or other unexpected factors adversely affect us, our business may not generate sufficient cash flow from operations and future financings may not be available on terms acceptable to us or at all to meet our liquidity needs. In assessing our liquidity, management reviews and analyzes our current cash on-hand, the average number of days our accounts receivable are outstanding, payment terms that we have established with our vendors, inventory turns, foreign exchange rates, capital expenditure commitments and income tax rates. Cash Flows The following table shows our cash flows from operating, investing and financing activities for the three months ended March 31, 2013 and 2014: Three Months Ended March 31, 2013 2014



Net cash used in operating activities $ (3,967 )$ (9,183 ) Net cash used in investing activities

(1,457 ) (2,734 ) Net cash provided by financing activities 12,735 15,631 Effect of exchange rate on cash (36 ) 13



Net change in cash and cash equivalents $ 7,275$ 3,727

Cash Used in Operating Activities Net cash used in operating activities increased $5.2 million from $4.0 million for the three months ended March 31, 2013 to $9.2 million for the three months ended March 31, 2014. The increase in net cash used in operations was due primarily to increases in inventory purchases to support future sales activities and growth in accounts receivable due to increased revenue from the three months ended March 31, 2013 to the three months ended March 31, 2014, driven by the continued expansion of our global distribution network. Cash Used in Investing Activities Net cash used in investing activities increased $1.2 million from $1.5 million for the three months ended March 31, 2013 to $2.7 million for the three months ended March 31, 2014. The increase in net cash used in investing activities was primarily attributable to increased purchases of surgical instruments for use within our global distribution network Cash Provided by Financing Activities Net cash provided by financing activities increased $2.9 million from $12.7 million for the three months ended March 31, 2013 to $15.6 million for the three months ended March 31, 2014. The increase was primarily attributable to proceeds from the issuance of Shareholder Notes and common stock in 2014, partially offset by borrowings under the bank line of credit and issuances of series B preferred stock in 2013. Capital Expenditures



Our capital expenditures increased $1.3 million from $1.4 million for the three months ended March 31, 2013 to $2.7 million for the three months ended March 31, 2014. Of the increase, $0.7 million was the result of an increase in purchases of

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consigned instrumentation to support surgical sales and $0.6 million was due to an increase in property and equipment mainly as a result of greater software purchases and software development activities undertaken to support our internal systems. For the remainder of 2014, we expect capital expenditures to increase from 2013 levels as we continue to further expand our global distribution network through the purchase of additional inventory. We intend to use a portion of the IPO proceeds, cash flows from our operations and funding available from our revolving credit facility to fund our additional future capital expenditures. Indebtedness Revolving Credit Facility Our senior secured asset-based revolving credit facility with Silicon Valley Bank and Comerica Bank (the Lenders) consists of a revolving credit facility of $30.0 million and a sub-facility for letters of credit in the aggregate availability amount of $1.0 million, a swing line sub-facility in the aggregate availability amount of $5.0 million and a sub-facility in the aggregate availability amount of $10.0 million with the Export-Import Bank of the United States (the Export-Import Bank). In addition, we may be eligible to receive a one-time increase of $5.0 million in aggregate credit availability subject to our compliance with the credit agreement governing the revolving credit facility, as well as additional commitments from the Lenders. At any time, the aggregate obligations shall not exceed the lesser of the total revolving commitment, of which the initial amount is $30.0 million, and the borrowing base, which is calculated as 80% of our accounts receivable plus up to the lesser of 35% of the eligible inventory or $5.0 million. At any time, the aggregate credit availability on the Export-Import Bank credit facility is limited to the lesser of Export-Import Bank commitments of the Lenders, initially established at $10.0 million, or the borrowing base, which is calculated as a certain percentage of qualifying assets. Our revolving credit facility matures in October 2014. Borrowings under the revolving credit facility are secured by a first priority lien on all of our personal property assets, including intellectual property. On April 30, 2014, in connection with our anticipated transition to a public company, K2M and K2M UK Limited entered into an amendment to the revolving credit facility to (1) allow for the repayment of the Company's outstanding Shareholder Notes with the proceeds of the IPO, (2) replace the existing minimum consolidated adjusted EBITDA financial covenant with a maximum loss financial covenant which requires that consolidated net loss of K2M, Inc. and K2M UK, Ltd., shall not exceed (i) $(11.0) million for the three-month period ended March 31, 2014 and (ii) $(16.0) million for the six-month period ending June 30, 2014 and (3) permit the Lenders to add additional financial covenants to the extent that our IPO was not consummated on or prior to June 30, 2014. The Company is also required to maintain Liquidity (as defined in the credit agreement governing the revolving credit facility) of at least $3.0 million at all times. The revolving credit facility also contains other restrictive covenants with which we must comply, including restrictive covenants which limit transfer of cash to foreign subsidiaries, limitations on our ability to pay dividends on our common stock and make other payments to stockholders. We anticipate further amending the credit agreement in the second quarter 2014, to increase commitments available under the facility to $40.0 million and extend the maturity date to October 2015. In May 2014, following the IPO, we repaid all amounts outstanding under the revolving credit facility of $23.5 million. Notes to Stockholders In January and March 2014, we executed securities purchase agreements and note agreements with certain existing stockholders. Pursuant to such securities purchase agreements, such existing stockholders agreed to purchase 121,111 shares of our common stock from us at $19.05 per share, resulting in cash proceeds of $2.3 million. Pursuant to the note agreements, we issued notes to such stockholders in an aggregate principal amount of $16.9 million at a discount for cash consideration of $14.6 million. Following these note issuances, the outstanding aggregate principal amount of Shareholder Notes was $39.2 million. On May 13, 2014, we prepaid the principal balance of notes to stockholders, along with accrued interest with proceeds from our IPO. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements. Critical Accounting Policies and Estimates



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

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Accounting Policies and Estimates in our Prospectus dated May 7, 2014. An accounting estimate is considered critical if the estimate requires management to make an assumption about matters that were highly uncertain at the time the estimate was made, different estimates reasonably could have been used, or if changes in the estimate that would have a material impact on the Company's financial condition or results of operations are reasonably likely to occur from period to period. Management believes that the accounting estimates employed are appropriate and resulting balances are reasonable; however, actual results could differ from the original estimates, requiring adjustments to these balances in future periods. The Company has reviewed and determined that those policies remain the Company's critical accounting policies as of and for the three months ended March 31, 2014. Recently Issued Accounting Pronouncements We qualify as an emerging growth company pursuant to the provisions of the JOBS Act. Section 107 of the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. We have elected to delay the adoption of new or revised accounting standards until those standards would otherwise apply to private companies, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result of this election, our financial statements may not be comparable to the financial statements of other public companies. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. Deformity Business Seasonality and Other Quarterly Fluctuations in Revenue Our revenue is typically higher in the second and fourth quarters of our fiscal year, driven by higher sales of our complex spine products, which is influenced by the higher incidence of adolescent surgeries during these periods to coincide with the beginning of summer vacation and holiday periods. In addition, our international revenue fluctuates quarterly based on the timing of product registrations, expansion to new markets and product orders from our exclusive international distribution partners.


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