GLOBUS MEDICAL INC 10-Q

Item 1. Financial Statements GLOBUS MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) September 30, December 31, (In thousands, except par value) 2020 2019 ASSETS Current assets: Cash, cash equivalents, and restricted cash $ 250,607 $ 195,724 Short-term marketable securities 159,030 115,763 Accounts receivable, net of allowances of $ 7,011 and $ 5,599 , respectively 143,268 154,326 Inventories 231,858 196,314 Prepaid expenses and other current assets 19,091 17,243 Income taxes receivable 8,097 8,098 Total current assets 811,951 687,468 Property and equipment, net of accumulated depreciation of $ 267,364 and $ 243,732 , respectively 215,274 199,841 Long-term marketable securities 275,587 409,514 Intangible assets, net 81,794 78,812 Goodwill 129,662 128,775 Other assets 22,851 21,741 Deferred income taxes 4,620 5,926 Total assets $ 1,541,739 $ 1,532,077 LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 30,022 $ 24,614 Accrued expenses 61,803 63,283 Income taxes payable 979 1,057 Business acquisition liabilities 997 6,727 Deferred revenue 6,179 5,402 Payable to broker - 10,320 Total current liabilities 99,980 111,403 Business acquisition liabilities, net of current portion 3,551 2,822 Deferred income taxes 4,128 6,023 Other liabilities 16,876 9,377 Total liabilities 124,535 129,625 Commitments and contingencies (Note 12) Equity: Class A common stock; $ 0.001 par value. Authorized 500,000,000 shares; issued and outstanding 76,241,618 and 77,394,983 shares at September 30, 2020 and December 31, 2019, respectively 76 77 Class B common stock; $ 0.001 par value. Authorized 275,000,000 shares; issued and outstanding 22,430,097 and 22,430,097 shares at September 30, 2020 and December 31, 2019, respectively 22 22 Additional paid-in capital 422,774 357,320 Accumulated other comprehensive income (loss) 2,207 ( 2,898 ) Retained earnings 992,125 1,047,931 Total equity 1,417,204 1,402,452 Total liabilities and equity $ 1,541,739 $ 1,532,077 See accompanying notes to unaudited condensed consolidated financial statements. ‎ 3 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, (In thousands, except per share amounts) 2020 2019 2020 2019 Net sales $ 216,098 $ 196,215 $ 555,597 $ 573,701 Cost of goods sold 57,097 45,387 156,604 131,214 Gross profit 159,001 150,828 398,993 442,487 Operating expenses: Research and development 14,421 14,508 69,278 44,577 Selling, general and administrative 89,152 88,455 262,710 262,618 Provision for litigation — 1,625 197 1,625 Amortization of intangibles 4,152 3,620 12,043 10,412 Acquisition related costs 1,263 559 1,867 1,245 Total operating expenses 108,988 108,767 346,095 320,477 Operating income/(loss) 50,013 42,061 52,898 122,010 Other income, net Interest income/(expense), net 3,085 4,377 10,999 12,954 Foreign currency transaction gain/(loss) ( 170 ) 145 ( 806 ) 123 Other income/(expense) 202 169 595 410 Total other income/(expense), net 3,117 4,691 10,788 13,487 Income/(loss) before income taxes 53,130 46,752 63,686 135,497 Income tax provision 8,914 8,445 14,358 25,816 Net income/(loss) $ 44,216 $ 38,307 $ 49,328 $ 109,681 Earnings per share: Basic $ 0.45 $ 0.39 $ 0.50 $ 1.11 Diluted $ 0.44 $ 0.38 $ 0.49 $ 1.08 Weighted average shares outstanding: Basic 98,217 99,238 98,453 98,998 Dilutive stock options 2,268 2,862 2,370 2,687 Diluted 100,485 102,100 100,823 101,685 Anti-dilutive stock options excluded from weighted average calculation 5,101 5,108 6,130 4,939 See accompanying notes to unaudited condensed consolidated financial statements. ‎ 4 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2020 2019 2020 2019 Net income/(loss) $ 44,216 $ 38,307 $ 49,328 $ 109,681 Other comprehensive income/(loss): Unrealized gain/(loss) on marketable securities, net of tax ( 770 ) 244 2,285 4,027 Foreign currency translation gain/(loss) 1,679 ( 1,342 ) 2,820 319 Total other comprehensive income/(loss) 909 ( 1,098 ) 5,105 4,346 Comprehensive income/(loss) $ 45,125 $ 37,209 $ 54,433 $ 114,027 See accompanying notes to unaudited condensed consolidated financial statements. ‎ 5 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Unaudited) Class A ‎ Common Stock Class B ‎ Common Stock Additional paid-in Accumulated other comprehensive Retained (In thousands) Shares $ Shares $ capital income/(loss) earnings Total Balance at December 31, 2019 77,394 $ 77 22,431 $ 22 $ 357,320 $ ( 2,898 ) $ 1,047,931 $ 1,402,452 Cumulative effects of adoption of accounting standards — — — — — — ( 468 ) ( 468 ) Stock-based compensation — — — — 6,902 — — 6,902 Exercise of stock options 190 1 — — 5,762 — — 5,763 Comprehensive income/(loss) — — — — — ( 3,368 ) 25,949 22,581 Repurchase and retirement of common stock ( 1,920 ) ( 2 ) — — — — ( 73,862 ) ( 73,864 ) Balance at March 31, 2020 75,664 $ 76 22,431 $ 22 $ 369,984 $ ( 6,266 ) $ 999,550 $ 1,363,366 Stock-based compensation — — — — 7,426 — — 7,426 Exercise of stock options 434 — ( 1 ) — 10,201 — — 10,201 Comprehensive income/(loss) — — — — — 7,564 ( 20,837 ) ( 13,273 ) Repurchase and retirement of common stock ( 771 ) ( 1 ) — — — — ( 30,804 ) ( 30,805 ) Balance at June 30, 2020 75,327 $ 75 22,430 $ 22 $ 387,611 $ 1,298 $ 947,909 $ 1,336,915 Stock-based compensation — — — — 7,007 — — 7,007 Exercise of stock options 915 1 — — 28,156 — — 28,157 Comprehensive income/(loss) — — — — — 909 44,216 45,125 Balance at September 30, 2020 76,242 $ 76 22,430 $ 22 $ 422,774 $ 2,207 $ 992,125 $ 1,417,204 Class A ‎ Common Stock Class B ‎ Common Stock Additional paid-in Accumulated other comprehensive Retained (In thousands) Shares $ Shares $ capital income/(loss) earnings Total Balance at December 31, 2018 76,144 $ 76 22,431 $ 22 $ 299,869 $ ( 7,172 ) $ 892,721 $ 1,185,516 Stock-based compensation — — — — 6,541 — — 6,541 Exercise of stock options 407 1 — — 10,255 — ( 1 ) 10,255 Comprehensive income/(loss) — — — — — 1,692 33,210 34,902 Balance at March 31, 2019 76,551 $ 77 22,431 $ 22 $ 316,665 $ ( 5,480 ) $ 925,930 $ 1,237,214 Stock-based compensation — — — — 6,381 — — 6,381 Exercise of stock options 96 — — — 2,015 — 1 2,016 Comprehensive income/(loss) — — — — — 3,752 38,163 41,915 Balance at June 30, 2019 76,647 $ 77 22,431 $ 22 $ 325,061 $ ( 1,728 ) $ 964,094 $ 1,287,526 Stock-based compensation — — — — 6,978 — — 6,978 Exercise of stock options 326 — — — 7,081 — 1 7,082 Comprehensive income/(loss) — — — — — ( 1,098 ) 38,307 37,209 Balance at September 30, 2019 76,973 $ 77 22,431 $ 22 $ 339,120 $ ( 2,826 ) $ 1,002,402 $ 1,338,795 See accompanying notes to unaudited condensed consolidated financial statements. 6 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, (In thousands) 2020 2019 Cash flows from operating activities: Net income $ 49,328 $ 109,681 Adjustments to reconcile net income to net cash provided by operating activities: Acquired in-process research and development 24,418 — Depreciation and amortization 45,970 38,688 Amortization of premium (discount) on marketable securities 215 ( 1,008 ) Write-down for excess and obsolete inventories 12,411 1,939 Stock-based compensation expense 21,138 19,647 Allowance for doubtful accounts 2,741 2,732 Change in fair value of business acquisition liabilities 1,027 579 Change in deferred income taxes ( 4,458 ) 2,434 (Gain)/loss on disposal of assets, net 714 518 Payment of business acquisition related liabilities ( 700 ) — (Increase)/decrease in: Accounts receivable 8,412 ( 5,367 ) Inventories ( 47,271 ) ( 40,869 ) Prepaid expenses and other assets ( 4,381 ) ( 3,044 ) Increase/(decrease) in: Accounts payable 5,401 ( 158 ) Accrued expenses and other liabilities 3,749 1,225 Income taxes payable/receivable ( 105 ) ( 9,331 ) Net cash provided by operating activities 118,609 117,666 Cash flows from investing activities: Purchases of marketable securities ( 57,418 ) ( 277,446 ) Maturities of marketable securities 100,830 205,818 Sales of marketable securities 39,944 46,474 Purchases of property and equipment ( 49,595 ) ( 54,957 ) Acquisition of businesses, net of cash acquired, and purchases of intangible and other assets ( 31,991 ) ( 24,135 ) Net cash used in investing activities 1,770 ( 104,246 ) Cash flows from financing activities: Payment of business acquisition related liabilities ( 5,327 ) ( 6,096 ) Proceeds from exercise of stock options 44,121 19,350 Repurchase of common stock ( 104,669 ) — Net cash used in/provided by financing activities ( 65,875 ) 13,254 Effect of foreign exchange rate on cash 379 ( 231 ) Net increase in cash, cash equivalents, and restricted cash 54,883 26,443 Cash, cash equivalents, and restricted cash at beginning of period 195,724 139,747 Cash, cash equivalents, and restricted cash at end of period $ 250,607 $ 166,190 Supplemental disclosures of cash flow information: Income taxes paid $ 19,328 $ 34,056 Purchases of property and equipment included in accounts payable and accrued expenses $ 3,931 $ 5,959 See accompanying notes to unaudited condensed consolidated financial statements. 7 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) NOTE 1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) The Company Globus Medical, Inc., together with its subsidiaries, is a medical device company that develops and commercializes healthcare solutions whose mission is to improve the quality of life of patients with musculoskeletal disorders. We are primarily focused on implants that promote healing in patients with musculoskeletal disorders, including the use of a robotic guidance and navigation system and products to treat patients who have experienced orthopedic traumas. We are an engineering-driven company with a history of rapidly developing and commercializing advanced products and procedures to assist surgeons in effectively treating their patients and address new treatment options. With over 210 products on the market, we offer a comprehensive portfolio of innovative and differentiated technologies that address a variety of musculoskeletal pathologies, anatomies, and surgical approaches. We are headquartered in Audubon, Pennsylvania, and market and sell our products through our exclusive sales force in the United States, as well as within North, Central & South America, Europe, Asia, Africa and Australia. The sales force consists of direct sales representatives and distributor sales representatives employed by exclusive independent distributors. The terms the “Company,” “Globus,” “we,” “us” and “our” refer to Globus Medical, Inc. and, where applicable, our consolidated subsidiaries. (b) COVID-19 Pandemic Impact On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (“COVID-19”) a global pandemic and recommended containment and mitigation measures worldwide. The pandemic has significantly impacted the economic conditions in the U.S. and globally as federal, state and local governments react to the public health crisis, creating significant uncertainties in the economy. While emergency and time-sensitive surgical procedures continue, as of the date of this filing, the Company has been impacted by temporary postponement of elective surgeries in hospitals and surgical facilities worldwide. The Company cannot reasonably estimate the length or severity of this pandemic, however, as a result of these developments the Company expects a material adverse impact on its sales, results of operations, and cash flows in fiscal 2020, and potentially fiscal 2021. In response to these developments, the Company will continue to monitor liquidity and cash flow. The Company has the ability to borrow from our credit facility signed on August 6, 2020, if needed, although we do not expect to do so due to our cash, cash equivalents and short-term marketable securities balances. (c) Basis of Presentation The accompanying interim unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in complete financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). As such, the information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2019. In the opinion of management, the statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of our financial position and of the results for the three and nine month periods presented. The results of operations for any interim period are not indicative of results for the full year. (d) Principles of Consolidation The accompanying unaudited condensed consolidated financial statements include the accounts of Globus and its wholly-owned subsidiaries. All intercompany balances and transactions are eliminated in consolidation. 8 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (e) Use of Estimates The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates, in part, on historical experience that management believes to be reasonable under the circumstances. Actual results could differ from those estimates. Estimates and assumptions are periodically reviewed and the effects of revisions are reflected in the condensed consolidated financial statements in the period they are determined to be necessary. Significant areas that require management’s estimates include intangible assets, business acquisition liabilities, stock-based compensation, write-down for excess and obsolete inventory, useful lives of assets, the outcome of litigation, recoverability of intangible assets and income taxes. We are subject to risks and uncertainties due to changes in the healthcare environment, regulatory oversight, competition, and legislation that may cause actual results to differ from estimated results. (f) Cash, Cash Equivalents, and Restricted Cash The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the statement of financial position that sum to the total of the same such amounts shown in the statement of cash flows: September 30, December 31, September 30, December 31, (In thousands) 2020 2019 2019 2018 Cash and cash equivalents $ 250,607 $ 195,474 $ 166,090 $ 139,647 Restricted cash — 250 100 100 Total cash, cash equivalents, and restricted cash as presented in the condensed consolidated statement of cash flows $ 250,607 $ 195,724 $ 166,190 $ 139,747 (g) Marketable Securities Our marketable securities include municipal bonds, corporate debt securities, commercial paper, securities of government, federal agency, and other sovereign obligations, and asset-backed securities, and are classified as available-for-sale as of September 30, 2020 and December 31, 2019. Available-for-sale securities are recorded at fair value in both short-term and long-term marketable securities on our condensed consolidated balance sheets. The change in fair value for available-for-sale securities, that do not result in recognition or reversal of an allowance for credit loss or write-down, is recorded, net of taxes, as a component of accumulated other comprehensive income or loss on our condensed consolidated balance sheets. Premiums and discounts are recognized over the life of the related security as an adjustment to yield using the straight-line method. Realized gains or losses from the sale of our marketable securities are determined on a specific identification basis. Realized gains and losses, along with interest income and the amortization/accretion of premiums/discounts are included as a component of other income/(expense), on our condensed consolidated statements of income. Interest receivable is recorded as a component of prepaid expenses and other current assets on our condensed consolidated balance sheets. We maintain a portfolio of various holdings, types and maturities, though most of the securities in our portfolio could be liquidated at minimal cost at any time. We invest in securities that meet or exceed standards as defined in our investment policy. Our policy also limits the amount of credit exposure to any one issue, issuer or type of security. We review our securities for other-than-temporary impairment at each reporting period. If an unrealized loss for any security is expected, the loss will be recognized on an allowance basis, consistent with ASC 326-30, in our condensed consolidated statement of income in the period the determination is made. (h) Fair Value Measurements Assets and Liabilities That Are Measured at Fair Value on a Recurring Basis Under the accounting for fair value measurements and disclosures, fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or the liability in an orderly transaction between market participants on the measurement date. Additionally, a fair value hierarchy was established that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. The level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. 9 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) Our assets and liabilities measured at fair value on a recurring basis are classified and disclosed in one of the following three categories: Level 1—quoted prices (unadjusted) in active markets for identical assets and liabilities; Level 2—observable inputs other than quoted prices in active markets for identical assets and liabilities; and Level 3—unobservable inputs in which there is little or no market data available, which require the reporting entity to use significant unobservable inputs or valuation techniques. Assets and Liabilities That Are Measured at Fair Value on a Nonrecurring Basis The purchase price of business acquisitions is primarily allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition dates, with the excess recorded as goodwill. We utilize Level 3 inputs in the determination of the initial fair value. Non-financial assets such as goodwill, intangible assets, and property, plant, and equipment are subsequently measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment is recognized. We assess the impairment of intangible assets annually or whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable. The fair value of our goodwill and intangible assets is not estimated if there is no change in events or circumstances that indicate the carrying amount of an intangible asset may not be recoverable. Contingent consideration represents our contingent milestone, performance and revenue-sharing payment obligations related to our acquisitions and is measured at fair value, based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The valuation of contingent consideration uses assumptions we believe would be made by a market participant. We assess these assumptions on an ongoing basis as additional data impacting the assumptions is obtained. The balances of the fair value of contingent consideration are recognized within business acquisition liabilities on our condensed consolidated balance sheets, and the changes in the fair value of contingent consideration are recognized within acquisition related costs in the condensed consolidated statements of income. (i) Inventories Inventories are stated at the lower of cost or net realizable value. Cost is determined on a first-in, first-out basis. The majority of our inventories are finished goods and we utilize both in-house manufacturing and third-party suppliers to source our products. We periodically evaluate the carrying value of our inventories in relation to our estimated forecast of product demand, which takes into consideration the estimated life cycle of product releases. When quantities on hand exceed estimated sales forecasts, we record a write-down for such excess inventories. Once inventory has been written down, it creates a new cost basis for inventory that is not subsequently written up. (j) Revenue Recognition Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. Sales and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. For purposes of disclosing disaggregated revenue, we disaggregate our revenue into two categories, Musculoskeletal Solutions and Enabling Technologies. Our Musculoskeletal Solutions products consist primarily of the implantable devices, disposables, and unique instruments used in an expansive range of spine, orthopedic trauma, hip, knee and extremity procedures. The majority of our Musculoskeletal Solutions contracts have a single performance obligation and revenue is recognized at a point in time. Our Enabling Technologies products are the advanced hardware and software systems and related technologies that are designed to enhance a surgeon’s capabilities and streamline surgical procedures by making them less invasive, more accurate, and more reproducible to improve patient care. The majority of our Enabling Technologies product contracts typically contain multiple performance obligations, including maintenance and support, and revenue is recognized as we fulfill each performance obligation. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. Our policy is to classify shipping and handling costs billed to customers as sales and the related expenses as cost of goods sold. 10 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) Nature of Products and Services A significant portion of our Musculoskeletal Solutions product revenue is generated from consigned inventory maintained at hospitals or with sales representatives. Revenue from the sale of consigned musculoskeletal products is recognized when we transfer control, which occurs at the time the product is used or implanted. For all other Musculoskeletal Solutions product transactions, we recognize revenue when we transfer title to the goods, provided there are no remaining performance obligations that will affect the customer’s final acceptance of the sale. We use an observable price to determine the stand-alone selling price for the identified performance obligation. Revenue from the sale of Enabling Technologies products is generally recognized when control transfers to the customer which occurs at the time the product is shipped or delivered. Depending on the terms of the arrangement, we may also defer the recognition of a portion of the consideration received as we have to satisfy a future performance obligation to provide maintenance and support. We use an observable price to determine the stand-alone selling price for each separate performance obligation. Contract Balances Timing of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when revenue is recognized prior to invoicing, or deferred revenue when revenue is recognized subsequent to invoicing. Deferred revenue is comprised mainly of unearned revenue related to the sales of certain Enabling Technologies products, which includes maintenance and support services. Deferred revenue is generally invoiced annually at the beginning of each contract period and recognized ratably over the coverage period. For the three and nine months ended September 30, 2020, there was an immaterial amount of revenue recognized from previously deferred revenue. Disaggregation of Revenue Net sales for the three and nine months ended September 30, 2020 and 2019, respectively included the following: Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2020 2019 2020 2019 Musculoskeletal Solutions products $ 207,063 $ 182,324 $ 533,085 $ 540,620 Enabling Technologies products 9,035 13,891 22,512 33,081 Total net sales $ 216,098 $ 196,215 $ 555,597 $ 573,701 (k) Recently Issued Accounting Pronouncements In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”) , which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures. On March 12, 2020, the FASB issued ASU No. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting , which provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is effective for all entities as of March 12, 2020, and will apply through December 31, 2022. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures. Management does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the Company’s consolidated financial statements. 11 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) (l) Recently Adopted Accounting Pronouncements In February 2016, the FASB released ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). Under ASU 2016-02, a right-of-use asset and lease obligation will be recorded for all leases with terms greater than 12 months, whether operating or financing, while the income statement will reflect lease expense for operating leases and amortization/interest expense for financing leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted, and permits modified retrospective method or cumulative-effect adjustment method. We adopted the standard on January 1, 2019, using the cumulative-effect adjustment transition method. As part of the adoption, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed carry forward of historical lease classifications. The adoption of this standard did not have a material impact on our financial position and results of operations. See “Note 13. Leases” for more detail regarding our disclosures. In February 2018, the FASB released ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) , Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). Prior to ASU 2018-02, GAAP required the remeasurement of deferred tax assets and liabilities as a result of a change in tax laws or rates to be presented in net income from continuing operations, even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income. As a result, such items, referred to as stranded tax effects, did not reflect the appropriate tax rate. Under ASU 2018-02, entities are permitted, but not required, to reclassify from accumulated other comprehensive income to retained earnings those stranded tax effects resulting from the U.S. legislation commonly referred to as the Tax Cuts and Jobs Act enacted in December 2017 . ASU 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. We adopted ASU 2018-02 on January 1, 2019. Adoption of the standard did not have a material impact on our financial position, results of operations and disclosures. In June 2018, the FASB released ASU 2018-07, Compensation—Stock Compensation (Topic 718) , (“ASU 2018-07”), which expanded the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. This update is effective for public entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. We adopted ASU 2018-07 on January 1, 2019. Adoption of the standard did not have a material impact on our financial position, results of operations, and disclosures. In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 replaces the incurred loss impairment methodology for measuring and recognizing credit losses with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This amendment is effective for fiscal years beginning after December 15, 2019. We adopted the updated guidance on January 1, 2020 on a prospective basis recording $ 0.5 million as a cumulative effect adjustment to retained earnings and as a result, prior period amounts were not adjusted. Adoption of the standard did not have a material impact on our financial position, results of operations, and disclosures. In January 2017, the FASB released ASU 2017-04, Intangibles - Goodwill and Other (Topic 805): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which eliminates the Step 2 calculation for the implied fair value of goodwill to measure a goodwill impairment charge. Under the updated standard, an entity will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. ASU 2017-04 does not change the guidance on completing Step 1 of the goodwill impairment test and still allows an entity to perform the optional qualitative goodwill impairment assessment before determining whether to proceed to Step 1. This update is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption permitted for any impairment test performed on testing dates after January 1, 2017. We adopted ASU 2017-04 on January 1, 2020. Adoption of the standard did not have a material impact on our financial position, results of operations, and disclosures. In August 2018, the FASB released ASU 2018-13, Fair Value Measurement (Topic 820) , (“ASU 2018-13”), which modifies the disclosure requirements on fair value measurements in Topic 820, including the consideration of costs and benefits. This update is effective for public entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. We adopted ASU 2018-13 on January 1, 2020. Adoption of the standard did not have a material impact on our financial position, results of operations, and disclosures . 12 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) NOTE 2. ASSET ACQUISITIONS AND BUSINESS COMBINATIONS Asset Acquisitions During the second quarter of 2020, the Company acquired Synoste Oy (“Synoste”), a Finnish engineering company that specializes in the research and development of a limb lengthening system. The fair value of the net assets acquired was $ 25.3 million, and the consideration consisted of approximately $ 22.8 million of cash paid at closing plus $ 2.5 million of a contractual holdback obligation payable eighteen months from the closing date of the transaction, subject to net working capital and other post-closing adjustments, if applicable. The contractual holdback obligation is included in Other Liabilities in the Condensed Consolidated Balance Sheet. The Company accounted for the transaction as an asset acquisition as substantially all of the estimated fair value of the gross assets acquired was concentrated in a single identified asset, in-process research and development (“IPR&D”) of the limb lengthening system, thus satisfying the requirements of the screen test in ASU 2017-1. Acquired IPR&D in the asset acquisition was accounted for in accordance with FASB ASC Topic 730, “Research and Development” (ASC 730). At the date of acquisition, the Company determined that the development of the projects underway at Synoste had not yet reached technological feasibility and that the research in process had no alternative future use. Accordingly, the acquired IPR&D of $ 24.4 million was charged to Research and Development expense in the Condensed Consolidated Statements of Income on the acquisition date. The Company also recorded the remaining immaterial identifiable net assets based on their estimated fair values, which primarily consisted of cash and assembled workforce. The transaction also provides for additional consideration contingent upon the developed product obtaining approval from the U.S. Food and Drug Administration (the “FDA”) of $ 8.0 million within the third anniversary, or $ 4.0 million within the fourth anniversary of the acquisition closing date, respectively. Contingent consideration is not recorded in an asset acquisition until the milestone is met. Business Combinations During the second quarter of 2019, the Company acquired substantially all of the assets of StelKast, Inc. (the “StelKast Acquisition”), a privately held company that designs, manufactures and distributes orthopedic implants for knee and hip replacement surgeries. The Company has included the financial results from the StelKast Acquisition in our condensed financial statements from the acquisition date, and the results from the StelKast Acquisition were not material to our condensed financial statements. At the acquisition date, the fair value of the net assets acquired was $ 28.1 million, which consisted of approximately $ 23.8 million of cash paid at closing, plus a potential $ 4.3 million contingent consideration payment based on product sales milestones. The Company recorded identifiable net assets, based on their estimated fair values, related to inventory of $ 15.3 million, fixed assets of $ 4.2 million and customer relationships of $ 3.9 million and goodwill of $ 4.7 million. The contingent consideration payable related to this acquisition of $ 5.0 million was paid during the third quarter of 2020. The payment up to the amount of the contingent consideration liability recognized at the acquisition date of $ 4.3 million is presented as a financing activity and the excess cash payment of $ 0.7 million is presented as an operating activity on the Condensed Consolidated Statement of Cash Flows as of the nine months ended September 30, 2020 in accordance with FASB ASC Topic 230, “Statement of Cash Flows” (ASC 230) . 13 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) NOTE 3. GOODWILL AND INTANGIBLE ASSETS Intangible assets as of September 30, 2020 included the following: September 30, 2020 (In thousands) Weighted Average Amortization Period (in years) Gross ‎ Carrying ‎ Amount Accumulated ‎ Amortization Intangible ‎ Assets, ‎ net Supplier network 10.0 $ 4,000 $ ( 2,367 ) $ 1,633 Customer relationships & other intangibles 7.0 48,256 ( 29,506 ) 18,750 Developed technology 8.0 71,736 ( 16,745 ) 54,991 Patents 16.1 8,894 ( 2,474 ) 6,420 Total intangible assets $ 132,886 $ ( 51,092 ) $ 81,794 Due to the completion of contractual milestones related to the 2018 acquisition of Nemaris, in the first quarter of 2020, $ 13.0 million was capitalized to Developed technology and began to be amortized over a period of 5.4 years. Intangible assets as of December 31, 2019 included the following: December 31, 2019 (In thousands) Weighted Average Amortization Period (in years) Gross ‎ Carrying ‎ Amount Accumulated ‎ Amortization Intangible ‎ Assets, ‎ net Supplier network 10.0 4,000 ( 2,067 ) 1,933 Customer relationships & other intangibles 7.0 46,766 ( 24,264 ) 22,502 Developed technology 8.6 57,577 ( 10,189 ) 47,388 Patents 16.0 8,662 ( 1,673 ) 6,989 Total intangible assets $ 117,005 $ ( 38,193 ) $ 78,812 The change in the carrying amount of goodwill during the twelve months ended December 31, 2019 and the nine months ended September 30, 2020, respectively included the following: (In thousands) December 31, 2018 $ 123,734 Additions and adjustments 4,817 Foreign exchange 224 December 31, 2019 128,775 Additions and adjustments ( 123 ) Foreign exchange 1,010 September 30, 2020 $ 129,662 14 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) NOTE 4. MARKETABLE SECURITIES Short-term and long-term marketable securities as of September 30, 2020 and December 31, 2019, respectively included the following: September 30, 2020 (In thousands) Contractual ‎ Maturity ‎ (in years) Amortized ‎ Cost Gross ‎ Unrealized ‎ Gains Gross Unrealized Losses Fair ‎ Value Short-term: Municipal bonds Less than 1 $ 23,965 $ 191 $ — $ 24,156 Corporate debt securities Less than 1 99,461 849 — 100,310 Commercial paper Less than 1 7,984 15 — 7,999 Asset-backed securities Less than 1 13,962 106 — 14,068 Government, federal agency, and other sovereign obligations Less than 1 12,380 117 — 12,497 Total short-term marketable securities $ 157,752 $ 1,278 $ — $ 159,030 Long-term: Municipal bonds 1 - 2 $ 26,209 $ 561 $ — $ 26,770 Corporate debt securities 1 - 3 119,164 3,559 — 122,723 Asset-backed securities 1 - 2 123,778 2,316 — 126,094 Total long-term marketable securities $ 269,151 $ 6,436 $ — $ 275,587 December 31, 2019 (In thousands) Contractual ‎ Maturity ‎ (in years) Amortized ‎ Cost Gross ‎ Unrealized ‎ Gains Gross ‎ Unrealized ‎ Losses Fair ‎ Value Short-term: Municipal bonds Less than 1 $ 7,840 $ 23 $ ( 1 ) $ 7,862 Corporate debt securities Less than 1 69,091 247 ( 3 ) 69,335 Commercial paper Less than 1 34,747 6 ( 1 ) 34,752 Asset-backed securities Less than 1 3,808 6 — 3,814 Total short-term marketable securities $ 115,486 $ 282 $ ( 5 ) $ 115,763 Long-term: Municipal bonds 1 - 3 $ 45,010 $ 254 $ ( 8 ) $ 45,256 Corporate debt securities 1 - 3 186,356 2,578 ( 5 ) 188,929 Asset-backed securities 1 - 3 161,347 1,583 ( 33 ) 162,897 Government, federal agency, and other sovereign obligations 1 - 2 12,366 66 — 12,432 Total long-term marketable securities $ 405,079 $ 4,481 $ ( 46 ) $ 409,514 15 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) NOTE 5. FAIR VALUE MEASUREMENTS Assets and liabilities measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019, respectively included the following: (In thousands) Balance at September 30, 2020 Level 1 Level 2 Level 3 Assets: Cash equivalents $ 96,953 $ 96,953 $ — $ — Municipal bonds 50,926 — 50,926 — Corporate debt securities 223,033 — 223,033 — Commercial paper 7,999 — 7,999 — Asset-backed securities 140,162 — 140,162 — Government, federal agency, and other sovereign obligations 12,497 — 12,497 — Liabilities: Business acquisition liabilities 4,548 — — 4,548 (In thousands) Balance at December 31, 2019 Level 1 Level 2 Level 3 Assets: Cash equivalents $ 18,218 $ 4,988 $ 13,230 $ — Municipal bonds 53,118 — 53,118 — Corporate debt securities 258,264 — 258,264 — Commercial paper 34,752 — 34,752 — Asset-backed securities 166,711 — 166,711 — Government, federal agency, and other sovereign obligations 12,432 — 12,432 — Liabilities: Business acquisition liabilities 9,549 — — 9,549 Our marketable securities are classified as Level 2 within the fair value hierarchy, as we measure their fair value using market prices for similar instruments and inputs such as actual trade data, benchmark yields, broker/dealer quotes and other similar data obtained from quoted market prices or independent pricing vendors. Assets and Liabilities That Are Measured at Fair Value on a Nonrecurring Basis The recurring Level 3 fair value measurements of our business acquisition liabilities include the following significant unobservable inputs, which have not materially changed since December 31, 2019, exclusive of the contractual payable reclassification to Accrued Expenses in the Condensed Consolidated Balance Sheet: (In thousands) Fair Value at September 30, 2020 Valuation technique Unobservable input Range Discount rate 8.5 % Revenue-based payments $ 4,548 Discounted cash flow Probability of payment 75 % - 100 % Projected year of payment 2020 - 2029 16 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) The change in the carrying value of the business acquisition liabilities during the three and nine months ended September 30, 2020 and 2019, respectively included the following: Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2020 2019 2020 2019 Beginning balance $ 4,216 $ 9,304 $ 9,549 $ 10,118 Purchase price contingent consideration — — — 4,299 Changes resulting from foreign currency fluctuations — — — ( 9 ) Contingent payments ( 175 ) ( 463 ) ( 1,028 ) ( 6,096 ) Changes in fair value of business acquisition liabilities 507 50 970 579 Contractual payable reclassification — — ( 4,943 ) — Ending balance $ 4,548 $ 8,891 $ 4,548 $ 8,891 NOTE 6. INVENTORIES Inventories as of September 30, 2020 and December 31, 2019, respectively included the following: September 30, December 31, (In thousands) 2020 2019 Raw materials $ 34,198 $ 33,025 Work in process 19,314 15,940 Finished goods 178,346 147,349 Total inventories $ 231,858 $ 196,314 During the three months ended September 30, 2020 and 2019, net adjustments to cost of sales related to excess and obsolete inventory were $ 5.2 million and ($ 0.6 ) million, respectively. The net adjustments for the three months ended September 30, 2020 and 2019 reflect a combination of additional expense for excess and obsolete related provisions ($ 7.9 million and $ 1.2 million, respectively) offset by sales and disposals ($ 2.7 million and $ 1.8 million, respectively) of inventory for which an excess and obsolete provision was provided previously through expense recognized in prior periods. During the nine months ended September 30, 2020 and 2019, net adjustments to cost of sales related to excess and obsolete inventory were $ 12.4 million and $ 1.9 million, respectively. The net adjustments for the nine months ended September 30, 2020 and 2019 reflect a combination of additional expense for excess and obsolete related provisions ($ 18.9 million and $ 7.8 million, respectively) offset by sales and disposals ($ 6.5 million and $ 5.9 million, respectively) of inventory for which an excess and obsolete provision was provided previously through expense recognized in prior periods. During the third quarter of 2020, the Company initiated a voluntary Class II recall of specific lots of ALTERA ® Spacers. This recall was initiated because specific lots of ALTERA ® implants have internal components that were manufactured using stainless steel rather than the specified cobalt chromium molybdenum alloy. Only devices made after February 12, 2020 from specific lots were affected, and some parts in some lots may not be affected. No reports of adverse reactions related to the affected ALTERA ® implants have been received to date. A recall notification was issued to all relevant parties and Globus has collected and replaced impacted field inventory. The Company recorded an accrual in the second quarter of approximately $ 1.3 million in costs associated with this recall of which $ 1.0 million was charged to Cost of Goods Sold in the Condensed Consolidated Statements of Income. 17 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) NOTE 7. ACCRUED EXPENSES Accrued expense as of September 30, 2020 and December 31, 2019, respectively included the following: September 30, December 31, (In thousands) 2020 2019 Compensation and other employee-related costs $ 37,579 $ 37,178 Legal and other settlements and expenses 960 1,538 Accrued non-income taxes 3,800 4,996 Royalties 2,656 2,370 Other 16,808 17,201 Total accrued expenses $ 61,803 $ 63,283 NOTE 8. DEBT Line of Credit On August 6, 2020, we entered into a credit agreement with Citizens Bank, N.A. (the “Credit Agreement”) that provides a revolving credit facility permitting borrowings up to $ 125.0 million (the “Revolving Credit Facility”), and has a termination date of August 5, 2021 . The Revolving Credit Facility includes up to a $ 25.0 million sub limit for letters of credit. Revolving loans under the Credit Agreement will bear interest, at the Company’s option, at either a base rate or the Adjusted LIBOR Rate (as defined in the Credit Agreement), plus, in each case, an applicable margin, as determined in accordance with the provisions of the Credit Agreement. The base rate will be the highest of: the rate of interest announced publicly by Citizens Bank, N.A. from time to time as its “prime rate”; the federal funds effective rate plus 1/2 of 1 %; and the Adjusted LIBOR Rate for a one-month period plus 1 %. The applicable margin is subject to adjustment as provided in the Credit Agreement. The Credit Agreement contains financial and other customary covenants, including a maximum leverage ratio. In May 2011, we entered into a credit agreement with Wells Fargo Bank related to a revolving credit facility that provided for borrowings up to $ 50.0 million. In June 2018, we amended the credit agreement to increase the revolving credit facility amount from $ 50.0 million to $ 125.0 million. At our request, and with the approval of the bank, the amount of borrowings available under the revolving credit facility increased to $ 150.0 million. The revolving credit facility included up to a $ 25.0 million sub-limit for letters of credit. As amended to date, the revolving credit facility with Wells Fargo Bank expired in May 2020. NOTE 9. EQUITY Stock Repurchases Under the current stock repurchase plan, announced on March 11, 2020, the Company is authorized to repurchase up to $ 200 million of the Company’s Class A common stock. As of September 30, 2020, $ 95.3 million of this authorization is remaining. The timing and actual number of shares repurchased will depend on various factors including price, corporate and regulatory requirements, debt covenant requirements, alternative investment opportunities and other market conditions. We continue to expect funding of share repurchases will come from operating cash flows and excess cash. Shares repurchased by the Company are accounted for under the constructive retirement method, in which the shares repurchased, are immediately retired, as there is no plan to reissue. The Company made an accounting policy election to charge the excess of repurchase price over par value entirely to retained earnings. 18 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) The following table summarizes the activity related to share repurchases: (In thousands except for per share prices) Period Total number of shares repurchased Average Price Paid per Share Dollar amount of shares repurchased (1) Approximate dollar value of shares that may yet be purchased under the plan January 1, 2020 - March 31, 2020 1,920 $ 38.49 $ 73,902 $ 126,098 April 1, 2020 - June 30, 2020 771 39.95 30,804 95,294 July 1, 2020 - September 30,2020 — — — 95,294 January 1, 2020 - September 30, 2020 2,691 $ 38.91 $ 104,706 (1) Inclusive of an immaterial amount of commission fees Common Stock Our amended and restated Certificate of Incorporation provides for a total of 775,000,000 authorized shares of common stock. Of the authorized number of shares of common stock, 500,000,000 shares are designated as Class A common stock (“Class A Common”), and 275,000,000 shares are designated as Class B common stock (“Class B Common”). Each share of our Class B common stock is convertible at any time at the option of the holder into one share of our Class A common stock. In addition, each share of our Class B common stock will convert automatically into one share of our Class A common stock upon any transfer, whether or not for value, except for permitted transfers. For more details relating to the conversion of our Class B common stock please see “Exhibit 4.2, Description of Securities of the Registrant filed with our amended Form 10-K on March 2, 2020.” Accumulated Other Comprehensive Income (Loss) The tables below present the changes in each component of accumulated other comprehensive income/(loss), including current period other comprehensive income/(loss) and reclassifications out of accumulated other comprehensive income/(loss) for the nine months ended September 30, 2020 and 2019, respectively: (In thousands) Unrealized ‎ gain/(loss) on ‎ marketable ‎ securities, ‎ net of tax Foreign ‎ currency ‎ translation ‎ adjustments Accumulated ‎ other ‎ comprehensive ‎ loss Accumulated other comprehensive loss, net of tax, at December 31, 2019 $ 3,599 $ ( 6,497 ) $ ( 2,898 ) Other comprehensive (loss)/income before reclassifications 3,001 2,820 5,821 Amounts reclassified from accumulated other comprehensive income, net of tax ( 716 ) — ( 716 ) Other comprehensive (loss)/income, net of tax 2,285 2,820 5,105 Accumulated other comprehensive loss, net of tax, at September 30, 2020 $ 5,884 $ ( 3,677 ) $ 2,207 (In thousands) Unrealized ‎ gain/(loss) on ‎ marketable ‎ securities, ‎ net of tax Foreign ‎ currency ‎ translation ‎ adjustments Accumulated ‎ other ‎ comprehensive ‎ loss Accumulated other comprehensive loss, net of tax, at December 31, 2018 $ ( 168 ) $ ( 7,004 ) $ ( 7,172 ) Other comprehensive (loss)/income before reclassifications 5,266 319 5,585 Amounts reclassified from accumulated other comprehensive income, net of tax ( 1,239 ) — ( 1,239 ) Other comprehensive (loss)/income, net of tax 4,027 319 4,346 Accumulated other comprehensive loss, net of tax, at September 30, 2019 $ 3,859 $ ( 6,685 ) $ ( 2,826 ) 19 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) NOTE 10. STOCK-BASED COMPENSATION We have three stock plans: our Amended and Restated 2003 Stock Plan, our 2008 Stock Plan, and our 2012 Equity Incentive Plan (the “2012 Plan”). The 2012 Plan is the only remaining active stock plan. The purpose of these stock plans was, and the 2012 Plan is, to provide incentive to employees, directors, and consultants of Globus. The Plans are administered by the Board of Directors of Globus (the “Board”) or its delegates. The number, type of option, exercise price, and vesting terms are determined by the Board or its delegates in accordance with the terms of the Plans. The options granted expire on a date specified by the Board, but generally not more than ten years from the grant date. Option grants to employees generally vest in varying installments over a four-year period. The 2012 Plan was approved by our Board in March 2012, and by our stockholders in June 2012. Under the 2012 Plan, the aggregate number of shares of Class A Common stock that may be issued subject to options and other awards is equal to the sum of (i) 3,076,923 shares, (ii) any shares available for issuance under the 2008 Plan as of March 13, 2012, (iii) any shares underlying awards outstanding under the 2008 Plan as of March 13, 2012 that, on or after that date, are forfeited, terminated, expired or lapse for any reason, or are settled for cash without delivery of shares and (iv) starting January 1, 2013, an annual increase in the number of shares available under the 2012 Plan equal to up to 3 % of the number of shares of our common and preferred stock outstanding at the end of the previous year, as determined by our Board. The number of shares that may be issued or transferred pursuant to incentive stock options under the 2012 Plan is limited to 10,769,230 shares. The shares of Class A Common stock issuable under the 2012 Plan include authorized but unissued shares, treasury shares or shares of common stock purchased on the open market. As of September 30, 2020, pursuant to the 2012 Plan, there were 17,899,947 shares of Class A Common stock reserved and 2,206,992 shares of Class A Common stock available for future grants. The weighted average grant date fair value per share of the options awarded to employees for the three and nine months ended September 30, 2020 and 2019, respectively were as follows: Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Weighted average grant date fair value per share $ 16.98 $ 13.43 $ 14.54 $ 13.61 Stock option activity during the nine months ended September 30, 2020 is summarized as follows: Option ‎ Shares (thousands) Weighted ‎ average ‎ exercise ‎ price Weighted ‎ average ‎ remaining ‎ contractual ‎ life (years) Aggregate ‎ intrinsic ‎ value ‎ (thousands) Outstanding at December 31, 2019 10,650 $ 35.80 Granted 2,071 52.43 Exercised ( 1,539 ) 28.69 Forfeited ( 488 ) 47.41 Outstanding at September 30, 2020 10,694 $ 39.50 7.2 $ 117,826 Exercisable at September 30, 2020 5,204 $ 31.71 5.9 $ 93,761 Expected to vest at September 30, 2020 5,490 $ 46.85 8.4 $ 24,065 20 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) The intrinsic value of stock options exercised and the compensation cost related to stock options granted to employees and non-employees under our stock plans for the three and nine months ended September 30, 2020 and 2019, respectively was as follows: Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2020 2019 2020 2019 Intrinsic value of stock options exercised $ 23,268 $ 7,565 $ 39,425 $ 19,533 Stock-based compensation expense $ 7,020 $ 5,545 $ 21,138 $ 19,647 Net stock-based compensation capitalized into inventory ( 13 ) 86 197 255 Total stock-based compensation cost $ 7,007 $ 5,631 $ 21,335 $ 19,902 As of September 30, 2020, there was $ 62.0 million of unrecognized compensation expense related to unvested employee stock options that are expected to vest over a weighted average period of three years . NOTE 11. INCOME TAXES In computing our income tax provision, we make certain estimates and management judgments, such as estimated annual taxable income or loss, annual effective tax rate, the nature and timing of permanent and temporary differences between taxable income for financial reporting and tax reporting, and the recoverability of deferred tax assets. Our estimates and assumptions may change as new events occur, additional information is obtained, or as the tax environment changes. Should facts and circumstances change during a quarter causing a material change to the estimated effective income tax rate, a cumulative adjustment is recorded. The following table provides a summary of our effective tax rate for the three and nine months ended September 30, 2020 and 2019, respectively: Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Effective income tax rate 16.8 % 18.1 % 22.5 % 19.1 % The change in the effective income tax rates for the three month period ended September 30, 2020 and 2019 is primarily a result of tax benefits due to an increase in stock option exercises in the current year. The change in the effective income tax rates for the nine month period ended September 30, 2020 and 2019 is primarily driven by the non-deductible expense of acquired IPR&D of $ 24.4 million, offset by tax benefits due to an increase in stock option exercises in the current year. NOTE 12. COMMITMENTS AND CONTINGENCIES We are involved in a number of proceedings, legal actions, and claims arising in the ordinary course of business. Such matters are subject to many uncertainties, and the outcomes of these matters are not within our control and may not be known for prolonged periods of time. In some actions, the claimants seek damages, as well as other relief, including injunctions prohibiting us from engaging in certain activities, which, if granted, could require significant expenditures and/or result in lost revenues. We record a liability in the condensed consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is reasonably possible but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded. While it is not possible to predict the outcome for most of the matters discussed, we believe it is possible that costs associated with them could have a material adverse impact on our consolidated earnings, financial position or cash flows. 21 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) L5 Litigation In December 2009, we filed suit in the Court of Common Pleas of Montgomery County, Pennsylvania against our former exclusive independent distributor L5 Surgical, LLC and its principals, seeking an injunction and declaratory judgment concerning certain restrictive covenants made to L5 by its sales representatives. L5 brought counterclaims against us alleging tortious interference, unfair competition and conspiracy. The injunction phase was resolved in September 2010 and the remaining claims were fully resolved through settlement by the parties on February 6, 2019. Moskowitz Family LLC Litigation On November 20, 2019, Moskowitz Family LLC filed suit against us in the U.S. District Court for the Western District of Texas for patent infringement. Moskowitz, a non-practicing entity, alleges that Globus willfully infringes one or more claims of eight patents by making, using, offering for sale or selling the COALITION ® , COALITION MIS ® , COALITION AGX ® , MONUMENT ® , MAGNIFY ® -S, HEDRON IA TM , HEDRON IC TM , INDEPENDENCE ® , INDEPENDENCE MIS ® , FORTIFY ® and XPAND ® families, SABLE TM , RISE ® , RISE ® INTRALIF, RISE ® -L, ELSA ® , ELSA ® ATP, RASS, ALTERA ® , ARIEL ® , LATIS ® , CALIBER ® and CALIBER ® -L products. Moskowitz seeks an unspecified amount in damages and injunctive relief. On July 2, 2020, this suit was transferred from the U.S. District Court for the Western District of Texas to the U.S. District Court for the Eastern District of Pennsylvania and was stayed on September 25, 2020 pending the outcome of earlier filed Inter Partes Reviews. The probable outcome of this litigation cannot be determined, nor can we estimate a range of potential loss. Therefore, in accordance with authoritative guidance on the evaluation of loss contingencies, we have not recorded an accrual related to this litigation. NOTE 13. LEASES The Company leases certain equipment, vehicles, and facilities under operating leases. Certain leases contain options to extend terms beyond the lease termination date. In these leases, we use judgment to determine whether it is reasonably possible that we will extend the lease beyond the initial term and for how long. Leases that have terms of less than 12 months are treated as short-term and are not recognized as right of use assets or lease liabilities. As most leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. As of September 30, 2020, the Company’s short-term lease commitments and sublease income are immaterial. The Company classifies right-of-use assets as Other assets, short-term lease liabilities as Accrued expenses, and long-term lease liabilities as Other liabilities on the Condensed Consolidated Balance Sheet. Lease expense is recognized, on a straight-line basis over the term of the lease, as a component of operating income on the Condensed Consolidated Statement of Income. Amounts reported in the Condensed Consolidated Balance Sheet as of September 30, 2020 were as follows: (In thousands, except weighted average lease term and discount rate) Operating leases: Right of use assets $ 4,255 Lease liability - short term 1,645 Lease liability - long term 2,610 Total operating lease liability $ 4,255 Lease expense as of September 30, 2020 $ 2,652 Weighted-average remaining lease term - operating leases (in years) 3.2 Weighted-average discount rate 3.0 % 22 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) Future minimum lease payments under non-cancellable leases as of September 30, 2020 are as follows: (In thousands) Operating ‎ Leases 2020 (excluding the nine months ended September 30, 2020) $ 526 2021 1,515 2022 1,231 2023 676 2024 506 2025 136 Total undiscounted leases payments $ 4,590 Less: imputed interest 335 Total lease liabilities $ 4,255 NOTE 14. SEGMENT AND GEOGRAPHIC INFORMATION Operating segments are defined as components of an enterprise for which separate discrete financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. We globally manage the business within one operating segment. Segment information is consistent with how management reviews the business, makes investing and resource allocation decisions and assesses operating performance. The following table represents total net sales by geographic area, based on the location of the customer for the three and nine months ended September 30, 2020 and 2019, respectively: Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2020 2019 2020 2019 United States $ 182,104 $ 162,697 $ 465,705 $ 470,224 International 33,994 33,518 89,892 103,477 Total net sales $ 216,098 $ 196,215 $ 555,597 $ 573,701 23 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES