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Item 7. Management’s Discussion and Analysis

2021-02-17 compared with 2020-02-20 · 158 added, 251 removed, 157 unchanged (72% of the section changed)

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We are an engineering-driven company with a history of rapidly developing and commercializing advanced products and procedures to address treatment challenges.

With over 200 products on the market, we offer a comprehensive portfolio of innovative and differentiated technologies that treat a variety of musculoskeletal conditions of the spine, extremities and pelvis.

With 220 products on the market, we offer a comprehensive portfolio of innovative and differentiated technologies that treat a variety of musculoskeletal conditions.

Although we manage our business globally within one operating segment, we separate our products into two major categories:

Musculoskeletal Solutions and Enabling Technologies.

COVID-19 Update

We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities, regarding the COVID-19 pandemic, and we may need to make changes to our business based on their recommendations.

In these circumstances, there may be developments outside our control requiring us to adjust our operating plan.

As such, given the dynamic nature of this situation, the Company cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows in the future.

However, while the government mandated restrictions, including elective surgeries, are in place, we do expect that it could continue to have a material adverse impact on our revenue growth, operating profit and cash flow and may lead to higher than normal inventory levels, revised payment terms with certain of our customers, and a change in effective tax rate driven by changes in the mix of earnings across the Company’s jurisdictions.

We are focused on navigating these recent challenges presented by COVID-19 and believe we are in a strong position to continue to sustain and grow our business once the restrictions are lifted and elective surgeries fully resume.

To date, COVID-19 has not materially affected our supply chain or production schedule, although delays may be possible in the future due to the dynamic nature of the situation.

Product Categories

While we group our products into two categories, Musculoskeletal Solutions and Enabling Technologies, they are not limited to a particular technology, platform or surgical approach.

Instead, our goal is to offer a comprehensive product suite that can be used to safely and effectively treat patients based on their specific anatomy and condition, and is customized to the surgeon’s training and surgical preference.

Musculoskeletal Solutions

Musculoskeletal Solutions consist primarily of implantable devices, biologics, accessories, and unique surgical instruments used in an expansive range of spinal, orthopedic and neurosurgical procedures.

Our broad spectrum of spine products addresses the vast majority of conditions affecting the spine including degenerative conditions, deformity, tumors, and trauma.

With more than fifteen years in this competitive market, we provide comprehensive solutions that facilitate both open and minimally invasive surgery (“MIS”) techniques.

This includes traditional fusion implants such as pedicle screw and rod systems, plating systems, intervertebral spacers and corpectomy devices.

We believe we pioneered innovative expandable solutions for interbody fusion, corpectomy and interspinous fixation that allow intraoperative customization of our devices to the patient’s anatomy and save surgical time by eliminating sequential trialing.

We have also developed treatment options for motion preservation technologies, such as dynamic stabilization, total disc replacement and interspinous distraction devices;

and interventional pain management solutions to treat vertebral compression fractures.

Regenerative biologic products such as allografts and synthetic alternatives are adjunctive treatments typically used in combination with stabilizing implant hardware.

Our orthopedic trauma solutions are designed to treat a wide variety of orthopedic fracture patterns and patient anatomies in the upper and lower extremities as well as the hip.

To date, Globus has received 510(k) clearance from the U.S.

Food and Drug Administration (the “FDA”) for numerous orthopedic trauma and extremity products, covering four major segments of the orthopedic trauma market - fracture plates, compression screws, intramedullary nails, and external fixation.

We began marketing these products in 2018 and intend to grow our presence in this field.

Fracture plating includes proximal humerus, distal radius, proximal tibia, distal fibula, small fragment, mini-fragment and clavicle plates.

Intramedullary nailing includes tibial, trochanteric, and femoral nail systems.

Regenerative biologic products such as bone void fillers and allograft struts are also used in orthopedic procedures where applicable.

Our hip and knee joint solutions for the treatment of degenerative conditions or failed previous reconstruction have a long history of clinical use with StelKast, Inc.

Over 40 different implants have been marketed to date, including modular hip stems and acetabular cups for total hip arthroplasty as well as posterior stabilizing and cruciate retaining knee arthroplasty implants.

Our Musculoskeletal Solutions consist primarily of implantable devices, biologics, accessories, and unique surgical instruments used in an expansive range of spinal, orthopedic and neurosurgical procedures.

Musculoskeletal disorders are a leading driver of healthcare costs worldwide.

Disorders range in severity from mild pain and loss of feeling to extreme pain and paralysis.

These disorders are primarily caused by degenerative and congenital conditions, deformity, tumors and traumatic injuries.

Treatment alternatives for musculoskeletal disorders range from non-operative conservative therapies to surgical interventions depending on the pathology.

Conservative therapies include bed rest, medication, casting, bracing, and physical therapy.

When conservative therapies are not indicated, or fail to provide adequate quality of life improvements, surgical interventions may be used.

Surgical treatments for musculoskeletal disorders can be instrumented, which include the use of implants, or non-instrumented, which forego the use of hardware but may include biologics.

