The purpose of the Audit Committee (the "Committee") of the Board of Directors (the "Board") of K2M Group Holdings, Inc. (the "Company") is to (A) assist the Board with its oversight of: (i) the quality and integrity of the Company's financial statements (including the effectiveness of internal control over financial reporting); (ii) the Company's compliance with legal and regulatory requirements; and (iii) the independent registered public accounting firm's qualifications, performance and independence; and (B) prepare the audit committee report required by the Securities and Exchange Commission (the "SEC") to be included in the Company's annual proxy statement.
The Committee must have at least three members, each of whom must be determined by the Board to be an Independent Director as defined in the NASDAQ Listing Rules and must meet the criteria for independence set forth in Rule 10A-3(b)(1) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in each case, subject to an election by the Company to rely upon the transition periods applicable to initial public offerings or as may otherwise be permitted by the NASDAQ Listing Rules. In addition, each member of the Committee must not have participated in the preparation of the financial statements of the Company or any current subsidiary of the Company at any time during the past three years and each member must be able to read and understand fundamental financial statements, including the Company's balance sheet, income statement, and cash flow statement.
At least one member of the Committee must have past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in the individual's financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities.
It is also expected that at least one member of the Committee will be an "audit committee financial expert" as defined by SEC rules. This person may be the same person with the financial sophistication described in the preceding paragraph.
Appointment and Removal
The members of the Committee shall be appointed by the Board and each member shall serve until such member's successor is duly elected and qualified or until such member's earlier resignation, removal, disqualification or death. The members of the Committee may be removed, with or without cause, by action of the Board.
Unless a chairperson of the Committee (the "Chairperson") is selected by the Board, the members of the Committee shall designate a Chairperson by the majority vote of the full Committee membership. The Chairperson of the Committee will chair all regular sessions of the Committee and is responsible for setting the agendas of Committee meetings. In the absence of the Chairperson of the Committee, the Committee shall select another member to preside.
Delegation to Subcommittees
The Committee may form subcommittees composed of one or more of its independent members for any purpose that the Committee deems appropriate and may delegate to such subcommittees such power and authority as the Committee deems appropriate.
The Committee shall meet at least quarterly, or more frequently as circumstances dictate. The Chairperson of the Board or any member of the Committee may call meetings of the Committee. All meetings of the Committee may be held telephonically. In addition, unless otherwise restricted by the Company's certificate of incorporation or bylaws, the Committee may act by unanimous written consent in lieu of a meeting.
As part of its goal to foster open communication, the Committee shall periodically, as appropriate, meet separately with each of management and the independent registered public accounting firm to discuss any matters that the Committee or each of these groups believes would be appropriate to discuss privately.
All non-management directors who are not members of the Committee may attend meetings of the Committee but may not vote. Additionally, the Committee may invite to its meetings any director, management of the Company and such other persons as it deems appropriate in order to carry out its responsibilities. The Committee may also exclude from its meetings any persons it deems appropriate in order to carry out its responsibilities.
A majority of the Committee shall constitute a quorum for the transaction of business and the act of a majority of those present at any meeting at which there is a quorum shall be the act of the Committee.
The Committee, in discharging its oversight role, is empowered to study or investigate any matter of interest or concern that the Committee deems appropriate. In this regard, the Committee shall have the sole authority to engage and terminate independent counsel and other advisors, as it determines necessary or appropriate to carry out its duties.
The Company shall provide appropriate funding, as determined by the Committee, for payment of compensation to the independent registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company and to any advisors that the Committee chooses to engage, as well as funding for the payment of ordinary administrative expenses of the Committee that are necessary or appropriate in carrying out its duties.
The Committee shall be given full access to the Company's Board, corporate executives, employees and the independent registered public accounting firm as necessary to carry out these responsibilities.
The following functions shall be the common recurring activities of the Committee in carrying out its responsibilities. These functions should serve as a guide with the understanding that the Committee may carry out additional functions and adopt additional policies and procedures as may be required or appropriate in light of business, legislative, regulatory, legal or other conditions or changes. The Committee shall also carry out any other responsibilities and duties delegated to it by the Board from time to time.
Review of Financial Statements; Reports and Disclosures
- The Committee shall, prior to public dissemination, review and discuss with management and the independent registered public accounting firm, the Company's annual audited financial statements and quarterly financial statements including the Company's specific disclosures under "Management's Discussion and Analysis of Financial Condition and Results of Operations."
- The Committee shall discuss with the independent registered public accounting firm the matters required to be discussed by the applicable auditing standards adopted by the Public Company Accounting Oversight Board (the "PCAOB") and approved by the SEC from time to time.
- The Committee shall review and discuss with management and the independent registered public accounting firm the Company's earnings press releases (paying particular attention to the use of any "pro forma" or "adjusted" non-GAAP information and measures), as well as financial information and earnings guidance provided to analysts and rating agencies. The Committee's discussion in this regard may be general in nature (i.e., discussion of the types of information to be disclosed and the type of presentation to be made) and need not take place in advance of each earnings release or each instance in which the Company may provide earnings guidance.
- The Committee shall review and discuss with management and the independent registered public accounting firm any major issues arising as to the adequacy and effectiveness of the Company's internal controls (including to the extent applicable management's process for assessing the effectiveness of internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act), any actions taken in light of material weaknesses, significant deficiencies and the adequacy of disclosures about changes in internal control over financial reporting. The Committee shall review management's report on its assessment of the effectiveness of internal controls over financial reporting as of the end of each fiscal year and the independent registered public accounting firm's report on the effectiveness of internal control over financial reporting. The Committee shall discuss with management its process for performing its required quarterly certifications under Section 302 of the Sarbanes-Oxley Act, including the evaluation of the effectiveness of disclosure control by the Chief Executive Officer and the Chief Financial Officer.
Independent Registered Public Accounting Firm
- The Committee shall be directly responsible for the appointment, compensation, retention, termination and oversight of the work of any independent registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company (including the resolution of disagreements between management and such firm regarding financial reporting).
- The Committee shall inform each independent registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company that such firm must report directly to the Committee.
- The Committee shall pre-approve all auditing services and non-audit services (other than "prohibited non-audit services") to be provided to the Company by its independent registered public accounting firm. The Committee may delegate authority to one or more independent members to grant pre-approvals of audit and permitted non-audit services; provided that any such pre-approvals shall be presented to the full Committee at its next scheduled meeting.
Notwithstanding the foregoing, pre-approval is not necessary for minor non-audit services if: (i) the aggregate amount of all such non-audit services provided to the Company constitutes not more than five percent of the total amount of revenues paid by the Company to its independent registered public accounting firm during the fiscal year in which the non-audit services are provided; (ii) such services were not recognized by the Company at the time of the engagement to be non-audit services; and (iii) such services are promptly brought to the attention of the Committee and approved prior to the completion of the audit by the Committee or by one or more members of the Committee who are members of the Board to whom authority to grant such approvals has been delegated by the Committee.
The following shall be "prohibited non-audit services": (i) bookkeeping or other services related to the accounting records or financial statements of the Company; (ii) financial information systems design and implementation; (iii) appraisal or valuation services, providing fairness opinions or preparing contribution-in-kind reports; (iv) actuarial services; (v) management functions or human resources; (vi) broker or dealer, investment adviser or investment banking services; (vii) legal services and expert services unrelated to the audit; and (viii) any other service that the PCAOB prohibits through regulation.
- Review and oversee the qualifications, performance and independence of the independent registered public accounting firm and, at least annually, present its conclusions with respect to the independent registered public accounting firm to the full Board. In conducting its review and evaluation, the Committee:
- will obtain and review a report by the Company's independent registered public accounting firm: (i) describing such firm's internal quality-control procedures; (ii) describing any material issues raised by the most recent internal quality-control review, or peer review, of the firm, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by such firm, and any steps taken to deal with any such issues; and, (iii) to assess the firm's independence, all relationships between such firm and the Company;
- will actively engage in a dialogue with the independent registered public accounting firm with respect to any disclosed relationships or services that may impact the objectivity and independence of the independent registered public accounting firm.
- should review and evaluate the lead audit partner of the independent registered public accounting firm;
- will confirm and evaluate the rotation of the audit partners on the audit engagement team as required by law, and should consider whether there should be regular rotation of the independent registered public accounting firm itself; and
- should take into account the opinions of management.
- At least on a quarterly basis, inquire from the independent registered public accounting firm whether the Company's financial statements have been selected by the PCAOB for inspection. The Committee shall be apprised on a "real time" basis of any material developments in connection with this inspection.
Financial Reporting Process
- In consultation with the independent registered public accounting firm and management, the Committee shall review the integrity of the Company's financial reporting processes. In that connection, the Committee should obtain and discuss with management and the independent registered public accounting firm reports from management and the independent registered public accounting firm regarding:
- all critical accounting policies and practices to be used by the Company including the quality not just the acceptability of the accounting policies and practices;
- analyses prepared by management and/or the independent registered public accounting firm setting forth significant financial reporting issues and judgments made in connection with the preparation of the financial statements, including all alternative treatments of financial information within generally accepted accounting principles related to material items that have been discussed with the Company's management, the ramifications of the use of the alternative disclosures and treatments, and the treatment preferred by the independent registered public accounting firm;
- major issues regarding accounting principles and financial statement presentations, including any significant changes in the Company's selection or application of accounting principles;
- the completeness and clarity of disclosures in the financial statements;
- major issues as to the adequacy of the Company's internal controls and any special audit steps adopted in light of material weaknesses or significant deficiencies; and
- any other material written communications between the independent registered public accounting firm and the Company's management.
- Review periodically the effect of regulatory and accounting initiatives, as well as off-balance sheet structures (if any), on the financial statements of the Company.
- Review with the independent registered public accounting firm (i) any audit problems or difficulties encountered by such firm in the course of the review or audit work, including any restrictions on the scope of its activities or on access to requested information, and any significant disagreements with management and (ii) management’s responses to such matters. Without excluding other possibilities, the Committee may wish to review with the independent registered public accounting firm (i) any accounting adjustments that were noted or proposed by such firm but were “passed” (as immaterial or otherwise), (ii) any communications between the audit team and the audit firm’s national office respecting auditing or accounting issues presented by the engagement and (iii) any “management” or “internal control” letter issued, or proposed to be issued, by the independent registered public accounting firm to the Company.
Legal Compliance / General
- The Committee shall periodically review and discuss with the Company's General Counsel any legal matters that have been brought to the Committee's attention and that could have a significant impact on the Company's financial statements.
- Set clear policies that meet SEC regulations and applicable stock exchange listing standards for the Company's hiring of employees or former employees of the independent registered public accounting firm. At a minimum, these policies must provide that any independent registered public accounting firm may not provide audit services to the Company if the CEO, controller, CFO, chief accounting officer or any person serving in an equivalent capacity for the Company was employed by the independent registered public accounting firm and participated in any capacity in the audit of the Company during the one-year period preceding the date of the initiation of the audit.
- The Committee shall establish procedures for: (i) the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls, or auditing matters; and (ii) the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters.
- Unless otherwise approved or ratified pursuant to the Board's "Related Person Transaction Policy," the Committee shall review and approve or ratify all transactions between the Company and any Related Person that are required to be disclosed pursuant to Item 404(a) of Regulation S-K ("Item 404(a)") or applicable accounting or auditing standards. "Related Person" shall have the meaning given to such term in Item 404(a), as amended from time to time.
- The Committee shall review and approve at least on an annual basis the decisions, if any, by management to enter into derivative transactions on a cleared or non-cleared basis, and the policies and processes of the Company related thereto, and review and recommend to the Board on matters pertaining to the Company's derivative transactions and hedging strategy.
- The Committee shall prepare the Audit Committee report required by the SEC proxy rules to be included in the Company's annual proxy statement.
- The Committee shall report regularly to the Board including:
- with respect to any issues that arise with respect to the quality or integrity of the Company's financial statements, the Company's compliance with legal or regulatory requirements and the qualification, performance, and independence of the Company's independent registered public accounting;
- following meetings of the Committee; and
- with respect to such other matters as are relevant to the Committee's discharge of its responsibilities.
- The Committee shall maintain minutes or other records of meetings and activities of the Committee.
The Committee shall perform a review and evaluation, at least annually, of the performance of the Committee and its members, including by reviewing the compliance of the Committee with this Charter. In addition, the Committee shall review and reassess, at least annually, the adequacy of this Charter and recommend to the Board any improvements to this Charter that the Committee considers necessary or appropriate. The Committee shall conduct such evaluations and reviews in such manner as it deems appropriate.
Notwithstanding the foregoing, the Committee is not responsible for certifying the Company's financial statements or guaranteeing the independent registered public accounting firm's report. The fundamental responsibility for the Company's financial statements and disclosures and establishing and maintaining internal controls over financial reporting rests with management while the independent registered public accounting firm is responsible for conducting the annual audit and reviewing the Company's unaudited interim financial statements in accordance with the standards of the PCAOB.
- Financial Expert
- Independent Director