GLOBUS MEDICAL INC 10-K

Item 8. Financial Statements and Supplementary Data GLOBUS MEDICAL, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Reports of Independent Registered Public Accounting Firms 50 Consolidated Balance Sheets 53 Consolidated Statements of Operations and Comprehensive Income 54 Consolidated Statements of Equity 55 Consolidated Statements of Cash Flows 57 Notes to Consolidated Financial Statements 58 ‎ 49 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Globus Medical, Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Globus Medical, Inc. and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income, equity, and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes and the schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 17, 2021, expressed an unqualified opinion on the Company’s internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Inventories Valuation – Refer to Notes 2 and 8 to the financial statements Critical Audit Matter Description Inventories are recorded at the lower of cost or net realizable value. Management periodically evaluates the carrying value of inventories in relation to the forecasts of product demand, which takes into consideration the estimated life cycle of product releases. When quantities on hand exceed sales forecasts, a write-down is recorded for such excess inventories. Changes in assumptions of product demand could have a significant impact on the amount of write-down recorded. Given the inherent uncertainty in forecasting product demand, including the impact of product releases, auditing the reasonableness of management’s estimates and assumptions required a high degree of auditor judgment and an increased extent of effort. 50 Table of Contents How the Critical Audit Matter Was Addressed in the Audit Our procedures related to management’s forecasts of product demand used to record a write-down for excess and obsolete inventories included the following, among others:  We t ested the effectiveness of controls over management’s inventory valuation model, including those over management’s development and approval of product demand forecasts.  We evaluated management’s ability to accurately forecast product demand by comparing actual results to management’s historical estimates.  We tested the mathematical accuracy of management’s calculations.  We selected a sample of products and verified that the product demand forecasts were supported by historical sales data and other current information.  Performed corroborative inquiries with the personnel responsible for product development and sales forecasting to evaluate the reaso nableness of the product demand forecasts. /s/ DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania February 17, 2021 We have served as the Company’s auditor since 2017. ‎ 51 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Globus Medical, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Globus Medical, Inc. and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2020, of the Company and our report dated February 17, 2021, expressed an unqualified opinion on those financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate . /s/ DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania February 17, 2021 ‎ 52 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, (In thousands, except par value) 2020 2019 ASSETS Current assets: Cash, cash equivalents, and restricted cash $ 239,397 $ 195,724 Short-term marketable securities 187,344 115,763 Accounts receivable, net of allowances of $ 4,408 and $ 5,599 , respectively 141,676 154,326 Inventories 229,153 196,314 Prepaid expenses and other current assets 17,771 17,243 Income taxes receivable 6,424 8,098 Total current assets 821,765 687,468 Property and equipment, net of accumulated depreciation of $ 276,451 and $ 243,732 , respectively 216,879 199,841 Long-term marketable securities 358,522 409,514 Intangible assets, net 86,949 78,812 Goodwill 156,716 128,775 Other assets 32,039 21,741 Deferred income taxes 6,615 5,926 Total assets $ 1,679,485 $ 1,532,077 LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 18,205 $ 24,614 Accrued expenses 78,334 63,283 Income taxes payable 1,101 1,057 Business acquisition liabilities 5,777 6,727 Deferred revenue 8,125 5,402 Payable to broker 9,250 10,320 Total current liabilities 120,792 111,403 Business acquisition liabilities, net of current portion 31,493 2,822 Deferred income taxes 6,202 6,023 Other liabilities 14,701 9,377 Total liabilities 173,188 129,625 Commitments and contingencies (Note 17) Equity: Class A common stock; $ 0.001 par value. Authorized 500,000,000 shares; issued and outstanding 77,284,007 and 77,394,983 shares at December 31, 2020 and December 31, 2019, respectively 77 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 December 31, 2020 and December 31, 2019, respectively 22 22 Additional paid-in capital 457,161 357,320 Accumulated other comprehensive loss 3,955 ( 2,898 ) Retained earnings 1,045,082 1,047,931 Total equity 1,506,297 1,402,452 Total liabilities and equity $ 1,679,485 $ 1,532,077 See accompanying notes to consolidated financial statements. ‎ 53 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME Year Ended December 31, (In thousands, except per share amounts) 2020 2019 2018 Net sales $ 789,042 $ 785,368 $ 712,969 Cost of goods sold 217,463 179,975 159,410 Gross profit 571,579 605,393 553,559 Operating expenses: Research and development 84,519 60,073 55,496 Selling, general and administrative 354,757 354,757 311,591 Provision for litigation 9 2,190 5,878 Amortization of intangibles 16,831 13,809 9,588 Acquisition related costs 4,030 2,575 1,681 Total operating expenses 460,146 433,404 384,234 Operating income/(loss) 111,433 171,989 169,325 Other income/(expense), net Interest income/(expense), net 13,952 17,406 13,278 Foreign currency transaction gain/(loss) ( 279 ) 75 360 Other income/(expense) 793 476 5,642 Total other income/(expense), net 14,466 17,957 19,280 Income/(loss) before income taxes 125,899 189,946 188,605 Income tax provision 23,614 34,736 32,131 Net income/(loss) $ 102,285 $ 155,210 $ 156,474 Other comprehensive income/(loss): Unrealized gain/(loss) on marketable securities, net of tax 1,402 3,767 145 Foreign currency translation gain/(loss) 5,451 507 ( 410 ) Total other comprehensive income/(loss) 6,853 4,274 ( 265 ) Comprehensive income/(loss) $ 109,138 $ 159,484 $ 156,209 Earnings per share: Basic $ 1.04 $ 1.57 $ 1.60 Diluted $ 1.01 $ 1.52 $ 1.54 Weighted average shares outstanding: Basic 98,580 99,150 97,884 Diluted 100,971 101,998 101,316 See accompanying notes to consolidated financial statements. ‎ 54 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY 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 Stock-based compensation — — — — 5,995 — — 5,995 Grant of restricted stock units — — — — 191 — — 191 Exercise of stock options 1,042 1 — — 28,201 — — 28,202 Comprehensive income/(loss) — — — — — 1,748 52,957 54,705 Balance at December 31, 2020 77,284 $ 77 22,430 $ 22 $ 457,161 $ 3,955 $ 1,045,082 $ 1,506,297 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 Stock-based compensation — — — — 6,516 — — 6,516 Exercise of stock options 421 — — — 11,684 — — 11,684 Comprehensive income/(loss) — — — — — ( 72 ) 45,529 45,457 Balance at December 31, 2019 77,394 $ 77 22,431 $ 22 $ 357,320 $ ( 2,898 ) $ 1,047,931 $ 1,402,452 See accompanying notes to consolidated financial statements. ‎ 55 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY (Continued) 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, 2017 72,780 $ 73 23,878 $ 24 $ 238,341 $ ( 6,907 ) $ 736,247 $ 967,778 Stock-based compensation — — — — 6,110 — — 6,110 Exercise of stock options 506 — — — 9,307 — — 9,307 Comprehensive income/(loss) — — — — — 4,135 39,538 43,673 Balance at March 31, 2018 73,286 $ 73 23,878 $ 24 $ 253,758 $ ( 2,772 ) $ 775,785 $ 1,026,868 Stock-based compensation — — — — 5,551 — — 5,551 Exercise of stock options 1,084 1 — — 23,823 — 1 23,825 Comprehensive income/(loss) — — — — — ( 4,035 ) 44,977 40,942 Balance at June 30, 2018 74,370 $ 74 23,878 $ 24 $ 283,132 $ ( 6,807 ) $ 820,763 $ 1,097,186 Conversion to Class A 1,447 1 ( 1,447 ) ( 1 ) — — — — Stock-based compensation — — — — 5,631 — — 5,631 Exercise of stock options 203 1 — — 3,112 — — 3,113 Comprehensive income/(loss) — — — — — ( 21 ) 35,208 35,187 Balance at September 30, 2018 76,020 $ 76 22,431 $ 23 $ 291,875 $ ( 6,828 ) $ 855,971 $ 1,141,117 Stock-based compensation — — — — 4,927 — — 4,927 Exercise of stock options 124 — — ( 1 ) 3,067 — — 3,066 Comprehensive income/(loss) — — — — — ( 344 ) 36,750 36,406 Balance at December 31, 2018 76,144 $ 76 22,431 $ 22 $ 299,869 $ ( 7,172 ) $ 892,721 $ 1,185,516 See accompanying notes to consolidated financial statements. ‎ 56 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, (In thousands) 2020 2019 2018 Cash flows from operating activities: Net income $ 102,285 $ 155,210 $ 156,474 Adjustments to reconcile net income to net cash provided by operating activities: Acquired in-process research and development 24,418 — — Depreciation and amortization 62,874 52,734 41,630 Amortization of premium (discount) on marketable securities 587 ( 1,089 ) 1,677 Write-down for excess and obsolete inventories, net 17,741 2,498 10,475 Stock-based compensation expense 27,073 26,085 21,899 Allowance for doubtful accounts 2,960 3,026 957 Change in fair value of business acquisition liabilities 2,674 1,787 985 Change in deferred income taxes ( 4,338 ) 4,302 971 (Gain)/loss on disposal of assets, net 809 866 ( 3,557 ) Payment of business acquisition related liabilities ( 700 ) — — (Increase)/decrease in: Accounts receivable 10,696 ( 18,306 ) ( 21,789 ) Inventories ( 50,111 ) ( 50,018 ) ( 31,382 ) Prepaid expenses and other assets ( 11,088 ) ( 12,263 ) ( 7,496 ) Increase/(decrease) in: Accounts payable ( 6,352 ) 773 ( 3,008 ) Accrued expenses and other liabilities 17,608 7,043 14,728 Income taxes payable/receivable 1,657 ( 673 ) ( 921 ) Net cash provided by operating activities 198,793 171,975 181,643 Cash flows from investing activities: Purchases of marketable securities ( 223,540 ) ( 346,526 ) ( 537,942 ) Maturities of marketable securities 134,462 247,008 278,049 Sales of marketable securities 68,897 53,786 106,388 Purchases of property and equipment ( 63,658 ) ( 70,750 ) ( 59,697 ) Collections/(issuance) of note receivable — — 30,000 Proceeds from sale of assets — — 5,000 Acquisition of businesses, net of cash acquired and purchases of intangible and other assets ( 33,483 ) ( 23,799 ) ( 14,825 ) Net cash used in investing activities ( 117,322 ) ( 140,281 ) ( 193,027 ) Cash flows from financing activities: Payment of business acquisition liabilities ( 6,316 ) ( 6,597 ) ( 6,739 ) Proceeds from exercise of stock options 72,322 31,036 39,309 Repurchase of common stock ( 104,669 ) — — Net cash used in/provided by financing activities ( 38,663 ) 24,439 32,570 Effect of foreign exchange rate on cash 865 ( 156 ) ( 256 ) Net increase in cash, cash equivalents, and restricted cash 43,673 55,977 20,930 Cash, cash equivalents, and restricted cash at beginning of period 195,724 139,747 118,817 Cash, cash equivalents, and restricted cash at end of period $ 239,397 $ 195,724 $ 139,747 Supplemental disclosures of cash flow information: Income taxes paid $ 25,437 $ 34,139 $ 30,552 Purchases of property and equipment included in accounts payable and accrued expenses $ 4,210 $ 4,226 $ 10,084 See accompanying notes to consolidated financial statements. 57 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BACKGROUND (a) The Company Globus Medical, Inc., together with its subsidiaries, is a medical device company that develops and commercializes healthcare solutions in a mission 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 to address new treatment options. With 220 products launched, 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. Although the Company cannot reasonably estimate the length or severity of the impact that the pandemic will have on its financial results, the Company has experienced, and may continue to experience, a material adverse impact on its sales, results of operations, and cash flows in 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 a credit facility signed in August 2020, if needed, although we do not expect to do so due to our cash, cash equivalents and short-term marketable securities balances. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation The accompanying consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). (b) Principles of Consolidation The accompanying consolidated financial statements include the accounts of Globus and its wholly owned subsidiaries. All intercompany balances and transactions are eliminated in consolidation. (c) Use of Estimates The preparation of 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 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 consolidated financial statements in the period they are determined to be necessary. 58 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Significant areas that require estimates include revenue recognition, intangible assets, business acquisition liabilities, allowance for doubtful accounts, stock-based compensation, reserves 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. (d) 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 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 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. 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 can affect the customer’s final acceptance of the sale. 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 as we satisfy future performance obligations related to the provision of 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 years ended December 31, 2020, 2019, and 2018, there was an immaterial amount of revenue recognized from previously deferred revenue. (e) Concentrations of Credit Risk Financial instruments, which potentially subject us to concentrations of credit risk, are primarily marketable securities and accounts receivable. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of entities comprising our customer base. We perform ongoing credit evaluations of our customers and generally do not require collateral. There was no customer that accounted for 10% or more of sales for the years ended December 31, 2020, 2019, and 2018, respectively. (f) Cash, Cash Equivalents, and Restricted Cash The Company considers all short-term, highly liquid investments with original maturities of 90 days or less at acquisition date to be cash equivalents. Cash equivalents, which consist of money market accounts, commercial paper and corporate debt securities are stated at fair value. 59 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (g) Marketable Securities Our marketable securities include municipal bonds, corporate debt securities, commercial paper, asset-backed securities, and securities of government, federal agency, and other sovereign obligations, and are classified as available-for-sale as of December 31, 2020 and 2019. Short-term and long-term marketable securities are recorded at fair value on our consolidated balance sheets. Any 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 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 marketable securities are determined on a specific identification basis. Realized gains and losses, interest income and the amortization/accretion of premiums/discounts are included as a component of other income/(expense), net, on our consolidated statements of operations and comprehensive income. Interest receivable is recorded as a component of prepaid expenses and other current assets on our consolidated balance sheets. 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 consolidated statements of operations and comprehensive 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 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; 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 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 that are 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 changes in the fair value of contingent consideration is 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. (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 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 estimated forecasts of product demand, which takes into consideration the 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. 60 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (j) Property and Equipment Property and equipment is recorded at cost less accumulated depreciation. Additions or improvements are capitalized, while repairs and maintenance are expensed as incurred. Depreciation is recognized using the straight-line method over the related useful lives of the assets. When assets are sold or otherwise disposed of, the related property, equipment, and accumulated depreciation amounts are relieved from the accounts, and any gain or loss is recorded in the consolidated statements of operations and comprehensive income. (k) Goodwill and Intangible Assets Goodwill represents the excess of purchase price over the fair values of the identifiable assets acquired less the liabilities assumed in the acquisition of a business. 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. Fair values are estimated using an income and discounted cash flow approach. We perform our annual impairment test of 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 no t 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 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. 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. (l) Impairment of Long-Lived Assets 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 no t record any impairment charges related to long-lived assets. (m) Cost of Goods Sold Cost of goods sold consists primarily of costs from our manufacturing operations, costs of products purchased from third-party suppliers, reserves for excess and obsolete inventory, depreciation of surgical instruments and cases, royalties, shipping, inspection and related costs incurred in making our products available for sale or use. (n) Research and Development Research and development costs are expensed as incurred. Research and development costs include salaries, employee benefits, supplies, consulting services, clinical services and clinical trial costs, and facilities costs. Costs incurred in obtaining technology licenses and patents are charged immediately to research and development expense if the technology licensed has not reached technological feasibility and has no alternative future use. (o) Stock -Based Compensation 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. 61 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. (p) Advertising Expense We expense advertising costs as they are incurred. Advertising expense was $ 0.6 million, $ 1.1 million, and $ 1.9 million for the years ended December 31, 2020, 2019, and 2018, respectively. (q) Provision for Litigation 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. (r) Acquisition Related Costs Acquisition related costs 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. (s ) Foreign Currency Translation The functional currency of our foreign subsidiaries is generally their local currency. Assets and liabilities of the foreign subsidiaries are translated at the period end currency exchange rate and revenues and expenses are translated at an average currency exchange rate for the period. The resulting foreign currency translation gains and losses are included as a component of accumulated other comprehensive income. Gains and losses arising from intercompany foreign transactions are included in other income, net on the consolidated statements of operations and comprehensive income. (t) Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which such items are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance is established to offset any deferred tax assets if, based upon available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Significant judgment is required in determining income tax provisions and in evaluating tax positions. We will establish additional provisions for income taxes when, despite the belief that tax positions are fully supportable, there remain certain positions that do not meet the minimum probability threshold that a tax position is more likely than not to be sustained upon examination by the taxing authority. In the normal course of business, we and our subsidiaries are examined by various federal, state, and foreign tax authorities. We regularly assess the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of the provision for income taxes. We periodically assess the likelihood and amount of potential adjustments and adjust the income tax provision, the current tax liability, and deferred taxes in the period in which the facts that give rise to a revision become known. 62 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (u) 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. We adopted ASU 2019-12 on January 1, 2021. Adoption of the standard did not have a material impact on our financial position, results of operations and 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. To date, we have had no impacts on our investment portfolio or our credit agreement with Citizens Bank, N.A. related to reference rate reform. We will continue to evaluate the impact this guidance could have on our 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. (v) 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 16. 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 Tax Act. 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 Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. 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 63 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. This 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), 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. We adopted ASU 2018-13 on January 1, 2020. This standard did not have a material impact on our financial position, results of operations, and disclosures . NOTE 3. 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 accrued expenses in the consolidated balance sheet. The Company accounted for the transaction as an asset acquisition as substantially all of the fair value of the 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. 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 consolidated statements of operations and comprehensive income. 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 On October 1, 2020, the Company completed two acquisitions that were not considered material, individually or collectively, to the overall consolidated financial statements during the periods presented. These acquisitions have been included in the consolidated financial statements from the date of acquisition. The combined purchase price consisted of approximately $ 1.5 million of cash paid at closing, plus $ 0.3 million of other liabilities and $ 33.2 million of contingent consideration payments. These payments are based upon achieving various performance obligations over a period of 10 years, and are payable in a combination of cash and RSUs. The Company recorded other intangible assets of $ 8.8 million, with a weighted average useful life of 4.2 years, and goodwill of $ 26.2 million based on their preliminary estimated fair values. The Company will finalize the purchase price allocation of the assets and liabilities acquired within one year from the date of acquisition. While the Company does not expect material changes from the initial outcome of the valuation, certain assumptions and findings made at the date of acquisition could result in changes in the purchase price allocation. 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 consolidated financial statements from the acquisition date. At acquisition date, the fair value of the net assets acquired was $ 28.1 million. The purchase price consisted of approximately $ 23.8 million of cash paid at closing, plus $ 4.3 million of contingent consideration payable based upon the achievement product sales milestones. The Company recorded identifiable net assets, based on their estimated fair values, for 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 the StelKast 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 consolidated statement of cash flows as of the year ended December 31, 2020 in accordance with FASB ASC Topic 230, “Statement of Cash Flows” (ASC 230) . 64 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 4. NET SALES The following table represents net sales by product category: Year Ended December 31, (In thousands) 2020 2019 2018 Musculoskeletal Solutions $ 748,446 $ 738,377 $ 666,040 Enabling Technologies 40,596 46,991 46,929 Total net sales $ 789,042 $ 785,368 $ 712,969 NOTE 5. NOTE RECEIVABLE In September 2016, in connection with the acquisition of the international operations and distribution channels of Alphatec Holdings, Inc. (“Alphatec”), we entered into a Credit, Security and Guaranty Agreement (the “Credit Agreement”) with Alphatec and Alphatec Spine, Inc. (“Alphatec Spine” and together with Alphatec, the “Alphatec Borrowers”), pursuant to which we made available to the Alphatec Borrowers a senior secured term loan facility in an amount not to exceed $ 30.0 million. The term loan interest rate for the first two years following the Closing Date was priced at the London Interbank Offered Rate (“LIBOR”) plus 8.0 %, subject to a 9.5 % floor. The term loan interest rate thereafter was LIBOR plus 13.0 %. On the Closing Date, we made an initial loan of $ 25.0 million and the Alphatec Borrowers issued a note for such amount to us. In December 2016, the remaining $ 5.0 million was drawn by the Alphatec Borrowers and added to the note. In November 2018, the Alphatec Borrowers repaid all of the outstanding principal and interest under the Credit Agreement in a total amount of $ 29.3 million. NOTE 6. MARKETABLE SECURITIES The composition of our short-term and long-term marketable securities is as follows: December 31, 2020 (In thousands) Amortized ‎ Cost Gross ‎ Unrealized ‎ Gains Gross Unrealized Losses Fair ‎ Value Short-term: Municipal bonds $ 39,684 $ 140 $ — $ 39,824 Corporate debt securities 97,937 817 ( 4 ) 98,750 Commercial paper 25,543 4 — 25,547 Asset-backed securities 15,232 44 — 15,276 Government, federal agency, and other sovereign obligations 7,886 61 — 7,947 Total short-term marketable securities $ 186,282 $ 1,066 $ ( 4 ) $ 187,344 Long-term: Municipal bonds $ 70,176 $ 612 $ — $ 70,788 Corporate debt securities 158,464 3,120 — 161,584 Asset-backed securities 124,406 1,747 ( 3 ) 126,150 Total long-term marketable securities $ 353,046 $ 5,479 $ ( 3 ) $ 358,522 65 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2019 (In thousands) Amortized ‎ Cost Gross ‎ Unrealized ‎ Gains Gross ‎ Unrealized ‎ Losses Fair ‎ Value Short-term: Municipal bonds $ 7,840 $ 23 $ ( 1 ) $ 7,862 Corporate debt securities 69,091 247 ( 3 ) 69,335 Commercial paper 34,747 6 ( 1 ) 34,752 Asset-backed securities 3,808 6 — 3,814 Total short-term marketable securities $ 115,486 $ 282 $ ( 5 ) $ 115,763 Long-term: Municipal bonds $ 45,010 $ 254 $ ( 8 ) $ 45,256 Corporate debt securities 186,356 2,578 ( 5 ) 188,929 Asset-backed securities 161,347 1,583 ( 33 ) 162,897 Government, federal agency, and other sovereign obligations 12,366 66 — 12,432 Total long-term marketable securities $ 405,079 $ 4,481 $ ( 46 ) $ 409,514 The short-term marketable securities have effective maturity dates of less than one year and the long-term marketable securities have effective maturity dates ranging from one to three years as of December 31, 2020 and 2019, respectively. Purchases of marketable securities include amounts payable to brokers of $ 9.3 million and $ 10.3 million as of December 31, 2020 and 2019, respectively. NOTE 7. FAIR VALUE MEASUREMENTS Assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 and 2019, respectively included the following: (In thousands) Balance at December 31, 2020 Level 1 Level 2 Level 3 Assets Cash equivalents $ 56,223 $ 23,628 $ 32,595 $ — Municipal bonds 110,612 — 110,612 — Corporate debt securities 260,334 — 260,334 — Commercial paper 25,547 — 25,547 — Asset-backed securities 141,426 — 141,426 — Government, federal agency, and other sovereign obligations 7,947 — 7,947 — Liabilities Business acquisition liabilities 37,270 — — 37,270 (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 quoted 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 . 66 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Assets and Liabilities That Are Measured at Fair Value on a Nonrecurring Basis Fair value of the revenue-based business acquisition liabilities was determined using a discounted cash flow model and an option pricing methodology. The significant inputs of such models are not observable in the market, such as certain financial metric growth rates, volatility and discount rates, market price risk adjustment, projections associated with the applicable milestone, the interest rate, and the related probabilities and payment structure in the contingent consideration arrangement. The following are the significant unobservable inputs used in the two valuation techniques: Unobservable input Range Weighted Average* Market risk adjustment 3.1 % - 4.3 % 3.3 % Discount rate 0.7 % - 8.5 % 5.1 % Probability of payment 36 % - 100 % 87.4 % Projected year of payment 2021 - 2030 2030 * The weighted average rates were calculated based on the relative fair value of each business acquisition liability. The change in the carrying value of the business acquisition liabilities during the years ended December 31, 2020 and 2019, respectively included the following: Year Ended December 31, (In thousands) 2020 2019 Beginning balance $ 9,549 $ 10,118 Purchase price contingent consideration 33,219 4,299 Changes resulting from foreign currency fluctuations — ( 58 ) Contingent cash payments ( 6,971 ) ( 6,597 ) Contingent RSU grants ( 191 ) — Changes in fair value of business acquisition liabilities 2,674 1,787 Contractual payable reclassification ( 1,010 ) — Ending balance $ 37,270 $ 9,549 NOTE 8. INVENTORIES Inventories as of December 31, 2020 and 2019, respectively included the following: December 31, (In thousands) 2020 2019 Raw materials $ 39,646 $ 33,025 Work in process 16,446 15,940 Finished goods 173,061 147,349 Total inventories $ 229,153 $ 196,314 During years ended December 31, 2020, 2019, and 2018, net adjustments to cost of sales related to excess and obsolete inventory were $ 17.7 million, $ 2.5 million, and $ 10.5 million, respectively. The net adjustments for the years ended December 31, 2020, 2019, and 2018 reflect a combination of additional expense for excess and obsolete related provisions ($ 27.4 million, $ 11.2 million, and $ 17.6 million, respectively) offset by sales and disposals ($ 9.7 million, $ 8.7 million, and $ 7.1 million, respectively) of inventory for which an excess and obsolete provision was previously recorded. 67 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 9. PROPERTY AND EQUIPMENT Property and equipment as of December 31, 2020 and 2019, respectively included the following: Useful December 31, (In thousands) Life 2020 2019 Land — $ 8,322 $ 8,290 Buildings and improvements 31.5 33,825 33,242 Equipment 5 - 15 102,553 97,829 Instruments 5 278,930 253,929 Modules and cases 5 41,919 38,293 Other property and equipment 3 - 5 27,781 11,990 493,330 443,573 Less: accumulated depreciation ( 276,451 ) ( 243,732 ) Total $ 216,879 $ 199,841 Instruments are hand-held devices used by surgeons to install implants during surgery. Modules and cases are used to store and transport the instruments and implants. Depreciation expense related to property and equipment was as follows: Year Ended December 31, (In thousands) 2020 2019 2018 Depreciation $ 46,043 $ 38,924 $ 32,042 In June 2018, we sold assets for $ 5.0 million, which resulted in a gain on sale of assets of $ 4.6 million and was recognized as other income in the consolidated statement of operations and comprehensive income. NOTE 10. GOODWILL AND INTANGIBLE ASSETS The change in the carrying amount of goodwill during the years ended December 31, 2020 and 2019, 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 26,043 Foreign exchange 1,898 December 31, 2020 $ 156,716 Intangible assets as of December 31, 2020 included the following: December 31, 2020 (In thousands) Weighted Average Amortization Period (in years) Gross ‎ Carrying ‎ Amount Accumulated ‎ Amortization Intangible ‎ Assets, ‎ net Supplier network 10.0 $ 4,000 $ ( 2,467 ) $ 1,533 Customer relationships & other intangibles 6.5 57,704 ( 32,056 ) 25,648 Developed technology 8.0 72,644 ( 19,295 ) 53,349 Patents 16.1 9,082 ( 2,663 ) 6,419 Total intangible assets $ 143,430 $ ( 56,481 ) $ 86,949 68 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 is being 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 following table summarizes amortization of intangible assets for future periods as of December 31, 2020: (In thousands) Annual ‎ Amortization Year ending December 31: 2021 $ 18,858 2022 18,201 2023 15,983 2024 12,829 2025 8,801 Thereafter 12,277 Total $ 86,949 NOTE 11. ACCRUED EXPENSES Accrued expenses as of December 31, 2020 and 2019, respectively included the following: December 31, (In thousands) 2020 2019 Compensation and other employee-related costs $ 44,948 $ 37,178 Legal and other settlements and expenses 650 1,538 Accrued non-income taxes 4,952 4,996 Royalties 3,720 2,370 Other 24,064 17,201 Total accrued expenses $ 78,334 $ 63,283 NOTE 12. DEBT Line of Credit 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. 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 69 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 13. EQUITY Stock Repurchases Under the stock repurchase plan, announced in March 2020, the Company is authorized to repurchase up to $ 200 million of the Company’s Class A common stock. As of December 31, 2020, $ 95.3 million of this authorization was 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. Funding for share repurchases in the future is expected to 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 shares. The Company made an accounting policy election to charge the excess of repurchase price over par value entirely to retained earnings. The following table summarizes share repurchases made during the year ended December 31, 2020: (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 October 1, 2020 – December 31, 2020 — — — 95,294 January 1, 2020 – December 31, 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”). The holders of Class A Common are entitled to one vote for each share of Class A Common held. 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 herein. The holders of Class B Common are entitled to 10 votes for each share of Class B Common held. The holders of Class A Common and Class B Common vote together as one class of common stock. Except for voting rights, the Class A Common and Class B Common have the same rights and privileges. 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 years ended December 31, 2020 and 2019, respectively: (In thousands) Unrealized 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 1,827 5,451 7,278 Amounts reclassified from accumulated other comprehensive income, net of tax ( 425 ) — ( 425 ) Other comprehensive (loss)/income, net of tax 1,402 5,451 6,853 Accumulated other comprehensive loss, net of tax, at December 31, 2020 $ 5,001 $ ( 1,046 ) $ 3,955 70 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands) Unrealized 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 4,932 507 5,439 Amounts reclassified from accumulated other comprehensive income, net of tax ( 1,165 ) — ( 1,165 ) Other comprehensive (loss)/income, net of tax 3,767 507 4,274 Accumulated other comprehensive loss, net of tax, at December 31, 2019 $ 3,599 $ ( 6,497 ) $ ( 2,898 ) Amounts reclassified from accumulated other comprehensive loss, net of tax, related to unrealized gains/losses on marketable securities were released to other income, net in our consolidated statements of operations and comprehensive income. Net Income (Loss) Per Common Share The Company computes basic net income per share using the weighted-average number of common shares outstanding during the period. Diluted net income per share assumes the conversion, exercise or issuance of all potential common stock equivalents, unless the effect of inclusion would be anti-dilutive. For purposes of this calculation, common stock equivalents include the Company’s stock options and unvested RSUs. The contingently issuable shares are included in basic net income per share as of the date that all necessary conditions have been satisfied and are included in the denominator for dilutive calculation for the entire period if such shares would be issuable as of the end of the reporting period assuming the end of the reporting period was the end of the contingency period. The following table sets forth the computation of basic and diluted earnings per share: Year Ended December 31, (In thousands, except per share amounts) 2020 2019 2018 Numerator: Net income/(loss) $ 102,285 $ 155,210 $ 156,474 Denominator for basic and diluted net income per share: Weighted average shares outstanding for basic 98,580 99,150 97,884 Dilutive stock options 2,391 2,848 3,432 Weighted average shares outstanding for diluted 100,971 101,998 101,316 Earnings per share: Basic $ 1.04 $ 1.57 $ 1.60 Diluted $ 1.01 $ 1.52 $ 1.54 Anti-dilutive stock options and RSUs excluded from the calculation 5,454 4,494 2,451 NOTE 14. STOCK-BASED AWARDS 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 active stock plan. The purpose of these stock plans was, and of 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, which is generally not more than ten years from the grant date. Options granted 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 covered by the 2012 Plan include authorized but unissued shares, treasury shares or shares of common stock purchased on the open market. 71 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of December 31, 2020, pursuant to the 2012 Plan, there were 17,899,947 shares of Class A Common stock reserved and 2,109,742 shares of Class A Common stock available for future grants. Stock Options Stock option activity during the year ended December 31, 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 2,411 52.40 Exercised ( 2,581 ) 28.03 Forfeited ( 734 ) 43.78 Outstanding at December 31, 2020 9,746 $ 41.33 7.3 $ 232,813 Exercisable at December 31, 2020 4,574 $ 33.72 6.1 $ 144,050 Expected to vest at December 31, 2020 5,172 $ 48.06 8.3 $ 88,763 The total intrinsic value of stock options exercised was $ 76.1 million, $ 31.3 million, and $ 59.3 million, during the years ended December 31, 2020, 2019, and 2018, respectively. The fair value of the options was estimated on the date of the grant using a Black-Scholes option pricing model with the following assumptions: Year Ended December 31, 2020 2019 2018 Risk-free interest rate 0.23 % - 1.67 % 1.35 % - 2.57 % 2.30 % - 3.09 % Expected term (years) 4.9 5.0 5.8 - 7.5 Expected volatility 28.0 % - 37.0 % 29.0 % 23.0 % - 28.0 % Expected dividend yield —% —% —% The weighted average grant date fair value of stock options granted during the years ended December 31, 2020, 2019, and 2018 was $ 14.81 , $ 13.76 , and $ 14.90 per share, respectively. Restricted Stock Units Restricted stock unit activity during the year ended December 31, 2020 is summarized as follows: Restricted Stock Units (thousands) Weighted ‎ average ‎ grant date fair value per share Weighted ‎ average ‎ remaining ‎ contractual ‎ life (years) Outstanding at December 31, 2019 — $ — Granted 3 58.69 Exercised — — Forfeited — — Expected to vest at December 31, 2020 3 $ 58.69 10 72 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Stock-Based Compensation Compensation expense related to stock options granted to employees and non-employees under the Plans and the intrinsic value of stock options exercised was as follows: Year Ended December 31, (In thousands) 2020 2019 2018 Stock-based compensation expense $ 27,073 $ 26,085 $ 21,899 Net stock-based compensation capitalized into inventory 257 331 320 Total stock-based compensation cost $ 27,330 $ 26,416 $ 22,219 As of December 31, 2020, there was $ 58.0 million of unrecognized compensation expense related to unvested employee stock options that vest over a weighted average period of two years . NOTE 15. INCOME TAXES The components of income before income taxes are as follows: Year Ended December 31, (In thousands) 2020 2019 2018 Domestic $ 154,356 $ 179,194 $ 180,701 Foreign ( 28,457 ) 10,752 7,904 Total $ 125,899 $ 189,946 $ 188,605 The components of the provision for income taxes are as follows: Year Ended December 31, (In thousands) 2020 2019 2018 Current: Federal $ 22,183 $ 23,093 $ 23,774 State 4,381 4,532 4,662 Foreign 991 2,819 2,724 27,555 30,444 31,160 Deferred: Federal ( 3,293 ) 6,542 4,155 State ( 678 ) ( 68 ) ( 587 ) Foreign 30 ( 2,182 ) ( 2,597 ) ( 3,941 ) 4,292 971 Total $ 23,614 $ 34,736 $ 32,131 73 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) A reconciliation of the statutory U.S. federal tax rate to our effective rate is as follows: Year Ended December 31, 2020 2019 2018 Statutory U.S. federal tax rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal benefit 3.5 2.2 2.3 Foreign taxes 0.6 0.3 1.2 Valuation allowance 1.7 0.1 0.5 Domestic production activities deduction ( 0.3 ) ( 0.6 ) ( 0.7 ) Tax credits ( 2.6 ) ( 2.6 ) ( 1.6 ) Stock-based compensation windfall ( 9.5 ) ( 2.5 ) ( 5.2 ) Nondeductible expenses 0.5 0.3 ( 0.6 ) Other — 0.1 0.1 IPR&D 3.9 — — Effective tax rate 18.8 % 18.3 % 17.0 % Deferred income taxes reflect the tax effects of temporary differences between the basis of assets and liabilities recognized for financial reporting purposes and tax purposes. Significant components of our deferred income taxes are as follows: December 31, (In thousands) 2020 2019 Deferred tax assets: Inventory reserve $ 28,973 $ 26,381 Accruals, reserves, and other currently not deductible 12,537 8,620 Stock-based compensation 14,297 14,020 Net operating loss carryforwards 4,269 3,857 Total deferred tax assets 60,076 52,878 Valuation allowance ( 6,487 ) ( 2,846 ) Total deferred tax assets, net of valuation allowance 53,589 50,032 Deferred tax liabilities: Depreciation and amortization ( 53,176 ) ( 50,129 ) Total deferred tax liabilities ( 53,176 ) ( 50,129 ) Net deferred tax assets/(liabilities) $ 413 $ ( 97 ) In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that we will realize a portion of the benefits of these deductible differences at December 31, 2020 and 2019. The Company has established valuation allowances of $ 6.5 million and $ 2.8 million at December 31, 2020 and 2019, respectively, primarily related to the uncertainty of the utilization of certain deferred tax assets and primarily comprised of tax loss carryforwards in various jurisdictions. The increase in the valuation allowance during fiscal year 2020 is primarily driven by foreign tax assets that are not expected to be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. As of December 31, 2020 and 2019, we have NOL carryforwards of $ 26.1 million and $ 21.4 million, respectively, which, if unused, will expire in years 2021 through 2037. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: Year Ended December 31, (In thousands) 2020 2019 2018 Unrecognized tax benefits at the beginning of the year $ 2,399 $ 4,777 $ 2,601 Additions related to prior year tax positions — — 2,176 Reductions related to prior year tax positions ( 799 ) ( 2,378 ) — Unrecognized tax benefits at the end of the year $ 1,600 $ 2,399 $ 4,777 74 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The reduction s related to prior year tax positions for the year ended December 31, 2020 of $ 0.8 million are primarily related to resolution of certain tax positions confirmed from refunds on amended tax returns. The impact of our unrecognized tax benefits to the effective income tax rate is as follows: December 31, (In thousands) 2020 2019 2018 Portion of total unrecognized tax benefits that, if recognized, would affect the effective income tax rate $ 2,032 $ 2,878 $ 4,084 The Company intends to indefinitely reinvest its foreign earnings abroad to ensure sufficient working capital for further expansion of its existing operations outside the United States, therefore the Company has not recorded income taxes on the undistributed earnings of its foreign subsidiaries. The undistributed earnings of our foreign subsidiaries as of December 31, 2020 are immaterial. In the event we are required to repatriate funds from outside of the United States, such repatriation may be subject to local laws, customs, and tax consequences. Interest and penalties are recorded in the statement of income as provision for income taxes. The total interest and penalties recorded in the statement of income was nominal for the years ended December 31, 2020, 2019, and 2018. We do not expect a significant change in our uncertain tax benefits in the next twelve months. We are subject to federal income tax as well as income tax of multiple state and foreign jurisdictions. With few exceptions, we are no longer subject to income tax examination by tax authorities in major jurisdictions for years prior to 2015 as of December 31, 2020. NOTE 16. LEASES The Company leases certain equipment, vehicles, and facilities under operating leases. Our leases have initial lease terms ranging from one year to 14 years. Certain leases contain options to extend terms beyond the lease termination date. We use judgment to determine whether it is reasonably possible that we will extend the lease beyond the initial term and the length of the possible extension. Leases that have a term 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 estimate of our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. As of December 31, 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 consolidated balance sheets. Lease expense is recognized, on a straight-line basis over the term of the lease, as a component of operating income on the consolidated statements of operations and comprehensive income. Amounts reported in the consolidated balance sheet as of the years ended December 31, 2020 and 2019, respectively are as follows: December 31, (In thousands, except weighted average lease term and discount rate) 2020 2019 Operating lease right of use asset $ 4,741 $ 2,481 Lease liability - current 1,865 1,339 Lease liability - long-term 2,936 1,142 Total operating lease liability $ 4,801 $ 2,481 Operating lease expense $ 3,579 $ 3,174 Supplemental non-cash information: Weighted-average remaining lease term (years) - operating leases 2.9 2.6 Weighted-average discount rate - operating leases 3.0 % 3.4 % 75 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table summarized the future minimum lease payments under non-cancellable leases as of December 31, 2020: (In thousands) Operating Leases 2021 $ 1,987 2022 1,535 2023 815 2024 565 2025 159 Thereafter — Total undiscounted operating lease payments $ 5,061 Less: imputed interest 260 Total operating lease liability $ 4,801 NOTE 17. 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 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 in 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. 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 outcome of this litigation cannot be determined, nor can we estimate a range of potential loss, therefore, we have not recorded a liability related to this litigation as of December 31, 2020. NOTE 18. RETIREMENT BENEFIT PLANS We sponsor a 401(k) Plan covering all eligible U.S. employees. Under the 401(k) Plan, we make nondiscretionary matching contributions at the rate of 100 % of employee’s contributions up to a maximum annual contribution of $ 6,000 per eligible employee, limited to 3 % of the employee’s compensation for the period. Additionally, we contribute to various foreign retirement benefit plans required by local law or coordinated with government sponsored plans which cover many of our international employees. The benefits offered under these plans are reflective of local customs and practices in the countries concerned. 76 Table of Contents GLOBUS MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Company contributions to these retirement plans were as follows: Year Ended December 31, (In thousands) 2020 2019 2018 401(k) and other retirement plan contributions $ 5,798 $ 5,363 $ 4,682 NOTE 19. SEGMENT AND GEOGRAPHIC INFORMATION Operating segments are defined as components of an enterprise for which separate 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 manage our business globally 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 years ended December 31, 2020, 2019 and 2018, respectively: Year Ended December 31, (In thousands) 2020 2019 2018 United States $ 664,454 $ 647,683 $ 593,878 International 124,588 137,685 119,091 Total net sales $ 789,042 $ 785,368 $ 712,969 NOTE 20. QUARTERLY FINANCIAL DATA (unaudited) (unaudited) March 31, June 30, September 30, December 31, (In thousands, except per share amounts) 2020 2020 2020 2020 Net sales $ 190,577 $ 148,922 $ 216,098 $ 233,445 Gross profit 141,713 98,279 159,001 172,586 Net income/(loss) 25,949 ( 20,837 ) 44,216 52,957 Earnings per share - basic 0.26 ( 0.21 ) 0.45 0.54 Earnings per share - diluted 0.25 ( 0.21 ) 0.44 0.52 * amounts might not add due to rounding (unaudited) March 31, June 30, September 30, December 31, (In thousands, except per share amounts) 2019 2019 2019 2019 Net sales $ 182,947 $ 194,539 $ 196,215 $ 211,667 Gross profit 141,109 150,549 150,828 162,907 Net income/(loss) 33,210 38,163 38,307 45,530 Earnings per share - basic 0.34 0.39 0.39 0.46 Earnings per share - diluted 0.33 0.38 0.38 0.44 * amounts might not add due to rounding 77 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.