DEBT

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 October 6, 2017, we entered into an amendment to the credit agreement, which extended its maturity date from April 26, 2018 to April 26, 2019, among other changes. As amended, the credit facility consists of revolving credit facility 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. As of December 31, 2017 and 2016, we had no outstanding borrowings on the revolving credit facility.

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, 2017.

Interest expense related to the credit facility was $0, $263 and $22, respectively, and amortization expense of loan issuance fees was $218, $201 and $318 for the years ended December 31, 2017, 2016 and 2015.

As of December 31, 2017 and 2016 we had $49,000 and $46,715 of unused borrowing capacity under the revolving credit facility which is net of issued but undrawn letter of credit for $6,000 in the years ended December 31, 2017, 2016 and 2015, respectively, representing a security deposit on the corporate headquarters and operations facilities lease.

Convertible Senior Notes

On August 11, 2016, we issued $50,000 aggregate principal amount of 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 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.

Interest expense related to the Notes was $4,344, $1,604 and $0 for the year ended December 31, 2017, 2016 and 2015, respectively, of which $2,063, $796 and $0 was accrued and will be paid in cash and $2,281, $807 and $0 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, 2017 and 2016, the fair value of the Notes was $45,294 and $39,949, respectively.

Capital Lease

Our deed of lease for our corporate headquarters and operating facilities (the “Lease Agreement”) has an initial term of 186 months expiring in September, 2031. We account for the Lease Agreement as a capital lease and are amortizing the related capital lease obligations over the lease term under the effective interest method. Annual base rent under the Lease Agreement was $3,268 as of December 31, 2017 and will increase by 2.50% each year. 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.

We have also provided 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 $2,296 , $2,290 and $480 for the years ended December 31, 2017, 2016 and 2015, respectively.

Operating Leases

As of December 31, 2017, we lease space for our offices under operating leases located in the United Kingdom, Germany and Italy.

The following table summarizes our future minimum lease payments under non-cancelable capital and operating leases agreements:



	Capital Lease			Operating Leases
Year ending December 31:
2018	$	3,350		$	648
2019	3,434			566
2020	3,519			468
2021	3,607			393
2022	3,698			55
Thereafter	36,568			—
Total minimum lease payments	54,176			$	2,130
Less: interest	(19,242		)
Capital lease obligations	34,934
Less: current portion	(1,122		)
Long-term capital lease obligations	$	33,812