Enabling Technologies

Enabling Technologies are advanced computer-assisted intelligent systems designed to enhance a surgeon’s capabilities and streamline surgical procedures to be safer, less invasive, more accurate, and more reproducible, to ultimately improve patient care and reduce radiation exposure for all involved.

Our current enabling technologies are comprised of imaging, navigation and robotic (“INR”) assisted surgery solutions.

This includes the ExcelsiusGPS ® platform, a robotic guidance and navigation system that supports minimally invasive and open procedures with screw placement applications.

The ExcelsiusGPS ® platform has a modular design that can be used for a variety of screw placement applications, and we expect that it will serve as a foundation for future clinical applications using artificial intelligence and augmented reality.

Globus’ innovative Enabling Technologies products offer surgeons more information about patient anatomy and surgical options to help them to make well-informed surgical decisions.

We believe the advantages of pre-planning implant position and viewing patient anatomy during surgery are self-evident, and also create significant secondary gains such as eliminating radiation exposure altogether.

While we group our products into two categories, they are not limited to a particular technology, platform or surgical approach.

Instead, our goal is to offer a comprehensive product suite that can be used to effectively treat patients based on their specific anatomy and condition, and is customized to the surgeon’s training and surgical preference.

To date, the primary market for our products has been the United States, where we sell our products through a combination of direct sales representatives employed by us and distributor sales representatives employed by our exclusive independent distributors, who distribute our products on our behalf for a commission that is generally based on a percentage of sales.

Our Enabling Technologies are comprised of imaging, navigation and robotics (“INR”) solutions for assisted surgery which are advanced computer-assisted intelligent systems designed to enhance a surgeon’s capabilities, and ultimately improve patient care and reduce radiation exposure for all involved, by streamlining surgical procedures to be safer, less invasive, and more accurate.

The market for our Enabling Technologies in spine and orthopedic surgery is still in the infancy stage and consists primarily of imaging, navigation and robotic systems.

In spine, a majority of these technologies are limited to surgical planning and assistance in implant placement for increased accuracy and time savings with less intraoperative radiation exposure to the patient and surgical staff.

As our Enabling Technologies become more fully integrated with our Musculoskeletal Solutions, a continued rise in adoption is expected.

Furthermore, we believe as new technologies such as augmented reality and artificial intelligence are introduced, Enabling Technologies have the potential to transform the way surgery is performed and most importantly, continue to improve patient outcomes.

Geographic Information

To date, the primary market for our products has been the United States, where we sell our products through a combination of direct sales representatives employed by us and distributor sales representatives employed by exclusive independent distributors, who distribute our products for a commission that is generally based on a percentage of sales.

We believe there is significant opportunity to strengthen our position in the U.S.

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sales force and we intend to add additional direct and distributor sales representatives in the future.

During the year ended December 31, 2019, our international sales accounted for approximately 17.5% of our total sales.

We currently sell our products in 50 countries outside the United States through a combination of direct sales representatives employed by us and exclusive international distributors.

We believe there are significant opportunities for us to increase our presence in both existing and new international markets through the continued expansion of our direct and distributor sales forces and the commercialization of additional products.

During the year ended December 31, 2020, international net sales accounted for approximately 15.8% of our total net sales.

We have sold our products in approximately 50 countries other than the United States through a combination of sales representatives employed by us and exclusive international distributors.

Our business is generally not seasonal in nature.

However, sales of Musculoskeletal Solutions products may be influenced by summer vacation and winter holiday periods during which we have experienced fewer surgeries taking place, as well as more surgeries taking place later in the year when patients have met the deductibles under insurance plans.

Sales of our Enabling Technologies products may be influenced by longer capital purchase cycles and the timing of budget approvals for major capital purchases.

Components of our Results of Operations

We manage our business globally within one operating segment, which is consistent with how our management reviews our business, makes investment and resource allocation decisions and assesses operating performance.

Today, we sell primarily implants and related disposables, primarily to hospitals, for use by surgeons to treat musculoskeletal disorders.

We generally consign our surgical sets, which contain our implants, disposables, surgical instruments and cases to our sales representatives, and the sets are maintained with the sales representatives or at our hospital customers that purchase the implants and related disposables used in the surgeries.

We recognize revenue when the consigned implants and related disposables have been implanted or used, or for sets that are sold directly and not consigned, when title to the goods and risk of loss are transferred to customers with no remaining performance obligations which affect the customer’s final acceptance of the sale.

We sell implants and related disposables, primarily to hospitals, for use by surgeons to treat musculoskeletal disorders.

We generally place surgical sets, which contain our implants, disposables, surgical instruments and cases, in the field with our sales representatives, and the surgical sets are maintained either with our sales representatives or at our hospital customers that purchase the surgical sets used in surgeries.

We recognize revenue when the implants and related disposables have been implanted or used in a surgery, or for sets that are sold directly, when title to the goods and risk of loss are transferred to the customer and there are no remaining performance obligations which affect the customer’s final acceptance of the sale.

We completed our first sale of ExcelsiusGPS™ in the fourth quarter of 2017.

We generally recognize revenue 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 expect to expand our U.S.

and international sales forces, which will provide us with significant opportunity to continue to increase our penetration in existing markets and to enter new international markets.

We also expect to increase sales by commercializing new products, but expect the increase of sales from new products to be partially offset by decreased sales of earlier-generation products.

Depending on the terms of the arrangement, we may also defer the recognition of a portion of the consideration as we satisfy future performance obligations related to the provision of maintenance and support.

Cost of Goods Sold

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Our cost of goods sold consists primarily of costs from our in-house manufacturing, costs of products purchased from third-party suppliers, excess and obsolete inventory charges, depreciation of surgical instruments and cases, royalties, shipping, inspection and related costs incurred in making our products available for sale or use.

Beginning in January 2013, our cost of goods sold increased as a result of a medical device excise tax (“MDET”) of up to 2.3% on the sale of certain medical devices in the United States.

On December 20, 2019, pursuant to the Further Consolidated Appropriations Act, the MDET was repealed.

Prior to its repeal, the MDET was on a four-year moratorium.

As a result, the MDET does not apply to sales of taxable medical devices after December 31, 2015.

Research and Development Expenses

Our research and development expenses primarily consist of engineering, product development, clinical and regulatory expenses, consulting services, outside prototyping services, internal and external research activities, materials, depreciation, and other costs associated with development of our products.

Research and development expenses also include related personnel and consultants’ compensation and stock-based compensation expense.

Research and development expenses primarily consist of engineering, product development, clinical and regulatory expenses, consulting services, outside prototyping services, internal and external research activities, materials, depreciation, and other costs associated with development of our products.

Research and development expenses also include personnel and consultants’ compensation, stock-based compensation expense, and acquired research in process with no alternative future use.

We expense research and development costs as they are incurred.

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Our selling, general and administrative expenses also include commissions, generally based on a percentage of sales, to direct sales representatives and distributors.

We expect our selling, general and administrative expenses will increase in absolute terms with the continued expansion of our sales force and commercialization of our current and pipeline products.

We expect selling, general and administrative expenses will increase in absolute terms with the continued expansion of our sales force and commercialization of our current and pipeline products.

We plan to hire more personnel to support the growth of our business.

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Amortization of Intangibles

We amortize finite lived intangible assets over the period of estimated benefit using the straight-line method and estimated lives ranging from one to seventeen years.

We amortize finite lived intangible assets over the period of estimated benefit using the straight-line method.

Indefinite lived intangible assets are tested for impairment annually or whenever events or circumstances indicate that the carrying amount of the asset (asset group) may not be recoverable.

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Notes to Consolidated Financial Statements;

Background and Summary of Significant Accounting Policies” below in this Annual Report, we believe that the following accounting policies and estimates are most critical to a full understanding and evaluation of our reported financial results.

Summary of Significant Accounting Policies” below in this Annual Report, we believe that the following accounting policies and estimates are most critical to a full understanding and evaluation of our reported financial results.

The critical accounting policies addressed below reflect our most significant judgments and estimates used in the preparation of our consolidated financial statements.

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Sales and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.

Incidental items that are immaterial in the context of the

contract are recognized as expense.

For purposes of disclosing disaggregated revenue, we disaggregate our revenue, into two categories, Musculoskeletal Solutions and Enabling Technologies, based on the timing of revenue recognition.

For purposes of disclosure, 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 Enabling Technologies products are 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 contain multiple performance obligations, including maintenance and support, and revenue is recognized as we fulfill each performance obligation.

When contracts have 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.

Excess and Obsolete Inventory.

We state inventories at the lower of cost or market.

We determine cost on a first-in, first-out basis.

The majority of our inventory is finished goods.

We periodically evaluate the carrying value of our inventories in relation to the 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 excess inventories, which results in a corresponding charge to cost of goods sold.

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 inventory is finished goods and we utilize both in-house manufacturing and third-party suppliers to produce 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.

The need to maintain substantial levels of inventory impacts the risk of carrying excess inventory.

The need to maintain substantial levels of inventory increases the risk of carrying excess inventory.

Many of our Musculoskeletal Solutions products come in sets which feature components in a variety of sizes so that the implant or device may be customized to the patient’s needs.

In order to market our Musculoskeletal Solutions products effectively, we must often maintain and provide surgeons and hospitals with consignment implant sets, back-up products and products of different sizes.

In order to market our Musculoskeletal Solutions products effectively, we must often maintain and provide surgeons and hospitals with surgical sets, back-up products and products of different sizes.

For each surgery, fewer than all of the components of the set are used, and therefore certain portions of the set may be considered excess inventory since they are not likely to be used.

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When we introduce new products or next-generation products, we may be required to take charges for excess and obsolete inventory that have a significant impact on the value of our inventory or on our operating results.

Fair Value Measurements.

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.

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;

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.

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 date, with the excess recorded as goodwill.

We utilize Level 3 inputs in the determination of the initial fair value.

Contingent consideration represents contingent milestone, performance and revenue-sharing payment obligations related to 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 fair value of contingent consideration is recorded in business acquisition liabilities on our consolidated balance sheets, and the changes in the fair value of contingent consideration are recognized in acquisition related costs in the consolidated statements of operations and comprehensive income.

The fair value of contingent restricted stock unit (“RSU”) grants are recorded as additional paid-in capital in the consolidated balance sheet on the day of the grant due to the remote likelihood of forfeiture.

Goodwill and Intangible Assets.

Goodwill represents the excess purchase price over the fair values of the identifiable assets acquired less the liabilities assumed.

We acquired goodwill in connection with the various acquisitions completed.

Goodwill is tested for impairment at a minimum on an annual basis.

The fair value is estimated using an income and discounted cash flow approach.

We performed our qualitative goodwill and indefinite-lived intangible assets impairment tests in the fourth quarter of 2019 and determined that fair value of our reporting units is substantially in excess of carrying value.

Intangible assets consist of purchased in-process research and development (“IPR&D”), developed technology, supplier networks, patents, customer relationships and non-compete agreements.

Intangible assets with finite useful lives are amortized over the period of estimated benefit using the straight-line method and estimated useful lives ranging from one to seventeen years.

Goodwill is tested for impairment at least annually.

Goodwill is tested for impairment at the reporting unit level by comparing the reporting unit’s carrying amount to the fair value of the reporting unit.

The fair values are estimated

using an income and discounted cash flow approach.

We perform our annual impairment test for goodwill in the fourth quarter of each year.

We consider qualitative indicators of the fair value of a reporting unit when it is unlikely that a reporting unit has impaired goodwill.

During the years ended December 31, 2020, 2019, and 2018, we did not record any impairment charges related to goodwill.

Intangible assets consist of purchased in-process research and development (“IPR&D”), developed technology, supplier network, patents, customer relationships, re-acquired rights, and non-compete agreements.

Intangible assets with finite useful lives are amortized over the period of estimated benefit using the straight-line method and estimated useful lives ranging from one to sixteen years.

Intangible assets are tested for impairment annually or whenever events or circumstances indicate that a carrying amount of an asset (asset group) may not be recoverable.

If impairment is indicated, we measure the amount of the impairment loss as the amount by which the carrying amount exceeds the fair value of the asset.

If an impairment is indicated, we measure the amount of the impairment loss as the amount by which the carrying amount exceeds the fair value of the asset.

Fair value is generally determined using a discounted future cash flow analysis.

IPR&D has an indefinite life and is not amortized until completion and development of the project at which time the IPR&D becomes an amortizable asset.

There were no impairments of finite-lived intangible assets during the years ended December 31, 2020, 2019, or 2018.

IPR&D has an indefinite life and is not amortized until completion of the project at which time the IPR&D becomes an amortizable asset.

If the related project is not completed in a timely manner, we may have an impairment related to the IPR&D, calculated as the excess of the asset’s carrying value over its fair value.

There were no impairments of IPR&D during the years ended December 31, 2020, 2019, or 2018.

Long-Lived Assets .

We periodically evaluate the recoverability of the carrying amount of long-lived assets, which include property and equipment, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable.

We assess impairment when the undiscounted future cash flows from the use and eventual disposition of an asset are less than its carrying value.

If impairment is indicated, we measure the amount of the impairment loss as the amount by which the carrying amount exceeds the fair value of the asset.

We base our fair value methodology on quoted market prices, if available.

If quoted market prices are not available, we estimate fair value based on prices of similar assets or other valuation techniques including present value techniques.

We periodically evaluate the recoverability of the carrying amount of long-lived assets, which include property and equipment, as well as whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be fully recoverable.

An impairment is assessed when the undiscounted future cash flows from the use and eventual disposition of an asset group are less than its carrying value.

If an impairment is indicated, we measure the amount of the impairment loss as the amount by which the carrying amount exceeds the fair value of the asset group.

Our fair value methodology is based on quoted market prices, if available.

If quoted market prices are not available, an estimate of fair value is made based on prices of similar assets or other valuation techniques including present value techniques.

During the years ended December 31, 2020, 2019, and 2018, we did not record any impairment charges related to long-lived assets.

Stock-Based Compensation Expense.

The cost of employee and non-employee director awards is measured at the grant date fair value of the award and is recognized as expense over the requisite service period, which is generally the vesting period of the equity award.

Compensation expense for awards includes the impact of forfeiture in the period when they occur.

We estimate the fair value of stock options utilizing the Black-Scholes option-pricing model.

Inputs to the Black-Scholes model include our stock price, expected volatility, expected term, risk-free interest rate and expected dividends.

Expected volatility is based on the historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected term of the Company’s stock options offering period which is derived from historical experience.

The risk-free interest rate assumption is based on observed interest rates of U.S.

Treasury securities appropriate for the expected terms of the stock options.

The dividend yield assumption is based on the history and expectation of no dividend payouts.

The fair value of restricted stock units is estimated on the day of grant based on the closing price of the Company’s common stock.

We expect to continue to grant stock options in the future, and to the extent that we do, our actual stock-based compensation expense recognized may increase.

Legal Proceedings.

We are involved in a number of proceedings, legal actions, and claims.

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 consolidated financial statements for these actions when a loss is considered probable and the amount can be reasonably estimated.

If the reasonable estimate of a 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.

We expense legal costs related to loss contingencies as incurred.

While it is not possible to predict the outcome for these matters, 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.

Income Taxes.

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Significant judgment is required in accounting for tax reserves.

Legal Proceedings.

We are involved in a number of legal actions involving both product liability and intellectual property disputes.

The outcomes of these legal actions are not within our complete 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 barring the sale of products that are the subject of the lawsuit, that could require significant expenditures or result in lost sales.

In accordance with authoritative guidance, we record a liability in our 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 the notes to the consolidated financial statements.

In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded.

Stock-Based Compensation Expense.

We measure the cost for employee and non-employee awards at the grant date based on the fair value of the award.

For employee awards, we amortize the expense, which is the fair value of the portion of the award that is ultimately expected to vest, over the requisite service periods (generally the vesting period of the equity award).

We record the awards issued to non-employees at their fair value as determined in accordance with authoritative guidance, and we periodically revalue the awards as they vest, recognizing the expense over the requisite service period.

We estimate the fair value of stock options using a Black-Scholes option-pricing model.

Our determination of the fair value is affected by our stock price and a number of assumptions, including expected volatility, expected term, risk-free interest rate and expected dividends.

The risk-free rate, for periods within the contractual life of the option, is based on the U.S.

Treasury yield in effect at the time of grant.

The Company has never declared or paid dividends and has no plans to do so in the foreseeable future.

We estimate the weighted-average fair value of the options granted using a Black-Scholes option-pricing model, which requires the input of subjective assumptions, including the expected stock price volatility, the calculation of expected term and fair value of the underlying common stock on the date of grant, among other inputs.

To the extent that further evidence regarding these variables is available and provides estimates that we believe are more indicative of actual trends, we may refine or change our approach to deriving these input estimates.

Any such changes could materially affect the stock-based compensation expense we record in the future.

We expect to continue to grant stock options in the future, and to the extent that we do, our actual stock-based compensation expense recognized may increase.

Results of Operations

Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019

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

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

(In thousands, except percentages)

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International

In the United States, the increase in sales of $53.8 million was due primarily to increased spine product sales resulting from penetration in existing territories .

Internationally, the increase in sales of $18.6 million was due primarily to increased sales in Japan and other existing countries combined with increased INR technology sales.

On a constant currency basis, our international sales grew $20.9 million, or by 17.6%, and our worldwide sales increased by 10.5%.

Total net sales

In the United States, the increase in net sales of $16.8 million was due primarily to increased spine product sales resulting from continued penetration in existing territories .

International net sales decreased by $13.1 million, which was due primarily to the postponement of elective surgeries at hospitals and surgical centers as well as a one-time distributor stocking order in the period ended March 31, 2019.

Cost of Goods Sold

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Cost of goods sold

Percentage of sales

The increase in cost of goods sold was primarily due to higher volumes, product mix, and depreciation.

These increases were partially offset by lower write-downs of excess and obsolete inventory.

Percentage of net sales

The $37.5 million increase in cost of goods sold was primarily due to higher write-downs of excess and obsolete inventory on less frequently used implant product sizes, non-recurring inventory write-offs and other manufacturing expenses, including depreciation.

Research and Development Expenses

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Research and development

Percentage of sales

The increase in research and development expenses was due primarily to an increase in employee compensation costs from additional headcount, including our INR technology group and increased supplies for furthering research activities and developing new innovative products , which increases were partially offset by the one-time licensing fee in the twelve months ended December 31, 2018 that did not reoccur in the twelve months ended December 31, 2019.

Percentage of net sales

The increase in research and development expenses was due primarily to $24.4 million of in-process research and development (“IPR&D”) from the acquisition of Synoste Oy (“Synoste”) which was expensed because we determined that it did not have an alternative future use.

Selling, General and Administrative Expenses

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Selling, general and administrative

Percentage of sales

The increase in selling, general and administrative expenses was primarily due to an increase of $29.3 million in selling and marketing expenses relating to continued build out of the U.S.

orthopedic trauma and INR technology sales forces, as well as increases in the international sales forces to further penetrate those markets.

Percentage of net sales

Selling, general and administrative expenses for the year ended December 31, 2020 remained consistent with the previous fiscal year.

Provision for Litigation

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Provision for litigation

Percentage of sales

The decrease in provision for litigation, which includes settlement and verdict costs, was primarily due to the timing and amount of settlements between the two periods.

For additional information regarding litigation, please refer to “Part II;

Financial Statements and Supplementary Data;

Notes to Consolidated Financial Statements;

Commitments and Contingencies.”

Percentage of net sales

The decrease in the provision for litigation is due to a one-time legal settlement and verdict costs that did not occur in the year ended December 31, 2020.

Amortization of Intangibles

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Amortization of intangibles

Percentage of sales

The increase in the amortization of intangibles was primarily due to the developed technology intangible assets acquired in connection with the StelKast, KB Medical and Nemaris Acquisitions.

Percentage of net sales

The increase in the amortization of intangibles was primarily due to the developed technology and customer relationship intangible assets acquired in connection with the Nemaris and StelKast acquisitions, respectively.

Acquisition Related Costs

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Acquisition related costs

Percentage of sales

The increase in acquisition related costs was primarily due to costs associated with the StelKast Acquisition.

Percentage of net sales

The increase in acquisition related costs was primarily due to costs associated with the change in fair value of business acquisition liabilities and business development-related activities.

Other Income, Net

(In thousands, except percentages)

Other income, net

Percentage of sales

The decrease in other income, net was due primarily to the gain on sale of assets of $4.6 million during the twelve-months ended December 31, 2018, which was partially offset by increased interest income from marketable securities.

Other income/(expense), net

Percentage of net sales

The decrease in other income, net was due primarily to lower interest income from lower yields on short and long-term investments in marketable securities during the year ended December 31, 2020.

Income Tax Provision

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Effective income tax rate

The increase in income tax provision is primarily driven by the increase in income before income taxes.

The change in the effective income tax rate between the current year and prior year periods is primarily driven by the reduction of benefits related to the exercise of stock based compensation.

The change in the effective income tax rates between the current year and prior year was primarily the result of the non-deductible expense of acquired IPR&D of $24.4 million, partially offset by higher tax benefits resulting from an increase in stock option exercises in the current year period.

A discussion of our Results of Operations for the year ended December 31, 2019 can be found in “ Part II, Item 7.

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Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018.

” on our Form 10-K filed on February 21, 2019.

Non-GAAP Financial Measures

To supplement our financial statements prepared in accordance with U.S.

generally accepted accounting principles (“U.S.

GAAP”), management uses certain non-GAAP financial measures.

For example, non-GAAP Adjusted EBITDA, which represents net income before interest income, net and other non-operating expenses, provision for income taxes, depreciation and amortization, stock-based compensation expense, provision for litigation, acquisition related costs/licensing, is useful as an additional measure of operating performance, and particularly as a measure of comparative operating performance from period to period, as it is reflective of changes in pricing decisions, cost controls and other factors that affect operating performance, and it removes the effect of our capital structure, asset base, income taxes and interest income and expense.

Our management also uses non-GAAP Adjusted EBITDA for planning purposes, including the preparation of our annual operating budget and financial projections.

Provision for litigation represents costs incurred for litigation settlements or unfavorable verdicts when the loss is known or considered probable and the amount can be reasonably estimated, or in the case of a favorable settlement, when income is realized.

Acquisition related costs/licensing represents the change in fair value of business-acquisition-related contingent consideration;

costs related to integrating recently acquired businesses, including but not limited to costs to exit or convert contractual obligations, severance, and information system conversion;

and specific costs related to the consummation of the acquisition process such as banker fees, legal fees, and other acquisition related professional fees, as well as one-time licensing fees.

Net gain from sale of assets represents the gain on sale of assets and the offsetting impact of costs incurred through the sale.

The following is a reconciliation of Net income to Adjusted EBITDA for the periods presented:

(In thousands, except percentages)

Interest income, net

Provision for income taxes

Depreciation and amortization

Stock-based compensation expense

Provision for litigation

Acquisition related costs/licensing

Net (gain) loss from sale of assets

Adjusted EBITDA

Net income as a percentage of sales

Adjusted EBITDA as a percentage of sales

______________

For additional information regarding the prior period adjustment, please refer to “Part II;

Financial Statements and Supplementary Data;

Notes to Consolidated Financial Statements;

Background and Summary of Significant Accounting Policies;

(b) Basis of Presentation.”

In addition, for the year ended December 31, 2019 and for other comparative periods, we are presenting non-GAAP net income and non-GAAP Diluted Earnings Per Share, which represents net income and diluted earnings per share excluding the provision for litigation, amortization of intangibles, acquisition related costs/licensing, and the tax effects of all of the foregoing adjustments.

The tax effect adjustment represents the tax effect of the pre-tax non-GAAP adjustments excluded from non-GAAP net income.

The tax impact of the non-GAAP adjustments is calculated based on the consolidated effective tax rate on a GAAP basis, applied to the non-GAAP adjustments, unless the underlying item has a materially different tax treatment, in which case the estimated tax rate applicable to the adjustment is used.

At December 31, 2017, we calculated the tax effect of adjusting items utilizing our effective tax rate prior to the one-time Tax Reform Act adjustment.

The effective tax rate applied was 30.3%.

We believe these non-GAAP measures are also useful indicators of our operating performance, and particularly as additional measures of comparative operating performance from period to period as they remove the effects of litigation, amortization of intangibles, acquisition related costs/licensing, and the tax effects of all of the foregoing adjustments, which we believe are not reflective of underlying business trends.

The following is a reconciliation of net income computed in accordance with U.S.

GAAP to non-GAAP net income for the periods presented.

(In thousands)

Provision for litigation

Amortization of intangibles

Acquisition related costs/licensing

Net (gain) loss from sale of assets

Tax reform impact

Tax effect of adjusting items

Non-GAAP net income

The following is a reconciliation of Diluted Earnings Per Share as computed in accordance with U.S.

GAAP to non-GAAP Diluted Earnings Per Share for the periods presented.

(In thousands)

Diluted earnings per share, as reported

Provision for litigation

Amortization of intangibles

Acquisition related costs/licensing

Net (gain) loss from sale of assets

Tax reform impact

Tax effect of adjusting items

Non-GAAP diluted earnings per share

We also define the non-GAAP measure of Free Cash Flow as the net cash provided by operating activities, adjusted for the impact of restricted cash, less the cash impact of purchases of property and equipment.

We believe that this financial measure provides meaningful information for evaluating our overall financial performance for comparative periods as it facilitates an assessment of funds available to satisfy current and future obligations and fund acquisitions.

Below is a reconciliation of net cash provided by operating activities as computed in accordance with U.S.

GAAP to Free Cash Flow for the periods presented.

(In thousands)

Net cash provided by operating activities

Purchases of property and equipment

Free cash flow

Furthermore, the non-GAAP measure of constant currency sales growth is calculated by translating current year sales at the same average exchange rates in effect during the applicable prior year period.

We believe constant currency sales growth provides insight to the comparative increase or decrease in period sales, in dollar and percentage terms, excluding the effects of fluctuations in foreign currency exchange rates.

Below is a reconciliation of sales growth as reported in accordance with U.S.

GAAP compared to constant currency sales growth for the periods presented.

(In thousands, except percentages)

United States

International

(In thousands, except percentages)

United States

International

Non-GAAP Adjusted EBITDA, non-GAAP net income, non-GAAP Diluted Earnings Per Share, Free Cash Flow and constant currency sales growth are not calculated in conformity with U.S.

GAAP within the meaning of Item 10(e) of Regulation S-K.

Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for financial measures prepared in accordance with U.S.

These measures do not include certain expenses that may be necessary to evaluate our liquidity or operating results.

Our definitions of non-GAAP Adjusted EBITDA, non-GAAP net income, non-GAAP Diluted Earnings Per Share, Free Cash Flow and constant currency sales growth may differ from that of other companies and therefore may not be comparable.

Additionally, we have recast prior periods for non-GAAP net income and non-GAAP Diluted Earnings Per Share to conform with current period presentation.

The following table summarizes, for the periods indicated, cash flows from operating, investing and financing activities:

(In thousands)

Net cash provided by operating activities

Net cash used in investing activities

Net cash provided by financing activities

Effect of foreign exchange rate changes on cash

Increase (decrease) in cash, cash equivalents, and restricted cash

Our cash, cash equivalents, and marketable securities at December 31, 2019 and 2018 were $710.7 million and $602.8 million, respectively.

We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities, whereby our principal source of liquidity is operating cash flows.

Excess operating cash is primarily used to fund acquisitions to advance the strategic growth of the Company, as well as continue our cash management program to generate returns on our cash and cash equivalents through investing in marketable securities, which include municipal bonds, corporate debt securities, commercial paper, securities of government, federal agency, and other sovereign obligations and asset-backed securities.

Our overall cash position reflects our strong business results and a cash management strategy that takes into account liquidity, economic factors and tax considerations.

We believe our future operating cash flows will be sufficient to meet our future operating cash needs.

See “Liquidity and Capital Resources” below for further discussion of cash flow results.

Cash Provided by Operating Activities

The decrease in net cash provided by operating activities for the year ended December 31, 2019 was primarily due to the decrease of cash flow from inventories and the timing of spending, which were offset partially by the increase of cash flow from accounts payable and accounts receivable.

The increase in net cash provided by operating activities for the year ended December 31, 2018 was due primarily to increased operational cash flows in 2018 related to timing of spending and cash receipts.

Cash Used in Investing Activities

The decrease in net cash used in investing activities for the year ended December 31, 2019 was due primarily to the decrease in net impact of purchases, maturities and sales of marketable securities, partially offset by increased purchases of property and equipment and the StelKast Acquisition.

The increase in net cash used in investing activities for the year ended December 31, 2018 was due primarily to higher investment in marketable securities and increased purchases of property and equipment, which was partially offset by the cash received from collection of the note receivable.

Cash Provided by Financing Activities

The decrease in cash provided by financing activities for the year ended December 31, 2019 was primarily the result of the decrease in proceeds from option exercises.

The increase in cash provided by financing activities for the year ended December 31, 2018 was due primarily to higher proceeds from exercises of stock options, which was partially offset by payments for business acquisition liabilities.

” on our Form 10-K/A filed on March 2, 2020 .

Liquidity and Capital Resources

The following table highlights certain information related to our liquidity and capital resources:

(In thousands)

Cash, cash equivalents, and restricted cash

Short-term marketable securities

Long-term marketable securities

Total cash, cash equivalents, restricted cash and marketable securities

During the year ended December 31, 2019, our total cash, cash equivalents, restricted cash, and marketable securities increased $107.9 million, primarily as a result of our cash provided by operating activities and increased investment in marketable securities.

Our investment in marketable securities includes municipal bonds, corporate debt securities, commercial paper, U.S.

treasuries, securities of government, federal agency, and other sovereign obligations and asset-backed securities, and are classified as available-for-sale as of December 31, 2019.

In May 2011, we entered into a credit agreement with Wells Fargo Bank related to a revolving credit facility that provides 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 can be increased to $150.0 million.

The revolving credit facility includes up to a $25.0 million sub-limit for letters of credit.

As amended to date, the revolving credit facility expires in May 2020.

Cash advances bear interest at our option either at a fluctuating rate per annum equal to the daily LIBOR in effect for a one-month period plus 0.75%, or a fixed rate for a one- or three-month period equal to LIBOR plus 0.75%.

The credit agreement governing the revolving credit facility also subjects us to various restrictive covenants, including the requirement to maintain maximum consolidated leverage.

The covenants also include limitations on our ability to repurchase shares, to pay cash dividends or to enter into a sale transaction.

As of December 31, 2019, we were in compliance with all financial covenants under the credit agreement, there were no outstanding borrowings under the revolving credit facility and available borrowings were $125.0 million.

We may terminate the credit agreement at any time on ten days’ notice without premium or penalty.

In addition to our existing cash and marketable securities balances, our principal sources of liquidity are cash flow from operating activities and our revolving credit facility, which was fully available as of December 31, 2019.

We believe these sources will provide sufficient liquidity for us to meet our liquidity requirements for the foreseeable future.

Our principal liquidity requirements are to meet our working capital, research and development, including clinical trials, and capital expenditure needs, principally for our surgical sets required to maintain and expand our business and potential future business or intellectual property acquisitions.

Our principal sources of liquidity are cash flow from operating activities and our revolving credit facility, which was fully available as of December 31, 2020.

We believe these sources will provide sufficient funding for us to meet our liquidity requirements for the foreseeable future.

Our principal liquidity requirements are to fund working capital, research and development, including clinical trials, capital expenditures primarily related to investment in surgical sets required to maintain and expand our business, and potential future business or intellectual property acquisitions.

We expect to continue to make investments in surgical sets as we launch new products, increase the size of our U.S.

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There is no assurance that we will be able to secure such additional funding on terms acceptable to us, or at all.

In August 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.

The following table summarizes, for the periods indicated, cash flows from operating, investing and financing activities:

(In thousands)

Net cash provided by operating activities

Net cash used in investing activities

Net cash used in/provided by financing activities

Effect of foreign exchange rate changes on cash

Increase (decrease) in cash, cash equivalents, and restricted cash

Cash Provided by Operating Activities

The increase in net cash provided by operating activities for the year ended December 31, 2020 was primarily due to the increase of cash flow from the collection of accounts receivable.

Cash Used in Investing Activities

The decrease in net cash used in investing activities for the year ended December 31, 2020 was primarily due to the decrease in net purchases, maturities and sales of marketable securities and a decrease in purchases of property and equipment, partially offset by increases in payments related to asset acquisitions.

Cash Provided by Financing Activities

The increase in net cash used in financing activities for year ended December 31, 2020 was primarily the result of the repurchases of common stock, partially offset by the increase in proceeds from option exercises.

A discussion of our Cash Flows for the year ended December 31, 2019 can be found in “ Part II, Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations:

Results of Operations;

” on our Form 10-K/A filed on March 2, 2020 .

Contractual Obligations and Commitments

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Purchase obligations (1)

Reflects minimum annual volume commitments to purchase inventory under certain of our supplier contracts as well as costs related to service agreements.

Reflects minimum annual volume commitments to purchase inventory under certain of our supplier contracts.

In connection with certain acquisitions completed in 2011 through 2020, we have certain contingent consideration obligations payable to the sellers in these transactions upon the achievement of certain regulatory and sales milestones.

The maximum aggregate undiscounted amounts potentially payable not included in the table above total $21.3 million.

For further information, see Notes 3 , and 7 to the consolidated financial statements in “ Part II;

Financial Statements and Supplementary Data.

Excludes contributions to pension and other post-employment benefit plans, uncertain tax positions, non-current tax liabilities and royalty obligations for which we cannot make a reliable estimate of the period of cash settlement.

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Notes to Consolidated Financial Statements;

Background and Summary of Significant Accounting Policies;

(x) Recently Issued Accounting Pronouncements.”

Summary of Significant Accounting Policies;

(v) Recently Issued Accounting Pronouncements.”

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis