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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark(Mark One)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20182020
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 000-50744
NUVASIVE, INC.
(Exact name of registrant as specified in its charter)
Delaware |
| 33-0768598 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
7475 Lusk Boulevard |
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92121 |
San Diego, California (Address of principal executive offices) |
| (Zip Code) |
(858) 909-1800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the ActAct:
Title of each class |
| Trading Symbol(s) | Name of | registered | ||
Common Stock, par value $0.001 per share | NUVA | The ( |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933, as amended. YES Act. Yes☑ NO No☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended. YES Act. Yes☐ NO No☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period than the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES Yes☑ NO No☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES Yes☑ NO No☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” a “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Non-accelerated filer |
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| Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES Yes☐ NO No☑
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $2.7$2.8 billion as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2018)2020), based upon the closing sale price for the registrant’s common stock on that day as reported by the NASDAQNasdaq Global Select Market. Shares of common stock held by each officer and director on June 30, 20182020 have been excluded in that such persons may be deemed to be affiliates.
As of February 18, 2019,23, 2021, there were 51,635,60251,379,052 shares of the registrant’s common stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates information by reference to portions of the definitive Proxy Statement for the registrant’s 20192021 Annual Meeting of Stockholders, which will be filed with the U.S. Securities and Exchange Commission notnot- later than 120 days after December 31, 2018.
2020.
NuVasive, Inc.
Annual Report on Form 10-K for the Fiscal Year ended December 31, 20182020
PART I | ||||
Item 1. |
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Item 1A. |
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Item 1B. |
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Item 2. |
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Item 3. |
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Item 4. |
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PART II | ||||
Item 5. |
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Item 6. |
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Item 7. |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 7A. |
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Item 8. |
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Item 9. |
| Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
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Item 9A. |
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Item 9B. |
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PART III | ||||
Item 10. |
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Item 11. |
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Item 12. |
| Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Item 13. |
| Certain Relationships and Related Transactions, and Director Independence |
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Item 14. |
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PART IV | ||||
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1
PART I
This Annual Report on Form 10-K (“Annual Report”) contains forward-looking statements that involve risks, uncertainties, assumptions and other factors which, if they do not materialize or prove correct, could cause our results to differ from historical results or those expressed or implied by such forward-looking statements. In some cases, you can identify these forward-looking statements by words like “may”, “will”, “should”, “could”, “expect”, “plan”, “anticipate”, “believes”, “estimates”, “predicts”, “potential”, “intends”, or “continues” (or the negative of those words and other comparable words). Forward-looking statements include, but are not limited to, statements about:
our intentions, beliefs and expectations regarding our expenses, sales, operations and future financial performance;
• | the value proposition of our products and procedural solutions; |
our operating results;
• | our intentions, beliefs and expectations regarding our net sales, expenses, operations and future financial performance; |
our plans for future products and enhancements of existing products;
• | our operating results; |
anticipated growth and trends in our business;
• | our plans for future product development and enhancements of existing products; |
the timing of and our ability to maintain and obtain regulatory clearances or approvals;
• | anticipated growth and trends in our business; |
our belief that our cash and cash equivalents and investments will be sufficient to satisfy our anticipated cash requirements;
• | third-party reimbursement policies and practices; |
our expectations regarding our revenues, customers and distributors;
• | the timing of and our ability to maintain and obtain regulatory clearances or approvals; |
our beliefs and expectations regarding our market penetration and expansion efforts;
• | our belief that our cash, cash equivalents and investments will be sufficient to satisfy our anticipated obligations; |
our expectations regarding the benefits and integration of recently-acquired businesses and our ability to make future acquisitions and successfully integrate any such future-acquired businesses;
• | the impact of global economic conditions and public health crises and epidemics, such as the COVID-19 pandemic, on our business; |
our anticipated trends and challenges in the markets in which we operate; and
• | our expectations regarding our customers and the adoption of our products and procedures; |
• | our beliefs and expectations regarding our market penetration and expansion efforts; |
| • | our expectations regarding the benefits and integration of recently-acquired businesses and our ability to make future acquisitions and successfully integrate any such future-acquired businesses; |
• | our anticipated trends, product pricing pressure, competitive tactics and other challenges in the markets in which we operate; and |
• | our expectations and beliefs regarding and the impact of policy changes, investigations, claims and litigation. |
These statements are not guarantees of future performance or events. Our actual results may differ materially from those discussed in this Annual Report and the documents incorporated by reference to this Annual Report. The potential risks and uncertainties that could cause actual results to differ materially include, but are not limited to, those set forth in Part I, Item 1(A)1A under the heading “Risk Factors”, Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere throughout this Annual Report and in any other documents incorporated by reference to this Annual Report. Readers are cautioned not to place undue reliance on such forward-looking statements. We assume no obligation to update any forward-looking statements to reflect new information, future events or circumstances or otherwise, except as required by law. This Annual Report and the documents incorporated by reference to this Annual Report also contain estimates, projections and other information concerning our industry, our business, and the markets for certain medical conditions and procedures. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market, and other data from reports, research surveys, studies, and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data, and similar sources.
This Annual Report and the documents incorporated by reference into this Annual Report refer to trademarks, such as Absolute Responsiveness®, Advanced Materials Science™, Acuity®, Affix®, Armada®, AttraX®, Back Pact®, Bendini®, Better Back Alliance®, Better Insight. Better Decisions. Better Medicine®, Brigade®, C360™, CerPass®, COALESCE™COALESCE®, COHERE®, CoRoent®, Creative Spine Technology®, DBR®, Embody®Embody™, Embrace®Embrace™, ExtenSure®, Formagraft®, Gradient Plus®, Halo®, iGA™iGA®, ILIF®, InStim®InStim™, LessRay®Lessray®, Leverage®, MAGEC®, MAGEC-EOS™, MAS®, MaXcess®Maxcess®, Modulus®, NeoDisc™, Nerve Avoidance Leader™, NuvaLine™NuvaLine®, NuvaMap™NuvaMap® O.R., NuvaPlanning™, NuVasive®, NVM5®, Osteocel®, Precept®, PRECICE®Precice®, PROPEL®, Pulse™Pulse®, Radian®, Reline™Reline®, Speed of Innovation®, SpheRx®, Surgical Intelligence™, The Better Way Back®, Traverse®, Triad®, VuePoint®, X360™, X-Core®, and XLIF®, which are protected under applicable intellectual property laws and are our property or the property of our subsidiaries. Solely for convenience, our trademarks and tradenames referred to in this Annual Report may appear without the® or ™ symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights to these trademarks and tradenames.This Annual Report also includes trademarks owned by other parties, and all other such trademarks mentioned in this Annual Report are the property of their respective owners.
2
Item 1.Business
Overview
We are a leadingglobal medical devicetechnology company in the global spine surgery market, focused on developing, minimally disruptivemanufacturing, selling and providing procedural solutions for spine surgery, with a guiding purpose to transform surgery, advance care and change lives. We offer a comprehensive portfolio of procedurally integrated spine surgery solutions, including surgical productsaccess instruments, spinal implants, fixation systems, biologics, and enabling technologies, as well as systems and services for intraoperative neuromonitoring. In addition, we develop and sell magnetically adjustable implant systems for spine and specialized orthopedic procedures. For the year ended December 31, 2020, we generated net sales of $1.05 billion, including sales in more than 50 countries.
Since our incorporation in 1997, we have grown from a small developer of specialty spinal implants into a leading medical technology company delivering procedurally integrated solutions for spine surgery. Our currently marketed product portfolio is focusedA key driver of our growth has been our focus on applications for spine fusion surgery, including ancillaryinnovative products and services used to aid in the surgical procedure. Our procedurally integrated solutions use innovative, technological advancements and a minimally disruptive surgical platform called Maximum Access Surgery, or MAS, to provide surgical efficiency, operative reliability, and procedural versatility. For the year ended December 31, 2018, we generated global revenues of $1.1 billion, including sales in over 50 countries.
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Our principal product offering includes the MAS platform which combines three categories of solutionstechnologies that collectively minimize soft tissue disruption during spine fusion surgery, provide maximum visualization and are designed to enable safe anddrive reproducible outcomes for the surgeonpatients, surgeons and the patient. The platform includes our proprietary software-driven nerve detection and avoidance systems, and Intraoperative Monitoring, or IOM, services and support offered by NuVasive Clinical Services; MaXcess, an integrated split-blade retractor system; and a wide variety of specialized implants and biologics. Many of our products, including the individual components of our MAS platform can also be used in open or traditional spine surgery. Our spine surgery product line offerings, which include products for the thoracolumbar and the cervical spine, are primarily used to enable surgeon access to the spine to perform restorative and fusion procedures in a minimally disruptive fashion. To assist with surgical procedures,providers. In 2003, we offer a platform called Integrated Global Alignment, or iGA, in which products and computer assisted technology under our MAS platform help achieve more precise spinal alignment.
Our MAS platform and its related offerings are designed to provide a unique and comprehensive solution forintroduced the safe and reproducible minimally disruptive surgical treatment of spine disorders by enabling surgeons to access the spine in a manner that affords both direct visualization and detection and avoidance of critical nerves along with intraoperative reconciliation. The fundamental difference between our MAS platform, which is sometimes referred to in the industry as “minimally invasive surgery” or “MIS”, is the ability to customize safe and reproducible access to the spine while allowing surgeons to continue to use instruments that are familiar to them and effective during surgery. Accordingly, the MAS platform does not force surgeons to reinvent or learn new approaches that add complexity and undermine safety, ease of use and/or efficacy. We have dedicated and continue to dedicate significant resources toward training spine surgeons around the world; both those who are new to our MAS and other product platforms, as well as ongoing education for MAS-trained surgeons attending advanced courses. An important ongoing objective of ours has been to maintain a leading position in access and nerve avoidance, as well as to pioneer and remain the ongoing leader in minimally invasive spine surgery. Our MAS platform, with the unique advantages provided by our neuromonitoring systems, enables innovative lateral procedures, including a procedure known as eXtreme Lateral Interbody Fusion procedure, or XLIF, a lateral access spine surgery technique that is less-invasive than traditional, open surgical procedures and clinically proven to enable better patient outcomes. Building off the success of XLIF, we have continued to develop innovative, less-invasive techniques and technologies for spine surgery, and we have broadened our portfolio of solutions for traditional, open surgical procedures. Our comprehensive portfolio of solutions can be utilized in which surgeons accessprocedures for the cervical, thoracic and lumbar spine, for a fusion proceduresupporting surgical approaches from the sideanterior, including lateral, and posterior. Our solutions are used to treat degenerative conditions and for complex spinal surgery, including adult and pediatric deformities, as well as trauma and tumors.
Underlying our procedurally integrated solutions for spine surgery are innovative technologies designed to enable better clinical, financial, and operational outcomes, including:
• | our differentiated surgical access instruments, including our Maxcess integrated split-blade retractor system, designed to enable less-invasive surgical techniques by minimizing soft tissue disruption during spine surgery; |
• | our neuromonitoring systems, which use proprietary software-driven nerve detection and avoidance technology, and our intraoperative neuromonitoring, or IONM, services and support; |
• | our Advanced Materials Science portfolio of specialized spinal implants, designed to advance spinal fusion by enhancing the osseointegration and biomechanical properties of implant materials, including porous titanium and porous polyetheretherketone, or PEEK; |
• | our comprehensive Reline fixation system, designed to facilitate the preservation and restoration of patient alignment, while addressing a vast array of spinal pathologies from an open or less-invasive approach across all spinal procedures; and |
• | our Integrated Global Alignment platform, or iGA, which is comprised of procedurally-based technologies that help increase the predictability of achieving global alignment in spinal procedures, including our Bendini spinal rod bending system that expedites manual rod manipulation for spinal fixation. |
We have also invested in enabling technologies, including the development of capital equipment designed to further improve clinical, financial, and operational outcomes of spine surgery. Our capital equipment portfolio currently consists of Lessray and the patient’s body, rather than fromPulse platform. Lessray is an image enhancement platform designed to reduce radiation exposure in the front or back. It has been demonstrated clinically that XLIFoperating room by allowing surgeons to take low-quality, low-dose images and improve them to look like conventional full-dose images. Pulse integrates multiple enabling technologies within a single, expandable platform and is engineered to improve workflow, reduce variability, and increase the reproducibility of surgical outcomes. The Pulse platform’s modular architecture is designed to incorporate applications for neuromonitoring, surgical planning, patient-specific rod bending, smart imaging, navigation, and integration with robotics and other procedures facilitated bysmart tools in the future. Selling and leasing of capital equipment do not make up a material portion of our MAS platform decrease trauma and blood loss, and leadtotal net sales.
In addition to faster overall patient recovery times compared to openour procedurally integrated solutions for spine surgery.
We offer a range of implants for spinal surgery, which include our porous titanium and polyetheretherketone, or PEEK, implants under our Advanced Materials Science portfolio, fixation devices such as customizable rods, plates and screws, bone allograft in patented saline packaging, allogeneic and synthetic biologics, and disposables used in IOM. Wewe also design and sell expandable growing rod implant systems that can be non-invasively lengthened following implantation with precise, incremental adjustments via an external remote controller using magnetic technology called MAGnetic External Control, or MAGEC, which allows for the minimally invasive treatment of early-onset and adolescent scoliosis. This technology is also the basis for our PRECICEPrecice limb lengthening system, which allows for the correction of long bone limb length discrepancy, as well as enhanced bone healing in patients that have experienced traumatic injury. The PRECICE limb lengthening system is sold by NuVasive Specialized Orthopedics.other products for treating specialized orthopedic procedures.
We intend to continue development on a wide variety of innovation projects intended to broadenadvance our MASleadership position in less-invasive spine surgery, increase our product offerings and other product platformssolutions for traditional spine surgery procedures, and advance the applications offurther our unique technology into procedurally integrated surgical solutions designed to improve clinical and economic outcomes. In 2019, weenabling technologies portfolio. We expect to commerciallycontinue to invest in the Pulse platform to support a full global launch Pulse, aof the technology and to develop and expand its application offerings, including investments related to surgical automation platform which will incorporate LessRay, neuromonitoring, surgical planning, rod bending, imaging, navigation, and other automation capabilities. Pulse is a combined hardware and software platform designed to achieve surgical efficiencies via real-time feedback to aid in clinical decision making and to optimize the procedural workflow in the operating room.
Werobotics. In addition, we expect to continue to pursue business and technology acquisition targets and strategic relationships to identify opportunities to broaden participation along the spine care continuum. Top priorities include opportunities that complement our technology leadership position in spine, targeted geographic expansion, technology that makes procedures even safer, as well as opportunities for surgical automation.
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Our corporate headquarters is located in San Diego, California where we currently occupy approximately 169,000 square feet, includingand offers a six-suite state-of-the-art cadaver operating theatre and research and development labs designed to accommodate the training of spine surgeons. In August 2017, we entered into a 17 year operating lease agreement for the purpose of expanding and restructuringsurgeons through our corporate headquarters located in San Diego, California, from approximately 145,000 square feet to approximately 252,000 square feet.Clinical Professional Development education programs. Our location in Amsterdam, the Netherlands, serves as our international headquarters. Our primary distribution and warehousing operations are located in our facility in Memphis, Tennessee. Our business is facilitated byTennessee, which due to its proximity to overnight third-party transporters, helps facilitate rapid delivery of our products and surgical instruments for surgeries involving our products. Because of its location and proximity to overnight third-party transporters, our Memphis facility enhances our ability to meet demanding delivery schedules and provide a greater level of customer service.surgeries. Additionally, our primary self-manufacturing facility, which produces spinal implants and fixation products, is located in West Carrollton, Ohio.
COVID-19 Impact on our Business
3
TableThe COVID-19 pandemic materially impacted our business and results of Contentsoperations in fiscal year 2020. Many government agencies in conjunction with hospitals and healthcare systems have, to varying degrees, deferred or suspended elective surgical procedures due to COVID-19. While certain spine surgeries are deemed essential and certain surgeries, like in cases of trauma, cannot be delayed, we have seen and may continue to see a significant reduction in procedural volumes as hospital systems and/or patients elect to defer spine surgery procedures. As a result of these measures, we have experienced reductions in procedural volumes during 2020 and anticipate this trend may continue. Further discussion of the potential impacts on our business from the COVID-19 pandemic is provided under Part I, Item 1A – Risk Factors.
Despite the impact COVID-19 has had on our business, we continued to invest in research and development, invest in our people, improve operating processes, and take steps to position ourselves for long-term success. During 2020, we raised additional capital to solidify our financial foundation. We continued to train and educate surgeons on our products and less-invasive surgical techniques, while our Clinical Professional Development team developed virtual labs and created a Virtual Spine Conference series to enhance remote surgeon education and provide clinical insights. During 2020, we continued to focus on developing innovative solutions and enabling technologies to drive increased adoption of less-invasive surgery and improve clinical, financial and operational outcomes in furtherance of our strategy.
Our Strategy
We are a leading provider of innovative medical products that provide comprehensive solutions for the surgical treatment of spine disorders. We continue to pursue the following business strategies in order to improve our competitive position:
Establish our MAS Platform as the Standard of Care. We believe our MAS platform has the potential to become the standard of care for spine surgery as hospitals, providersposition and spine surgeons continue to recognize its many benefits and adopt our products and procedures. We also believe our MAS platform has the potential to dramatically improve the clinical results of spine surgery. Because of this belief, we dedicate significant resources to researching clinical outcomes data as well as educating spine surgeons, hospitals, and other providers and their patients on the clinical and financial benefits of our products, and we intend to capitalize on the growing demand for minimally disruptive surgical procedures.
Continue to Develop and Introduce Procedurally-Integrated Solutions and New Innovative Products. One of our core competencies is our ability to rapidly develop and commercialize innovative spine surgery products and procedures to fulfill an unmet clinical need. In the past several years, we have introduced a continual flow of new products and product enhancements. We have additional products and procedural offerings currently under development that should expand our presence in fusion surgery. With our comprehensive portfolio of product and service offerings, we believe we can offer our customers a comprehensive procedural solution for spine surgery that distinguishes us from traditional spine implant companies. We intend to continue to build upon our procedural solution with new and enhanced technology offerings, as well as product expansions. We believe through continued innovation and a focus on providing comprehensive procedural solutions for our customers, we will increase our market share while at the same time improving patient care. As part of this strategy, we must continue to protect and defend the intellectual property related to our innovative products.
Expand the Reach of Our Exclusive Sales Force. We believe having a sales force dedicated to selling only our products is critical to achieving continued growth across our various product lines, driving greater market penetration and increasing our revenues. In the United States, we have a sales force consisting of a mix of directly-employed sales representatives and exclusive sales agents who are responsible for particular geographic regions of the country. Outside of the United States, our sales force consists of directly-employed sales representatives, independent sales agents and territory-based distributors.
Provide Tailored Solutions in Response to Surgeon Needs. Responding quickly to the needs of spine surgeons is central to our culture, critical to our success, and we believe differentiates us from our competition. We solicit information and feedback from our surgeon customers and clinical advisors regarding the utility of, and potential improvements to, our products. For example, we have an on-site machine shop to allow us to rapidly manufacture product prototypes and a cadaver operating theatre in San Diego, California to provide clinical training and validate new ideas through prototype testing. We also maintain regional training facilities and centers for excellence in strategic locations around the globe. Responding quickly goes beyond product development to include active support in all areas, including clinical research and payer relations. Continuing to remain connected and responsive to the collective voices of the surgeon community should allow us to increase our market share and drive adoption of our procedurally-integrated spine solutions.
Selectively License or Acquire Complementary Products and Technologies and Drive our International Presence. In addition to building our company through internal product development and global expansion efforts, we intend to selectively license or acquire complementary products and technologies and enter into strategic relationships that should keep us on the forefront of innovation and to pursue opportunities that allow us to expand our presence in international markets. With the 2016 acquisition of Ellipse Technologies, we offer innovative products based on the MAGEC technology platform. With this acquisition, we accelerated our entry into the pediatric and idiopathic spine deformity segment and expanded our international presence. With the 2016 acquisition of the LessRay software technology suite, we now help surgeons and hospital staff manage radiation exposure, without compromising intra-operative images or visual accuracy. With the acquisition of Vertera Spine in 2017, which developed patented porous PEEK technology, we now offer porous interbody technology across both PEEK and titanium materials, thereby addressing the spectrum of surgeons’ needs and preferences for interbody implants. In 2018, we entered into a Spine Precision Partnership with Siemens Healthineers to advance operating room workflow efficiency and provide increased precision in the delivery of minimally-disruptive spine surgery technologies through the integration of our Pulse surgical automation platform with Siemens Healthineers’ mobile 3D C-arm. By acquiring complementary products, entering into strategic relationships, and executing on domestic and international footprint expansion opportunities, we believe we can leverage our expertise of bringing new products to market that are intended to improve patient outcomes, simplify or better integrate techniques, reduce hospitalization and rehabilitation times across the globe, and, as a result, reduce overall costs to the healthcare system and continue to grow our global presence.business:
• | Advance our Position in Less-Invasive Spine Surgery. We believe that surgeons, providers and patients will continue to recognize the benefits of less-invasive surgical techniques and our procedurally integrated solutions will promote better clinical, financial, and operational outcomes. It has been demonstrated clinically that XLIF and other procedures facilitated by our procedurally integrated solutions decrease trauma and blood loss, and lead to faster overall patient recovery times compared to traditional, open spine surgery procedures. We believe our solutions have the potential to dramatically improve the clinical results of spine surgery and drive better reproducibility through enabling technologies. Because of this belief, we dedicate significant resources to researching clinical outcomes data as well as educating surgeons, providers and patients on the benefits of our products, and we intend to continue to capitalize on the growing demand for less-invasive surgical procedures. |
• | Continue to Develop Innovative Solutions and Broaden our Portfolio of Offerings. One of our core competencies is our ability to rapidly develop and commercialize innovative spine surgery solutions to fulfill unmet clinical needs while improving clinical, financial, and operational outcomes. In the past several years, we have introduced a continual flow of new products and product enhancements, including a broader portfolio of offerings for traditional, open spine surgery procedures. With our comprehensive portfolio of product and service offerings, we can offer our customers procedural solutions for the cervical, thoracic and lumbar spine, and for various surgical approaches that distinguishes us from traditional spine implant companies. As part of this strategy, we must continue to vigorously protect and defend the intellectual property related to our innovative products. |
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• | Expand the Reach of Our Sales Force and Drive Growth Globally. We believe there is significant opportunity for us to further penetrate existing markets and to enter new markets by increasing the size and geographic scope of our sales force both in the United States and internationally. In the United States, we have a sales force consisting of a mix of directly employed and independent sales representatives who are responsible for particular geographic regions of the country. Outside of the United States, our sales force consists of directly employed and independent sales representatives and distributors. We expect to increase the number of sales representatives in the United States to expand into new geographic territories and to deepen our penetration in existing territories. Internationally, we intend to make investments in infrastructure in order to better support existing markets and to drive expansion into new markets. |
• | Selectively License or Acquire Complementary Products and Technologies. In addition to building our company through internal product development and global expansion efforts, we intend to selectively license or acquire complementary products and technologies and enter into strategic relationships intended to keep us on the forefront of innovation and to pursue opportunities that allow us to expand our presence in international markets. With the 2016 acquisition of Ellipse Technologies, we offer innovative products based on the MAGEC technology platform. With this acquisition, we accelerated our entry into the pediatric and idiopathic spine deformity segment and expanded our international presence. With the 2016 acquisition of the Lessray software technology suite, we are able to help surgeons and hospital staff manage radiation exposure, without compromising intraoperative images or visual accuracy. With the acquisition of Vertera Spine in 2017, we offer porous interbody technology across both PEEK and titanium materials, thereby addressing the spectrum of surgeons’ needs and preferences for spinal implants. In 2018, we entered into a Spine Precision Partnership with Siemens Healthineers to advance operating room workflow efficiency and provide increased precision in the delivery of minimally-disruptive spine surgery technologies through the integration of our Pulse platform with Siemens Healthineers’ mobile 3D C-arm, Cios Spin. By acquiring complementary products, entering into strategic relationships, and executing on domestic and international footprint expansion opportunities, we believe we can leverage our expertise of bringing new products to market that are intended to improve patient outcomes, simplify or better integrate techniques, reduce hospitalization and rehabilitation times across the globe, and, as a result, reduce overall costs to the healthcare system and continue to grow our global presence. |
• | Provide Intraoperative |
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Industry Background and Market
The spine is the core of the human skeleton and provides a crucial balance between structural support and flexibility. It consists of 33 separate bones called vertebrae that are connected together by connective tissue (defined as bone, muscle, or ligament) to form a column and to permit a normal range of motion. The spinal cord, the body’s central nerve system, is enclosed within the spinal column. Vertebrae are paired into what are called motion segments that move by means of three joints: two facet joints and one spine disc. The four major categories of spine disorders are degenerative conditions, deformities, trauma and tumors. The largest market and the focus of our business historically are degenerative conditions of the facet joints and the intervertebral disc space. These two conditions can result in instability and pressure on the nerve roots as they exit the spinal column, causing back or neck pain or radiating pain in the arms or legs.
The prescribed treatment for back or neck pain depends on the severity and duration of the disorder. Initially, physicians will prescribe non-operative, conservative procedures including bed rest, medication, lifestyle modification, exercise, physical therapy, chiropractic care and steroid injections. In many cases, non-operative treatment options are effective; however, some patients eventually require spine fusion surgery. The vast majority of spine fusion surgeries are doneperformed using traditional open surgical techniques from either the frontanterior or backposterior of the patient. These traditional open surgical approaches generally require a large incision in the patient’s abdomen or back in order to enable the surgeon to access and see the spine and surrounding area. These open procedures are invasive, lengthy and complex, and typically result in significant blood loss, extensive tissue damage and lengthy patient hospitalization and rehabilitation.
We believe the market for procedurally integrated spine surgery solutions will continue to grow over the long term, and we also believe our market share will increase, because of the following market dynamics:
Demand for Surgical Alternatives with Less Tissue Disruption. As has been proven in other surgical markets, we anticipate the broader acceptance of surgical treatments with less tissue disruption and patient trauma will result in increased demand.
• | Demand for Surgical Alternatives with Less Tissue Disruption. As has been demonstrated in other surgical markets, we anticipate the broader acceptance of less-invasive surgical treatments with reduced tissue disruption and patient trauma will result in increased demand. |
Favorable Domestic Demographics. The population segment most likely to experience back pain is expected to increase as a result of aging “baby boomers” (people born between 1946 and 1965). This large population segment is expected to increasingly demand a quicker return to activities of daily living following surgery than prior generations.
• | Favorable Domestic Demographics. The population segment most likely to experience back pain is expected to increase as a result of aging “baby boomers” (people born between 1946 and 1965). This large population segment is expected to increasingly demand a quicker return to activities of daily living following surgery than prior generations. |
Access to Care in Emerging Markets. Healthcare reforms in many emerging markets are expanding access to treatments to a greater proportion of their populations, which is expected to continue to drive strong increases in demand for healthcare-related product volumes. Increasing economic affluence in key developing regions will further drive demand for healthcare treatments.
• | Access to Care in Emerging Markets. Healthcare reforms in many emerging markets are expanding access to treatments to a greater proportion of their populations, which is expected to continue to drive strong increases in demand for healthcare-related product volumes. Increasing economic affluence in key developing regions will further drive demand for healthcare treatments. |
Vendor/Hospital Consolidation. Given the continued economic pressures facing hospitals and healthcare systems, we anticipate broader consolidation of vendors in the spine space. We believe we are well-positioned to benefit from this vendor consolidation given our size and scale and the breadth of our portfolio.
• | Vendor/Hospital Consolidation. Given the continued economic pressures facing hospitals and healthcare systems, we anticipate broader consolidation of vendors in the spine space. We believe we are well-positioned to benefit from this vendor consolidation given our size and scale and the breadth of our portfolio. |
Although the market for procedurally-integratedprocedurally integrated spine surgery solutions should continue to grow over the long term, economic, political and regulatory influences are subjecting our industry to significant changes that may slow the growth rate of the spine surgery market.
Surgical Alternatives with Less Tissue Disruption
The benefits of minimally invasiveless-invasive surgical procedures in other areas of orthopedics have significantly contributed to the strong and growing demand for surgical alternatives with less tissue disruption of the spine. Surgeons and hospitals seek spine procedures that result in fewer operative and postoperative complications and decreased patient hospitalization periods. At the same time, patientsPatients seek procedures that reduce trauma, allow for faster recovery times and result in more favorable and predictable clinical outcomes. Despite patient and doctor demands, the rate of adoption of alternative surgical procedures with less tissue disruption has been relatively slow with respect to the spine. Currently, the majority of spine surgery patients are treated with traditional open and invasive techniques.
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A principal factor contributing to spine surgeons’ slow adoption of traditional minimally invasive“minimally invasive” spine procedure alternatives has been inconsistent outcomes driven by the limited or lack of direct access to and visibility of the surgical anatomy, and the associated complex instruments that have been required to perform these procedures. Most traditional minimally invasive spine surgery systems do not allow the surgeon to directly view the spine and the relevant pathology point and, as such, provide only restrictive visualization through a camera system or endoscope, while also requiring the use of complex surgical techniques. In addition, most traditional minimally invasive spine surgery systems use complex or highly customized surgical instruments that require special training and the completion of a large number of trial cases before the surgeon becomes proficient using the system, which is an impediment and/or deterrent to their adoption.
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Our Commercial Products
Our MAS platform allowsprocedurally integrated spine surgery solutions are designed to allow surgeons to perform a wide range of minimally disruptiveless-invasive surgical procedures with less tissue disruption of the spine, procedures in all regions of the spine and from various surgical approaches, while overcoming the shortcomings of traditional minimally invasive spine surgical techniques. The MAS platform isOur solutions are designed to treat a wide range of spinal pathologies while accommodating a surgeon’s preferred surgical technique. We believe our approach improvessolutions can improve clinical, resultsfinancial, and operational outcomes of spine surgery and should continue to drive an expanded number of minimally disruptive procedures performed, lead the market away from open surgery, and make less invasiveless-invasive techniques the standard of care in spine fusion and non-fusion surgery.
Our products and technology facilitate minimally disruptiveless-invasive applications of the following spine surgery procedures, among others:
• | Decompression, which is removal of a portion of bone or disc from over or under the nerve root to relieve impingement of the nerve; |
• | Lumbar and thoracic fusion procedures in which the surgeon approaches the spine through the patient’s back (posterior), side (lateral) or abdomen (anterior); |
• | Cervical fusion procedures for either the posterior occipito-cervico-thoracic region or the anterior cervical region; and |
• | Complex cases involving adult and pediatric spinal deformity, trauma and tumor patients. |
LumbarWe offer a comprehensive portfolio of procedurally integrated spine surgery solutions, including surgical access instruments, spinal implants, fixation systems, biologics, and thoracic fusion procedures in which the surgeon approaches the spine through the patient’s back, side or abdomen;
Cervical fusion procedures for either the posterior occipito-cervico-thoracic region or the anterior cervical region; and
Decompression, which is removal of a portion of bone or disc from over or under the nerve root to relieve pinching of the nerve.
Our MAS platform combines three product categories: our MaXcess retractors, our specialized implants and fixation products, and our neuromonitoringenabling technologies, as well as systems and service offerings that collectively enable surgeons to detect and navigate around nerves while directing customized access to the spineservices for implant delivery. Biologics are used to complement procedures by promoting bone fusion.intraoperative neuromonitoring. In addition, we develop and sell magnetically adjustable implant systems for spine and specialized orthopedic procedures.
Surgical Access Instruments
We have differentiated surgical access instruments that surgeons use to access the surgical site, including our MAS platform and biologics, our comprehensive procedural solutions include our IOM services, Integrated Global Alignment, or iGA, and Pulse, our surgical automation platform.
MaXcess
MaXcessMaxcess integrated split-blade retractor system, designed to minimize soft tissue disruption during spine surgery. Our Maxcess retractors have a split-blade design consisting of three blades that can be positioned to customize the surgical exposure in the shape and size specific to the surgical requirements rather than the more traditional fixed tube or two-blade designs of traditional minimally invasive spine surgical systems. This split-blade design also provides customizable access to the spine, which allows surgeons to perform surgical procedures using instruments that are similar to those used in open procedures but with a smaller incision and less tissue disruption. The ability to use familiar instruments reduces the learning curve for our procedures and facilitates the adoption of our products. Our system’s illumination of the operative corridor aids in providing surgeons with better direct visualization of the patient’s anatomy, without the need for additional technology or other special equipment such as endoscopes. Over the years, severalwe have made improvements to our MaXcessMaxcess systems, have been made, including incorporating integrated neuromonitoring technologyenabling technologies and improving the blade systems, and the MAS approach has broadened from the lumbar to the thoracic region.systems. Our MaXcessMaxcess products are used in the cervical spine for posterior application and anterior retraction, the lumbar spine for decompressions, transforaminal lumbar interbody fusions, or TLIFs, posterior lumbar interbody fusions, or PLIFs, the thoracolumbar spine for eXtreme Lateral Interbody Fusion, or XLIFs, and the thoracic region for tumors and trauma, as well as in adult degenerative scoliosis procedures. Additionally, the Maxcess system is integrated into our X360 procedure which allows surgeons to conduct lateral single-position spine surgery without repositioning the patient, which enhances operating room workflow and efficiency and can reduce time under anesthesia and lower intraoperative risks for the patient.
Implants and Fixation ProductsSystems
We have many specialized implants and fixation devicesproducts designed to be used withas part of our MAS platform.procedurally integrated solutions. Our portfolio of spinal implants used for interbodyintervertebral disc height restoration include implants made from allograft, titanium, and PEEK. Our titanium and PEEKThese spinal implants are available in both porous and non-porous formats and come in a variety of shapes, sizes, and lordosis options to accommodate specific approach, pathology, alignment restoration, and anatomical requirements of the patient and the particular fusion procedure. Our Advanced Materials Science portfolio of implants, designed to improve spinal fusion by enhancing the osseointegration and biomechanical properties of implant materials, includes our Modulus porous titanium implants and Cohere and Coalesce porous PEEK implants. Our implants are designed for insertion into the smallest possible space while maximizing surface area contact for fusion. Following our acquisition of Simplify Medical Pty Limited, or Simplify Medical, in February 2021, we also offer cervical artificial disc technology for cervical total disc replacement procedures. Our fixation products, including pedicle screws, rods and plates, have been uniquely designed and include a highly differentiated percutaneous minimally invasive solution with advanced guide technology, superior rod insertion options, and multiple reduction capabilities to be delivered through our procedures to provide stabilization of the spine. Our fixation offerings include our VuePoint, Armada, Precept and Reline posterior fixation portfolios.
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Table The Reline portfolio consists of Contents
innovative posterior fixation technology designed to preserve and restore spinal alignment, while addressing a wide range of spinal pathologies. Our neuromonitoring systems utilize electromyography, or EMG,Reline portfolio can be used in both traditional open procedures and less-invasive surgical procedures and includes fixation products for cervical, thoracic and lumbar spine, as well as proprietary software hunting algorithmsReline Trauma and graphical user interfaces to provide surgeons with an enhanced and intuitive nerve avoidance system. Our systems function by monitoring changes in electrical signals across muscle groups, which allows us to detect underlying changes in nerve activity. Through our neuromonitoring platforms, we give surgeons the option to connect their instruments toReline Small Stature for complex spinal surgery.
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Biologics
We offer a computer systemvariety of biologics that provides discrete, real-time, surgeon directed and surgeon controlled feedback about the directionality and relative proximity of nerves during surgery. We believe our proprietary neuromonitoring platforms are a differentiator in the market and are unique in their ability to provide information about the directionality and proximity of nerves. Our systems analyze and then translate complex neurophysiologic data into simple, useful information to assist the surgeon’s clinical decision-making process. The health and integrity of the spinal cord and related nerves can also be assessed using motor evoked potentials, or MEPs, and somatosensory evoked potentials, SSEPs. Both of these methods of IOM involve applying stimulation and recording the response that must travel along the motor or sensory paths of the spinal cord. Surgeons can connect certain instruments to our neuromonitoring systems, thus creating an interactive set of instruments that better enable the safe navigation through the body’s nerve anatomy during surgery. The connection is accomplished using a clip that is attached to the instrument, effectively providing the benefits of our neuromonitoring systems through an instrument already familiar to the surgeon. Our proprietary software and easy to use graphical user interfaces allow the surgeon to make critical decisions in real time to help enable safer, faster, and more reproducible procedures to achieve improved patient outcomes.
Biologics
Biologics are used to aid in the spinal fusion process or bone healing process. The global biologics market in spine surgery consists of autograft (autologous human tissue), allograft (donated human tissue), and a varied offering of synthetic products and growth factors. Our allograft biologics product offerings include Osteocel Plus and Pro, – a cellular bone matrix designed to mimic the biologic profile of autograft including mesenchymal stem cells and osteoprogenitor cells to aid in spinal fusion, and Propel DBM (highly moldable demineralized bone matrix putty and gel). Our synthetic biologics product offerings include Formagraft (collagen-based synthetic bone substitute) and AttraX (synthetic bone graft material delivered in putty and other forms).
Intraoperative MonitoringNeuromonitoring Systems
Our intraoperative neuromonitoring systems utilize proprietary software hunting algorithms and graphical user interfaces to provide surgeons with an enhanced and intuitive nerve avoidance system. Our systems function by monitoring changes in electrical signals across muscle groups, which allows us to detect underlying changes in nerve activity. Through our neuromonitoring platforms, we give surgeons the option to connect their instruments to a computer system that provides discrete, real-time, surgeon directed and surgeon controlled feedback about the directionality and relative proximity of nerves during surgery. We believe our proprietary neuromonitoring platforms are a differentiator in the market and are unique in their ability to provide information about the directionality and proximity of nerves. Our systems analyze and then translate complex neurophysiologic data into simple, useful information to assist the surgeon’s clinical decision-making process. Surgeons can connect certain instruments to our neuromonitoring systems, thus creating an interactive set of instruments that better enable the safe navigation through the body’s nerve anatomy during surgery. The connection is accomplished using a clip that is attached to the instrument, effectively providing the benefits of our neuromonitoring systems through an instrument already familiar to the surgeon. Our proprietary software and easy to use graphical user interfaces allow the surgeon to make critical decisions in real time to help enable safer, faster, and more reproducible procedures to achieve improved patient outcomes.
Intraoperative Neuromonitoring Services
Through our NuVasive Clinical Services subsidiary, we provide onsite and remote monitoring of the neurological systems of patients undergoing spinal and brain-related surgeries. Monitoring the health of the nervous system during spinal surgery has been a key component of our strategy of product differentiation since early in our development. Over time, surgeon and hospital demand for neuromonitoring has increased along with the advancement of technologies and techniques used in IOM. Through our IOM services business, we provide onsite and remote monitoring of the neurological systems of patients undergoing spinal and brain-related surgeries.IONM. Our neurophysiologists are present in the operating room during procedures and work in partnership with supervising physicians who remotely oversee and interpret neurophysiological data gathered via broadband transmission over the internet. Through this service, data can be analyzed in real timereal-time by healthcare professionals for additional interpretation of intraoperative information and oversight, which we believe further improves the safety and reproducibility of the vast array of our spine surgery procedures.
Integrated Global Alignment
Current and emerging data illustrates a direct correlation between proper spinal alignment and long-term clinical outcomes. OurTo assist with surgical procedures, we offer a platform called Integrated Global Alignment, or iGA, platformwhich offers a global approach for assessing, preserving, and restoring spinal alignment in an effort to promote surgical effectiveness and efficiencies, lasting patient outcomes, and improved quality of life. Using our NuvaPlanning portfolio of software productsWe offer iGA for integrated operative solutions,thoracolumbar and cervical procedures, which allows surgeons canto use procedurally-based technologies to preoperatively calculate and evaluate alignment parameters and implant integration by accurately modeling surgery to create a reliable plan with clear results, and then conduct a real-time intraoperative assessment in order to correct the anterior and posterior column alignment in line with the surgical plan. Following a procedure, surgeons can use our iGA solutions to confirm the success of the procedure and effect on alignment by reviewing surgical results and easily comparing those results to the surgical plan. In addition to our software solutions, we also offer specific products that are designed to restore alignment, including our Reline posterior fixation portfolio, our VuePoint occipito-cervico-thoracic fixation system, and our Bendini spinal rod bending system.system which is designed to provide rapid intraoperative alignment assessment and rod customization.
Imaging Technology
Our LessRayLessray system is a software technologyan image enhancement platform designed to help surgeons and hospital staff manage radiation exposure associated with x-ray and other imaging technology, without compromising intraoperative images or visual accuracy. This is achieved through digital imaging processing technology that generates high resolutionhigh-resolution images of the surgical field from low resolutionlow-resolution fluoroscopy (or x-ray) images. We currently offer LessRayLessray as a standalone product but anticipate incorporatingand the LessRayLessray technology will also be incorporated into our Pulse surgical automation platform in the future.platform.
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Integrated Surgical Automation Platform
The Pulse platform is our integrated technology platform designed to comprehensively address the unique clinical and operational challenges of spine surgery. Pulse integrates multiple enabling technologies within a single, expandable platform and is engineered to improve workflow, reduce variability, and increase the reproducibility of surgical outcomes. The Pulse platform’s modular surgical automation platform which willarchitecture is designed to incorporate LessRay, applications for neuromonitoring, iGA surgical planning, patient-specific rod bending, smart imaging, navigation, and integration with robotics and other automation capabilities.smart tools in the future. We expect to continue to invest in the Pulse isplatform to support a combined hardware and software platform designed to achieve surgical efficiencies via real-time feedback to aid in clinical decision makingfull commercial launch of the technology and to optimize the procedural workflow in the operating room. In 2018, Pulse received 510(k) clearance from the United States Fooddevelop and Drug Administrationexpand its application offerings, including investments related to surgical automation and we expect to commercially launch Pulse in 2019.robotics.
MAGEC-EOSMAGEC Spinal Bracing and Distraction System
EarlyOur MAGEC system is designed to overcome the limitations of conventional adjustable rod treatments for early onset scoliosis, or EOS, and reduce the number of surgical procedures required throughout childhood. EOS refers to severely deformed curvatures of the spine diagnosed before the age of ten. EOS is a challenging health issue and can lead to more severe progressive deformities. Surgical treatments for EOS include the use of surgically adjustable expandable rods to control the spine deformity while still allowing the spine to grow until a child reaches an appropriate size or age for a more permanent solution, such as spinal fusion. Surgeries to adjust traditional growing rods are typically performed every six to nine months and are associated with scarring, elevated infection rates, postoperative pain, and impaired mobility as the child heals from surgery. Additionally, these surgeries involve repetitive exposure to general anesthesia, which can delay development and impair long-term cognitive function. The MAGEC-EOS system is designed to overcome the limitations of conventional adjustable rod treatments for EOS and reduce the number of surgical procedures required throughout childhood. Once our magnetically adjustable MAGEC growing rods are surgically implanted in a patient, they can be adjusted non-invasively using thean external remote controller. The ability to adjust growing rods without surgical intervention means that EOS patients can be treated with fewer planned surgeries. Our non-invasive adjustment technology enables physicians to perform more frequent adjustments in a non-surgical outpatient setting, thereby improving deformity correction and allowing for optimal spinal growth.
PRECICE Limb Lengthening SystemSpecialized Orthopedics
LimbThrough our NuVasive Specialized Orthopedics subsidiary, we develop and manufacture magnetically adjustable orthopedics products using the MAGEC technology. The Precice system is our primary specialized orthopedics product offering and is designed to treat and correct limb length discrepancies, or LLDs, refer to acaused by congenital deformity or injury resulting in one leg being shorter than the other. Large LLDs often require complex treatments including limb lengthening surgery to create equal limb length. The traditional limb lengthening surgical procedure includes the creation of a gap in the bone, or osteotomy, the attachment of wires or pins to the fractured bones, and the passing of the wires or pins through the skin to an external fixator, a scaffold-like frame that surrounds the limb. The external fixator distracts the bone when the patient or a family member manually turns the knobs on the fixator. These adjustments must be performed several times each day such that the bone is lengthened approximately one millimeter per day. Adjustments of the external fixator are very painful and associated with soft tissue disruption, disturbance of the wound healing process of the skin and soft tissue and high rates of pin site infection. In addition, traditional external fixation can result in significant psychosocial comorbidities that reduce quality of life for patients undergoing treatment, including anxiety, social disengagement, sleep disorders, depression and addiction to pain medication. The PRECICE LLDPrecice system uses a specialized intramedullary nail that, once surgically implanted, is lengthened using the MAGEC technology, to enablewhich enables non-invasive and painless adjustments using a pre-programmed external remote controller. As a result, PRECICE LLDPrecice enables physicians to customize therapy to the needs of the patient over time without the need for surgical re-intervention and provides improved quality of life and satisfaction for patients in need of surgical limb lengthening.
Research and Development
Our research and development efforts are primarily focused on developing our new technology platforms and further enhancing our existing products to improve and further integrate our procedural solutions to address unmet clinical needs while improving patientclinical, economic, and economicoperational outcomes. Our research and development group has extensive experience in developing products to treat spine pathologies. This group continues to work closely with our clinical advisors and spine surgeon customerssurgeons to design products and procedural solutions designed to improve patient outcomes, simplify techniques, and reduce patient trauma including subsequent hospitalization and rehabilitation times; and as a result reduce overall costs to patients and the healthcare system.
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International
As the spine market shifts towards minimally invasiveless-invasive surgery and international access to healthcare increases, it should provide us with an opportunity for accelerated growth outside the United States. Because our procedurally-integratedprocedurally integrated solutions and technologies treat similar pathologies around the world, we are focused on expanding our operations in select developed and emerging international markets. We are investing to tailor our products and technologies to meet varying international patient, surgeon and market requirements. We are also investing in expanding our global infrastructure to adapt to alternative distribution channels, to support differing language and customer service requirements, and to provide training and surgeon education in our MAS surgical techniques, our surgical instruments, products and our implantstechnologies to our international customers. We intend to continue to make targeted investments in select international markets in order to increase our commercial reach outside of the United States. Our international revenue,net sales, which excludesexclude Puerto Rico, was $205.6were $228.8 million or 19%22% of total revenuenet sales for the year ended December 31, 2018.2020.
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In the United States, we currently sell our procedurally-integratedprocedurally integrated solutions through a combination of exclusive and non-exclusive independent sales agents and directly-employed sales force. Each member of our United States sales force is responsible for a defined territory, with our independent sales agents acting as our sole representative in their respective territories. The determination of whether to engage a directly-employed sales representative or an independent sales agent is made on a territory–by-territory basis, with a focus on aligning the sales team with the best skills and experience with local surgeons’ needs. Our international sales force is comprised of directly-employed sales representatives, as well as exclusive distributors and independent sales agents. Directly-employed sales representatives make up the majority of our overall sales force.
Surgeon Training and Education
We devote significant resources to training and educating surgeons regarding the safety and reproducibility of our surgical techniques and our instruments and implants. We maintain state-of-the-art cadaver operating roomsprocedurally integrated solutions. Our surgeon education and training facilitiesprogram is led by our Clinical Professional Development team, and integrates surgical training with professional development and enables us to help educateintroduce surgeons regardingto our products atless-invasive approaches to spine surgery. At our corporate headquarters in San Diego, California. We continueCalifornia, we maintain our West Coast Experience Center, including a state-of-the-art cadaver operating theatre and research and development labs to help educate and train surgeons onsurgeons. In February 2021, we announced plans to expand our lateral techniques, including XLIF, and our other MAS platform products including: our proprietary neuromonitoring systems, MaXcess, biologics, and specialized implants. Our surgeon education program includes a Clinical Professional Development globalprogram with a new East Coast Experience Center in Englewood, New Jersey, scheduled to open later in 2021, where we will host competency-based courses and cadaveric trainings on our procedurally integrated solutions and showcase our Pulse platform which integrates surgicalin a dedicated demonstration lab. Additionally, we offer educational and training with professional development.courses globally through in-person formats and via virtual content, including through virtual conferences, video and social channels, to demonstrate the benefits of our innovative products and procedures.
Manufacturing and Supply
AsA substantial portion of our business has continued to scale, we significantly expandedimplant products are self-manufactured in our self-manufacturing capabilities in 2017 as we increased production at our approximately 180,000 square foot manufacturing facility in West Carrollton, Ohio. As we increase our self-manufacturing capabilities, we will look toWe also maintain adequate raw materialsa network of third-party suppliers sourcing alternativesfor certain implant and adequate supply to support our operations. We have identified or are in the process of identifying and qualifying additional suppliers, on a per product basis, for our highest volume products to best enable us to be able to maintain consistent supply to our customers. instrument products. Our outsourcing strategy is targeted at companies that meet U.S. Food and Drug Administration, (“FDA”),or FDA, International Organization for Standardization, (ISO),or ISO, and quality standards supported by internal policies and procedures. Supplier performance is maintained and managed through a supplier qualification, performance management and corrective action program intended to ensure that all of our product requirements are met or exceeded.
Our products are inspected, packaged and labeled, as needed, at our qualified suppliers or at our facilities in San Diego, headquarters, our Memphis, distribution facility or ourWest Carrollton, and Aliso Viejo facility.Viejo. Under our existing contracts with third-party manufacturers, we reserve the exclusive right to inspect and assure conformance of each product and product component to our specifications.
We currently rely on several tissue banks as our suppliers of allograft tissue implants, including for our Osteocel Plus and Osteocel Proproduct lines. Like our relationships with our device manufacturing suppliers, we subject our tissue processing suppliers to the same quality criteria in terms of selection, qualification, and verification of processed tissue quality upon receipt of goods, as well as hold them accountable to compliance with FDA regulations, state requirements, and as-voluntary industry standards (such as those put forward by the American Association of Tissue Banks).
We rely on two suppliers for PEEK, which comprises many of our partial vertebral body replacement and interbody product lines. lines. We rely on one, exclusive supplieralso work with a limited number of suppliers for certain components of our neuromonitoring platforms, and rely on one, exclusive suppliercontinue to develop redundancies for our neuromonitoring equipment that is used outsidecritical components within those supply chains.
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Table of the NVM5 and Pulse platforms.Contents
We, and our third-party manufacturers, are subject to the quality system regulations of the FDA, state regulations (such as the regulations promulgated by the California Department of Health Services), and regulations promulgated by foreign regulatory bodies (such as in the European Union). For tissue products, we are FDA registered and licensed in the States of California, New York, Florida, Maryland and Oregon. For our device implants and instruments, we are FDA registered, California licensed, CE marked and ISO certified. CE is an abbreviation for “Conformité Européenne” or European Conformity, and is the registration marking designating that a device can be commercially distributed throughout Europe. Our facilities and the facilities of our third-party manufacturers are subject to periodic announced and unannounced inspections by regulatory authorities, and may undergo compliance inspections conducted by the FDA, state, and/or international regulatory agencies.
Surgical Instrument, Implant Sets and Equipment Sales
For many of our customers, we provide surgical instrumentation sets, including both implants and instruments, as well as our neuromonitoring systems in a manner tailored to fulfill our customer’s obligations to meet surgery schedules. We do not generally receive separate economic value specific to the surgical instrument sets from the surgeons or hospitals that utilize them. In many cases, once the surgery is finished, the surgical instrument sets are returned to us, and we prepare them for shipment to meet future surgeries.
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We complement this implant and instrument shipment model with field-based instrument assets. This hybrid strategy is designed to improve customer service, minimize backlogs, increase asset turns, optimize freight costs, and maximize cash flow. Our pool of surgical equipment that we make available to hospitals continues to increase as we increase our product offering, expand our distribution channels and increase the market penetration of our products. These surgical instrumentation and implant sets are important to the growth of our business, and we anticipate additional investments in such assets going forward.
In certain cases, we will sell either surgical instruments, implant sets or both to our customers. While this does not constitute a material component of our business, as customer penetration and volume increases, these sales of sets allowsallow our customers to increase the amount of surgical volume performed locally. Additionally, LessRay units are sold as awe offer flexibility to customers for our capital sale or as a lease. We also intend to offer the Pulse platform through aequipment by offering capital sales and leasing model.arrangements. We do not have a long history of selling, leasing or servicing capital equipment, and we have recently invested and intend to continue to invest in building resources and expertise in this area.Selling and leasing of capital equipment do not make up a material portion of our total net sales.
Intellectual Property
We rely on a combination of patent, trademark, copyright, trade secret and other intellectual property laws, nondisclosure agreements and other measures to protect our intellectual property rights. In order to have a competitive advantage, we must develop and maintain the proprietary aspects of our technologies. We require our employees, (who we refer to as “shareowners”), consultants and advisors to execute confidentiality agreements in connection with their employment, consulting or advisory relationships with us. We also require our shareowners,employees, consultants and advisors who we expect to work on our products to agree to disclose and assign to us all inventions conceived using our property or which relate to our business. Despite any measures taken to protect our intellectual property, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary.
Patents
As of December 31, 2018,2020, we had over 1,1251,350 issued and pending patents world-wide, including over 530650 U.S. issued patents. Our issued and pending patents cover, among other things:
MAS surgical access instrumentation and methodology, including our XLIF procedure and aspects thereof;
• | Surgical access instrumentation and methodology, relating to our XLIF and X360 procedures and aspects thereof, as well as technologies and methods related to our C360 portfolio; |
Neurophysiology enabled instrumentation and methodology, including pedicle screw test systems, software hunting algorithms, navigated guidance, rod bending and surgical access systems;
• | Neurophysiology enabled instrumentation and methodology, including pedicle screw test systems, software hunting algorithms, navigated guidance, rod bending and surgical access systems; |
Implants and related instrumentation and targeting systems;
• | Spinal implants and related instrumentation and targeting systems; |
Biologics, including Osteocel Plus and Osteocel Pro, Formagraft and AttraX;
• | Biologics, including Osteocel Plus and Osteocel Pro, Formagraft and AttraX; |
Magnetic technology for non-invasive distraction of an implanted device, including the MAGEC technology platform;
• | Magnetic technology for non-invasive distraction of an implanted device, including the MAGEC technology platform; |
Digital imaging processing technology that generates high resolution images of the surgical field from low resolution scans, including the LessRay technology platform; and
• | Digital imaging processing technology that generates high resolution images of the surgical field from low resolution scans, including the Lessray technology platform; |
• | Porous PEEK technology, included in our Cohere and Coalesce spinal implants; and |
Porous PEEK technology, included in our Cohere, Coalesce and Coalesce Straight interbody implants.
• | Surgical navigation and robotics technology. |
Our issued patents began to expire in 2018. We do not believe that the expiration of any single patent is likely to significantly affect our intellectual property position.
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The medical device industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. Patent litigation can involve complex factual and legal questions, can be expensive, and its outcome is uncertain. Our success will depend in part on our not infringing patents issued to others, including our competitors and potential competitors. As the number of entrants into our market increases, the possibility of future patent infringement claims against us grows. While we make extensive efforts to ensure that our products do not infringe other parties’ patents and proprietary rights, our products and methods may be covered by patents held by our competitors. There are numerous risks associated with our intellectual property. For a complete discussion of these risks, please see the “Risk Factors” section of this Annual Report.
Trademarks
As of December 31, 2018,2020, we had over 265320 trademark registrations in both domestic and foreign regions.
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Competition within the industry is primarily based on technology, innovation, quality, reputation and customer service. Our significant competitors are Medtronic Sofamor Danek, or Medtronic, DePuy/Synthes, a Johnson & Johnson company, Stryker Spine, Globus Medical, and Zimmer Biomet Spine, which together represent a significant portion of the spine market. We also face competition from a significant number of smaller companies with more limited product offerings and geographic reach than our larger competitors. These companies, who represent intense competition in specific markets, include Orthofix International N.V., Alphatec Spine, SeaSpine Holdings Corporation, and others. With respect to our neuromonitoring systems, we primarily compete with Medtronic and Cadwell Industries. Our IOMIONM services business competes with SpecialtyCare and numerous smaller and regional neuromonitoring companiesas well as insourced neuromonitoring companies. We also face competition from physician owned distributorships, or PODs, which are medical device distributors that are owned, directly or indirectly,functions operated by physicians. However, these PODs have come under scrutiny by the Office of Inspector General, or OIG as the associated physicians derive a portion of their revenue from selling or arranging for the sale of medical devices for use in procedures they perform on their own patients. The prevalence of these PODs may impact our ability to grow.hospitals.
The United States Government Regulation
Our products are medical devices and human tissue products subject to extensive regulation by the FDA and other regulatory bodies both inside and outside of the United States. Each of these agencies requires us - to varying degrees - to comply with laws and regulations governing the development, testing, manufacturing, storage, labeling, marketing and distribution of our products.
FDA’s Premarket Clearance and Approval Requirements
Unless an exemption applies, each medical device that we market and sell in the United States must first receive either premarket clearance (by submitting a 510(k) notification) or premarket approval (by filing a premarket approval application, or PMA) from the FDA. In addition, certain modifications to marketed devices may require 510(k) clearance or approval of a PMA supplement. The FDA will clear marketing of a medical device through the 510(k) process if it is demonstrated that the new product is substantially equivalent to other 510(k)-cleared products (referred to as a predicate device). The FDA’s 510(k) clearance process usually takes between three and six months from the date the application is completed, but may last longer. The process of obtaining PMA approval is much more costly, lengthy and uncertain than the 510(k) clearance process and generally takes between one and three years, or even longer, from the time the application is submitted to the FDA until any approval is obtained. In addition, a clinical trial is almost always required to support a PMA application and may be required for a 510(k) premarket notification.
In 2018, the FDA issued draft guidance and announced steps to modernize the 510(k) clearance pathway that, if finalized and implemented, could impact the ability of medical device manufacturers to obtain or maintain 510(k) clearance for devices. Among other initiatives, the FDA has proposed to “sunset” the use of older predicate devices for purposes of comparison in new device 510(k) clearance submissions. If we cannot establish that a new or modified product is substantially equivalent to a predicate device, we may be required to seek pre-market approval through the PMA process. There are numerous risks associated with the PMA process, which typically requires conducting clinical trials with high costs and uncertain outcomes. For a complete discussion of these risks, please see the “Risk Factors” section of this Annual Report.
Human Cell, Tissue, and Cellular and Tissue Based Products
Our allograft products, including our Triad and ExtenSure, and our Osteocel Plus and Osteocel Pro products, are regulated by the FDA as Human Cell, Tissue, and Cellular and Tissue Based Products. FDA regulations do not currently require these minimally manipulated human tissue-based products to be subjected to a premarket approval or pre-market notification process before they are marketed if they are deemed to meet the requirements of a “361” product under the Public Health Safety Act.
We are however, required to register with the FDA as a provider of such products and to list these products with the FDA and comply with its Current Good Tissue Practices for Human Cell, Tissue, and Cellular- and Tissue-Based Product Establishments. The FDA periodically inspects tissue facilities to determine compliance with these requirements. Entities that provide us with allograft bone tissue are responsible for performing donor recovery, donor screening, donor testing, processing, and packaging and our compliance with those aspects of the Current Good Tissue Practices regulations that regulate those functions are dependent upon the actions of these independent entities.
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The procurement and transplantation of allograft bone tissue is subject to United States federal law pursuant to the National Organ Transplant Act (NOTA), a criminal statute that prohibits the purchase and sale of human organs used in human transplantation - including bone and related tissue - for “valuable consideration” (as defined in the NOTA). The NOTA permits reasonable payments associated with the removal, transportation, processing, preservation, quality control, implantation and storage of human bone tissue. With the exception of removal and implantation, we provide services, directly or indirectly, in all of these areas. We make payments to vendors in consideration for the services they provide in connection with the recovery and screening of donors. Failure to comply with the requirements of NOTA could result in enforcement action against us.
The procurement of human tissue is also subject to state anatomical gift acts and some states have statutes similar to NOTA. In addition, some states require that tissue processors be licensed by that state. Failure to comply with state laws could also result in enforcement action against us.
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After a device is placed on the market, numerous regulatory requirements continue to apply. These regulatory requirements include, but are not limited to, the following:
product listing and establishment registration;
• | product listing and establishment registration; |
adherence to the Quality System Regulation which requires stringent design, testing, control, documentation and other quality assurance procedures;
• | adherence to the Quality System Regulation which requires stringent design, testing, control, documentation and other quality assurance procedures; |
labeling requirements and FDA prohibitions against the promotion of off-label uses or indications;
• | labeling requirements and FDA prohibitions against the promotion of off-label uses or indications; |
adverse event reporting;
• | adverse event reporting; |
post-approval restrictions or conditions, including post-approval clinical trials or other required testing;
• | post-approval restrictions or conditions, including post-approval clinical trials or other required testing; |
post-market surveillance requirements;
• | post-market surveillance requirements; |
the FDA’s recall authority, whereby it can ask for, or require, the recall of products from the market; and
• | the FDA’s recall authority, whereby it can ask for, or require, the recall of products from the market; and |
requirements relating to voluntary corrections or removals.
• | requirements relating to voluntary corrections or removals. |
Failure to comply with applicable regulatory requirements can result in fines and other enforcement actions by the FDA, which could adversely impact our business.
We are also subject to announced and unannounced inspections by the FDA, the California Food and Drug Branch, American Association of Tissue Banking, as well as other regulatory agencies overseeing the implementation and adherence of applicable state and federal device and tissue licensing regulations. These inspections may include our manufacturing and subcontractors’ facilities.
Pursuant to FDA regulations, we can only market our products for cleared or approved uses. Although surgeons are permitted to use medical devices for indications other than those cleared or approved by the FDA based on their medical judgment, we are prohibited from promoting products for such “off-label” uses.
Healthcare Regulation and Commercial Compliance
The healthcare industry is highly regulated and changes in laws and regulations can be significant. The federal government and all states in which we currently operate regulate various aspects of our business. Changes in the law or new interpretation of existing laws can have a material effect on our permissible activities, the relative costs associated with doing business and the amount of reimbursement by government and other third-party payers.
Anti-kickbackAnti-Kickback Statute
We are subject to the federal anti-kickback statuteAnti-Kickback Statute which, among other things, prohibits the knowing and willful solicitation, offer, payment or receipt of any remuneration, direct or indirect, in cash or in kind, in return for, or to induce the referral of patients for, items or services covered by Medicare, Medicaid and certain other governmental health programs. Under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (ACA), neither knowledge of the anti-kickback statuteAnti-Kickback Statute nor the specific intent to violate the law is a requirement for being found in violation of such laws. Violation of the anti-kickback statuteAnti-Kickback Statute may result in civil or criminal penalties and exclusion from Medicare, Medicaid and other federal healthcare programs, and - according to ACA - now provides a basis for liability under the False Claims Act. Many states have enacted similar statutes, which are not limited to items and services paid for under Medicare or a federally funded healthcare program. We believe our operations materially comply with the anti-kickback statutes;laws; however, because these provisions are interpreted broadly by regulatory authorities, we cannot be assured that law enforcement officials or others will not challenge our operations under these statutes.
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The Federal False Claims Act (in particular -itsits “qui tam” or “whistleblower” provisions) allow(s)allows private individuals to bring actions in the name of the United States government alleging that a defendant has made false claims for payment from federal funds. In addition, various states are considering enacting or have enacted laws modeled after the Federal False Claims Act, penalizing false claims against state funds. In 2013, we received a federal administrative subpoena from the OIG in connection with an investigation into possible false or otherwise improper claims submitted to Medicare and Medicaid. The subpoena sought discovery of documents for the period January 2007 through April 2013. In July 2015, we entered into a definitive settlement agreement with the U.S. Department of Justice, or DOJ, to settle this matter. Under the terms of the agreement, we paid $13.5 million plus fees and accrued interest of approximately $0.3 million to resolve this matter. The settlement was not an admission of liability or wrongdoing by us, and we were not required to enter into a corporate integrity agreement with the OIG as part of the settlement. In August 2015, we received a civil investigative demand, or CID, issued by the DOJ pursuant to the federal False Claims Act. The CID requires the delivery of a wide range of documents and information related to an investigation by the DOJ concerning allegations that we assisted a physician group customer in submitting improper claims for reimbursement and made improper payments to the physician group in violation of the Anti-Kickback Statute. We are cooperating with the DOJ in regards to this matter. Any adverse findings related to this investigation could result in material financial penalties against the Company.
Health Insurance Portability and Accountability Act
Under the Health Insurance Portability and Accountability Act of 1996, as was amended in 2005 and in 2009, or HIPAA, a Covered Entity as further defined under HIPAA, is required to adhere to certain requirements regarding the use, disclosure and security of protected health information, or PHI. In the past, HIPAA has generally affected us indirectly, as NuVasive is generally neither a Covered Entity nor a Business Associate, as further defined under HIPAA, to Covered Entities, except that our provision of IOMIONM services through various subsidiaries may create a Business Associate relationship; additionally, we treat our Puerto Rico subsidiary as a Covered Entity. Regardless of Covered Entity status under HIPAA, in those cases where patient data is received, NuVasive is committed to maintaining the security and privacy of PHI. The potential for enforcement action against us is now greater, as the U.S. Department of Health and Human Services, (HHS)or HHS, can take action directly against Business Associates. Thus, while we believe we are and will be in compliance with all required HIPAA standards, there is no guarantee that the government will agree. Enforcement actions can be costly and interrupt regular operations of our business.
Foreign Corrupt Practices Act
The United States and foreign government regulators have increased regulation, enforcement, inspections and governmental investigations of the medical device industry, including increased United States government oversight and enforcement of the Foreign Corrupt Practices Act.Act, or FCPA. The FCPA and similar anti-bribery laws in non-U.S. jurisdictions generally prohibit companies and their intermediaries from making improper payments for the purpose of obtaining or retaining business. The FCPA also imposes accounting standards and requirements on publicly traded U.S. corporations and their foreign affiliates, which are intended to prevent the diversion of corporate funds to the payment of bribes and other improper payments. If the United States or another foreign governmental authority were to conclude that we are not in compliance with applicable laws or regulations, such governmental authority can impose fines, delay or suspend regulatory clearances, institute proceedings to detain or seize our products, issue a recall, impose operating restrictions, enjoin future violations and assess civil penalties against us or our officers or employees, and can recommend criminal prosecution to the Department of Justice.DOJ. Moreover, governmental authorities can ban or request the recall, repair, replacement or refund of the cost of any device or product we manufacture or distribute. We are also potentially subject to the UK Bribery Act, which would also subject us to the imposition of civil and criminal fines. Any of the foregoing actions could result in decreased sales as a result of negative publicity and product liability claims, and could have a material adverse effect on our financial condition, results of operations and prospects.
Physician Payments Sunshine Act of 2009 (Sunshine Act)
The Sunshine Act was enacted into law in 2010 and requires public disclosure to the United States government of payments to physicians and teaching hospitals, including in-kind transfers of value such as free gifts or meals. The Act also provides penalties for non-compliance. The Sunshine Act requires that we file an annual report on March 31 of a calendar year for the transfers of value incurred for the prior calendar year. This law, along with various international and individual state reporting requirements, such as in Massachusetts and Vermont, increases the possibility that a healthcare company may run afoul of one or more of the requirements.
Compliance Program
A compliance program is a set of internal controls established by a company to prevent and/or detect any non-compliant activities and to address properly those issues that may be discovered. The United States government has recommended that healthcare companies, among others, develop and maintain an effective compliance program to reduce the likelihood of any such non-compliance by the company, its employees, agents and contractors. In addition, some states, such as Massachusetts and California, now require certain healthcare companies to have a formal compliance program in place in order to do business within the state. For years, we have maintained a compliance program structured to meet the requirements of the federal sentencing guidelines for an effective compliance program and the model compliance program guidance promulgated by HHS over the years. Our program includes, but is not limited to, a Code of Ethical Business Conduct, designation of a compliance officer, oversight by a designated committee of our Board of Directors, policies and procedures, a confidential disclosure method (a hotline), and conducting periodic audits to ensure compliance.compliance audits.
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Sales of medical devices outside the United States are subject to foreign government regulations, which vary substantially from country to country. The time required to obtain clearance or approval by a foreign country may be longer or shorter than that required forof the FDA, approval, and the requirements may differ.
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The European Union has adopted numerous directives and standards regulating the design, manufacture, clinical trials, labeling, and adverse event reporting for medical devices. Additionally, certain countries (such as Switzerland), have voluntarily adopted laws and regulations that mirror those of the European Union with respect to medical devices. Devices that comply with the requirements of a relevant directive will be entitled to bear “CE” conformity marking, and, accordingly, can be commercially distributed throughout Europe. The method of assessing conformity varies depending on the class of the product, but normally involves a combination of self-assessment by the manufacturer and a third-party assessment by a “Notified Body”. This third-party assessment consists of an audit of the manufacturer’s quality system and technical review of the manufacturer’s product. We have now successfully passed several Notified Body audits since our original certification in 2001, granting us ISO certification and allowing the CE conformity marking to be applied to certain of our devices under the European Union Medical Device Directive.
In 2017, the European Union adopted the EU Medical Device Regulation (Council Regulations 2017/745) which imposes stricter requirements for the marketing and sale of medical devices, including new quality system and post-market surveillance requirements. In 2017, the European Union adopted the EU Medical Device Regulation (Council Regulations 2017/745) which will replace existing directives and impose stricter requirements for the marketing and sale of medical devices, including new clinical evaluation, quality system, and post-market surveillance requirements. The regulation hasinitially provided for a three-year implementation period, with full application of the regulation to occur in May 2020, but this timeline has been delayed to May 2020 and will replace2021 due to the existing directives on medical devices in the European Union.COVID-19 pandemic. After May 2020,2021, medical devices marketed in the European Union will require certification according to these new requirements, except that devices with valid CE certificates, issued pursuant to the Medical Device Directive before May 2020,2021, may be placed on the market until May 2024. Complying with this new regulation will require us to incur significant costs and failure to meet the requirements of the regulation could adversely impact our business in the European Union and other countries that utilize or rely on European Union requirements for medical device registrations.
Following a national referendum and enactment of legislation by the government of the United Kingdom, or the UK, the UK formally withdrew from the European Union and ratified a trade and cooperation agreement governing its future relationship with the European Union. The agreement, which is being applied provisionally from January 1, 2021, until it is ratified by the European Parliament and the Council of the European Union, addresses trade, economic arrangements, law enforcement, judicial cooperation, and a governance framework, including procedures for dispute resolution, among other things. Because the agreement merely sets forth a framework in many respects and will require complex additional bilateral negotiations between the UK and the European Union, significant political and economic uncertainty remains about how the precise terms of the relationship between the parties will differ from the terms before withdrawal. Further, pursuant to guidance issued by the UK Government, the Medicines and Healthcare products Regulatory Agency (MHRA) became the standalone medicines and medical devices regulator for the UK as of January 1, 2021. A new mark referred to as “UKCA” (UK Conformity Assessed) has also been introduced and will replace the CE conformity mark. UK Approved Bodies designated by the MHRA will conduct conformity assessments against applicable requirements of the UKCA mark. Obtaining the UKCA conformity mark will be optional beginning in January 2021 and will become mandatory in July 2023. Although CE conformity marketing and certificates issued by Notified Bodies will continue to be recognized in the UK through June 2023, all medical devices must be registered with the MHRA as of January 1, 2021. Additionally, for manufacturers based outside of the UK, a single UK Responsible Person with a place of business in the UK must be established. Complying with this new regulatory framework will require us to invest in additional resources and could be expensive, time-consuming and disruptive to our existing operations in the UK.
In 2014, the Japanese government made revisions to the Pharmaceutical Affairs Law (now called PMD Act) that made significant changes to the preapproval regulatory systems. These changes have - in part - stipulated that, in addition to obtaining a manufacturing or import approval from the Ministry of Health, Labor and Welfare, certain low-risk medical devices can now be evaluated by third-party organizations. Based on the risk-based classification, manufacturers are provided three procedures for satisfying the PMD Act requirements prior to placing products on the market: Pre-market Submission, or Todokede; Pre-market Certification, or Ninsho; and Pre-market Approval, or Shonin. NuVasive markets devices in Japan that are assessed by both government entities and third-party organizations using all three procedures in place for manufacturers. The level of review and time line for medical device approval will dependdepends on the risk-based classification and subsequent regulatory procedure that the medical device is aligned based on assessment against the current PMD Law. Manufacturers must also obtain a manufacturing or import license from the prefectural government prior to importing medical devices. We also pursue authorizations required by the prefectural government as required.
Device and tissue premarket approval and/or registration and/or facility licensing requirements also exist in other markets where international NuVasive facilities are established and/or where we may conduct business, including, but not limited to, Southeast Asia, Australia, and Latin America. Such requirements vary by country and NuVasive has established procedures to drive its compliance with these requirements.
Data protection laws, including the EU General Data Protection Regulation, (“GDPR”),or GDPR, also apply to our international operations. The GDPR requires, among other things, obligations and restrictions on the ability to collect, analyze and transfer EU personal data and the prompt notice of data breaches to data subjects and supervisory authorities in certain circumstances. These data protection regulations create a range of compliance obligations and permit substantial fines for noncompliance.
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Third-Party Reimbursement
Broadly speaking, payer pushback on spine surgery and IOMIONM services in the United States has increased in the recent past, and we believe this has had an overall dampening effect on spine procedure volumes and prices.
We expect that sales volumes and prices of our products and services will continue to be largely dependent on the availability of reimbursement from third-party payers, such as governmental programs, for example, Medicare and Medicaid, private insurance plans, accountable care organizations and managed care programs. Reimbursement is contingent on established coding for a given procedure, coverage of the codes by the third-party payers, and adequate payment for the resources used.
Physician coding for procedures is established by the American Medical Association, or AMA. For coding related to spine surgery, the North American Spine Society, or NASS, is the primary liaison to the AMA. In July of 2006, NASS established the proper physician coding for the XLIF procedure by declaring it to be encompassed in existing codes that describe an anterolateral approach to the spine. This position was confirmed in a formal statement by NASS in January 2010. Hospital coding is established by the Centers for Medicare & Medicaid Services. XLIF is included in the nomenclature for hospital codes as an additional descriptor under long standing codes. All physician and hospital coding is subject to change which could impact reimbursement and physician practice behavior.
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Independent of the coding status, third-party payers may deny coverage based on their own criteria, including if they feel that a device or procedure is not well established clinically, is not the most cost-effective treatment available, or is used for an unapproved indication. At various times in the past, certain insurance providers have adopted policies of not providing reimbursement for the XLIF procedure. We have worked with our surgeon customers and NASS who, in turn, have worked with these insurance providers to supply the information, explanation and clinical data they require to categorize the XLIF procedure as a procedure entitled to reimbursement under their policies. At present, the majority ofmost major health insurance companies in the United States provide reimbursement for XLIF procedures.
However, certain carriers, large and small, may have policies significantly limiting coverage of XLIF, Interlaminar Lumbar Interbody Fusion, or ILIF, Osteocel Plus and Osteocel Pro, cervical interbody implants, and/or other procedures, products or services that we offer. We will continue to provide resources to patients, surgeons, hospitals, and insurers in order to ensure optimum patient care and clarity regarding reimbursement and work to remove any and all non-coverage policies. National and regional coverage policy decisions are subject to unforeseeable change and have the potential to impact physician behavior and reimbursement for physician services. We cannot offer definitive time frames or final outcomes regarding reversal of the coverage-limiting policies, as the process is dictated by the third-party insurance providers. For a discussion of these risks, please see the “Risk Factors” section of this Annual Report.
Payment amounts are established by government and private payer programs and are subject to fluctuations, which could impact physician practice behavior. Third-party payers are increasingly challenging the prices charged for a wide range of medical products and services, including those in spine and intraoperative monitoring where we participate.
In international markets, reimbursement and healthcare payment systems vary significantly by country and many countries have instituted price ceilings on specific product lines. There can be no assurance that our products will be accepted by third-party payers, that reimbursement will be available, and/or that the third-party payers’ reimbursement policies (if available) will not adversely affect our ability to sell our products profitably.
In the United States, as a result of healthcare reform, third-party payers are increasingly required to demonstrate they can improve quality and reduce costs; we accordingly see an increase in pre-approval/prior authorizations and non-coverage policies citing higher levels of evidence required for medical therapies and technologies. In addition, insured individuals are facing increased premiums and higher out–of-pocket costs for medical coverage, which can lead a patient to delay medical treatment. An increasing number of insured individuals receive their medical care through managed care programs, which monitor and often require pre-approval of the services that a member will receive. The percentage of individuals covered by managed care programs is expected to grow in the United States over the next decade.
Overall escalating costs of medical products and services has led to, and is expected to continue to lead to, increased pressures on the healthcare industry to reduce the costs of products and services. There can be no assurance that third-party reimbursement and coverage will be available or adequate, or that future legislation, regulation, or reimbursement policies of third-party payers will not adversely affect the demand for our products and services or our ability to sell these products and services on a profitable basis. The unavailability or inadequacy of third-party payer coverage or reimbursement could have a material adverse effect on our business, operating results and financial condition. For a discussion of these risks, please see the “Risk Factors” section of this Annual Report.
Shareowners (our employees)
We refer to our employees as “shareowners.” 16
Human Capital Resources
Workforce Composition
As of December 31, 2018,2020, we havehad approximately 2,600 shareowners.2,700 employees worldwide. Approximately 2,200 employees were located within the U.S. and 500 employees were located outside of the U.S., primarily throughout Europe and Asia. None of our employees are represented by a labor union. Employees of our wholly-owned subsidiary, NuVasive Netherlands B.V., based in the Netherlands, are covered by a Works Council. In addition to our shareowners,employees, we partner with independent sales agentsrepresentatives and independent distributors who sell our products in the United States and internationally. None
In the United States, our sales force consists of directly employed sales representatives and independent sales representatives who are responsible for particular geographic regions of the country. Outside of the United States, our sales force consists of directly employed sales representatives, independent sales representatives and independent territory-based distributors. We operate in a highly competitive industry and it is essential that we attract and retain qualified personnel through competitive compensation and benefits and a rewarding work environment in order to achieve our strategic business objectives. In particular, competition for sales talent in the spine industry is significant. Our sales force provides a delivery and consultative service to our surgeon and hospital customers, and our sales representatives often develop long-lasting relationships with the customers they serve. Accordingly, recruiting sales representatives with appropriate expertise, retaining our talent, and incentivizing our sales force is important to our success. We also believe we attract and retain sales talent based on the breadth of our shareowners orspine product and service offerings, our enabling technologies, our commitment to investing in research and development and our new product innovation pipeline, as well our world-class surgeon training and education program, all of which we believe makes NuVasive a destination of choice for top sales agentstalent.
Compensation and Benefits
We offer competitive benefit packages, supporting our employees as they help to transform spine surgery. This includes encouraging a culture of health by providing cost-effective wellness programs to best serve our employees and their family members. Our comprehensive benefits package may include competitive pay, annual incentive awards and bonus opportunities, healthcare and retirement benefits, an Employee Stock Purchase Plan, paid time off and sick leave, flexible work schedules, remote working opportunities, and a wellness program.
Talent Development
We believe that success comes from investing in our people and ensuring our work force is aligned with our mission and values. To achieve this goal, we devote time and resources to ensure that throughout our organization, employees are representedfamiliar with our business, industry and product offerings. Training is offered to new employees which teaches the anatomy and pathologies of the spine and our surgical procedures, and our sales representatives receive additional comprehensive training on our various product offerings. In addition, a key driver of the Company’s future growth is our ability to develop leaders. We are committed to identifying and developing talent to help those employees accelerate their growth and achieve their career goals.
Employee Communication and Engagement
We value open and direct communication with our employees about their experiences. We use a variety of channels to obtain employee feedback, including employee surveys, open forums with leadership, and employee resource groups. Our annual employee survey provides us with actionable data for the overall Company and each department and also provides managers with upward feedback on how they are progressing against expectations. Each year, the input received through these mechanisms is used to help evolve our working environment and strengthen our culture.
Diversity and Inclusion
We recognize the value associated with fostering a work environment that is culturally diverse and inclusive. Our goal is to cultivate a respectful and professional environment where all voices are heard and valued. We have dedicated personnel focused on our diversity and inclusion vision and have established employee resource groups, which aim to highlight the value of diversity, inclusion and engagement, while providing professional development opportunities for employees of all genders, experience levels, and locations. As we seek to create a more diverse and inclusive workforce, we have begun to monitor voluntarily disclosed diversity data to review hiring, promotion and attrition overall at the company and at the department level. We also review performance data and promotion and compensation information to ensure fair and objective decision-making.
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Community
Our employees and sales representatives have a long history of providing support and care to our communities, donating time, resources and funds to local causes. Since 2009, we have leveraged our expertise in spine care to give back to local and global communities through the NuVasive Spine Foundation (“NSF”). NSF supports life-changing spine surgery for individuals around the world with limited access to high quality medical treatment by a labor union,working with surgeons to advance the quality of spine care in disadvantaged communities. In addition, through our grants program, we support medical research and education, charitable and philanthropic endeavors. We believe in giving back, and we also believe it is important to operate our shareownerCompany in a socially responsible manner.
Health, Safety, and agency relationsWellness
We are good.committed to the protection of our employees, customers, communities and the environment. Our operations require the use of hazardous materials that subject us to various federal, state, and local environmental and safety laws and regulations. Our key areas of focus include corporate compliance with responsible hazardous waste management, recycling, emergency preparedness, as well as various initiatives to improve our health and safety programs with the goal of reducing and ultimately eliminating serious injuries.
In response to the COVID-19 pandemic, we adopted a broad approach to increased safety, including work-at-home arrangements for employees who were able to do so, working shift adjustments to decrease the number of people in our manufacturing and distribution facilities, requirements for the wearing of masks and for physical distancing, increased cleaning between shifts, readily available hand sanitizing stations, widespread signage and messaging reminding employees of the importance of these measures and other steps.
Human Capital Governance
Our Board of Directors receives regular updates on topics related to talent development, retention and recruiting initiatives, our diversity and inclusion program, succession planning, employee engagement and the results from our annual employee survey. Management also works closely with the Compensation Committee to establish goals and objectives and metrics in connection with the design and funding of the annual bonus opportunity for our employees. Additionally, the Nominating, Corporate Governance and Compliance Committee and the Audit Committee share oversight responsibilities related to the Company’s Code of Ethical Business Conduct which establishes policies pertaining to, among other things, employee conduct in the workplace, workplace safety, confidentiality, conflicts of interest, accuracy of books, records and financial statements, securities trading, anti-corruption, competition laws, interactions with health care professionals and political and charitable activities.
Corporate Information
Our business was incorporated in Delaware in July 1997. Our principal executive offices are located at 7475 Lusk Boulevard, San Diego, California 92121, and our telephone number is (858) 909-1800. Our website is located at www.nuvasive.com.www.nuvasive.com.
We file our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports, electronically with the Securities and Exchange Commission, (the Commission).or the Commission. We make these reports available free of charge on our website under the investor relations page as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Commission. All such reports were made available in this fashion during 2018.2020.
The public can also obtain any documents that we file with the Commission at http://www.sec.gov.www.sec.gov.
This report may refer to brand names, trademarks, service marks or trade names of other companies and organizations, and these brand names, trademarks, service marks and trade names are the property of their respective holders.
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An investment in our common stock involves a high degree of risk. Risk factors that could cause actual results to differ from our expectations and that could negatively impact our financial condition and results of operations are summarized and set forth in detail below and elsewhere in this report. If any of these risks actually occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected. Under these circumstances, the trading price of our common stock could decline, and you may lose all or part of your investment. Further, additional risks not currently known to us or that we currently believe are immaterial also may impair our business, operations, liquidity and stock price materially and adversely. You should consider carefully the risks and uncertainties describedsummarized and set forth in detail below and elsewhere in this report before you decide to invest in our common stock.
Summary of Risk Factors
We are providing the following summary of the risk factors contained in this Annual Report on Form 10-K to enhance the readability and accessibility of our risk factor disclosures. This summary does not address all of the risks that we face. We encourage you to carefully review the full risk factors contained in this Annual Report on Form 10-K in their entirety for additional information regarding the material factors that make an investment in our securities speculative or risky. The primary categories by which we classify risks include those related to: (i) our business and industry, (ii) our commercial operations and plans for future growth, (iii) litigation and intellectual property, (iv) regulatory and compliance, (v) our financial results and financing needs, and (vi) the securities markets and ownership of our common stock. Set forth below within each of these categories is a summary of the principal factors that make an investment in our common stock speculative or risky.
Risks Related to Our Business and Industry
• | We are subject to risks associated with public health threats, including the ongoing COVID-19 pandemic, which has had, and we expect will continue to have, a material adverse effect on our business. |
• | To be commercially successful, we must effectively demonstrate to surgeons and hospitals the value proposition of our products and procedural solutions compared to those of our competitors. |
• | We operate in a highly competitive market segment that is subject to rapid change, and if we are unable to compete successfully, our sales and operating results may suffer. |
• | Third-party reimbursement policies and practices, including non-coverage decisions, can negatively impact our ability to sell our products and services. |
• | Pricing pressure from our competitors, hospital customers and insurance providers can negatively impact our ability to sell our products and services. |
• | Quality or safety issues affecting our products could harm our reputation, result in liability and adversely impact our business. |
• | Our IONM business exposes us to risks inherent with the sale of services. |
Risks Related to our Commercial Operations and Plans for Future Growth
• | If we are unable to maintain and expand our network of direct and independent sales representatives, we may not be able to generate anticipated sales. |
• | We may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy. |
• | Our reliance on a limited number of suppliers and manufacturers could limit our ability to meet demand for our products in a timely manner or within our budget. |
• | Manufacturing risks may adversely affect our ability to manufacture products and could reduce our gross margins and negatively affect our operating results. |
• | The loss of key employees, or our inability to recruit, hire and retain skilled and experienced personnel, could negatively impact our ability to effectively manage and expand our business. |
• | Cybersecurity risks and the failure to maintain the confidentiality, integrity, and availability of our computer hardware, software, and Internet applications and related tools and functions could result in harm to our business and/or subject us to costs, fines or lawsuits. |
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Risks Related to Litigation and Intellectual Property
• | Defending against litigation or other proceedings or third-party claims of intellectual property infringement could require us to spend significant time and money, and if we are unsuccessful, we may be obligated to pay damages and halt sales of our products. |
• | We are currently, and may in the future be, subject to claims and lawsuits that could cause us to incur significant legal expenses and result in harm to our business. |
• | Our ability to protect our intellectual property and proprietary technology through patents and other means is uncertain. |
• | If we are unable to protect the confidentiality of our trade secrets, our business and competitive position could be harmed. |
• | Third parties may assert ownership or commercial rights to inventions we develop. |
• | If personal injury lawsuits are brought against us, our business may be harmed, and we may be required to pay damages that exceed our insurance coverage. |
Risks Related to Regulatory and Compliance
• | We are subject to rigorous FDA and other governmental regulations regarding the development, manufacture, and sale of our products and we may incur significant expenses to comply with these regulations and develop products that satisfy these regulations. |
• | Failure or alleged failure to comply with FDA and other governmental regulations can result in investigations and other regulatory proceedings, which are expensive and could divert management attention. |
• | We are subject to federal, state and foreign fraud and abuse laws and health information privacy and security laws, which, if violated, could subject us to substantial penalties. |
• | We may fail to obtain or maintain foreign regulatory approvals to market our products in other countries. |
• | If we fail to obtain, or experience significant delays in obtaining, FDA clearances or approvals for our future products or product enhancements, our ability to commercially distribute and market our products could suffer. |
• | The misuse or off-label use of our products may harm our reputation in the marketplace, result in injuries that lead to product liability suits or result in costly investigations, fines or sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be costly to our business. |
• | If we or our suppliers fail to comply with the FDA’s quality system regulations, ISO or other applicable regulations and standards, the manufacture and processing of our products could be delayed or interrupted and we may be subject to an enforcement action by the FDA or other government agencies. |
• | Our relationships with physicians could be subject to additional scrutiny from regulatory enforcement authorities and could subject us to possible administrative, civil or criminal sanctions. |
Risks Related to Our Financial Results and Need for Financing
• | We may be unable to grow our net sales or earnings as anticipated, which may have a material adverse effect on our future operating results. |
• | We have a significant amount of outstanding indebtedness, and our financial condition and results of operations could be adversely affected if we do not effectively manage our liabilities. |
• | We may need additional financing in the future to meet our capital needs or to make opportunistic acquisitions and such financing may not be available on favorable terms, if at all, and may be dilutive to existing stockholders. |
Risks Related to the Securities Markets and Ownership of Our Common Stock
• | We expect that the price of our common stock will fluctuate substantially, potentially adversely affecting the ability of investors to sell their shares. |
• | Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change of control, even if an acquisition would be beneficial to our stockholders, which could affect our stock price adversely and prevent attempts by our stockholders to replace or remove our current management. |
• | We do not intend to pay cash dividends. |
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Risk Factors
Risks Related to Our Business and Industry
We are subject to risks associated with public health threats, including the ongoing COVID-19 pandemic, which has had, and we expect will continue to have, a material adverse effect on our business.
The nature of our business and our interactions with healthcare systems, surgeons and patients expose us to substantial risks associated with public health threats, including widespread outbreaks of contagious diseases, epidemics, and pandemics such as COVID-19. To slow the proliferation of COVID-19, governments have implemented extraordinary measures, which include the mandatory closure of businesses, restrictions on travel and gatherings, and quarantine and physical distancing requirements. In addition, many government agencies in conjunction with hospitals and healthcare systems have to varying degrees deferred or suspended elective surgical procedures. While certain spine surgeries are deemed essential and certain surgeries, like in cases of trauma, cannot be delayed, we have seen and may continue to see a significant reduction in procedural volumes as hospital systems and/or patients elect to defer spine surgery procedures. As a result of these measures, we experienced reductions in procedural volumes during 2020 and anticipate this trend may continue. In addition, restrictions on our ability to travel as well as the temporary closures of our facilities and the facilities of our suppliers adversely affected our business in 2020. Further, due to the travel restrictions and physical distancing requirements, we faced challenges in our ability to train and educate surgeons on our surgical techniques and products. These restrictions also impacted our manufacturing capabilities and distribution and warehousing operations. The cumulative effect of these disruptions had a significant impact on our business in 2020, and it is not possible for us to accurately predict the length or severity of the COVID-19 pandemic or the timing for a broad and sustained resumption of elective surgical procedures. The COVID-19 pandemic continues to rapidly evolve, and its impact on our business will depend on several factors that are highly uncertain and unpredictable, including, the efficacy and adoption of vaccines, future resurgences of the virus and its variants, the speed at which government restrictions are lifted, and the willingness and ability of patients to seek care and treatment due to safety concerns or financial hardship. We continue to believe that our overall business strategy and long-term future growth opportunities remain strong, and our priority is the health and well-being of our employees, customers, surgeons, and patients and the communities in which we operate.
The COVID-19 pandemic is straining healthcare systems worldwide, which will further impact our business, results of operations and liquidity.
Due to the COVID-19 pandemic, hospitals in the U.S. and globally have to varying degrees suspended and delayed elective surgeries in order to allocate and direct medical supplies and capacity to the COVID-19 response. Some hospitals have also limited access to their facilities or changed access protocols, which has made it difficult for us to support our surgeon customers. As a result, we experienced reductions in procedural volumes during 2020 and anticipate this trend may continue. We expect that hospitals and other facilities may face significant disruptions in their business and incur financial losses as they decrease elective procedures and increase spending on supplies and infrastructure in order to expand system capacity related to COVID-19 treatment. Potential patients may also cancel elective procedures or fail to seek needed care at hospitals which are involved in treating patients with COVID-19 due to the highly infectious nature of the disease. Additionally, the impact of the COVID-19 pandemic on the global economy and the financial markets could lead to a sustained period of economic turmoil and increased unemployment which may affect the ability of patients to seek care and treatment due to reduced health insurance coverage or the inability to pay premiums, deductibles, and copayments under health insurance plans. If the financial condition of hospitals deteriorate it could cause us to experience slower or impaired collections on accounts receivable, reductions in sales of our products and services, and increased price competition all of which could adversely impact our business, results of operations and liquidity. As of December 31, 2020, we had over $1.0 billion in cash, cash equivalents and short-term investments and the ability to draw $550.0 million under our 2020 Facility. However, our ability to borrow under the 2020 Facility is subject to remaining in compliance with underlying financial covenants which may be difficult to satisfy if the COVID-19 pandemic continues to adversely impact the healthcare system and our business. If the business interruptions caused by COVID-19 persist for a substantial period of time, we may need to seek other sources of liquidity and there can be no guarantee that additional liquidity will be readily available or available on favorable terms.
To the extent the COVID-19 pandemic adversely affects our operations and global economic conditions more generally, it may also have the effect of heightening many of the other risks described below.
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To be commercially successful, we must effectively demonstrate to spine surgeons and hospitals the value proposition of our products and procedural solutions compared to those of our competitors.
We focus on marketing our products and procedural solutions to spine surgeons, because of the role that they play in determining the course of patient treatment. Spine surgeonsHowever, hospitals are also becoming increasingly involved in the evaluation and acceptance of our products and procedural solutions. Surgeons and hospitals may not widely adopt our products and procedural solutions unless we are able to effectively educate and train them as to the distinctive characteristics, perceived benefits, safety and cost-effectiveness of our offerings as compared to those of our competitors. We believe that the most effective way to introduce and build market demand for our products and procedural solutions is by directly training spine surgeons in their use. If surgeons are not properly trained, they may misuse or ineffectively use our products and procedural solutions. This may also result in unsatisfactory patient outcomes, patient injury, negative publicity or lawsuits against us, any of which could have a significant adverse effect on our business, financial condition and results of operations.
Surgeons and hospitals may be hesitant to use and accept our products and procedural solutions for the following reasons, among others:
lack of surgeon experience with minimally disruptive surgical products and procedures;
• | lack of experience with less invasive surgical products and procedures; |
lack or perceived lack of evidence supporting additional patient benefits;
• | lack or perceived lack of evidence supporting additional patient benefits; |
perceived liability risks generally associated with the use of new products and procedures;
• | perceived liability risks generally associated with the use of new products and procedures; |
existing relationships with competitors and distributors;
• | existing relationships with competitors; |
limited or lack of availability of coverage and reimbursement within healthcare payment systems;
• | limited or lack of availability of coverage and reimbursement within healthcare payment systems; |
increased competition in procedural offerings;
• | higher pricing associated with new products and procedures; |
lack or perceived lack of differentiation among procedures;
• | increased competition in procedural offerings; |
costs associated with the purchase of new products and equipment; and
• | lack or perceived lack of differentiation among procedures; |
• | costs associated with the purchase of new products and equipment; and |
the time commitment that may be required for training.
• | the time commitment that may be required for training. |
If we are not able to effectively demonstrate to spine surgeons and hospitals the value proposition of our products and procedural solutions, or if spine surgeons and hospitals adopt competing products, into their practice, our sales could significantly decrease or fail to increase, which could adversely impact our profitability and cash flow. In addition, we believe recommendations and support of our offerings by influential spine surgeons and other key opinion leaders are essential for market acceptance and adoption. If we are not successful in obtaining such support, surgeons may not use our products and procedural solutions, and we may not achieve expected sales or profitability.
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Our future success depends on our strategy of obsoleting our productsrapidly developing innovative solutions and our ability to timely acquire, develop and introduce new products or product enhancements that will be accepted by the market.
An important part of our business strategy is to stay ahead of our competitors by obsoleting our current offerings with newrapidly developing and enhanced products and technologies.commercializing innovative surgical solutions to fulfill unmet clinical needs. As such, our success will depend in part on our ability to acquire, develop and introduce new products and enhancements to our existing products to keep pace with changes in technology and market demand, as well as physician, hospital and healthcare provider practices. The success of any new product offering or enhancement to an existing product will depend on numerous factors, including our ability to:
properly identify and anticipate surgeon and patient needs;
• | properly identify and anticipate surgeon and patient needs; |
develop and introduce new products or product enhancements in a timely and cost-effective manner;
• | develop and introduce new products or product enhancements in a timely and cost-effective manner; |
• | adequately protect our intellectual property and avoid infringing upon the intellectual property rights of third parties; |
• | demonstrate the safety and efficacy of new products through clinical investigations or the collection of existing relevant clinical data; |
• | qualify for adequate reimbursement from third-party payers; and |
• | obtain the necessary regulatory clearances or approvals for new products or product enhancements. |
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demonstrate the safety and efficacy of new products through clinical investigations or the collection of existing relevant clinical data;
qualify for adequate reimbursement from third-party payers; and
obtain the necessary regulatory clearances or approvals for new products or product enhancements.
In addition, our research and development efforts may require a substantial investment of time and resources before we are adequately able to determine the commercial or technical viability of a new product, technology, or other innovation. Even if we are able to develop enhancements or new generation products successfully, these enhancements or new generation products may not generate sufficient demand or produce sales in excess of the costs of development, which would cause our results of operations to suffer. It is also important that we carefully manage our introduction of new and enhanced products. If potential customers delay purchases until new or enhanced products are available, it could negatively impact our sales. In addition, to the extent we have excess or obsolete inventory as we transition to new products, it would result in margin reducing write-offs and charges for obsolete inventory, and our results of operations may suffer.
Furthermore, our product development strategy is based on certain assumptions, including assumptions about various demographic trends and trends in the treatment of spine disorders, which could affect the demand for our products and procedural solutions. However, these trends are uncertain and actual demand for our products and procedural solutions could differ materially from projected demand if our assumptions regarding these trends prove to be incorrect or do not materialize, or if alternative treatments to those offered by our products gain widespread acceptance.
We operate in a highly competitive market segment that is subject to rapid change, and if we are unable to compete successfully, our sales and operating results may suffer.
The market for spine surgeryour surgical products and procedures is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. Our ability to compete successfully will depend on our ability to develop proprietary products that reach the market in a timely manner, receive adequate reimbursement and are safer, less invasive and less expensive than those of our competitors. With respect to our neuromonitoring systems, we primarily compete with Medtronic and Cadwell Industries. Our IOMIONM services business competes with Specialty Care and numerous smaller and regional neuromonitoring companies.companies as well as insourced neuromonitoring functions operated by hospitals. With respect to MaXcess, our minimally disruptiveproducts and technologies for spine surgical system,procedures, our largest competitors are Medtronic, DePuy/Synthes, Stryker Spine, Globus Medical, and Zimmer Biomet Spine. We compete with many of the same companies with respect to our other products. We also compete with numerous smaller companies with respect to our implant products, many of whom have a significant regional market presence. At any time, these companies and other potential market entrants may develop alternative treatments, products or procedures for the treatment of spine disorders that compete directly or indirectly with our offerings. In addition, they may gain a market advantage by developing and patenting competitive products or processes earlier than we can or by obtaining regulatory clearances or market registrations more rapidly than we can.
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Many of our competitors have greater resources than we have.
Many of our larger competitors are either publicly traded or divisions or subsidiaries of publicly tradedlarge medical device companies and enjoythat have several competitive advantages over us, including:
significantly greater name recognition;
• | significantly greater name recognition; |
established relationships with a greater number of spine surgeons, hospitals, other healthcare providers and third-party payers;
• | established relationships with a greater number of surgeons, hospitals, other healthcare providers and third-party payers; |
larger and more well-established distribution networks domestically and/or internationally;
• | larger and more well-established distribution networks domestically and/or internationally; |
products supported by long-term clinical data;
• | products supported by long-term clinical data; |
greater experience in obtaining and maintaining FDA and other regulatory approvals or clearances for products and product enhancements;
• | greater experience in obtaining and maintaining FDA and other regulatory approvals or clearances for products and product enhancements; |
greater experience in, and resources for, launching, marketing, distributing and selling products, including capital equipment;
• | greater experience in, and resources for, launching, marketing, distributing and selling products, including capital equipment; |
greater ability to cross-sell their products or create bundled offerings to incentivize hospitals and surgeons to use their products;
• | greater ability to cross-sell their products or create bundled offerings to incentivize hospitals and surgeons to use their products; |
more expansive portfolios of intellectual property rights; and
• | more expansive portfolios of intellectual property rights; and |
greater financial assets, cash flow, capital markets access and other resources for product research and development, sales and marketing, and litigation.
• | greater financial assets, cash flow, capital markets access and other resources for product research and development, sales and marketing, and litigation. |
Because of the significant size of the potential market for spine surgery products and procedures, we anticipate that existing competitors will continue to dedicate substantial resources to developing competing products. If we are unable to compete effectively, our sales and operating results may suffer.
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Third-party reimbursement policies and practices, including non-coverage decisions, can negatively impact our ability to sell our products and services.
Sales of our products and procedural solutions depend on the availability of adequate reimbursement from third-party payers. Future third-party reimbursement for healthcare costs may be subject to changes in policies and practices, such as more restrictive criteria to qualify for surgery coverage or reduction in payment amounts to hospitals and surgeons for approved surgery and IOMIONM services, both in the United States and internationally. Further, certain third-party payers have stated non-coverage decisions concerning our technologies and services. These actions could significantly alter our ability to sell our products and procedural solutions. The continuing efforts of governmental authorities, insurance companies, and other payers of healthcare costs to contain or reduce costs could lead to patients being unable to obtain approval for payment from these third-party payers. Changes in legislation, regulation or reimbursement policies of third-party payers may adversely affect the demand for our products and services as healthcare providers generally rely on third-party payers to reimburse all or part of the costs and fees associated with the procedures performed with these devices and services. Likewise, spine surgeons, neurophysiologists and their supervising physicians rely primarily on third-party reimbursement for the surgical or monitoring fees they earn. Spine surgeons are unlikely to use our products and services if they do not receive reimbursement adequate to cover the cost of their involvement in surgical procedures.
Further, as we continue to grow our international business, market acceptance of our products and procedural solutions in a particular foreigninternational market may also depend, in part, upon the availability of coverage and reimbursement within the applicable healthcare payment system. Reimbursement and healthcare payment systems in international markets vary significantly by country. As in the United States, our products and procedural solutionswe may not be able to obtain coverage and reimbursement approvals in a timely manner, if at all, for our products and procedural solutions in a particular foreign market. In addition, even if we are able to obtain country-specific coverage and reimbursement approvals, the amount of such coverage and reimbursement may not be adequate and we could incur considerable expense in seeking such approvals. Our failure to obtain such coverage and approvals would negatively affect market acceptance of our products and procedural solutions in the international markets in which such failure occurs and the expenses incurred in connection with obtaining such coverage and approvals could outweigh the benefits of obtaining them.
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Pricing pressure from our competitors, hospital customers and insurance providers can negatively impact our ability to sell our products and services.
The market for spine surgery products is large and has attracted numerous new companies and technologies. As some companies have sought to compete based on price, it has created pricing pressure, which we expect to continue in the future. In addition, wePricing pressure may experience decreasing prices for our productsalso increase due to pricing pressure from our hospital customerscontinued consolidation among healthcare providers, trends toward managed and insurance providers. Becausevalue-based care, the shift toward governments becoming the primary payers of healthcare costs have risen significantly over the past decade, numerous initiativesexpenses, and reforms have resultedreduction in efforts to drive down prices.reimbursement levels. As hospitalshealthcare providers look to reduce costs, including by aggregating purchasing decisions and through industry consolidation, they mayare able to demand lower pricing and limit their number of suppliers. If competitive forces drive down the prices we are able to charge for our products, our profit margins will shrink, which will adversely affect our ability to maintain our profitability and to invest in and grow our business.
In addition, as we expand our procedural solutions offerings to include new technologies, we expect that sales and leases of capital equipment will become a larger portion of our revenues. Demand for capital equipment can be affected by changes in the budgets of healthcare organizations, the timing of spending under these budgets and conflicting spending priorities. In addition, the implementation of healthcare reform in the United States, which may reduce or eliminate the amount that healthcare organizations may be reimbursed for capital equipment, could further impact demand. Any such decreases in expenditures by these healthcare organizations and decreases in demand for our capital equipment could have an adverse effect on our results of operations and financial condition.
The proliferation of physician-owned distributorships, as well as aggressive competitive tactics to attract away key customers, could result in increased pricing pressure and harm our ability to maintain or grow revenue.
Physician-owned distributorships, or PODs, are medical device distributors that are owned, directly or indirectly, by physicians. These physicians derive revenue from selling or arranging for the sale of medical devices via their PODs that are used in the procedures they perform on their patients. We do not sell or distribute any of our products to PODs. However, the proliferation of PODs may reduce our market opportunities and may hamper our ability to grow or maintain revenue. PODs can have significant market knowledge and access to the surgeons who use our products, and we have seen increasingly aggressive competitive tactics from PODs focused on attracting customers away from us. To the extent these tactics are successful, our revenue may materially suffer.
Quality or safety issues affecting our products could harm our reputation, result in liability and adversely impact our business.
In the course of conducting our business, we must adequately address quality and safety issues that may arise with our products, as well as defects in third-party components included in our products. Although we have established internal procedures to minimize risks that may arise from quality and safety issues, we may not be able to eliminate or mitigate occurrences of these issues and associated liabilities. Additionally, as we continue to launch more complex products and technologies, including products based on the MAGEC technology platform and products like Lessray and Pulse, risks related to quality and safety issues increase compared to our portfolio of spinal implants and fixation products. Manufacturing flaws, component failures, design defects, or inadequate disclosure of product-related information could result in an unsafe condition or the injury or death of a patient. These problems could lead to a recall of, or issuance of a safety alert relating to our products and result in significant costs and negative publicity. An adverse event, safety alert or recall involving one of our products could result in reduced market acceptance and demand for our products, and could harm our reputation and our ability to market our products in the future. In some circumstances, an adverse events arising fromevent, safety alert or associated with therecall could require costly design, manufacture or marketing of our products couldengineering, and manufacturing changes, and result in the suspension or delay of regulatory reviews of our applications for new product approvals or clearances. Further, if we substitute, replace or exchange products to address an adverse event, safety alert or recall, or take other steps to address the needs or concerns of our customers and patients, it could disrupt our business and have an adverse effect on our results of operations and financial condition. We may also voluntarily undertake a recall of our products, initiate certain field actions, temporarily shut down production lines, or place products on a shipping hold based on internal safety, and quality monitoring and testing data. If we take action to reduce a health risk posed by our products, or to remedy a violation of the Federal, Food, Drug and Cosmetic Act or other regulations caused by our products that may present a risk to health, such action may need to be reported to the FDA or equivalent governmental authority. If the FDA or equivalent governmental authority subsequently determines that a report was required for a quality or safety action related to our products that we did not believe required a report, we could be subject to enforcement actions.
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While we have a network of quality systems throughout our business lines and facilities, quality and safety issues may occur with respect to any of our products. A quality or safety issue may result in a public warning letter or consent decree from the FDA or an equivalent action by a governmental health authority in an international jurisdiction. In addition, we may be subject to product recalls or seizures, monetary sanctions, injunctions to halt manufacturing and distribution of products, civil or criminal sanctions, refusal of a government to grant clearances or approvals or delays in granting such clearances or approvals, import detentions of products made outside the United States, restrictions on operations or withdrawal or suspension of existing approvals. Any of the foregoing events could disrupt our business and have an adverse effect on our results of operations and financial condition.
The safety of many of our products is not yet supported by long-term clinical data and many of our products may therefore prove to be less safe and effective than initially thought.
As a consequence of our strategy to obsolete our ownrapidly develop and commercialize new products with new technologies,and product enhancements, many of our products do not have a long history of use. Further, many of our products are subject to the FDA’s 510(k) premarket notification clearance process in the United States and similar regulatory processes in other countries, which typically domay not require substantial clinical data. Accordingly, many of our products currently lack the breadth of published long-term clinical data supporting their safety and effectiveness. For these reasons, spine surgeons may be slow to adopt our products, we may not have comparative data that our competitors have or are generating, and we may be subject to greater regulatory and product liability risks. In particular, as we continue to launch more complex products and technologies, including products based on the MAGEC technology platform and products like Lessray and Pulse, we may have to conduct additional studies and gather additional data to support their safety and effectiveness.
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Further, future patient studies or clinical experience may indicate that treatment with our products does not improve patient outcomes. Such results would reduce demand for our products, affect sustainable reimbursement from third-party payers, significantly reduce our ability to achieve expected revenuesales and could prevent us from sustaining or increasing profitability. Moreover, if future results and experience indicate that our products cause unexpected or serious complications or other unforeseen negative effects, we could be subject to significant legal liability and harm to our business reputation. The spine medical device market has been particularly prone to potential product liability claims that are inherent in the testing, manufacture and sale of medical devices and products for spine surgery procedures.
As we expand our offerings to include capital equipment and invest in related resources and expertise, we are exposed to additional risks.
As we expand our procedural solutions offerings to include new technologies, including the Pulse platform, we expect that the selling and leasing of capital equipment will become a larger portion of our total net sales over time. We do not have a long history of selling, leasing or servicing capital equipment, and we intend to continue to invest in building resources and expertise in this area. We may not generate sufficient sales to offset the expenses associated with this investment. There can be no assurance that our capital equipment strategy will be successful and will not materially adversely affect our financial condition and operating results.
Approval processes of healthcare organizations for the purchase or lease of capital equipment can be lengthy, and such organizations may delay or accelerate system purchases or leases in conjunction with their internal budget timelines. Additionally, the introduction of new products by us or our competitors could adversely impact the sales cycle as healthcare organizations evaluate the benefits and costs of such products.As a result, it is difficult for us to predict the length of capital sales cycles and, therefore, the exact timing of capital sales, which may cause fluctuations in our financial results. Further, demand for capital equipment can be affected by changes in the budgets of healthcare organizations and conflicting spending priorities. Any such decreases in expenditures by these healthcare organizations and decreases in demand for our capital equipment could have an adverse effect on our results of operations and financial condition.
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We may engage in strategic transactions, including acquisitions, investments, joint development agreements or divestitures that may have an adverse effect on our business.
We may pursue transactions, including acquisitions of complementary businesses, technology licensing arrangements, strategic relationships, and joint development agreements to expand our product offerings and geographic presence as part of our business strategy, which could be material to our financial condition and results of operations. We may also consider divesting non-core product lines or out-licensing our technology. We may not complete transactions in a timely manner, on a cost-effective basis, or at all, and we may not realize the expected benefits of any acquisition, license arrangement, strategic relationship, joint development agreement or divestiture. Other companies may compete with us for these strategic opportunities. We also could experience negative effects on our results of operations and financial condition from charges related to acquisitions and investments, amortization of intangible assets and asset impairment charges, and other issues that could arise in connection with, or as a result of, the acquisition of an acquired company or business, including issues related to internal control over financial reporting, regulatory or compliance issues and potential adverse short-term effects on results of operations through increased costs or otherwise. Following our acquisition of Simplify Medical Pty Limited, or Simplify Medical, in February 2021, we also offer cervical artificial disc technology for cervical total disc replacement procedures. Pursuant to the terms of the definitive agreement, we agreed to make an upfront payment of $150.0 million at closing, subject to customary purchase price adjustments, plus additional future payments contingent upon milestones related to regulatory approval and net sales from products incorporating the Simplify Medical cervical artificial disc technology. The closing of the acquisition occurred on February 24, 2021, and Simplify Medical is now our wholly-owned subsidiary. Acquisitions, including the acquisition of Simplify Medical, involve numerous risks, including the following:
difficulties in finding suitable partners or acquisition candidates;
• | difficulties in finding suitable partners or acquisition candidates; |
difficulties in obtaining financing on favorable terms, if at all;
• | difficulties in obtaining financing on favorable terms, if at all; |
difficulties in completing transactions on favorable terms, if at all;
• | difficulties in completing transactions on favorable terms, if at all; |
the possibility that we will pay more than the value we derive from the acquisition, which could result in future non-cash impairment charges and/or a dilution of future earnings per share;
• | the possibility that we will pay more than the value we derive from the acquisition, which could result in future non-cash impairment charges and/or a dilution of future earnings per share; |
difficulties in integration of the operations, technologies, personnel, and products of acquired companies, which may require significant attention of our management team that otherwise would be available for the ongoing development of our business;
• | difficulties in integration of the operations, technologies, personnel, and products of acquired companies, which may require significant attention of our management team that otherwise would be available for the ongoing development of our business; |
the applicability of additional laws, regulations and policies that have particular application to our acquisitions, including those relating to patient privacy, insurance fraud and abuse, false claims, prohibitions against self-referrals, anti-kickbacks, direct billing practices, HIPAA compliance, and prohibitions against the corporate practice of medicine and fee-splitting;
• | the applicability of additional laws, regulations and policies that have particular application to our acquisitions, including those relating to patient privacy, insurance fraud and abuse, false claims, prohibitions against self-referrals, anti-kickbacks, direct billing practices, HIPAA compliance, and prohibitions against the corporate practice of medicine and fee-splitting; |
the assumption of certain known and unknown liabilities of acquired companies;
• | the assumption of certain known and unknown liabilities of acquired companies; |
the incurrence of debt, contingent liabilities or future write-offs of intangible assets or goodwill;
• | the incurrence of debt, contingent liabilities or future write-offs of intangible assets or goodwill; |
difficulties in retaining key relationships with employees, customers, partners and suppliers of an acquired company; and
• | difficulties in retaining key relationships with employees, customers, partners and suppliers of an acquired company; and |
difficulties in operating in different business markets where we may not have historical experience.
• | difficulties in operating in different business markets where we may not have historical experience. |
Any of these factors could have a negative impact on our business, results of operations or financial position. Further, past and potential acquisitions entail risks, uncertainties and potential disruptions to our business, especially where we have limited experience as a company developing or marketing a particular product or technology. Following any acquisition, we must integrate the new business, which can be expensive, time-consuming and time-consuming.cause disruptions to our existing operations. Failure to timely and successfully integrate acquired businesses may result in non-compliance with regulatory or other requirements and may result in unexpected costs, including as a result of inadequate cost containment and failure to fully realize expected synergies. As a result of any of the foregoing, we may not realize the expected benefit from any acquisition or investment. If we cannot integrate acquired businesses, products or technologies, our business, financial conditions and results of operations could be materially and adversely affected.
In addition, we may face additional risks related to foreign acquisitions and investments. Foreign acquisitions and investments involve unique risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries.
Any divestitures may result in a dilutive impact to our future earnings, as well as significant write-offs, including those related to goodwill and other intangible assets, which could have a material adverse effect on our results of operations and financial condition. Divestitures could involve additional risks, including difficulties in the separation of operations, services, products and personnel, the diversion of management’s attention from other business concerns, the disruption of our business and the potential loss of key employees. We may not be successful in managing these or any other significant risks that we encounter in divesting a product or technology.
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Healthcare policy changes may have a material adverse effect on us.
Political, economic and regulatory influences are subjecting the healthcare industry to fundamental changes. In March 2010, comprehensive healthcare reform legislation was signed into law in the United States through the passageFor example, as a result of the Patient Protection and Affordable Health Care Act and the Health Care and Education Reconciliation Act (“ACA”). Among other initiatives,, the legislationU.S. has implemented a 2.3% annual excise tax on the sales of certain medical devices in the United States, effective January 2013. This excise tax was suspended for years 2016 through 2019, but will be reinstatedvalue-based payment methodologies and has created alternative payment models such as of January 1, 2020, absent further legislative actionbundled payments to repeal – or extend the suspension of – the tax. As this excise tax is recorded as a selling, general and administrative expense, it would have an adverse effect on our operating expenses and results of operations. In addition, thecontinue to drive improved value. The ACA also significantly altersaltered Medicare and Medicaid reimbursements for medical services and medical devices, which could result in downward pricing pressure and decreased demand for our products.devices. We anticipate that Congress, regulatory agencies and certain state legislatures will continue to review and assess alternative healthcare delivery systems and payment methods with an objective of ultimately reducing healthcare costs and expanding access. We cannot predict with certainty what healthcare initiatives, if any, will be implemented at the state level, or what ultimate effect federal healthcare reform or any future legislation or regulation may have on our customers’ purchasing decisions regarding our products and services. However, the implementation of new legislation and regulation may lower reimbursements for our products, reduce medical procedure volumes and adversely affect our business, possibly materially.
Our IOMIONM business exposes us to risks inherent with the sale of services.
Our IOMIONM services and support business exposes us to different risks than our other products and technologies. Through our NuVasive Clinical Services business, including the Biotronic NeuroNetwork business acquired in July 2016 and the SafePassage business acquired in January 2018, we provide onsite and remote monitoring of the neurological systems of patients undergoing spinal and brain-related surgeries. Our neurophysiologists are present in the operating room during procedures and work in partnership with supervising physicians who remotely oversee and interpret neurophysiological data gathered via broadband transmission over the Internet. Providing this service subjects us to malpractice exposure. In addition, given the reliance on technology, any disruption to our neuromonitoring equipment or the Internet could harm our service operations and our reputation among our customers. Further, any disruption to our information technology systems could adversely impact the performance of our neurophysiologists.neurophysiologists and oversight physicians.
In addition, IOMIONM services are directly billed to Medicare and commercial payers, which brings with it additional risks associated with proper billing practice regulations, HIPAA compliance, corporate practice of medicine laws, and new collections risk associated with third-party payers. Due to the breadth of many healthcare laws and regulations, our IOMIONM business could also be subject to healthcare fraud regulation and enforcement by both the federal government and the states in which we conduct our business, including under the Anti-Kickback Statute, the federal false claims laws and state law equivalents. If our operations are found to be in violation of any of the laws described in the previous sentence or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results.
As we expand our offeringsOur increased focus on specialized pediatric conditions exposes us to include capital equipment and invest in related resources and expertise, we are exposed to additionaldifferent risks.
As we expand our procedural solutions offerings to include new technologies, including Pulse and LessRay, we expect that sales and leases of capital equipment will become a larger portionIn furtherance of our revenues. We do notgrowth strategy, we have a long history of selling, leasing or servicing capital equipment,invested in, and we intendexpect to continue to invest in building resourcesthe pediatric spine and expertiseorthopedic segments, which exposes us to different risks than our other products and technologies. With the 2016 acquisition of Ellipse Technologies, we began to offer innovative products based on the MAGEC technology platform, which accelerated our entry into the pediatric spine segment. Our MAGEC growing rods are used to treat early-onset scoliosis (EOS) and, once surgically implanted in this area. We may not generate sufficient revenue to offset the expenses associated with this investment. Therea patient, can be no assuranceadjusted non-invasively using an external remote controller. We have further added to our pediatric portfolio with the launch of the Reline Small Stature system, designed as a deformity fixation solution for pediatric spine surgery, and products to support the adolescent deformity market. Designing and engineering specialized products for pediatric patients can be challenging, particularly as products need to accommodate growth in pediatric patients. If we are unable to design safe and effective products that meet the needs of pediatric patients, our capital equipment strategyability to compete in the pediatric segment will be successfuladversely impacted. Further, patients with EOS often have other risk factors and will not materially adversely affect our financial conditionco-morbidities that can make surgeries more risky, which can lead to surgical and operating results.post-operative complications and potentially greater exposure for allegations of product liability.
In addition, approval processesif our pediatric products are the subject of healthcare organizations for the purchasesafety concerns, whether actual or lease of capital equipment can be lengthy, and such organizations may delay or accelerate system purchases or leases in conjunction with their budget timelines. As a result,perceived, it is difficult for us to predict the length of capital sales cycles and, therefore, the exact timing of capital sales, which may cause fluctuations in our financial results. Further, demand for capital equipment can be affected by changes in the budgets of healthcare organizations and conflicting spending priorities. Any such decreases in expenditures by these healthcare organizations and decreases in demand for our capital equipment couldwould have an adverse effectimpact on our business and results of operationsoperations. We have issued field safety notices regarding the MAGEC system in the past, and financial condition. in April 2020, we agreed to voluntarily suspend sales of all MAGEC rods in non-essential cases in the United Kingdom and Ireland while local regulatory authorities conducted a market surveillance review of the MAGEC system. If we are unable to address the issues identified in the market surveillance review, we may need to conduct additional studies, gather additional data, or re-design or re-engineer the MAGEC system, which could be costly. Further, if our surgeon customers and their patients choose alternative treatments, it would negatively impact our pediatric business. If we are the subject of any claims or lawsuits related to the issues identified in the field safety notices, whether from impacted customers, distributors, surgeons or patients, it would have an adverse impact on our business and results of operations.
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Our employee shareowners,employees, independent sales representatives, consultants, distributors and other commercial partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements.
We are exposed to the risk that our employee shareowners,employees, independent sales representatives, consultants, distributors and other commercial partners may engage in fraudulent or illegal activity. Misconduct by these parties could include intentional, reckless or negligent conduct or other unauthorized activities that violate the regulations of the FDA and non-U.S. regulators, including those laws requiring the reporting of true, complete and accurate information to such regulators, manufacturing standards, healthcare fraud and abuse laws and regulations in the United States and abroad or laws that require the true, complete and accurate reporting of financial information or data. In particular, sales, marketing and business arrangements in the healthcare industry, including the sale of medical devices, are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. It is not always possible to identify and deter misconduct by our employees sales agents, distributors and otheror third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us and we are not successful in defending ourselves or asserting our rights, those actions could result in the imposition of significant fines or other sanctions, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings and curtailment of operations, any of which could adversely affect our ability to operate our business and our results of operations. Whether or not we are successful in defending against such actions or investigations, we could incur substantial costs, including legal fees, and divert the attention of management in defending ourselves against any of these claims or investigations.
Risks Related to our Commercial Operations and Plans for Future Growth
If we are unable to maintain and expand our network of direct and independent sales representatives, we may not be able to generate anticipated sales.
In the United States, we sell our products primarily through a combination of independent sales agentsrepresentatives and directly-employed sales personnel. Our international sales force is comprised of independent sales agents, directly-employed sales personnel, as well as exclusive and non-exclusive independent third-party distributors. We expect these sales representatives to develop long-lasting relationships with the customers they serve. If our sales representatives and sales agents fail to adequately promote, market and sell our products, or fail to develop lastingstrong relationships with customers, our sales could significantly decrease or fail to increase. Further, we may terminatethe termination or transition of a sales representatives from timerepresentative could disrupt business and cause us to time, which could subject usincur expenses related to such termination or transition, including contract termination fees or expenses associated with claims and lawsuits. Asserting or defending against these types of claims and lawsuits may result in significant legal fees and expenses, and if we are unsuccessful, we could be liable for damages.
We face significant challenges and risks in managing our geographically dispersed distribution network and retaining the individuals who make up that network. In the past, we have experienced departures of sales representatives, which have had a negative impact on our results. If sales representatives were to depart and be retained by one of our competitors, we may be unable to prevent them from helping competitors solicit business from our existing customers, which could further adversely affect our sales. In addition, as we expand into new markets, it may be difficult to find sales representatives with the appropriate expertise or it may take time for new sales representatives to reach full operational effectiveness and generate expected revenue.sales. Because of the intense competition for their services, we may be unable to recruit or retain sales representatives to work with us. Failure to hire or retain qualified sales representatives would prevent us from expanding our business and generating sales.
We may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy.
We intend to grow our business operations and we may experience periods of rapid growth and expansion. This anticipated future growth could create a strain on our organizational, administrative and operational infrastructure, including manufacturing operations, quality control, information technology infrastructure, technical support and customer service, sales force management and general and financial administration. We may not be able to maintain the quality or delivery timelines of our products or satisfy customer demand as it grows. Our ability to manage our growth properly will require us to continue to improve our operational, financial and management controls, as well as our reporting systems and procedures.
If our commercial operations and sales volume grow, we will need to continue to increase our workflow capacity for manufacturing, customer service, billing and general process improvements and expand our internal quality assurance program, among other things. We will also need to purchase additional equipment, some of which can take several months or more to procure, set up and validate, and increase our manufacturing, maintenance, software and computinginformation technology systems capacity to meet increased demand.demand, and further invest in our inventory. These increases in scale, expansion of personnel, purchases of equipment or process enhancements and investments in inventory can be costly and may not be successfully implemented.implemented, any of which could disrupt our business and have an adverse effect on our results of operations and financial condition.
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Our reliance on a limited number of suppliers and manufacturers could limit our ability to meet demand for our products in a timely manner or within our budget.
While we are increasing our capacity to self-manufacture many of our products, we continue to rely on a limited number of third-party suppliers and manufacturers to supply and manufacture our products, and we may not be able to find replacements or immediately transition to alternative suppliers or manufacturers. Many of our key products are manufactured at single locations, with limited alternate facilities, and it could take considerable time and resources for us to replace the capacity of such vendors in the event of disruptions. In addition, if we are required to change the manufacturer of a critical component of our products, we will be required to verify that the new manufacturer maintains facilities, procedures and operations that comply with our quality and applicable regulatory requirements, which could further impede our ability to manufacture our products in a timely manner.
Further, for reasons of quality assurance or cost effectiveness, we purchase certain components and raw materials from sole suppliers. To be successful, we rely on our suppliers to provide us with products and components in substantial quantities, in compliance with regulatory requirements, in accordance with agreed upon specifications, at acceptable cost and on a timely basis. In the event we experience delays, shortages, or stoppages of supply with any supplier, we would be forced to identify a suitable alternative supplier which could take significant time and result in significant expense. In addition, our anticipated growth could strain the ability of suppliers to deliver an increasingly large supply of products, materials and components. If we are required to transition to new third-party suppliers for certain components of our products, the use of components or materials furnished by these alternative suppliers could require us to alter our operations. Any such interruption or alteration could harm our reputation, business, financial condition and results of operations. Transitioning to a new supplier could be time-consuming and expensive, may result in interruptions in our operations and product delivery, could affect the performance specifications of our products or could require that we modify the design of those systems.
Performance issues, service interruptions or price increases by our shipping carriers could adversely affect our business and harm our reputation and ability to provide our products and services on a timely basis.
Expedited, reliable shipping is essential to our operations. We rely heavily on providers of transport services for reliable and secure point-to-point transport of our products to our customers and for tracking of these shipments. Should a carrier encounter delivery performance issues such as loss, damage or destruction of any products, it could be costly to replace such products in a timely manner and such occurrences may damage our reputation and lead to decreased demand for our products and increased cost and expense to our business. In addition, any significant increase in shipping rates could adversely affect our operating margins and results of operations. Similarly, strikes, severe weather, natural disasters, public health threats, or other service interruptions affecting delivery services we use would adversely affect our ability to process and fulfill orders for our products on a timely basis.
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Manufacturing risks may adversely affect our ability to manufacture products and could reduce our gross margins and negatively affect our operating results.
In 2017, we significantly expanded our self-manufacturing capabilities as we increased production at our approximately 180,000 square foot manufacturing facility in West Carrollton, Ohio. As part of our business strategy, we intend to continue to expand our ability to manufacture our current and new products with exceptional quality and in sufficient quantities to meet demand, while complying with regulatory requirements and managing manufacturing costs. We are subject to numerous risks relating to our manufacturing capabilities, including both those of our own manufacturing facilities and those of our third partythird-party suppliers, such as:
problems with quality control and assurance;
• | problems with quality control and assurance, including manufacturing nonconformances and product design defects; |
defects in product components that we source from third-party suppliers;
• | defective raw materials or defects in product components that we source from third-party suppliers; |
delays in obtaining components from third-party suppliers and component supply shortages;
• | delays in obtaining components from third-party suppliers and component supply shortages; |
failing to predict demand accurately, resulting in a failure to increase production of products to meet demand;
• | failing to predict demand accurately, resulting in a failure to increase production of products to meet demand; |
potential adverse effects on existing business relationships with current third-party suppliers as we expand our in-house manufacturing capabilities;
• | potential adverse effects on existing business relationships with current third-party suppliers as we expand our in-house manufacturing capabilities; |
maintaining control over manufacturing expenses as production expands;
• | maintaining control over manufacturing expenses as production expands; |
difficulties associated with compliance with local, state, federal and foreign regulatory requirements;
• | difficulties associated with compliance with local, state, federal and foreign regulatory requirements; |
shortages of qualified personnel or workforce disruptions;
• | shortages of qualified personnel or workforce disruptions; |
the inability to modify production lines to enable the efficient manufacture of new products or to quickly implement changes to current products in response to regulatory requirements; and
• | the inability to modify production lines to enable the efficient manufacture of new products or to quickly implement changes to current products in response to regulatory requirements; |
• | disruptions caused by natural disasters such as hurricanes, tornadoes earthquakes or wildfires, and the impact of epidemics or pandemics, such as COVID-19; and |
potential damage to or destruction of our, or our suppliers’ manufacturing equipment or manufacturing facilities.
• | potential damage to or destruction of our, or our suppliers’ manufacturing equipment or manufacturing facilities. |
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These risks may be exacerbated by our limited experience with self- manufacturing processes and procedures. In addition, as we seek to expand our manufacturing capabilities, we will have to continue to invest additional resources to hire and train personnel and enhance our production processes. If we fail to increase our manufacturing capacity efficiently, our profit margins will shrink, which will negatively affect our operating results.
The loss of key employee shareowners,employees, or our inability to recruit, hire and retain skilled and experienced personnel, could negatively impact our ability to effectively manage and expand our business.
Our success depends on the skills, experience and performance of the members of our executive management team and other key employee shareowners.employees. Their individual and collective efforts will continue to be important as we continue to develop our products and as we expand our commercial activities. The loss or incapacity of existing members of our executive management team could negatively impact our operations, particularly if we experience difficulties in hiring qualified successors. We do not maintain key manperson life insurance with respect to any of our employee shareowners. employees.
Our research and development programs and operations depend on our ability to attract and retain highly skilled engineers and technicians. We may not be able to attract or retain qualified managers, engineers and technicians in the future due to the competition for qualified personnel among medical device businesses, particularly in California.businesses. We also face competition from universities and public and private research institutions in recruiting and retaining highly qualified personnel. Recruiting and retention difficulties can limit our ability to support our commercial, manufacturing and research and development programs. All of our U.S. employee shareownersemployees are employed on an at-will basis, which means that either we or the employee shareowner may terminate his or her employment at any time. The loss of key employee shareowners,employees, the failure of any key employee shareownersemployees to perform or our inability to attract and retain skilled employee shareowners,employees, as needed, or an inability to effectively plan for and implement a succession plan for key employee shareownersemployees could harm our business.
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We face risks associated with our international business.
During the year ended December 31, 2018, $205.62020, $228.8 million or approximately 19%22% of our net revenuesales was attributable to our international customers. customers (excluding Puerto Rico). We are seekingexpect to increase ourcontinue to invest in international sales over the foreseeable future. expansion with a focus on European, Asia-Pacific and Latin American markets. Our international business operations are subject to a variety of risks, including:
difficulties in staffing and managing foreign and geographically dispersed operations;
• | difficulties in staffing and managing foreign and geographically dispersed operations; |
having to comply with various U.S. and international laws, including the U.S. Foreign Corrupt Practices Act of 1977, or the FCPA, and anti-money laundering laws;
• | having to comply with various U.S. and international laws, including the FCPA and anti-money laundering laws; |
having to comply with U.S. and foreign trade, import and export and customs regulations and laws, including, but not limited to, the Export Administration Regulations and trade sanctions against embargoed countries, which are administered by the Office of Foreign Assets Control within the Department of the Treasury, as well as the laws and regulations administered by the Department of Commerce;
• | having to comply with U.S. and foreign trade, import and export and customs regulations and laws, including, but not limited to, the Export Administration Regulations and trade sanctions against embargoed countries, which are administered by the Office of Foreign Assets Control within the Department of the Treasury, as well as the laws and regulations administered by the Department of Commerce; |
differing complex regulatory requirements for obtaining clearances or approvals to market our products, including the EU Medical Device Regulation (Council Regulations 2017/745);
• | differing complex regulatory requirements for obtaining clearances or approvals to market our products, including the EU Medical Device Regulation (Council Regulations 2017/745) and recent regulatory guidance issued by the UK Government in connection with the UK formally withdrawing from the European Union; |
changes in, or uncertainties relating to, foreign rules and regulations that may impact our ability to sell our products, perform services or repatriate profits to the United States;
• | changes in, or uncertainties relating to, foreign rules and regulations that may impact our ability to sell our products, perform services or repatriate profits to the United States; |
tariffs and trade barriers, export regulations and other regulatory and contractual limitations on our ability to sell our products in certain foreign markets;
• | tariffs and trade barriers, export regulations and other regulatory and contractual limitations on our ability to sell our products in certain foreign markets; |
fluctuations in foreign currency exchange rates;
• | fluctuations in foreign currency exchange rates; |
limitations on or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries or joint ventures;
• | limitations on or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries or joint ventures; |
differing multiple payer reimbursement regimes, government payers or patient self-pay systems;
• | differing multiple payer reimbursement regimes, government payers or patient self-pay systems; |
differing labor laws and standards;
• | differing labor laws and standards; |
changes in, or uncertainties relating to foreign laws around VAT/GST or permanent establishment that may impact our international indirect and income tax expense and related compliance costs;
• | changes in, or uncertainties relating to foreign laws around value-added taxes or permanent establishment that may impact our international indirect and income tax expense and related compliance costs; |
complex data privacy requirements, including the EU General Data Protection Regulation;
• | complex data privacy requirements, including the EU GDPR; |
economic, political or social instability in foreign countries and regions;
• | economic, political or social instability in foreign countries and regions; |
an inability, or reduced ability, to protect our intellectual property, including any effect of compulsory licensing imposed by government action;
• | an inability, or reduced ability, to protect our intellectual property, including any effect of compulsory licensing imposed by government action; |
potential changes to U.S. trade policy, including new legislation that could restrict international trade, or protectionist or retaliatory measures taken by governments of other countries; and
• | potential changes to U.S. trade policy, including new legislation that could restrict international trade, or protectionist or retaliatory measures taken by governments of other countries; and |
availability of government subsidies or other incentives that benefit competitors in their local markets that are not available to us.
• | availability of government subsidies or other incentives that benefit competitors in their local markets that are not available to us. |
The FCPA and similar anti-bribery laws in non-U.S. jurisdictions generally prohibit companies and their intermediaries from making improper payments for the purpose of obtaining or retaining business. The FCPA also imposes accounting standards and requirements on publicly traded U.S. corporations and their foreign affiliates, which are intended to prevent the diversion of corporate funds to the payment of bribes and other improper payments. Because of the predominance of government-sponsored healthcare systems around the world, many of our customer relationships outside of the United States are with governmental entities and are therefore subject to such anti-bribery laws. Our internal control policies and procedures may not always prevent or protect us from reckless or criminal acts committed by our employee shareowners,employees, distributors or agents. In recent years, both the United States and foreign government regulators have increased regulation, enforcement, inspections and governmental investigations of the medical device industry, including increased United States government oversight and enforcement of the FCPA. Despite implementation of a comprehensive global healthcare compliance program, we may be subject to more regulation, enforcement, inspections and investigations by governmental authorities in the future.
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Any failure to comply with applicable legal and regulatory obligations in the United States or abroad could adversely affect us in a variety of ways that include, but are not limited to, significant criminal, civil and administrative penalties, including imprisonment of individuals, fines and penalties, denial of export privileges, seizure of shipments and restrictions on certain business activities, disgorgement and other remedial measures, disruptions of our operations, and significant management distraction. Also, the failure to comply with applicable legal and regulatory obligations could result in the disruption of our distribution and sales activities. Any reduction in international sales, or our failure to further develop our international markets, could have a material adverse effect on our business, results of operations and financial condition.
Our results may be impacted by changes in foreign currency exchange rates.
As we increasingly compete in markets outside of the United States, we are and will be exposed to foreign currency exchange risk related to our foreign operations. A significant portion of our foreign subsidiaries’ operating expenses are incurred in foreign currencies. If the U.S. dollar weakens, our consolidated operating expenses would increase. An increase in the value of the U.S. dollar relative to foreign currencies could require us to reduce our selling price or risk making our products less competitive in international markets or our costs could increase. Also, as our international sales continue to increase, we may enter into a greater number of transactions denominated in non-U.S. dollars, which could increase our exposure to foreign currency risks, including changes in currency exchange rates. If we are unable to address these risks and challenges effectively, our international operations may not be successful and our business could be harmed.
If we fail to properly manage our anticipated international growth, our business could suffer.
We have invested, and expect to increase our investment for the foreseeable future, in our expansion into international markets. To execute our anticipated growth in international markets we must:
manage the complexities associated with a larger, faster growing and more geographically diverse organization;
• | manage the complexities associated with a larger, faster growing and more geographically diverse organization; |
expand our clinical development resources to manage and execute increasingly global, larger and more complex clinical trials and studies;
• | expand our clinical development resources to manage and execute increasingly global, larger and more complex clinical trials and studies; |
manage our directly-employed sales personnel as well as independent distributors and sales agents operating in international markets often pursuant to laws, regulations and customs that may be different than those that are customary for our United States operations;
• | manage our directly-employed sales personnel as well as independent distributors and sales agents operating in international markets often pursuant to laws, regulations and customs that may be different than those that are customary for our United States operations; |
expand our sales and marketing presence in international markets generally to avoid revenue concentration in a small number of markets that would subject us to the risk of business disruption as a result of economic or political problems in concentrated locations;
• | expand our sales and marketing presence in international markets generally to avoid concentration of sales in a small number of markets that would subject us to the risk of business disruption as a result of economic or political problems in concentrated locations; |
upgrade our internal business processes and capabilities (e.g., information technology platform and systems, product distribution and tracking) to create scalability and properly handle the transaction volumes that our growing geographically diverse organization demands;
• | upgrade our internal business processes and capabilities (e.g., information technology platform and systems, product distribution and tracking) to create scalability and properly handle the transaction volumes that our growing geographically diverse organization demands; |
expend time and resources to receive product approvals and clearances to sell and promote products; and
• | expend time and resources to receive product approvals and clearances to sell and promote products; and |
incur significant costs to comply with new and complex regulatory requirements such as the EU Medical Device Regulation (Council Regulations 2017/745).
• | incur significant costs to comply with new and complex regulatory requirements such as the EU Medical Device Regulation (Council Regulations 2017/745) and recent regulatory guidance issued by the UK Government in connection with the UK formally withdrawing from the European Union. |
We expect that our operating expenses will continue to increase as we continue to expand into international markets. International markets may be slower than domestic markets in adopting our products and are expected, in many instances, to yield lower profit margins when compared to our domestic operations. We have only limited experience in expanding into international markets as well as marketing and operating our products and services in such markets.
Additionally, our international endeavors may involve significant risks and uncertainties, including distraction of management from domestic operations, insufficient revenuesales to offset the expenses associated with our international strategy, and issues not discovered in our due diligence of new markets or ventures. Because expansion into international markets is inherently risky, no assurance can be given that such strategies and initiatives will be successful and will not materially adversely affect our financial condition and operating results. Even if our international expansion is successful, our expenses may increase at a greater pace than our revenuenet sales and our operating results could be harmed.
Further, our anticipated growth internationally will place additional strain on our suppliers and manufacturers, resulting in increased need for us to carefully monitor quality assurance. Any failure by us to manage our international growth effectively could have an adverse effect on our ability to achieve our development and commercialization goals.
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Cybersecurity risks and the failure to maintain the confidentiality, integrity, and availability of our computer hardware, software, and Internet applications and related tools and functions could result in harm to our business and/or subject us to costs, fines or lawsuits.
We rely on sophisticated information technology systems and network infrastructure to operate and manage our business. We also maintain personally identifiable information (PII) about our employee shareowners,employees, and given the nature of our business, we have access to protected health information (PHI). Our business therefore depends on the continuous, effective, reliable, and secure operation of our computer hardware, software, networks, Internet servers, and related infrastructure. To the extent that our hardware or software malfunctions or access to our data by internal personnel, suppliers or customers through the Internet is interrupted or compromised, our business could suffer.
The integrity and protection of our customer, personnel, financial, research and development, and other confidential data is critical to our business, and our customers and employees have a high expectation that we will adequately protect their personal information. The regulatory environment governing information, security and privacy laws is increasingly demanding and continues to evolve and a number of states have adopted laws and regulations that may affect our privacy and data security practices regarding the use, disclosure and protection of PII. For example, California recently enacted legislation, the California Consumer Privacy Act, that, will, among other things, createcreates new individual privacy rights and imposeimposes increased obligations on companies handling PII, when it goes into effect on January 1, 2020.PII.
Although our computer and communications hardware is protected through physical and software safeguards, it is still vulnerable to system malfunction, computer viruses, malware and ransomware, and other cybersecurity threats such as phishing and social engineering attacks. These events could lead to the unauthorized access of our information technology systems and result in financial loss and the misappropriation or unauthorized disclosure of confidential information belonging to us, our employee shareowners,employees, partners, customers, or our suppliers. The techniques used by criminal elements to attack computer systems are sophisticated, change frequently and may originate from less regulated and remote areas of the world. As a result, we may not be able to address these techniques proactively or implement adequate preventative measures. If our information technology systems are compromised we could be subject to fines, damages, litigation and enforcement actions, incur financial losses, suffer reputational damage, and lose trade secrets or other confidential information, each of which could significantly harm our business.
We rely on the performance of our information technology systems, the failure of which could have an adverse effect on our business and performance.
Our business requires the continued operation of sophisticated information technology systems and network infrastructure. These systems are vulnerable to interruption by fire, floods, earthquakes, power loss, system malfunction, computer viruses, security breaches, cybersecurity threats such as phishing and social engineering attacks and other events, which are beyond our control. Systems interruptions could reduce our ability to manufacture, deliver, and provide service for our products, and could have an adverse effect on our operations and financial performance. The level of protection and disaster-recovery capability varies from site to site, and there can be no guarantee that any such plans, to the extent they are in place, will be totallycompletely effective. Further, a greater number of our employees are working remotely in response to the COVID-19 pandemic and related government actions and may choose to continue to work remotely after the pandemic has ended, which could expose us to greater risks associated with cybersecurity threats and systems interruptions. Loss of data could interrupt our operations, including our ability to ship products, bill our customers, provide customer support services, conduct research and development activities, process and prepare company financial information, manage various general and administrative aspects of our business and damage our reputation, any of which could adversely affect our business.
Our operations are vulnerable to interruption or loss due to natural or other disasters, power loss, strikes and other events beyond our control.
We conduct a significant portion of our activities, including administration and data processing, at facilities located in Southern California, an area that has experienced major earthquakes, fires and other natural disasters. In addition, our primary self-manufacturing facility is located in West Carrollton, Ohio, an area that has experienced tornados, winter storms and other natural disasters. A major earthquake, fire, tornado or other disaster (such as a major flood, tsunami, storm or terrorist attack) affecting these or other NuVasive facilities, or those of our suppliers, could significantly disrupt our operations, and delay or prevent product shipment or installation during the time required to repair, rebuild or replace our facilities or those of our suppliers. These delays could be lengthy and costly. If our manufacturing facilities or any of our customers’ facilities are negatively impacted by a disaster, shipments of our products could be delayed. Additionally, customers may delay purchases of our products until operations return to normal. Even if we are able to quickly respond to a disaster, the ongoing effects of the disaster could create some uncertainty in the operations of our business. In addition, our facilities may be subject to a shortage of available electrical power and other energy supplies. Any shortages may increase our costs for power and energy supplies or could result in blackouts, which could disrupt the operations of our affected facilities and harm our business. In addition, concerns about terrorism, the effects of a terrorist attack, political turmoil or an outbreak of epidemic diseasesa widespread disease or other public health crisis, such as the COVID-19 pandemic, could have a negative effect on our operations, those of our suppliers and customers and the ability to travel, which could harm our business, financial condition and results of operations.
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Our insurance policies are expensive and protect us only from some business risks, which will leave us exposed to significant uninsured liabilities.
We do not carry insurance for all categories of risk that our business may encounter. Some of the policies we currently maintain include general liability, foreign liability, employee benefits liability, property, umbrella, workers’ compensation, products liability and directors’ and officers’ insurance. We do not know, however, if we will be able to maintain existing insurance with adequate levels of coverage. Any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our cash position and results of operations.
We bear the risk of warranty claims on our products.
We bear the risk of express and implied warranty claims on products we supply, including equipment and component parts manufactured by third parties. We may not be successful in claiming recovery under any warranty or indemnity provided to us by our suppliers or vendors in the event of a successful warranty claim against us by a customer or that any recovery from such vendor or supplier would be adequate. In addition, warranty claims brought by our customers related to third-party components may arise after our ability to bring corresponding warranty claims against such suppliers expire, which could result in additional costs to us. There is a risk that warranty claims made against us will exceed our warranty reserve and our business, financial condition and results of operations could be harmed.
Risks Related to LitigationRegulatory and Intellectual PropertyCompliance
• | We are subject to rigorous FDA and other governmental regulations regarding the development, manufacture, and sale of our products and we may incur significant expenses to comply with these regulations and develop products that satisfy these regulations. |
• | Failure or alleged failure to comply with FDA and other governmental regulations can result in investigations and other regulatory proceedings, which are expensive and could divert management attention. |
• | We are subject to federal, state and foreign fraud and abuse laws and health information privacy and security laws, which, if violated, could subject us to substantial penalties. |
• | We may fail to obtain or maintain foreign regulatory approvals to market our products in other countries. |
• | If we fail to obtain, or experience significant delays in obtaining, FDA clearances or approvals for our future products or product enhancements, our ability to commercially distribute and market our products could suffer. |
• | The misuse or off-label use of our products may harm our reputation in the marketplace, result in injuries that lead to product liability suits or result in costly investigations, fines or sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be costly to our business. |
• | If we or our suppliers fail to comply with the FDA’s quality system regulations, ISO or other applicable regulations and standards, the manufacture and processing of our products could be delayed or interrupted and we may be subject to an enforcement action by the FDA or other government agencies. |
• | Our relationships with physicians could be subject to additional scrutiny from regulatory enforcement authorities and could subject us to possible administrative, civil or criminal sanctions. |
Risks Related to Our Financial Results and Need for Financing
• | We may be unable to grow our net sales or earnings as anticipated, which may have a material adverse effect on our future operating results. |
• | We have a significant amount of outstanding indebtedness, and our financial condition and results of operations could be adversely affected if we do not effectively manage our liabilities. |
• | We may need additional financing in the future to meet our capital needs or to make opportunistic acquisitions and such financing may not be available on favorable terms, if at all, and may be dilutive to existing stockholders. |
Risks Related to the Securities Markets and Ownership of Our Common Stock
• | We expect that the price of our common stock will fluctuate substantially, potentially adversely affecting the ability of investors to sell their shares. |
• | Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change of control, even if an acquisition would be beneficial to our stockholders, which could affect our stock price adversely and prevent attempts by our stockholders to replace or remove our current management. |
• | We do not intend to pay cash dividends. |
Defending
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Risk Factors
Risks Related to Our Business and Industry
We are subject to risks associated with public health threats, including the ongoing COVID-19 pandemic, which has had, and we expect will continue to have, a material adverse effect on our business.
The nature of our business and our interactions with healthcare systems, surgeons and patients expose us to substantial risks associated with public health threats, including widespread outbreaks of contagious diseases, epidemics, and pandemics such as COVID-19. To slow the proliferation of COVID-19, governments have implemented extraordinary measures, which include the mandatory closure of businesses, restrictions on travel and gatherings, and quarantine and physical distancing requirements. In addition, many government agencies in conjunction with hospitals and healthcare systems have to varying degrees deferred or suspended elective surgical procedures. While certain spine surgeries are deemed essential and certain surgeries, like in cases of trauma, cannot be delayed, we have seen and may continue to see a significant reduction in procedural volumes as hospital systems and/or patients elect to defer spine surgery procedures. As a result of these measures, we experienced reductions in procedural volumes during 2020 and anticipate this trend may continue. In addition, restrictions on our ability to travel as well as the temporary closures of our facilities and the facilities of our suppliers adversely affected our business in 2020. Further, due to the travel restrictions and physical distancing requirements, we faced challenges in our ability to train and educate surgeons on our surgical techniques and products. These restrictions also impacted our manufacturing capabilities and distribution and warehousing operations. The cumulative effect of these disruptions had a significant impact on our business in 2020, and it is not possible for us to accurately predict the length or severity of the COVID-19 pandemic or the timing for a broad and sustained resumption of elective surgical procedures. The COVID-19 pandemic continues to rapidly evolve, and its impact on our business will depend on several factors that are highly uncertain and unpredictable, including, the efficacy and adoption of vaccines, future resurgences of the virus and its variants, the speed at which government restrictions are lifted, and the willingness and ability of patients to seek care and treatment due to safety concerns or financial hardship. We continue to believe that our overall business strategy and long-term future growth opportunities remain strong, and our priority is the health and well-being of our employees, customers, surgeons, and patients and the communities in which we operate.
The COVID-19 pandemic is straining healthcare systems worldwide, which will further impact our business, results of operations and liquidity.
Due to the COVID-19 pandemic, hospitals in the U.S. and globally have to varying degrees suspended and delayed elective surgeries in order to allocate and direct medical supplies and capacity to the COVID-19 response. Some hospitals have also limited access to their facilities or changed access protocols, which has made it difficult for us to support our surgeon customers. As a result, we experienced reductions in procedural volumes during 2020 and anticipate this trend may continue. We expect that hospitals and other facilities may face significant disruptions in their business and incur financial losses as they decrease elective procedures and increase spending on supplies and infrastructure in order to expand system capacity related to COVID-19 treatment. Potential patients may also cancel elective procedures or fail to seek needed care at hospitals which are involved in treating patients with COVID-19 due to the highly infectious nature of the disease. Additionally, the impact of the COVID-19 pandemic on the global economy and the financial markets could lead to a sustained period of economic turmoil and increased unemployment which may affect the ability of patients to seek care and treatment due to reduced health insurance coverage or the inability to pay premiums, deductibles, and copayments under health insurance plans. If the financial condition of hospitals deteriorate it could cause us to experience slower or impaired collections on accounts receivable, reductions in sales of our products and services, and increased price competition all of which could adversely impact our business, results of operations and liquidity. As of December 31, 2020, we had over $1.0 billion in cash, cash equivalents and short-term investments and the ability to draw $550.0 million under our 2020 Facility. However, our ability to borrow under the 2020 Facility is subject to remaining in compliance with underlying financial covenants which may be difficult to satisfy if the COVID-19 pandemic continues to adversely impact the healthcare system and our business. If the business interruptions caused by COVID-19 persist for a substantial period of time, we may need to seek other sources of liquidity and there can be no guarantee that additional liquidity will be readily available or available on favorable terms.
To the extent the COVID-19 pandemic adversely affects our operations and global economic conditions more generally, it may also have the effect of heightening many of the other risks described below.
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To be commercially successful, we must effectively demonstrate to surgeons and hospitals the value proposition of our products and procedural solutions compared to those of our competitors.
We focus on marketing our products and procedural solutions to surgeons, because of the role that they play in determining the course of patient treatment. However, hospitals are also becoming increasingly involved in the evaluation and acceptance of our products and procedural solutions. Surgeons and hospitals may not widely adopt our products and procedural solutions unless we are able to effectively educate them as to the distinctive characteristics, perceived benefits, safety and cost-effectiveness of our offerings as compared to those of our competitors. We believe that the most effective way to introduce and build market demand for our products and procedural solutions is by directly training surgeons in their use. If surgeons are not properly trained, they may misuse or ineffectively use our products and procedural solutions. This may also result in unsatisfactory patient outcomes, patient injury, negative publicity or lawsuits against litigationus, any of which could have a significant adverse effect on our business, financial condition and results of operations.
Surgeons and hospitals may be hesitant to use and accept our products and procedural solutions for the following reasons, among others:
• | lack of experience with less invasive surgical products and procedures; |
• | lack or perceived lack of evidence supporting additional patient benefits; |
• | perceived liability risks generally associated with the use of new products and procedures; |
• | existing relationships with competitors; |
• | limited or lack of availability of coverage and reimbursement within healthcare payment systems; |
• | higher pricing associated with new products and procedures; |
• | increased competition in procedural offerings; |
• | lack or perceived lack of differentiation among procedures; |
• | costs associated with the purchase of new products and equipment; and |
• | the time commitment that may be required for training. |
If we are not able to effectively demonstrate to surgeons and hospitals the value proposition of our products and procedural solutions, or if surgeons and hospitals adopt competing products, our sales could significantly decrease or fail to increase, which could adversely impact our profitability and cash flow. In addition, we believe recommendations and support of our offerings by influential surgeons and other key opinion leaders are essential for market acceptance and adoption. If we are not successful in obtaining such support, surgeons may not use our products and procedural solutions, and we may not achieve expected sales or profitability.
Our future success depends on our strategy of rapidly developing innovative solutions and our ability to timely acquire, develop and introduce new products or product enhancements that will be accepted by the market.
An important part of our business strategy is to stay ahead of our competitors by rapidly developing and commercializing innovative surgical solutions to fulfill unmet clinical needs. As such, our success will depend in part on our ability to acquire, develop and introduce new products and enhancements to our existing products to keep pace with changes in technology and market demand, as well as physician, hospital and healthcare provider practices. The success of any new product offering or enhancement to an existing product will depend on numerous factors, including our ability to:
• | properly identify and anticipate surgeon and patient needs; |
• | develop and introduce new products or product enhancements in a timely and cost-effective manner; |
• | adequately protect our intellectual property and avoid infringing upon the intellectual property rights of third parties; |
• | demonstrate the safety and efficacy of new products through clinical investigations or the collection of existing relevant clinical data; |
• | qualify for adequate reimbursement from third-party payers; and |
• | obtain the necessary regulatory clearances or approvals for new products or product enhancements. |
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In addition, our research and development efforts may require a substantial investment of time and resources before we are adequately able to determine the commercial or technical viability of a new product, technology, or other proceedingsinnovation. Even if we are able to develop enhancements or third-party claimsnew generation products successfully, these enhancements or new generation products may not generate sufficient demand or produce sales in excess of intellectual property infringementthe costs of development, which would cause our results of operations to suffer. It is also important that we carefully manage our introduction of new and enhanced products. If potential customers delay purchases until new or enhanced products are available, it could require usnegatively impact our sales. In addition, to spend significant timethe extent we have excess or obsolete inventory as we transition to new products, it would result in margin reducing write-offs and money,charges for obsolete inventory, and our results of operations may suffer.
Furthermore, our product development strategy is based on certain assumptions, including assumptions about various demographic trends and trends in the treatment of spine disorders, which could affect the demand for our products and procedural solutions. However, these trends are uncertain and actual demand for our products and procedural solutions could differ materially from projected demand if our assumptions regarding these trends prove to be incorrect or do not materialize, or if alternative treatments to those offered by our products gain widespread acceptance.
We operate in a highly competitive market segment that is subject to rapid change, and if we are unsuccessful,unable to compete successfully, our sales and operating results may suffer.
The market for our surgical products and procedures is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. Our ability to compete successfully will depend on our ability to develop proprietary products that reach the market in a timely manner, receive adequate reimbursement and are safer, less invasive and less expensive than those of our competitors. With respect to our neuromonitoring systems, we primarily compete with Medtronic and Cadwell Industries. Our IONM services business competes with Specialty Care and numerous smaller and regional neuromonitoring companies as well as insourced neuromonitoring functions operated by hospitals. With respect to our products and technologies for spine surgical procedures, our largest competitors are Medtronic, DePuy/Synthes, Stryker Spine, Globus Medical, and Zimmer Biomet Spine. We compete with many of the same companies with respect to our other products. We also compete with numerous smaller companies with respect to our implant products, many of whom have a significant regional market presence. At any time, these companies and other potential market entrants may develop alternative treatments, products or procedures for the treatment of spine disorders that compete directly or indirectly with our offerings. In addition, they may gain a market advantage by developing and patenting competitive products or processes earlier than we can or by obtaining regulatory clearances or market registrations more rapidly than we can.
Many of our competitors have greater resources than we have.
Many of our competitors are large medical device companies that have several competitive advantages over us, including:
• | significantly greater name recognition; |
• | established relationships with a greater number of surgeons, hospitals, other healthcare providers and third-party payers; |
• | larger and more well-established distribution networks domestically and/or internationally; |
• | products supported by long-term clinical data; |
• | greater experience in obtaining and maintaining FDA and other regulatory approvals or clearances for products and product enhancements; |
• | greater experience in, and resources for, launching, marketing, distributing and selling products, including capital equipment; |
• | greater ability to cross-sell their products or create bundled offerings to incentivize hospitals and surgeons to use their products; |
• | more expansive portfolios of intellectual property rights; and |
• | greater financial assets, cash flow, capital markets access and other resources for product research and development, sales and marketing, and litigation. |
Because of the significant size of the potential market for spine surgery products and procedures, we anticipate that existing competitors will continue to dedicate substantial resources to developing competing products. If we are unable to compete effectively, our sales and operating results may suffer.
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Third-party reimbursement policies and practices, including non-coverage decisions, can negatively impact our ability to sell our products and services.
Sales of our products and procedural solutions depend on the availability of adequate reimbursement from third-party payers. Future third-party reimbursement for healthcare costs may be obligatedsubject to pay damageschanges in policies and halt salespractices, such as more restrictive criteria to qualify for surgery coverage or reduction in payment amounts to hospitals and surgeons for approved surgery and IONM services, both in the United States and internationally. Further, certain third-party payers have stated non-coverage decisions concerning our technologies and services. These actions could significantly alter our ability to sell our products and procedural solutions. The continuing efforts of governmental authorities, insurance companies, and other payers of healthcare costs to contain or reduce costs could lead to patients being unable to obtain approval for payment from these third-party payers. Changes in legislation, regulation or reimbursement policies of third-party payers may adversely affect the demand for our products and services as healthcare providers generally rely on third-party payers to reimburse all or part of the costs and fees associated with the procedures performed with these devices and services. Likewise, spine surgeons, neurophysiologists and their supervising physicians rely primarily on third-party reimbursement for the surgical or monitoring fees they earn. Spine surgeons are unlikely to use our products and services if they do not receive reimbursement adequate to cover the cost of their involvement in surgical procedures.
Further, as we continue to grow our international business, market acceptance of our products.
Significant litigation regarding patent rights occursproducts and procedural solutions in our industry and our commercial success dependsa particular international market may also depend, in part, on not infringingupon the patents or violatingavailability of coverage and reimbursement within the other proprietary rights of others. We have receivedapplicable healthcare payment system. Reimbursement and healthcare payment systems in international markets vary significantly by country. As in the past, and expect to receive in the future, claims from our competitors alleging infringement of their intellectual property rights as part of business strategies designed to impede our successful commercialization of updated and new products and entry into new markets. A patent infringement suit brought against us or any of our strategic partners or licensees may force us or such strategic partners or licensees to stop or delay developing, manufacturing or selling potential products that are claimed to infringe a third-party’s intellectual property, unless that party grants us or our strategic partners or licensees rights to use its intellectual property. In such cases, we may be required to obtain licenses to patents or proprietary rights of others in order to continue to commercialize our products. However,United States, we may not be able to obtain any licenses required under any patents or proprietary rights of third parties on acceptable terms, orcoverage and reimbursement approvals in a timely manner, if at all, for our products and any licenses may require substantial royalties or other payments by us. Evenprocedural solutions in a particular foreign market. In addition, even if our strategic partners, licensees or we wereare able to obtain rightscountry-specific coverage and reimbursement approvals, the amount of such coverage and reimbursement may not be adequate and we could incur considerable expense in seeking such approvals. Our failure to obtain such coverage and approvals would negatively affect market acceptance of our products and procedural solutions in the international markets in which such failure occurs and the expenses incurred in connection with obtaining such coverage and approvals could outweigh the benefits of obtaining them.
Pricing pressure from our competitors, hospital customers and insurance providers can negatively impact our ability to sell our products and services.
The market for spine surgery products is large and has attracted numerous new companies and technologies. As some companies have sought to compete based on price, it has created pricing pressure, which we expect to continue in the future. Pricing pressure may also increase due to continued consolidation among healthcare providers, trends toward managed and value-based care, the shift toward governments becoming the primary payers of healthcare expenses, and reduction in reimbursement levels. As healthcare providers look to reduce costs, including by aggregating purchasing decisions and through industry consolidation, they are able to demand lower pricing and limit their number of suppliers. If competitive forces drive down the prices we are able to charge for our products, our profit margins will shrink, which will adversely affect our ability to maintain our profitability and to invest in and grow our business.
Quality or safety issues affecting our products could harm our reputation, result in liability and adversely impact our business.
In the course of conducting our business, we must adequately address quality and safety issues that may arise with our products, as well as defects in third-party components included in our products. Although we have established internal procedures to minimize risks that may arise from quality and safety issues, we may not be able to eliminate or mitigate occurrences of these issues and associated liabilities. Additionally, as we continue to launch more complex products and technologies, including products based on the MAGEC technology platform and products like Lessray and Pulse, risks related to quality and safety issues increase compared to our portfolio of spinal implants and fixation products. Manufacturing flaws, component failures, design defects, or inadequate disclosure of product-related information could result in an unsafe condition or the injury or death of a patient. These problems could lead to a recall of, or issuance of a safety alert relating to our products and result in significant costs and negative publicity. An adverse event, safety alert or recall involving one of our products could result in reduced market acceptance and demand for our products, and could harm our reputation and our ability to market our products in the future. In some circumstances, an adverse event, safety alert or recall could require costly design, engineering, and manufacturing changes, and result in the suspension or delay of regulatory reviews of our applications for new product approvals or clearances. Further, if we substitute, replace or exchange products to address an adverse event, safety alert or recall, or take other steps to address the needs or concerns of our customers and patients, it could disrupt our business and have an adverse effect on our results of operations and financial condition. We may also voluntarily undertake a recall of our products, initiate certain field actions, temporarily shut down production lines, or place products on a shipping hold based on internal safety, quality monitoring and testing data. If we take action to reduce a health risk posed by our products, or to remedy a violation of the Federal, Food, Drug and Cosmetic Act or other regulations caused by our products that may present a risk to health, such action may need to be reported to the third-party’s intellectual property, these rightsFDA or equivalent governmental authority. If the FDA or equivalent governmental authority subsequently determines that a report was required for a quality or safety action related to our products that we did not believe required a report, we could be subject to enforcement actions.
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While we have a network of quality systems throughout our business lines and facilities, quality and safety issues may be non-exclusive, thereby givingoccur with respect to any of our competitors access toproducts. A quality or safety issue may result in a public warning letter or consent decree from the same intellectual property. Ultimately,FDA or an equivalent action by a governmental health authority in an international jurisdiction. In addition, we may be unablesubject to commercialize someproduct recalls or seizures, monetary sanctions, injunctions to halt manufacturing and distribution of products, civil or criminal sanctions, refusal of a government to grant clearances or approvals or delays in granting such clearances or approvals, import detentions of products made outside the United States, restrictions on operations or withdrawal or suspension of existing approvals. Any of the foregoing events could disrupt our business and have an adverse effect on our results of operations and financial condition.
The safety of many of our potential products or may have to cease someis not yet supported by long-term clinical data and many of our business operations asproducts may therefore prove to be less safe and effective than initially thought.
As a result of patent infringement claims, which could severely harm our business.
Moreover, we may become party to future adversarial proceedings regarding our patent portfolio or the patents of third parties. Such proceedings could include supplemental examination or contested post-grant proceedings such as inter partes review, reexamination, interference or derivation proceedings before the U.S. Patent and Trademark Office and challenges in U.S. District Court. Patents may be subjected to opposition, post-grant review or comparable proceedings lodged in various foreign, both national and regional, patent offices. The legal threshold for initiating litigation or contested proceedings may be low, so that even lawsuits or proceedings with a low probability of success might be initiated. Litigation and contested proceedings can also be expensive and time-consuming, and our adversaries in these proceedings may have the ability to dedicate substantially greater resources to prosecuting these legal actions than we can.
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Any lawsuits resulting from such allegations could subject us to significant liability for damages and invalidate our proprietary rights. Any potential intellectual property litigation also could force us to do one or more of the following:
stop making, selling or using products or technologies that allegedly infringe the asserted intellectual property;
lose the opportunity to license our technology to others or to collect royalty payments based upon successful protection and assertionconsequence of our intellectual property rights against others;
incur significant legal expenses;
pay substantial damages or royaltiesstrategy to rapidly develop and commercialize new products and product enhancements, many of our products do not have a long history of use. Further, many of our products are subject to the party whose intellectual property rights we may be found to be infringing;
payFDA’s 510(k) premarket notification clearance process in the attorney’s feesUnited States and costs of litigation to the party whose intellectual property rights we may be found to be infringing;
redesign those products that contain the allegedly infringing intellectual property, which could be costly, disruptive and/or infeasible; or
attempt to obtain a license to the relevant intellectual property from third parties,similar regulatory processes in other countries, which may not be available on reasonable terms or at all.
Any litigation or claim against us, even those without merit, may cause us to incurrequire substantial costs, and could place a significant strain on our financial resources, divert the attentionclinical data. Accordingly, many of management from our core business and harm our reputation. In addition, we generally indemnify our customers and distributors with respect to infringement by our products currently lack the breadth of the proprietary rights of third parties. If third parties assert infringement claims againstpublished long-term clinical data supporting their safety and effectiveness. For these reasons, surgeons may be slow to adopt our customers or distributors,products, we may be required to initiatenot have comparative data that our competitors have or defend protracted and costly litigation on behalf of our customers or distributors, regardless of the merits of these claims. If any of these claims succeed or settle, we may be forced to pay damages or settlement payments on behalf of our customers or distributors or may be required to obtain licenses for the products they use. If we cannot obtain all necessary licenses on commercially reasonable terms, our customers may be forced to stop using our products.
We are currently, and may in the future be, subject to claims and lawsuits that could cause us to incur significant legal expenses and result in harm to our business.
We are currently party to various commercial, personal injury, and intellectual property litigation and have previously been subject to a purported securities class action lawsuit, shareholder derivative litigation, and intellectual property infringement lawsuits,generating, and we may be subject to greater regulatory and product liability risks. In particular, as we continue to launch more complex products and technologies, including products based on the MAGEC technology platform and products like Lessray and Pulse, we may have to conduct additional claimsstudies and lawsuits in the future. In addition, we, as well as certain ofgather additional data to support their safety and effectiveness.
Further, future patient studies or clinical experience may indicate that treatment with our officers andproducts does not improve patient outcomes. Such results would reduce demand for our products, affect sustainable reimbursement from third-party payers, significantly reduce our ability to achieve expected sales representatives, are subject to claims or lawsuits from time to time. Regardless of the outcome, these lawsuits may result in significant legal fees and expenses and could divert management’s timeprevent us from sustaining or increasing profitability. Moreover, if future results and experience indicate that our products cause unexpected or serious complications or other resources. If the claims contained in these lawsuits are successfully asserted against us,unforeseen negative effects, we could be liable for damagessubject to significant legal liability and be requiredharm to alter or cease certain of our business practices or product lines. Any of these outcomes could cause our business, financial performance and cash position to be negatively impacted. Litigation may also harm our relationships with existing customers and subject us to negative publicity, each of which could harm our business and financial results.
Our ability to protect our intellectual property and proprietary technology through patents and other means is uncertain.
Our success depends significantly on our ability to protect our proprietary rights to the technologies used in our products and procedural solutions. We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws, and nondisclosure, confidentiality and other contractual restrictions to protect our proprietary technology. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. If we do not adequately protect our intellectual property and proprietary technology, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability.
Our pending U.S. and foreign patent applications may not issue as patents at all or not in a form that will be advantageous to us or may issue and be subsequently successfully challenged by others and invalidated. Our existing patents and any patents issued in the future may not have claims with a scope sufficient to protect our products, any additional features we develop for our products or any new products. Both the patent application process and the process of managing patent disputes can be time consuming and expensive. Other parties may have developed technologies that may be related or competitive to our technology, may have filed or may file patent applications and may have received or may receive patents that overlap or conflict with our patent applications, either by claiming the same methods or devices or by claiming subject matter that could dominate our patent position. Further, competitors may also be able to design around our patents or develop products that provide outcomes that are comparable to our products but fall outside of the scope of our patent protection.
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We rely on our trademarks, trade names and brand names to distinguish our products from the products of our competitors, and have registered or applied to register many of these trademarks. We cannot assure you that our trademark applications will be approved. Third parties may also oppose our trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition, and could require us to devote resources to advertising and marketing new brands. Further, we cannot assure you that competitors will not infringe upon our trademarks, or that we will have adequate resources to enforce our trademarks.
If we seek to enforce our intellectual property rights through litigation or other proceedings, it could require us to spend significant time and money, with uncertain results.
In the event a competitor infringes upon our patent or other intellectual property rights, enforcing those rights may be costly, difficult and time consuming. We may not have sufficient resources to enforce our intellectual property rights or to defend our patents against a challenge. Our ability to enforce our patent rights depends on our ability to detect infringement. It may be difficult to detect infringers who do not advertise the components that are used in their products. Moreover, it may be difficult or impossible to obtain evidence of infringement in a competitor’s or potential competitor’s product.reputation. The spine medical device industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. It is not unusual for parties to exchange letters surrounding allegations of intellectual property infringement and licensing arrangements. In addition, the patent positions of medical device companies, including our patent position, may involve complex legal and factual questions, and, therefore, the scope, validity and enforceability of any patent claims that we have or may obtain cannot be predicted with certainty.
Changes in U.S. patent laws may limit our ability to obtain, defend and/or enforce our patents.
Patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. The Leahy-Smith America Invents Act, or the Leahy-Smith Act, includes a number of significant changes to U.S. patent law, including provisions that affect the way patent applications are prosecuted and also affect patent litigation. The U.S. Patent and Trademark Office developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, which became effective in March 2013. The first to file provisions limit the rights of an inventor to patent an invention if not the first to file an application for patenting that invention, even if such invention was the first invention. Additionally, the pool of prior art available to inhibit or limit our ability to obtain issued patents on the technology utilized in our products has expanded and the grace period for filing a patent applicationmarket has been reduced in some ways. It is now possible for a situation to arise in which a competitor is able to obtain patent rights to technology which we invented first. Furthermore, the Leahy-Smith Act has expanded the types of post grant challenges of issued patents and these proceedings may provide our competitors with additional opportunities to challenge the validity of our issued patents.
Additionally, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the enforcement and defense of our issued patents. For example, the Leahy-Smith Act provides that an administrative tribunal known as the Patent Trial and Appeals Board, or PTAB, provides a venue for challenging the validity of patents at a cost that is much lower than district court litigation and on timelines that are much faster. Although it is not clear what, if any, long-term impact the Leahy-Smith Act will have on the operation of our business, proceedings before the PTAB have resulted in several of our patents being challenged. The availability of the PTAB as a lower-cost, faster and potentially more potent tribunal for challenging patents could increase the likelihood that our own patents will be challenged, thereby increasing the uncertainties and costs of maintaining and enforcing them.
Further, competitors may challenge our issued patents through post-grant challenge procedures (domestically) and/or opposition proceedings (internationally). The Leahy-Smith Act amended the post-grant challenge procedures in the U.S. to eliminate inter partes reexamination, maintain ex parte reexamination, and add inter partes review making it easier for third-parties to challenge issued patents. We are currently engaged in various such proceedings with respect to our issued patents and the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the enforcement or defense of our issued patents.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position could be harmed.
We rely upon non-disclosure agreements and invention assignment agreements with our employee shareowners, consultants and third parties to protect our confidential and proprietary information and trade secrets. In addition to contractual measures, we try to protect the confidential nature of our proprietary information using physical and technological security measures. Such measures may not, for example, in the case of misappropriation of a trade secret by an employee or third party with authorized access, provide adequate protection for our proprietary information. Our security measures may not prevent an employee or consultant from misappropriating our trade secrets and providing them to a competitor, and recourse we take against such misconduct may not provide an adequate remedy to protect our interests fully. Unauthorized parties may also attempt to copy or reverse engineer certain aspects of our products that we consider proprietary. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret can be difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, trade secrets may be independently developed by others in a manner that could prevent legal recourse by us. If any of our confidential or proprietary information, such as our trade secrets, were to be disclosed or misappropriated, or if any such information was independently developed by a competitor, our business and competitive position could be harmed.
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We may not be able to enforce our intellectual property rights throughout the world.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. This could make it difficult for us to stop infringement of our foreign patents, if obtained, or the misappropriation of our other intellectual property rights. For example, some foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, some countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries.
Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of our intellectual property.
Third parties may assert ownership or commercial rights to inventions we develop.
We enter into agreements with collaborators that provide for the ownership of intellectual property arising from our collaborations and product development initiatives. These collaborators and other third parties may in the future make claims challenging the inventorship or ownership of our intellectual property. In addition, we may face claims by third parties that our agreements with employee shareowners, contractors or consultants obligating them to assign intellectual property to us are ineffective or in conflict with prior or competing contractual obligations of assignment, which could result in ownership disputes regarding intellectual property we have developed or will develop and interfere with our ability to capture the commercial value of such intellectual property. Litigation may be necessary to resolve an ownership dispute, and if we are not successful, we may be precluded from using certain intellectual property or may lose our exclusive rights in that intellectual property. Either outcome could harm our business and competitive position.
In addition, in certain instances we have agreed to pay consultants royalties, milestones and other payments in connection with their product development efforts. There can be no assurance that these consultants will not claim to be entitled to a royalty, milestone or other payment, even if we do not believe that it is warranted. Any such claim against us, even those without merit, may cause us to incur substantial costs, and could place a strain on our financial resources, divert the attention of management from our core business and harm our reputation.
Third parties may assert that our employees or consultants have wrongfully used or disclosed confidential information or misappropriated trade secrets or are in breach of non-competition or non-solicitation agreements with our competitors.
We employ individuals who previously worked with other companies, including our competitors or potential competitors. Although we try to ensure that our employee shareowners and consultants do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our personnel, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of a former employer or other third party. In addition, we have been and may in the future be subject to claims that we caused an employee to breach the terms of his or her non-competition or non-solicitation agreement with a third party. Litigation may be necessary to defend against these claims. If we fail in defending any such claims or settling those claims, in addition to paying monetary damages or a settlement payment, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and/or be a distraction to management and other employee shareowners.
If personal injury lawsuits are brought against us, our business may be harmed, and we may be required to pay damages that exceed our insurance coverage.
Our business exposes usparticularly prone to potential product liability claims that are inherent in the testing, manufacture and sale of medical devices and products for surgical procedures,spine surgery procedures.
As we expand our offerings to include capital equipment and invest in related resources and expertise, we are exposed to additional risks.
As we expand our procedural solutions offerings to include new technologies, including the Pulse platform, we expect that the selling and leasing of capital equipment will become a larger portion of our total net sales over time. We do not have a long history of selling, leasing or servicing capital equipment, and we intend to continue to invest in building resources and expertise in this area. We may not generate sufficient sales to offset the expenses associated with this investment. There can be no assurance that our capital equipment strategy will be successful and will not materially adversely affect our financial condition and operating results.
Approval processes of healthcare organizations for the purchase or lease of capital equipment can be lengthy, and such organizations may delay or accelerate system purchases or leases in conjunction with their internal budget timelines. Additionally, the introduction of new products by us or our competitors could adversely impact the sales cycle as well as potential malpractice claims that are inherenthealthcare organizations evaluate the benefits and costs of such products.As a result, it is difficult for us to predict the length of capital sales cycles and, therefore, the exact timing of capital sales, which may cause fluctuations in our financial results. Further, demand for capital equipment can be affected by changes in the provisionbudgets of IOM services. Surgical procedures usinghealthcare organizations and conflicting spending priorities. Any such decreases in expenditures by these healthcare organizations and decreases in demand for our productscapital equipment could have an adverse effect on our results of operations and services often involve significant riskfinancial condition.
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Table of serious complications,Contents
We may engage in strategic transactions, including bleeding, nerve injury, paralysisacquisitions, investments, joint development agreements or divestitures that may have an adverse effect on our business.
We may pursue transactions, including acquisitions of complementary businesses, technology licensing arrangements, strategic relationships, and even death. We could become the subject ofjoint development agreements to expand our product liability lawsuits alleging that component failures, malfunctions, manufacturing flaws, design defects or inadequate disclosure of product-related risks or product-related information resulted in an unsafe condition or injury to patients. Furthermore, our biologics products may expose us to additional potential product liability claims, including due to the risk of transmitting disease to human recipients. Additionally, our IOM services business could become the subject of medical malpractice lawsuits alleging negligence on theofferings and geographic presence as part of our neurophysiologists and/or oversight physicians.
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We have had, and continue to have, personal injury claims relatingbusiness strategy, which could be material to our productsfinancial condition and clinical servicesresults of operations. We may also consider divesting non-core product lines or out-licensing our technology. We may not complete transactions in a timely manner, on a cost-effective basis, or at all, and in the future, we may benot realize the expected benefits of any acquisition, license arrangement, strategic relationship, joint development agreement or divestiture. Other companies may compete with us for these strategic opportunities. We also could experience negative effects on our results of operations and financial condition from charges related to acquisitions and investments, amortization of intangible assets and asset impairment charges, and other issues that could arise in connection with, or as a result of, the acquisition of an acquired company or business, including issues related to internal control over financial reporting, regulatory or compliance issues and potential adverse short-term effects on results of operations through increased costs or otherwise. Following our acquisition of Simplify Medical Pty Limited, or Simplify Medical, in February 2021, we also offer cervical artificial disc technology for cervical total disc replacement procedures. Pursuant to the terms of the definitive agreement, we agreed to make an upfront payment of $150.0 million at closing, subject to customary purchase price adjustments, plus additional claims, somefuture payments contingent upon milestones related to regulatory approval and net sales from products incorporating the Simplify Medical cervical artificial disc technology. The closing of the acquisition occurred on February 24, 2021, and Simplify Medical is now our wholly-owned subsidiary. Acquisitions, including the acquisition of Simplify Medical, involve numerous risks, including the following:
• | difficulties in finding suitable partners or acquisition candidates; |
• | difficulties in obtaining financing on favorable terms, if at all; |
• | difficulties in completing transactions on favorable terms, if at all; |
• | the possibility that we will pay more than the value we derive from the acquisition, which could result in future non-cash impairment charges and/or a dilution of future earnings per share; |
• | difficulties in integration of the operations, technologies, personnel, and products of acquired companies, which may require significant attention of our management team that otherwise would be available for the ongoing development of our business; |
• | the applicability of additional laws, regulations and policies that have particular application to our acquisitions, including those relating to patient privacy, insurance fraud and abuse, false claims, prohibitions against self-referrals, anti-kickbacks, direct billing practices, HIPAA compliance, and prohibitions against the corporate practice of medicine and fee-splitting; |
• | the assumption of certain known and unknown liabilities of acquired companies; |
• | the incurrence of debt, contingent liabilities or future write-offs of intangible assets or goodwill; |
• | difficulties in retaining key relationships with employees, customers, partners and suppliers of an acquired company; and |
• | difficulties in operating in different business markets where we may not have historical experience. |
Any of these factors could have a negative impact on our business, results of operations or financial position. RegardlessFurther, past and potential acquisitions entail risks, uncertainties and potential disruptions to our business, especially where we have limited experience as a company developing or marketing a particular product or technology. Following any acquisition, we must integrate the new business, which can be expensive, time-consuming and cause disruptions to our existing operations. Failure to timely and successfully integrate acquired businesses may result in non-compliance with regulatory or other requirements and may result in unexpected costs, including as a result of inadequate cost containment and failure to fully realize expected synergies. As a result of any of the meritforegoing, we may not realize the expected benefit from any acquisition or eventual outcome,investment. If we cannot integrate acquired businesses, products or technologies, our business, financial conditions and results of operations could be materially and adversely affected.
In addition, we may face additional risks related to foreign acquisitions and investments. Foreign acquisitions and investments involve unique risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries.
Any divestitures may result in a dilutive impact to our future earnings, as well as significant write-offs, including those related to goodwill and other intangible assets, which could have a material adverse effect on our results of operations and financial condition. Divestitures could involve additional risks, including difficulties in the separation of operations, services, products and personnel, the diversion of management’s attention from other business concerns, the disruption of our business and the potential loss of key employees. We may not be successful in managing these or any other significant risks that we encounter in divesting a product or technology.
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Healthcare policy changes may have a material adverse effect on us.
Political, economic and regulatory influences are subjecting the healthcare industry to fundamental changes. For example, as a result of the Patient Protection and Affordable Care Act (“ACA”), the U.S. has implemented value-based payment methodologies and has created alternative payment models such as bundled payments to continue to drive improved value. The ACA also significantly altered Medicare and Medicaid reimbursements for medical services and medical devices. We anticipate that Congress, regulatory agencies and certain state legislatures will continue to review and assess alternative healthcare delivery systems and payment methods with an objective of ultimately reducing healthcare costs and expanding access. We cannot predict with certainty what healthcare initiatives, if any, will be implemented at the state level, or what ultimate effect federal healthcare reform or any future legislation or regulation may have on our customers’ purchasing decisions regarding our products and services. However, the implementation of new legislation and regulation may lower reimbursements for our products, reduce medical procedure volumes and adversely affect our business, possibly materially.
Our IONM business exposes us to risks inherent with the sale of services.
Our IONM services and support business exposes us to different risks than our other products and technologies. Through our NuVasive Clinical Services business, including the Biotronic NeuroNetwork business acquired in July 2016 and the SafePassage business acquired in January 2018, we provide onsite and remote monitoring of the neurological systems of patients undergoing spinal and brain-related surgeries. Our neurophysiologists are present in the operating room during procedures and work with supervising physicians who remotely oversee and interpret neurophysiological data gathered via broadband transmission over the Internet. Providing this service subjects us to malpractice exposure. In addition, given the reliance on technology, any disruption to our neuromonitoring equipment or the Internet could harm our service operations and our reputation among our customers. Further, any disruption to our information technology systems could adversely impact the performance of our neurophysiologists and oversight physicians.
In addition, IONM services are directly billed to Medicare and commercial payers, which brings with it additional risks associated with proper billing practice regulations, HIPAA compliance, corporate practice of medicine laws, and collections risk associated with third-party payers. Due to the breadth of many healthcare laws and regulations, our IONM business could also be subject to healthcare fraud regulation and enforcement by both the federal government and the states in which we conduct our business, including under the Anti-Kickback Statute, the federal false claims laws and state law equivalents. If our operations are found to be in violation of any of the laws described in the previous sentence or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results.
Our increased focus on specialized pediatric conditions exposes us to different risks.
In furtherance of our growth strategy, we have invested in, and expect to continue to invest in the pediatric spine and orthopedic segments, which exposes us to different risks than our other products and technologies. With the 2016 acquisition of Ellipse Technologies, we began to offer innovative products based on the MAGEC technology platform, which accelerated our entry into the pediatric spine segment. Our MAGEC growing rods are used to treat early-onset scoliosis (EOS) and, once surgically implanted in a patient, can be adjusted non-invasively using an external remote controller. We have further added to our pediatric portfolio with the launch of the Reline Small Stature system, designed as a deformity fixation solution for pediatric spine surgery, and products to support the adolescent deformity market. Designing and engineering specialized products for pediatric patients can be challenging, particularly as products need to accommodate growth in pediatric patients. If we are unable to design safe and effective products that meet the needs of pediatric patients, our ability to compete in the pediatric segment will be adversely impacted. Further, patients with EOS often have other risk factors and co-morbidities that can make surgeries more risky, which can lead to surgical and post-operative complications and potentially greater exposure for allegations of product liability.
In addition, if our pediatric products are the subject of safety concerns, whether actual or perceived, it would have an adverse impact on our business and results of operations. We have issued field safety notices regarding the MAGEC system in the past, and in April 2020, we agreed to voluntarily suspend sales of all MAGEC rods in non-essential cases in the United Kingdom and Ireland while local regulatory authorities conducted a market surveillance review of the MAGEC system. If we are unable to address the issues identified in the market surveillance review, we may need to conduct additional studies, gather additional data, or re-design or re-engineer the MAGEC system, which could be costly. Further, if our surgeon customers and their patients choose alternative treatments, it would negatively impact our pediatric business. If we are the subject of any claims or lawsuits related to the issues identified in the field safety notices, whether from impacted customers, distributors, surgeons or patients, it would have an adverse impact on our business and results of operations.
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Our employees, independent sales representatives, consultants, distributors and other commercial partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements.
We are exposed to the risk that our employees, independent sales representatives, consultants, distributors and other commercial partners may engage in fraudulent or illegal activity. Misconduct by these parties could include intentional, reckless or negligent conduct or other unauthorized activities that violate the regulations of the FDA and non-U.S. regulators, including those laws requiring the reporting of true, complete and accurate information to such regulators, manufacturing standards, healthcare fraud and abuse laws and regulations in the United States and abroad or laws that require the true, complete and accurate reporting of financial information or data. In particular, sales, marketing and business arrangements in the healthcare industry, including the sale of medical devices, are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. It is not always possible to identify and deter misconduct by our employees or third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us and we are not successful in defending ourselves or asserting our rights, those actions could result in the imposition of significant fines or other sanctions, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings and curtailment of operations, any of which could adversely affect our ability to operate our business and our results of operations. Whether or not we are successful in defending against such actions or investigations, we could incur substantial costs, including legal fees, and divert the attention of management in defending ourselves against any of these claims may result in:or investigations.
decreased demand for our products;
injuryRisks Related to our reputation; Commercial Operations and Plans for Future Growth
significant litigation costs;
substantial monetary awardsIf we are unable to or costly settlements with patients;
product recalls;
material defense costs;
lossmaintain and expand our network of revenue;
increased insurance costs;
the inability to commercialize new products or product candidates;direct and
diversion of management attention from pursuing our business strategy.
Our existing insurance coverage for personal injury claims may be inadequate to protect us from any liabilities we might incur. If a personal injury claim or series of claims is brought against us for uninsured liabilities or in excess of our insurance coverage, our business could suffer. In addition,independent sales representatives, we may not be able to generate anticipated sales.
In the United States, we sell our products primarily through a combination of independent sales representatives and directly-employed sales personnel. Our international sales force is comprised of independent sales agents, directly-employed sales personnel, as well as exclusive and non-exclusive independent third-party distributors. If our sales representatives and sales agents fail to adequately promote, market and sell our products, or fail to develop strong relationships with customers, our sales could significantly decrease or fail to increase. Further, the termination or transition of a sales representative could disrupt business and cause us to incur expenses related to such termination or transition, including contract termination fees or expenses associated with claims and lawsuits. Asserting or defending against these types of claims and lawsuits may result in significant legal fees and expenses, and if we are unsuccessful, we could be liable for damages.
We face significant challenges and risks in managing our geographically dispersed distribution network and retaining the individuals who make up that network. In the past, we have experienced departures of sales representatives, which have had a negative impact on our results. If sales representatives were to depart and be retained by one of our competitors, we may be unable to prevent them from helping competitors solicit business from our existing customers, which could further adversely affect our sales. In addition, as we expand into new markets, it may be difficult to find sales representatives with the appropriate expertise or it may take time for new sales representatives to reach full operational effectiveness and generate expected sales. Because of the intense competition for their services, we may be unable to recruit or retain sales representatives to work with us. Failure to hire or retain qualified sales representatives would prevent us from expanding our business and generating sales.
We may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy.
We intend to grow our business operations and we may experience periods of rapid growth and expansion. This anticipated future growth could create a strain on our organizational, administrative and operational infrastructure, including manufacturing operations, quality control, information technology infrastructure, technical support and customer service, sales force management and general and financial administration. We may not be able to maintain insurance coveragethe quality or delivery timelines of our products or satisfy customer demand as it grows. Our ability to manage our growth properly will require us to continue to improve our operational, financial and management controls, as well as our reporting systems and procedures.
If our commercial operations and sales volume grow, we will need to continue to increase our capacity for manufacturing, customer service, billing and general process improvements and expand our internal quality assurance program, among other things. We will also need to purchase additional equipment, some of which can take several months or more to procure, set up and validate, and increase our manufacturing, maintenance, and information technology systems capacity to meet increased demand, and further invest in our inventory. These increases in scale, expansion of personnel, purchases of equipment or process enhancements and investments in inventory can be costly and may not be successfully implemented, any of which could disrupt our business and have an adverse effect on our results of operations and financial condition.
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Our reliance on a limited number of suppliers and manufacturers could limit our ability to meet demand for our products in a timely manner or within our budget.
While we self-manufacture many of our products, we continue to rely on a limited number of third-party suppliers and manufacturers to supply and manufacture our products, and we may not be able to find replacements or immediately transition to alternative suppliers or manufacturers. Many of our key products are manufactured at single locations, with limited alternate facilities, and it could take considerable time and resources for us to replace the capacity of such vendors in the event of disruptions. In addition, if we are required to change the manufacturer of a reasonablecritical component of our products, we will be required to verify that the new manufacturer maintains facilities, procedures and operations that comply with our quality and applicable regulatory requirements, which could further impede our ability to manufacture our products in a timely manner.
Further, for reasons of quality assurance or cost effectiveness, we purchase certain components and raw materials from sole suppliers. To be successful, we rely on our suppliers to provide us with products and components in substantial quantities, in compliance with regulatory requirements, in accordance with agreed upon specifications, at acceptable cost and on a timely basis. In the event we experience delays, shortages, or stoppages of supply with any supplier, we would be forced to identify a suitable alternative supplier which could take significant time and result in significant expense. In addition, our anticipated growth could strain the ability of suppliers to deliver an increasingly large supply of products, materials and components. If we are required to transition to new third-party suppliers for certain components of our products, the use of components or materials furnished by these alternative suppliers could require us to alter our operations. Any such interruption or alteration could harm our reputation, business, financial condition and results of operations. Transitioning to a new supplier could be time-consuming and expensive, may result in interruptions in our operations and product delivery, could affect the performance specifications of our products or could require that we modify the design of those systems.
Performance issues, service interruptions or price increases by our shipping carriers could adversely affect our business and harm our reputation and ability to provide our products and services on a timely basis.
Expedited, reliable shipping is essential to our operations. We rely heavily on providers of transport services for reliable and secure point-to-point transport of our products to our customers and for tracking of these shipments. Should a carrier encounter delivery performance issues such as loss, damage or destruction of any products, it could be costly to replace such products in a timely manner and such occurrences may damage our reputation and lead to decreased demand for our products and increased cost and expense to our business. In addition, any significant increase in shipping rates could adversely affect our operating margins and results of operations. Similarly, strikes, severe weather, natural disasters, public health threats, or other service interruptions affecting delivery services we use would adversely affect our ability to process and fulfill orders for our products on a timely basis.
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Manufacturing risks may adversely affect our ability to manufacture products and could reduce our gross margins and negatively affect our operating results.
As part of our business strategy, we intend to continue to expand our ability to manufacture our current and new products with exceptional quality and in sufficient amountsquantities to meet demand, while complying with regulatory requirements and managing manufacturing costs. We are subject to numerous risks relating to our manufacturing capabilities, including both those of our own manufacturing facilities and those of our third-party suppliers, such as:
• | problems with quality control and assurance, including manufacturing nonconformances and product design defects; |
• | defective raw materials or defects in product components that we source from third-party suppliers; |
• | delays in obtaining components from third-party suppliers and component supply shortages; |
• | failing to predict demand accurately, resulting in a failure to increase production of products to meet demand; |
• | potential adverse effects on existing business relationships with current third-party suppliers as we expand our in-house manufacturing capabilities; |
• | maintaining control over manufacturing expenses as production expands; |
• | difficulties associated with compliance with local, state, federal and foreign regulatory requirements; |
• | shortages of qualified personnel or workforce disruptions; |
• | the inability to modify production lines to enable the efficient manufacture of new products or to quickly implement changes to current products in response to regulatory requirements; |
• | disruptions caused by natural disasters such as hurricanes, tornadoes earthquakes or wildfires, and the impact of epidemics or pandemics, such as COVID-19; and |
• | potential damage to or destruction of our, or our suppliers’ manufacturing equipment or manufacturing facilities. |
These risks may be exacerbated by our limited experience with self- manufacturing processes and procedures. In addition, as we seek to expand our manufacturing capabilities, we will have to continue to invest additional resources to hire and train personnel and enhance our production processes. If we fail to increase our manufacturing capacity efficiently, our profit margins will shrink, which will negatively affect our operating results.
The loss of key employees, or scopeour inability to recruit, hire and retain skilled and experienced personnel, could negatively impact our ability to effectively manage and expand our business.
Our success depends on the skills, experience and performance of the members of our executive management team and other key employees. Their individual and collective efforts will continue to be important as we continue to develop our products and as we expand our commercial activities. The loss or incapacity of existing members of our executive management team could negatively impact our operations, particularly if we experience difficulties in hiring qualified successors. We do not maintain key person life insurance with respect to any of our employees.
Our research and development programs and operations depend on our ability to attract and retain highly skilled engineers and technicians. We may not be able to attract or retain qualified managers, engineers and technicians in the future due to the competition for qualified personnel among medical device businesses. We also face competition from universities and public and private research institutions in recruiting and retaining highly qualified personnel. Recruiting and retention difficulties can limit our ability to support our commercial, manufacturing and research and development programs. All of our U.S. employees are employed on an at-will basis, which means that either we or the employee may terminate his or her employment at any time. The loss of key employees, the failure of any key employees to perform or our inability to attract and retain skilled employees, as needed, or an inability to effectively plan for and implement a succession plan for key employees could harm our business.
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We face risks associated with our international business.
During the year ended December 31, 2020, $228.8 million or approximately 22% of our net sales was attributable to our international customers (excluding Puerto Rico). We expect to continue to invest in international expansion with a focus on European, Asia-Pacific and Latin American markets. Our international business operations are subject to a variety of risks, including:
• | difficulties in staffing and managing foreign and geographically dispersed operations; |
• | having to comply with various U.S. and international laws, including the FCPA and anti-money laundering laws; |
• | having to comply with U.S. and foreign trade, import and export and customs regulations and laws, including, but not limited to, the Export Administration Regulations and trade sanctions against embargoed countries, which are administered by the Office of Foreign Assets Control within the Department of the Treasury, as well as the laws and regulations administered by the Department of Commerce; |
• | differing complex regulatory requirements for obtaining clearances or approvals to market our products, including the EU Medical Device Regulation (Council Regulations 2017/745) and recent regulatory guidance issued by the UK Government in connection with the UK formally withdrawing from the European Union; |
• | changes in, or uncertainties relating to, foreign rules and regulations that may impact our ability to sell our products, perform services or repatriate profits to the United States; |
• | tariffs and trade barriers, export regulations and other regulatory and contractual limitations on our ability to sell our products in certain foreign markets; |
• | fluctuations in foreign currency exchange rates; |
• | limitations on or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries or joint ventures; |
• | differing multiple payer reimbursement regimes, government payers or patient self-pay systems; |
• | differing labor laws and standards; |
• | changes in, or uncertainties relating to foreign laws around value-added taxes or permanent establishment that may impact our international indirect and income tax expense and related compliance costs; |
• | complex data privacy requirements, including the EU GDPR; |
• | economic, political or social instability in foreign countries and regions; |
• | an inability, or reduced ability, to protect our intellectual property, including any effect of compulsory licensing imposed by government action; |
• | potential changes to U.S. trade policy, including new legislation that could restrict international trade, or protectionist or retaliatory measures taken by governments of other countries; and |
• | availability of government subsidies or other incentives that benefit competitors in their local markets that are not available to us. |
The FCPA and similar anti-bribery laws in non-U.S. jurisdictions generally prohibit companies and their intermediaries from making improper payments for the purpose of obtaining or retaining business. The FCPA also imposes accounting standards and requirements on publicly traded U.S. corporations and their foreign affiliates, which are intended to prevent the diversion of corporate funds to the payment of bribes and other improper payments. Because of the predominance of government-sponsored healthcare systems around the world, many of our customer relationships outside of the United States are with governmental entities and are therefore subject to such anti-bribery laws. Our internal control policies and procedures may not always prevent or protect us against losses. from reckless or criminal acts committed by our employees, distributors or agents. In recent years, both the United States and foreign government regulators have increased regulation, enforcement, inspections and governmental investigations of the medical device industry, including increased United States government oversight and enforcement of the FCPA. Despite implementation of a comprehensive global healthcare compliance program, we may be subject to more regulation, enforcement, inspections and investigations by governmental authorities in the future.
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Any claims againstfailure to comply with applicable legal and regulatory obligations in the United States or abroad could adversely affect us regardlessin a variety of their merit,ways that include, but are not limited to, significant criminal, civil and administrative penalties, including imprisonment of individuals, fines and penalties, denial of export privileges, seizure of shipments and restrictions on certain business activities, disgorgement and other remedial measures, disruptions of our operations, and significant management distraction. Also, the failure to comply with applicable legal and regulatory obligations could severely harmresult in the disruption of our distribution and sales activities. Any reduction in international sales, or our failure to further develop our international markets, could have a material adverse effect on our business, results of operations and financial condition.
Our results may be impacted by changes in foreign currency exchange rates.
As we increasingly compete in markets outside of the United States, we are and will be exposed to foreign currency exchange risk related to our foreign operations. A significant portion of our foreign subsidiaries’ operating expenses are incurred in foreign currencies. If the U.S. dollar weakens, our consolidated operating expenses would increase. An increase in the value of the U.S. dollar relative to foreign currencies could require us to reduce our selling price or risk making our products less competitive in international markets or our costs could increase. Also, as our international sales continue to increase, we may enter into a greater number of transactions denominated in non-U.S. dollars, which could increase our exposure to foreign currency risks, including changes in currency exchange rates. If we are unable to address these risks and challenges effectively, our international operations may not be successful and our business could be harmed.
If we fail to properly manage our anticipated international growth, our business could suffer.
We have invested, and expect to increase our investment for the foreseeable future, in our expansion into international markets. To execute our anticipated growth in international markets we must:
• | manage the complexities associated with a larger, faster growing and more geographically diverse organization; |
• | expand our clinical development resources to manage and execute increasingly global, larger and more complex clinical trials and studies; |
• | manage our directly-employed sales personnel as well as independent distributors and sales agents operating in international markets often pursuant to laws, regulations and customs that may be different than those that are customary for our United States operations; |
• | expand our sales and marketing presence in international markets generally to avoid concentration of sales in a small number of markets that would subject us to the risk of business disruption as a result of economic or political problems in concentrated locations; |
• | upgrade our internal business processes and capabilities (e.g., information technology platform and systems, product distribution and tracking) to create scalability and properly handle the transaction volumes that our growing geographically diverse organization demands; |
• | expend time and resources to receive product approvals and clearances to sell and promote products; and |
• | incur significant costs to comply with new and complex regulatory requirements such as the EU Medical Device Regulation (Council Regulations 2017/745) and recent regulatory guidance issued by the UK Government in connection with the UK formally withdrawing from the European Union. |
We expect that our operating expenses will continue to increase as we continue to expand into international markets. International markets may be slower than domestic markets in adopting our products and are expected, in many instances, to yield lower profit margins when compared to our domestic operations. We have only limited experience in expanding into international markets as well as marketing and operating our products and services in such markets.
Additionally, our international endeavors may involve significant risks and uncertainties, including distraction of management from domestic operations, insufficient sales to offset the expenses associated with our international strategy, and issues not discovered in our due diligence of new markets or ventures. Because expansion into international markets is inherently risky, no assurance can be given that such strategies and initiatives will be successful and will not materially adversely affect our financial condition and operating results. Even if our international expansion is successful, our expenses may increase at a greater pace than our net sales and our operating results could be harmed.
Further, our anticipated growth internationally will place additional strain on our managementsuppliers and manufacturers, resulting in increased need for us to carefully monitor quality assurance. Any failure by us to manage our international growth effectively could have an adverse effect on our ability to achieve our development and commercialization goals.
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Cybersecurity risks and the failure to maintain the confidentiality, integrity, and availability of our computer hardware, software, and Internet applications and related tools and functions could result in harm to our business and/or subject us to costs, fines or lawsuits.
We rely on sophisticated information technology systems and network infrastructure to operate and manage our business. We also maintain personally identifiable information (PII) about our employees, and given the nature of our business, we have access to protected health information (PHI). Our business therefore depends on the continuous, effective, reliable, and secure operation of our computer hardware, software, networks, Internet servers, and related infrastructure. To the extent that our hardware or software malfunctions or access to our data by internal personnel, suppliers or customers through the Internet is interrupted or compromised, our business could suffer.
The integrity and protection of our customer, personnel, financial, research and development, and other resourcesconfidential data is critical to our business, and our customers and employees have a high expectation that we will adequately protect their personal information. The regulatory environment governing information, security and privacy laws is increasingly demanding and continues to evolve and a number of states have adopted laws and regulations that may affect our privacy and data security practices regarding the use, disclosure and protection of PII. For example, California recently enacted legislation, the California Consumer Privacy Act, that, among other things, creates new individual privacy rights and imposes increased obligations on companies handling PII.
Although our computer and communications hardware is protected through physical and software safeguards, it is still vulnerable to system malfunction, computer viruses, malware and ransomware, and other cybersecurity threats such as phishing and social engineering attacks. These events could lead to the unauthorized access of our information technology systems and result in financial loss and the misappropriation or unauthorized disclosure of confidential information belonging to us, our employees, partners, customers, or our suppliers. The techniques used by criminal elements to attack computer systems are sophisticated, change frequently and may originate from less regulated and remote areas of the world. As a result, we may not be able to address these techniques proactively or implement adequate preventative measures. If our information technology systems are compromised we could be subject to fines, damages, litigation and enforcement actions, incur financial losses, suffer reputational damage, and lose trade secrets or other confidential information, each of which could significantly harm our business.
We rely on the performance of our information technology systems, the failure of which could have an adverse effect on our business and performance.
Our business requires the continued operation of sophisticated information technology systems and network infrastructure. These systems are vulnerable to interruption by fire, floods, earthquakes, power loss, system malfunction, computer viruses, security breaches, cybersecurity threats such as phishing and social engineering attacks and other events, which are beyond our control. Systems interruptions could reduce our ability to manufacture, deliver, and provide service for our products, and could have an adverse effect on our operations and financial performance. The level of protection and disaster-recovery capability varies from site to site, and there can be no guarantee that any such plans, to the extent they are in place, will be completely effective. Further, a greater number of our employees are working remotely in response to the COVID-19 pandemic and related government actions and may choose to continue to work remotely after the pandemic has ended, which could expose us to greater risks associated with cybersecurity threats and systems interruptions. Loss of data could interrupt our operations, including our ability to ship products, bill our customers, provide customer support services, conduct research and development activities, process and prepare company financial information, manage various general and administrative aspects of our business and damage our reputation, any of which could adversely affect our business.
Our operations are vulnerable to interruption or eliminate the prospects for commercializationloss due to natural or other disasters, power loss, strikes and other events beyond our control.
We conduct a significant portion of our IOM businessactivities, including administration and data processing, at facilities located in Southern California, an area that has experienced major earthquakes, fires and other natural disasters. In addition, our primary self-manufacturing facility is located in West Carrollton, Ohio, an area that has experienced tornados, winter storms and other natural disasters. A major earthquake, fire, tornado or salesother disaster (such as a major flood, tsunami, storm or terrorist attack) affecting these or other NuVasive facilities, or those of our suppliers, could significantly disrupt our operations, and delay or prevent product shipment or installation during the time required to repair, rebuild or replace our facilities or those of our suppliers. These delays could be lengthy and costly. If our manufacturing facilities or any of our customers’ facilities are negatively impacted by a disaster, shipments of our products could be delayed. Additionally, customers may delay purchases of our products until operations return to normal. Even if we are able to quickly respond to a disaster, the ongoing effects of the disaster could create some uncertainty in the operations of our business. In addition, our facilities may be subject to a shortage of available electrical power and other energy supplies. Any shortages may increase our costs for power and energy supplies or could result in blackouts, which could disrupt the operations of our affected facilities and harm our business. In addition, concerns about terrorism, the effects of a productterrorist attack, political turmoil or product candidatean outbreak of a widespread disease or other public health crisis, such as the COVID-19 pandemic, could have a negative effect on our operations, those of our suppliers and customers and the ability to travel, which could harm our business, financial condition and results of operations.
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Our insurance policies are expensive and protect us only from some business risks, which will leave us exposed to significant uninsured liabilities.
We do not carry insurance for all categories of risk that our business may encounter. Some of the policies we currently maintain include general liability, foreign liability, employee benefits liability, property, umbrella, workers’ compensation, products liability and directors’ and officers’ insurance. We do not know, however, if we will be able to maintain existing insurance with adequate levels of coverage. Any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our cash position and results of operations.
We bear the risk of warranty claims on our products.
We bear the risk of express and implied warranty claims on products we supply, including equipment and component parts manufactured by third parties. We may not be successful in claiming recovery under any warranty or indemnity provided to us by our suppliers or vendors in the event of a successful warranty claim against us by a customer or that any recovery from such vendor or supplier would be adequate. In addition, warranty claims brought by our customers related to third-party components may arise after our ability to bring corresponding warranty claims against such suppliers expire, which could result in additional costs to us. There is the subjecta risk that warranty claims made against us will exceed our warranty reserve and our business, financial condition and results of any such claim.operations could be harmed.
Risks Related to Regulatory and Compliance
• | We are subject to rigorous FDA and other governmental regulations regarding the development, manufacture, and sale of our products and we may incur significant expenses to comply with these regulations and develop products that satisfy these regulations. |
• | Failure or alleged failure to comply with FDA and other governmental regulations can result in investigations and other regulatory proceedings, which are expensive and could divert management attention. |
• | We are subject to federal, state and foreign fraud and abuse laws and health information privacy and security laws, which, if violated, could subject us to substantial penalties. |
• | We may fail to obtain or maintain foreign regulatory approvals to market our products in other countries. |
• | If we fail to obtain, or experience significant delays in obtaining, FDA clearances or approvals for our future products or product enhancements, our ability to commercially distribute and market our products could suffer. |
• | The misuse or off-label use of our products may harm our reputation in the marketplace, result in injuries that lead to product liability suits or result in costly investigations, fines or sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be costly to our business. |
• | If we or our suppliers fail to comply with the FDA’s quality system regulations, ISO or other applicable regulations and standards, the manufacture and processing of our products could be delayed or interrupted and we may be subject to an enforcement action by the FDA or other government agencies. |
• | Our relationships with physicians could be subject to additional scrutiny from regulatory enforcement authorities and could subject us to possible administrative, civil or criminal sanctions. |
Risks Related to Our Financial Results and Need for Financing
• | We may be unable to grow our net sales or earnings as anticipated, which may have a material adverse effect on our future operating results. |
• | We have a significant amount of outstanding indebtedness, and our financial condition and results of operations could be adversely affected if we do not effectively manage our liabilities. |
• | We may need additional financing in the future to meet our capital needs or to make opportunistic acquisitions and such financing may not be available on favorable terms, if at all, and may be dilutive to existing stockholders. |
Risks Related to the Securities Markets and Ownership of Our Common Stock
• | We expect that the price of our common stock will fluctuate substantially, potentially adversely affecting the ability of investors to sell their shares. |
• | Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change of control, even if an acquisition would be beneficial to our stockholders, which could affect our stock price adversely and prevent attempts by our stockholders to replace or remove our current management. |
• | We do not intend to pay cash dividends. |
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Risk Factors
Risks Related to Our Business and Industry
We are subject to risks associated with public health threats, including the ongoing COVID-19 pandemic, which has had, and we expect will continue to have, a material adverse effect on our business.
The nature of our business and our interactions with healthcare systems, surgeons and patients expose us to substantial risks associated with public health threats, including widespread outbreaks of contagious diseases, epidemics, and pandemics such as COVID-19. To slow the proliferation of COVID-19, governments have implemented extraordinary measures, which include the mandatory closure of businesses, restrictions on travel and gatherings, and quarantine and physical distancing requirements. In addition, many government agencies in conjunction with hospitals and healthcare systems have to varying degrees deferred or suspended elective surgical procedures. While certain spine surgeries are deemed essential and certain surgeries, like in cases of trauma, cannot be delayed, we have seen and may continue to see a significant reduction in procedural volumes as hospital systems and/or patients elect to defer spine surgery procedures. As a result of these measures, we experienced reductions in procedural volumes during 2020 and anticipate this trend may continue. In addition, restrictions on our ability to travel as well as the temporary closures of our facilities and the facilities of our suppliers adversely affected our business in 2020. Further, due to the travel restrictions and physical distancing requirements, we faced challenges in our ability to train and educate surgeons on our surgical techniques and products. These restrictions also impacted our manufacturing capabilities and distribution and warehousing operations. The cumulative effect of these disruptions had a significant impact on our business in 2020, and it is not possible for us to accurately predict the length or severity of the COVID-19 pandemic or the timing for a broad and sustained resumption of elective surgical procedures. The COVID-19 pandemic continues to rapidly evolve, and its impact on our business will depend on several factors that are highly uncertain and unpredictable, including, the efficacy and adoption of vaccines, future resurgences of the virus and its variants, the speed at which government restrictions are lifted, and the willingness and ability of patients to seek care and treatment due to safety concerns or financial hardship. We continue to believe that our overall business strategy and long-term future growth opportunities remain strong, and our priority is the health and well-being of our employees, customers, surgeons, and patients and the communities in which we operate.
The COVID-19 pandemic is straining healthcare systems worldwide, which will further impact our business, results of operations and liquidity.
Due to the COVID-19 pandemic, hospitals in the U.S. and globally have to varying degrees suspended and delayed elective surgeries in order to allocate and direct medical supplies and capacity to the COVID-19 response. Some hospitals have also limited access to their facilities or changed access protocols, which has made it difficult for us to support our surgeon customers. As a result, we experienced reductions in procedural volumes during 2020 and anticipate this trend may continue. We expect that hospitals and other facilities may face significant disruptions in their business and incur financial losses as they decrease elective procedures and increase spending on supplies and infrastructure in order to expand system capacity related to COVID-19 treatment. Potential patients may also cancel elective procedures or fail to seek needed care at hospitals which are involved in treating patients with COVID-19 due to the highly infectious nature of the disease. Additionally, the impact of the COVID-19 pandemic on the global economy and the financial markets could lead to a sustained period of economic turmoil and increased unemployment which may affect the ability of patients to seek care and treatment due to reduced health insurance coverage or the inability to pay premiums, deductibles, and copayments under health insurance plans. If the financial condition of hospitals deteriorate it could cause us to experience slower or impaired collections on accounts receivable, reductions in sales of our products and services, and increased price competition all of which could adversely impact our business, results of operations and liquidity. As of December 31, 2020, we had over $1.0 billion in cash, cash equivalents and short-term investments and the ability to draw $550.0 million under our 2020 Facility. However, our ability to borrow under the 2020 Facility is subject to remaining in compliance with underlying financial covenants which may be difficult to satisfy if the COVID-19 pandemic continues to adversely impact the healthcare system and our business. If the business interruptions caused by COVID-19 persist for a substantial period of time, we may need to seek other sources of liquidity and there can be no guarantee that additional liquidity will be readily available or available on favorable terms.
To the extent the COVID-19 pandemic adversely affects our operations and global economic conditions more generally, it may also have the effect of heightening many of the other risks described below.
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To be commercially successful, we must effectively demonstrate to surgeons and hospitals the value proposition of our products and procedural solutions compared to those of our competitors.
We focus on marketing our products and procedural solutions to surgeons, because of the role that they play in determining the course of patient treatment. However, hospitals are also becoming increasingly involved in the evaluation and acceptance of our products and procedural solutions. Surgeons and hospitals may not widely adopt our products and procedural solutions unless we are able to effectively educate them as to the distinctive characteristics, perceived benefits, safety and cost-effectiveness of our offerings as compared to those of our competitors. We believe that the most effective way to introduce and build market demand for our products and procedural solutions is by directly training surgeons in their use. If surgeons are not properly trained, they may misuse or ineffectively use our products and procedural solutions. This may also result in unsatisfactory patient outcomes, patient injury, negative publicity or lawsuits against us, any of which could have a significant adverse effect on our business, financial condition and results of operations.
Surgeons and hospitals may be hesitant to use and accept our products and procedural solutions for the following reasons, among others:
• | lack of experience with less invasive surgical products and procedures; |
• | lack or perceived lack of evidence supporting additional patient benefits; |
• | perceived liability risks generally associated with the use of new products and procedures; |
• | existing relationships with competitors; |
• | limited or lack of availability of coverage and reimbursement within healthcare payment systems; |
• | higher pricing associated with new products and procedures; |
• | increased competition in procedural offerings; |
• | lack or perceived lack of differentiation among procedures; |
• | costs associated with the purchase of new products and equipment; and |
• | the time commitment that may be required for training. |
If we are not able to effectively demonstrate to surgeons and hospitals the value proposition of our products and procedural solutions, or if surgeons and hospitals adopt competing products, our sales could significantly decrease or fail to increase, which could adversely impact our profitability and cash flow. In addition, we believe recommendations and support of our offerings by influential surgeons and other key opinion leaders are essential for market acceptance and adoption. If we are not successful in obtaining such support, surgeons may not use our products and procedural solutions, and we may not achieve expected sales or profitability.
Our future success depends on our strategy of rapidly developing innovative solutions and our ability to timely acquire, develop and introduce new products or product enhancements that will be accepted by the market.
An important part of our business strategy is to stay ahead of our competitors by rapidly developing and commercializing innovative surgical solutions to fulfill unmet clinical needs. As such, our success will depend in part on our ability to acquire, develop and introduce new products and enhancements to our existing products to keep pace with changes in technology and market demand, as well as physician, hospital and healthcare provider practices. The success of any new product offering or enhancement to an existing product will depend on numerous factors, including our ability to:
• | properly identify and anticipate surgeon and patient needs; |
• | develop and introduce new products or product enhancements in a timely and cost-effective manner; |
• | adequately protect our intellectual property and avoid infringing upon the intellectual property rights of third parties; |
• | demonstrate the safety and efficacy of new products through clinical investigations or the collection of existing relevant clinical data; |
• | qualify for adequate reimbursement from third-party payers; and |
• | obtain the necessary regulatory clearances or approvals for new products or product enhancements. |
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In addition, our research and development efforts may require a substantial investment of time and resources before we are adequately able to determine the commercial or technical viability of a new product, technology, or other innovation. Even if we are able to develop enhancements or new generation products successfully, these enhancements or new generation products may not generate sufficient demand or produce sales in excess of the costs of development, which would cause our results of operations to suffer. It is also important that we carefully manage our introduction of new and enhanced products. If potential customers delay purchases until new or enhanced products are available, it could negatively impact our sales. In addition, to the extent we have excess or obsolete inventory as we transition to new products, it would result in margin reducing write-offs and charges for obsolete inventory, and our results of operations may suffer.
Furthermore, our product development strategy is based on certain assumptions, including assumptions about various demographic trends and trends in the treatment of spine disorders, which could affect the demand for our products and procedural solutions. However, these trends are uncertain and actual demand for our products and procedural solutions could differ materially from projected demand if our assumptions regarding these trends prove to be incorrect or do not materialize, or if alternative treatments to those offered by our products gain widespread acceptance.
We operate in a highly competitive market segment that is subject to rapid change, and if we are unable to compete successfully, our sales and operating results may suffer.
The market for our surgical products and procedures is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. Our ability to compete successfully will depend on our ability to develop proprietary products that reach the market in a timely manner, receive adequate reimbursement and are safer, less invasive and less expensive than those of our competitors. With respect to our neuromonitoring systems, we primarily compete with Medtronic and Cadwell Industries. Our IONM services business competes with Specialty Care and numerous smaller and regional neuromonitoring companies as well as insourced neuromonitoring functions operated by hospitals. With respect to our products and technologies for spine surgical procedures, our largest competitors are Medtronic, DePuy/Synthes, Stryker Spine, Globus Medical, and Zimmer Biomet Spine. We compete with many of the same companies with respect to our other products. We also compete with numerous smaller companies with respect to our implant products, many of whom have a significant regional market presence. At any time, these companies and other potential market entrants may develop alternative treatments, products or procedures for the treatment of spine disorders that compete directly or indirectly with our offerings. In addition, they may gain a market advantage by developing and patenting competitive products or processes earlier than we can or by obtaining regulatory clearances or market registrations more rapidly than we can.
Many of our competitors have greater resources than we have.
Many of our competitors are large medical device companies that have several competitive advantages over us, including:
• | significantly greater name recognition; |
• | established relationships with a greater number of surgeons, hospitals, other healthcare providers and third-party payers; |
• | larger and more well-established distribution networks domestically and/or internationally; |
• | products supported by long-term clinical data; |
• | greater experience in obtaining and maintaining FDA and other regulatory approvals or clearances for products and product enhancements; |
• | greater experience in, and resources for, launching, marketing, distributing and selling products, including capital equipment; |
• | greater ability to cross-sell their products or create bundled offerings to incentivize hospitals and surgeons to use their products; |
• | more expansive portfolios of intellectual property rights; and |
• | greater financial assets, cash flow, capital markets access and other resources for product research and development, sales and marketing, and litigation. |
Because of the significant size of the potential market for spine surgery products and procedures, we anticipate that existing competitors will continue to dedicate substantial resources to developing competing products. If we are unable to compete effectively, our sales and operating results may suffer.
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Third-party reimbursement policies and practices, including non-coverage decisions, can negatively impact our ability to sell our products and services.
Sales of our products and procedural solutions depend on the availability of adequate reimbursement from third-party payers. Future third-party reimbursement for healthcare costs may be subject to changes in policies and practices, such as more restrictive criteria to qualify for surgery coverage or reduction in payment amounts to hospitals and surgeons for approved surgery and IONM services, both in the United States and internationally. Further, certain third-party payers have stated non-coverage decisions concerning our technologies and services. These actions could significantly alter our ability to sell our products and procedural solutions. The continuing efforts of governmental authorities, insurance companies, and other payers of healthcare costs to contain or reduce costs could lead to patients being unable to obtain approval for payment from these third-party payers. Changes in legislation, regulation or reimbursement policies of third-party payers may adversely affect the demand for our products and services as healthcare providers generally rely on third-party payers to reimburse all or part of the costs and fees associated with the procedures performed with these devices and services. Likewise, spine surgeons, neurophysiologists and their supervising physicians rely primarily on third-party reimbursement for the surgical or monitoring fees they earn. Spine surgeons are unlikely to use our products and services if they do not receive reimbursement adequate to cover the cost of their involvement in surgical procedures.
Further, as we continue to grow our international business, market acceptance of our products and procedural solutions in a particular international market may also depend, in part, upon the availability of coverage and reimbursement within the applicable healthcare payment system. Reimbursement and healthcare payment systems in international markets vary significantly by country. As in the United States, we may not be able to obtain coverage and reimbursement approvals in a timely manner, if at all, for our products and procedural solutions in a particular foreign market. In addition, even if we are able to obtain country-specific coverage and reimbursement approvals, the amount of such coverage and reimbursement may not be adequate and we could incur considerable expense in seeking such approvals. Our failure to obtain such coverage and approvals would negatively affect market acceptance of our products and procedural solutions in the international markets in which such failure occurs and the expenses incurred in connection with obtaining such coverage and approvals could outweigh the benefits of obtaining them.
Pricing pressure from our competitors, hospital customers and insurance providers can negatively impact our ability to sell our products and services.
The market for spine surgery products is large and has attracted numerous new companies and technologies. As some companies have sought to compete based on price, it has created pricing pressure, which we expect to continue in the future. Pricing pressure may also increase due to continued consolidation among healthcare providers, trends toward managed and value-based care, the shift toward governments becoming the primary payers of healthcare expenses, and reduction in reimbursement levels. As healthcare providers look to reduce costs, including by aggregating purchasing decisions and through industry consolidation, they are able to demand lower pricing and limit their number of suppliers. If competitive forces drive down the prices we are able to charge for our products, our profit margins will shrink, which will adversely affect our ability to maintain our profitability and to invest in and grow our business.
Quality or safety issues affecting our products could harm our reputation, result in liability and adversely impact our business.
In the course of conducting our business, we must adequately address quality and safety issues that may arise with our products, as well as defects in third-party components included in our products. Although we have established internal procedures to minimize risks that may arise from quality and safety issues, we may not be able to eliminate or mitigate occurrences of these issues and associated liabilities. Additionally, as we continue to launch more complex products and technologies, including products based on the MAGEC technology platform and products like Lessray and Pulse, risks related to quality and safety issues increase compared to our portfolio of spinal implants and fixation products. Manufacturing flaws, component failures, design defects, or inadequate disclosure of product-related information could result in an unsafe condition or the injury or death of a patient. These problems could lead to a recall of, or issuance of a safety alert relating to our products and result in significant costs and negative publicity. An adverse event, safety alert or recall involving one of our products could result in reduced market acceptance and demand for our products, and could harm our reputation and our ability to market our products in the future. In some circumstances, an adverse event, safety alert or recall could require costly design, engineering, and manufacturing changes, and result in the suspension or delay of regulatory reviews of our applications for new product approvals or clearances. Further, if we substitute, replace or exchange products to address an adverse event, safety alert or recall, or take other steps to address the needs or concerns of our customers and patients, it could disrupt our business and have an adverse effect on our results of operations and financial condition. We may also voluntarily undertake a recall of our products, initiate certain field actions, temporarily shut down production lines, or place products on a shipping hold based on internal safety, quality monitoring and testing data. If we take action to reduce a health risk posed by our products, or to remedy a violation of the Federal, Food, Drug and Cosmetic Act or other regulations caused by our products that may present a risk to health, such action may need to be reported to the FDA or equivalent governmental authority. If the FDA or equivalent governmental authority subsequently determines that a report was required for a quality or safety action related to our products that we did not believe required a report, we could be subject to enforcement actions.
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While we have a network of quality systems throughout our business lines and facilities, quality and safety issues may occur with respect to any of our products. A quality or safety issue may result in a public warning letter or consent decree from the FDA or an equivalent action by a governmental health authority in an international jurisdiction. In addition, we may be subject to product recalls or seizures, monetary sanctions, injunctions to halt manufacturing and distribution of products, civil or criminal sanctions, refusal of a government to grant clearances or approvals or delays in granting such clearances or approvals, import detentions of products made outside the United States, restrictions on operations or withdrawal or suspension of existing approvals. Any of the foregoing events could disrupt our business and have an adverse effect on our results of operations and financial condition.
The safety of many of our products is not yet supported by long-term clinical data and many of our products may therefore prove to be less safe and effective than initially thought.
As a consequence of our strategy to rapidly develop and commercialize new products and product enhancements, many of our products do not have a long history of use. Further, many of our products are subject to the FDA’s 510(k) premarket notification clearance process in the United States and similar regulatory processes in other countries, which may not require substantial clinical data. Accordingly, many of our products currently lack the breadth of published long-term clinical data supporting their safety and effectiveness. For these reasons, surgeons may be slow to adopt our products, we may not have comparative data that our competitors have or are generating, and we may be subject to greater regulatory and product liability risks. In particular, as we continue to launch more complex products and technologies, including products based on the MAGEC technology platform and products like Lessray and Pulse, we may have to conduct additional studies and gather additional data to support their safety and effectiveness.
Further, future patient studies or clinical experience may indicate that treatment with our products does not improve patient outcomes. Such results would reduce demand for our products, affect sustainable reimbursement from third-party payers, significantly reduce our ability to achieve expected sales and could prevent us from sustaining or increasing profitability. Moreover, if future results and experience indicate that our products cause unexpected or serious complications or other unforeseen negative effects, we could be subject to significant legal liability and harm to our business reputation. The spine medical device market has been particularly prone to potential product liability claims that are inherent in the testing, manufacture and sale of medical devices and products for spine surgery procedures.
As we expand our offerings to include capital equipment and invest in related resources and expertise, we are exposed to additional risks.
As we expand our procedural solutions offerings to include new technologies, including the Pulse platform, we expect that the selling and leasing of capital equipment will become a larger portion of our total net sales over time. We do not have a long history of selling, leasing or servicing capital equipment, and we intend to continue to invest in building resources and expertise in this area. We may not generate sufficient sales to offset the expenses associated with this investment. There can be no assurance that our capital equipment strategy will be successful and will not materially adversely affect our financial condition and operating results.
Approval processes of healthcare organizations for the purchase or lease of capital equipment can be lengthy, and such organizations may delay or accelerate system purchases or leases in conjunction with their internal budget timelines. Additionally, the introduction of new products by us or our competitors could adversely impact the sales cycle as healthcare organizations evaluate the benefits and costs of such products.As a result, it is difficult for us to predict the length of capital sales cycles and, therefore, the exact timing of capital sales, which may cause fluctuations in our financial results. Further, demand for capital equipment can be affected by changes in the budgets of healthcare organizations and conflicting spending priorities. Any such decreases in expenditures by these healthcare organizations and decreases in demand for our capital equipment could have an adverse effect on our results of operations and financial condition.
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We may engage in strategic transactions, including acquisitions, investments, joint development agreements or divestitures that may have an adverse effect on our business.
We may pursue transactions, including acquisitions of complementary businesses, technology licensing arrangements, strategic relationships, and joint development agreements to expand our product offerings and geographic presence as part of our business strategy, which could be material to our financial condition and results of operations. We may also consider divesting non-core product lines or out-licensing our technology. We may not complete transactions in a timely manner, on a cost-effective basis, or at all, and we may not realize the expected benefits of any acquisition, license arrangement, strategic relationship, joint development agreement or divestiture. Other companies may compete with us for these strategic opportunities. We also could experience negative effects on our results of operations and financial condition from charges related to acquisitions and investments, amortization of intangible assets and asset impairment charges, and other issues that could arise in connection with, or as a result of, the acquisition of an acquired company or business, including issues related to internal control over financial reporting, regulatory or compliance issues and potential adverse short-term effects on results of operations through increased costs or otherwise. Following our acquisition of Simplify Medical Pty Limited, or Simplify Medical, in February 2021, we also offer cervical artificial disc technology for cervical total disc replacement procedures. Pursuant to the terms of the definitive agreement, we agreed to make an upfront payment of $150.0 million at closing, subject to customary purchase price adjustments, plus additional future payments contingent upon milestones related to regulatory approval and net sales from products incorporating the Simplify Medical cervical artificial disc technology. The closing of the acquisition occurred on February 24, 2021, and Simplify Medical is now our wholly-owned subsidiary. Acquisitions, including the acquisition of Simplify Medical, involve numerous risks, including the following:
• | difficulties in finding suitable partners or acquisition candidates; |
• | difficulties in obtaining financing on favorable terms, if at all; |
• | difficulties in completing transactions on favorable terms, if at all; |
• | the possibility that we will pay more than the value we derive from the acquisition, which could result in future non-cash impairment charges and/or a dilution of future earnings per share; |
• | difficulties in integration of the operations, technologies, personnel, and products of acquired companies, which may require significant attention of our management team that otherwise would be available for the ongoing development of our business; |
• | the applicability of additional laws, regulations and policies that have particular application to our acquisitions, including those relating to patient privacy, insurance fraud and abuse, false claims, prohibitions against self-referrals, anti-kickbacks, direct billing practices, HIPAA compliance, and prohibitions against the corporate practice of medicine and fee-splitting; |
• | the assumption of certain known and unknown liabilities of acquired companies; |
• | the incurrence of debt, contingent liabilities or future write-offs of intangible assets or goodwill; |
• | difficulties in retaining key relationships with employees, customers, partners and suppliers of an acquired company; and |
• | difficulties in operating in different business markets where we may not have historical experience. |
Any of these factors could have a negative impact on our business, results of operations or financial position. Further, past and potential acquisitions entail risks, uncertainties and potential disruptions to our business, especially where we have limited experience as a company developing or marketing a particular product or technology. Following any acquisition, we must integrate the new business, which can be expensive, time-consuming and cause disruptions to our existing operations. Failure to timely and successfully integrate acquired businesses may result in non-compliance with regulatory or other requirements and may result in unexpected costs, including as a result of inadequate cost containment and failure to fully realize expected synergies. As a result of any of the foregoing, we may not realize the expected benefit from any acquisition or investment. If we cannot integrate acquired businesses, products or technologies, our business, financial conditions and results of operations could be materially and adversely affected.
In addition, we may face additional risks related to foreign acquisitions and investments. Foreign acquisitions and investments involve unique risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries.
Any divestitures may result in a dilutive impact to our future earnings, as well as significant write-offs, including those related to goodwill and other intangible assets, which could have a material adverse effect on our results of operations and financial condition. Divestitures could involve additional risks, including difficulties in the separation of operations, services, products and personnel, the diversion of management’s attention from other business concerns, the disruption of our business and the potential loss of key employees. We may not be successful in managing these or any other significant risks that we encounter in divesting a product or technology.
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Healthcare policy changes may have a material adverse effect on us.
Political, economic and regulatory influences are subjecting the healthcare industry to fundamental changes. For example, as a result of the Patient Protection and Affordable Care Act (“ACA”), the U.S. has implemented value-based payment methodologies and has created alternative payment models such as bundled payments to continue to drive improved value. The ACA also significantly altered Medicare and Medicaid reimbursements for medical services and medical devices. We anticipate that Congress, regulatory agencies and certain state legislatures will continue to review and assess alternative healthcare delivery systems and payment methods with an objective of ultimately reducing healthcare costs and expanding access. We cannot predict with certainty what healthcare initiatives, if any, will be implemented at the state level, or what ultimate effect federal healthcare reform or any future legislation or regulation may have on our customers’ purchasing decisions regarding our products and services. However, the implementation of new legislation and regulation may lower reimbursements for our products, reduce medical procedure volumes and adversely affect our business, possibly materially.
Our IONM business exposes us to risks inherent with the sale of services.
Our IONM services and support business exposes us to different risks than our other products and technologies. Through our NuVasive Clinical Services business, including the Biotronic NeuroNetwork business acquired in July 2016 and the SafePassage business acquired in January 2018, we provide onsite and remote monitoring of the neurological systems of patients undergoing spinal and brain-related surgeries. Our neurophysiologists are present in the operating room during procedures and work with supervising physicians who remotely oversee and interpret neurophysiological data gathered via broadband transmission over the Internet. Providing this service subjects us to malpractice exposure. In addition, given the reliance on technology, any disruption to our neuromonitoring equipment or the Internet could harm our service operations and our reputation among our customers. Further, any disruption to our information technology systems could adversely impact the performance of our neurophysiologists and oversight physicians.
In addition, IONM services are directly billed to Medicare and commercial payers, which brings with it additional risks associated with proper billing practice regulations, HIPAA compliance, corporate practice of medicine laws, and collections risk associated with third-party payers. Due to the breadth of many healthcare laws and regulations, our IONM business could also be subject to healthcare fraud regulation and enforcement by both the federal government and the states in which we conduct our business, including under the Anti-Kickback Statute, the federal false claims laws and state law equivalents. If our operations are found to be in violation of any of the laws described in the previous sentence or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results.
Our increased focus on specialized pediatric conditions exposes us to different risks.
In furtherance of our growth strategy, we have invested in, and expect to continue to invest in the pediatric spine and orthopedic segments, which exposes us to different risks than our other products and technologies. With the 2016 acquisition of Ellipse Technologies, we began to offer innovative products based on the MAGEC technology platform, which accelerated our entry into the pediatric spine segment. Our MAGEC growing rods are used to treat early-onset scoliosis (EOS) and, once surgically implanted in a patient, can be adjusted non-invasively using an external remote controller. We have further added to our pediatric portfolio with the launch of the Reline Small Stature system, designed as a deformity fixation solution for pediatric spine surgery, and products to support the adolescent deformity market. Designing and engineering specialized products for pediatric patients can be challenging, particularly as products need to accommodate growth in pediatric patients. If we are unable to design safe and effective products that meet the needs of pediatric patients, our ability to compete in the pediatric segment will be adversely impacted. Further, patients with EOS often have other risk factors and co-morbidities that can make surgeries more risky, which can lead to surgical and post-operative complications and potentially greater exposure for allegations of product liability.
In addition, if our pediatric products are the subject of safety concerns, whether actual or perceived, it would have an adverse impact on our business and results of operations. We have issued field safety notices regarding the MAGEC system in the past, and in April 2020, we agreed to voluntarily suspend sales of all MAGEC rods in non-essential cases in the United Kingdom and Ireland while local regulatory authorities conducted a market surveillance review of the MAGEC system. If we are unable to address the issues identified in the market surveillance review, we may need to conduct additional studies, gather additional data, or re-design or re-engineer the MAGEC system, which could be costly. Further, if our surgeon customers and their patients choose alternative treatments, it would negatively impact our pediatric business. If we are the subject of any claims or lawsuits related to the issues identified in the field safety notices, whether from impacted customers, distributors, surgeons or patients, it would have an adverse impact on our business and results of operations.
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Our employees, independent sales representatives, consultants, distributors and other commercial partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements.
We are exposed to the risk that our employees, independent sales representatives, consultants, distributors and other commercial partners may engage in fraudulent or illegal activity. Misconduct by these parties could include intentional, reckless or negligent conduct or other unauthorized activities that violate the regulations of the FDA and non-U.S. regulators, including those laws requiring the reporting of true, complete and accurate information to such regulators, manufacturing standards, healthcare fraud and abuse laws and regulations in the United States and abroad or laws that require the true, complete and accurate reporting of financial information or data. In particular, sales, marketing and business arrangements in the healthcare industry, including the sale of medical devices, are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. It is not always possible to identify and deter misconduct by our employees or third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us and we are not successful in defending ourselves or asserting our rights, those actions could result in the imposition of significant fines or other sanctions, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings and curtailment of operations, any of which could adversely affect our ability to operate our business and our results of operations. Whether or not we are successful in defending against such actions or investigations, we could incur substantial costs, including legal fees, and divert the attention of management in defending ourselves against any of these claims or investigations.
Risks Related to our Commercial Operations and Plans for Future Growth
If we are unable to maintain and expand our network of direct and independent sales representatives, we may not be able to generate anticipated sales.
In the United States, we sell our products primarily through a combination of independent sales representatives and directly-employed sales personnel. Our international sales force is comprised of independent sales agents, directly-employed sales personnel, as well as exclusive and non-exclusive independent third-party distributors. If our sales representatives and sales agents fail to adequately promote, market and sell our products, or fail to develop strong relationships with customers, our sales could significantly decrease or fail to increase. Further, the termination or transition of a sales representative could disrupt business and cause us to incur expenses related to such termination or transition, including contract termination fees or expenses associated with claims and lawsuits. Asserting or defending against these types of claims and lawsuits may result in significant legal fees and expenses, and if we are unsuccessful, we could be liable for damages.
We face significant challenges and risks in managing our geographically dispersed distribution network and retaining the individuals who make up that network. In the past, we have experienced departures of sales representatives, which have had a negative impact on our results. If sales representatives were to depart and be retained by one of our competitors, we may be unable to prevent them from helping competitors solicit business from our existing customers, which could further adversely affect our sales. In addition, as we expand into new markets, it may be difficult to find sales representatives with the appropriate expertise or it may take time for new sales representatives to reach full operational effectiveness and generate expected sales. Because of the intense competition for their services, we may be unable to recruit or retain sales representatives to work with us. Failure to hire or retain qualified sales representatives would prevent us from expanding our business and generating sales.
We may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy.
We intend to grow our business operations and we may experience periods of rapid growth and expansion. This anticipated future growth could create a strain on our organizational, administrative and operational infrastructure, including manufacturing operations, quality control, information technology infrastructure, technical support and customer service, sales force management and general and financial administration. We may not be able to maintain the quality or delivery timelines of our products or satisfy customer demand as it grows. Our ability to manage our growth properly will require us to continue to improve our operational, financial and management controls, as well as our reporting systems and procedures.
If our commercial operations and sales volume grow, we will need to continue to increase our capacity for manufacturing, customer service, billing and general process improvements and expand our internal quality assurance program, among other things. We will also need to purchase additional equipment, some of which can take several months or more to procure, set up and validate, and increase our manufacturing, maintenance, and information technology systems capacity to meet increased demand, and further invest in our inventory. These increases in scale, expansion of personnel, purchases of equipment or process enhancements and investments in inventory can be costly and may not be successfully implemented, any of which could disrupt our business and have an adverse effect on our results of operations and financial condition.
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Our reliance on a limited number of suppliers and manufacturers could limit our ability to meet demand for our products in a timely manner or within our budget.
While we self-manufacture many of our products, we continue to rely on a limited number of third-party suppliers and manufacturers to supply and manufacture our products, and we may not be able to find replacements or immediately transition to alternative suppliers or manufacturers. Many of our key products are manufactured at single locations, with limited alternate facilities, and it could take considerable time and resources for us to replace the capacity of such vendors in the event of disruptions. In addition, if we are required to change the manufacturer of a critical component of our products, we will be required to verify that the new manufacturer maintains facilities, procedures and operations that comply with our quality and applicable regulatory requirements, which could further impede our ability to manufacture our products in a timely manner.
Further, for reasons of quality assurance or cost effectiveness, we purchase certain components and raw materials from sole suppliers. To be successful, we rely on our suppliers to provide us with products and components in substantial quantities, in compliance with regulatory requirements, in accordance with agreed upon specifications, at acceptable cost and on a timely basis. In the event we experience delays, shortages, or stoppages of supply with any supplier, we would be forced to identify a suitable alternative supplier which could take significant time and result in significant expense. In addition, our anticipated growth could strain the ability of suppliers to deliver an increasingly large supply of products, materials and components. If we are required to transition to new third-party suppliers for certain components of our products, the use of components or materials furnished by these alternative suppliers could require us to alter our operations. Any such interruption or alteration could harm our reputation, business, financial condition and results of operations. Transitioning to a new supplier could be time-consuming and expensive, may result in interruptions in our operations and product delivery, could affect the performance specifications of our products or could require that we modify the design of those systems.
Performance issues, service interruptions or price increases by our shipping carriers could adversely affect our business and harm our reputation and ability to provide our products and services on a timely basis.
Expedited, reliable shipping is essential to our operations. We rely heavily on providers of transport services for reliable and secure point-to-point transport of our products to our customers and for tracking of these shipments. Should a carrier encounter delivery performance issues such as loss, damage or destruction of any products, it could be costly to replace such products in a timely manner and such occurrences may damage our reputation and lead to decreased demand for our products and increased cost and expense to our business. In addition, any significant increase in shipping rates could adversely affect our operating margins and results of operations. Similarly, strikes, severe weather, natural disasters, public health threats, or other service interruptions affecting delivery services we use would adversely affect our ability to process and fulfill orders for our products on a timely basis.
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Manufacturing risks may adversely affect our ability to manufacture products and could reduce our gross margins and negatively affect our operating results.
As part of our business strategy, we intend to continue to expand our ability to manufacture our current and new products with exceptional quality and in sufficient quantities to meet demand, while complying with regulatory requirements and managing manufacturing costs. We are subject to numerous risks relating to our manufacturing capabilities, including both those of our own manufacturing facilities and those of our third-party suppliers, such as:
• | problems with quality control and assurance, including manufacturing nonconformances and product design defects; |
• | defective raw materials or defects in product components that we source from third-party suppliers; |
• | delays in obtaining components from third-party suppliers and component supply shortages; |
• | failing to predict demand accurately, resulting in a failure to increase production of products to meet demand; |
• | potential adverse effects on existing business relationships with current third-party suppliers as we expand our in-house manufacturing capabilities; |
• | maintaining control over manufacturing expenses as production expands; |
• | difficulties associated with compliance with local, state, federal and foreign regulatory requirements; |
• | shortages of qualified personnel or workforce disruptions; |
• | the inability to modify production lines to enable the efficient manufacture of new products or to quickly implement changes to current products in response to regulatory requirements; |
• | disruptions caused by natural disasters such as hurricanes, tornadoes earthquakes or wildfires, and the impact of epidemics or pandemics, such as COVID-19; and |
• | potential damage to or destruction of our, or our suppliers’ manufacturing equipment or manufacturing facilities. |
These risks may be exacerbated by our limited experience with self- manufacturing processes and procedures. In addition, as we seek to expand our manufacturing capabilities, we will have to continue to invest additional resources to hire and train personnel and enhance our production processes. If we fail to increase our manufacturing capacity efficiently, our profit margins will shrink, which will negatively affect our operating results.
The loss of key employees, or our inability to recruit, hire and retain skilled and experienced personnel, could negatively impact our ability to effectively manage and expand our business.
Our success depends on the skills, experience and performance of the members of our executive management team and other key employees. Their individual and collective efforts will continue to be important as we continue to develop our products and as we expand our commercial activities. The loss or incapacity of existing members of our executive management team could negatively impact our operations, particularly if we experience difficulties in hiring qualified successors. We do not maintain key person life insurance with respect to any of our employees.
Our research and development programs and operations depend on our ability to attract and retain highly skilled engineers and technicians. We may not be able to attract or retain qualified managers, engineers and technicians in the future due to the competition for qualified personnel among medical device businesses. We also face competition from universities and public and private research institutions in recruiting and retaining highly qualified personnel. Recruiting and retention difficulties can limit our ability to support our commercial, manufacturing and research and development programs. All of our U.S. employees are employed on an at-will basis, which means that either we or the employee may terminate his or her employment at any time. The loss of key employees, the failure of any key employees to perform or our inability to attract and retain skilled employees, as needed, or an inability to effectively plan for and implement a succession plan for key employees could harm our business.
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We face risks associated with our international business.
During the year ended December 31, 2020, $228.8 million or approximately 22% of our net sales was attributable to our international customers (excluding Puerto Rico). We expect to continue to invest in international expansion with a focus on European, Asia-Pacific and Latin American markets. Our international business operations are subject to a variety of risks, including:
• | difficulties in staffing and managing foreign and geographically dispersed operations; |
• | having to comply with various U.S. and international laws, including the FCPA and anti-money laundering laws; |
• | having to comply with U.S. and foreign trade, import and export and customs regulations and laws, including, but not limited to, the Export Administration Regulations and trade sanctions against embargoed countries, which are administered by the Office of Foreign Assets Control within the Department of the Treasury, as well as the laws and regulations administered by the Department of Commerce; |
• | differing complex regulatory requirements for obtaining clearances or approvals to market our products, including the EU Medical Device Regulation (Council Regulations 2017/745) and recent regulatory guidance issued by the UK Government in connection with the UK formally withdrawing from the European Union; |
• | changes in, or uncertainties relating to, foreign rules and regulations that may impact our ability to sell our products, perform services or repatriate profits to the United States; |
• | tariffs and trade barriers, export regulations and other regulatory and contractual limitations on our ability to sell our products in certain foreign markets; |
• | fluctuations in foreign currency exchange rates; |
• | limitations on or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries or joint ventures; |
• | differing multiple payer reimbursement regimes, government payers or patient self-pay systems; |
• | differing labor laws and standards; |
• | changes in, or uncertainties relating to foreign laws around value-added taxes or permanent establishment that may impact our international indirect and income tax expense and related compliance costs; |
• | complex data privacy requirements, including the EU GDPR; |
• | economic, political or social instability in foreign countries and regions; |
• | an inability, or reduced ability, to protect our intellectual property, including any effect of compulsory licensing imposed by government action; |
• | potential changes to U.S. trade policy, including new legislation that could restrict international trade, or protectionist or retaliatory measures taken by governments of other countries; and |
• | availability of government subsidies or other incentives that benefit competitors in their local markets that are not available to us. |
The FCPA and similar anti-bribery laws in non-U.S. jurisdictions generally prohibit companies and their intermediaries from making improper payments for the purpose of obtaining or retaining business. The FCPA also imposes accounting standards and requirements on publicly traded U.S. corporations and their foreign affiliates, which are intended to prevent the diversion of corporate funds to the payment of bribes and other improper payments. Because of the predominance of government-sponsored healthcare systems around the world, many of our customer relationships outside of the United States are with governmental entities and are therefore subject to such anti-bribery laws. Our internal control policies and procedures may not always prevent or protect us from reckless or criminal acts committed by our employees, distributors or agents. In recent years, both the United States and foreign government regulators have increased regulation, enforcement, inspections and governmental investigations of the medical device industry, including increased United States government oversight and enforcement of the FCPA. Despite implementation of a comprehensive global healthcare compliance program, we may be subject to more regulation, enforcement, inspections and investigations by governmental authorities in the future.
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Any failure to comply with applicable legal and regulatory obligations in the United States or abroad could adversely affect us in a variety of ways that include, but are not limited to, significant criminal, civil and administrative penalties, including imprisonment of individuals, fines and penalties, denial of export privileges, seizure of shipments and restrictions on certain business activities, disgorgement and other remedial measures, disruptions of our operations, and significant management distraction. Also, the failure to comply with applicable legal and regulatory obligations could result in the disruption of our distribution and sales activities. Any reduction in international sales, or our failure to further develop our international markets, could have a material adverse effect on our business, results of operations and financial condition.
Our results may be impacted by changes in foreign currency exchange rates.
As we increasingly compete in markets outside of the United States, we are and will be exposed to foreign currency exchange risk related to our foreign operations. A significant portion of our foreign subsidiaries’ operating expenses are incurred in foreign currencies. If the U.S. dollar weakens, our consolidated operating expenses would increase. An increase in the value of the U.S. dollar relative to foreign currencies could require us to reduce our selling price or risk making our products less competitive in international markets or our costs could increase. Also, as our international sales continue to increase, we may enter into a greater number of transactions denominated in non-U.S. dollars, which could increase our exposure to foreign currency risks, including changes in currency exchange rates. If we are unable to address these risks and challenges effectively, our international operations may not be successful and our business could be harmed.
If we fail to properly manage our anticipated international growth, our business could suffer.
We have invested, and expect to increase our investment for the foreseeable future, in our expansion into international markets. To execute our anticipated growth in international markets we must:
• | manage the complexities associated with a larger, faster growing and more geographically diverse organization; |
• | expand our clinical development resources to manage and execute increasingly global, larger and more complex clinical trials and studies; |
• | manage our directly-employed sales personnel as well as independent distributors and sales agents operating in international markets often pursuant to laws, regulations and customs that may be different than those that are customary for our United States operations; |
• | expand our sales and marketing presence in international markets generally to avoid concentration of sales in a small number of markets that would subject us to the risk of business disruption as a result of economic or political problems in concentrated locations; |
• | upgrade our internal business processes and capabilities (e.g., information technology platform and systems, product distribution and tracking) to create scalability and properly handle the transaction volumes that our growing geographically diverse organization demands; |
• | expend time and resources to receive product approvals and clearances to sell and promote products; and |
• | incur significant costs to comply with new and complex regulatory requirements such as the EU Medical Device Regulation (Council Regulations 2017/745) and recent regulatory guidance issued by the UK Government in connection with the UK formally withdrawing from the European Union. |
We expect that our operating expenses will continue to increase as we continue to expand into international markets. International markets may be slower than domestic markets in adopting our products and are expected, in many instances, to yield lower profit margins when compared to our domestic operations. We have only limited experience in expanding into international markets as well as marketing and operating our products and services in such markets.
Additionally, our international endeavors may involve significant risks and uncertainties, including distraction of management from domestic operations, insufficient sales to offset the expenses associated with our international strategy, and issues not discovered in our due diligence of new markets or ventures. Because expansion into international markets is inherently risky, no assurance can be given that such strategies and initiatives will be successful and will not materially adversely affect our financial condition and operating results. Even if our international expansion is successful, our expenses may increase at a greater pace than our net sales and our operating results could be harmed.
Further, our anticipated growth internationally will place additional strain on our suppliers and manufacturers, resulting in increased need for us to carefully monitor quality assurance. Any failure by us to manage our international growth effectively could have an adverse effect on our ability to achieve our development and commercialization goals.
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Cybersecurity risks and the failure to maintain the confidentiality, integrity, and availability of our computer hardware, software, and Internet applications and related tools and functions could result in harm to our business and/or subject us to costs, fines or lawsuits.
We rely on sophisticated information technology systems and network infrastructure to operate and manage our business. We also maintain personally identifiable information (PII) about our employees, and given the nature of our business, we have access to protected health information (PHI). Our business therefore depends on the continuous, effective, reliable, and secure operation of our computer hardware, software, networks, Internet servers, and related infrastructure. To the extent that our hardware or software malfunctions or access to our data by internal personnel, suppliers or customers through the Internet is interrupted or compromised, our business could suffer.
The integrity and protection of our customer, personnel, financial, research and development, and other confidential data is critical to our business, and our customers and employees have a high expectation that we will adequately protect their personal information. The regulatory environment governing information, security and privacy laws is increasingly demanding and continues to evolve and a number of states have adopted laws and regulations that may affect our privacy and data security practices regarding the use, disclosure and protection of PII. For example, California recently enacted legislation, the California Consumer Privacy Act, that, among other things, creates new individual privacy rights and imposes increased obligations on companies handling PII.
Although our computer and communications hardware is protected through physical and software safeguards, it is still vulnerable to system malfunction, computer viruses, malware and ransomware, and other cybersecurity threats such as phishing and social engineering attacks. These events could lead to the unauthorized access of our information technology systems and result in financial loss and the misappropriation or unauthorized disclosure of confidential information belonging to us, our employees, partners, customers, or our suppliers. The techniques used by criminal elements to attack computer systems are sophisticated, change frequently and may originate from less regulated and remote areas of the world. As a result, we may not be able to address these techniques proactively or implement adequate preventative measures. If our information technology systems are compromised we could be subject to fines, damages, litigation and enforcement actions, incur financial losses, suffer reputational damage, and lose trade secrets or other confidential information, each of which could significantly harm our business.
We rely on the performance of our information technology systems, the failure of which could have an adverse effect on our business and performance.
Our business requires the continued operation of sophisticated information technology systems and network infrastructure. These systems are vulnerable to interruption by fire, floods, earthquakes, power loss, system malfunction, computer viruses, security breaches, cybersecurity threats such as phishing and social engineering attacks and other events, which are beyond our control. Systems interruptions could reduce our ability to manufacture, deliver, and provide service for our products, and could have an adverse effect on our operations and financial performance. The level of protection and disaster-recovery capability varies from site to site, and there can be no guarantee that any such plans, to the extent they are in place, will be completely effective. Further, a greater number of our employees are working remotely in response to the COVID-19 pandemic and related government actions and may choose to continue to work remotely after the pandemic has ended, which could expose us to greater risks associated with cybersecurity threats and systems interruptions. Loss of data could interrupt our operations, including our ability to ship products, bill our customers, provide customer support services, conduct research and development activities, process and prepare company financial information, manage various general and administrative aspects of our business and damage our reputation, any of which could adversely affect our business.
Our operations are vulnerable to interruption or loss due to natural or other disasters, power loss, strikes and other events beyond our control.
We conduct a significant portion of our activities, including administration and data processing, at facilities located in Southern California, an area that has experienced major earthquakes, fires and other natural disasters. In addition, our primary self-manufacturing facility is located in West Carrollton, Ohio, an area that has experienced tornados, winter storms and other natural disasters. A major earthquake, fire, tornado or other disaster (such as a major flood, tsunami, storm or terrorist attack) affecting these or other NuVasive facilities, or those of our suppliers, could significantly disrupt our operations, and delay or prevent product shipment or installation during the time required to repair, rebuild or replace our facilities or those of our suppliers. These delays could be lengthy and costly. If our manufacturing facilities or any of our customers’ facilities are negatively impacted by a disaster, shipments of our products could be delayed. Additionally, customers may delay purchases of our products until operations return to normal. Even if we are able to quickly respond to a disaster, the ongoing effects of the disaster could create some uncertainty in the operations of our business. In addition, our facilities may be subject to a shortage of available electrical power and other energy supplies. Any shortages may increase our costs for power and energy supplies or could result in blackouts, which could disrupt the operations of our affected facilities and harm our business. In addition, concerns about terrorism, the effects of a terrorist attack, political turmoil or an outbreak of a widespread disease or other public health crisis, such as the COVID-19 pandemic, could have a negative effect on our operations, those of our suppliers and customers and the ability to travel, which could harm our business, financial condition and results of operations.
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Our insurance policies are expensive and protect us only from some business risks, which will leave us exposed to significant uninsured liabilities.
We do not carry insurance for all categories of risk that our business may encounter. Some of the policies we currently maintain include general liability, foreign liability, employee benefits liability, property, umbrella, workers’ compensation, products liability and directors’ and officers’ insurance. We do not know, however, if we will be able to maintain existing insurance with adequate levels of coverage. Any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our cash position and results of operations.
We bear the risk of warranty claims on our products.
We bear the risk of express and implied warranty claims on products we supply, including equipment and component parts manufactured by third parties. We may not be successful in claiming recovery under any warranty or indemnity provided to us by our suppliers or vendors in the event of a successful warranty claim against us by a customer or that any recovery from such vendor or supplier would be adequate. In addition, warranty claims brought by our customers related to third-party components may arise after our ability to bring corresponding warranty claims against such suppliers expire, which could result in additional costs to us. There is a risk that warranty claims made against us will exceed our warranty reserve and our business, financial condition and results of operations could be harmed.
Risks Related to Litigation and Intellectual Property
Defending against litigation or other proceedings or third-party claims of intellectual property infringement could require us to spend significant time and money, and if we are unsuccessful, we may be obligated to pay damages and halt sales of our products.
Significant litigation regarding patent rights occurs in our industry and our commercial success depends in part on not infringing the patents or violating the proprietary rights of others. We have received in the past, and expect to receive in the future, claims from our competitors alleging infringement of their intellectual property rights as part of business strategies designed to impede our successful commercialization of updated and new products and entry into new markets. A patent infringement suit brought against us or any of our strategic partners or licensees may force us or such strategic partners or licensees to stop or delay developing, manufacturing or selling potential products that are claimed to infringe a third-party’s intellectual property, unless that party grants us or our strategic partners or licensees rights to use its intellectual property. In such cases, we may be required to obtain licenses to patents or proprietary rights of others in order to continue to commercialize our products. However, we may not be able to obtain any licenses required under any patents or proprietary rights of third parties on acceptable terms, or at all, and any licenses may require substantial royalties or other payments by us. Even if our strategic partners, licensees or we were able to obtain rights to the third-party’s intellectual property, these rights may be non-exclusive, thereby giving our competitors access to the same intellectual property. Ultimately, we may be unable to commercialize some of our potential products or may have to cease some of our business operations as a result of patent infringement claims, which could severely harm our business.
Moreover, we are currently and may become party to future adversarial proceedings regarding our patent portfolio or the patents of third parties. Such proceedings could include supplemental examination or contested post-grant proceedings such as inter partes review, reexamination, interference or derivation proceedings before the U.S. Patent and Trademark Office and challenges in U.S. District Court. Patents may be subjected to opposition, post-grant review or comparable proceedings lodged in various foreign, both national and regional, patent offices. The legal threshold for initiating litigation or contested proceedings may be low, so that even lawsuits or proceedings with a low probability of success might be initiated. Litigation and contested proceedings can also be expensive and time-consuming, and our adversaries in these proceedings may have the ability to dedicate substantially greater resources to prosecuting these legal actions than we can.
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Any lawsuits or claims relating to infringement of intellectual property or our patent portfolio could subject us to significant liability for damages and invalidate our proprietary rights. Any potential intellectual property litigation also could force us to do one or more of the following:
• | stop making, selling or using products or technologies that allegedly infringe the asserted intellectual property; |
• | lose the opportunity to license our technology to others or to collect royalty payments based upon successful protection and assertion of our intellectual property rights against others; |
• | incur significant legal expenses; |
• | pay substantial damages or royalties to the party whose intellectual property rights we may be found to be infringing; |
• | pay the attorney’s fees and costs of litigation to the party whose intellectual property rights we may be found to be infringing; |
• | redesign those products that contain the allegedly infringing intellectual property, which could be costly, disruptive and/or infeasible; or |
• | attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reasonable terms or at all. |
Any litigation or claim against us, even those without merit, may cause us to incur substantial costs, and could place a significant strain on our financial resources, divert the attention of management from our core business and harm our reputation. In addition, we generally indemnify our customers and distributors with respect to infringement by our products of the proprietary rights of third parties. If third parties assert infringement claims against our customers or distributors, we may be required to initiate or defend protracted and costly litigation on behalf of our customers or distributors, regardless of the merits of these claims. If any of these claims succeed or settle, we may be forced to pay damages or settlement payments on behalf of our customers or distributors or may be required to obtain licenses for the products they use. If we cannot obtain all necessary licenses on commercially reasonable terms, our customers may be forced to stop using our products.
We are currently, and may in the future be, subject to claims and lawsuits that could cause us to incur significant legal expenses and result in harm to our business.
We are currently party to various commercial, personal injury, and intellectual property litigation and have previously been subject to a purported securities class action lawsuit, shareholder derivative litigation, and intellectual property infringement lawsuits, and we may be subject to additional claims and lawsuits in the future. In addition, we, as well as certain of our officers and sales representatives, are subject to claims or lawsuits from time to time. Regardless of the outcome, these lawsuits may result in significant legal fees and expenses and could divert management’s time and other resources. If the claims contained in these lawsuits are successfully asserted against us, we could be liable for damages and be required to alter or cease certain of our business practices or product lines. Any of these outcomes could cause our business, financial performance and cash position to be negatively impacted. Litigation may also harm our relationships with existing customers and subject us to negative publicity, each of which could harm our business and financial results.
Our ability to protect our intellectual property and proprietary technology through patents and other means is uncertain.
Our success depends significantly on our ability to protect our proprietary rights to the technologies used in our products and procedural solutions. We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws, and nondisclosure, confidentiality and other contractual restrictions to protect our proprietary technology. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. If we do not adequately protect our intellectual property and proprietary technology, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and impact our profitability.
Our pending U.S. and foreign patent applications may not issue as patents at all or not in a form that will be advantageous to us or may issue and be subsequently successfully challenged by others and invalidated. Our existing patents and any patents issued in the future may not have claims with a scope sufficient to protect our products, any additional features we develop for our products or any new products. Both the patent application process and the process of managing patent disputes can be time consuming and expensive. Other parties may have developed technologies that may be related or competitive to our technology, may have filed or may file patent applications and may have received or may receive patents that overlap or conflict with our patent applications, either by claiming the same methods or devices or by claiming subject matter that could dominate our patent position. Further, competitors may also be able to design around our patents or develop products that provide outcomes that are comparable to our products but fall outside of the scope of our patent protection.
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We rely on our trademarks, trade names and brand names to distinguish our products from the products of our competitors, and have registered or applied to register many of these trademarks. We cannot assure you that our trademark applications will be approved. Third parties may also oppose our trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition, and could require us to devote resources to advertising and marketing new brands. Further, we cannot assure you that competitors will not infringe upon our trademarks, or that we will have adequate resources to enforce our trademarks.
If we seek to enforce our intellectual property rights through litigation or other proceedings, it could require us to spend significant time and money, with uncertain results.
In the event a competitor infringes upon our patent or other intellectual property rights, enforcing those rights may be costly, difficult and time consuming. We may not have sufficient resources to enforce our intellectual property rights or to defend our patents against a challenge. Our ability to enforce our patent rights depends on our ability to detect infringement. It may be difficult to detect infringers who do not advertise the components that are used in their products. Moreover, it may be difficult or impossible to obtain evidence of infringement in a competitor’s or potential competitor’s product. The medical device industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. It is not unusual for parties to exchange letters surrounding allegations of intellectual property infringement and licensing arrangements. In addition, the patent positions of medical device companies, including our patent position, may involve complex legal and factual questions, and, therefore, the scope, validity and enforceability of any patent claims that we have or may obtain cannot be predicted with certainty.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position could be harmed.
We rely upon non-disclosure agreements and invention assignment agreements with our employees, consultants and third parties to protect our confidential and proprietary information and trade secrets. In addition to contractual measures, we try to protect the confidential nature of our proprietary information using physical and technological security measures. Such measures may not, for example, in the case of misappropriation of a trade secret by an employee or third party with authorized access, provide adequate protection for our proprietary information. Our security measures may not prevent an employee or consultant from misappropriating our trade secrets and providing them to a competitor, and recourse we take against such misconduct may not provide an adequate remedy to protect our interests fully. Unauthorized parties may also attempt to copy or reverse engineer certain aspects of our products that we consider proprietary. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret can be difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, trade secrets may be independently developed by others in a manner that could prevent legal recourse by us. If any of our confidential or proprietary information, such as our trade secrets, were to be disclosed or misappropriated, or if any such information was independently developed by a competitor, our business and competitive position could be harmed.
We may not be able to enforce our intellectual property rights throughout the world.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. This could make it difficult for us to stop infringement of our foreign patents, if obtained, or the misappropriation of our other intellectual property rights. For example, some foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, some countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries.
Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of our intellectual property.
Third parties may assert ownership or commercial rights to inventions we develop.
We enter into agreements with collaborators that provide for the ownership of intellectual property arising from our collaborations and product development initiatives. These collaborators and other third parties may in the future make claims challenging the inventorship or ownership of our intellectual property. In addition, we may face claims by third parties that our agreements with employees, contractors or consultants obligating them to assign intellectual property to us are ineffective or in conflict with prior or competing contractual obligations of assignment, which could result in ownership disputes regarding intellectual property we have developed or will develop and interfere with our ability to capture the commercial value of such intellectual property. Litigation may be necessary to resolve an ownership dispute, and if we are not successful, we may be precluded from using certain intellectual property or may lose our exclusive rights in that intellectual property. Either outcome could harm our business and competitive position.
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In addition, in certain instances we have agreed to pay consultants royalties, milestones and other payments in connection with their product development efforts. There can be no assurance that these consultants will not claim to be entitled to a royalty, milestone or other payment, even if we do not believe that it is warranted. Any such claim against us, even those without merit, may cause us to incur substantial costs, and could place a strain on our financial resources, divert the attention of management from our core business and harm our reputation.
Third parties may assert that our employees or consultants have wrongfully used or disclosed confidential information or misappropriated trade secrets or are in breach of non-competition or non-solicitation agreements with our competitors.
We employ and contract with individuals who previously worked with other companies, including our competitors or potential competitors. Although we try to ensure that our employees and consultants do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our personnel, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of a former employer or other third party. In addition, we have been and may in the future be subject to claims that we caused an employee to breach the terms of his or her non-competition or non-solicitation agreement with a third party. Litigation may be necessary to defend against these claims. If we fail in defending any such claims or settling those claims, in addition to paying monetary damages or a settlement payment, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and/or be a distraction to management and other employees.
If personal injury lawsuits are brought against us, our business may be harmed, and we may be required to pay damages that exceed our insurance coverage.
Our business exposes us to potential product liability claims that are inherent in the testing, manufacture and sale of medical devices for surgical procedures, as well as potential malpractice claims that are inherent in the provision of IONM services. Surgical procedures using our products and services often involve significant risk of serious complications, including bleeding, nerve injury, paralysis and even death. We could become the subject of product liability lawsuits alleging that component failures, malfunctions, manufacturing flaws, design defects or inadequate disclosure of product-related risks or product-related information resulted in an unsafe condition or injury to patients. Furthermore, our biologics products may expose us to additional potential product liability claims, including due to the risk of transmitting disease to human recipients. Additionally, our IONM services business could become the subject of medical malpractice lawsuits alleging negligence on the part of our neurophysiologists and/or oversight physicians.
We have had, and continue to have, personal injury claims relating to our products and clinical services and in the future, we may be subject to additional claims, some of which may have a negative impact on our business, results of operations or financial position. Regardless of the merit or eventual outcome, these claims may result in:
• | decreased demand for our products; |
• | injury to our reputation; |
• | significant litigation costs; |
• | substantial monetary awards to or costly settlements with patients; |
• | product recalls; |
• | material defense costs; |
• | loss of net sales; |
• | increased insurance costs; |
• | the inability to commercialize new products or product candidates; and |
• | diversion of management attention from pursuing our business strategy. |
Our existing insurance coverage for personal injury claims may be inadequate to protect us from any liabilities we might incur. If a personal injury claim or series of claims is brought against us for uninsured liabilities or in excess of our insurance coverage, our business could suffer. In addition, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts or scope to protect us against losses. Any claims against us, regardless of their merit, could severely harm our financial condition, strain our management and other resources and adversely affect or eliminate the prospects for commercialization of our IONM business or sales of a product or product candidate that is the subject of any such claim.
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Risks Related to Regulatory and Compliance
We are subject to rigorous FDA and other governmental regulations regarding the development, manufacture, and sale of our products and we may incur significant expenses to comply with these regulations and develop products that satisfy these regulations.
The medical devices we manufacture and market are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities, including regulations that cover, among other things, the composition, labeling, testing, clinical study, manufacturing, packaging, marketing and distribution of our products.
We are required to register with the FDA as a device manufacturer and tissue bank. As a result, we are subject to periodic inspection by the FDA for compliance with the FDA’s Quality System Regulation (QSR) and Good Tissue Practices requirements, which require manufacturers of medical devices and tissue banks to adhere to certain regulations, including testing, quality control and documentation procedures. Our compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections by the FDA. In the European Community, we are required to maintain certain ISO certifications in order to sell our products, and are subject to periodic inspections by Notified Bodies to obtain and maintain these certifications. If we or our suppliers fail to adhere to QSR, ISO or other applicable regulations and standards, it could negatively impact product production and regulatory clearances and could result in fines. Further our products could be subject to field safety corrective actions or recall by the FDA or other regulatory bodies, or voluntarily by us, in the event of a material deficiency or defect in design, manufacture, labeling of a product or in the event that a product poses an unacceptable risk to health. TheseFor example, we have recently issued field safety notices for our MAGEC and other consequencesPrecice systems. If we are unable to resolve the issues identified in the field safety notices, we may need to re-design or re-engineer the affected systems, which could be costly. Further, if we are the subject of any claims or lawsuits related to the issues identified in the field safety notices, it could have a material adverse effect on our salesbusiness and results of operations.
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Most medical devices must receive FDA clearance or approval before they can be commercially marketed.marketed in the United States. In addition, the FDA may require testing and surveillance programs to monitor the effects of approved products that have been commercialized, and can prevent or limit further marketing of a product based upon the results of such post-marketing programs. In addition, the Federal Medical Device Reporting Regulations require us to provide information to the FDA whenever there is evidence that reasonably suggests that a device may have caused or contributed to a death or serious injury or, if a malfunction were to occur, that could cause or contribute to a death or serious injury. Furthermore, most major markets for medical devices outside the United States require clearance, approval or compliance with certain standards before a product can be commercially marketed. The process of obtaining regulatory approvals to market a medical device, particularly from the FDA and certain foreign governmental authorities, can be costly and time-consuming, and approvals may not be granted for future products or product improvements on a timely basis, if at all. Delays in receipt of, or failure to obtain, approvals for future products or product improvements could result in delayed realization of product revenuesales or in substantial additional costs, which could have a material adverse effect on our business or results of operations or prospects. At any time after approval of a product, the FDA or other applicable regulator, including Notified Bodies, may conduct periodic inspections to determine compliance with both QSR requirements and/or current Medical Device Reporting regulations. If we fail to comply with our reporting obligations,quality system and other laws and regulations governing the FDA could take action, including warning letters, untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties, revocation of our device clearance, seizuredevelopment, labeling, testing, manufacturing, packaging, marketing and distribution of our products. The results of these inspections can include observations, warning letters, or other forms of enforcement. If the FDA or another regulator were to conclude that we are not in compliance with applicable laws or regulations, or that any of our products are ineffective or pose an unreasonable health risk, they could ban such products, detain or seize adulterated or misbranded products, order a recall, repair, replacement, or refund of payment of such products, revoke existing product clearances or delay in clearance of future products. Product clearances products, refuse to provide certificates for exports, and/or approvals byrequire us to notify healthcare professionals and others that the products present unreasonable risks of substantial harm to the public health. The FDA can be withdrawn due to failure to comply with regulatory standards or the occurrence of unforeseen problems following initial clearanceother regulators may also assess civil or approval. criminal penalties against us, our officers or employees and impose operating restrictions on a company-wide basis.
Also, the procurement and transplantation of allograft bone tissue is subject to the criminal statute National Organ Transplant Act and state rules and regulations which govern, among other things, payments we make to vendors in consideration for the services they provide in connection with the recovery and screening of donors. Failure to comply with such laws could result in enforcement action against us and a disruption to these product lines (and the revenuenet sales associated therewith).
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Failure or alleged failure to comply with FDA and other governmental regulations can result in investigations and other regulatory proceedings, which are expensive and could divert management attention.
If the FDA or other governmental authorities in the United States or abroad believes we are not conducting our business in compliance with applicable laws or regulations, such governmental authority can initiate investigations or other regulatory proceedings. Responding to such investigations and proceedings may cause us to incur substantial costs, and could place a significant strain on our financial resources and divert the attention of management from our core business. We could be subject to proceedings to detain or seize our products, recall our products, or restrict our operations. Moreover, governmental authorities can ban or request the recall, repair, replacement or refund of the cost of any device or product we manufacture or distribute. Any of the foregoing actions could result in decreased sales as a result of negative publicity and product liability claims, and could have a material adverse effect on our financial condition, results of operations and prospects.
We are subject to federal, state and foreign fraud and abuse laws and health information privacy and security laws, which, if violated, could subject us to substantial penalties.
There are numerous U.S. federal and state, as well as foreign, laws pertaining to healthcare fraud and abuse, including anti-kickback, false claims and physician transparency laws. Our relationships with physicians, providers and hospitals are subject to scrutiny under these laws. We may also be subject to patient privacy regulation by both the federal government and the states and foreign jurisdictions in which we conduct our business.
Healthcare fraud and abuse laws are broad in scope and are subject to evolving interpretation, which could require us to incur substantial costs to monitor compliance or to alter our practices if they are found not to be in compliance. Violations of these laws may be punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in governmental healthcare programs. Despite implementation of a comprehensive global healthcare compliance program, we cannot provide assurance that any of the healthcare fraud and abuse laws will not change or be interpreted in the future in a manner which restricts or adversely affects our business activities or relationships with healthcare professionals, nor can we make any assurances that authorities will not challenge or investigate our current or future activities under these laws.
In July 2015, we entered into a settlement agreement with the U.S. Department of Justice, or DOJ, pursuant to which we paid $13.5 million to resolve an investigation into possible false or otherwise improper claims submitted to Medicare and Medicaid. We admitted no wrongdoing as part of the settlement. In August 2015, we received a civil investigative demand, or CID, issued by the DOJ pursuant to the federal False Claims Act. The CID requires the delivery of a wide range of documents and information related to an investigation by the DOJ concerning allegations that we assisted a physician group customer in submitting improper claims for reimbursement and made improper payments to the physician group in violation of the Anti-Kickback Statute. We are cooperating with the DOJ.
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No assurance can be given as to the timing or outcome of this investigation. Responding to government requests and investigations requires considerable resources, including the time and attention of management. If we were to become the subject of an enforcement action including any action resulting from the investigation by the DOJ, it could result in negative publicity, penalties, fines, the exclusion of our products from reimbursement under federally-funded programs and/or prohibitions on our ability to sell our products, which could have a material adverse effect on our results of operations, financial condition and liquidity.
We may fail to obtain or maintain foreign regulatory approvals to market our products in other countries.
We currently market our products internationally and intend to continue to expand our operations in select developed and emerging international markets. International jurisdictions require separate regulatory approvals and compliance with numerous and varying regulatory requirements. The approval procedures vary among countries and may involve requirements for additional testing.studies and gathering of additional data. Clearance or approval by the FDA does not ensure approval or certification by regulatory authorities in other countries or jurisdictions, and approval or certification by one foreign regulatory authority does not ensure approval or certification by regulatory authorities in other foreign countries or by the FDA.
The European Union requires that manufacturers of medical devices obtain the right to bear the “CE” conformity marking which designates compliance with existing directives and standards regulating the design, manufacture and distribution of medical devices in member countries of the European Union. In 2017, the European Union adopted the EU Medical Device Regulation (Council Regulations 2017/745) which imposeswill replace existing directives and impose stricter requirements for the marketing and sale of medical devices, including new clinical evaluation, quality system, and post-market surveillance requirements. The regulation hasinitially provided for a three-year implementation period, with full application of the regulation to occur in May 2020, but this timeline has been delayed to May 2020 and will replace2021 due to the existing directives on medical devices in the European Union.COVID-19 pandemic. After May 2020,2021, medical devices marketed in the European Union will require certification according to these new requirements, except that devices with valid CE certificates, issued pursuant to the Medical Device Directive before May 2020,2021, may be placed on the market until May 2024. Complying with this new regulation will require us to incur significant costs and failure to meet the requirements of the regulation could adversely impact our business in the European Union and other countries that utilize or rely on European Union requirements for medical device registrations.
Additionally, pursuant to guidance issued by the UK Government as a result of the UK formally withdrawing from the European Union, the Medicines and Healthcare products Regulatory Agency (MHRA) became the standalone medicines and medical devices regulator for the UK as of January 1, 2021. A new mark referred to as “UKCA” (UK Conformity Assessed) has also been introduced and will replace the CE conformity mark. Although CE conformity marketing and certificates issued by Notified Bodies will continue to be recognized in the UK through June 2023, all medical devices must be registered with the MHRA as of January 1, 2021. Complying with this new regulatory framework will require us to invest in additional resources and could be expensive, time-consuming and disruptive to our existing operations in the UK.
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The global regulatory environment is becoming increasingly complex and we expect the time and expense of obtaining and maintaining foreign regulatory approvals for our products to increase. We cannot be certain that we will receive necessary approvals or certifications to commercialize our products in foreign jurisdictions on a timely basis, or at all. If we fail to receive or maintain necessary approvals or certifications to commercialize our products in foreign jurisdictions our business, results of operations and financial condition could be adversely affected.
If we fail to obtain, or experience significant delays in obtaining, FDA clearances or approvals for our future products or product enhancements, our ability to commercially distribute and market our products could suffer.
The process of obtaining regulatory clearances or approvals to market a medical device, particularly from the FDA, can be costly and time consuming, and there can be no assurance that such clearances or approvals will be granted on a timely basis, if at all. In particular, the FDA permits commercial distribution of a new, non-exempt, non-Class I medical device only after the device has received clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act, or receives approval under the premarket approval application (PMA) process. If clinical trials of our current or future product candidates do not produce results necessary to support regulatory approval, we will be unable to commercialize these products, which could have a material adverse effect on our financial results.
The FDA will clear marketing of a medical device through the 510(k) process if it is demonstrated that the new product is substantially equivalent to other 510(k)-cleared products. The PMA process is more costly, lengthy and uncertain than the 510(k) clearance process. Additionally, any modification to a 510(k)-cleared device that could significantly affect its safety or efficacy, or that would constitute a major change in its intended use, requires a new 510(k) clearance or, possibly, a PMA. The FDA may not agreerequires each manufacturer to make the determination of whether a modification requires a new 510(k) notification or PMA application in the first instance, but the FDA can review any such decision. If the FDA disagrees with any of our decisions regarding whether new clearances or approvals are necessary.necessary, the FDA may retroactively require us to seek 510(k) clearance or PMA approval. For device modifications that we conclude do not require a new regulatory clearance or approval, we may be required to recall and to stop marketing the modified devices if the FDA or other agency disagrees with our conclusion and requires new clearances or approvals for the modifications. Our failure to comply with such regulations could lead to the imposition of injunctions, suspensions or loss of regulatory approvals, product recalls, termination of distribution, or product seizures. In the most egregious cases, criminal sanctions or closure of our manufacturing facilities are possible.
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Legislative or regulatory reforms in the United States may make it more difficult and costly for us to obtain regulatory clearances or approvals for our products or to produce, market or distribute our products after clearance or approval is obtained.
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulation of medical devices or the reimbursement thereof in the United States. In addition, the FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. For example, in 2018 the FDA issued draft guidance and announced steps to modernize the 510(k) clearance pathway that, if finalized and implemented, could impact the ability of medical device manufacturers to obtain or maintain 510(k) clearances for devices. Any new statutes, regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of any future products or make it more difficult to manufacture, market or distribute our products or future products. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such changes could, among other things, require:
additional testing prior to obtaining clearance or approval;
• | additional testing prior to obtaining clearance or approval; |
changes to manufacturing methods;
• | changes to manufacturing methods; |
recall, replacement or discontinuance of our products or future products; or
• | recall, replacement or discontinuance of our products or future products; or |
additional record keeping.
• | additional record keeping. |
Any of these changes could require substantial time and cost and could harm our business and our financial results.
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The misuse or off-label use of our products may harm our reputation in the marketplace, result in injuries that lead to product liability suits or result in costly investigations, fines or sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be costly to our business.
Pursuant to FDA regulations, we can medical devices may be promoted only market our products for their cleared or approved uses.indications and in accordance with the provisions of the cleared or approved label. Although physicians are permitted to use medical devices for indications other than those cleared or approved by the FDA based on their medical judgment, we are prohibitedthe FDA generally prohibits manufacturers and distributors of medical devices from promoting products for such off-label uses. We train our marketing personnel and independent sales representatives and distributors to not promote our products for uses outside of the FDA-cleared indications. Although we believe our marketing, promotional materials and training programs for physicians do not constitute promotion of unapproved uses of our products, if the FDA or any foreign regulatory body determines that our marketing, promotional materials or training programs constitute promotion of an off-label use, we could be subject to significant fines in addition to regulatory enforcement actions. It is also possible that other federal, state or foreign enforcement authorities might take action under other regulatory authority, such as false claims laws, if they consider our business activities to constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs and the curtailment of our operations.
In addition, there may be increased risk of injury to patients if physicians attempt to use our products off-label. Furthermore, the use of our products for indications other than those cleared by the FDA or approved by any foreign regulatory body may not effectively treat such conditions, which could harm our reputation in the marketplace among physicians and patients.
If we or our suppliers fail to comply with the FDA’s quality system regulations, ISO or equivalentother applicable regulations and standards, internationally, the manufacture and processing of our products could be delayed or interrupted and we may be subject to an enforcement action by the FDA or other government agencies.
We and our suppliers are required to comply with the QSR, ISO and other applicable standardsregulations and requirements,standards, which cover the methods and documentation of the design, testing, production or processing, control, quality assurance, labeling, packaging, storage and shipping of our products. The FDA and other regulatory bodies enforce compliance with certain regulatory requirements and standards through periodic inspections. If we or one of our suppliers failreceive a warning letter or significant observed non-conformities are identified as a result of an inspection or if any corrective action plan is deemed not to be sufficient, the release of our products could be delayed. We have undergone inspections by the FDA and other regulatory bodies regarding our allograft business and FDA inspections regarding our medical device activities. In connection with these inspections as well as prior inspections, regulatory agencies have requested minor corrective actions, which we have implemented. There can be no assurance that the FDA will not subject us to further enforcement action and theThe FDA and other regulatory agencies may impose additional inspections at any time.time and we may be required to take corrective actions in the future to address any findings.
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Additionally, we are the legal manufacturer of record for the products that are distributed and labeled by us, regardless of whether the products are manufactured by us or our suppliers. Thus, a failure by us or our suppliers to comply with applicable regulatory requirements can result in enforcement action against us by the FDA, which may include any of the following sanctions:
fines, injunctions, and civil penalties;
• | fines, injunctions, and civil penalties; |
recall or seizure of our products;
• | recall or seizure of our products; |
operating restrictions, partial suspension or total shutdown of production;
• | operating restrictions, partial suspension or total shutdown of production; |
refusing our request for 510(k) clearance or premarket approval of new products;
• | refusing our request for 510(k) clearance or premarket approval of new products; |
withdrawing 510(k) clearance or premarket approvals that are already granted; and
• | withdrawing 510(k) clearance or premarket approvals that are already granted; and |
criminal prosecution.
• | criminal prosecution. |
We or our suppliers may be the subject of claims for non-compliance with FDA regulations in connection with the processing or distribution of allograft products.
It is possible that allegations may be made against us or against donor recovery groups or tissue banks, including those with which we have a contractual relationship, claiming that the acquisition or processing of tissue for allograft products does not comply with applicable FDA regulations or other relevant statutes and regulations. Allegations like these could cause regulators or other authorities to take investigative or other action against us, or could cause negative publicity for us or our industry in general. These actions or any negative publicity could cause us to incur substantial costs, divert the attention of management from our business, harm our reputation and cause the market price of our shares to decline.
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As a U.S. federal government contractor, we are subject to a number of procurement rules and regulations.
Our contracts with the U.S. federal government are subject to specific procurement requirements including various import and export, security, contract pricing and cost, contract termination and adjustment, subcontracting, and audit requirements. These requirements, although customary in government contracts, increase our performance and compliance costs. In addition, failure to comply with these regulations and requirements could result in reductions of the value of contracts, contract modifications or termination, and the assessment of penalties and fines, which could negatively impact our results of operations and financial condition. Our failure to comply with these regulations and requirements could also lead to suspension or debarment, for cause, from government contracting or subcontracting for a period of time. Among the causes for debarment are violations of various statutes, including those related to product sourcing, product pricing, security regulations, employment practices and policies, and subcontracting requirements. The termination of a government contract as a result of any of these acts could have a negative impact on our results of operations and financial condition and could have a negative impact on our reputation and ability to procure other government contracts in the future.
Compliance with SECCommission regulations relating to “conflict minerals” may increase our costs and adversely affect our business.
We are subject to SECCommission regulations that require us to determine whether our products contain certain specified minerals, referred to under the regulations as “conflict minerals”, and, if so, to perform an extensive inquiry into our supply chain, in an effort to determine whether or not such conflict minerals originate from the Democratic Republic of Congo, (“DRC”), or an adjoining country. Compliance with these regulations has increased our costs, and we expect our costs may increase in the future. We have determined that certain of our products contain such specified minerals. As of the date of our conflict minerals report for the 2017 calendar year, we were unable to determine whether or not such minerals originate from the DRC or an adjoining country. We are continuing to conduct inquiries into our supply chain in connection with the preparation of our conflict minerals report for 2018. Compliance with these requirements has been time-consuming for management and our supply chain personnel (as well as time-consuming for our suppliers), and we expect that compliance will continue to require the expenditure of significant amounts of time and moneyresources by us and them. In addition, to the extent any of our disclosures are perceived by the market to be “negative,” it may cause customers to refuse to purchase our products. Further, if we determine to make any changes to products, processes, or sources of supply, it may result in additional costs, which may adversely affect our business.
Our relationships with physicians could be subject to additional scrutiny from regulatory enforcement authorities and could subject us to possible administrative, civil or criminal sanctions.
Federal and state laws and regulations impose restrictions on our relationships with physicians. We have entered into consulting agreements, license agreements and other agreements with physicians in which we provided equity awards or cash or both as compensation. Some of the physicians with which we have such consulting and other agreements are affiliated with some of our customers. Finally, we have other arrangements with physicians, including for research and development grants, education, training, and for other purposes as well.
We could be adversely affected if regulatory agencies were to interpret our financial relationships with these physicians, who may be in a position to influence the ordering of and use of our products for which governmental reimbursement may be available, as being in violation of applicable laws. If our relationships with physicians are found to be in violation of the laws and regulations that apply to us, we may be required to restructure the arrangements and could be subject to administrative, civil and criminal penalties, including exclusion from participation in government healthcare programs and the curtailment or restructuring of our operations, any of which could negatively impact our ability to operate our business and our results of operations.
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Our business involves the use of hazardous materials and we and our third-party manufacturers must comply with environmental laws and regulations, which may be expensive and restrict how we do business.
Our third-party manufacturers’ activities and our own activities involve the controlled storage, use and disposal of hazardous materials.materials or materials that can become hazardous as result of the manufacturing process. For example, we develop porous titanium implants using additive manufacturing technology, or 3D printing, which generates dust that is highly combustible. We and our manufacturers are subject to federal, state, local and foreign laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these hazardous materials. We currently carry nolimited insurance specifically covering environmental claims relating to the use of hazardous materials, but we do reserve funds to address these claims at both the federal and state levels.materials. Although we believe that our safety procedures for handling and disposing of these materials and waste products comply with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental injury or contamination from the use, storage, handling or disposal of hazardous materials. In the event of an accident, state or federal or other applicable authorities may curtail our use of these materials and interrupt our business operations. In addition, if an accident or environmental discharge occurs, or if we discover contamination caused by prior operations, including by prior owners and operators of properties we acquire, we could be liable for cleanup obligations, damages and fines. If such unexpected costs are substantial, this could significantly harm our financial condition and results of operations.
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Risks Related to Our Financial Results and Need for Financing
We may be unable to grow our revenuenet sales or earnings as anticipated, which may have a material adverse effect on our future operating results.
We have experienced rapid growth since our inception, and have increased our revenuenet sales from $38.4 million in 2004, the year of our initial public offering, to $1.1$1.05 billion in 2018.2020. Our ability to achieve future growth will depend upon, among other things, the successeffectiveness of our growth strategies, which we cannot assure will be successful. In addition, we may have more difficulty maintaining our prior rate of growth of revenuenet sales or recent levels of profitability and cash flow. Our future success will depend upon various factors, including the strength of our brand image, the market success of our current and future products, competitive conditions and our ability to manage increased revenue,sales, if any, or implement our growth strategy. In addition, we anticipate significantlyinvesting in and expanding our infrastructure and adding personnel in connection with our anticipated growth, which we expect will cause our selling, generalmarketing and administrative expenses to increase in absolute dollars and as a percentage of revenue.increase. Because these expenses are generally fixed, particularly in the short-to-medium term, our operating and financial results may be adversely impacted if we do not achieve our anticipated growth.
We have a significant amount of outstanding indebtedness, and our financial condition and results of operations could be adversely affected if we do not efficientlyeffectively manage our liabilities.
As of December 31, 2018,2020, we had outstanding $650.0 million aggregate principal amount of our 2.25% Convertible Senior Notes due 2021 (the “2021 Notes”), $450.0 million aggregate principal amount of our 1.00% Convertible Senior Notes due 2023 (the “2023 Notes”) and$450.0 million aggregate principal amount of our 0.375% Convertible Senior Notes due 2025 (the “2025 Notes”). This significant amount of debt has important risks to us and our investors, including:
requiring a portion of our cash flow from operations to make interest payments on this debt;
• | requiring a portion of our cash flow from operations to make interest payments on this debt; |
increasing our vulnerability to general adverse economic and industry conditions;
• | increasing our vulnerability to general adverse economic and industry conditions; |
reducing the cash flow available to fund capital expenditures and other corporate purposes and to grow our business;
• | reducing the cash flow available to fund capital expenditures and other corporate purposes and to grow our business; |
limiting our flexibility in planning for, or reacting to, changes in our business and the industry; and
• | limiting our flexibility in planning for, or reacting to, changes in our business and the industry; and |
limiting our ability to borrow additional funds as needed or take advantage of business opportunities as they arise.
• | limiting our ability to borrow additional funds as needed or take advantage of business opportunities as they arise. |
In addition, to the extent we draw on our $500.0$550.0 million revolving senior credit facility (the “2017“2020 Facility”) or otherwise incur additional indebtedness, the risks described above could increase. Further, if we increase our indebtedness, our actual cash requirements in the future may be greater than expected. Our cash flow from operations may not be sufficient to repay all of the outstanding debt as it becomes due, and we may not be able to borrow money, sell assets or otherwise raise funds on acceptable terms, or at all, to refinance our debt. Further, there are a large number of shares of common stock reserved for issuance upon the potential conversion of our 2021 Notes, 2023 Notes and 2025 Notes and the warrants that we issued as part of the related bond hedge transactions related to the 2021 Notes, 2023 Notes and 2025 Notes. TheIf any of these shares are issued, the issuance of these shares may depress the market price of our common stock.stock and our existing stockholders could experience dilution.
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If we fail to comply with the covenants and other obligations under our credit facility, the lenders may be able to accelerate amounts owed under the facilities and may foreclose upon the assets securing our obligations.
In April 2017,February 2020, we entered into ana Second Amended and Restated Credit Agreement (the “2017“2020 Credit Agreement”) with respect to the 20172020 Facility, which replaced the previous Amended and Restated Credit Agreement we had entered into in February 2016.April 2017. The 20172020 Credit Agreement was further amended in May 2020 to, among other things, provide additional flexibility in determining the financial covenant leverage ratios for the second and third fiscal quarters of 2020 and to adjust certain margin and benchmark rates used to determine interest under the 2020 Facility. The 2020 Credit Agreement provides for secured revolving loans, multicurrency loan options and letters of credit in an aggregate amount of up to $500.0$550.0 million. The 20172020 Credit Agreement also contains an expansion feature, which allows us to increase the aggregate principal amount of the 20172020 Facility provided we remain in compliance with the underlying financial covenants on a pro forma basis, including but not limited to, compliance with the consolidated interest coverage ratio and certain consolidated net leverage ratios. All of our assets and the assets of our material domestic subsidiaries are pledged as collateral under the 20172020 Facility (subject to customary exceptions) and each of our material domestic subsidiaries guarantee the 20172020 Facility. The covenants set forth in the 20172020 Credit Agreement restrict,impose limitations on, among other things, our ability to: create liens on assets, incur additional indebtedness, make investments, make acquisitions and other fundamental changes, sell and dispose of property or assets, pay dividends and other distributions, change the business conducted, engage in certain transactions with affiliates, enter into burdensome agreements, limit certain use of proceeds, amend organizational documents, change accounting policies or reporting practices, modify or terminate documents related to certain indebtedness, enter into sale and leaseback transactions, fund any person or business that is the subject of sanctions, and use proceeds for any breach of anti-corruption laws. If we fail to comply with the covenants and our other obligations under the 20172020 Facility, the lenders would be able to accelerate the required repayment of amounts due under the 20172020 Credit Agreement and, if they are not repaid, could foreclose upon our assets securing our obligations under the 20172020 Facility.
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We may need additional financing in the future to meet our capital needs or to make opportunistic acquisitions and such financing may not be available on favorable terms, if at all, and may be dilutive to existing stockholders.
In furtherance of our growth strategy and global expansion efforts, we intend to continue to invest in our business, including through acquisitions and strategic transactions. These investments willmay be expensive, and we may need to seek additional financing in the future to meet our capital needs. As of December 31, 2018,2020, we had $117.8 million$1.0 billion in cash, and cash equivalents and short-term investments, and the ability to draw $500.0$550.0 million on our 20172020 Facility. Additionally, as of December 31, 2020, we had outstanding $650.0 million aggregate principal amount of the 2021 Notes, which have a maturity date of March 15, 2021, $450.0 million aggregate principal amount of the 2023 Notes, which have a maturity date of June 1, 2023 and $450.0 million aggregate principal amount of the 2025 Notes, which have a maturity date of March 15, 2025. On February 23, 2021, we entered into a definitive agreement to acquire Simplify Medical for an upfront payment of $150.0 million at closing, subject to customary purchase price adjustments, plus additional future payments contingent upon milestones related to regulatory approval and net sales from products incorporating the Simplify Medical cervical artificial disc technology. The closing of the acquisition occurred on February 24, 2021, and Simplify Medical is now our wholly-owned subsidiary. In connection with the closing, the Company funded the $150.0 million upfront payment using available cash and investments on hand. We may seek to raise capital from public and private debt and equity offerings, borrowings under our existing or future credit facilities or other sources. We may be unable to obtain any desired additional financing on terms favorable to us, if at all. If adequate funds are not available on acceptable terms, we may be unable to fund our expansion, successfully develop or enhance products or respond to competitive pressures, any of which could negatively affect our business. If we raise additional funds through the issuance of equity securities, our stockholders will experience dilution of their ownership interest. If we raise additional funds by issuing debt, we may be subject to limitations on our operations due to restrictive covenants. Additionally, our ability to make scheduled payments or refinance our obligations will depend on our operating and financial performance, which in turn is subject to prevailing economic conditions and financial, business and other factors beyond our control.
We could be subject to changes in tax rates, the adoption, evolution or change of new and/or amended U.S. or international tax legislation or exposure to additional tax liabilities.
We are subject to taxes in the United States and numerous foreign jurisdictions, including the Netherlands, where a numberthe location of our subsidiaries are located.international headquarters. Significant judgment is required to determine and estimate our worldwide tax liabilities. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. Our effective income tax rates have been, and could in the future be, adversely affected by changes in tax laws or interpretations of those tax laws,laws; by stock-based compensation and other non-deductible expenses,expenses; by changes in the mix of earnings in countries with differing statutory tax rates,rates; or by changes in the valuation of our deferred tax assets and liabilities.
As part of our globalization initiative, weWe have centralized international operations in the Netherlands and have entered into intercompany transfer pricing arrangements, including the licensing of intangibles. We continue to streamline our international operations to better align with and support our international business activities and markets through changes in how we develop, licensemanage the development and use of our intangible property and how we structure our international procurement and customer service functions. We have experienced a negative impact to our effective tax rate over the last few years as we’ve invested in our expansion and expect continued but declining pressure on the tax rate over the next several years until we achieve our net profitability goals outside the U.S. and see the long-term benefits of expansion on our effective tax rate. There can be no assurance that the taxing authorities of the jurisdictions in which we operate, or will operate or to which we are otherwise deemed to have sufficient tax presence, will not challenge the tax benefits that we ultimately expect to realize as a result of our international structure. In addition, current and future changes to U.S. and non-U.S. tax laws, including recently enacted U.S. tax reform of international business and the continuing development of the Organization for Economic Cooperation and Development Base Erosion and Profit Shifting recommendations, could negatively impact the anticipated tax benefits of our international structure. Any long term benefits to our tax rate will also depend on our ability to achieve our anticipated international growth projections and to operate our business in a manner consistent with our international structure and intercompany transfer pricing arrangements. If we do not operate our business consistent with the structure and applicable tax provisions, we may fail to achieve the financial efficiencies that we anticipate as a result of the structure and our future operating results and financial condition may be negatively impacted.
38
Finally, we may be subject in the future to examination of our income tax returns by the Internal Revenue Service and other taxing authorities which may result in the assessment of additional income taxes. We regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of our provision for taxes. There can be no assurance as to the outcome of these examinations. If our effective tax rates were to increase, particularly in the U.S. or the Netherlands or if the ultimate determination of our taxes owed is for an amount in excess of amounts previously accrued, our financial condition, cash flows or results of operations could be adversely affected.
3944
Risks Related to the Securities Markets and Ownership of Our Common Stock
We expect that the price of our common stock will fluctuate substantially, potentially adversely affecting the ability of investors to sell their shares.
The market price of our common stock may be subject to wide fluctuations, which may negatively affect the ability of investors to sell our shares at consistent prices. Fluctuation in the stock price may occur due to many factors, including, without limitation:
general market conditions and other factors related to the economy or otherwise, including factors unrelated to our operating performance or the operating performance of our competitors;
• | general market conditions and other factors related to the economy or otherwise, including factors unrelated to our operating performance or the operating performance of our competitors; |
people’s expectations, favorable or unfavorable, as to the likely unit growth of the spine sector;
• | people’s expectations, favorable or unfavorable, as to the likely growth of the markets in which we participate; |
negative stock market reactions to the results of litigation;
• | negative publicity regarding spine surgeon’s practices or outcomes, whether warranted or not, that cast the sector in a negative light; |
negative publicity regarding spine surgeon’s practices or outcomes, whether warranted or not, that cast the sector in a negative light;
• | the introduction of new products or product enhancements by us or our competitors; |
the introduction of new products or product enhancements by us or our competitors;
• | changes in the availability of third-party reimbursement in the United States or other countries; |
changes in the availability of third-party reimbursement in the United States or other countries;
• | disputes or other developments with respect to intellectual property rights or other potential legal actions; |
disputes or other developments with respect to intellectual property rights or other potential legal actions;
• | our ability to develop, obtain regulatory clearance or approval for, and market new and enhanced products on a timely basis; |
our ability to develop, obtain regulatory clearance or approval for, and market new and enhanced products on a timely basis;
• | quarterly variations in our or our competitor’s results of operations; |
quarterly variations in our or our competitor’s results of operations;
• | sales of large blocks of our common stock, including sales by our executive officers and directors; |
sales of large blocks of our common stock, including sales by our executive officers and directors;
• | announcements of technological or medical innovations for the treatment of spine pathology; |
announcements of technological or medical innovations for the treatment of spine pathology;
• | changes in governmental regulations or in the status of our regulatory approvals, clearances or applications; |
changes in governmental regulations or in the status of our regulatory approvals, clearances or applications;
• | the acquisition or divestiture of businesses, products, assets or technology by us or by our competitors; |
the acquisition or divestiture of businesses, products, assets or technology by us or by our competitors;
• | litigation (including intellectual property litigation) and any associated negative verdicts or ruling; |
litigation (including intellectual property litigation) and any associated negative verdicts or ruling;
• | announcements of actions by the FDA or other regulatory agencies; and |
announcements of actions by the FDA or other regulatory agencies; and
changes in earnings or operating margin estimates or recommendations by us or by securities analysts.
• | changes in earnings or operating margin estimates or financial guidance provided by us or by reports or ratings by securities analysts. |
Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change of control, even if an acquisition would be beneficial to our stockholders, which could affect our stock price adversely and prevent attempts by our stockholders to replace or remove our current management.
Our certificate of incorporation and bylaws contain provisions that could delay or prevent a change of control of our company or changes in our boardBoard of directorsDirectors that our stockholders might consider favorable. Some of these provisions:
authorize the issuance of preferred stock which can be created and issued by the board of directors without prior stockholder approval, with rights senior to those of the common stock;
• | authorize the issuance of preferred stock which can be created and issued by the Board of Directors without prior stockholder approval, with rights senior to those of the common stock; |
provide for a classified board of directors, with each director serving a staggered three-year term;
• | provide for a classified Board of Directors, with each director serving a staggered three-year term; |
provide that our stockholders may remove our directors only for cause;
• | provide that our stockholders may remove our directors only for cause; |
prohibit our stockholders from filling board vacancies, calling special stockholder meetings, or taking action by written consent;
• | prohibit our stockholders from filling board vacancies, calling special stockholder meetings, or taking action by written consent; |
prohibit our stockholders from making certain changes to our certificate of incorporation or bylaws except with 66 2/3% stockholder approval; and
• | prohibit our stockholders from making certain changes to our certificate of incorporation or bylaws except with 66 2/3% stockholder approval; and |
require advance written notice of stockholder proposals and director nominations.
• | require advance written notice of stockholder proposals and director nominations. |
In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our certificate of incorporation, our bylaws and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our boardBoard of directorsDirectors or initiate actions that are opposed by our then-current boardBoard of directors,Directors, including delay or impede a merger, tender offer, or proxy contest involving our company. Any delay or prevention of a change of control transaction or changes in our boardBoard of directorsDirectors could cause the market price of our common stock to decline.
40
We do not intend to pay cash dividends.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. In addition, the terms of any future debt or credit facility may preclude us from paying any dividends. As a result, capital appreciation, if any, of our common stock will be our stockholders’ source of potential gain for the foreseeable future.
45
Item 1B.Unresolved Staff Comments
None.
The following table sets forth our principal properties as of December 31, 2018,2020, all of which are leased unless otherwise noted as owned:
Primary Use | Square Footage |
|
| Location | |
Corporate headquarters | 252,000 | San Diego, CA | |||
Manufacturing facilities (1) |
| 180,000 |
|
| West Carrollton, OH |
|
|
| |||
Fulfillment and warehouse operations (1) |
| 100,000 |
|
| Memphis, TN |
Office facilities |
|
|
|
| Aliso Viejo, CA |
Office facilities and warehouse |
|
|
|
| Japan |
Office facilities and warehouse |
| 22,000 |
|
| Netherlands |
Office facilities |
| 21,000 |
|
| Columbia, MD |
Office facilities and warehouse |
|
|
|
| Australia |
Office facilities and warehouse |
| 15,000 |
|
| Germany |
Office facilities |
|
|
|
| Brazil |
Office facilities |
| 7,000 |
|
|
|
|
|
|
|
|
|
(1) Owned by the Company |
|
|
|
|
|
For a description of our material pending legal proceedings, refer to “Note 10. Contingencies” inNote 12 “Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report.Report, which is incorporated herein by reference.
Item 4.Mine Safety Disclosures
Not applicable.
46
PART II
Item 5.Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock Market PriceInformation
Our common stock is traded on the NASDAQNasdaq Global Select Market under the symbol “NUVA.”
We had approximately 7471 stockholders of record as of January 31, 2019.2021. The number of beneficial owners is substantially greater than the number of record holders because a large portion of our common stock is held of record through brokerage firms in “street name.”
Recent Sales of Unregistered Securities
DuringThere were no unregistered sales of equity securities which have not been previously disclosed in a Quarterly Report on Form 10-Q or a Current Report on Form 8-K during the fourth quarter of 2018, we did not issue any securities that were not registered under the Securities Act of 1933, as amended (the Securities Act).year ended December 31, 2020.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain future earnings, if any, for development of our business and do not anticipate that we will declare or pay cash dividends on our capital stock in the foreseeable future.
4147
Equity Compensation Plan Information
The following table provides certain information with respect to all of our compensation plans in effect as of December 31, 2018:
Plan Category |
| (A) Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights |
|
| (B) Weighted Average Exercise Price of Outstanding Options, Warrants and Rights |
|
| (C) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in column(A)) |
|
| |||
Equity Compensation Plans approved by stockholders |
|
| 2,232,740 |
| (1) | $ | 35.76 |
|
|
| 4,844,041 |
| (2)(3) |
Equity Compensation Plans not approved by stockholders |
|
| — |
|
|
| — |
|
|
| — |
|
|
Total |
|
| 2,232,740 |
|
| $ | 35.76 |
|
|
| 4,844,041 |
|
|
|
|
|
|
|
|
42
The following graph compares the cumulative total stockholder return data on our common stock with the cumulative return of (i) The NASDAQNasdaq Stock Market Composite Index, and (ii) NASDAQNasdaq Medical Equipment Index over the five-year period ending December 31, 2018.2020. The graph assumes that $100 was invested on December 31, 20132015 in our common stock and in each of the comparative indices.indices, and the reinvestment of any dividends. The stock price performance on the following graph is not necessarily indicative of future stock price performance.
The following graph and related information shall not be deemed “soliciting material” or be deemed to be “filed” with the Commission, nor shall such information be incorporated by reference into any future filing, except to the extent that we specifically incorporate it by reference into such filing.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG NUVASIVE, INC.,
THE NASDAQ COMPOSITE INDEX
AND THE NASDAQ MEDICAL EQUIPMENT INDEX
|
*$100 invested on December 31, 2015 in stock or index, including reinvestment of dividends. |
43
48
Purchases of Equity Securities
In October 2017, we announced that our Board of Directors had approved a share repurchase program authorizing the repurchase of up to $100 million of our common stock over a three-year period. Under this program, we are authorized to repurchase our shares in open market purchases, privately negotiated purchases or other transactions through October 2020. In February 2020, we announced that our Board of Directors increased the share repurchase authorization from $100 million to $150 million of our common stock through December 31, 2021. In March 2020, in connection with the issuance of our Convertible Senior Notes due 2025, we repurchased approximately 1,085,000 shares of our common stock for $75.0 million. As of December 31, 2018, we have not repurchased any shares2020, $75.0 million remained authorized under thisthe share repurchase program.
The selected consolidated financial data set forth in the table below has been derived from our audited financial statements. The data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements and notes thereto appearing elsewhere in this report.Data
|
| Year Ended December 31, |
| |||||||||||||||||
|
| 2018 (1) |
|
| 2017 (2)(3) |
|
| 2016 (3)(4) |
|
| 2015 |
|
| 2014 |
| |||||
|
| (In thousands, except per share amounts) |
| |||||||||||||||||
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
| $ | 1,101,714 |
|
| $ | 1,026,685 |
|
| $ | 962,132 |
|
| $ | 811,113 |
|
| $ | 762,415 |
|
Gross profit |
|
| 790,555 |
|
|
| 758,244 |
|
|
| 722,027 |
|
|
| 616,634 |
|
|
| 580,057 |
|
Consolidated net income (loss) |
|
| 12,479 |
|
|
| 79,855 |
|
|
| 35,471 |
|
|
| 65,290 |
|
|
| (17,496 | ) |
Net income (loss) attributable to NuVasive, Inc. |
|
| 12,479 |
|
|
| 81,598 |
|
|
| 37,192 |
|
|
| 66,291 |
|
|
| (16,720 | ) |
Net income (loss) per share attributable to NuVasive, Inc.: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.24 |
|
| $ | 1.60 |
|
| $ | 0.74 |
|
| $ | 1.36 |
|
| $ | (0.36 | ) |
Diluted |
| $ | 0.24 |
|
| $ | 1.48 |
|
| $ | 0.69 |
|
| $ | 1.26 |
|
| $ | (0.36 | ) |
|
| December 31, |
| |||||||||||||||||
|
| 2018 (1) |
|
| 2017 (2)(3) |
|
| 2016 (3)(4) |
|
| 2015 |
|
| 2014 |
| |||||
|
| (In thousands, except per share amounts) |
| |||||||||||||||||
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
| $ | 438,749 |
|
| $ | 398,668 |
|
| $ | 335,155 |
|
| $ | 603,210 |
|
| $ | 490,972 |
|
Total assets |
|
| 1,707,859 |
|
|
| 1,640,140 |
|
|
| 1,573,993 |
|
|
| 1,289,649 |
|
|
| 1,343,459 |
|
Senior Convertible Notes (net of current portion) |
|
| 602,526 |
|
|
| 582,920 |
|
|
| 564,412 |
|
|
| 376,542 |
|
|
| 360,746 |
|
Non-current liabilities (excluding convertible notes) |
|
| 91,348 |
|
|
| 96,409 |
|
|
| 64,208 |
|
|
| 111,288 |
|
|
| 119,456 |
|
Total equity (5) |
|
| 834,525 |
|
|
| 799,416 |
|
|
| 702,194 |
|
|
| 718,843 |
|
|
| 648,358 |
|
Part II, Item 6 is no longer required. The Company has adopted certain provisions within the amendments to Regulation S-K that eliminate Item 301. |
|
|
|
|
|
|
|
|
|
|
4449
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
As noted earlier, this Annual Report, including the following discussion and analysis, may contain forward-looking statements that involve risks, uncertainties, assumptions and other factors which, if they do not materialize or prove correct, could cause our results to differ from historical results or those expressed or implied by such forward-looking statements. Please review this Annual Report and the following discussion and analysis in light of the forward-looking statements provisions outlined at the outset of Part I.
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the Consolidated Financial Statements and the Notes to those statements included in this Annual Report.
Overview
We are a leadingglobal medical devicetechnology company in the global spine surgery market, focused on developing, minimally disruptivemanufacturing, selling and providing procedural solutions for spine surgery, with a guiding purpose to transform surgery, advance care and change lives. We offer a comprehensive portfolio of procedurally integrated spine surgery solutions, including surgical productsaccess instruments, spinal implants, fixation systems, biologics, and enabling technologies, as well as systems and services for intraoperative neuromonitoring. In addition, we develop and sell magnetically adjustable implant systems for spine and specialized orthopedic procedures. For the year ended December 31, 2020, we generated net sales of $1.05 billion, including sales in more than 50 countries.
Since our incorporation in 1997, we have grown from a small developer of specialty spinal implants into a leading medical technology company delivering procedurally integrated solutions for spine surgery. Our currently marketed product portfolio is focusedA key driver of our growth has been our focus on applications for spine fusion surgery, including ancillaryinnovative products and services used to aid in the surgical procedure. Our procedurally integrated solutions use innovative, technological advancements and a minimally disruptive surgical platform called Maximum Access Surgery, or MAS, to provide surgical efficiency, operative reliability, and procedural versatility. For the year ended December 31, 2018, we generated global revenues of $1.1 billion, including sales in over 50 countries.
Our principal product offering includes the MAS platform which combines three categories of solutionstechnologies that collectively minimize soft tissue disruption during spine fusion surgery, provide maximum visualization and are designed to enable safe anddrive reproducible outcomes for the surgeonpatients, surgeons and the patient. The platform includes our proprietary software-driven nerve detection and avoidance systems, and Intraoperative Monitoring, or IOM, services and support offered by NuVasive Clinical Services; MaXcess, an integrated split-blade retractor system; and a wide variety of specialized implants and biologics. Many of our products, including the individual components of our MAS platform can also be used in open or traditional spine surgery. Our spine surgery product line offerings, which include products for the thoracolumbar and the cervical spine, are primarily used to enable surgeon access to the spine to perform restorative and fusion procedures in a minimally disruptive fashion. To assist with surgical procedures,providers. In 2003, we offer a platform called Integrated Global Alignment, or iGA, in which products and computer assisted technology under our MAS platform help achieve more precise spinal alignment.
Our MAS platform and its related offerings are designed to provide a unique and comprehensive solution forintroduced the safe and reproducible minimally disruptive surgical treatment of spine disorders by enabling surgeons to access the spine in a manner that affords both direct visualization and detection and avoidance of critical nerves along with intraoperative reconciliation. The fundamental difference between our MAS platform, which is sometimes referred to in the industry as “minimally invasive surgery” or “MIS”, is the ability to customize safe and reproducible access to the spine while allowing surgeons to continue to use instruments that are familiar to them and effective during surgery. Accordingly, the MAS platform does not force surgeons to reinvent or learn new approaches that add complexity and undermine safety, ease of use and/or efficacy. We have dedicated and continue to dedicate significant resources toward training spine surgeons around the world; both those who are new to our MAS and other product platforms, as well as ongoing education for MAS-trained surgeons attending advanced courses. An important ongoing objective of ours has been to maintain a leading position in access and nerve avoidance, as well as to pioneer and remain the ongoing leader in minimally invasive spine surgery. Our MAS platform, with the unique advantages provided by our neuromonitoring systems, enables innovative lateral procedures, including a procedure known as eXtreme Lateral Interbody Fusion procedure, or XLIF, a lateral access spine surgery technique that is less-invasive than traditional, open surgical procedures and clinically proven to enable better patient outcomes. Building off the success of XLIF, we have continued to develop innovative less-invasive techniques and technologies for spine surgery, and we have broadened our portfolio of solutions for traditional, open surgical procedures. Our comprehensive portfolio of solutions can be utilized in which surgeons accessprocedures for the cervical, thoracic and lumbar spine, for a fusion proceduresupporting surgical approaches from the sideanterior, including lateral, and posterior. Our solutions are used to treat degenerative conditions and for complex spinal surgery, including adult and pediatric deformities, as well as trauma and tumors.
Underlying our procedurally integrated solutions for spine surgery are innovative technologies designed to enable better clinical, financial, and operational outcomes, including:
• | our differentiated surgical access instruments, including our Maxcess integrated split-blade retractor system, designed to enable less-invasive surgical techniques by minimizing soft tissue disruption during spine surgery; |
• | our neuromonitoring systems, which use proprietary software-driven nerve detection and avoidance technology, and our intraoperative neuromonitoring, or IONM, services and support; |
• | our Advanced Materials Science portfolio of specialized spinal implants, designed to advance spinal fusion by enhancing the osseointegration and biomechanical properties of implant materials, including porous titanium and porous polyetheretherketone, or PEEK; |
• | our comprehensive Reline fixation system, designed to facilitate the preservation and restoration of patient alignment, while addressing a vast array of spinal pathologies from an open or less-invasive approach across all spinal procedures; and |
• | our Integrated Global Alignment platform, or iGA, which is comprised of procedurally-based technologies that help increase the predictability of achieving global alignment in spinal procedures, including our Bendini spinal rod bending system that expedites manual rod manipulation for spinal fixation. |
We have also invested in enabling technologies, including the development of capital equipment designed to further improve clinical, financial, and operational outcomes of spine surgery. Our capital equipment portfolio currently consists of Lessray and the patient’s body, rather than fromPulse platform. Lessray is an image enhancement platform designed to reduce radiation exposure in the front or back. It has been demonstrated clinically that XLIFoperating room by allowing surgeons to take low-quality, low-dose images and improve them to look like conventional full-dose images. Pulse integrates multiple enabling technologies within a single, expandable platform and is engineered to improve workflow, reduce variability, and increase the reproducibility of surgical outcomes. The Pulse platform’s modular architecture is designed to incorporate applications for neuromonitoring, surgical planning, patient-specific rod bending, smart imaging, navigation, and integration with robotics and other procedures facilitated bysmart tools in the future. Selling and leasing of capital equipment do not make up a material portion of our MAS platform decrease trauma and blood loss, and leadtotal net sales.
In addition to faster overall patient recovery times compared to openour procedurally integrated solutions for spine surgery.
We offer a range of implants for spinal surgery, which include our porous titanium and polyetheretherketone, or PEEK, implants under our Advanced Materials Science portfolio, fixation devices such as customizable rods, plates and screws, bone allograft in patented saline packaging, allogeneic and synthetic biologics, and disposables used in IOM. Wewe also design and sell expandable growing rod implant systems that can be non-invasively lengthened following implantation with precise, incremental adjustments via an external remote controller using magnetic technology called MAGnetic External Control, or MAGEC, which allows for the minimally invasive treatment of early-onset and adolescent scoliosis. This technology is also the basis for our PRECICEPrecice limb lengthening system, which allows for the correction of long bone limb length discrepancy, as well as enhanced bone healing in patients that have experienced traumatic injury. The PRECICE limb lengthening system is sold by NuVasive Specialized Orthopedics.other products for treating specialized orthopedic procedures.
50
We intend to continue development on a wide variety of innovation projects intended to broadenadvance our MASleadership position in less-invasive spine surgery, increase our product offerings and other product platformssolutions for traditional spine surgery procedures, and advancefurther our enabling technologies portfolio. We expect to continue to invest in the applicationsPulse platform to support a full global launch of our uniquethe technology into procedurally integratedand to develop and expand its application offerings, including investments related to surgical solutions that improve clinicalautomation and economic outcomes.robotics. In 2019,addition, we expect to commercially launch Pulse, a surgical automation platform which will incorporate neuromonitoring, surgical planning, rod bending, imaging, navigation, and other automation. Pulse is a combined hardware and software platform designed to achieve surgical efficiencies via real-time feedback to aid in clinical decision making and to optimize the procedural workflow in the operating room. We intend to continue to pursue business and technology acquisition targets and strategic relationships.relationships to identify opportunities to broaden participation along the spine care continuum. Top priorities include opportunities that complement our technology leadership position in spine, targeted geographic expansion, technology that makes procedures even safer, as well as opportunities for surgical automation.
45
TableIn December 2019, a novel strain of Contents
On October 15, 2018, our Board of Directors (the “Board”) approved the appointment of J. Christopher Barry to succeed Gregory T. Lucier as Chief Executive Officer and the election of Mr. Barrycoronavirus, which causes COVID-19, was identified. Due to the Board, effective November 5, 2018. Mr. Lucier willrapid and global spread of the virus, on March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. To slow the proliferation of COVID-19, governments have implemented extraordinary measures, which include the mandatory closure of businesses, restrictions on travel and gatherings, and quarantine and physical distancing requirements. In addition, many government agencies in conjunction with hospitals and healthcare systems have, to varying degrees, deferred or suspended elective surgical procedures. While certain spine surgeries are deemed essential and certain surgeries, like in cases of trauma, cannot be delayed, we have seen and may continue to servesee a significant reduction in procedural volumes as Chairmanhospital systems and/or patients elect to defer spine surgery procedures. As a result of these measures, we have experienced reductions in procedural volumes during 2020 and anticipate this trend may continue. The cumulative effect of these disruptions had a significant impact on our business in 2020 and it is not possible for us to accurately predict the length or severity of the Board.COVID-19 pandemic or the timing for a broad and sustained resumption of elective surgical procedures. Further discussion of the potential impacts on our business from the COVID-19 pandemic is provided under Part I, Item 1A – Risk Factors.
RevenuesNet Sales and Operations
The majority of our revenuesnet sales are derived from the sale of implants and fixation products, biologics, disposables and disposablesIONM services and we expect this trend to continue for the foreseeable future. Additionally, with our recent acquisitions of IOM service providers, we expect our IOM serviceOur implants and support revenue to increase compared to previous periods. Our implants,fixation products, biologics, and disposables are currently sold and shipped from our distribution and warehousing operations. We generally recognize revenue fornet sales from implants and fixation products, biologics and disposables upon notice that our products have been used in a surgical procedure or upon shipment to a third-party customer assumingwho has assumed control of the products. RevenueNet sales from IOMIONM services is recognized in the period the service is performed for the amount of payment we expect to receive. We make available MASsurgical access instrument sets MaXcess and neuromonitoring systems to hospitals to facilitate surgeon access to the spine to perform restorative and fusion procedures using our implants and fixation devices. products. We sell MASsurgical instrument sets MaXcess devices, and our proprietary software-driven neuromonitoring systems, however this does not make up a material part of our business. Currently, sales and leases Selling or leasing of capital equipment including our LessRay software technology suite, representdoes not make up a smallmaterial portion of our consolidated revenues.total net sales.
The majorityA substantial portion of our operations are located in the United States, and the majority of our net sales and cash generation have been generatedmade in the United States. We sell our products in the United States through a sales force comprised primarily of directly employed and independent sales agents and directly-employed sales representatives.representatives. Our sales force provides a delivery and consultative service to our surgeon and hospital customers and is compensated based on sales and product placements in their territories. Sales force commissions are reflected in the sales, marketingselling, general and administrative operating expense line item within our Consolidated Statements of Operations. We continue to invest in international expansion with a focus on European, Asia-Pacific and Latin American markets. Our international sales force is comprised of directly-employed sales personnel, independent sales agents,representatives, as well as exclusive and non-exclusive independent third-party distributors.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon our audited Consolidated Financial Statements, which have been prepared in accordance with generally accepted accounting principles in the United States (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenuesnet sales and expenses. On an ongoing basis, we evaluate our estimates including those related to revenue recognition, bad debts,credit losses, inventories, valuation of financial instruments, goodwill, intangibles, property and equipment, contingent liabilities, stock-based compensation, income taxes, and legal proceedings. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources. Actual results may differ from these estimates.
The following accounting policies are critical to the judgments and estimates used in the preparation of our Consolidated Financial Statements.
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In accordance with Accounting Standards Codification 606 Revenue from Contracts with Customers (“ASC 606”) guidance,, we recognize revenue upon the transfer of goods or services to a customer at an amount that reflects the expected consideration to be received in exchange for those goods or services. The principles in ASC 606 are applied using the following five steps: (i) identify the contract with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) we satisfy our performance obligation(s). Specifically, revenue from the sale of implants, fixation products and disposables is generally recognized at an amount that reflects the expected consideration upon notice that our products have been used in a surgical procedure or upon shipment to a third-party customer assuming control of the products. Revenue from neuromonitoringIONM services is recognized in the period the service is performed for the amount of consideration expected to be received. Revenue from the sale of surgical instrument sets is generally recognized upon receipt of a purchase order and the subsequent shipment to a customer who assumes control. In certain cases, we offer the ability for customers to lease surgical instrumentation primarily on a non-sales type basis. InstrumentRevenue from the sale or lease of capital equipment is recognized when we transfer control to the customer, which is generally at the point when acceptance occurs that indicates customer acknowledgment of delivery or installation, depending on the terms of the arrangement. Revenue from sales and leasing revenue leases of surgical instrument sets and capital equipment represent an immaterial amount of our total revenue.revenue in all periods presented. Revenue associated with products holding rights of return or trade-in are recognized when we conclude there is not a risk of significant revenue reversal in future periods for the expected consideration in the transaction. Our costs incurred associated with sales contracts with customers are deferred over the performance obligation period and recognized in the same period as the related revenue, with the exception of contracts that complete within one year or less, in which case the associated costs are expensed as incurred.
Allowance for Doubtful AccountsCredit Losses and Sales Return Reserveand Pricing Reserves
We maintain an allowance for doubtful accounts for estimatedcredit losses resulting from the inability of our customers, including hospitals, ambulatory surgery centers, and distributors, to make required payments. The allowance for doubtful accountscredit losses is reviewedcalculated quarterly, and is estimated based on the aginga region-by-region basis considering a number of factors including age of account balances, collection history, historical account write-offs, third party credit reports, identified trends, current economic conditions, and known trends with current customers and in the economy in general. As a result of this review, thesupportable forecasted economic expectations. The allowance is adjusted on a specific identification basis for significantcertain accounts and a general reserve approach for non-significant accounts. We also review the overall quality and ageas well as pooling of those invoices not specifically identified. In determiningaccounts with similar characteristics. An increase in the provision for invoices not specifically reviewed, we analyze historicalcredit losses may be required when the financial condition of our customers or their collection experience and current economic trends.deteriorates. An increase to the allowance for doubtful accountscredit losses results in a corresponding charge to sales, marketingselling, general and administrative expenses. If the historical data used to calculate the allowance provided for doubtful accounts does not reflect our future ability to collect outstanding receivables or if the financial condition of customers were to deteriorate, resulting in impairment of their ability to make payments, an increase in the provision for doubtful accounts may be required. We maintainhave a relatively largediverse customer base that mitigates the riskand no single customer represented greater than ten percent of concentration with any one particular customer. net sales or accounts receivable. Historically, our reserves have been adequate to cover credit losses.
Our exposure to credit losses may increase if our customers are adversely affected by changes in healthcare laws, coverage and reimbursement, economic pressures or uncertainty associated with local or global economic recessions, disruption associated with the current COVID-19 pandemic, or other customer-specific factors. It is possible that there could be a material adverse impact from potential adjustments of the carrying amount of trade receivables as customers’ cash flows are impacted by their response to the COVID-19 pandemic and the deferral of elective surgical procedures.
In addition, we establish a liability for estimated sales returns and a reserve for price adjustments that are recorded as a reduction to revenue.net sales. The liability and reserve are maintained to account for future product returns and price adjustments of products sold in the current period. This reserve is reviewed quarterly and is estimated based on an analysis of our historical experience and expected future trends. Historically, our reserves have been adequate to account for returns and pricing adjustments.
Inventory, net
Net inventory as of December 31, 20182020 consisted of $259.4$285.4 million of finished goods, $5.0$7.3 million of work in progress and $8.8$7.9 million of raw materials. Net inventory as of December 31, 20172019 consisted of $232.3$298.7 million of finished goods, $9.8$6.4 million of work in progress, and $5.0$7.3 million of raw materials.
Finished goods includeprimarily consists of specialized implants, fixation products and disposables and are stated at the lower of cost or marketnet realizable value determined by utilizing a standard cost method, which includes assessment of capitalized variances, which approximates the weighted average cost. Work in progress and raw materials represent the underlying material, and labor for work in progress, that ultimately yield finished goods upon completion and are stated atsubject to lower of cost or market.net realizable value. We review the components of our inventory on a periodic basis for excess and obsolescence and adjust inventory to its net realizable value as necessary.
Excess and Obsolete Inventory
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We providerecord an inventory reserve for estimated obsolescenceexcess and excessobsolete inventory based upon historical turnover and assumptions about future demand for our products and market conditions. Our allograft products have shelf lives ranging from two to five years and are subject to demand fluctuations based on the availability and demand for alternative products. Our inventory, which consists primarily of disposables, and specialized implants and fixation products, is at risk of obsolescence following the introduction and development of new or enhanced products. One of our strategic objectives is to continue to rapidly develop and commercialize new products and product enhancements which increases the risk that existing products will become obsolete prior to the end of their anticipated useful life. Our estimates and assumptions for excess and obsolete inventory are reviewed and updated on a quarterly basis. The estimates we use for demand are also used for near-term capacity planning and inventory purchasing and are consistent with our revenuenet sales forecasts. Increases in the reserve for excess and obsolete inventory result in a corresponding charge to cost of products sold. Historicallysales.
For the year ended December 31, 2020 and December 31, 2019, we recorded a reserve for excess and obsolete inventory of $48.9 million and $14.0 million, respectively. The increase is primarily attributable to updates to our reservesestimates and assumptions about future product demand and product life cycles which have been adequate to cover losses.affected by multiple factors, including the COVID-19 pandemic and general market conditions.
A stated goal of our business is to focus on continual product innovation and to obsolete our own products. While this provides a competitive edge, it also results in the risk that our products and related capital instruments will become obsolete prior to sale or to the end of their anticipated useful lives.
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Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value and requires us to establish a framework for measuring fair value and disclosure about fair value measurements. The framework requires the valuation of assets and liabilities subject to fair value measurements using a three tiered approach and fair value measurement be classified and disclosed in one of the following three categories. Inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions.
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available.
Carrying value of the financial instruments measured and classified within Level 1 is based on quoted prices.
The types of instruments that trade in markets that are not considered to be active, but are valued based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency are generally classified within Level 2 of the fair value hierarchy.
Certain contingent consideration liabilities are classified within Level 3 of the fair value hierarchy because they use unobservable inputs. For those liabilities, fair value is determined using a discounted cash flow model or probability simulation model. The significant inputs of such models that are not observable in the market include financial metric growth rates, volatility rates, projections associated with milestones, the discount rate, and the related probabilities and payment structure in the contingent consideration arrangement.
Valuation of Goodwill and Intangible Assets with Indefinite Lives
Our goodwill represents the excess of the cost over the fair value of net assets acquired from our business combinations. The determination of the value of goodwill and intangible assets arising from business combinations and asset acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired, including capitalized in-process research and development, or IPR&D. Intangible assets acquired in a business combination that are used for IPR&D activities are considered indefinite lived until the completion or abandonment of the associated research and development efforts. Upon commercialization of the relevant research and development project, we will amortize the acquired in-process research and development over its estimated useful life or expense the acquired in-process research and development should the research and development project be unsuccessful with no future alternative use.
Goodwill and IPR&D are not amortized; however, they are assessed for impairment using fair value measurement techniques on an annual basis or more frequently if facts and circumstance warrant such a review. The goodwill or IPR&D are considered to be impaired if we determine that the carrying value of the reporting unit or IPR&D exceeds its respective fair value.
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We perform our goodwill impairment analysis at the reporting unit level, which aligns with our reporting structure and availability of discrete financial information. We perform our annual impairment analysis by either doing a qualitative assessment of a reporting unit’s fair value from the last quantitative assessment to determine if there is potential impairment, or comparing a reporting unit’s estimated fair value to its carrying amount. We may do a qualitative assessment when the results of the previous quantitative test indicated the reporting unit’s estimated fair value was significantly in excess of the carrying value of its net assets and we do not believe there have been significant changes in the reporting unit’s operations that would significantly decrease its estimated fair value or significantly increase its net assets. If a quantitative assessment is performed the evaluation includes management estimates of cash flow projections based on internal future projections and/or use of a market approach by looking at market values of comparable companies. Key assumptions for these projections include revenuenet sales growth, future gross and operating margin growth, and its weighted cost of capital and terminal growth rates. The revenuenet sales and margin growth is based on increased sales of new and existing products as we maintain our investment in research and development. Additional assumed value creators may include increased efficiencies from capital spending. The resulting cash flows are discounted using a weighted average cost of capital. Operating mechanisms and requirements to ensure that growth and efficiency assumptions will ultimately be realized are also considered in the evaluation, including timing and probability of regulatory approvals for our products to be commercialized. Our market capitalization is also considered as a part of this analysis.
Our annual evaluation for impairment of goodwill consists of one reporting unit. In accordance with our policy, we completed our most recent annual evaluation for impairment as of October 1, 20182020 using the qualitative method and determined that no impairment existed. In addition, no indicators of impairments were noted through December 31, 20182020 and consequently, no impairment charge was recorded during the year.
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Valuation of Intangible Assets
Our intangible assets are comprised primarily of purchased technology, customer relationships, manufacturing know-how and trade secrets, and trade name and trademarks. We make significant judgments in relation to the valuation of intangible assets resulting from business combinations and asset acquisitions.
Intangible assets are generally amortized on a straight-line basis over their estimated useful lives of 12 to 17 years. We base the useful lives and related amortization expense on the period of time we estimate the assets will generate revenuesnet sales or otherwise be used by the Company.used. We also periodically review the lives assigned to our intangible assets to ensure that our initial estimates do not exceed any revised estimated periods from which we expect to realize cash flows from the technologies. If a change were to occur in any of the above-mentioned factors or estimates, the likelihood of a material change in our reported results would increase.
We evaluate our intangible assets with finite lives for indications of impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that could trigger an impairment review include significant under-performance relative to expected historical or projected future operating results, significant changes in the manner of our use of the acquired assets or the strategy for our overall business or significant negative industry or economic trends. If this evaluation indicates that the value of the intangible asset may be impaired, we make an assessment of the recoverability of the net carrying value of the asset over its remaining useful life. If this assessment indicates that the intangible asset is not recoverable, based on the estimated undiscounted future cash flows of the technology over the remaining amortization period, we reduce the net carrying value of the related intangible asset to fair value and may adjust the remaining amortization period.
Significant judgment is required in the forecasts of future operating results that are used in the discounted cash flow valuation models. It is possible that plans may change and estimates used may prove to be inaccurate. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges.
Valuation of Stock-Based Compensation
Stock-based compensation expense for equity-classified awards, principally related to restricted stock units, or RSUs, and performance restricted stock units, or PRSUs, is measured at the grant date based on the estimated fair value of the award. The fair value of equity instruments that are expected to vest is recognized and amortized over the requisite service period. We have granted awards with up to five year graded or cliff vesting terms (in each case, with service through the date of vesting being required). terms. No exercise price or other monetary payment is required for receipt of the shares issued in settlement of the respective award; instead, consideration is furnished in the form of the participant’s service to the Company.service.
The fair value of RSUs including PRSUs with pre-defined performance criteria is based on the stock price on the date of grant whereas the expense for PRSUPRSUs with pre-defined performance criteria is adjusted with the probability of achievement of such performance criteria at each period end. The fair value of the PRSUs that are earned based on the achievement of pre-defined market conditions for total shareholder return, is estimated on the date of grant using a Monte Carlo valuation model. The key assumptions in applying this model are an expected volatility and a risk-free interest rate.
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Stock-based compensation expense is adjusted from the grant date to exclude expense for awards that are expected to be forfeited. The forfeiture estimate is adjusted as necessary through the vesting date so that full compensation cost is recognized only for awards that vest. We assess the reasonableness of the estimated forfeiture rate at least annually, with any change to be made on a cumulative basis in the period the estimated forfeiture rates change. We considered our historical experience of pre-vesting forfeitures on awards by each homogenous group of shareownersemployees as the basis to arrive at our estimated annual pre-vesting forfeiture rates.
We estimate the fair value of stock options issued under our equity incentive plans and shares issued to shareownersemployees under our employee stock purchase plan, or ESPP, using a Black-Scholes option-pricing model on the date of grant. The Black-Scholes option-pricing model incorporates various and highly sensitive assumptions including expected volatility, expected term and risk-free interest rates. The expected volatility is based on the historical volatility of our common stock over the most recent period commensurate with the estimated expected term of our stock options and ESPP offering period which is derived from historical experience. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield in effect at the time of grant. We have never declared or paid dividends and have no plans to do so in the foreseeable future.
Stock-based compensation expense was $25.7 million, $22.4 million, and $26.9 million for 2018, 2017, and 2016, respectively. Stock-based compensation expense increased $3.3 million in 2018 compared to 2017. Stock-based compensation expense decreased $4.5 million in 2017 compared to 2016. The decreased expense in 2017 was primarily attributed to an increase in award forfeitures, including forfeitures on awards held by certain executives who exited the Company during 2017.
As of December 31, 2018, there was approximately $25.1 million and $14.4 million of unrecognized compensation expense for RSUs and PRSUs, respectively, which is expected to be recognized over a weighted-average period of approximately 1.9 years and 2.6 years, respectively. In addition, as of December 31, 2018, there was $0.9 million of unrecognized compensation expense for shares expected to be issued under the ESPP which is expected to be recognized through April 2019. There was no unrecognized amortization expense for stock options as of December 31, 2018.
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The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Tax law and rate changes are reflected in income in the period such changes are enacted. We include interest and penalties related to income taxes, including unrecognized tax benefits, within income tax expense.
During 2018 we completed our tax accounting in connection with the Tax Cuts and Jobs Act (the “Act”) which was enacted into law on December 22, 2017. In 2018, we recorded approximately $0.3 million of tax expense attributable to 2017 during the Staff Accounting Bulletin 118 measurement period, which would have increased the 2017 effective tax rate by 0.5%. We have elected an accounting policy to treat the tax impact of the global intangible low taxed income provision of the Act as a future period charge rather than a current component of deferred taxes.
Our income tax returns are based on calculations and assumptions that are subject to examination by the Internal Revenue Service and other tax authorities. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. While we believe we have appropriate support for the positions taken on our tax returns, we regularly assess the potential outcomes of examinations by tax authorities in determining the adequacy of our provision for income taxes. We continually assess the likelihood and amount of potential revisions and adjust the income tax provision, income taxes payable and deferred taxes in the period in which the facts that give rise to a revision become known.
Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and the valuation allowance recorded against our net deferred tax assets. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized. A valuation allowance is established when it is more likely than not the future realization of all or some of the deferred tax assets will not be achieved. The evaluation of the need for a valuation allowance is performed on a jurisdiction-by-jurisdiction basis, and includes a review of all available positive and negative evidence. Factors reviewed include projections of pre-tax book income for the foreseeable future, determination of cumulative pre-tax book income after permanent differences, earnings history, and reliability of forecasting.
Based on our review, we concluded that it was more likely than not that we would be able to realize the future benefits of our domestic and foreign deferred tax assets, with the exceptions of the state of California, Malta, Mexico, Brazil and Brazil.Colombia. This conclusion was based on historical and projected operating performance, as well as our expectation that our operations will generate sufficient taxable income in future periods to realize the tax benefits associated with the deferred tax assets well within the statutory carryover periods. Due to low state apportionment, large net operating losses and the generation of sizeable research credits in California, we concluded that it is not more likely than not that we will be able to utilize our California deferred tax assets. Therefore, we have maintained a full valuation allowance on our California deferred tax assets as of December 31, 2018.2020. Due to a history of losses in Malta, Mexico, Brazil and Brazil,Colombia, and the lack of alternative sources of future taxable income, we have established a full valuation allowance against these entities’ deferred tax assets as of December 31, 2018. 2020.
We will continue to assess the need for a valuation allowance on our deferred tax assets by evaluating both positive and negative evidence that may exist. Any adjustment to the net deferred tax asset valuation allowance would be recorded in the statement of operations for the period that the adjustment is determined to be required.
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Legal Proceedings
We are involved in a number of legal actions and investigations arising out of the normal course of our business. The outcomes of these legal actions and investigations are not within our complete control and may not be known for prolonged periods of time. In some actions, the claimants seek damages as well as other relief, including injunctions barring the sale of products that are the subject of the lawsuit, that could require significant expenditures or result in lost revenues.net sales. In accordance with authoritative guidance, we disclose information regarding each material claim where the likelihood of a material loss contingency is probable or reasonably possible. An estimated loss contingency is accrued in our financial statements if it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. If a loss is reasonably possible and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the Consolidated Financial Statements. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded. Our significant legal proceedings and investigations are discussed in Note 10Notes 12 to the Consolidated Financial Statements included in this Annual Report.
The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP. See our Consolidated Financial Statements and Notes thereto included in this Annual Report, which contain accounting policies and other disclosures required by GAAP.
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RevenueNet Sales
|
| Year Ended December 31, |
|
| 2017 to 2018 |
|
| 2016 to 2017 |
| |||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| $ Change |
|
| % Change |
|
| $ Change |
|
| % Change |
| |||||||
|
| (Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Spinal Hardware |
| $ | 788,650 |
|
| $ | 737,534 |
|
| $ | 683,703 |
|
| $ | 51,116 |
|
|
| 7 | % |
| $ | 53,831 |
|
|
| 8 | % |
Surgical Support |
|
| 313,064 |
|
|
| 289,151 |
|
|
| 278,429 |
|
|
| 23,913 |
|
|
| 8 | % |
|
| 10,722 |
|
|
| 4 | % |
Total revenue |
| $ | 1,101,714 |
|
| $ | 1,026,685 |
|
| $ | 962,132 |
|
| $ | 75,029 |
|
|
| 7 | % |
| $ | 64,553 |
|
|
| 7 | % |
|
| Year Ended December 31, |
|
| 2019 to 2020 |
|
| 2018 to 2019 |
| |||||||||||||||||||
(in thousands, except %) |
| 2020 |
|
| 2019 |
|
| 2018 |
|
| $ Change |
|
| % Change |
|
| $ Change |
|
| % Change |
| |||||||
Spinal hardware |
| $ | 783,510 |
|
| $ | 851,440 |
|
| $ | 788,649 |
|
| $ | (67,930 | ) |
|
| (8 | )% |
| $ | 62,791 |
|
|
| 8 | % |
Surgical support |
|
| 267,072 |
|
|
| 316,630 |
|
|
| 313,065 |
|
|
| (49,558 | ) |
|
| (16 | )% |
|
| 3,565 |
|
|
| 1 | % |
Total net sales |
| $ | 1,050,582 |
|
| $ | 1,168,070 |
|
| $ | 1,101,714 |
|
| $ | (117,488 | ) |
|
| (10 | )% |
| $ | 66,356 |
|
|
| 6 | % |
Our spinal hardware product line offerings include our implants and fixation products. Our surgical support product line offerings include IOMIONM services, disposables and biologics, and our capital equipment, all of which are used to aid spinalspine surgery.
The continued adoption of minimally invasive procedures for spine has led to the expansion of our procedure volume. In addition, increased market acceptance in our international markets contributed to the increase in revenues for the periods presented. We expect continued adoption of our innovative minimally invasive procedures and deeper penetration into existing accounts and international markets as our sales force executes on our strategy of selling the full mix of our products and services. However, the continued consolidation and increased purchasing power of our hospital customers and group purchasing organizations, the continued existence of physician-owned distributorships, continued changes in the public and private insurance markets regarding reimbursement, and ongoing policy and legislative changes in the United States have created less predictability in the lumbar portion of the spine market. predictability. Although the market for procedurally-integrated spine surgery solutions should continue to grow over the long term, economic, political and regulatory influences are subjecting our industry to significant changes that may slow the growth rate of the spine surgery market. Our growthmarket. Further, the COVID-19 pandemic has led to a significant reduction in revenueprocedural volumes in 20192020, and it is expectednot possible for us to come primarily from market share gains inaccurately predict the shift toward less invasive spinal surgery, revenue from new productslength or severity of the COVID-19 pandemic or the timing for a broad and services, and international growth.sustained resumption of elective surgical procedures.
Our total revenues increased $75.0net sales decreased $117.5 million in 20182020 compared to 2017 and $64.62019, representing total net sales decline of 10%. In 2019 our total net sales increased $66.4 million in 2017 compared to 2016,2018, representing total revenuenet sales growth of 6%.
Net sales from our spinal hardware product line offerings decreased $67.9 million, or 8%, in 2020 compared to 2019. Product volume in spinal hardware decreased our net sales by approximately 7% in both years. To date, foreign currency fluctuations have not materially impacted our overall revenues2020 compared to 2019, primarily due to a reduction in elective surgeries as a percentageresult of growth year over year.the COVID-19 pandemic. Additionally, we experienced unfavorable pricing impacts of approximately 1% in 2020 compared to 2019. Foreign currency fluctuation from 2019 to 2020 did not have a material impact on spinal hardware net sales.
RevenueNet sales from our spinal hardware product line offerings increased $51.1$62.8 million, or 7%8%, in 20182019 compared to 2017.2018. Product volume for our spinal hardware business increased our revenuenet sales by approximately 9%11%, offset by unfavorable pricing impacts of approximately 2% for the year ended December 31, 2018,in 2019, as compared to 2017. 2018. Foreign currency fluctuation decreased our spinal hardware net sales by approximately 1% in 2019 compared to 2018.
Net sales from our surgical support product line offerings decreased $49.6 million, or 16%, in 2020 compared to 2019. Product and service volume in surgical support decreased our net sales by approximately 15% in 2020 compared to 2019, primarily due to a reduction in elective surgeries as a result of the COVID-19 pandemic. Additionally, we experienced unfavorable pricing impacts of approximately 1% in 2020 compared to 2019. Foreign currency fluctuation from 20172019 to 20182020 did not have a material impact on spinal hardware revenue.surgical support net sales.
Revenue from our spinal hardware product line offerings increased $53.8 million, or 8%, in 2017 compared to 2016. Revenue associated with our 2016 acquisitions accounted for approximately 1% of the increase in spinal hardware revenue for the year ended December 31, 2017. Product volume for our spinal hardware business, excluding the impact from our 2016 acquisitions, increased our revenue by approximately 10%, offset by unfavorable changes in price of approximately 3% for the year ended December 31, 2017, as compared to 2016. Foreign currency fluctuation from 2016 to 2017 did not have a material impact on spinal hardware revenue
Revenue from our spinal hardware product line offerings for the year ended December 31, 2016 included a $4.8 million purchase order, which did not recur during the year ended December 31, 2017, from an organization established by certain former stockholders of Ellipse Technologies with their stated purpose to be donated for use in spinal deformity procedures for children in underprivileged communities.
RevenueNet sales from our surgical support product line offerings increased $23.9$3.6 million, or 8%1%, in 20182019 compared to 2017. Revenue associated with our 2018 acquisitions accounted for approximately 7% of the increase in surgical support revenue for the year ended December 31, 2018, as compared to 2017.2018. Product and service volume for our surgical support business excluding the impact from our 2018 acquisitions, increased our revenuenet sales by approximately 3% for the year ended December 31, 2018,2% in 2019, offset by unfavorable pricing impacts of approximately 2% for the year ended December 31, 2018,1% in 2019, as compared to 2017. 2018. Foreign currency fluctuation from 20172018 to 20182019 did not have a material impact on surgical support revenue.
Revenue from our surgical support product line offerings increased $10.7 million, or 4%, in 2017 compared to 2016. Revenue associated with our 2016 acquisitions accounted for approximately 10% of the increase in surgical support revenue for the year ended December 31, 2017, as compared to 2016. Product and service volume for our surgical support business, excluding the impact from our 2016 acquisitions, decreased our revenue by approximately 3% for the year ended December 31, 2017, as compared to 2016. We also realized unfavorable changes in price of approximately 3% which includes lower reimbursement rates on our IOM services for the year ended December 31, 2017, as compared to 2016. Foreign currency fluctuation from 2016 to 2017 did not have a material impact on surgical support revenue.net sales.
5156
Cost of Revenue,Sales, Excluding Below Amortization of Intangible Assets
|
| Year Ended December 31, |
|
| 2017 to 2018 |
|
| 2016 to 2017 |
| |||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| $ Change |
|
| % Change |
|
| $ Change |
|
| % Change |
| |||||||
|
| (Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Cost of revenue |
| $ | 311,159 |
|
| $ | 268,441 |
|
| $ | 240,105 |
|
| $ | 42,718 |
|
|
| 16 | % |
| $ | 28,336 |
|
|
| 12 | % |
% of total revenue |
|
| 28 | % |
|
| 26 | % |
|
| 25 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended December 31, |
|
| 2019 to 2020 |
|
| 2018 to 2019 |
| |||||||||||||||||||
(in thousands, except %) |
| 2020 |
|
| 2019 |
|
| 2018 |
|
| $ Change |
|
| % Change |
|
| $ Change |
|
| % Change |
| |||||||
Cost of sales |
| $ | 321,631 |
|
| $ | 312,357 |
|
| $ | 311,159 |
|
| $ | 9,274 |
|
|
| 3 | % |
| $ | 1,198 |
|
|
| 0 | % |
% of total net sales |
|
| 31 | % |
|
| 27 | % |
|
| 28 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenuesales consists primarily of purchased goods, raw materials, labor and overhead associated with product manufacturing, inventory-related costs and royalty expenses, as well as the cost of providing IOMIONM services, which includes personnel and physician oversight costs. We primarily procure and manufacture our goods in the United States, and accordingly, foreign currency fluctuations have not materially impacted our cost of revenue.sales.
Cost of sales increased $9.3 million, or 3%, in 2020 compared to 2019. However, cost of sales as a percentage of net sales in 2020 increased by 4% compared to 2019. The increase in cost of sales in 2020 is due to an increase in the reserve for excess and obsolete inventory of $35.0 million, which is primarily attributable to updates to our estimates and assumptions about future demand for certain spinal hardware products associated with market conditions affected by the COVID-19 pandemic. Offsetting this increase is a proportional reduction in cost of sales associated with lower net sales due to a reduction in elective surgeries as a result of the COVID-19 pandemic.
Cost of revenue sales increased $42.7$1.2 million or 16%, during the year ended December 31, 2018,2019, compared to 2017. The cost of revenue associated with the operations of our 2018 acquisitions accounted for approximately 4% of the total increase during the year ended December 31, 2018, compared to 2017. 2018. Cost of revenue sales for our business excluding our 2018 acquisitions, increased primarily due to growth in volume, additional excesschanges in product mix, and obsolete inventory reserve,shifts in production costs, offset by favorable manufacturing absorption from in-sourced products and production related costs, for an overall increase of approximately 12% during the year ended December 31, 2018,improved throughput and plant efficiencies in 2019, compared to 2017.2018.
Cost of revenue increased $28.3 million, or 12%, during the year ended December 31, 2017, compared to 2016. The cost of revenue associated with the operations of our 2016 acquisitions accounted for approximately 9% of the total increase during the year ended December 31, 2017, compared to 2016. Cost of revenue for our business, excluding our 2016 acquisitions, increased primarily due to growth in volume, but also includes unfavorable shifts in inventory costing and product mix, for an overall increase of approximately 11% for the year ended December 31, 2017. These increases were partially offset by royalty obligations for certain product lines and other non-recurring inventory related items, including write-offs and reserves from both manufacturing and obsolescing products, which accounted for approximately a 2% decrease to cost of revenue for the year ended December 31, 2017, compared to 2016. The year ended December 31, 2017 did not include the non-recurring inventory expense associated with the purchase accounting for our acquisition of Ellipse Technologies, which accounted for 6% of total cost of revenue in 2016.
On a long-term basis, we expect cost of revenue, as a percentage of revenue, to decrease moderately due to our manufacturing insourcing efforts.
52
|
| Year Ended December 31, |
|
| 2017 to 2018 |
|
| 2016 to 2017 |
|
| Year Ended December 31, |
|
| 2019 to 2020 |
|
| 2018 to 2019 |
| ||||||||||||||||||||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| $ Change |
|
| % Change |
|
| $ Change |
|
| % Change |
| |||||||||||||||||||||||||||||||||||
|
| (Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Sales, marketing, and administrative |
| $ | 575,836 |
|
| $ | 539,507 |
|
| $ | 533,600 |
|
| $ | 36,329 |
|
|
| 7 | % |
| $ | 5,907 |
|
|
| 1 | % | ||||||||||||||||||||||||||||
% of total revenue |
|
| 52 | % |
|
| 53 | % |
|
| 55 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
(in thousands, except %) |
| 2020 |
|
| 2019 |
|
| 2018 |
|
| $ Change |
|
| % Change |
|
| $ Change |
|
| % Change |
| |||||||||||||||||||||||||||||||||||
Selling, general and administrative |
| $ | 547,195 |
|
| $ | 611,181 |
|
| $ | 575,836 |
|
| $ | (63,986 | ) |
|
| (10 | )% |
| $ | 35,345 |
|
|
| 6 | % | ||||||||||||||||||||||||||||
% of total net sales |
|
| 52 | % |
|
| 52 | % |
|
| 52 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Research and development |
|
| 61,695 |
|
|
| 50,425 |
|
|
| 47,999 |
|
|
| 11,270 |
|
|
| 22 | % |
|
| 2,426 |
|
|
| 5 | % |
|
| 79,838 |
|
|
| 72,380 |
|
|
| 61,695 |
|
|
| 7,458 |
|
|
| 10 | % |
|
| 10,685 |
|
|
| 17 | % |
% of total revenue |
|
| 6 | % |
|
| 5 | % |
|
| 5 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
% of total net sales |
|
| 8 | % |
|
| 6 | % |
|
| 6 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Amortization of intangibles |
|
| 50,670 |
|
|
| 48,039 |
|
|
| 42,001 |
|
|
| 2,631 |
|
|
| 5 | % |
|
| 6,038 |
|
|
| 14 | % |
|
| 51,726 |
|
|
| 51,097 |
|
|
| 50,670 |
|
|
| 629 |
|
|
| 1 | % |
|
| 427 |
|
|
| 1 | % |
Purchase of in-process research and development |
|
| 8,913 |
|
|
| — |
|
|
| — |
|
|
| 8,913 |
|
| * |
|
|
| — |
|
|
| — |
|
|
| 1,011 |
|
|
| — |
|
|
| 8,913 |
|
|
| 1,011 |
|
| * |
|
|
| (8,913 | ) |
|
| (100 | )% | ||
Litigation liability loss (gain) |
|
| 27,800 |
|
|
| 4,500 |
|
|
| (43,310 | ) |
|
| 23,300 |
|
|
| 518 | % |
|
| 47,810 |
|
|
| 110 | % | ||||||||||||||||||||||||||||
Litigation liability loss |
|
| — |
|
|
| — |
|
|
| 27,800 |
|
|
| — |
|
| * |
|
|
| (27,800 | ) |
|
| (100 | )% | |||||||||||||||||||||||||||||
Business transition costs |
|
| 11,473 |
|
|
| 4,287 |
|
|
| 18,138 |
|
|
| 7,186 |
|
|
| 168 | % |
|
| (13,851 | ) |
|
| 76 | % |
|
| 10,878 |
|
|
| (1,995 | ) |
|
| 11,473 |
|
|
| 12,873 |
|
|
| 645 | % |
|
| (13,468 | ) |
|
| (117 | )% |
Sales, MarketingSelling, General and Administrative
Sales, marketingSelling, general and administrative expenses consist primarily of compensation costs, commissions and training costs for our employees (who we refer to as “shareowners”) engaged in sales, marketing and customer support functions. The expense also includes commissions to sales representatives, freight expenses, surgeon training costs, depreciation expense for property and equipment such as surgical instrument sets, and administrative expenses for both shareownersemployees and third partythird-party service providers.
Sales, marketingSelling, general and administrative expenses increaseddecreased by $36.3$64.0 million, or 7%10%, in 2020 compared to 2019. The decrease in 2020 is primarily due to impacts from the COVID-19 pandemic reducing compensation costs, including stock-based compensation subject to fair value adjustments for certain equity awards, as well as decreases in travel and consulting expenses, as compared to 2019. Additionally, during the year ended December 31, 2018, compared2020, due to 2017. The increasethe impacts from the COVID-19 pandemic we implemented temporary actions to reduce expenses, including implementing compensation reductions for our Board of Directors and executive officers, and reducing discretionary spend across the organization.
Selling, general and administrative expenses increased by $35.3 million, or 6%, during the year ended December 31, 20182019 as compared to 2018. The increase in 2019 is primaryprimarily due to increased shareowneremployee compensation and other expenses resulting fromassociated with increased headcount, as compared to 2017. Other costswell as expenses that increased as a function of the increase in revenuenet sales and international expansion, includedsuch as equipment, freight, and facility related expenses, as compared to 2018. Stock-based compensation expense increased in 2019 as compared to 2018 due to higher fair value adjustments to certain equity awards that are subject to revaluation on a recurring basis based on stock price performance. These costs were partially offset by decreases in non-recurring consulting travel, equipment and freight.fees associated with the implementation of our state tax-planning strategy, which occurred during 2018. Additionally, during the year ended December 31, 2018, legal expenses increased compared to 2017 due to the ongoing litigation with a former Board member and his current employer related to various matters, including infringement of our intellectual property. Sales, marketing and administrative2019 there was an increase in expenses associated with our 2018 acquisitions, which is included incompliance efforts with the results discussed herein, accounted for approximately 1%EU Medical Device Regulation, and legal expenses.
57
Sales, marketing and administrative expenses increased by $5.9 million, or 1%, during the year ended December 31, 2017 as compared to 2016 due to increases in shareowner compensation and other expenses resulting from increased headcount, offset by the reversal of stock-based compensation expense previously recognized on unvested equity awards forfeited during the year. Other costs which increased as a function of the increase in revenue and expansion included consulting, facilities, travel and equipment, which were partially offset by decreased distributor commissions due to increased sales mix to our direct sales force in 2017 as compared to 2016 and decreased legal expense in 2017 due to the settlement of the Medtronic litigation in 2016. Sales, marketing and administrative expenses associated with our 2016 acquisitions, which are included in the results discussed herein, accounted for approximately 2% of the increase in sales, marketing and administrative expenses for the year ended December 31, 2017, compared to 2016.
Sales, marketing and administrative expenses as a percentage of revenue decreased during the year ended December 31, 2018 compared to 2017. On a long-term basis, we expect total sales, marketing and administrative costs, as a percentage of revenue, to decrease moderately. To date, foreign currency fluctuations have not materially impacted our sales, marketing and administrative expenses.
Research and Development
Research and development expense consists primarily of product research and development, clinical trial and study costs, regulatory and clinical functions, and compensation and other shareowneremployee related expenses. In the last several years, we have introduced numerous new products and product enhancements that have significantly expanded our MAS platform, including iGA,technology platforms and our comprehensive product portfolio. We have also acquired complementary and strategic assets and technology, particularly in the area of spinal hardware products. We continue to invest in research and development programs.programs related to our core product portfolio, as well as in our capital equipment.
Research and development expense increased by $11.3$7.5 million, or 22% during the year ended December 31, 2018,10%, in 2020 compared to the 2017. 2019, and $10.7 million, or 17%, in 2019 compared to 2018. The increase in spending is primarily due to increased headcount and increased spending forcost associated with further enhancement and functionality of our current and future product offerings, including Pulse, our surgical automation platform which we expect to commercially launch in 2019.capital equipment.
Research and development expense increased by $2.4 million, or 5%, in 2017 compared to 2016. The increase in spending is primarily due to increased headcount and increased spending for our integrated operative solutions technologies, partially offset by non-recurring research and development expenses associated with our 2016 acquisitions.
53
Research and development costs as a percentage of revenue increased as compared with the previous year. On a long-term basis, we expect total research and development costs as a percentage of revenue to increase in support of our ongoing development and regulatory approval efforts.
Amortization of Intangible Assets
Amortization of intangible assets relates to the amortization of finite-lived intangible assets acquired. Amortization expense increased $2.6 millionremained relatively constant in 20182020 compared to 2017, primarily due to our 20172019 and 2018 acquisitions. Amortization expense increased $6.0 million in 20172019 compared to 2016, primarily due to our 20162018.
Purchase of In-Process Research and 2017 acquisitions.Development
During the year ended December 31, 2018, we acquired $26.2 million in definite-lived intangible assets,2020 and began amortizing the assets over their respective useful lives.
We expect future amortization of our current intangible assets as a percentage of revenue to be relatively consistent, excluding future acquisitions.
Purchase of In-Process Research and Development
During the year ended December 31, 2018, we expensed $1.0 million and $8.9 million, respectively, for a purchased in-process research and development asset which had no future alternative use.
Litigation Liability Loss (Gain)
During the year ended December 31, 2018, we settled our ongoing litigationall outstanding matters with Madsen Medical, Inc. for $27.8 million. We paid the settlement amount and no longer have any remaining liability related to this matter as of December 31, 2018. See Note 10 to the Consolidated Financial Statements included in this Annual Report for further discussion.
During the year ended December 31, 2017, we paid $4.5 million for the settlement of fees associated with the outcome of the Medtronic litigation matter.
During the year ended December 31, 2016, we agreed to settle our ongoing litigation with Medtronic. As a result of the settlement, we paid $45.0 million to Medtronic and accordingly recorded a gain of $43.3 million related to the settlement by reducing our previous accrual of $88.3 million related to the matter.
Business Transition Costs
We incur certain costs related to acquisition, integration and business transition activities, which include severance, relocation, consulting, leasehold exit costs, third-party merger and acquisition costs, contingent consideration fair value adjustments and other costs directly associated with such activities. Contingent consideration is accrued based on the fair value of the expected payment, and such accruals are subject to increase or decrease based on the assessment of the likelihood that the contingent milestones will be achieved resulting in payment. If an accrual for contingent consideration decreases during a particular period, it results in a reduction of costs during such period.
We incurred $11.5During the year ended December 31, 2020, we recorded $10.9 million of such costs duringrelated to acquisition, integration and business transition activities, which included $2.3 million of fair value adjustments on contingent consideration liabilities associated with our 2018, 2017 and 2016 acquisitions.
During the year ended December 31, 2019, we recorded a reduction of costs of $(2.0) million related to acquisition, integration and business transition activities, which included $(6.3) million of fair value adjustments on contingent consideration liabilities associated with our 2018, 2017 and 2016 acquisitions.
During the year ended December 31, 2018, which consisted primarilywe recorded $11.5 million of costs related to acquisition, integration and business transition activities, but also includeswhich included $(1.5) million of fair value adjustments on contingent consideration liabilities associated with our 2018, 2017 and 2016 acquisitions.
During the year ended December 31, 2017, we incurred $4.3 million of business transition costs, which consisted primarily of acquisition and integration activities, and $(1.3) million of fair value adjustments on contingent consideration liabilities associated with our 2017 and 2016 acquisitions.
During the year ended December 31, 2016, we incurred $18.1 million of such costs, which consisted primarily of acquisition and integration activities, and $7.3 million of fair value adjustments on contingent consideration liabilities associated with our 2016 acquisitions.
54
Interest and Other Expense, Net
|
| Year Ended December 31, |
|
| 2017 to 2018 |
|
| 2016 to 2017 |
|
| Year Ended December 31, |
|
| 2019 to 2020 |
|
| 2018 to 2019 |
| ||||||||||||||||||||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| $ Change |
|
| % Change |
|
| $ Change |
|
| % Change |
| |||||||||||||||||||||||||||||||||||
|
| (Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
(in thousands, except %) |
| 2020 |
|
| 2019 |
|
| 2018 |
|
| $ Change |
|
| % Change |
|
| $ Change |
|
| % Change |
| |||||||||||||||||||||||||||||||||||
Interest income |
| $ | 586 |
|
| $ | 440 |
|
| $ | 1,091 |
|
| $ | 146 |
|
|
| 33 | % |
| $ | (651 | ) |
|
| 60 | % |
| $ | 1,472 |
|
| $ | 1,917 |
|
| $ | 586 |
|
| $ | (445 | ) |
|
| (23 | )% |
| $ | 1,331 |
|
|
| 227 | % |
Interest expense |
|
| (37,857 | ) |
|
| (38,021 | ) |
|
| (40,520 | ) |
|
| 164 |
|
|
| 0 | % |
|
| 2,499 |
|
|
| 6 | % |
|
| (70,466 | ) |
|
| (38,525 | ) |
|
| (37,857 | ) |
|
| (31,941 | ) |
|
| 83 | % |
|
| (668 | ) |
|
| 2 | % |
Loss on repurchases of convertible notes |
|
| — |
|
|
| — |
|
|
| (19,085 | ) |
|
| — |
|
|
| — |
|
|
| 19,085 |
|
|
| 100 | % | ||||||||||||||||||||||||||||
Other income (expense), net |
|
| (8,174 | ) |
|
| (1,542 | ) |
|
| (305 | ) |
|
| (6,632 | ) |
|
| 430 | % |
|
| (1,237 | ) |
|
| 406 | % | ||||||||||||||||||||||||||||
Other (expense) income, net |
|
| (16,854 | ) |
|
| (5,925 | ) |
|
| (8,174 | ) |
|
| (10,929 | ) |
|
| 184 | % |
|
| 2,249 |
|
|
| (28 | )% | ||||||||||||||||||||||||||||
Total interest and other expense, net |
| $ | (45,445 | ) |
| $ | (39,123 | ) |
| $ | (58,819 | ) |
| $ | (6,322 | ) |
|
| 16 | % |
| $ | 19,696 |
|
|
| 33 | % |
| $ | (85,848 | ) |
| $ | (42,533 | ) |
| $ | (45,445 | ) |
| $ | (43,315 | ) |
|
| 102 | % |
| $ | 2,912 |
|
|
| (6 | )% |
% of total revenue |
|
| 4 | % |
|
| 4 | % |
|
| 6 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
% of total net sales |
|
| 8 | % |
|
| 4 | % |
|
| 4 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and other expense, net for the year ended December 31, 2018 increased $6.3 million, compared to 2017 primarily due toperiods presented included gains and losses from strategic investments, foreign currency impacts,gains and losses from changes in the fair value of derivatives, our pro rata allocation of net income or loss from our equity method investments, during the year ended December 31, 2018.and net foreign currency exchange gains and losses.
Total interest and other expense, net for the year ended December 31, 2017 decreased $19.7increased by $43.3 million in 2020 compared to 2016,2019. The increase in 2020 is primarily due to a net loss of $19.1$12.3 million recognized duringfor the year ended December 31, 2016 related to the repurchase of a portion ofchange in fair value derivative assets and liabilities resulting from the Senior Convertible Notes due 2017. Additionally, we settled2023 issued in June 2020, as well as an increase in interest expense associated with the remaining Senior Convertible Notes due 2017 on July 1, 2017 resulting2025 issued in decreased interest expenseMarch 2020 and Senior Convertible Notes due 2023 issued in 2017.June 2020.
Total interest and other expense, net for the years presented also included gains and losses from derivative instruments and foreign currency impacts on settled receivables and payables.
58
Income Tax (Benefit) Expense
|
| Year Ended December 31, |
|
| 2017 to 2018 |
|
| 2016 to 2017 |
|
| Year Ended December 31, |
|
| 2019 to 2020 |
|
| 2018 to 2019 |
| ||||||||||||||||||||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| $ Change |
|
| % Change |
|
| $ Change |
|
| % Change |
| |||||||||||||||||||||||||||||||||||
|
| (Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
(in thousands, except %) |
| 2020 |
|
| 2019 |
|
| 2018 |
|
| $ Change |
|
| % Change |
|
| $ Change |
|
| % Change |
| |||||||||||||||||||||||||||||||||||
Income tax (benefit) expense |
| $ | (3,756 | ) |
| $ | (7,492 | ) |
| $ | 29,309 |
|
| $ | (3,736 | ) |
|
| 50 | % |
| $ | 36,801 |
|
|
| 126 | % |
| $ | (10,392 | ) |
| $ | 15,283 |
|
| $ | (3,756 | ) |
| $ | (25,675 | ) |
|
| (168 | )% |
| $ | 19,039 |
|
|
| 507 | % |
Effective income tax rate |
|
| 43 | % |
|
| 10 | % |
|
| 45 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 22 | % |
|
| 19 | % |
|
| 43 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income tax expense as a percentage of pre-tax incomeloss from continuing operations reflected a tax benefit of 43%22% for the year ended December 31, 20182020 compared with a tax benefitexpense of 10%19% on pre-tax income for the year ended December 31, 2017. The2019. Tax benefits contributing to the effective tax benefit was higherrate in 20182020 were lower than those contributing to the effective tax rate in 2019 primarily due to permanenthigher foreign income inclusion, an increase in non-deductible officer’s compensation expense, increased contingent consideration adjustments, and increased valuation allowances, offset by increased tax benefits from research credits,reserve releases, decrease in state taxes, and increased deferred tax planning related deductions and reorganization of its international intellectual property company structure. While the 2017 permanent tax benefits for worthless stock and U.S. tax reform were significantly larger than the permanent tax benefits realized in 2018, the percentage impact of the 2018 tax benefits were largerassets due to the lower pretax earnings in 2018.tax rate changes.
The provision for income tax expense as a percentage of pre-tax income from continuing operations reflected a tax benefitexpense of 10%19% for the year ended December 31, 20172019 compared with a tax expensebenefit of 45%43% on pre-tax income for the year ended December 31, 2016. The2018. Tax benefits contributing to the effective tax rate for 2017 isin 2019 were lower than 2016those contributing to the effective tax rate in 2018 primarily due to one-timereduced tax benefits from the worthless stock deductionexpiration of onestatute of our wholly-owned U.S. subsidiarieslimitations on uncertain tax positions, less favorable return to provision adjustments, and the revaluation of deferred taxes due to the enactment of U.S. tax reforman increase in 2017. In addition, during 2017, there were lower losses in jurisdictions where we do not receive benefit as well as lower non-deductible acquisition costs,officer’s compensation expense, offset by an increase in tax benefits associated with share-based payments, increase in research and development credit generation, and a reductiondecrease in share-based compensation windfall tax benefits.valuation allowances.
We are subject to audits by federal, state, local, and foreign tax authorities. We believe that adequate provisions have been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. Should any issues addressed in our tax audits be resolved in a manner not consistent with our expectations, we could be required to adjust our provision for income taxes in the period such resolution occurs.
We expect our future effective income tax rate to be in-line with the U.S federal and statutory income tax rates due to the large concentration of earnings in the U.S. and foreign statutory tax rates being, on average, comparable to that in the U.S. We continue to streamline our international operations, including procurement, logistics and customer service functions, in an effort to improve overall operational efficiencies. U.S. tax reform has lessened the tax benefit associated with foreign earnings due to a reduced federal corporate tax rate and the forced U.S. inclusion of certain foreign intangible related earnings. As international tax rules and regulations change, we may be subjected to higher taxes on foreign earnings.
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Liquidity, Cash Flows and Capital Resources
Liquidity and Capital Resources
Our principal sources of liquidity are our existing cash, cash equivalents and marketable securities, cash generated from operations, proceeds from our convertible notes issuances, and access to our revolving line of credit. We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, which include impacts from the COVID-19 pandemic, working capital requirements and capital deployment decisions. We have historically invested our cash primarily in the U.S. treasuries and government agencies, corporate debt, and money market funds. Certain of these investments are subject to general credit, liquidity and other market risks. The general condition of the financial markets and the economy may increase those risks and may affect the value and liquidity of investments and restrict our ability to access the capital markets.
Our future capital requirements will depend on many factors including our growth rate of revenue growth,in net sales, the timing and extent of spending to support development efforts, the expansion of sales, marketingselling, general and administrative activities, the timing of introductions of new products and enhancements to existing products, successful vertical integrationinsourcing of our manufacturing process, the continuing market acceptance of our products, the expenditures associated with possible future acquisitions or other business combination transactions, the outcome of current and future litigation, the evolution of our globalization initiative, and continuous international expansions of our business. Ourbusiness, and impacts from the COVID-19 pandemic. We expect our cash flowflows from operations and growing operations shouldto continue to fund the ongoing core business. As current borrowing sourcesborrowings become due, we may be required to access the capital markets or draw upon our line of credit for additional funding. As we assess inorganic growth strategies, we may need to supplement our internally generated cash flow with outside sources. In the event that we are required to access the debt market, we should be able to secure reasonable borrowing rates. As part of our liquidity strategy, we will continue to monitor our current level of earnings and cash flow generation as well as our ability to secure additional credit facilities, term loans, or other similar arrangements and access the marketcapital markets in light of those earning levels.levels and general financial market conditions.
59
A substantial portion of our operations are located in the United States, and the majority of our net sales and cash generation since inception have been made in the United States. Accordingly, we do not have material net cash flow exposures to foreign currency rate fluctuations. However, as our business in markets outside of the United States continues to increase, we will be exposed to foreign currency exchange risk related to our foreign operations. Fluctuations in the rate of exchange between the United States dollar and foreign currencies, primarily in the pound sterling, the euro, the Australian dollar, the Brazilian real, the Singapore dollar, and the yen, could adversely affect our financial results, including our revenues, revenuenet sales, growth rates in net sales, gross margins, income and losses as well as assets and liabilities. We enter into forward currency contracts to partially offset the impact from fluctuations of the foreign currency rates on our third partythird-party and short-term intercompany receivables and payables between our domestic and international operations. We currently do not hedge future forecasted transactions but will continue to assess whether that strategy is appropriate. AtAs of December 31 2018,, 2020, the cash balance held by our foreign subsidiaries with currencies other than the United States dollar was approximately $39.3$52.3 million and it is our intention to indefinitely reinvest all of our current foreign earnings in order to partially support foreignincrease working capital within our international business and to expand our existing operations outside the United States. As of December 31, 20182020, our account receivable balance held by our foreign subsidiaries with currencies other than the United States dollar was approximately $41.7$48.3 million. We have operations in markets in which there is governmental financial instability which could impact funds that flow into the medical reimbursement system. In addition, loss of financial stability within these markets could lead to delays in reimbursement or inability to remit payment due to currency controls. Specifically, we have operations and/or sales in Puerto Rico, Brazil Argentina and Venezuela.Argentina. We do not have any material financial exposure to one customer or one country that would significantly hinder our liquidity.
On August 31, 2015, we received a civil investigative demand, or CID, issued by the DOJ pursuant to the federal False Claims Act. The CID requires the delivery of a wide range of documents and information related to an investigation by the DOJ concerning allegations that we assisted a physician group customer in submitting improper claims for reimbursement and made improper payments to the physician group in violation of the Anti-Kickback Statute. We are cooperating withcurrently, and in the DOJ in regards to this matter. No assurance canfuture could be, given as to the timing or outcome of this investigation, and the probable outcome of this matter cannot be determined.
In May 2018, we settled all outstanding matters with Madsen Medical, Inc. for $27.8 million, which was funded by cash on hand and credit available under our revolving senior credit facility. We no longer have any remaining liability related to this matter. See Note 10 to the Consolidated Financial Statements included in this Annual Report for further discussion.
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We are involved in a number of legal actions and investigations arising out of the normal course of our business as discussed in Note 10 and Note 11 of the Consolidated Financial Statements included in this Annual Report.business. Due to the inherent uncertainties associated with pending legal actions and investigations, we cannot predict the outcome, and, with respect to certain pending litigation or claims where no liability has been accrued, to make a meaningful estimate of the reasonably possible loss or range of loss that could result from an unfavorable outcome, other than those matters disclosed in this Annual Report. We have no material accruals for pending litigation or claims for which accrual amounts are not disclosed in our Consolidated Financial Statements included in this Annual Report.Statements. It is reasonably possible, however, that an unfavorable outcome that exceeds our current accrual estimate if any, for onea particular legal proceeding or more of the matters described in our Consolidated Financial Statements included in this Annual Reportinvestigation could have a material adverse effect on our liquidity and access to capital resources. Additionally, it is possible that in connection with a legal proceeding or investigation we are required to pay fees and expenses of the other party or set aside funds in an escrow or purchase a performance bond, regardless of our assessment of the probability of a loss. These requirements to pay fees and expenses or escrow funding in connection with a legallegal proceeding or investigation could have an adverse impact on our liquidity or impactaffect our access to additional capital resources.
In 2018, we drew $100.0 million from our $500.0 million revolving senior credit facility to be used We have disclosed all material accruals for working capital, general corporate purposes, and strategic investments and acquisitions, including the acquisition of SafePassage, a privately-held provider of IOM services. We do not carry any outstanding amount under the revolving senior credit facility as of December 31, 2018.
On September 7, 2017, we completed an acquisition of a medical device company that developed interbody implants for spinal fusion using patented porous PEEK technology. In connection with the acquisition we recorded a purchase accounting fair value estimate of $31.4 million for contingent consideration liabilities related to the achievement of certain manufacturing and commercial milestones. We anticipate these milestones will become payable at varying times between 2019 and 2021, but are subject to change based on the achievement of those manufacturing and commercial milestones.
On August 28, 2017, we entered into a 17 year operating lease agreement for the purpose of expanding and restructuring our corporate headquarterspending litigation or investigations in San Diego, California, from approximately 145,000 square feet to approximately 252,000 square feet. The lease and its terms supersede the existing lease agreement with respect to the currently occupied office buildings comprising our corporate headquarters. The renovation and expansionNote 12 of the corporate headquarters is expected to be completedConsolidated Financial Statements included in three phases over a period of two years. The rental payments associated with the lease will total approximately $164.2 million over the 17 year term of the lease. Rental payments escalate annually at 3% for the term of the lease upon the anniversary of completion of each phase of expansion.this Annual Report.
On September 12, 2016, we completed an acquisition of an imaging software and technology platform known as LessRay.Lessray. In connection with the acquisition, we recorded a purchase accounting fair value estimate of $34.1 million for contingent consideration liabilities related to the achievement of certain regulatory and commercial milestones. In January 2018, we paid $9.0 million of the outstanding contingent consideration liabilities for the achievement of a commercial milestone. In July 2018, we paid $10.0 million of the outstanding contingent consideration liabilities for the achievement of a regulatory approval milestone. We anticipate the remaining sales-based milestones will become payable at varying times by 2024.
On September 7, 2017, we completed an acquisition of a medical device company that developed interbody implants for spinal fusion using patented porous PEEK technology. In connection with the acquisition, we recorded a purchase accounting fair value estimate of $31.4 million for contingent consideration liabilities related to the achievement of certain manufacturing and commercial milestones. In May 2020, we paid $7.5 million toward the successful achievement of a milestone. We anticipate the remaining milestones will become payable at varying times between 20222021 and 2023.2024, but are subject to change based on the achievement of those manufacturing and commercial milestones.
On February 24, 2021, we completed the acquisition of Simplify Medical Pty Limited, or Simplify Medical, a developer of cervical artificial disc technology for cervical total disc replacement procedures. Pursuant to the terms of the definitive agreement, we agreed to make an upfront payment of $150.0 million at closing, subject to customary purchase price adjustments, plus additional future payments contingent upon milestones related to regulatory approval and net sales from products incorporating the Simplify Medical cervical artificial disc technology. In connection with the closing, we funded the $150.0 million upfront payment using available cash and investments on hand. Upon achievement of the regulatory milestone, Simplify Medical will be entitled to a one-time payment of up to $45.9 million which could become due and payable at any time between 2021 and 2024. Additional milestone payments, which are contingent upon net sales from products incorporating the Simplify Medical cervical artificial disc technology, will become payable to Simplify Medical in calendar years 2023, 2024 and 2025.
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Cash, and cash equivalents and short-term investments were $117.8 million$1.0 billion and $72.8$213.0 million at December 31, 2018 2020 and December 31, 2017,2019, respectively. OurWhile the unprecedented public health and governmental efforts to contain the spread of COVID-19 have created significant disruptions to the healthcare system and the global economy, as of the filing date of this report, we believe our existing cash, and cash equivalents, short-term investments, projected future cash flows from operations and available liquidity should beaccess to external financing sources are sufficient to meetsatisfy our current and reasonably anticipated cash needsrequirements for funds to conduct our operations in the ordinary course of our business and pay our obligation as they become due for the next twelve months. We couldGiven the impact the COVID-19 pandemic has had on demand for elective surgical procedures, we took temporary actions to reduce operating expenses and preserve liquidity such as reducing compensation for our directors and executive officers in 2020, limiting discretionary spend, and adjusting manufacturing capacity based upon demand. Additionally, we have varying needs for cash in connection with our Senior Convertible Notes and also as a result of certain acquisition-related obligations and milestone achievements. As of December 31, 2020, we had outstanding $650.0 million aggregate principal amount of unsecured senior convertible notes with a stated interest rate of 2.25% and a maturity date of March 15, 2021, which we refer to as the achievement of certain acquisition related milestones.2021 Notes. We anticipate funding these milestones fromthat the 2021 Notes will be settled by satisfying the principal amount outstanding with cash and any note conversion value over the principal amount in shares of our common stock. Future litigation or requirements to escrow funds could also materially impact our liquidity and our ability to invest in and run our business on hand and operations, however,an ongoing basis. Although we have the ability to fund these fromno cash borrowings under our existing revolving senior credit facility as of the date of this report, we expect to use our cash resources or cash borrowings under our senior credit facility to support our business within the context of prevailing market and economic conditions, which, given the COVID-19 crisis, could rapidly and materially deteriorate or otherwise change. During this time, we may seek other sources of liquidity through capital market or bank loan transactions to support our business needs. In addition, we may seek to further adjust or amend the terms of and/or expand the capacity of our existing senior credit facility, or enter into additional credit facilities, term loans, or other similar arrangements. However, with the uncertainty surrounding the COVID-19 crisis, our ability to engage in such transactions may be constrained by volatile financial market conditions, reduced investor and/or lender interest or capacity, as well as our liquidity, leverage, and general creditworthiness and we can provide no assurance as to successfully completing such transactions. Furthermore, our ability to borrow under our existing revolving senior credit facility is subject to remaining in compliance with underlying financial covenants which may be difficult to satisfy if necessary. the COVID-19 pandemic continues to adversely impact the healthcare system and our business. Further discussion of the potential impacts from the COVID-19 pandemic is provided under Part I, Item 1A – Risk Factors.
The increase in liquidity during the year ended December 31, 20182020 of $45.0$817.0 million was mainly driven by $219.5cash inflows of $873.8 million related to the net issuance of our Senior Convertible Notes due 2023 and 2025 and $185.9 million in cash inflowprovided from operations which includes the $27.8 million settlement payment in the Madsen litigation,, partially offset by $101.9$105.7 million in cash used for purchases of property and equipment, $62.9 $80.7million in cash used for business combinations, strategic investmentstreasury stock purchases, and intangible assets, and $19.8$53.9 million net in cash used for paymentsthe call spreads on the sales and purchases of contingent consideration.our warrants and bond hedges issued in connection with the Senior Convertible Notes due 2023 and 2025. At December 31, 2018,2020, we havehad cash totaling $2.4 $1.5 million in restricted accounts which is not available to us to meet any ongoing capital requirements if and when needed. Future litigation or requirements to escrow funds could materially impact our liquidity and our ability to invest in and run our business on an ongoing basis.
Cash Flows
The following table summarizes our Consolidated Statements of Cash Flows:
|
| Year Ended December 31, |
|
| 2017 to 2018 |
|
| 2016 to 2017 |
|
| Year Ended December 31, |
|
| 2019 to 2020 |
|
| 2018 to 2019 |
| ||||||||||||||||||||||||||||||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2016 |
|
| $ Change |
|
| % Change |
|
| $ Change |
|
| % Change |
| |||||||||||||||||||||||||||||||||||
(in thousands, except %) |
| 2020 |
|
| 2019 |
|
| 2018 |
|
| $ Change |
|
| % Change |
|
| $ Change |
|
| % Change |
| |||||||||||||||||||||||||||||||||||
Cash provided by operating activities |
| $ | 219,183 |
|
| $ | 176,969 |
|
| $ | 158,085 |
|
| $ | 42,214 |
|
|
| 24 | % |
| $ | 18,884 |
|
|
| 12 | % |
| $ | 185,911 |
|
| $ | 235,290 |
|
| $ | 219,183 |
|
| $ | (49,379 | ) |
|
| (21 | )% |
| $ | 16,107 |
|
|
| 7 | % |
Cash used in investing activities |
|
| (161,285 | ) |
|
| (174,861 | ) |
|
| (304,885 | ) |
|
| 13,576 |
|
|
| 8 | % |
|
| 130,024 |
|
|
| 43 | % |
|
| (281,934 | ) |
|
| (134,484 | ) |
|
| (161,285 | ) |
|
| (147,450 | ) |
|
| 110 | % |
|
| 26,801 |
|
|
| (17 | )% |
Cash (used in) provided by financing activities |
|
| (14,578 | ) |
|
| (87,028 | ) |
|
| 110,823 |
|
|
| 72,450 |
|
|
| 83 | % |
|
| (197,851 | ) |
|
| 179 | % | ||||||||||||||||||||||||||||
Cash provided by (used in) financing activities |
|
| 736,656 |
|
|
| (6,644 | ) |
|
| (14,578 | ) |
|
| 743,300 |
|
|
| 11,188 | % |
|
| 7,934 |
|
|
| (54 | )% | ||||||||||||||||||||||||||||
Effect of exchange rate changes on cash |
|
| (1,283 | ) |
|
| 2,070 |
|
|
| (929 | ) |
|
| (3,353 | ) |
|
| 162 | % |
|
| 2,999 |
|
|
| 323 | % |
|
| 3,202 |
|
|
| 131 |
|
|
| (1,283 | ) |
|
| 3,071 |
|
|
| 2,344 | % |
|
| 1,414 |
|
|
| (110 | )% |
Increase (decrease) in cash, cash equivalents and restricted cash |
| $ | 42,037 |
|
| $ | (82,850 | ) |
| $ | (36,906 | ) |
| $ | 124,887 |
|
|
| 151 | % |
| $ | (45,944 | ) |
|
| 124 | % | ||||||||||||||||||||||||||||
Increase in cash, cash equivalents and restricted cash |
| $ | 643,835 |
|
| $ | 94,293 |
|
| $ | 42,037 |
|
| $ | 549,542 |
|
|
| 583 | % |
| $ | 52,256 |
|
|
| 124 | % |
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Cash provided by operating activitiesFlows from Operating Activities
Cash provided by operating activities was $219.2$185.9 million for the year ended December 31, 2018,in 2020, compared to $177.0$235.3 million for the same period in 2017. 2019. The $42.2 $49.4 million increase decrease in cash provided by operating activities was primarily due to increaseddecreased operational cash flows in 20182020 related to lower net sales and cash receipts resulting from the impact of the COVID-19 pandemic, as well as an increase in payments for compensation related accruals and timing of cash receipts and disbursements, offset by $27.8 million in cash paid for the settlement of the Madsen litigation matter in 2018.spending.
Cash provided by operating activities was $177.0$235.3 million for the year ended December 31, 2017,in 2019, compared to $158.1$219.2 million for the same period in 2016.2018. The $18.9$16.1 million increase in cash provided by operating activities was primarily due to $45.0the comparable period’s payment of $27.8 million in cash paid for the settlement of the MedtronicMadsen litigation matter in 2016,matter. This was partially offset withby increased operational cash flows in 2016 related toinventory purchases and general timing of spendingcash receipts and cash receipts. Additionally, we paid $30.0 milliondisbursements in 2017 for contingent consideration related to the acquisition2019.
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Cash Flows from operating activities, with the remaining $18.8 million representing the initial purchase price allocation classified in financing activities.
Cash used in investing activitiesInvesting Activities
Cash used in investing activities was $161.3$281.9 million in 2018,2020, compared to $174.9$134.5 million used in 2017. 2019. The $13.6$147.4 million decreaseincrease in cash used in investing activities was primarily due to an $8.3$173.5 million in cash used for the net purchases of marketable debt securities, offset by a decrease of $17.2 million in cash used for purchases of property and equipment, and a decrease of $1.7$8.9 million in cash used for acquisitions, strategic investments and intangible assets in 2020 compared to 2019.
Cash used in investing activities was $134.5 million in 2019, compared to $161.3 million used in 2018. The $26.8 million decrease in cash used in investing activities was primarily due to a decrease of $51.3 million in cash used for business combinations, strategic investments and intangible assets, in 2018 as compared to 2017.
Cash used in investing activities was $174.9offset by a $21.0 million in 2017, compared to $304.9 million in 2016. The $130.0 million decrease in cash used in investing activities in 2017 as compared to 2016 is primarily due to the $380.1 million cash payment (net of cash received) to fund the acquisition of Ellipse Technologies and a net $278.1 million cash received related to activities within investment portfolios during the year ended December 31, 2016. The year ended December 31, 2017 includes a decrease of $49.9 millionincrease in cash used for business combinations, strategic investments and purchases of intangible assets and an increase of $21.8 million in cash used on purchases of property and equipment associated with our manufacturing initiative and general business as in 2019 compared to the same period in 2016.
For 2019, we expect capital expenditures to support expansions of our business globally to be in the range of $110.0 million to $120.0 million which is expected to be sourced by the cash generated from operations and the revolving senior credit facility, as described below in the section “Revolving Senior Credit Facility”2018.
Cash (used in)Flows from Financing Activities
Cash provided by financing activities was $736.7 million in 2020, compared to $6.6 million cash used in 2019. The $743.3 million increase in cash provided by financing activities was primarily due to the net issuances of our Senior Convertible Notes due 2023 and 2025 of $873.8 million, offset by $53.9 million of net cash used for the call spreads on the sales and purchases of our warrants and bond hedges issued in connection with the Senior Convertible Notes due 2023 and 2025, and an increase in treasury stock purchases of $66.2 million in 2020 compared to 2019.
Cash used in financing activities was $14.6$6.6 million in 2018,2019, compared to $87.0$14.6 million cash used in 2017. 2018. The $72.4$8.0 million decrease in cash used in financing activities was primarily due to decreased contingent consideration payments of $18.6 million, offset by increased treasury stock purchases of $11.6 million in 2019 compared to 2018.
Treasury stock purchases totaled $80.7 million during 2020, relating to our share repurchase program, the $63.3 million settlementvesting of equity awards and stock option exercises. In March 2020, in connection with the remaining principal onissuance of the Senior Convertible Notes due July 2017 during the third quarter of 2017, offset by decreased treasury stock purchases of $8.9 million in 2018 as compared to the same period in 2017.
Our equity incentive plans allow for “net share settlement” of certain equity awards whereby, in lieu of (i) making cash payments in satisfaction of the exercise price owed respective to non-qualified stock option awards, or (ii) open market selling award shares to generate cash proceeds for use in satisfaction of statutory tax obligations respective to an award’s settlement or exercise,2025, we offset the award shares being settled in a respective transaction by the number ofrepurchased approximately 1,085,000 shares of our common stock withfor $75.0 million. We use net share settlement on stock issuances, which results in cash tax payments, as well as a value equal to the respective obligation, and,decrease in the casecash receipts from the issuance of taxes, making acommon stock upon the exercising of stock options. Net share settlement is generally used in lieu of cash payment to the respective taxing authority on behalf of the shareowner using our cash on hand.payments by employees for minimum tax withholding or exercise costs for equity awards. The net share settlement is accounted for as a treasury share repurchase transaction, with the cost of any awarddeemed repurchased shares that are net settled being included in treasury stock and reported as a reduction in total equity at the time of settlement.
During 2019, we estimate at least $20.0 million Additionally, net share settlement for tax withholding requires us to fund a significant amount of such cash for certain tax payments will be made, howeverpayment obligations from time-to-time with respect to the actual remittance can vary significantly depending on our share price at the date of RSU or PRSU release or option exercises or actual volume of such activities.employee tax obligations for vested equity awards. We anticipate using cash generated from operating activities and the credit facility to fund all such payments.
Cash used in financing activities was $87.0 million for the year ended December 31, 2017, compared to $110.8 million cash provided for the same period in 2016. The $197.9 million decrease in cash provided by financing activities was primarily due to the net issuance
62
Senior Convertible Notes due 2021 of $634.1 million. The proceeds from the issuance of the Senior Convertible Notes due 2021 were offset by the net $66.3 million purchase of a call spread related to that issuance and approximately $439.5 million in cash to repurchase a portion of the Senior Convertible Notes due 2017 during the year ended December 31, 2016. We used $63.3 million to settle the remaining principal on the Senior Convertible Notes due 2017 during the year ended December 31, 2017.
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2.25% Senior Convertible Notes due 2021
In March 2016, we issued $650.0 million principal amount of unsecured senior convertible notes with a stated interest rate of 2.25% and a maturity date of March 15, 2021, which we refer to as the 2021 Notes. The net proceeds from the offering, after deducting initial purchasers' discounts and costs directly related to the offering, were approximately $634.1 million. Interest on the 2021 Notes began accruing upon issuance and is payable semi-annually. ThePrior to September 14, 2020, the 2021 Notes may be settledprovided for settlement in cash, stock, or a combination thereof, solely at our discretion. It is our current intent and policy to settle all conversions throughAs of September 14, 2020, combination settlement which involveswas deemed to have been elected by us and the 2021 Notes will be settled by satisfying the principal amount outstanding with cash and any note conversion value over the principal amount in shares of our common stock. The initial conversion rate of the 2021 Notes is 16.7158 shares per $1,000 principal amount, which is equivalent to a conversion price of approximately $59.82 per share, subject to adjustments. Prior to September 15, 2020, holders may convertcould have converted their 2021 Notes only under the following conditions: (a) during any calendar quarter beginning June 30, 2016, if the reported sale price of our common stock for at least 20 days out of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter iswas greater than 130% of the conversion price on each applicable trading day; (b) during the five business day period in which the trading price of the 2021 Notes fallsfell below 98% of the product of (i) the last reported sale price of our common stock and (ii) the conversion rate on that date; and (c) upon the occurrence of specified corporate events, as defined in the 2021 Notes. From September 15, 2020 and until the close of business on the second scheduled trading day immediately preceding March 15, 2021, holders may convert their 2021 Notes at any time (regardless of the foregoing circumstances). We may not redeem theThe 2021 Notes priorcan no longer be redeemed by us. We previously had the ability to March 20, 2019. We may redeem the 2021 Notes, at our option, in whole or in part beginning on or after March 20, 2019 until the close of business on the business day immediately preceding September 15, 2020 if the last reported sale price of our common stock hashad been at least 130% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which we deliver written notice of a redemption. The redemption price will be equal to 100% of the principal amount of such 2021 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date. No principal payments are due on the 2021 Notes prior to maturity. Other than restrictions relating to certain fundamental changes and consolidations, mergers or asset sales and customary anti-dilution adjustments, the 2021 Notes do not contain any financial covenants and do not restrict us from paying dividends or issuing or repurchasing any of our other securities. We are unawareAs of September 15, 2020, holders may convert their 2021 Notes at any current events or market conditions that would allow holderstime prior to convert the 2021 Notes.close of business on the second scheduled trading day immediately preceding the maturity date. The impact of the convertible feature will be dilutive to our earnings per share when our average stock price for the period is greater than the conversion price.
In connection with the offering of the 2021 Notes, we entered into transactions for convertible notes hedge, which we refer to as the 2021 Hedge, and warrants, which we refer to as the 2021 Warrants. The 2021 Hedge was entered into with the initial purchasers of the 2021 Notes and/or their affiliates, which we refer to as the 2021 Counterparties, entitling us to purchase up to 10,865,270 shares of our own common stock at an initial stock price of $59.82 per share, each of which is subject to adjustment. The cost of the 2021 Hedge was $111.2 million. The 2021 Hedge will expire on March 15, 2021. The 2021 Hedge is expected to reduce the potential equity dilution upon conversion of the 2021 Notes if the daily volume-weighted average price per share of our common stock exceeds the strike price of the 2021 Hedge. Our assumed exercise of the 2021 Hedge is considered anti-dilutive since the effect of the inclusion would always be anti-dilutive with respect to the calculation of diluted earnings per share.
In addition, we sold the 2021 Warrants to the 2021 Counterparties to acquire up to 10,865,270 common shares of our stock. The 2021 Warrants will expire on various dates from June 2021 through December 2021 and may be settled in cash or net shares. It is our current intent and policy to settle all conversions in shares of our common stock. We received $44.9 million in cash proceeds from the sale of the 2021 Warrants. The 2021 Warrants could have a dilutive effect on our earnings per share to the extent that the price of our common stock during a given measurement period exceeds the strike price of the 2021 Warrants, which is $80.00 per share.
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1.00% Senior Convertible Notes due 2023
In June 2020, we issued $450.0 million principal amount of unsecured Senior Convertible Notes with a stated interest rate of 1.00% and a maturity date of June 1, 2023, which we refer to as the 2023 Notes. The net proceeds from the offering, after deducting initial purchasers’ discounts and costs directly related to the offering, were approximately $436.7 million. The 2023 Notes were initially required to be settled in cash as we did not have enough available shares and were unable to reserve the maximum number of shares issuable under the 2023 Notes (“sufficient reserved shares”). On September 10, 2020, we held a Special Meeting of Stockholders and received stockholder approval to amend our Restated Certificate of Incorporation to increase the number of shares of our common stock authorized for issuance from 120,000,000 shares to 150,000,000 shares. As a result of the increase in the number of shares of our common stock authorized for issuance, we currently have sufficient reserved shares and therefore may settle conversions of the 2023 Notes in cash, stock, or a combination thereof, solely at our discretion. It is our current intent and policy to settle all conversions through combination settlement, which involves satisfying the principal amount outstanding with cash and any note conversion value over the principal amount in shares of our common stock. The initial conversion rate of the 2023 Notes is 11.8778 shares per $1,000 principal amount, which is equivalent to a conversion price of approximately $84.19 per share, subject to adjustments. In addition, following certain corporate events that occur prior to the maturity date or if we issue a notice of redemption, we will increase the conversion rate for a holder who elects to convert its 2023 Notes in connection with such a corporate event or in connection with such redemption in certain circumstances. Prior to February 1, 2023, holders may convert their 2023 Notes only under the following conditions: (a) during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (b) during the five business day period after any five consecutive trading day period, referred to as the measurement period, in which the trading price of the 2023 Notes per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on such trading day; (c) if we call any or all of the 2023 Notes for redemption, at any time prior to the close of business on the second scheduled trading day preceding the redemption date; or (d) upon the occurrence of specified corporate events, as defined in the 2023 Notes. On or after February 1, 2023, until the close of business on the second scheduled trading day immediately preceding June 1, 2023, holders may convert their 2023 Notes at any time, regardless of the foregoing conditions. We may not redeem the 2023 Notes prior to the maturity date. No principal payments are due on the 2023 Notes prior to maturity. Other than restrictions relating to certain fundamental changes and consolidations, mergers or asset sales and customary anti-dilution adjustments, the 2023 Notes do not contain any financial covenants and do not restrict us from conducting significant restructurings, paying dividends or issuing or repurchasing any of our other securities. As of December 31, 2020, we are unaware of any current events or market conditions that would allow holders to convert the 2023 Notes. The impact of the convertible feature will be dilutive to our earnings per share when our average stock price for the period is greater than the conversion price.
In connection with the sale of the 2023 Notes, we entered into transactions for convertible notes hedge, which we refer to as the 2023 Hedge, and warrants, which we refer to as the 2023 Warrants. The 2023 Hedge was entered into with certain dealers, which included affiliates of certain of the initial purchasers of the 2023 Notes and other financial institutions, which we refer to as the 2023 Counterparties, entitling us to purchase up to 5,345,010 shares of our own common stock at an initial stock price of $84.19 per share, each of which is subject to adjustment. The cost of the 2023 Hedge was $69.5 million. The 2023 Hedge will expire on the second scheduled trading day immediately preceding June 1, 2023. The 2023 Hedge is expected to reduce the potential equity dilution upon conversion of the 2023 Notes if the daily volume-weighted average price per share of our common stock exceeds the strike price of the 2023 Hedge. Our assumed exercise of the 2023 Hedge is considered anti-dilutive since the effect of the inclusion would always be anti-dilutive with respect to the calculation of diluted earnings per share.
In addition, we sold the 2023 Warrants to the 2023 Counterparties to acquire up to 5,345,010 common shares of our stock. The 2023 Warrants initially limited the amount of shares we were required to reserve for issuance under the 2023 Warrants to an aggregate of 3,093,500 shares of our common stock, subject to adjustment upon having a sufficient amount of authorized and unissued shares which are not reserved for other transactions. As a result of receiving stockholder approval to increase the number of shares of our common stock authorized for issuance on September 10, 2020, we subsequently entered into amendment agreements with each of the 2023 Counterparties to increase the number of authorized shares of our common stock required to be reserved under the 2023 Warrants to the aggregate amount of 6,948,512 shares. The 2023 Warrants will expire on various dates from September 2023 through November 2023 and may be settled in net shares or cash, subject to certain conditions. It is our current intent and policy to settle all conversions in shares of our common stock. We received $46.8 million in cash proceeds from the sale of the 2023 Warrants. The 2023 Warrants could have a dilutive effect on our earnings per share to the extent that the price of our common stock during a given measurement period exceeds the strike price of the 2023 Warrants, which is $104.84 per share.
64
0.375% Senior Convertible Notes due 2025
In March 2020, we issued $450.0 million principal amount of unsecured senior convertible notes with a stated interest rate of 0.375% and a maturity date of March 15, 2025, which we refer to as the 2025 Notes. The net proceeds from the offering, after deducting initial purchasers’ discounts and costs directly related to the offering, were approximately $437.0 million. Interest on the 2025 Notes began accruing upon issuance and is payable semi-annually. The 2025 Notes may be settled in cash, stock, or a combination thereof, solely at our discretion. It is our current intent and policy to settle all conversions through combination settlement, which involves satisfying the principal amount outstanding with cash and any note conversion value over the principal amount in shares of our common stock. The initial conversion rate of the 2025 Notes is 10.7198 shares per $1,000 principal amount, which is equivalent to a conversion price of approximately $93.29 per share, subject to adjustments. In addition, following certain corporate events that occur prior to the maturity date or if we issue a notice of redemption, we will increase the conversion rate for a holder who elects to convert its 2025 Notes in connection with such a corporate event or in connection with such redemption in certain circumstances. Prior to September 15, 2024, holders may convert their 2025 Notes only under the following conditions: (a) during any calendar quarter commencing after the calendar quarter ending on June 30, 2020 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (b) during the five business day period after any five consecutive trading day period, referred to as the measurement period, in which the trading price of the 2025 Notes per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on such trading day; (c) if we call any or all of the 2025 Notes for redemption, at any time prior to the close of business on the second scheduled trading day preceding the redemption date; or (d) upon the occurrence of specified corporate events, as defined in the 2025 Notes. On or after September 15, 2024, until the close of business on the second scheduled trading day immediately preceding March 15, 2025, holders may convert their 2025 Notes at any time, regardless of the foregoing conditions. We may not redeem the 2025 Notes prior to March 20, 2023. We may redeem the 2025 Notes, at our option, in whole or in part, on or after March 20, 2023 until the close of business on the business day immediately preceding September 15, 2024, if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which we deliver written notice of a redemption. The redemption price will be equal to 100% of the principal amount of such 2025 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date. No principal payments are due on the 2025 Notes prior to maturity. Other than restrictions relating to certain fundamental changes and consolidations, mergers or asset sales and customary anti-dilution adjustments, the 2025 Notes do not contain any financial covenants and do not restrict us from conducting significant restructurings, paying dividends or issuing or repurchasing any of our other securities. As of December 31, 2020, we are unaware of any current events or market conditions that would allow holders to convert the 2025 Notes. The impact of the convertible feature will be dilutive to our earnings per share when our average stock price for the period is greater than the conversion price.
In connection with the sale of the 2025 Notes, we entered into transactions for convertible notes hedge, which we refer to as the 2025 Hedge, and warrants, which we refer to as the 2025 Warrants. The 2025 Hedge was entered into with certain dealers, which included affiliates of certain of the initial purchasers of the 2025 Notes and other financial institutions, which we refer to as the 2025 Counterparties, entitling us to purchase up to 4,823,910 shares of our own common stock at an initial stock price of $93.29 per share, each of which is subject to adjustment. The cost of the 2025 Hedge was $78.3 million. The 2025 Hedge will expire on the second scheduled trading day immediately preceding March 15, 2025. The 2025 Hedge is expected to reduce the potential equity dilution upon conversion of the 2025 Notes if the daily volume-weighted average price per share of our common stock exceeds the strike price of the 2025 Hedge. Our assumed exercise of the 2025 Hedge is considered anti-dilutive since the effect of the inclusion would always be anti-dilutive with respect to the calculation of diluted earnings per share.
In addition, we sold the 2025 Warrants to the 2025 Counterparties to acquire up to 4,823,910 common shares of our stock. The 2025 Warrants will expire on various dates from June 2025 through October 2025 and may be settled in net shares or cash, subject to certain conditions. It is our current intent and policy to settle all conversions in shares of our common stock. We received $47.1 million in cash proceeds from the sale of the 2025 Warrants. The 2025 Warrants could have a dilutive effect on our earnings per share to the extent that the price of our common stock during a given measurement period exceeds the strike price of the 2025 Warrants, which is $127.84 per share.
65
Revolving Senior Credit Facility
In April 2017,February 2020, we entered into ana Second Amended and Restated Credit Agreement, (the “2017or the 2020 Credit Agreement”)Agreement, for a revolving senior credit facility, (the “2017 Facility”),referred to as the 2020 Facility, which replaced the previous credit agreementAmended and Restated Credit Agreement we had entered into in February 2016.April 2017. The 20172020 Credit Agreement was further amended in May 2020 to, among other things, provide additional flexibility in determining the financial covenant leverage ratios for the second and third fiscal quarters of 2020 and to adjust certain margin and benchmark rates used to determine interest under the 2020 Facility. The 2020 Credit Agreement provides for secured revolving loans, multicurrency loan options and letters of credit in an aggregate amount of up to $500.0$550.0 million. The 20172020 Credit Agreement also contains an accordionexpansion feature, which allows us to increase the aggregate principal amount of the 20172020 Facility provided we remain in compliance with the underlying financial covenants on a pro forma basis, including but not limited to, compliance with the consolidated interest coverage ratio and certain consolidated leverage ratios. The 20172020 Facility matures in April 2022February 2025 (subject to an earlier springing maturity date), and includes a sublimit of $100.0 million for multicurrency borrowings, a sublimit of $50.0 million for the issuance of standby letters of credit, a sublimit of $250.0 million for multicurrency borrowings, and a sublimit of $5.0 million for swingline loans. All of our assets including the assets of our material domestic subsidiaries arecontinue to be pledged as collateral under the 20172020 Facility (subject to customary exceptions) pursuant to the termterms set forth in the Second Amended and Restated Security and Pledge Agreement (the “2017 Security Agreement”) executed in favor of the administrative agent. Each of our material domestic subsidiaries guaranteesguarantee the 20172020 Facility. In connection with the 20172020 Facility, we incurred issuance costs which will be amortized over the term of the 20172020 Facility. We did not carry any outstanding revolving loans under the 20172020 Facility as of December 31, 20182020 and 2017.2019.
59
Borrowings under the 20172020 Facility bear interest, at our option, at a rate equal to an applicable margin plus: (a) the applicable Eurocurrency Rate (as defined in the 20172020 Credit Agreement), or (b) a base rate determined by reference to the highest of (1) the federal funds effective rate plus 0.50%, (2) the Bank of America prime rate, and (3) LIBORthe Eurocurrency Rate for an interest period of one month plus 1.00%. The margin for the 20172020 Facility ranges, based on our consolidated total net leverage ratio, from 0.00%0.50% to 1.00%1.25% in the case of base rate loans and from 1.00%1.50% to 2.00%2.25% in the case of Eurocurrency Rate loans. The 20172020 Facility includes an unused line fee ranging, based on our consolidated total net leverage ratio, from 0.20%0.35% to 0.35%0.50% per annum on the revolving commitment.
The 20172020 Credit Agreement contains affirmative, negative, permitted acquisition and financial covenants, and events of default customary for financings of this type. The financial covenants require us to maintain ratios of consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) in relation toa consolidated interest expensecoverage ratio and certain consolidated debt, respectively, as defined in the 2017 Credit Agreement.leverage ratios, which are measured on a quarterly basis. The 20172020 Facility grants the lenders preferred first priority liens and security interests in capital stock, intercompany debt and all of our present and future property and assets including each guarantor. WeAs of December 31, 2020, we are currently in compliance with the 2020 Credit Agreement covenants.
60
Contractual Obligations and Commitments
Contractual obligations and commitments represent future cash commitments and liabilities under agreements with third parties, including our 2021Senior Convertible Notes, operating leases and other contractual obligations.
The following table summarizes our contractual obligations and commitments as of December 31, 2018:2020:
|
|
|
|
|
| Payments Due by Period |
|
|
|
|
|
| Payments Due by Period |
| ||||||||||||||||||||||||||
(in thousands) |
| Total |
|
| Less Than 1 Year |
|
| 1 to 3 Years |
|
| 4 to 5 Years |
|
| After 5 Years |
|
| Total |
|
| Less Than 1 Year |
|
| 1 to 3 Years |
|
| 4 to 5 Years |
|
| After 5 Years |
| ||||||||||
Convertible Notes (1) |
| $ | 686,563 |
|
| $ | 14,625 |
|
| $ | 671,938 |
|
| $ | — |
|
| $ | — |
|
| $ | 1,576,156 |
|
| $ | 663,500 |
|
| $ | 460,125 |
|
| $ | 452,531 |
|
| $ | — |
|
Operating leases |
|
| 175,488 |
|
|
| 13,750 |
|
|
| 23,961 |
|
|
| 21,093 |
|
|
| 116,684 |
|
|
| 169,848 |
|
|
| 14,140 |
|
|
| 26,740 |
|
|
| 22,771 |
|
|
| 106,197 |
|
Capital leases |
|
| 1,314 |
|
|
| 534 |
|
|
| 751 |
|
|
| 29 |
|
|
| — |
| ||||||||||||||||||||
Other long-term liabilities |
|
| 43,647 |
|
|
| 8,610 |
|
|
| 13,100 |
|
|
| 11,937 |
|
|
| 10,000 |
| ||||||||||||||||||||
Finance leases |
|
| 3,337 |
|
|
| 1,465 |
|
|
| 1,863 |
|
|
| 9 |
|
|
| — |
| ||||||||||||||||||||
Other long-term obligations |
|
| 13,750 |
|
|
| 5,080 |
|
|
| 4,194 |
|
|
| 1,476 |
|
|
| 3,000 |
| ||||||||||||||||||||
Total |
| $ | 907,012 |
|
| $ | 37,519 |
|
| $ | 709,750 |
|
| $ | 33,059 |
|
| $ | 126,684 |
|
| $ | 1,763,091 |
|
| $ | 684,185 |
|
| $ | 492,922 |
|
| $ | 476,787 |
|
| $ | 109,197 |
|
| (1) | Senior Convertible Notes includes the expected coupon interest payments on the outstanding debt. See Note |
Total contractual obligations and commitments listed in the table above excludes the following liabilities:
Potentialpotential contingent consideration payments pursuant to certain merger, purchase, and product development agreements, other than achieved milestones. See Notes 3Note 4 and 67 to the Consolidated Financial Statements included in this Annual Report for further discussion on the contingent consideration obligations and product development agreements, respectively.
The expected timing of payments of the obligations discussed above is estimated based on current information. Timing of payment and actual amounts paid may be different depending on the time of receipt of services or changes to agreed-upon amounts for some obligations.
66
Off-Balance Sheet Arrangements
As of December 31, 2018,2020, we did not have any off-balance sheet activities.
Item 7A.Quantitative and QualitativeQualitative Disclosures About Market Risk
Interest Rate Sensitivity and Risk
Our exposure to interest rate risk at December 31, 20182020 is related to our investment portfolio which consists largely of cash equivalents in the form of debt instruments of high quality corporate issuers and the U.S. government and its agencies.. Due to the short-term nature of these investments, we have assessed that there is no material exposure to interest rate risk arising from our investments. Fixed rate investments and borrowings may have their fair market value adversely impacted from changes in interest rates. At December 31, 2018,2020, we do not hold any material asset-backed investment securities and in 2018,2020, we did not realize any losses related to asset-backed investment securities. Based upon our overall interest rate exposure as of December 31, 2018,2020, a change of 10 percent in interest rates, assuming the amount of our investment portfolio and overall economic environment remains constant, would not have a material effect on interest income.
The primary objective of our investment activities is to preserve the principal while at the same time maximizing yields without significantly increasing the risk. To achieve this objective, we maintain our portfolio of cash equivalents and investments in instruments that meet high credit quality standards, as specified in our investment policy. None of our investments are held for trading purposes. Our policy also limits the amount of credit exposure to any one issue, issuer and type of instrument.
As of December 31, 2018,2020, we only held investments in securities of a short-term nature classified as cash equivalents.equivalents or short-term investments. During the periods presented, we did not hold any investments that were in a significant unrealized loss position and no impairment charges were recorded. Realized gains and losses and interest income related to marketable securities were immaterial during all periods presented.
61
Market Price Sensitive Instruments
In order to reduce the potential equity dilution, we entered into the 2021 Hedge, 2023 Hedge, and 2025 Hedge in connection with the issuanceissuances of the 2021 Notes, 2023 Notes, and 2025 Notes, respectively, entitling us to purchase our common stock. Upon conversion of our convertible notes, the 2021 Hedge, is2023 Hedge, and 2025 Hedge are expected to reduce the equity dilution if the daily volume-weighted average price per share of our common stock exceeds the strike price of the applicable hedge. We also entered into warrant transactions with the counterparties of the 2021 Hedge, 2023 Hedge, and 2025 Hedge entitling them to acquire shares of our common stock. The warrant transactions could have a dilutive effect on our earnings per share to the extent that the price of our common stock during a given measurement period (the quarter or year to date period) exceeds the strike price of the warrants. See Note 56 to the Consolidated Financial Statements included in this Annual Report for further discussion.
Foreign Currency Exchange Risk
A substantial portion of our operations are located in the United States, and the majority of our sales since inception have been made in the United States dollars. Accordingly, we have assessed that we do not have any material net exposure to foreign currency rate fluctuations. However, as our business in markets outside of the United States continues to increase, we will be exposed to foreign currency exchange risk related to our foreign operations. Fluctuations in the rate of exchange between the United States dollar and foreign currencies, primarily the pound sterling, the euro, the Australian dollar, the Brazilian real, the Singapore dollar, and the yen, could adversely affect our financial results, including our revenues, revenuenet sales, net sales growth rates, gross margins, income and losses as well as assets and liabilities. In addition, loss of financial stability within these markets could lead to delays in reimbursement or inability to remit payment due to currency controls. Specifically, we have operations in Puerto Rico, Brazil, Argentina and VenezuelaArgentina that have financial instability or currency controls. We do not have any material financial exposure to one customer or one country that would significantly hinder our liquidity.
We translate the financial statements of our foreign subsidiaries with functional currencies other than the United States dollar into the United States dollar for consolidation using end-of-period exchange rates for assets and liabilities and average exchange rates during each reporting period for results of operations. Net gains or losses resulting from the translation of foreign financial statements and the effect of exchange rate changes on intercompany receivables and payables of a long-term investment nature are recorded as a separate component of stockholders’ equity. These adjustments will affect net income only upon sale or liquidation of the underlying investment in foreign subsidiaries. Exchange rate fluctuations resulting from the translation of the short-term intercompany balances between domestic entities and our foreign subsidiaries are recorded as foreign currency transaction gains or losses and are included in other income (expense) in the Consolidated Statement of Operations. For those short-term intercompany balances, we enter into the foreign currency forward contracts to partially offset the impact from fluctuation of the foreign currency rates. The notional amount of the outstanding foreign currency forward contracts was $26.8$14.0 million as of December 31, 2018,2020, which was settled in January 2019.2021. During the year ended December 31, 2018,2020, a gainloss of $0.5$(1.0) million was recognized in other (expense) income, (expense)net due to the change in the fair value of the derivative instruments, and the fair value of the hedge contracts we held was $(0.3) millionde minimis on our Consolidated Balance Sheet as of December 31, 2018.2020. The notional principal amounts provide one measure of the transaction volume outstanding as of period end, but do not represent the amount of our exposure to market loss. The estimates of fair value are based on applicable and commonly used pricing models using prevailing financial market information. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments. The financial exposures by exchange rate fluctuations are monitored and managed by us as an integral part of our overall risk management program, which recognizes the unpredictability of financial markets and seeks to reduce potentially adverse effects on our results.
67
Item 8.Financial Statements and Supplementary Data
The Consolidated Financial Statements and supplementary data required by this item are set forth at the pages indicated in Item 15 of this Annual Report.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (Exchange Act) is recorded, processed, summarized and reported within the timelines specified in the Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
62
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in SEC Rules 13a — 15(e) and 15d — 15(e) of the Exchange Act) as of December 31, 2018.2020. Based on such evaluation, our management has concluded as of December 31, 2018,2020, the Company’s disclosure controls and procedures are effective.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our boardBoard of directors,Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Management has used the framework set forth in the report entitled Internal Control — Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) to evaluate the effectiveness of the Company’s internal control over financial reporting. On May 14, 2013, the Committee of Sponsoring Organizations of the Treadway Commission published a 2013 framework and related illustrative documents. We adopted the new framework during 2014. Management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2018,2020, based on those criteria. Ernst & Young LLP, the Company’s independent registered public accounting firm, has issued an attestation report on the Company’s internal control over financial reporting which is included herein.
Changes in Internal Control over Financial Reporting
We are involved in ongoing evaluations of internal controls. In anticipation of the filing of this Form 10-K, our Chief Executive Officer and Chief Financial Officer, with the assistance of other members of our management, performed an evaluation of any change in internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. There has been no change to our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
63
68
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of NuVasive, Inc.
Opinion on Internal Control over Financial Reporting
We have audited NuVasive, Inc.’s internal control over financial reporting as of December 31, 2018,2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, NuVasive, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of NuVasive, Inc. as of December 31, 20182020 and 2017,2019, the related consolidated statements of operations, comprehensive (loss) income, equity and cash flows for each of the three years in the period ended December 31, 2018,2020, and the related notes and our report dated February 20, 201925, 2021 expressed an unqualified opinion thereon.
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/ Ernst & Young LLP
San Diego, California
February 20, 201925, 2021
6469
None.
PART III
Certain information required by Part III is omitted from this report because the Company will file a definitive proxy statement within 120 days after the end of its fiscal year pursuant to Regulation 14A (the Proxy Statement) for its 20192021 annual meeting of stockholders, and certain information included in the Proxy Statement is incorporated herein by reference.
Item 10.Directors, Executive Officers and Corporate Governance
We have adopted a Code of Ethical Business Conduct for all officers, directors and shareowners.employees. The Code of Ethical Business Conduct is available on our website, www.nuvasive.com. We intend to disclose future amendments to, or waivers from, provisions of our Code of Ethical Business Conduct that apply to our Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer, or Controller, or persons performing similar functions, within four business days of such amendment or waiver.
The other information required by this Item 10 will be set forth in the Proxy Statement and is incorporated in this report by reference.
Item 11.Executive Compensation
The information required by this item will be set forth in the Proxy Statement and is incorporated in this report by reference.
70
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item will be set forth in the Proxy Statement and is incorporated in this report by reference.
Equity Compensation Plan Information
The following table provides certain information with respect to all of our compensation plans in effect as of December 31, 2020:
Plan Category |
| (A) Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights |
|
| (B) Weighted Average Exercise Price of Outstanding Options, Warrants and Rights |
|
| (C) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in column(A)) |
|
| |||
Equity Compensation Plans approved by stockholders |
|
| 1,629,998 |
| (1) | $ | — |
|
|
| 4,478,472 |
| (2)(3) |
Equity Compensation Plans not approved by stockholders |
|
| — |
|
|
| — |
|
|
| — |
|
|
Total |
|
| 1,629,998 |
|
| $ | — |
|
|
| 4,478,472 |
|
|
(1) | Consists of shares subject to outstanding stock options, restricted stock units and performance restricted stock units under the NuVasive 2004 Amended and Restated Equity Incentive Plan, the NuVasive 2014 Equity Incentive Plan, and the Ellipse Technologies 2015 Incentive Award Plan, some of which are vested and some of which remain subject to the vesting and/or performance criteria of the respective equity award. |
(2) | Consists of shares available for future issuance under the NuVasive 2014 Equity Incentive Plan, the Ellipse Technologies 2015 Incentive Award Plan, and the Amended and Restated 2004 Employee Stock Purchase Plan (ESPP). As of December 31, 2020, an aggregate of 3,056,803 shares of common stock were available for issuance under the NuVasive 2014 Equity Incentive Plan, 593,454 shares of common stock were available for issuance under the Ellipse Technologies 2015 Incentive Award Plan, and 828,215 shares of common stock were available for issuance under the 2004 Amended and Restated Employee Stock Purchase Plan. |
(3) | The NuVasive 2004 Amended and Restated Equity Incentive Plan terminated in February 2014, upon the tenth anniversary of its effective date, and we are no longer granting awards under that plan. However, awards granted under the plan will remain outstanding until they are exercised, issued, terminated, cancelled or they expire. Pursuant to the terms of the plan, shares subject to awards granted under the NuVasive 2004 Amended and Restated Equity Incentive Plan may be utilized for future grants of awards under the NuVasive 2014 Equity Incentive Plan, to the extent such awards are terminated, cancelled or they expire, or shares subject thereto are withheld to cover taxes. |
Item 13.Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be set forth in the Proxy Statement and is incorporated in this report by reference.
Item 13.Certain Relationships14.Principal Accountant Fees and Related Transactions, and Director IndependenceServices
The information required by this item will be set forth in the Proxy Statement and is incorporated in this report by reference.
Item 14.Principal Accounting Fees and Services
The information required by this item will be set forth in the Proxy Statement and is incorporated in this report by reference.
6571
Item 15.Exhibits, Financial Statement Schedules
| (a) | The following documents are filed as a part of this report: |
| (1) | Report of Independent Registered Public Accounting Firm |
Consolidated Balance Sheets as of December 31, 20182020 and 20172019
Consolidated Statements of Operations for the years ended December 31, 2018, 20172020, 2019 and 20162018
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 20172020, 2019 and 20162018
Consolidated Statements of Equity for the years ended December 31, 2018, 20172020, 2019 and 20162018
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 20172020, 2019 and 20162018
Notes to Consolidated Financial Statements
| (2) | Financial Statement Schedules: Schedule II — Valuation Accounts |
All other financial statement schedules have been omitted because they are not applicable, not required or the information required by such schedules is shown in the financial statements or the notes thereto.
| (3) | Exhibits |
See Item 15, subsection (b) below.
(b) The following exhibits are filed as part of this report:
Exhibit Number |
|
| Description |
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| |
2.1† |
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2.2 |
| |||||
3.1 |
| |||||
3.2 |
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3.3 |
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3.4 | ||||||
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| |||||
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72
Exhibit
|
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| Description | |||
4.1 | ||||||
4.2 |
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66
|
| |||||
4.3 |
| |||||
4.4 |
| |||||
4.5 | ||||||
4.6 | ||||||
4.7 | ||||||
4.8 | ||||||
4.9 | ||||||
10.1# |
| |||||
10.2# |
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10.3# |
| |||||
10.4# |
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10.5# |
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10.6# |
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10.7# |
| |||||
10.8# |
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73
Exhibit
|
|
| Description | |||
10.9# | ||||||
10.10# |
| |||||
10.11# |
| |||||
10.12# |
| |||||
10.13# |
| |||||
| ||||||
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67
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10.19# | |||||||||
10.20# | |||||||||
10.21# | |||||||||
10.22# |
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74
Exhibit Number | Description | |||||
10.23# | ||||||
10.24# | ||||||
10.25# | ||||||
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68
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75
Exhibit
|
|
| Description | |||
10.39# | ||||||
| ||||||
10.40# |
| |||||
10.41# | ||||||
10.42# | Separation Agreement and General Release dated January 28, 2021 between the Company and Matthew Link | |||||
10.43# | ||||||
10.44# | ||||||
10.45# | ||||||
10.46# | ||||||
10.47# | ||||||
|
| Employment Letter dated January 1, 2019 between the Company and Lucas Vitale | ||||
10.49# | Employment Letter dated October 25, 2019 between the Company and Dale Wolf | |||||
10.50# | ||||||
10.51# | ||||||
10.52# | ||||||
10.53# | ||||||
10.54# | ||||||
10.55 |
| |||||
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76
Exhibit
|
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| Description | |||
10.57 | ||||||
10.58 | ||||||
|
| |||||
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| |||||
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10.67 | ||||||
10.68 | ||||||
10.69 | ||||||
10.70 | ||||||
10.71 |
6977
Exhibit Number |
|
| Description |
|
|
10.72 | |||||
10.73 | |||||
10.74 | |||||
10.75 | |||||
10.76 | |||||
10.77 | |||||
10.78 | |||||
10.79 | |||||
10.80 | |||||
10.81 | |||||
10.82 | |||||
10.83 | |||||
10.84 | |||||
10.85 | |||||
10.86 | |||||
10.87 | |||||
10.88 |
78
Exhibit
|
|
| Description | |||
10.89 | ||||||
10.90 | ||||||
10.91 | ||||||
10.92 | ||||||
10.93 | ||||||
10.94 | ||||||
10.95 | ||||||
10.96 | ||||||
10.97 | ||||||
21.1 |
| |||||
23.1 |
| |||||
31.1 |
| |||||
31.2 |
| |||||
32.1* |
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79
Exhibit
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| |||||
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| |||||
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| |||||
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| |||||
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| ||||
Description |
|
| ||||
101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |||||
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||
101.CAL | Inline XBRL Taxonomy Calculation Linkbase Document | |||||
101.DEF | Inline XBRL Taxonomy Definition Linkbase Document | |||||
101.LAB | Inline XBRL Taxonomy Label Linkbase Document | |||||
101.PRE | Inline XBRL Taxonomy Presentation Linkbase Document | |||||
104 | Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibit 101.INS) |
† | Certain confidential information contained in this exhibit was omitted by means of redacting a portion of the text and replacing it with an asterisk. We have filed separately with the Commission an unredacted copy of the exhibit. |
# | Indicates management contract or compensatory plan. |
* | These certifications are being furnished solely to accompany this annual report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of NuVasive, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing. |
The Company has elected not to provide a summary.
7080
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
| NUVASIVE, INC. |
Date: February |
|
|
|
By: /s/ J. Christopher Barry | |||
|
|
| J. Christopher Barry |
Chief Executive Officer | |||
(Principal Executive Officer) |
7181
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints J. Christopher Barry and Rajesh J. AsarpotaMatthew K. Harbaugh, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature |
| Title |
| Date |
|
/s/ J. Christopher Barry |
| Chief Executive Officer and Director |
| February |
|
J. Christopher Barry |
| (Principal Executive Officer) |
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/s/ |
| Executive Vice President and Chief Financial Officer |
| February |
|
|
| (Principal Financial Officer and Principal Accounting Officer) |
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/s/ Vickie L. Capps |
|
Director |
| February |
|
Vickie L. Capps |
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/s/ John A. DeFord |
| Director |
| February |
|
John A. DeFord, Ph.D. |
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/s/ Robert F. Friel |
| Director |
| February |
|
Robert F. Friel |
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/s/ R. Scott Huennekens |
| Director |
| February |
|
R. Scott Huennekens |
|
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|
| Director | ||||
Siddhartha C. Kadia, Ph.D. |
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/s/ Gregory T. Lucier |
| Director |
| February |
|
Gregory T. Lucier |
|
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/s/ Leslie V. Norwalk |
| Director |
| February |
|
Leslie V. Norwalk, Esq. | |||||
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| |||
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/s/ Donald J. Rosenberg |
| Director |
| February |
|
Donald J. Rosenberg |
|
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|
|
/s/ Daniel J. Wolterman |
| Director |
| February |
|
Daniel J. Wolterman |
|
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|
|
|
7282
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
7383
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of NuVasive, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of NuVasive, Inc. (the Company) as of December 31, 20182020 and 2017,2019, the related consolidated statements of operations, comprehensive (loss) income, equity and cash flows for each of the three years in the period ended December 31, 2018,2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20182020 and 2017,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018,2020, in conformity with U.S. generally accepted accounting principles.
We also have 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, 2018,2020, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 20, 201925, 2021 expressed an unqualified opinion thereon.
Adoption of ASU No. 2014-09
As discussed in Note 1 to the consolidated financial statements, the Company changed its method for recognizing revenue as a result of the adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), and the amendments in ASUs 2015-14, 2016-08, 2016-10 and 2016-12 effective January 1, 2018.
Adoption of ASU No. 2016-16
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for intra-entity transfers of assets other than inventory in 2017 due to the adoption of ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory.
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 U.S. 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 the critical audit matter does not alter in any way our opinion on the consolidated 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.
84
Valuation of inventory
Description of the Matter | The Company's inventories totaled $300.6 million as of December 31, 2020. As explained in Note 1 to the consolidated financial statements, the Company reviews the components of its inventory on a periodic basis for excess and obsolescence and adjusts inventory to its net realizable value as necessary. Auditing management's calculation of estimated excess and obsolete inventory involved subjective auditor judgment because the estimate was sensitive to changes in significant assumptions. In particular, such assumptions include product life cycle and revenue forecasts as well as specific product considerations such as timing of the introduction and development of new or enhanced products. |
How We Addressed the Matter in Our Audit | We evaluated and tested the design and operating effectiveness of internal controls over the Company's excess and obsolete inventory valuation process, including controls over management's assessment of the assumptions and controls related to the completeness and accuracy of data, including calculations underlying the excess and obsolete inventory valuation. Our substantive audit procedures included, among others, evaluating and testing the significant assumptions stated above and the accuracy and completeness of the underlying data used in management's excess and obsolete inventory valuation assessment. To test inventory excess and obsolescence assumptions, we compared the on-hand inventory quantities to revenue forecasts and historical sales and evaluated adjustments to revenue forecasts for specific product considerations, such as product life cycles and timing of the introduction and development of new or enhanced products. We also assessed the historical accuracy of management's estimate and performed sensitivity analyses over the significant assumptions to evaluate the impact of changes in the obsolete and excess inventory estimate that would result from changes in the underlying assumptions. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2000.
San Diego, California
February 20, 201925, 2021
74
85
NUVASIVE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and shares)data)
|
| December 31, |
|
| December 31, |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2020 |
|
| 2019 |
| ||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 117,840 |
|
| $ | 72,803 |
|
| $ | 856,869 |
|
| $ | 213,034 |
|
Restricted cash and investments |
|
| — |
|
|
| 3,901 |
| ||||||||
Accounts receivable, net of allowances of $16,171 and $13,026, respectively |
|
| 196,487 |
|
|
| 200,220 |
| ||||||||
Short-term marketable securities |
|
| 173,145 |
|
|
| — |
| ||||||||
Accounts receivable, net of allowances of $20,631 and $17,019, respectively |
|
| 207,071 |
|
|
| 211,532 |
| ||||||||
Inventory, net |
|
| 273,244 |
|
|
| 247,138 |
|
|
| 300,623 |
|
|
| 312,419 |
|
Prepaid income taxes |
|
| 16,905 |
|
|
| 17,209 |
|
|
| 4,727 |
|
|
| 10,434 |
|
Prepaid expenses and other current assets |
|
| 13,733 |
|
|
| 18,792 |
|
|
| 19,749 |
|
|
| 16,917 |
|
Total current assets |
|
| 618,209 |
|
|
| 560,063 |
|
|
| 1,562,184 |
|
|
| 764,336 |
|
Property and equipment, net |
|
| 238,841 |
|
|
| 215,326 |
|
|
| 286,369 |
|
|
| 266,318 |
|
Intangible assets, net |
|
| 252,048 |
|
|
| 280,774 |
|
|
| 152,264 |
|
|
| 201,092 |
|
Goodwill |
|
| 561,366 |
|
|
| 536,926 |
|
|
| 559,553 |
|
|
| 561,064 |
|
Operating lease right-of-use assets |
|
| 102,270 |
|
|
| 66,932 |
| ||||||||
Deferred tax assets |
|
| 5,263 |
|
|
| 6,440 |
|
|
| 15,755 |
|
|
| 9,162 |
|
Restricted cash and investments |
|
| 2,395 |
|
|
| 1,494 |
|
|
| 1,494 |
|
|
| 1,494 |
|
Other assets |
|
| 29,737 |
|
|
| 39,117 |
|
|
| 13,193 |
|
|
| 14,892 |
|
Total assets |
| $ | 1,707,859 |
|
| $ | 1,640,140 |
|
| $ | 2,693,082 |
|
| $ | 1,885,290 |
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
| $ | 105,877 |
|
| $ | 75,767 |
|
| $ | 110,401 |
|
| $ | 97,160 |
|
Contingent consideration liabilities |
|
| 7,560 |
|
|
| 18,952 |
|
|
| 7,289 |
|
|
| 15,727 |
|
Accrued payroll and related expenses |
|
| 59,960 |
|
|
| 55,618 |
|
|
| 63,421 |
|
|
| 86,458 |
|
Litigation liabilities |
|
| 1,415 |
|
|
| 8,150 |
| ||||||||
Operating lease liabilities |
|
| 7,875 |
|
|
| 5,567 |
| ||||||||
Income tax liabilities |
|
| 4,648 |
|
|
| 2,908 |
|
|
| 2,073 |
|
|
| 2,005 |
|
Senior convertible notes |
|
| 645,303 |
|
|
| — |
| ||||||||
Total current liabilities |
|
| 179,460 |
|
|
| 161,395 |
|
|
| 836,362 |
|
|
| 206,917 |
|
Long-term senior convertible notes |
|
| 602,526 |
|
|
| 582,920 |
|
|
| 766,226 |
|
|
| 623,298 |
|
Deferred and income tax liabilities, non-current |
|
| 4,964 |
|
|
| 18,870 |
| ||||||||
Deferred tax liabilities |
|
| 2,807 |
|
|
| 14,655 |
| ||||||||
Operating lease liabilities |
|
| 111,634 |
|
|
| 73,153 |
| ||||||||
Other long-term liabilities |
|
| 86,384 |
|
|
| 77,539 |
|
|
| 52,438 |
|
|
| 52,060 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable equity component of senior convertible notes |
|
| 4,697 |
|
|
| — |
| ||||||||
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 5,000,000 shares authorized, none outstanding |
|
| — |
|
|
| — |
| ||||||||
Common stock, $0.001 par value; 120,000,000 shares authorized at December 31, 2018 and December 31, 2017, 56,648,077 and 56,164,060 issued and outstanding at December 31, 2018 and December 31, 2017, respectively |
|
| 61 |
|
|
| 60 |
| ||||||||
Preferred stock, $0.001 par value; 5,000 shares authorized, NaN outstanding |
|
| — |
|
|
| — |
| ||||||||
Common stock, $0.001 par value; 150,000 and 120,000 shares authorized at December 31, 2020 and December 31, 2019, respectively; 57,945 shares issued and 51,376 outstanding at December 31, 2020; 57,525 issued and 52,145 outstanding at December 31, 2019 |
|
| 62 |
|
|
| 62 |
| ||||||||
Additional paid-in capital |
|
| 1,397,829 |
|
|
| 1,363,549 |
|
|
| 1,550,001 |
|
|
| 1,429,854 |
|
Accumulated other comprehensive loss |
|
| (8,628 | ) |
|
| (6,933 | ) |
|
| (7,585 | ) |
|
| (9,418 | ) |
Retained earnings |
|
| 17,241 |
|
|
| 4,762 |
|
|
| 45,322 |
|
|
| 82,475 |
|
Treasury stock at cost; 5,116,496 shares and 5,001,886 shares at December 31, 2018 and December 31, 2017, respectively |
|
| (571,978 | ) |
|
| (565,867 | ) | ||||||||
Total NuVasive, Inc. stockholders’ equity |
|
| 834,525 |
|
|
| 795,571 |
| ||||||||
Non-controlling interests |
|
| — |
|
|
| 3,845 |
| ||||||||
Treasury stock at cost; 6,569 shares and 5,380 shares at December 31, 2020 and December 31, 2019, respectively |
|
| (668,882 | ) |
|
| (587,766 | ) | ||||||||
Total equity |
|
| 834,525 |
|
|
| 799,416 |
|
|
| 918,918 |
|
|
| 915,207 |
|
Total liabilities and equity |
| $ | 1,707,859 |
|
| $ | 1,640,140 |
|
| $ | 2,693,082 |
|
| $ | 1,885,290 |
|
See accompanying notes to Consolidated Financial Statements.
7586
NUVASIVE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
|
| Year Ended December 31, |
|
| Year Ended December 31, |
| ||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
|
| 2018 |
| ||||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Product revenue |
| $ | 986,458 |
|
| $ | 938,981 |
|
| $ | 893,544 |
| ||||||||||||
Service revenue |
|
| 115,256 |
|
|
| 87,704 |
|
|
| 68,588 |
| ||||||||||||
Total revenue |
|
| 1,101,714 |
|
|
| 1,026,685 |
|
|
| 962,132 |
| ||||||||||||
Cost of revenue (excluding below amortization of intangible assets) |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Cost of products sold |
|
| 234,509 |
|
|
| 207,307 |
|
|
| 195,605 |
| ||||||||||||
Cost of services |
|
| 76,650 |
|
|
| 61,134 |
|
|
| 44,500 |
| ||||||||||||
Total cost of revenue |
|
| 311,159 |
|
|
| 268,441 |
|
|
| 240,105 |
| ||||||||||||
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Products |
| $ | 950,189 |
|
| $ | 1,044,569 |
|
| $ | 986,457 |
| ||||||||||||
Services |
|
| 100,393 |
|
|
| 123,501 |
|
|
| 115,257 |
| ||||||||||||
Total net sales |
|
| 1,050,582 |
|
|
| 1,168,070 |
|
|
| 1,101,714 |
| ||||||||||||
Cost of sales (excluding below amortization of intangible assets): |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Products |
|
| 247,809 |
|
|
| 232,474 |
|
|
| 234,509 |
| ||||||||||||
Services |
|
| 73,822 |
|
|
| 79,883 |
|
|
| 76,650 |
| ||||||||||||
Total cost of sales |
|
| 321,631 |
|
|
| 312,357 |
|
|
| 311,159 |
| ||||||||||||
Gross profit |
|
| 790,555 |
|
|
| 758,244 |
|
|
| 722,027 |
|
|
| 728,951 |
|
|
| 855,713 |
|
|
| 790,555 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, marketing and administrative |
|
| 575,836 |
|
|
| 539,507 |
|
|
| 533,600 |
| ||||||||||||
Selling, general and administrative |
|
| 547,195 |
|
|
| 611,181 |
|
|
| 575,836 |
| ||||||||||||
Research and development |
|
| 61,695 |
|
|
| 50,425 |
|
|
| 47,999 |
|
|
| 79,838 |
|
|
| 72,380 |
|
|
| 61,695 |
|
Amortization of intangible assets |
|
| 50,670 |
|
|
| 48,039 |
|
|
| 42,001 |
|
|
| 51,726 |
|
|
| 51,097 |
|
|
| 50,670 |
|
Purchase of in-process research and development |
|
| 8,913 |
|
|
| — |
|
|
| — |
|
|
| 1,011 |
|
|
| — |
|
|
| 8,913 |
|
Litigation liability loss (gain) |
|
| 27,800 |
|
|
| 4,500 |
|
|
| (43,310 | ) | ||||||||||||
Litigation liability loss |
|
| — |
|
|
| — |
|
|
| 27,800 |
| ||||||||||||
Business transition costs |
|
| 11,473 |
|
|
| 4,287 |
|
|
| 18,138 |
|
|
| 10,878 |
|
|
| (1,995 | ) |
|
| 11,473 |
|
Total operating expenses |
|
| 736,387 |
|
|
| 646,758 |
|
|
| 598,428 |
|
|
| 690,648 |
|
|
| 732,663 |
|
|
| 736,387 |
|
Interest and other expense, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
| 586 |
|
|
| 440 |
|
|
| 1,091 |
|
|
| 1,472 |
|
|
| 1,917 |
|
|
| 586 |
|
Interest expense |
|
| (37,857 | ) |
|
| (38,021 | ) |
|
| (40,520 | ) |
|
| (70,466 | ) |
|
| (38,525 | ) |
|
| (37,857 | ) |
Loss on repurchases of convertible notes |
|
| — |
|
|
| — |
|
|
| (19,085 | ) | ||||||||||||
Other income (expense), net |
|
| (8,174 | ) |
|
| (1,542 | ) |
|
| (305 | ) | ||||||||||||
Other (expense) income, net |
|
| (16,854 | ) |
|
| (5,925 | ) |
|
| (8,174 | ) | ||||||||||||
Total interest and other expense, net |
|
| (45,445 | ) |
|
| (39,123 | ) |
|
| (58,819 | ) |
|
| (85,848 | ) |
|
| (42,533 | ) |
|
| (45,445 | ) |
Income before income taxes |
|
| 8,723 |
|
|
| 72,363 |
|
|
| 64,780 |
| ||||||||||||
(Loss) income before income taxes |
|
| (47,545 | ) |
|
| 80,517 |
|
|
| 8,723 |
| ||||||||||||
Income tax benefit (expense) |
|
| 3,756 |
|
|
| 7,492 |
|
|
| (29,309 | ) |
|
| 10,392 |
|
|
| (15,283 | ) |
|
| 3,756 |
|
Consolidated net income |
| $ | 12,479 |
|
| $ | 79,855 |
|
| $ | 35,471 |
| ||||||||||||
Add back net loss attributable to non-controlling interests |
| $ | — |
|
| $ | (1,743 | ) |
| $ | (1,721 | ) | ||||||||||||
Net income attributable to NuVasive, Inc. |
| $ | 12,479 |
|
| $ | 81,598 |
|
| $ | 37,192 |
| ||||||||||||
Consolidated net (loss) income |
| $ | (37,153 | ) |
| $ | 65,234 |
|
| $ | 12,479 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to NuVasive, Inc.: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net (loss) income per share: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Basic |
| $ | 0.24 |
|
| $ | 1.60 |
|
| $ | 0.74 |
|
| $ | (0.72 | ) |
| $ | 1.26 |
|
| $ | 0.24 |
|
Diluted |
| $ | 0.24 |
|
| $ | 1.48 |
|
| $ | 0.69 |
|
| $ | (0.72 | ) |
| $ | 1.23 |
|
| $ | 0.24 |
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 51,382 |
|
|
| 50,874 |
|
|
| 50,077 |
|
|
| 51,416 |
|
|
| 51,956 |
|
|
| 51,382 |
|
Diluted |
|
| 52,355 |
|
|
| 55,193 |
|
|
| 54,102 |
|
|
| 51,416 |
|
|
| 53,160 |
|
|
| 52,355 |
|
See accompanying notes to Consolidated Financial Statements.
7687
NUVASIVE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
|
| Year Ended December 31, |
| |||||||||
|
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
Consolidated net income |
| $ | 12,479 |
|
| $ | 79,855 |
|
| $ | 35,471 |
|
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on marketable securities, net of tax |
|
| — |
|
|
| (1 | ) |
|
| 330 |
|
Translation adjustments, net of tax |
|
| (1,695 | ) |
|
| 3,699 |
|
|
| 1,151 |
|
Other comprehensive (loss) income: |
|
| (1,695 | ) |
|
| 3,698 |
|
|
| 1,481 |
|
Total consolidated comprehensive income |
|
| 10,784 |
|
|
| 83,553 |
|
|
| 36,952 |
|
Net loss attributable to non-controlling interests |
|
| — |
|
|
| 1,743 |
|
|
| 1,721 |
|
Comprehensive income attributable to NuVasive, Inc. |
| $ | 10,784 |
|
| $ | 85,296 |
|
| $ | 38,673 |
|
|
| Year Ended December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
Consolidated net (loss) income |
| $ | (37,153 | ) |
| $ | 65,234 |
|
| $ | 12,479 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on marketable securities, net of tax |
|
| 13 |
|
|
| — |
|
|
| — |
|
Translation adjustments, net of tax |
|
| 1,820 |
|
|
| (790 | ) |
|
| (1,695 | ) |
Other comprehensive income (loss): |
|
| 1,833 |
|
|
| (790 | ) |
|
| (1,695 | ) |
Total consolidated comprehensive (loss) income |
| $ | (35,320 | ) |
| $ | 64,444 |
|
| $ | 10,784 |
|
See accompanying notes to Consolidated Financial Statements.
7788
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| Additional |
|
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
| NuVasive, Inc. |
|
| Non- |
|
|
|
|
| ||||
|
| Common Stock |
|
| Paid-in |
|
| Comprehensive |
|
|
|
|
|
| Treasury Stock |
|
| Stockholders' |
|
| Controlling |
|
| Total |
| |||||||||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Loss |
|
| Accumulated Deficit |
|
| Shares |
|
| Amount |
|
| Equity |
|
| Interests |
|
| Equity |
| ||||||||||
Balance at December 31, 2015 |
|
| 52,616 |
|
|
| 53 |
|
|
| 989,387 |
|
|
| (12,112 | ) |
|
| (104,006 | ) |
|
| (3,316 | ) |
|
| (161,788 | ) |
|
| 711,534 |
|
|
| 7,309 |
|
|
| 718,843 |
|
Adjustment for full retrospective adoption of accounting standard |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,625 |
|
|
| — |
|
|
| — |
|
|
| 1,625 |
|
|
| — |
|
|
| 1,625 |
|
Issuance of common stock under employee and director stock option and purchase plans |
|
| 2,480 |
|
|
| 2 |
|
|
| 60,720 |
|
|
| — |
|
|
| — |
|
|
| (1,443 | ) |
|
| (76,079 | ) |
|
| (15,357 | ) |
|
| — |
|
|
| (15,357 | ) |
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| 24,981 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 24,981 |
|
|
| — |
|
|
| 24,981 |
|
Tax benefits related to convertible note repurchase |
|
| — |
|
|
| — |
|
|
| 13,374 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 13,374 |
|
|
| — |
|
|
| 13,374 |
|
Issuance of common stock in connection with royalty milestone achievement |
|
| 88 |
|
|
| — |
|
|
| 5,761 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,761 |
|
|
| — |
|
|
| 5,761 |
|
Issuance of common stock through conversion of notes payable |
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Sale of warrants |
|
| — |
|
|
| — |
|
|
| 44,850 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 44,850 |
|
|
| — |
|
|
| 44,850 |
|
Convertible note hedge |
|
| — |
|
|
| — |
|
|
| (111,150 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (111,150 | ) |
|
| — |
|
|
| (111,150 | ) |
Equity component of convertible note issuance |
|
| — |
|
|
| — |
|
|
| 84,784 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 84,784 |
|
|
| — |
|
|
| 84,784 |
|
Equity component of convertible note repurchase |
|
| — |
|
|
| — |
|
|
| (100,524 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (100,524 | ) |
|
| — |
|
|
| (100,524 | ) |
Debt issuance costs attributable to convertible feature |
|
| — |
|
|
| — |
|
|
| (1,931 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,931 | ) |
|
| — |
|
|
| (1,931 | ) |
Securities registration fees |
|
| — |
|
|
| — |
|
|
| (14 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (14 | ) |
|
| — |
|
|
| (14 | ) |
Net income attributable to NuVasive, Inc. |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 37,192 |
|
|
| — |
|
|
| — |
|
|
| 37,192 |
|
|
| — |
|
|
| 37,192 |
|
Net loss attributable to non-controlling interests |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,721 | ) |
|
| (1,721 | ) |
Other comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,481 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,481 |
|
|
| — |
|
|
| 1,481 |
|
Balance at December 31, 2016 |
|
| 55,185 |
|
| $ | 55 |
|
| $ | 1,010,238 |
|
| $ | (10,631 | ) |
| $ | (65,189 | ) |
|
| (4,759 | ) |
| $ | (237,867 | ) |
| $ | 696,606 |
|
| $ | 5,588 |
|
| $ | 702,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| Additional |
|
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
| NuVasive, Inc. |
|
| Non- |
|
|
|
|
| ||||
|
| Common Stock |
|
| Paid-in |
|
| Comprehensive |
|
|
|
|
|
| Treasury Stock |
|
| Stockholders' |
|
| Controlling |
|
| Total |
| |||||||||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Loss |
|
| Retained Earnings |
|
| Shares |
|
| Amount |
|
| Equity |
|
| Interests |
|
| Equity |
| ||||||||||
Balance at December 31, 2017 |
|
| 56,164 |
|
| $ | 60 |
|
| $ | 1,363,549 |
|
| $ | (6,933 | ) |
| $ | 4,762 |
|
|
| (5,002 | ) |
| $ | (565,867 | ) |
| $ | 795,571 |
|
| $ | 3,845 |
|
| $ | 799,416 |
|
Issuance of common stock under employee and director stock option and purchase plans |
|
| 466 |
|
|
| 1 |
|
|
| 11,309 |
|
|
| — |
|
|
| — |
|
|
| (114 | ) |
|
| (6,111 | ) |
|
| 5,199 |
|
|
| — |
|
|
| 5,199 |
|
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| 27,353 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 27,353 |
|
|
| — |
|
|
| 27,353 |
|
Issuance of common stock in connection with royalty milestone achievement |
|
| 18 |
|
|
| — |
|
|
| 4,719 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,719 |
|
|
| — |
|
|
| 4,719 |
|
Consolidated net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 12,479 |
|
|
| — |
|
|
| — |
|
|
| 12,479 |
|
|
| — |
|
|
| 12,479 |
|
Consideration paid in excess of non-controlling interests |
|
| — |
|
|
| — |
|
|
| (9,101 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (9,101 | ) |
|
| — |
|
|
| (9,101 | ) |
Non-controlling interests |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,845 | ) |
|
| (3,845 | ) |
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,695 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,695 | ) |
|
| — |
|
|
| (1,695 | ) |
Balance at December 31, 2018 |
|
| 56,648 |
|
| $ | 61 |
|
| $ | 1,397,829 |
|
| $ | (8,628 | ) |
| $ | 17,241 |
|
|
| (5,116 | ) |
| $ | (571,978 | ) |
| $ | 834,525 |
|
| $ | — |
|
| $ | 834,525 |
|
See accompanying notes to Consolidated Financial Statements.
78
89
NUVASIVE, INC.
CONSOLIDATED STATEMENTS OF EQUITY – (Continued)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| Additional |
|
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
| NuVasive, Inc. |
|
| Non- |
|
|
|
|
| ||||
|
| Common Stock |
|
| Paid-in |
|
| Comprehensive |
|
| (Accumulated Deficit) |
|
| Treasury Stock |
|
| Stockholders' |
|
| Controlling |
|
| Total |
| ||||||||||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Loss |
|
| Retained Earnings |
|
| Shares |
|
| Amount |
|
| Equity |
|
| Interests |
|
| Equity |
| ||||||||||
Balance at December 31, 2016 |
|
| 55,185 |
|
| $ | 55 |
|
| $ | 1,010,238 |
|
| $ | (10,631 | ) |
| $ | (65,189 | ) |
|
| (4,759 | ) |
| $ | (237,867 | ) |
| $ | 696,606 |
|
| $ | 5,588 |
|
| $ | 702,194 |
|
Adjustment for modified retrospective adoption of accounting standard |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (11,647 | ) |
|
| — |
|
|
| — |
|
|
| (11,647 | ) |
|
| — |
|
|
| (11,647 | ) |
Issuance of common stock under employee and director stock option and purchase plans |
|
| 743 |
|
|
| 1 |
|
|
| 15,569 |
|
|
| — |
|
|
| — |
|
|
| (243 | ) |
|
| (17,447 | ) |
|
| (1,877 | ) |
|
| — |
|
|
| (1,877 | ) |
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| 22,062 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 22,062 |
|
|
| — |
|
|
| 22,062 |
|
Issuance of common stock in connection with royalty milestone achievement |
|
| 90 |
|
|
| — |
|
|
| 5,131 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,131 |
|
|
| — |
|
|
| 5,131 |
|
Settlement of warrants |
|
| 3,657 |
|
|
| 3 |
|
|
| (3 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Settlement of convertible note hedge |
|
| (4,161 | ) |
|
| — |
|
|
| 310,553 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (310,553 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Equity component of convertible note settlement |
|
| 650 |
|
|
| 1 |
|
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Net income attributable to NuVasive, Inc. |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 81,598 |
|
|
| — |
|
|
| — |
|
|
| 81,598 |
|
|
| — |
|
|
| 81,598 |
|
Net loss attributable to non-controlling interests |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,743 | ) |
|
| (1,743 | ) |
Other comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,698 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,698 |
|
|
| — |
|
|
| 3,698 |
|
Balance at December 31, 2017 |
|
| 56,164 |
|
| $ | 60 |
|
| $ | 1,363,549 |
|
| $ | (6,933 | ) |
| $ | 4,762 |
|
|
| (5,002 | ) |
| $ | (565,867 | ) |
| $ | 795,571 |
|
| $ | 3,845 |
|
| $ | 799,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| Additional |
|
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| |||
|
| Common Stock |
|
| Paid-in |
|
| Comprehensive |
|
|
|
|
|
| Treasury Stock |
|
| Stockholders' |
| |||||||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Loss |
|
| Retained Earnings |
|
| Shares |
|
| Amount |
|
| Equity |
| ||||||||
Balance at December 31, 2018 |
|
| 56,648 |
|
| $ | 61 |
|
| $ | 1,397,829 |
|
| $ | (8,628 | ) |
| $ | 17,241 |
|
|
| (5,116 | ) |
| $ | (571,978 | ) |
| $ | 834,525 |
|
Issuance of common stock under employee and director stock option and purchase plans |
|
| 805 |
|
|
| 1 |
|
|
| 7,724 |
|
|
| — |
|
|
| — |
|
|
| (264 | ) |
|
| (15,788 | ) |
|
| (8,063 | ) |
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| 24,096 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 24,096 |
|
Issuance of common stock in connection with royalty milestone achievement |
|
| 72 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Consolidated net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 65,234 |
|
|
| — |
|
|
| — |
|
|
| 65,234 |
|
Consideration paid in excess of non-controlling interests |
|
| — |
|
|
| — |
|
|
| 205 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 205 |
|
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (790 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (790 | ) |
Balance at December 31, 2019 |
|
| 57,525 |
|
| $ | 62 |
|
| $ | 1,429,854 |
|
| $ | (9,418 | ) |
| $ | 82,475 |
|
|
| (5,380 | ) |
| $ | (587,766 | ) |
| $ | 915,207 |
|
See accompanying notes to Consolidated Financial Statements.
7990
CONSOLIDATED STATEMENTS OF EQUITY – (Continued)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| Additional |
|
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
| NuVasive, Inc. |
|
| Non- |
|
|
|
|
| ||||
|
| Common Stock |
|
| Paid-in |
|
| Comprehensive |
|
|
|
|
|
| Treasury Stock |
|
| Stockholders' |
|
| Controlling |
|
| Total |
| |||||||||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Loss |
|
| Retained Earnings |
|
| Shares |
|
| Amount |
|
| Equity |
|
| Interests |
|
| Equity |
| ||||||||||
Balance at December 31, 2017 |
|
| 56,164 |
|
| $ | 60 |
|
| $ | 1,363,549 |
|
| $ | (6,933 | ) |
| $ | 4,762 |
|
|
| (5,002 | ) |
| $ | (565,867 | ) |
| $ | 795,571 |
|
| $ | 3,845 |
|
| $ | 799,416 |
|
Issuance of common stock under employee and director stock option and purchase plans |
|
| 466 |
|
|
| 1 |
|
|
| 11,309 |
|
|
| — |
|
|
| — |
|
|
| (114 | ) |
|
| (6,111 | ) |
|
| 5,199 |
|
|
| — |
|
|
| 5,199 |
|
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| 27,353 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 27,353 |
|
|
| — |
|
|
| 27,353 |
|
Issuance of common stock in connection with royalty milestone achievement |
|
| 18 |
|
|
| — |
|
|
| 4,719 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,719 |
|
|
| — |
|
|
| 4,719 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 12,479 |
|
|
| — |
|
|
| — |
|
|
| 12,479 |
|
|
| — |
|
|
| 12,479 |
|
Consideration paid in excess of non-controlling interests |
|
| — |
|
|
| — |
|
|
| (9,101 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (9,101 | ) |
|
| — |
|
|
| (9,101 | ) |
Non-controlling interests |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,845 | ) |
|
| (3,845 | ) |
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,695 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,695 | ) |
|
| — |
|
|
| (1,695 | ) |
Balance at December 31, 2018 |
|
| 56,648 |
|
| $ | 61 |
|
| $ | 1,397,829 |
|
| $ | (8,628 | ) |
| $ | 17,241 |
|
|
| (5,116 | ) |
| $ | (571,978 | ) |
| $ | 834,525 |
|
| $ | — |
|
| $ | 834,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| Additional |
|
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| |||
|
| Common Stock |
|
| Paid-in |
|
| Comprehensive |
|
|
|
|
|
| Treasury Stock |
|
| Stockholders' |
| |||||||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Loss |
|
| Retained Earnings |
|
| Shares |
|
| Amount |
|
| Equity |
| ||||||||
Balance at December 31, 2019 |
|
| 57,525 |
|
| $ | 62 |
|
| $ | 1,429,854 |
|
| $ | (9,418 | ) |
| $ | 82,475 |
|
|
| (5,380 | ) |
| $ | (587,766 | ) |
| $ | 915,207 |
|
Issuance of common stock under employee and director stock option and purchase plans |
|
| 420 |
|
|
| — |
|
|
| 6,621 |
|
|
| — |
|
|
| — |
|
|
| (104 | ) |
|
| (6,116 | ) |
|
| 505 |
|
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| 25,778 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 25,778 |
|
Tax benefits related to convertible note issuance |
|
| — |
|
|
| — |
|
|
| 484 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 484 |
|
Shares repurchased |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,085 | ) |
|
| (75,000 | ) |
|
| (75,000 | ) |
Sale of warrants |
|
| — |
|
|
| — |
|
|
| 93,915 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 93,915 |
|
Convertible note hedge |
|
| — |
|
|
| — |
|
|
| (115,592 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (115,592 | ) |
Equity component of convertible note issuance |
|
| — |
|
|
| — |
|
|
| 115,559 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 115,559 |
|
Debt issuance costs attributable to convertible feature |
|
| — |
|
|
| — |
|
|
| (1,921 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,921 | ) |
Reclassification of redeemable equity component of senior convertible notes |
|
| — |
|
|
| — |
|
|
| (4,697 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,697 | ) |
Consolidated net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (37,153 | ) |
|
| — |
|
|
| — |
|
|
| (37,153 | ) |
Other comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,833 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,833 |
|
Balance at December 31, 2020 |
|
| 57,945 |
|
| $ | 62 |
|
| $ | 1,550,001 |
|
| $ | (7,585 | ) |
| $ | 45,322 |
|
|
| (6,569 | ) |
| $ | (668,882 | ) |
| $ | 918,918 |
|
See accompanying notes to Consolidated Financial Statements.
80
91
NUVASIVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
| Year Ended December 31, |
|
| Year Ended December 31, |
| ||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
|
| 2018 |
| ||||||
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income |
| $ | 12,479 |
|
| $ | 79,855 |
|
| $ | 35,471 |
| ||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Consolidated net (loss) income |
| $ | (37,153 | ) |
| $ | 65,234 |
|
| $ | 12,479 |
| ||||||||||||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Depreciation and amortization |
|
| 129,765 |
|
|
| 121,176 |
|
|
| 102,713 |
|
|
| 140,937 |
|
|
| 135,593 |
|
|
| 129,765 |
|
Purchase of in-process research and development |
|
| 8,913 |
|
|
| — |
|
|
| — |
|
|
| 1,011 |
|
|
| — |
|
|
| 8,913 |
|
Deferred income taxes |
|
| (11,396 | ) |
|
| (12,838 | ) |
|
| 26,292 |
|
|
| (18,007 | ) |
|
| 5,844 |
|
|
| (11,396 | ) |
Loss on repurchases of convertible notes |
|
| — |
|
|
| — |
|
|
| 19,085 |
| ||||||||||||
Amortization of non-cash interest |
|
| 20,123 |
|
|
| 20,538 |
|
|
| 22,721 |
|
|
| 48,986 |
|
|
| 21,288 |
|
|
| 20,123 |
|
Stock-based compensation |
|
| 25,673 |
|
|
| 22,391 |
|
|
| 26,924 |
|
|
| 18,145 |
|
|
| 30,297 |
|
|
| 25,673 |
|
Net loss on strategic investments |
|
| 4,421 |
|
|
| — |
|
|
| — |
|
|
| 268 |
|
|
| 4,767 |
|
|
| 4,421 |
|
Net loss recognized on change in fair value of derivatives |
|
| 12,301 |
|
|
| — |
|
|
| — |
| ||||||||||||
Reserves on current assets |
|
| 14,834 |
|
|
| 5,622 |
|
|
| 11,452 |
|
|
| 53,902 |
|
|
| 18,382 |
|
|
| 14,834 |
|
Other non-cash adjustments |
|
| 23,703 |
|
|
| 16,561 |
|
|
| 16,928 |
|
|
| 16,876 |
|
|
| 5,650 |
|
|
| 22,186 |
|
Changes in operating assets and liabilities, net of effects from acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| 4,562 |
|
|
| (26,610 | ) |
|
| (33,421 | ) |
|
| 3,030 |
|
|
| (16,407 | ) |
|
| 4,562 |
|
Inventory |
|
| (38,646 | ) |
|
| (35,867 | ) |
|
| (22,624 | ) |
|
| (40,765 | ) |
|
| (54,872 | ) |
|
| (38,646 | ) |
Prepaid expenses and other current assets |
|
| (1,280 | ) |
|
| (12,681 | ) |
|
| (3,875 | ) |
|
| (4,986 | ) |
|
| (4,622 | ) |
|
| (1,280 | ) |
Accounts payable and accrued liabilities |
|
| 20,518 |
|
|
| (5,558 | ) |
|
| 12,376 |
|
|
| 8,756 |
|
|
| (3,924 | ) |
|
| 22,900 |
|
Contingent consideration liabilities |
|
| (300 | ) |
|
| (11,200 | ) |
|
| — |
| ||||||||||||
Accrued payroll and related expenses |
|
| 2,595 |
|
|
| 3,975 |
|
|
| 8,841 |
|
|
| (23,654 | ) |
|
| 24,256 |
|
|
| 2,595 |
|
Litigation liability |
|
| 1,165 |
|
|
| 8,150 |
|
|
| (88,450 | ) | ||||||||||||
Income taxes |
|
| 2,054 |
|
|
| 3,455 |
|
|
| 23,652 |
|
|
| 6,264 |
|
|
| 3,804 |
|
|
| 2,054 |
|
Net cash provided by operating activities |
|
| 219,183 |
|
|
| 176,969 |
|
|
| 158,085 |
|
|
| 185,911 |
|
|
| 235,290 |
|
|
| 219,183 |
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Ellipse Technologies, net of cash acquired |
|
| — |
|
|
| — |
|
|
| (380,080 | ) | ||||||||||||
Other acquisitions and investments |
|
| (55,266 | ) |
|
| (62,370 | ) |
|
| (108,591 | ) | ||||||||||||
Acquisitions and investments |
|
| — |
|
|
| (4,100 | ) |
|
| (55,266 | ) | ||||||||||||
Proceeds from other investments |
|
| 3,584 |
|
|
| — |
|
|
| — |
|
|
| 1,143 |
|
|
| — |
|
|
| 3,584 |
|
Purchases of intangible assets |
|
| (7,682 | ) |
|
| (2,270 | ) |
|
| (5,918 | ) |
|
| (3,860 | ) |
|
| (7,501 | ) |
|
| (7,682 | ) |
Purchases of property and equipment |
|
| (101,921 | ) |
|
| (110,221 | ) |
|
| (88,372 | ) |
|
| (105,729 | ) |
|
| (122,883 | ) |
|
| (101,921 | ) |
Purchases of marketable securities |
|
| — |
|
|
| — |
|
|
| (128,956 | ) |
|
| (233,488 | ) |
|
| — |
|
|
| — |
|
Proceeds from sales of marketable securities |
|
| — |
|
|
| — |
|
|
| 407,032 |
| ||||||||||||
Proceeds from sales and maturities of marketable securities |
|
| 60,000 |
|
|
| — |
|
|
| — |
| ||||||||||||
Net cash used in investing activities |
|
| (161,285 | ) |
|
| (174,861 | ) |
|
| (304,885 | ) |
|
| (281,934 | ) |
|
| (134,484 | ) |
|
| (161,285 | ) |
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of common stock |
|
| 8,127 |
|
|
| 9,991 |
|
|
| 9,492 |
|
|
| 6,170 |
|
|
| 6,415 |
|
|
| 8,127 |
|
Payment of contingent consideration |
|
| (19,450 | ) |
|
| (19,400 | ) |
|
| (422 | ) |
|
| (7,053 | ) |
|
| (809 | ) |
|
| (19,450 | ) |
Purchase of treasury stock |
|
| (2,928 | ) |
|
| (11,860 | ) |
|
| (24,734 | ) |
|
| (80,665 | ) |
|
| (14,478 | ) |
|
| (2,928 | ) |
Proceeds from issuance of convertible debt, net of issuance costs |
|
| — |
|
|
| — |
|
|
| 634,140 |
|
|
| 873,848 |
|
|
| — |
|
|
| — |
|
Proceeds from sale of warrants |
|
| — |
|
|
| — |
|
|
| 44,850 |
|
|
| 93,915 |
|
|
| — |
|
|
| — |
|
Purchase of convertible note hedge |
|
| — |
|
|
| — |
|
|
| (111,150 | ) | ||||||||||||
Repurchases of convertible notes |
|
| — |
|
|
| (63,317 | ) |
|
| (439,519 | ) | ||||||||||||
Purchases of convertible note hedges |
|
| (147,825 | ) |
|
| — |
|
|
| — |
| ||||||||||||
Proceeds from revolving line of credit |
|
| 100,000 |
|
|
| 60,000 |
|
|
| 50,000 |
|
|
| — |
|
|
| — |
|
|
| 100,000 |
|
Repayments on revolving line of credit |
|
| (100,000 | ) |
|
| (60,000 | ) |
|
| (50,000 | ) |
|
| — |
|
|
| — |
|
|
| (100,000 | ) |
Other financing activities |
|
| (327 | ) |
|
| (2,442 | ) |
|
| (1,834 | ) |
|
| (1,734 | ) |
|
| 2,228 |
|
|
| (327 | ) |
Net cash (used in) provided by financing activities |
|
| (14,578 | ) |
|
| (87,028 | ) |
|
| 110,823 |
| ||||||||||||
Net cash provided by (used in) financing activities |
|
| 736,656 |
|
|
| (6,644 | ) |
|
| (14,578 | ) | ||||||||||||
Effect of exchange rate changes on cash |
|
| (1,283 | ) |
|
| 2,070 |
|
|
| (929 | ) |
|
| 3,202 |
|
|
| 131 |
|
|
| (1,283 | ) |
Increase (decrease) in cash, cash equivalents and restricted cash |
|
| 42,037 |
|
|
| (82,850 | ) |
|
| (36,906 | ) | ||||||||||||
Increase in cash, cash equivalents and restricted cash |
|
| 643,835 |
|
|
| 94,293 |
|
|
| 42,037 |
| ||||||||||||
Cash, cash equivalents and restricted cash at beginning of period |
|
| 78,198 |
|
|
| 161,048 |
|
|
| 197,954 |
|
|
| 214,528 |
|
|
| 120,235 |
|
|
| 78,198 |
|
Cash, cash equivalents and restricted cash at end of period |
| $ | 120,235 |
|
| $ | 78,198 |
|
| $ | 161,048 |
|
| $ | 858,363 |
|
| $ | 214,528 |
|
| $ | 120,235 |
|
Supplemental disclosure of non-cash transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in connection with royalty milestone achievement |
| $ | 4,719 |
|
| $ | 5,131 |
|
| $ | 5,761 |
|
| $ | — |
|
| $ | — |
|
| $ | 4,719 |
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
| $ | 17,182 |
|
| $ | 15,897 |
|
| $ | 13,249 |
|
| $ | 19,914 |
|
| $ | 16,145 |
|
| $ | 17,182 |
|
Income taxes paid (refunded) |
| $ | 5,510 |
|
| $ | 1,459 |
|
| $ | (20,499 | ) | ||||||||||||
Income taxes paid |
| $ | 1,873 |
|
| $ | 5,828 |
|
| $ | 5,510 |
|
81
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the Consolidated Statements of Cash Flows for the periods presented:
|
| Year Ended December 31, |
|
| Year Ended December 31, |
| ||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
|
| 2018 |
| ||||||
Cash and cash equivalents |
| $ | 117,840 |
|
| $ | 72,803 |
|
| $ | 153,643 |
|
| $ | 856,869 |
|
| $ | 213,034 |
|
| $ | 117,840 |
|
Restricted cash, current |
|
| — |
|
|
| 3,901 |
|
|
| — |
| ||||||||||||
Restricted cash, non-current |
|
| 2,395 |
|
|
| 1,494 |
|
|
| 7,405 |
| ||||||||||||
Restricted cash |
|
| 1,494 |
|
|
| 1,494 |
|
|
| 2,395 |
| ||||||||||||
Total cash, cash equivalents and restricted cash reported in the Consolidated Statements of Cash Flows |
| $ | 120,235 |
|
| $ | 78,198 |
|
| $ | 161,048 |
|
| $ | 858,363 |
|
| $ | 214,528 |
|
| $ | 120,235 |
|
See accompanying notes to Consolidated Financial Statements.
8292
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Description of Business
NuVasive, Inc. (the “Company” or “NuVasive”) was incorporated in Delaware on July 21, 1997, and began commercializing its products in 2001. The Company’s principal product offering includes a minimally disruptive surgical platform called Maximum Access Surgery, or MAS. The MAS platform combines three categories of solutions that collectively minimize soft tissue disruption during spine fusion surgery, provide maximum visualization and are designed to enable safe and reproducible outcomes for the surgeon and the patient. The platform includes the Company’s proprietary software-driven nerve detection and avoidance systems and Intraoperative Monitoring (“IOM”) services and support; MaXcess, an integrated split-blade retractor system; and a wide variety of specialized implants and biologics. To assist with surgical procedures,Since its incorporation in 1997, the Company offershas grown from a small developer of specialty spinal implants into a global medical technology platform called Integrated Global Alignment (“iGA”); in which products and computer assisted technology under the MAS platform help achieve more precise spinal alignment. The individual components of the MAS platform, and many of the Company’s products, can also be used in open or traditionalcompany delivering procedurally integrated solutions for spine surgery. The Company continues to focus research and development efforts to expand its MAS product platform and advanceUnderlying the applications of its unique technology into procedurally-integrated surgical solutions. The Company dedicates significant resources toward training spine surgeons on its unique technology and products.
The Company’s procedurally integrated solutions use innovative, technological advancementsfor spine surgery are technologies designed to enable better clinical, financial, and operational outcomes, including:
• | its surgical access instruments, including its Maxcess integrated split-blade retractor system, designed to enable less-invasive surgical techniques by minimizing soft tissue disruption during spine surgery; |
• | its neuromonitoring systems, which use proprietary software-driven nerve detection and avoidance technology, and its intraoperative neuromonitoring (“IONM”) services and support; |
• | its Advanced Materials Science portfolio of specialized spinal implants, designed to advance spinal fusion by enhancing the osseointegration and biomechanical properties of implant materials, including porous titanium and porous polyetheretherketone; |
• | its Reline fixation system, designed to facilitate the preservation and restoration of patient alignment, while addressing a vast array of spinal pathologies from an open or less-invasive approach across all spinal procedures; and |
• | its Integrated Global Alignment platform, which is comprised of procedurally based technologies that help increase the predictability of achieving global alignment in spinal procedures, including its Bendini spinal rod bending system that assist with manual rod manipulation for spinal fixation. |
The Company has also invested in enabling technologies, including the development of capital equipment designed to further improve clinical, financial, and operational outcomes of spine surgery. The Company’s capital equipment portfolio currently consists of Lessray and the MASPulse platform. Lessray is an image enhancement platform designed to providereduce radiation exposure in the operating room by allowing surgeons to take low-quality, low-dose images and improve them to look like conventional full-dose images. Pulse integrates multiple enabling technologies within a single, expandable platform and is engineered to improve workflow, reduce variability, and increase the reproducibility of surgical efficiency, operative reliability,outcomes. The Pulse platform’s modular architecture is designed to incorporate applications for neuromonitoring, surgical planning, patient-specific rod bending, smart imaging, navigation, and procedural versatility. The Company offersintegration with robotics and other smart tools in the future. Selling and leasing of capital equipment do not make up a rangematerial portion of implants for spinal surgery, which include its porous titanium and polyetheretherketone (“PEEK”) implants under its Advanced Materials Science portfolio, fixation devices such as customizable rods, plates and screws, bone allograft in patented saline packaging, allogeneic and synthetic biologics, and disposables used in IOM. The Company makes available MAS instrument sets, MaXcess and neuromonitoring systems to hospitals to facilitate surgeon access to the spine to perform restorative and fusion procedures using the Company’s implants and fixation devices. The Company sells MAS instrument sets, MaXcess and neuromonitoring systems to hospitals, however, such sales are immaterialtotal net sales.
In addition to the Company’s results of operations.
The Companyprocedurally integrated solutions for spine surgery, it also designs and sells expandable growing rod implant systems that can be non-invasively lengthened following implantation with precise, incremental adjustments via an external remote controller using magnetic technology called MAGnetic External Control or MAGEC,(“MAGEC”), which allows for the minimally invasive treatment of early-onset and adolescent scoliosis. This technology is also the basis for the Company’s PRECICEPrecice limb lengthening system, which allows for the correction of long bone limb length discrepancy, as well as enhanced bone healingother products for treating specialized orthopedic procedures.
In December 2019, a novel strain of coronavirus, which causes COVID-19, was identified. Due to the rapid and global spread of the virus, on March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. To slow the proliferation of COVID-19, governments have implemented extraordinary measures, which include the mandatory closure of businesses, restrictions on travel and gatherings, and quarantine and physical distancing requirements. In addition, many government agencies in conjunction with hospitals and healthcare systems have, to varying degrees, deferred or suspended elective surgical procedures. While certain spine surgeries are deemed essential and certain surgeries, like in cases of trauma, cannot be delayed, the Company has seen and may continue to see a significant reduction in procedural volumes as hospital systems and/or patients that haveelect to defer spine surgery procedures. As a result of these measures, the Company has experienced traumatic injury.reductions in procedural volumes during 2020 and anticipates this trend may continue. The cumulative effect of these disruptions had a significant impact on the Company’s business in 2020 and it is not possible to accurately predict the length or severity of the COVID-19 pandemic or the timing for a broad and sustained resumption of elective surgical procedures.
The Company continues to develop a wide variety
93
Basis of Presentation and Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of the Company and its majority-owned or controlled subsidiaries, collectively referred to as either NuVasive or the Company. The Company translates the financial statements of its foreign subsidiaries using end-of-period exchange rates for assets and liabilities and average exchange rates during each reporting period for results of operations. When there is a portion of equity in an acquired subsidiary not attributable, directly or indirectly, to the respective parent entity, the Company records the fair value of the non-controlling interest at the acquisition date and classifies the amounts attributable to non-controlling interest separately in equity in the Company's Consolidated Financial Statements. Any subsequent changes in a parent's ownership interest while the parent retains its controlling financial interest in its subsidiary are accounted for as equity transactions. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company has reclassified historically presented revenuereplaced the caption “Revenue” with “Net sales,” and costthe caption “Sales, marketing and administrative” with “Selling, general and administrative,” within the Consolidated Statements of revenueOperations and corresponding changes have been made throughout this Annual Report to conform to the current year presentation, which now reflects revenue and costs allocated to the Company’s product and service offerings.this presentation. These reclassifications hadupdated captions have no impact on previously reported results of operations. Additionally, as required by Accounting Standards Update 2014-09 Revenue from Contracts with Customers (“ASU 2014-09”), on January 1, 2018 the Company adopted Accounting Standards Codification 606 Revenue from Contracts with Customers (“ASC 606”), electing full retrospective method of adoption.operations or financial position.
83
To prepare financial statements in conformity with generally accepted accounting principles (“GAAP”) accepted in the United States, management must make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Recent Accounting Pronouncements Not Yet Adopted
In February 2016,January 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-02, Leases, 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the Emerging Issues Task Force), which introduced ASC 842 – Leasesclarifies the interaction of the accounting for equity securities, investments accounted for under the equity method, and certain forward contracts and purchased options. This update is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, and early adoption is permitted. The Company will adopt ASU 2020-01 on January 1, 2021, and does not expect a material impact to its Consolidated Financial Statements.
In August 2020, the FASB issued ASU No. 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2016-02”2020-06”), which simplifies the accounting for convertible instruments. The guidance removes certain accounting models that separate the embedded conversion features from the host contract for convertible instruments. ASU 2020-06 allows for a new comprehensive lease accounting model that supersedes the current lease guidance under ASC 840 – Leases. The new accounting standard requires lessees to recognize right-of-use assets and corresponding lease liabilities for all leases with lease termsmodified or full retrospective method of greater than twelve months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The new accounting standard will betransition. This update is effective for the Company starting in the first quarter of fiscal 2019. Earlyyears beginning after December 15, 2021, and interim periods within those fiscal years, and early adoption is permitted. The Company will adopt ASU 2016-022020-06 on January 1, 2019,2021, and will elect the optionalmodified transition method that allows for a cumulative-effect adjustment in the period of adoption and will not restate prior periods. The Company will elect the package of practical expedients permitted under the transition guidance, with the exception of the hindsight practical expedient. As a result of the adoption, the Company will record right-of-use assetsincrease its convertible debt liabilities and liabilities of approximately $62.0retained earnings on January 1, 2021 by $115.4 million and $75.0$64.5 million, respectively, and their correspondingdecrease its deferred tax assetsliabilities and liabilities, on its Consolidated Balance Sheet as of January 1, 2019, primarily associated with its operating leases.additional paid-in capital by approximately $28.0 million and $151.9 million, respectively.
Recently Adopted Accounting Standards
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (“ASU 2016-13”), which changes the accounting for recognizing impairments of financial assets. Under the new guidance, credit losses for certain types of financial instruments will be estimated based on expected losses. The new guidance also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. The newamendments in this update were adopted using a modified retrospective transition method as of January 1, 2020, which had 0 cumulative impact to retained earnings. The adoption of this guidance will be effective for the Company starting in the first quarter of fiscal 2021. Early adoption is permitted starting in the first quarter of fiscal 2020. The Company believes the adoption will modify the way the Company analyzes financial instruments, but it doesdid not anticipatehave a material impact on results of operations. The Company is in the process of determining the effects the adoption will have on itsCompany’s Consolidated Financial Statements as well as whether to early adopt the new guidance.Statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles – Goodwill and Other, which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The standard has tiered effective dates, starting in 2020 for calendar-year public business entities that meetCompany adopted the definition of an SEC filer. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company is in the process of determining the effects the adoption will have on its Consolidated Financial Statements as well as whether to early adopt the new guidance.
In July 2017, the FASB issued Accounting Standards Update No. 2017-11, Earnings Per Share, Distinguishing Liabilities from Equity, Derivatives and Hedging, which changes the accounting treatment and the earnings per share calculation for certain instruments with down round features. The amendments in this update should be applied using a cumulative-effect adjustment as of the beginning of the fiscal year of adoption or retrospective adjustment to each period presented. This update is effective for annual periods beginning after December 15, 2018, and interim periods within those periods and early adoption is permitted. The Company does not expect the adoption to have any significant impact on its Consolidated Financial Statements.
In August 2017, the FASB issued Accounting Standards Update No. 2017-12, Derivatives and Hedging,January 1, 2020, which is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting and increase transparency as to the scope and results of hedging programs. The amendments in this update will be applied using a cumulative-effect adjustment as of the beginning of the fiscal year of adoption. This update is effective for annual periods beginning after December 15, 2018, and interim periods within those periods and earlyprospective transition method. The adoption is permitted. The Company doesdid not expect the adoption to have any significanta material impact on itsthe Company’s Consolidated Financial Statements.
94
In August 2018, the FASB issued Accounting Standards Update No. 2018-13, Fair Value Measurement: Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement(“ASU 2018-13”), which adds and modifies certain disclosure requirements for fair value measurements. Under the new guidance, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, or valuation processes for Level 3 fair value measurements. However, public companies will be required to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and related changes in unrealized gains and losses included in other comprehensive income. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods, and early adoption is permitted. The Company is inadopted ASU 2018-13 as of January 1, 2020. The adoption did not have a material impact on the process of determiningCompany’s Consolidated Financial Statements. See Note 4 to the impact the adoption will have on its Consolidated Financial Statements as well as whether to early adopt the new guidance.for further discussion on fair value measurements.
84
In September 2018, the FASB issued Accounting Standards Update No. 2018-15, Intangible – Goodwill and Other – Internal-Use Software (“ASU 2018-15”), which requires a customer in a cloud computing arrangement to determine whichwhether implementation costs to capitalizeshould be capitalized as assets or expenseexpensed as incurred. Under the new guidance, capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods, and early adoption is permitted. The Company does not expect the adoption to have any significant impact on its Consolidated Financial Statements.
Recently Adopted Accounting Standards
In May 2014, the FASB issued ASU 2014-09, an updated standard on revenue recognition. The standard effectively replaces Accounting Standards Codification 605 Revenue Recognition (“ASC 605”) with ASC 606. In summary, the changes to the guidance in revenue recognition under ASC 606 focuses on the existence of a contract with the customer (whether written, oral, or implied by an entity’s customary business practices), the concept that the performance obligation is fulfilled when the customer obtains control of the asset/service, versus the transfer of risk and reward, and the requirement that variable consideration (including rebates, discounts, etc.) and incremental costs must be estimated and recognized in the amount that is expected or most likely to be realized over the term of the contract fulfillment.
Prior to the adoption of ASC 606, the Company recognized revenue in accordance with ASC 605 when all four of the following criteria were met: (i) persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectability is reasonably assured. Specifically, revenue from the sale of implants, biologics and disposables was generally recognized upon a purchase order from the hospital or acknowledgment from the hospital indicating product use or implantation or upon shipment to third-party customers who immediately accepted title. Revenue from the sale of instrument sets was recognized upon receipt of a purchase order and the subsequent shipment to customers who immediately accepted title. Revenue from neuromonitoring services was recognized in the period the service was performed for the amount of payment expected to be received.
The Company adopted ASC 606 as of January 1, 2018, electing full retrospective method of adoption, which resulted in a change in its accounting policy for revenue recognition and related adjustments to the Consolidated Financial Statements for all periods presented. The Company applied the practical expedients permitted under ASC 606 for which (i) contracts with customers originating prior to January 1, 2016 do not require disclosure for the amount of consideration allocated to remaining performance obligations or an explanation of when the Company expects to recognize that amount as revenue; (ii) contracts beginning and completing in the same annual reporting period need not be restated; and (iii) hindsight for estimating variable consideration for completed contracts is permitted.
The Company recognizes revenue from spinal surgery hardware and ancillary products at a point in time in two types of transactions: (i) procedural based transactions with products used during surgery defined as “charge sheet orders”, and (ii) shipping transactions which represent the stocking of product or the purchase of instrumentation to support future surgeries defined as “stocking and capital orders.” The Company also recognizes revenue at a point in time associated with surgical-related servicing procedures, including neuromonitoring services which are defined as “surgical-related services.” Other sources of revenue, such as leasing revenue and royalties, are immaterial to the Consolidated Financial Statements.
For charge sheet orders, the sale occurs when the surgery is performed and a charge sheet is submitted to the Company by its sales representative identifying the products consumed during the surgery. The charge sheet, as signed by the hospital, serves as a confirmation and acknowledgement of the Company’s products consumed during a surgery. Under ASC 605, persuasive evidence of an arrangement and delivery of product was deemed to have occurred once the charge sheet was processed, and an associated authorization or acknowledgement from the customer was received. Under ASC 606, the Company’s charge sheet orders are considered to be a contract with a customer when a surgery is scheduled with the Company as requested by the hospital or surgeon, and the products are consumed during the surgery or implanted into the patient. Revenue recognition under ASC 606 occurs upon completion of the Company’s performance obligation, which occurs upon consumption of the products during surgery and receipt of the charge sheet. In the event that information related to the surgical event and consumption of product is not readily available the Company recognizes revenue upon a purchase order from the hospital or acknowledgment from the hospital indicating product use.
For stocking and capital orders, under ASC 605, delivery was deemed to have occurred when the title, including all risks and rewards of ownership of the products specified in the sales agreement had passed to the buyer. Accordingly, title, including all risks and rewards of ownership, passed based on the shipping terms. Under ASC 606, the Company’s stocking and capital order performance obligation is considered to be satisfied when the buyer assumes control of the asset, either upon shipment or delivery depending on the terms, and ability to direct the use of the asset as appropriate without the Company’s consent.
85
Under both ASC 605 and ASC 606, revenue from surgical-related services, such as neuromonitoring services, is recognized in the period the service is performed based on the delivery of a services report to the customer. The Company recognizes revenue for the amount of payment expected to be received. The Company bills either hospitals or insurance companies for different aspects of the service, as applicable. Revenue from hospitals is recognized based on agreed upon pricing. Revenue from insurance companies is recognized using the expected value method, as the Company bills at a gross rate which is generally not the rate ultimately collected.
Under ASC 605, the Company has historically estimated the amounts of returns, trade-ins, discounts, rebates, credits or incentives as offsets to the total transaction price or revenue associated with the sale. In limited situations, when historical information was not available or reliable, the Company would defer revenue recognition until completion of all performance obligations. Under ASC 606, the Company analyzes sales that could include variable consideration, and estimates the expected or most likely amount of revenue after returns, trade-ins, discounts, rebates, credits, and incentives. In making these estimates, the Company considers whether the amount of variable consideration is constrained and is included in revenue only to the extent that it is probable that a significant reversal of the revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
The Company earns sales-based royalty revenue over time from sales of products using existing biologics intellectual property (“IP”) that is out-licensed to certain companies. Under ASC 605, royalty revenue was recognized as earned and when collection was reasonably assured and was generally estimated and recorded in the same period as the sales that generated the royalty obligation. ASC 606 provides an exception for sales or usage-based royalties from the guidance for accounting for variable consideration, allowing the royalty revenue from the license of IP to be recognized when the performance obligation has been satisfied and the subsequent sale has occurred. Therefore, the Company estimates monthly royalty revenue as its performance obligation is satisfied. The Company does not expect a significant impact to royalty revenue under the adoption of ASC 606 as it has historically estimated and accrued royalty revenue in the period earned.
The Company historically expensed incremental costs, such as commissions associated with sales contracts, as incurred. Under ASU 2014-09, ASC 340-40, Other Assets and Deferred Costs – Contracts with Customers was added along with ASC 606 to codify accounting guidance for the incremental costs to obtain or fulfill a contract with a customer. Under the guidance, the incremental costs must be deferred and recorded over the period in which the contract revenue is recognized. The Company typically does not associate quarterly or annual sales bonuses directly with a sale or master contract; however, commissions are directly associated with individual sales and expensed in the same period as the related contract revenue. The associated commissionable sales would not typically have a future benefit unless the revenue is recognized over time. The Company does not typically have situations where revenue is deferred in excess of one year. Given the practical expedient for contracts completing within one year, the Company does not expect these capitalized costs to be material in a given period.
As a result of the full retrospective method of adoption of ASC 606, the Company recorded a $1.6 million adjustment to January 1, 2016 accumulated deficit. The cumulative effect of the change on retained earnings as of December 31, 2017 for the full retrospective method of adoption of ASC 606 was $0.3 million. The following tables summarize in a condensed presentation the impact of the adoption of ASC 606 on the Company’s previously reported Consolidated Balance Sheet as of December 31, 2017, the Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2017 and 2016, and the Consolidated Statements of Cash Flows for the years ended December 31, 2017 and 2016.
86
| ||||||||||||
CONSOLIDATED BALANCE SHEET |
| |||||||||||
(in thousands) |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017 |
| As reported |
|
| Adjustments |
|
| As Adjusted |
| |||
Accounts receivable, gross |
| $ | 212,709 |
|
| $ | 537 |
| [a] | $ | 213,246 |
|
Allowances on accounts receivable |
|
| (13,669 | ) |
|
| 643 |
| [b] |
| (13,026 | ) |
Inventory, net |
|
| 247,245 |
|
|
| (107 | ) | [c] |
| 247,138 |
|
Other current assets |
|
| 112,705 |
|
|
| — |
|
|
| 112,705 |
|
Total current assets |
|
| 558,990 |
|
|
| 1,073 |
|
|
| 560,063 |
|
Remaining other assets |
|
| 1,080,077 |
|
|
| — |
|
|
| 1,080,077 |
|
Total assets |
| $ | 1,639,067 |
|
| $ | 1,073 |
|
| $ | 1,640,140 |
|
Accounts payable and accrued liabilities |
|
| 75,076 |
|
|
| 691 |
| [d] |
| 75,767 |
|
Accrued payroll and related expenses |
|
| 55,582 |
|
|
| 36 |
| [e] |
| 55,618 |
|
Other current liabilities |
|
| 30,010 |
|
|
| — |
|
|
| 30,010 |
|
Total current liabilities |
|
| 160,668 |
|
|
| 727 |
|
|
| 161,395 |
|
Deferred and income tax liabilities, non-current |
|
| 18,786 |
|
|
| 84 |
| [f] |
| 18,870 |
|
Other long-term liabilities |
|
| 660,459 |
|
|
| — |
|
|
| 660,459 |
|
Total NuVasive, Inc. stockholders’ equity |
|
| 795,309 |
|
|
| 262 |
| [g] |
| 795,571 |
|
Non-controlling interests |
|
| 3,845 |
|
|
| — |
|
|
| 3,845 |
|
Total equity |
|
| 799,154 |
|
|
| 262 |
|
|
| 799,416 |
|
Total liabilities and equity |
| $ | 1,639,067 |
|
| $ | 1,073 |
|
| $ | 1,640,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[a] Represents cumulative impact from January 1, 2016 to the period presented on accounts receivable for the full retrospective method of adoption of ASC 606. |
| |||||||||||
[b] Represents cumulative impact from January 1, 2016 to the period presented on allowances on accounts receivable for the full retrospective method of adoption of ASC 606. |
| |||||||||||
[c] Represents cumulative impact from January 1, 2016 to the period presented on inventory for the full retrospective method of adoption of ASC 606. |
| |||||||||||
[d] Represents cumulative impact from January 1, 2016 to the period presented on commissions payable and accrued returns for the full retrospective method of adoption of ASC 606. |
| |||||||||||
[e] Represents cumulative impact from January 1, 2016 to the period presented on commissions payable for the full retrospective method of adoption of ASC 606. |
| |||||||||||
[f] Represents cumulative impact from January 1, 2016 to the period presented on deferred tax liabilities for the full retrospective method of adoption of ASC 606. |
| |||||||||||
[g] Represents cumulative impact from January 1, 2016 to the period presented on retained earnings for the full retrospective method of adoption of ASC 606. |
|
87
| ||||||||||||
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME |
| |||||||||||
(in thousands, except per share amounts) |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2017 |
| As reported |
|
| Adjustments |
|
| As adjusted |
| |||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue |
| $ | 941,816 |
|
| $ | (2,835 | ) | [a] | $ | 938,981 |
|
Service revenue |
|
| 87,704 |
|
|
| — |
|
|
| 87,704 |
|
Total revenue |
|
| 1,029,520 |
|
|
| (2,835 | ) |
|
| 1,026,685 |
|
Cost of revenue (excluding amortization of intangible assets) |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold |
|
| 207,874 |
|
|
| (567 | ) | [b] |
| 207,307 |
|
Cost of services |
|
| 61,134 |
|
|
| — |
|
|
| 61,134 |
|
Total cost of revenue |
|
| 269,008 |
|
|
| (567 | ) |
|
| 268,441 |
|
Gross profit |
|
| 760,512 |
|
|
| (2,268 | ) |
|
| 758,244 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales, marketing and administrative |
|
| 539,913 |
|
|
| (406 | ) | [c] |
| 539,507 |
|
Other operating expenses |
|
| 107,251 |
|
|
| — |
|
|
| 107,251 |
|
Total operating expenses |
|
| 647,164 |
|
|
| (406 | ) |
|
| 646,758 |
|
Total interest and other expense, net |
|
| (39,123 | ) |
|
| — |
|
|
| (39,123 | ) |
Income tax benefit |
|
| 7,038 |
|
|
| 454 |
| [d] |
| 7,492 |
|
Consolidated net income |
| $ | 81,263 |
|
| $ | (1,408 | ) | [e] | $ | 79,855 |
|
Add back net loss attributable to non-controlling interests |
| $ | (1,743 | ) |
| $ | — |
|
| $ | (1,743 | ) |
Net income attributable to NuVasive, Inc. |
| $ | 83,006 |
|
| $ | (1,408 | ) | [e] | $ | 81,598 |
|
Net income per share attributable to NuVasive, Inc.: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 1.63 |
|
| $ | (0.03 | ) | [f] | $ | 1.60 |
|
Diluted |
| $ | 1.50 |
|
| $ | (0.02 | ) | [f] | $ | 1.48 |
|
Comprehensive income attributable to NuVasive, Inc. |
| $ | 86,704 |
|
| $ | (1,408 | ) | [e] | $ | 85,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[a] Represents net change in sales revenue for charge sheet orders recognized under ASC 606. |
| |||||||||||
[b] Represents net change in cost of products sold for charge sheet orders recognized under ASC 606. |
| |||||||||||
[c] Represents net change in accrued sales commissions for charge sheet orders recognized under ASC 606. |
| |||||||||||
[d] Represents deferred income tax liability on net change associated with charge sheet orders recognized under ASC 606. |
| |||||||||||
[e] Represents change in net income and comprehensive income resulting from net change in charge sheet orders recognized under ASC 606. |
| |||||||||||
[f] Represents earnings per share impact resulting from net change in charge sheet orders recognized under ASC 606. |
|
88
| ||||||||||||
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME |
| |||||||||||
(in thousands) |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016 |
| As reported |
|
| Adjustments |
|
| As adjusted |
| |||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue |
| $ | 893,484 |
|
| $ | 60 |
| [a] | $ | 893,544 |
|
Service revenue |
|
| 68,588 |
|
|
| — |
|
|
| 68,588 |
|
Total revenue |
|
| 962,072 |
|
|
| 60 |
|
|
| 962,132 |
|
Cost of revenue (excluding amortization of intangible assets) |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold |
|
| 195,593 |
|
|
| 12 |
| [b] |
| 195,605 |
|
Cost of services |
|
| 44,500 |
|
|
| — |
|
|
| 44,500 |
|
Total cost of revenue |
|
| 240,093 |
|
|
| 12 |
|
|
| 240,105 |
|
Gross profit |
|
| 721,979 |
|
|
| 48 |
|
|
| 722,027 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales, marketing and administrative |
|
| 533,624 |
|
|
| (24 | ) | [c] |
| 533,600 |
|
Other operating expenses |
|
| 64,828 |
|
|
| — |
|
|
| 64,828 |
|
Total operating expenses |
|
| 598,452 |
|
|
| (24 | ) |
|
| 598,428 |
|
Total interest and other expense, net |
|
| (58,819 | ) |
|
| — |
|
|
| (58,819 | ) |
Income tax expense |
|
| (29,282 | ) |
|
| (27 | ) | [d] |
| (29,309 | ) |
Consolidated net income |
| $ | 35,426 |
|
| $ | 45 |
| [e] | $ | 35,471 |
|
Add back net loss attributable to non-controlling interests |
| $ | (1,721 | ) |
| $ | — |
|
| $ | (1,721 | ) |
Net income attributable to NuVasive, Inc. |
| $ | 37,147 |
|
| $ | 45 |
| [e] | $ | 37,192 |
|
Net income per share attributable to NuVasive, Inc.: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.74 |
|
| $ | 0.00 |
| [f] | $ | 0.74 |
|
Diluted |
| $ | 0.69 |
|
| $ | 0.00 |
| [f] | $ | 0.69 |
|
Comprehensive income attributable to NuVasive, Inc. |
| $ | 38,628 |
|
| $ | 45 |
| [e] | $ | 38,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[a] Represents net change in sales revenue for charge sheet orders recognized under ASC 606. |
| |||||||||||
[b] Represents net change in cost of products sold for charge sheet orders recognized under ASC 606. |
| |||||||||||
[c] Represents net change in accrued sales commissions for charge sheet orders recognized under ASC 606. |
| |||||||||||
[d] Represents deferred income tax liability on net change associated with charge sheet orders recognized under ASC 606. |
| |||||||||||
[e] Represents change in net income and comprehensive income resulting from net change in charge sheet orders recognized under ASC 606. |
| |||||||||||
[f] Represents earnings per share impact resulting from net change in charge sheet orders recognized under ASC 606. |
|
89
| ||||||||||||
CONSOLIDATED STATEMENT OF CASH FLOWS |
| |||||||||||
(in thousands) |
| |||||||||||
|
|
|
| |||||||||
Year ended December 31, 2017 |
| As reported |
|
| Adjustments |
|
| As adjusted |
| |||
Consolidated net income |
| $ | 81,263 |
|
| $ | (1,408 | ) | [a] | $ | 79,855 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Reserves on current assets |
|
| 5,718 |
|
|
| (96 | ) | [b] |
| 5,622 |
|
Deferred income tax benefit |
|
| (12,384 | ) |
|
| (454 | ) | [c] |
| (12,838 | ) |
Other adjustments to reconcile net income |
|
| 180,666 |
|
|
| — |
|
|
| 180,666 |
|
Changes in operating assets and liabilities, net of effects from acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (29,389 | ) |
|
| 2,779 |
| [d] |
| (26,610 | ) |
Inventory |
|
| (35,300 | ) |
|
| (567 | ) | [e] |
| (35,867 | ) |
Prepaid expenses and other current assets |
|
| (12,681 | ) | [f] |
| — |
|
|
| (12,681 | ) |
Accounts payable and accrued liabilities |
|
| (16,617 | ) |
|
| (141 | ) | [g] |
| (16,758 | ) |
Litigation liability |
|
| 8,150 |
|
|
| — |
|
|
| 8,150 |
|
Accrued payroll and related expenses |
|
| 4,088 |
|
|
| (113 | ) | [g] |
| 3,975 |
|
Income taxes |
|
| 3,455 |
|
|
| — |
|
|
| 3,455 |
|
Net cash provided by operating activities |
|
| 176,969 |
|
|
| — |
|
|
| 176,969 |
|
Net cash used in investing activities |
|
| (174,861 | ) |
|
| — |
|
|
| (174,861 | ) |
Net cash used in financing activities |
|
| (87,028 | ) |
|
| — |
|
|
| (87,028 | ) |
Effect of exchange rate changes on cash |
|
| 2,070 |
|
|
| — |
|
|
| 2,070 |
|
Decrease in cash, cash equivalents and restricted cash |
| $ | (82,850 | ) |
| $ | — |
|
| $ | (82,850 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
[a] Represents change in net income resulting from charge sheet orders recognized under ASC 606. |
| |||||||||||
[b] Represents net change in allowances on accounts receivable for charge sheet orders recognized under ASC 606. |
| |||||||||||
[c] Represents deferred income tax liability on net change associated with charge sheet orders recognized under ASC 606. |
| |||||||||||
[d] Represents net change in accounts receivable for charge sheet orders recognized under ASC 606. |
| |||||||||||
[e] Represents net change in inventory for charge sheet orders recognized under ASC 606. |
| |||||||||||
[f] Recasted for adoption of ASU 2016-18 to exclude the impact of transfers to/from restricted cash balances. |
| |||||||||||
[g] Represents net change in accrued sales commissions for charge sheet orders recognized under ASC 606. |
|
90
| ||||||||||||
CONSOLIDATED STATEMENT OF CASH FLOWS |
| |||||||||||
(in thousands) |
| |||||||||||
|
|
|
| |||||||||
Year ended December 31, 2016 |
| As reported |
|
| Adjustments |
|
| As adjusted |
| |||
Consolidated net income |
| $ | 35,426 |
|
| $ | 45 |
| [a] | $ | 35,471 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Reserves on current assets |
|
| 11,408 |
|
|
| 44 |
| [b] |
| 11,452 |
|
Deferred income tax expense |
|
| 26,265 |
|
|
| 27 |
| [c] |
| 26,292 |
|
Other adjustments to reconcile net income |
|
| 188,371 |
|
|
| — |
|
|
| 188,371 |
|
Changes in operating assets and liabilities, net of effects from acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (33,250 | ) |
|
| (171 | ) | [d] |
| (33,421 | ) |
Inventory |
|
| (22,636 | ) |
|
| 12 |
| [e] |
| (22,624 | ) |
Prepaid expenses and other current assets |
|
| (3,875 | ) | [f] |
| — |
|
|
| (3,875 | ) |
Accounts payable and accrued liabilities |
|
| 12,325 |
|
|
| 51 |
| [g] |
| 12,376 |
|
Litigation liability |
|
| (88,450 | ) |
|
| — |
|
|
| (88,450 | ) |
Accrued payroll and related expenses |
|
| 8,849 |
|
|
| (8 | ) | [g] |
| 8,841 |
|
Income taxes |
|
| 23,652 |
|
|
| — |
|
|
| 23,652 |
|
Net cash provided by operating activities |
|
| 158,085 |
|
|
| — |
|
|
| 158,085 |
|
Net cash used in investing activities |
|
| (304,885 | ) |
|
| — |
|
|
| (304,885 | ) |
Net cash provided by financing activities |
|
| 110,823 |
|
|
| — |
|
|
| 110,823 |
|
Effect of exchange rate changes on cash |
|
| (929 | ) |
|
| — |
|
|
| (929 | ) |
Decrease in cash, cash equivalents and restricted cash |
| $ | (36,906 | ) |
| $ | — |
|
| $ | (36,906 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
[a] Represents change in net income resulting from charge sheet orders recognized under ASC 606. |
| |||||||||||
[b] Represents net change in allowances on accounts receivable for charge sheet orders recognized under ASC 606. |
| |||||||||||
[c] Represents deferred income tax liability on net change associated with charge sheet orders recognized under ASC 606. |
| |||||||||||
[d] Represents net change in accounts receivable for charge sheet orders recognized under ASC 606. |
| |||||||||||
[e] Represents net change in inventory for charge sheet orders recognized under ASC 606. |
| |||||||||||
[f] Recasted for adoption of ASU 2016-18 to exclude the impact of transfers to/from restricted cash balances. |
| |||||||||||
[g] Represents net change in accrued sales commissions for charge sheet orders recognized under ASC 606. |
|
91
In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which requires that (i) all equity investments, other than equity-method investments, in unconsolidated entities generally be measured at fair value through earnings and (ii) when the fair value option has been elected for financial liabilities, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive income. Additionally, ASU 2016-01 changes the disclosure requirements for financial instruments. ASU 2016-01 provides a practicability exception for investments that do not have readily determinable fair values, which allows investments to be measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. The Company adopted ASU 2016-01 as of January 1, 2018 and elected to apply the practicability exception for measuring equity investments that do not have readily determinable fair market. The adoption did not have any significant impact on the Company’s Consolidated Financial Statements.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayment or extinguishment costs, the maturing of a zero coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investees and beneficial interests obtained in a financial asset securitization. ASU 2016-15 designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. The retrospective transition method, requiring adjustment to all comparative periods presented, is required unless it is impracticable for some of the amendments, in which case those amendments would be made prospectively as of the earliest date practicable. The Company adopted ASU 2016-15 as of January 1, 2018. The adoption did not have any significant impact on the Company’s Consolidated Financial Statements.
In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), which aims to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This amendment requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. This update is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years with early adoption permitted, including adoption in an interim period. The Company elected to early adopt ASU 2016-16 in the first quarter 2017, which requires any adjustments to be recorded as of the beginning of fiscal 2017. As a result, the Company recorded a modified retrospective adjustment of $11.6 million to deferred tax assets and accumulated deficit as of January 1, 2017. The early adoption resulted in a decrease of $3.9 million in income tax expense that would have amortized out of prepaid income taxes during the year ended December 31, 2017. The decrease in income tax expense resulted in an increase in basic and diluted earnings per share of $0.08 and $0.07, respectively, for the year ended December 31, 2017.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Restricted Cash (“ASU 2016-18”), which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The amendments in this update will be applied using a retrospectiveprospective transition method to each period presented. The Company adopted ASU 2016-182018-15 as of January 1, 2018 and adjusted the presentation of its Statement of Cash Flows for the periods presented.2020. The adoption did not have any significanta material impact on the Company’s Consolidated Financial Statements.
In January 2017,December 2019, the FASB issued Accounting Standards Update No. 2017-01, Clarifying2019-12, Income Taxes (Topic 740): Simplifying the Definition of a BusinessAccounting for Income Taxes (“ASU 2017-01”2019-12”), which clarifiesmodifies Accounting Standard Codification 740 – Income Taxes (“ASC 740”). ASU 2019-12 enhances and simplifies various aspects of the income tax accounting guidance in ASC 740. This update is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, and early adoption is permitted. The Company elected to early adopt ASU 2019-12 in the quarter ended June 30, 2020. The Company applied the updated guidance for year-to-date losses in the Company’s interim period tax accounting on a prospective basis. The early adoption had no impact on the expected full year tax expense for 2020, but rather accelerated certain tax benefits to earlier quarters in 2020 that would otherwise have been limited under ASC 740.
In March 2020, the FASB issued Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provides a more robust frameworktemporary optional expedients and exceptions to use in determining when a setthe guidance on contract modifications and hedge accounting to ease the financial reporting burdens of assetsthe expected market transition from LIBOR and activitiesother interbank offered rates to alternative reference rates. This update is a business.effective upon issuance. The amendments in this update shouldrelief is temporary and generally cannot be applied prospectively onto contract modifications that occur after December 31, 2022 or hedging relationships entered into or evaluated after the effectivethat date. The Company adoptedadoption of ASU 2017-01 as of January 1, 2018. The adoption2020-04 did not have any significanta material impact on the Company’s Consolidated Financial Statements.
In February 2017, the FASB issued Accounting Standards Update No. 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (“ASU 2017-05”), which clarifies the scope of asset derecognition and adds guidance for partial sales and nonfinancial assets. An entity is required to apply the amendments in this update at the same time that it applies the amendments in ASU 2014-09. The Company adopted ASU 2017-05 as of January 1, 2018. The adoption did not have any significant impact on the Company’s Consolidated Financial Statements.
In May 2017, the FASB issued Accounting Standards Update No. 2017-09, Compensation – Stock Compensation (“ASU 2017-09”), which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as a modification. Entities will apply the modification accounting guidance if the value, vesting conditions, or classification of the award changes. The Company adopted ASU 2017-09 as of January 1, 2018. The adoption did not have any significant impact on the Company’s Consolidated Financial Statements.
92
In March 2018, the FASB issued Accounting Standards Update No. 2018-05, Income taxes (Topic 740):Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance regarding the recording of tax impacts where uncertainty exists, in the period of adoption of the 2017 U.S. Tax Cuts and Jobs Act (the “Act”). To the extent that a company’s accounting for certain income tax effects of the Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate to be included in the condensed financial statements. If a company cannot determine a provisional estimate to be included in the Consolidated Financial Statements, it should continue to apply ASC 740 on the basis of the provision of the tax laws that were in effect immediately before the enactment of the Act. See Note 9 to the Consolidated Financial Statements included in this Annual Report for further discussion on the impact of the Act.
In June 2018, the FASB issued Accounting Standards Update No. 2018-07, Compensation – Stock Compensation, which aligns the measurement and classification guidance for share-based payment to non-employees with the guidance for share-based payments to employees. Under the new guidance, the measurement period for equity-classified non-employee awards will be fixed at the grant date. The Company adopted ASU 2018-07 as of July 1, 2018. The Company will not apply ASU 2018-07 to previously issued interim-period financial statements and will not restate those financial statements the next time they are presented. The cumulative effect of the change on retained earnings was immaterial as of January 1, 2018.
Revenue Recognition
In accordance with Accounting Standards Codification 606 Revenue from Contracts with Customers (“ASC 606 guidance,606”), the Company recognizes revenue upon the transfer of goods or services to a customer at an amount that reflects the expected consideration to be received in exchange for those goods or services. The principles in ASC 606 are applied using the following five steps: (i) identify the contract with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) the Company satisfies its performance obligation(s). Specifically, revenue from the sale of implants, fixation products and disposables is generally recognized at an amount that reflects the expected consideration upon notice that the Company’s products have been used in a surgical procedure or upon shipment to a third-party customer assuming control of the products. Revenue from neuromonitoringIONM services is recognized in the period the service is performed for the amount of consideration expected to be received. Revenue from the sale of surgical instrument sets is generally recognized upon receipt of a purchase order and the subsequent shipment to a customer who assumes control. In certain cases, the Company does offer the ability for customers to lease surgical instrumentation primarily on a non-sales type basis. Instrument salesRevenue from the sale or lease of capital equipment is recognized when the Company transfers control to the customer, which is generally at the point when acceptance occurs that indicates customer acknowledgment of delivery or installation, depending on the terms of the arrangement. Selling and leasing revenue representof surgical instrument sets and capital equipment represents an immaterial amount of the Company’s total revenuenet sales in all periods presented. Revenue associated with products holding rights of return or trade-in are recognized when the Company concludes there is not a risk of significant revenue reversal in future periods for the expected consideration in the transaction. Costs incurred by the Company associated with sales contracts with customers are deferred over the performance obligation period and recognized in the same period as the related revenue, with the exception of contracts that complete within one year or less, in which case the associated costs are expensed as incurred.
95
Accounts Receivable and Related Valuation Accounts
Accounts receivable in the accompanying Consolidated Balance Sheets are presented net of allowances for doubtful accounts. credit losses.The Company performs credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers. The Company makes judgments as to its ability to collect outstanding receivables and providesmaintains an allowance for specific receivables ifcredit losses resulting from the inability of its customers, including hospitals, ambulatory surgery centers, and whendistributors, to make required payments. The allowance for credit losses is calculated quarterly, and is estimated on a region-by-region basis considering a number of factors including age of account balances, collection becomes doubtful. Provisions are made based uponhistory, historical account write-offs, third party credit reports, identified trends, current economic conditions, and supportable forecasted economic expectations. The allowance is adjusted on a specific review of all significant outstanding invoicesidentification basis for certain accounts as well as a reviewpooling of the overall quality and age of those invoices not specifically reviewed. In determiningaccounts with similar characteristics. An increase in the provision for invoices not specifically reviewed,credit losses may be required when the Company analyzes historicalfinancial condition of the Company’s customers or its collection experience deteriorates. An increase to the allowance for credit losses results in a corresponding charge to selling, general and administrative expenses. The Company has a diverse customer base and no single customer represented greater than ten percent of net sales or accounts receivable. Historically, the Company’s reserves have been adequate to cover credit losses.
The Company's exposure to credit losses may increase if its customers are adversely affected by changes in healthcare laws, coverage and reimbursement, economic pressures or uncertainty associated with local or global economic recessions, disruption associated with the current economic trends.COVID-19 pandemic, or other customer-specific factors. It is possible that there could be a material adverse impact from potential adjustments of the carrying amount of trade receivables as customers’ cash flows are impacted by their response to the COVID-19 pandemic and the deferral of elective surgical procedures.
The following table summarizes the changes in the allowance for credit losses:
(in thousands) |
| December 31, 2020 |
| |
Allowance for credit losses at January 1, 2020 |
| $ | 9,423 |
|
Current-period provision for expected losses |
|
| 1,079 |
|
Write-offs charged against the allowance |
|
| (1,305 | ) |
Recoveries of amounts previously written off |
|
| 220 |
|
Changes resulting from foreign currency fluctuations |
|
| 229 |
|
Allowance for credit losses at end of period |
| $ | 9,646 |
|
In addition, the Company establishes a liability for estimated sales returns and a reserve for price adjustments that are recorded as a reduction to revenue.net sales. The liability and reserve are maintained to account for the future product returns and price adjustments of products sold in the current period.
Concentration of Credit Risk and Significant Customers
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents, marketable securities and accounts receivable. The Company limits its exposure to credit loss by placing its cash and investments with high credit quality financial institutions. Additionally, the Company has established guidelines regarding diversification of its investments and their maturities, which are designed to maintain principal and maximize liquidity. The Company has a diverse customer base and no0 single customer represented greater than ten percent of sales or accounts receivable for any of the periods presented.
93
Fair Value of Financial Instruments
The Company’s financial instruments consist principally of cash and cash equivalents, marketable securities, restricted investments, derivatives, contingent consideration liabilities, accounts receivable, accounts payable, accrued expenses, and Senior Convertible Notes.
The Company measures certain assets and liabilities in accordance with authoritative guidance which requires fair value measurements to be classified and disclosed in one of the following three categories:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available.
Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain assets or liabilities within the fair value hierarchy. The Company did not have any transfers of assets and liabilities between the levels of the fair value measurement hierarchy during the years presented.
96
Cash and Cash Equivalents
The Company considers all highly liquid investments that are readily convertible into cash and have an original maturity of three months or less at the time of purchase to be cash equivalents.
Inventory, net
Net inventory as of December 31, 20182020 consisted of $259.4$285.4 million of finished goods, $5.0$7.3 million of work in progress and $8.8$7.9 million of raw materials. Net inventory as of December 31, 20172019 consisted of $232.3$298.7 million of finished goods, $9.8$6.4 million of work in progress and $5.0$7.3 million of raw materials.
Finished goods includeprimarily consists of specialized implants, fixation products and disposables and are stated at the lower of cost or marketnet realizable value determined by utilizing a standard cost method, which includes assessment of capitalized variances, which approximates the weighted average cost. Work in progress and raw materials represent the underlying material, and labor for work in progress, that ultimately yield finished goods upon completion and are subject to lower of cost or market.net realizable value. The Company reviews the components of its inventory on a periodic basis for excess and obsolescence and adjusts inventory to its net realizable value as necessary.
Excess and Obsolete Inventory
The Company providesrecords an inventory reserve for estimated obsolescenceexcess and excessobsolete inventory based upon historical turnover and assumptions about future demand for its products and market conditions.conditions, such as product life cycles and timing of the introduction and development of new or enhanced products. The Company’s allograft products have shelf lives ranging from two to five years and are subject to demand fluctuations based on the availability and demand for alternative products. The Company’s inventory, which consists primarily of disposables, and specialized implants and fixation products, is at risk of obsolescence following the introduction and development of new or enhanced products.One of the Company’s strategic objectives is to continue to rapidly develop and commercialize new products and product enhancements which increases the risk that products will become obsolete prior to the end of their anticipated useful life. The Company’s estimates and assumptions for excess and obsolete inventory are reviewed and updated on a quarterly basis. The estimates the Company uses for demand are also used for near-term capacity planning and inventory purchasing and are consistent with its revenue forecasts. Increases in the reserve for excess and obsolete inventory result in a corresponding charge to cost of products sold. Historically,sales.
For the year ended December 31, 2020 and 2019, the Company recorded a reserve for excess and obsolete inventory of $48.9 million and $14.0 million, respectively. The increase is primarily attributable to updates to the Company’s reservesestimates and assumptions about future product demand and product life cycles which have been adequate to cover losses.affected by multiple factors, including the COVID-19 pandemic and general market conditions.
Goodwill and Intangible Assets
The Company’s goodwill represents the excess of the cost over the fair value of net assets acquired from its business combinations. The determination of the value of goodwill and intangible assets arising from business combinations and asset acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired, including capitalized in-process research and development (IPR&D). Intangible assets acquired in a business combination that are used for in-process research and development activities are considered indefinite lived until the completion or abandonment of the associated research and development efforts. Upon reaching the end of the relevant research and development project, the Company will amortize the acquired IPR&D over its estimated useful life or expense the acquired in-process research and development should the research and development project be unsuccessful with no future alternative use.
Goodwill and IPR&D are not amortized; however, they are assessed for impairment using fair value measurement techniques on an annual basis or more frequently if facts and circumstance warrant such a review. The goodwill or IPR&D are considered to be impaired if the Company determines that the carrying value of the reporting unit or IPR&D exceeds its respective fair value.
9497
The Company performs its goodwill impairment analysis at the reporting unit level, which aligns with the Company’s reporting structure and availability of discrete financial information. The Company performs its annual impairment analysis by either comparing a reporting unit’s estimated fair value to its carrying amount or doing a qualitative assessment of a reporting unit’s fair value from the last quantitative assessment to determine if there is potential impairment. The Company may do a qualitative assessment when the results of the previous quantitative test indicated the reporting unit’s estimated fair value was significantly in excess of the carrying value of its net assets and it does not believe there have been significant changes in the reporting unit’s operations that would significantly decrease its estimated fair value or significantly increase its net assets. If a quantitative assessment is performed the evaluation includes management estimates of cash flow projections based on internal future projections and/or use of a market approach by looking at market values of comparable companies. Key assumptions for these projections include revenuenet sales growth, future gross and operating margin growth, and its weighted cost of capital and terminal growth rates. The revenuenet sales and margin growth is based on increased sales of new and existing products as the Company maintains investments in research and development. Additional assumed value creators may include increased efficiencies from capital spending. The resulting cash flows are discounted using a weighted average cost of capital. Operating mechanisms and requirements to ensure that growth and efficiency assumptions will ultimately be realized are also considered in the evaluation, including timing and probability of regulatory approvals for Company products to be commercialized. The Company’s market capitalization is also considered as a part of its analysis.
The Company’s annual evaluation for impairment of goodwill consists of one1 reporting unit. In accordance with the Company’s policy, the Company completed its most recent annual evaluation for impairment as of October 1, 20182020 using the qualitative assessment and determined that no0 impairment existed. In addition, no indicators of impairments were noted through December 31, 20182020 and consequently, no0 impairment charge has been recorded during the year.
Intangible assets with a finite life, such as acquired technology, customer relationships, manufacturing know-how, licensed technology, supply agreements and certain trade names and trademarks, are amortized on a straight-line basis over their estimated useful life, ranging from 12 to 17 years. In determining the useful lives of intangible assets, the Company considers the expected use of the assets and the effects of obsolescence, demand, competition, anticipated technological advances, changes in surgical techniques, market influences and other economic factors. For technology based intangible assets, the Company considers the expected life cycles of products which incorporate the corresponding technology. Trademarks and trade names that are related to products are assigned lives consistent with the period in which the products bearing each brand are expected to be sold.
The Company evaluates its intangible assets with finite lives for indications of impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that could trigger an impairment review include significant under-performance relative to expected historical or projected future operating results, significant changes in the manner of the Company’s use of the acquired assets or the strategy for the Company’s overall business or significant negative industry or economic trends. If this evaluation indicates that the value of the intangible asset may be impaired, the Company makes an assessment of the recoverability of the net carrying value of the asset over its remaining useful life. If this assessment indicates that the intangible asset is not recoverable, based on the estimated undiscounted future cash flows of the technology over the remaining amortization period, the Company reduces the net carrying value of the related intangible asset to fair value and may adjust the remaining amortization period.
See Note 2 to the Consolidated Financial Statements included in this Annual Report for further discussiondisclosure on goodwill and intangible assets.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, ranging from 2 to 20 years. The Company depreciates leasehold improvements over their estimated useful lives or the term of the applicable lease, whichever is shorter. Leased property meeting certain capitalfinancing lease criteria is capitalized under property and equipment, and the net present value of the related lease payments is recorded as a liability. Amortization of assets under capitalfinancing leases is recorded using the straight-line method over the shorter of the estimated useful lives or the lease terms. Maintenance and repairs are expensed as incurred.
The Company reviews property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss would be recognized when estimated future undiscounted cash flows relating to the asset are less than its carrying amount. An impairment loss is measured as the amount by which the carrying amount of an asset exceeds its fair value.
Income Taxes
The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Tax law and rate changes are reflected in income in the period such changes are enacted. The Company includes interest and penalties related to income taxes, including unrecognized tax benefits, within income tax expense.
9598
During 2018 the Company completed its tax accounting in connection with the Act which was enacted into law on December 22, 2017. In 2018, the Company recorded approximately $0.3 million of tax expense attributable to 2017 during the SAB 118 measurement period, which would have increased the 2017 effective tax rate by 0.5%. The Company has elected an accounting policy to treat the tax impact of the global intangible low taxed income provision of the Act as a future period charge rather than a current component of deferred taxes.
The Company’s income tax returns are based on calculations and assumptions that are subject to examination by the Internal Revenue Service and other tax authorities. In addition, the calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. While the Company believes it has appropriate support for the positions taken on its tax returns, the Company regularly assesses the potential outcomes of examinations by tax authorities in determining the adequacy of its provision for income taxes. The Company continually assesses the likelihood and amount of potential revisions and adjusts the income tax provision, income taxes payable and deferred taxes in the period in which the facts that give rise to a revision become known.
Significant judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities and the valuation allowance recorded against net deferred tax assets. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized. A valuation allowance is established when it is more likely than not the future realization of all or some of the deferred tax assets will not be achieved. The evaluation of the need for a valuation allowance is performed on a jurisdiction-by-jurisdiction basis, and includes a review of all available positive and negative evidence. Factors reviewed include projections of pre-tax book income for the foreseeable future, determination of cumulative pre-tax book income after permanent differences, earnings history, and reliability of forecasting.
Based on the Company’s review, it concluded that it was more likely than not that the Companyit would be able to realize the future benefits of its domestic and foreign deferred tax assets, with the exceptions of the state of California, Malta, Mexico, Brazil and Brazil.Colombia. This conclusion was based on historical and projected operating performance, as well as the Company’s expectation that its operations will generate sufficient taxable income in future periods to realize the tax benefits associated with the deferred tax assets well within the statutory carryover periods. Due to low state apportionment, large net operating losses and the generation of sizeable research credits in California, the Company concluded that it is not more likely than not that it will be able to utilize its California deferred tax assets. Therefore, the Company has maintained a full valuation allowance on its California deferred tax assets as of December 31, 2018.2020. Due to a history of losses in Malta, Brazil, Mexico and Brazil,Colombia, and the lack of alternative sources of future taxable income, the Company has established a full valuation allowance against these entities’ deferred tax assets as of December 31, 2018. 2020.
The Company will continue to assess the need for a valuation allowance on its deferred tax assets by evaluating both positive and negative evidence that may exist. Any adjustment to the net deferred tax asset valuation allowance would be recorded in the statement of operations for the period that the adjustment is determined to be required.
See Note 810 to the Consolidated Financial Statements included in this Annual Report for further discussion on income taxes.
Loss Contingencies
An estimated loss contingency is accrued and disclosed in the Company’s financial statements if it is probable or disclosed if it is reasonably possible that a liability has been incurred and the amount of the loss can be reasonably estimated. Based on the Company’s assessment, it has adequately accrued an amount for contingent liabilities currently in existence. The Company does not accrue amounts for liabilities that it does not believe are probable and only discloses those matters it considers material to its overall financial position. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded.
The Company is involved in a number of legal actions arising in the normal course of business. The outcomes of these legal actions are not within the Company’s complete control and may not be known for prolonged periods of time. In some actions, the claimants seek damages as well as other relief, including injunctions barring the sale of products that are the subject of the lawsuit, that could require significant expenditures or result in lost revenues.net sales. Litigation is inherently unpredictable, and unfavorable resolutions could occur. As a result, assessing contingencies is highly subjective and requires judgment about future events. The amount of ultimate loss may exceed the Company’s current accruals, and it is possible that its cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies.
See Note 1012 to the Consolidated Financial Statements included in this Annual Report for further discussion on legal proceedings.proceedings and investigations.
96
Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income includes net of tax, unrealized gains or losses on the Company’s marketable debt securities and foreign currency translation adjustments. The cumulative translation adjustments included in accumulated other comprehensive loss were $8.6$7.6 million, $6.9$9.4 million, and $10.6$8.6 million at December 31, 2018, 2017,2020, 2019, and 2016,2018, respectively.
Research and Development
Research and development costs are expensed as incurred. To the extent the Company purchases research and development assets with a future alternative use the Company will capitalize and amortize the assets over its useful life.
99
Product Shipment Costs
Product shipment costs, included in sales, marketingselling, general and administrative expense in the accompanying Consolidated Statements of Operations, were $25.4$27.4 million, $24.0$27.7 million, and $24.5$25.4 million for the years ended December 31, 2018, 2017,2020, 2019, and 2016,2018, respectively. The majority of the Company’s shipping costs are related toassociated with providing instrument sets to hospitals for use in individual surgical procedures, which are not typically sold as part of the Company’s core sales offering.procedures. Amounts billed to customers for shipping and handling of products are reflected in revenuesnet sales and are not material for any period presented.
Business Transition Costs
The Company incurs certain costs related to acquisition, integration and business transition activities, which include severance, relocation, consulting, leasehold exit costs, third-party merger and acquisition costs, contingent consideration fair value adjustments and other costs directly associated with such activities. Contingent consideration is accrued based on the fair value of the expected payment, and such accruals are subject to increase or decrease based on the assessment of the likelihood that the contingent milestones will be achieved resulting in payment. If an accrual for contingent consideration decreases during a particular period, it results in a reduction of costs during such period.
TheDuring the year ended December 31, 2020, the Company incurredrecorded $10.9 million of costs related to acquisition, integration and business transition activities, which included $2.3 million of fair value adjustments on contingent consideration liabilities associated with the Company’s 2018, 2017 and 2016 acquisitions.
During the year ended December 31, 2019, the Company recorded a reduction of costs of $(2.0) million related to acquisition, integration and business transition activities, which included $(6.3) million of fair value adjustments on contingent consideration liabilities associated with the Company’s 2018, 2017 and 2016 acquisitions.
During the year ended December 31, 2018, the Company recorded $11.5 million of such costs during the year ended December 31, 2018, which consisted primarily ofrelated to acquisition, integration and business transition activities, offset bywhich included $(1.5) million of fair value adjustments on contingent consideration liabilities associated with the Company’s 2018, 2017 and 2016 acquisitions.
During the year ended December 31, 2017, the Company incurred $4.3 million of such costs, which consisted primarily of acquisition and integration activities, offset by $(1.3) million of fair value adjustments on contingent consideration liabilities associated with the Company’s 2017 and 2016 acquisitions.
During the year ended December 31, 2016, the Company incurred $18.1 million of business transition costs, which consisted primarily of acquisition and integration activities, and $7.3 million of fair value adjustments on contingent consideration liabilities associated with the Company’s 2016 acquisitions.
Stock-based Compensation
Stock-based compensation expense for equity-classified awards, principally related to restricted stock units (“RSUs”) and performance restricted stock units (“PRSUs”), is measured at the grant date based on the estimated fair value of the award. The fair value of equity instruments that are expected to vest is recognized and amortized over the requisite service period. The Company has granted awards with up to five year graded or cliff vesting terms (in each case, with service through the date of vesting being required). No exercise price or other monetary payment is required for receipt of the shares issued in settlement of the respective award; instead, consideration is furnished in the form of the participant’s service to the Company.
The fair value of RSUs including PRSUs with pre-defined performance criteria is based on the stock price on the date of grant whereas the expense for PRSUPRSUs with pre-defined performance criteria is adjusted with the probability of achievement of such performance criteria at each period end. The fair value of the PRSUs that are earned based on the achievement of pre-defined market conditions for total shareholder return is estimated on the date of grant using a Monte Carlo valuation model. The key assumptions in applying this model are an expected volatility and a risk-free interest rate.
Stock-based compensation expense is adjusted from the grant date to exclude expense for awards that are expected to be forfeited. The forfeiture estimate is adjusted as necessary through the vesting date so that full compensation cost is recognized only for awards that vest. The Company assesses the reasonableness of the estimated forfeiture rate at least annually, with any change to be made on a cumulative basis in the period the estimated forfeiture rates change. The Company considered its historical experience of pre-vesting forfeitures on awards by each homogenous group of shareownersemployees as the basis to arrive at its estimated annual pre-vesting forfeiture rates.
97
The Company estimates the fair value of stock options issued under its equity incentive plans and shares issued to shareownersemployees under its employee stock purchase plan (“ESPP”) using a Black-Scholes option-pricing model on the date of grant. The Black-Scholes option-pricing model incorporates various and highly sensitive assumptions including expected volatility, expected term and risk-free interest rates. The 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 and ESPP offering period which is derived from historical experience. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield in effect at the time of grant. The Company has never declared or paid dividends and has no plans to do so in the foreseeable future.
See Note 79 to the Consolidated Financial Statements included in this Annual Report for further discussion on stockholder equity and stock-based compensation.
100
Net (Loss) Income Per 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, unvested RSUs, includingPRSUs (including those with performance and market conditions,conditions), warrants, and the shares to be issued upon the conversion of the Senior Convertible Notes. 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 earningsconsolidated net (loss) income per share:
|
| Year Ended December 31, |
|
| Year Ended December 31, |
| ||||||||||||||||||
(in thousands, except per share data) |
| 2018 |
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| 2017 |
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| 2016 |
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| 2020 |
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| 2019 |
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| 2018 |
| ||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to NuVasive, Inc. |
| $ | 12,479 |
|
| $ | 81,598 |
|
| $ | 37,192 |
| ||||||||||||
Denominator for basic and diluted net income per share: |
|
|
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|
|
|
|
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|
|
| ||||||||||||
Net (loss) income |
| $ | (37,153 | ) |
| $ | 65,234 |
|
| $ | 12,479 |
| ||||||||||||
Denominator for basic and diluted net (loss) income per share: |
|
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| ||||||||||||
Weighted average common shares outstanding for basic |
|
| 51,382 |
|
|
| 50,874 |
|
|
| 50,077 |
|
|
| 51,416 |
|
|
| 51,956 |
|
|
| 51,382 |
|
Dilutive potential common stock outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and ESPP |
|
| 36 |
|
|
| 141 |
|
|
| 314 |
|
|
| — |
|
|
| 15 |
|
|
| 36 |
|
RSUs |
|
| 760 |
|
|
| 1,083 |
|
|
| 1,273 |
| ||||||||||||
Warrants |
|
| — |
|
|
| 1,494 |
|
|
| 1,297 |
| ||||||||||||
RSUs and PRSUs |
|
| — |
|
|
| 658 |
|
|
| 760 |
| ||||||||||||
Senior Convertible Notes |
|
| 177 |
|
|
| 1,601 |
|
|
| 1,141 |
|
|
| — |
|
|
| 531 |
|
|
| 177 |
|
Weighted average common shares outstanding for diluted |
|
| 52,355 |
|
|
| 55,193 |
|
|
| 54,102 |
|
|
| 51,416 |
|
|
| 53,160 |
|
|
| 52,355 |
|
Basic net income per share attributable to NuVasive, Inc. |
| $ | 0.24 |
|
| $ | 1.60 |
|
| $ | 0.74 |
| ||||||||||||
Diluted net income per share attributable to NuVasive, Inc. |
| $ | 0.24 |
|
| $ | 1.48 |
|
| $ | 0.69 |
| ||||||||||||
Basic net (loss) income per share |
| $ | (0.72 | ) |
| $ | 1.26 |
|
| $ | 0.24 |
| ||||||||||||
Diluted net (loss) income per share |
| $ | (0.72 | ) |
| $ | 1.23 |
|
| $ | 0.24 |
|
The following weighted outstanding common stock equivalents were not included in the calculation of net (loss) income per diluted share because their effects were anti-dilutive:
|
| Year Ended December 31, |
|
| Year Ended December 31, |
| ||||||||||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
|
| 2018 |
| ||||||
Stock options, ESPP, and RSUs |
|
| 162 |
|
|
| 147 |
|
|
| 912 |
| ||||||||||||
Stock options, ESPP, RSUs and PRSUs |
|
| 1,095 |
|
|
| 115 |
|
|
| 162 |
| ||||||||||||
Warrants |
|
| 10,865 |
|
|
| 10,865 |
|
|
| 13,253 |
|
|
| 21,034 |
|
|
| 10,865 |
|
|
| 10,865 |
|
Senior Convertible Notes |
|
| 5,433 |
|
|
| 2,716 |
|
|
| 7,550 |
|
|
| 21,034 |
|
|
| 5,433 |
|
|
| 5,433 |
|
Total |
|
| 16,460 |
|
|
| 13,728 |
|
|
| 21,715 |
|
|
| 43,163 |
|
|
| 16,413 |
|
|
| 16,460 |
|
98
101
2. Balance Sheet Details
Property and Equipment, net
Property and equipment, net, consisted of the following:
|
|
| December 31, |
|
|
| December 31, |
| ||||||||||
(in thousands, except years) | Useful Life |
| 2018 |
|
| 2017 |
| Useful Life |
| 2020 |
|
| 2019 |
| ||||
Instrument sets | 4 |
| $ | 326,831 |
|
| $ | 287,435 |
| 4 |
| $ | 424,696 |
|
| $ | 381,310 |
|
Machinery and equipment | 5 to 7 |
|
| 58,585 |
|
|
| 49,142 |
| 5 to 7 |
|
| 71,616 |
|
|
| 66,482 |
|
Computer equipment and software | 3 to 7 |
|
| 127,539 |
|
|
| 102,729 |
| 3 to 7 |
|
| 173,364 |
|
|
| 149,134 |
|
Leasehold improvements | 2 to 15 |
|
| 32,973 |
|
|
| 23,532 |
| 2 to 15 |
|
| 35,372 |
|
|
| 29,542 |
|
Furniture and fixtures | 3 to 7 |
|
| 8,961 |
|
|
| 8,311 |
| 3 to 7 |
|
| 9,916 |
|
|
| 8,931 |
|
Building and improvements | 10 to 20 |
|
| 20,216 |
|
|
| 20,146 |
| 10 to 20 |
|
| 23,207 |
|
|
| 22,921 |
|
Land | — |
|
| 1,277 |
|
|
| 1,277 |
| — |
|
| 1,277 |
|
|
| 1,277 |
|
|
|
|
| 576,382 |
|
|
| 492,572 |
|
|
|
| 739,448 |
|
|
| 659,597 |
|
Less: accumulated depreciation and amortization |
|
|
| (337,541 | ) |
|
| (277,246 | ) |
|
|
| (453,079 | ) |
|
| (393,279 | ) |
|
|
| $ | 238,841 |
|
| $ | 215,326 |
|
|
| $ | 286,369 |
|
| $ | 266,318 |
|
Property and equipment mainly consisted of instrument sets, which are made available to surgeons and hospitals that purchase implants, biologics and disposables for use in individual surgical procedures.
Depreciation expense was $75.4$85.9 million, $69.5$80.8 million, and $57.1$75.4 million for the years ended December 31, 2020, 2019 and 2018, 2017 and 2016, respectively. At December 31, 2018 and 2017, gross assets recorded under capital leases of $1.5 million and $1.8 million, respectively, are included in machinery and equipment. Depreciation of the assets under capital leases is included in depreciation expense. The Company depreciates leasehold improvements over their estimated useful lives or the term of the applicable lease, whichever is shorter.
Capitalized internal-use software costs include only those direct costs associated with the actual development or acquisition of computer software for internal use, including costs associated with the design, coding, installation, and testing of the system.software. At December 31, 20182020 and 2017,2019, the Company had $40.6$57.6 million and $29.9$51.7 million in unamortized capitalized internal-use software costs, respectively. Amortization expense related to capitalized internal-use software costs was $10.6$10.4 million, $10.1$10.4 million and $7.4$10.6 million for the years ended December 31, 2018, 20172020, 2019 and 2016,2018, respectively.
Goodwill and Intangible Assets
Goodwill and intangible assets as of December 31, 20182020 consisted of the following:
|
| Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average |
|
|
|
|
|
|
|
|
|
|
|
|
| Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
| Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Period |
| Gross |
|
| Accumulated |
|
| Intangible |
|
| Period |
| Gross |
|
| Accumulated |
|
| Intangible |
| ||||||
(in thousands, except years) |
| (in years) |
| Amount |
|
| Amortization |
|
| Assets, net |
|
| (in years) |
| Amount |
|
| Amortization |
|
| Assets, net |
| ||||||
Intangible assets subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology |
| 8 |
| $ | 271,748 |
|
| $ | (131,730 | ) |
| $ | 140,018 |
|
| 8 |
| $ | 271,748 |
|
| $ | (195,283 | ) |
| $ | 76,465 |
|
Manufacturing know-how and trade secrets |
| 13 |
|
| 30,814 |
|
|
| (17,926 | ) |
|
| 12,888 |
|
| 13 |
|
| 30,882 |
|
|
| (22,720 | ) |
|
| 8,162 |
|
Trade name and trademarks |
| 9 |
|
| 25,500 |
|
|
| (13,901 | ) |
|
| 11,599 |
|
| 9 |
|
| 25,500 |
|
|
| (19,945 | ) |
|
| 5,555 |
|
Customer relationships |
| 9 |
|
| 147,021 |
|
|
| (59,478 | ) |
|
| 87,543 |
|
| 9 |
|
| 156,436 |
|
|
| (94,354 | ) |
|
| 62,082 |
|
Total intangible assets subject to amortization |
| 9 |
| $ | 475,083 |
|
| $ | (223,035 | ) |
| $ | 252,048 |
|
| 8 |
| $ | 484,566 |
|
| $ | (332,302 | ) |
| $ | 152,264 |
|
Intangible assets not subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
| 561,366 |
|
|
|
|
|
|
|
|
|
|
|
|
| 559,553 |
|
Total goodwill and intangible assets, net |
|
|
|
|
|
|
|
|
|
|
| $ | 813,414 |
|
|
|
|
|
|
|
|
|
|
|
| $ | 711,817 |
|
99102
Goodwill and intangible assets as of December 31, 20172019 consisted of the following:
|
| Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average |
|
|
|
|
|
|
|
|
|
|
|
|
| Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
| Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Period |
| Gross |
|
| Accumulated |
|
| Intangible |
|
| Period |
| Gross |
|
| Accumulated |
|
| Intangible |
| ||||||
(in thousands, except years) |
| (in years) |
| Amount |
|
| Amortization |
|
| Assets, net |
|
| (in years) |
| Amount |
|
| Amortization |
|
| Assets, net |
| ||||||
Intangible assets subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology |
| 8 |
| $ | 271,748 |
|
| $ | (98,693 | ) |
| $ | 173,055 |
|
| 8 |
| $ | 271,748 |
|
| $ | (163,459 | ) |
| $ | 108,289 |
|
Manufacturing know-how and trade secrets |
| 13 |
|
| 30,653 |
|
|
| (15,542 | ) |
|
| 15,111 |
|
| 13 |
|
| 30,798 |
|
|
| (20,333 | ) |
|
| 10,465 |
|
Trade name and trademarks |
| 9 |
|
| 25,200 |
|
|
| (10,559 | ) |
|
| 14,641 |
|
| 9 |
|
| 25,500 |
|
|
| (16,947 | ) |
|
| 8,553 |
|
Customer relationships |
| 9 |
|
| 122,249 |
|
|
| (44,282 | ) |
|
| 77,967 |
|
| 9 |
|
| 150,744 |
|
|
| (76,959 | ) |
|
| 73,785 |
|
Total intangible assets subject to amortization |
| 9 |
| $ | 449,850 |
|
| $ | (169,076 | ) |
| $ | 280,774 |
|
| 9 |
| $ | 478,790 |
|
| $ | (277,698 | ) |
| $ | 201,092 |
|
Intangible assets not subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
| 536,926 |
|
|
|
|
|
|
|
|
|
|
|
|
| 561,064 |
|
Total goodwill and intangible assets, net |
|
|
|
|
|
|
|
|
|
|
| $ | 817,700 |
|
|
|
|
|
|
|
|
|
|
|
| $ | 762,156 |
|
Total expense related to the amortization of intangible assets which is recorded in either cost of goods soldsales or operating expenses in the Consolidated Statements of Operations depending on the functional nature of the intangible, was $54.4$55.0 million, $51.7$54.8 million and $45.6$54.4 million for the years ended December 31, 2020, 2019 and 2018, 2017 and 2016, respectively.
During the year ended December 31, 2018, in connection with acquisitions, including changes in purchase price allocations, and other investments, the Company recorded additions to definite-lived intangible assets and goodwill of $26.2 million and $25.9 million, respectively. Goodwill recorded in business combinations is primarily attributable to synergies expected to arise after the acquisition. See Note 4 to the Consolidated Financial Statements included in this Annual Report for further discussion on assets acquired in business combinations and asset acquisitions.
The changes to goodwill are comprised of the following:
(in thousands) |
|
|
|
|
|
|
December 31, 2017 |
|
|
| |||
Gross goodwill | $ | 545,226 |
| $ | 569,364 |
|
Accumulated impairment loss |
| (8,300 | ) |
| (8,300 | ) |
December 31, 2019 |
| 561,064 |
| |||
|
| 536,926 |
|
|
|
|
Changes to gross goodwill |
|
|
| |||
Increases recorded in business combinations |
| 26,959 |
| |||
Changes in purchase price allocation |
| (1,075 | ) | |||
Changes to gross goodwill: |
|
|
| |||
Changes resulting from foreign currency fluctuations |
| (1,444 | ) |
| (1,511 | ) |
|
| 24,440 |
|
| (1,511 | ) |
December 31, 2018 |
|
|
| |||
|
|
|
| |||
Gross goodwill |
| 569,666 |
|
| 567,853 |
|
Accumulated impairment loss |
| (8,300 | ) |
| (8,300 | ) |
| $ | 561,366 |
| |||
December 31, 2020 | $ | 559,553 |
|
Total future amortization expense related to intangible assets subject to amortization at December 31, 20182020 is set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
2019 |
|
|
| $ | 52,298 |
| ||||||
2020 |
|
|
|
| 51,675 |
| ||||||
2021 |
|
|
|
| 49,297 |
|
|
|
| $ | 51,876 |
|
2022 |
|
|
|
| 41,834 |
|
|
|
|
| 43,843 |
|
2023 |
|
|
|
| 17,718 |
|
|
|
|
| 18,697 |
|
2024 |
|
|
|
| 12,506 |
| ||||||
2025 |
|
|
|
| 11,705 |
| ||||||
Thereafter through 2031 |
|
|
|
| 39,226 |
|
|
|
|
| 13,637 |
|
Total future amortization expense |
|
|
| $ | 252,048 |
|
|
|
| $ | 152,264 |
|
100
103
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following:
|
| December 31, |
|
| December 31, |
| ||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2020 |
|
| 2019 |
| ||||
Accrued expenses |
| $ | 70,386 |
|
| $ | 42,983 |
|
| $ | 59,249 |
|
| $ | 58,897 |
|
Other taxes payable |
|
| 9,359 |
|
|
| 12,692 |
| ||||||||
Accounts payable |
|
| 8,799 |
|
|
| 4,366 |
|
|
| 17,386 |
|
|
| 11,827 |
|
Distributor commissions payable |
|
| 8,194 |
|
|
| 7,697 |
|
|
| 9,891 |
|
|
| 7,983 |
|
Other taxes payable |
|
| 6,425 |
|
|
| 6,501 |
| ||||||||
Litigation liability |
|
| 5,346 |
|
|
| 1,370 |
| ||||||||
Debt interest payable |
|
| 5,203 |
|
|
| 4,266 |
| ||||||||
Royalties payable |
|
| 7,173 |
|
|
| 5,040 |
|
|
| 4,495 |
|
|
| 4,994 |
|
Other |
|
| 1,966 |
|
|
| 2,989 |
|
|
| 2,406 |
|
|
| 1,322 |
|
Accounts payable and accrued liabilities |
| $ | 105,877 |
|
| $ | 75,767 |
|
| $ | 110,401 |
|
| $ | 97,160 |
|
3. Fair Value Measurements Marketable Securities
Short-Term Marketable Securities
The fair valuesCompany invests in available-for-sale marketable debt securities consisting of corporate notes and commercial paper. The Company has the ability, if necessary, to liquidate without penalty any of its marketable debt securities to meet its liquidity needs in the next 12 months. As such, those investments with contractual maturities greater than one year from the date of purchase are classified as short-term on the accompanying Consolidated Balance Sheets.
As of December 31, 2020, the Company’s outstanding marketable debt securities all have contractual maturities due within one year. The carrying value and amortized cost of the Company’s assetsmarketable debt securities, summarized by major security type, consisted of the following:
(in thousands) |
| Amortized Cost |
|
| Gross Unrealized Gains |
|
| Gross Unrealized Losses |
|
| Fair Value |
| ||||
December 31, 2020: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities, available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes |
| $ | 54,197 |
|
| $ | 6 |
|
| $ | (15 | ) |
| $ | 54,188 |
|
Commercial paper |
|
| 118,932 |
|
|
| 25 |
|
|
| — |
|
|
| 118,957 |
|
Total debt securities, available for sale |
| $ | 173,129 |
|
| $ | 31 |
|
| $ | (15 | ) |
| $ | 173,145 |
|
At each reporting date, the Company performs an evaluation of impairment to determine if any unrealized losses are the result of credit losses. Impairment is assessed at the individual security level. Factors considered in determining whether a loss resulted from a credit loss or other factors include the Company’s intent and liabilities, including cash equivalents, marketable securities, restricted investments, derivatives, and contingent considerations are measured atability to hold the investment until the recovery of its amortized cost basis, the extent to which the fair value onis less than the amortized cost basis, the length of time and extent to which fair value has been less than the cost basis, the financial condition of the issuer, any historical failure of the issuer to make scheduled interest or principal payments, any changes to the rating of the security by a recurring basis. Asrating agency, any adverse legal or regulatory events affecting the issuer or issuer’s industry, and any significant deterioration in economic conditions.
The credit-related portion of December 31, 2018unrealized losses, and December 31, 2017,any subsequent improvements, are recorded in interest income in the Company held investments in securities classified as cash equivalents. During the periods presented, the Company did not hold any investments that were in a significant unrealized loss position and no impairment charges were recorded. RealizedConsolidated Statement of Operations through an allowance for credit losses. Unrealized gains and losses and interest income related to marketablethat are not credit-related are included in accumulated other comprehensive loss. Unrealized losses on available-for-sale debt securities were immaterial during all periods presented. Cash equivalents are determined under the fair value categories as follows:
|
|
|
|
|
| Quoted Price in |
|
| Significant Other |
|
| Significant |
| |||
|
|
|
|
|
| Active Market |
|
| Observable Inputs |
|
| Unobservable |
| |||
(in thousands) |
| Total |
|
| (Level 1) |
|
| (Level 2) |
|
| Inputs (Level 3) |
| ||||
December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
| $ | 56,000 |
|
| $ | 56,000 |
|
| $ | — |
|
| $ | — |
|
Total cash equivalents |
| $ | 56,000 |
|
| $ | 56,000 |
|
| $ | — |
|
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
| $ | 27,000 |
|
| $ | 27,000 |
|
| $ | — |
|
| $ | — |
|
Total cash equivalents |
| $ | 27,000 |
|
| $ | 27,000 |
|
| $ | — |
|
| $ | — |
|
The carrying amounts of certain financial instruments such as cash and cash equivalents, accounts receivable, prepaid expenses, other current assets, accounts payable, accrued expenses, and other current liabilities as of December 31, 20182020 were not significant and December 31, 2017 approximate their related fair valueswere primarily due to changes in interest rates, including market credit spreads, and not due to increased credit risks associated with specific securities. Accordingly, the short-term maturitiesCompany has not recorded an allowance for credit losses with these investments.
104
Table of these instruments.Contents
The fair value of certain financial instruments was measured4. Financial Instruments and classified within Level 1 of the fair value hierarchy based on quoted prices. Certain financial instruments classified within Level 2 of the fair value hierarchy include the types of instruments that trade in markets that are not considered to be active, but are valued based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The Company did not hold any financial instruments classified within Level 2 of the fair value hierarchy during the periods presented.Fair Value Measurements
Foreign Currency and Derivative Financial Instruments
To manage foreign currency exposure risks, the Company uses derivatives for activities in entities that have short-term intercompany receivables and payables denominated in a currency other than the entity’s functional currency. The fair value is based on a quoted market price (Level 1).
The Company translates the financial statements of its foreign subsidiaries using end-of-period exchange rates for assets and liabilities, and average exchange rates during each reporting period for results of operations.
101
Some of the Company’s reporting entities conduct a portion of their business in currencies other than the entity’s functional currency. These transactions give rise to receivables and payables that are denominated in currencies other than the entity’s functional currency. The value of these receivables and payables is subject to changes in currency exchange rates from the point at which the transactions are originated until the settlement in cash. Both realized and unrealized gains and losses in the value of these receivables and payables are included in the determination of net income. Net currency exchange losses, which includesinclude gains and losses from derivative instruments, were $(3.7)$4.2 million, $(0.9)$0.8 million and $(0.3)$3.7 million for the years ended December 31, 2018, 20172020, 2019 and 2016,2018, respectively, and are included in other (expense) income, (expense)net in the Consolidated Statements of Operations.
AsTo manage foreign currency exposure risks, the Company uses derivatives for activities in entities that have short-term intercompany receivables and payables denominated in a currency other than the entity’s functional currency. The fair value is based on a quoted market price (Level 1). As of December 31, 2018, 2017,2020, 2019, and 20162018 a notional principal amount of $26.8$14.0 million, $14.3$26.9 million, and $15.1$26.8 million, respectively, was outstanding to hedge currency risk relative to foreign receivables and payables. Derivative instrument net (losses) gains on the Company’s forward exchange contracts were $0.5$(1.0) million, $(1.9)$0.4 million, and $0.7$0.5 million for the years ended December 31, 2018, 20172020, 2019 and 2016,2018, respectively, and are included in other (expense) income, (expense)net in the Consolidated Statements of Operations. The fair value of the forward contract exchange derivative instrument liability was $(0.3)de minimis as of December 31, 2020 and $0.1 million as of December 31, 2018 and $(0.1) million as of December 31, 2017.2019. The derivative instruments are recorded in other current assets or other current liabilities in the Consolidated Balance Sheets commensurate with the nature of the instrument at period end.
The Company’s currency exposures vary, butFair Value Measurements
Assets and liabilities are primarily concentrated in classified based on the pound sterling,lowest level of input that is significant to the euro, the Australian dollar, the Brazilian real, the Singapore dollar, and the yen.fair value measurements. The Company will continuously monitorreviews the costsfair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain assets or liabilities within the fair value hierarchy. The Company did not have any transfers of assets and liabilities between the impactlevels of foreign currency risks upon the financial results as partfair value measurement hierarchy during the periods presented.
The fair values of the Company’s risk management program. assets and liabilities, including cash equivalents, marketable debt securities, derivatives, and contingent consideration are measured at fair value on a recurring basis. As of December 31, 2020 and December 31, 2019, the Company held investments in securities classified as cash equivalents. During the periods presented, the Company did 0t hold any such investments that were in a significant unrealized loss position and 0 impairment charges were recorded on such investments. Realized gains and losses and interest income related to marketable securities were immaterial during all periods presented. Cash equivalents and marketable debt securities are determined under the fair value categories as follows:
|
|
|
|
|
| Quoted Price in |
|
| Significant Other |
|
| Significant |
| |||
|
|
|
|
|
| Active Market |
|
| Observable Inputs |
|
| Unobservable |
| |||
(in thousands) |
| Total |
|
| (Level 1) |
|
| (Level 2) |
|
| Inputs (Level 3) |
| ||||
December 31, 2020: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
| $ | 725,108 |
|
| $ | 725,108 |
|
| $ | — |
|
| $ | — |
|
Commercial paper |
|
| 35,996 |
|
|
| — |
|
|
| 35,996 |
|
|
| — |
|
Total cash equivalents |
|
| 761,104 |
|
|
| 725,108 |
|
|
| 35,996 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities, available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes |
|
| 54,188 |
|
|
| — |
|
|
| 54,188 |
|
|
| — |
|
Commercial paper |
|
| 118,957 |
|
|
| — |
|
|
| 118,957 |
|
|
| — |
|
Total debt securities, available for sale |
|
| 173,145 |
|
|
| — |
|
|
| 173,145 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value |
| $ | 934,249 |
|
| $ | 725,108 |
|
| $ | 209,141 |
|
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
| $ | 151,750 |
|
| $ | 151,750 |
|
| $ | — |
|
| $ | — |
|
Total cash equivalents |
| $ | 151,750 |
|
| $ | 151,750 |
|
| $ | — |
|
| $ | — |
|
105
The Company does not use derivativecarrying amounts of certain financial instruments for speculation or trading purposes or for activitiessuch as cash and cash equivalents, accounts receivable, prepaid expenses, other than risk management. current assets, accounts payable, accrued expenses, and other current liabilities as of December 31, 2020 and December 31, 2019 approximate their related fair values due to the short-term maturities of these instruments.
The Company does not require and is not required to pledge collateral for thesefair value of certain financial instruments was measured and doesclassified within Level 1 of the fair value hierarchy based on quoted prices. Certain financial instruments classified within Level 2 of the fair value hierarchy include the types of instruments that trade in markets that are not carry any master netting arrangementsconsidered to mitigate the credit risk.be active, but are valued based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.
Fair Value of Senior Convertible Notes
The fair value, based on a quoted market price (Level 1), of the Company’s outstanding $650.0 million principal amount of Senior Convertible Notes due 2021 at December 31, 20182020 and December 31, 20172019 was approximately $684.8$651.6 million and $779.5$869.3 million, respectively. The fair value, based on a quoted market price (Level 1), of the Company’s outstanding $450.0 million principal amount of Senior Convertible Notes due 2023 at December 31, 2020 was approximately $461.9 million. The fair value, based on a quoted market price (Level 1), of the Company’s outstanding $450.0 million principal amount of Senior Convertible Notes due 2025 at December 31, 2020 was approximately $436.7 million. See Note 56 to the Consolidated Financial Statements included in this Annual Reportfor further discussion on the carrying value of the notes.notes.
Fair Value of Convertible Note Hedge and Embedded Conversion Derivatives
On June 1, 2020, the Company issued $450.0 million principal amount of 1.00% Senior Convertible Notes due 2023 (the “2023 Notes”). The 2023 Notes were initially required to be settled in cash as the Company did not have enough available shares and was unable to reserve the maximum number of shares issuable under the 2023 Notes (“sufficient reserved shares”). On September 10, 2020, the Company held a Special Meeting of Stockholders and received stockholder approval to amend the Company’s Restated Certificate of Incorporation to increase the number of shares of its common stock authorized for issuance from 120,000,000 shares to 150,000,000 shares. As a result of the increase in the number of shares of the Company’s common stock authorized for issuance, as of September 10, 2020 and as of December 31, 2020, the Company had sufficient reserved shares and therefore may settle conversions of the 2023 Notes in cash, stock, or a combination thereof, solely at the Company’s discretion. In accordance with authoritative guidance, the cash conversion feature of the 2023 Notes requires bifurcation from the 2023 Notes and was initially accounted for as a derivative liability (“Embedded Conversion Derivative”), which was included in long-term liabilities in the Company’s Consolidated Balance Sheet. On September 10, 2020, as a result of the increase in the number of shares of the Company’s common stock authorized for issuance, the Company had sufficient reserved shares to settle conversions of the 2023 Notes in cash, stock, or a combination thereof, and in accordance with authoritative literature, the Embedded Conversion Derivative was marked to fair value and reclassified to stockholders’ equity.
In connection with the issuance of the 2023 Notes, the Company entered into convertible note hedge transactions (the “2023 Hedge”) entitling the Company to purchase up to 5,345,010 shares of the Company’s common stock at an initial stock price of $84.19 per share, each of which is subject to adjustment. The 2023 Hedge was initially required to be settled in cash as the Company did not have sufficient reserved shares with respect to the 2023 Notes. As a result, the 2023 Hedge was accounted for as a derivative asset (“Convertible Note Hedge Derivative”), which was included in long-term assets in the Company’s Consolidated Balance Sheet. On September 10, 2020, as a result of the increase in the number of shares of the Company’s common stock authorized for issuance, the Company had sufficient reserved shares to settle the 2023 Notes, which therefore allows for the 2023 Hedge to be settled in cash, stock, or a combination thereof. In accordance with authoritative literature, the Convertible Note Hedge Derivative was marked to fair value and reclassified to stockholders’ equity.
Prior to their reclassification to stockholders’ equity on September 10, 2020, the Embedded Conversion Derivative and Convertible Note Hedge Derivative were classified as Level 3 of the fair value hierarchy as these derivative instruments were not actively traded and were valued using significant unobservable inputs.
The following tables set forth the changes in the estimated fair value for the Company’s derivative assets and liabilities measured using significant unobservable inputs (Level 3):
(in thousands) | 2020 | |||
Assets: | ||||
Fair value measurement at January 1 | $ | — | ||
Derivative assets recorded in connection with the 2023 Hedge | 69,525 | |||
Change in fair value measurement | (32,233 | ) | ||
Derivative asset reclassified to stockholders’ equity | (37,292 | ) | ||
Fair value measurement at December 31 | $ | — |
106
(in thousands) | 2020 | |||
Liabilities: | ||||
Fair value measurement at January 1 | $ | — | ||
Derivative liability recorded in connection with the 2023 Notes | 57,224 | |||
Change in fair value measurement | (19,932 | ) | ||
Derivative liability reclassified to stockholders’ equity | (37,292 | ) | ||
Fair value measurement at December 31 | $ | — |
During 2020, the fair value measurement was determined utilizing a Black-Scholes valuation model. Key assumptions used in the valuation included risk-free interest rates, volatility, and expected term. The Company recorded the change in fair value measurement associated with its derivative assets and liabilities in other (expense) income, net in the Consolidated Statement of Operations.
Contingent Consideration Liabilities
The fair value of contingent consideration liabilities assumed in business combinations is recorded as part of the purchase price consideration of the acquisition, and is determined using a discounted cash flow model or probability simulation model. The significant inputs of such models are not observable in the market, such as certain financial metric growth rates, volatility rates, projections associated with the applicable milestone, the interest rate, and the related probabilities and payment structure in the contingent consideration arrangement. Fair value adjustments to contingent consideration liabilities are recorded through operating expenses in the Consolidated Statement of Operations. Contingent consideration arrangements assumed by an asset purchase will be measured and accrued when such contingency is resolved.
The recurring Level 3 fair value measurements of contingent consideration liabilities associated with commercial sales milestones include the following significant unobservable inputs as of December 31, 2020:
2020 | |||
Valuation Techniques | Discounted cash flow, Monte Carlo | ||
Discount Rate Range | 2.8% - 4.0% | ||
Weighted Average Discount Rate | 3.6% | ||
Expected Years | 2021 - 2024 |
Contingent consideration liabilities were $50.437.0 million and $67.9$42.6 million as of December 31, 20182020 and December 31, 20172019, respectively, and were recorded in the Consolidated Balance Sheet commensurate with the respective payment terms. The following table sets forth the changes in the estimated fair value of the Company’s liabilities measured on a recurring basis using significant unobservable inputs (Level 3):
|
|
|
|
|
|
| ||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2020 |
|
| 2019 |
| ||||
Fair value measurement at January 1 |
| $ | 67,941 |
|
| $ | 67,501 |
|
| $ | 42,559 |
|
| $ | 50,410 |
|
Contingent consideration liability recorded upon acquisition |
|
| 3,543 |
|
|
| 32,559 |
| ||||||||
Change in fair value measurement |
|
| (1,517 | ) |
|
| (1,295 | ) |
|
| 2,420 |
|
|
| (6,297 | ) |
Contingent consideration paid or settled |
|
| (7,938 | ) |
|
| (1,435 | ) | ||||||||
Changes resulting from foreign currency fluctuations |
|
| 193 |
|
|
| (224 | ) |
|
| — |
|
|
| (119 | ) |
Contingent consideration paid or settled |
|
| (19,750 | ) |
|
| (30,600 | ) | ||||||||
Fair value measurement at December 31 |
| $ | 50,410 |
|
| $ | 67,941 |
|
| $ | 37,041 |
|
| $ | 42,559 |
|
During the year ended December 31, 2018, the Company paid $19.0 million in outstanding milestone obligations associated with the LessRay acquisition, of which $9.0 million related to the achievement of a commercial milestone, and $10.0 million related to the achievement of a regulatory approval milestone. In accordance with the guidance outlined in ASU 2016-15, $18.7 million of the $19.0 million represented the initial purchase price allocation and is presented as a cash outflow for financing activities on the Consolidated Statement of Cash Flows, and the remaining $0.3 million related to increased fair value adjustment is presented as a cash outflow in operating activities.
102
During the year ended December 31, 2017, the Company recorded contingent consideration liabilities of $32.6 million in connection with certain acquisitions. Such acquisitions include the acquisition in September 2017 of a medical device company that developed interbody implants for spinal fusion using patented porous PEEK technology, which was incorporated into the Company’s portfolio of interbody implants. The Company recorded a purchase accounting fair value estimate of $31.4 million for contingent consideration liabilities related to the achievement of certain manufacturing and commercial milestones associated with that acquisition.
In the year ended December 31, 2017, the Company paid the $30.0 million outstanding milestone obligation associated with the Ellipse Technologies acquisition. In accordance with the guidance outlined in ASU 2016-15, $18.8 million of the $30.0 million represented the initial purchase price allocation and is presented as a cash outflow for financing activities on the Consolidated Statement of Cash Flows, and the remaining $11.2 million related to increased fair value adjustments is presented as a cash outflow in operating activities.
Non-financial assets and liabilities measured on a nonrecurring basis
Certain non-financial assets and liabilities are measured at fair value, usually with Level 3 inputs including the discounted cash flow method or cost method, on a nonrecurring basis in accordance with authoritative guidance. These include items such as nonfinancial assets and liabilities initially measured at fair value in a business combination and non-financial long-lived assets measured at fair value for an impairment assessment. In general, non-financial assets, including goodwill, intangible assets and property and equipment, are measured at fair value when there is an indication of impairment and are recorded at fair value only when any impairment is recognized. The carrying values of the Company’s capitalfinancing lease obligations approximated their estimated fair value as of December 31, 20182020 and 2017. The Company has obligations under certain consultancy arrangements based on achievement of specified milestones. There was no accrual as of2019.
During the year ended December 31, 2018 or 2017, related to these obligations.2019, the Company recorded a loss of $4.8 million on a strategic investment. The loss was recorded in other (expense) income, net in the Consolidated Statement of Operations included in this Annual Report.
107
During the year ended December 31, 2018, the Company expensed $8.9 million for a purchased in-process research and development asset which had no future alternative use. The Company also recorded a net loss of $3.8 million on strategic investments during the year ended December 31, 2018. The net loss was recorded in other (expense) income, (expense), net in the Consolidated Statement of Operations included in this Annual Report.
4.5. Business Combinations
The Company recognizes the assets acquired, liabilities assumed, and any non-controlling interest at fair value at the date of acquisition. Certain acquisitions contained contingent consideration arrangements that required the Company to assess the acquisition date fair value of the contingent consideration liabilities, which was recorded as part of the purchase price allocation of the acquisition, with subsequent fair value adjustments to the contingent consideration recorded in the Consolidated Statements of Operations. See Note 3 4 to the Consolidated Financial Statements included in this Annual Report for further discussion on contingent consideration liabilities.
Acquisitions
In January 2018, the Company acquired SafePassage, a privately-held provider of IOM services, which now operates as a wholly-owned subsidiary of the Company. The acquisition was not considered material to the overall Consolidated Financial Statements. The Company provides IOM services through various subsidiaries, including SafePassage, which conduct business as NuVasive Clinical Services. The revenue generated from IOM services and support is reported as service revenue on the Consolidated Statement of Operations.
The Company has completed other 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 respective dates of acquisition. The Company does not believe that collectively the acquisitions made during the periods presented are material to the overall financial statements.
For certain acquisitions completed during the periods presented, theThe Company is still in the process of finalizingfinalizes the purchase price allocation given the timing of the acquisitions and the size and scope of the assets and liabilities subject to valuation.valuation obtained in business combinations within one year from the acquisition date. While the Company does not expect material changes infrom the initial outcome of the valuation, outcome, certain assumptions and findings that were in placemade at the date of acquisition could result in changes in the purchase price allocation.
103
Progentix Orthobiology, B.V.
In 2009, the Company purchased forty percent (40%) of the capital stock of Progentix Orthobiology B.V. (“Progentix”), a company organized under the laws of the Netherlands, from existing shareholders pursuant to a Preferred Stock Purchase Agreement for $10.0 million in cash (the “Initial Investment”). The Company also loaned Progentix cumulatively a total of $5.3 million at an interest rate of 6% per year (the “Loan”). Concurrently, with the Initial Investment, the Company and Progentix entered into a Distribution Agreement (as amended, the “Distribution Agreement”) for a term of ten years, whereby Progentix appointed the Company as its exclusive distributor for certain Progentix products.
Following the Initial Investment, in accordance with authoritative guidance, the Company determined that Progentix was a variable interest entity (“VIE”), as it did not have the ability to finance its activities without additional subordinated financial support and its equity investors would not absorb their proportionate share of expected losses and would be limited in the receipt of the potential residual returns of Progentix.
In January 2018, the Company completed the acquisition of the remaining 60% of the capital stock of Progentix (the “Non-Controlling Interest Acquisition”). Subsequent to the Non-Controlling Interest Acquisition, the Company owns 100% of the capital stock of Progentix, which now operates as a wholly-owned subsidiary of the Company and is no longer accounted for as a VIE or a separate reporting unit as of the date of the Non-Controlling Interest Acquisition. In accordance with authoritative guidance, the non-controlling interest associated with Progentix was reclassified to additional paid-in capital, including the difference between the non-controlling interest and consideration paid. The Loan plus accrued interest and the related receivable between the Company and Progentix was still outstanding as of December 31, 2018.
The following is a reconciliation of equity (net assets) attributable to the non-controlling interest:
|
| Year Ended December 31, |
| |||||
(in thousands) |
| 2018 |
|
| 2017 |
| ||
Non-controlling interests at beginning of period |
| $ | 3,845 |
|
| $ | 5,588 |
|
Acquired non-controlling interest reclassified to additional paid-in capital |
|
| (3,845 | ) |
|
| — |
|
Less: net loss attributable to the non-controlling interests |
|
| — |
|
|
| (1,743 | ) |
Non-controlling interests at end of period |
| $ | — |
|
| $ | 3,845 |
|
Total assets and liabilities of Progentix as a VIE included in the accompanying Consolidated Balance Sheets are as follows:
|
| December 31, |
| |||||
(in thousands) |
| 2018 |
|
| 2017 |
| ||
Total current assets |
| $ | — |
|
| $ | 670 |
|
Identifiable intangible assets, net |
|
| — |
|
|
| 8,752 |
|
Goodwill |
|
| — |
|
|
| 12,654 |
|
Accounts payable & accrued expenses |
|
| — |
|
|
| 562 |
|
Deferred tax liabilities, net |
|
| — |
|
|
| 331 |
|
Non-controlling interests |
|
| — |
|
|
| 3,845 |
|
NuVasive Clinical Services and Physician Practices
The Company provides IOMIONM services through various subsidiaries, including SafePassage, which conduct business as NuVasive Clinical Services. In providing IOMIONM services to surgeons and healthcare facilities across the U.S.,United States, the Company maintains contractual relationships with several physician practices (“PCs”). In accordance with authoritative guidance, the Company has determined that the PCs are VIEsvariable interest entities and therefore, the accompanying Consolidated Financial Statements include the accounts of the PCs from the date of acquisition. During the periods presented, the results of the PCs were immaterial to the Company’s financials.financial statements. The creditors of the PCs have claims only onto the assets of the PCs, which are not material, and the assets of the PCs are not available to the Company.
5.6. Indebtedness
The carrying values of the Company’s Senior Convertible Notes due 2021 are as follows:follows:
(in thousands) |
| December 31, 2018 |
|
| December 31, 2017 |
|
| December 31, 2020 |
|
| December 31, 2019 |
| ||||
2.25% Senior Convertible Notes due 2021: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal amount |
| $ | 650,000 |
|
| $ | 650,000 |
|
| $ | 650,000 |
|
| $ | 650,000 |
|
Unamortized debt discount |
|
| (40,117 | ) |
|
| (56,839 | ) |
|
| (3,945 | ) |
|
| (22,501 | ) |
Unamortized debt issuance costs |
|
| (7,357 | ) |
|
| (10,241 | ) |
|
| (752 | ) |
|
| (4,201 | ) |
|
|
| 645,303 |
|
|
| 623,298 |
| ||||||||
1.00% Senior Convertible Notes due 2023: |
|
|
|
|
|
|
|
| ||||||||
Principal amount |
|
| 450,000 |
|
|
| — |
| ||||||||
Unamortized debt discount |
|
| (46,837 | ) |
|
| — |
| ||||||||
Unamortized debt issuance costs |
|
| (11,049 | ) |
|
| — |
| ||||||||
|
|
| 392,114 |
|
|
| — |
| ||||||||
0.375% Senior Convertible Notes due 2025: |
|
|
|
|
|
|
|
| ||||||||
Principal amount |
|
| 450,000 |
|
|
| — |
| ||||||||
Unamortized debt discount |
|
| (66,346 | ) |
|
| — |
| ||||||||
Unamortized debt issuance costs |
|
| (9,542 | ) |
|
| — |
| ||||||||
|
|
| 374,112 |
|
|
| — |
| ||||||||
Total Senior Convertible Notes |
| $ | 602,526 |
|
| $ | 582,920 |
|
| $ | 1,411,529 |
|
| $ | 623,298 |
|
|
|
|
|
|
|
|
|
| ||||||||
Less: Current portion |
|
| (645,303 | ) |
|
| — |
| ||||||||
Long-term Senior Convertible Notes |
| $ | 766,226 |
|
| $ | 623,298 |
|
104
108
2.25% Senior Convertible Notes due 2021
In March 2016, the Company issued $650.0$650.0 million principal amount of unsecured Senior Convertible Notes with a stated interest rate of 2.25%2.25% and a maturity date of March 15, 2021 (the "2021 Notes"“2021 Notes”). The net proceeds from the offering, after deducting initial purchasers' discounts and costs directly related to the offering, were approximately $634.1$634.1 million. ThePrior to September 14, 2020, the 2021 Notes may be settledprovided for settlement in cash, stock, or a combination thereof, solely at the Company'sCompany’s discretion. It is the Company's current intent and policy to settle all conversions throughAs of September 14, 2020, combination settlement which involveswas deemed to have been elected by the Company and the 2021 Notes will be settled by satisfying the principal amount outstanding with cash and any note conversion value over the principal amount in shares of the Company's common stock. The initial conversion rate of the 2021 Notes is 16.7158 shares per $1,000$1,000 principal amount, which is equivalent to a conversion price of approximately $59.82$59.82 per share, subject to adjustments. The Company uses the treasury share method for assumed conversion of the 2021 Notes to compute the weighted average shares of common stock outstanding for diluted earnings per share. The Company also entered into transactions for a convertible notenotes hedge (the "2021 Hedge"“2021 Hedge”) and warrants (the "2021 Warrants"“2021 Warrants”) concurrently with the issuance of the 2021 Notes.
The cash conversion feature of the 2021 Notes required bifurcation from the notes and was initially accounted for as an equity instrument classified to stockholders’ equity, which resulted in recognizing $84.8 million in additional paid-in-capital during 2016.
The interest expense recognized on the 2021 Notes during the year ended December 31, 20182020 includes $14.6 million, $16.7$18.6 million and $2.9$3.4 million for the contractual coupon interest, the accretion of the debt discount and the amortization of the debt issuance costs, respectively. The interest expense recognized on the 2021 Notes during the year ended December 31, 20172019 includes $14.6 million, $15.9$17.6 million and $2.6$3.2 million for the contractual coupon interest, the accretion of the debt discount and the amortization of the debt issuance costs, respectively. The interest expense recognized on the 2021 Notes during the year ended December 31, 20162018 includes $11.5$14.6 million, $12.1$16.7 million and $1.9$2.9 million for the contractual coupon interest, the accretion of the debt discount and the amortization of the debt issuance costs, respectively. The effective interest rate on the 2021 Notes is 5.8%, which includes the interest on the notes, amortization of the debt discount and debt issuance costs. Interest on the 2021 Notes began accruing upon issuance and is payable semi-annually.
Prior to September 15, 2020, holders may convertcould have converted their 2021 Notes only under the following conditions: (a) during any calendar quarter beginning June 30, 2016, if the reported sale price of the Company's common stock for at least 20 days out of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter iswas greater than 130% of the conversion price on each applicable trading day; (b) during the five5 business day period in which the trading price of the 2021 Notes fallsfell below 98% of the product of (i) the last reported sale price of the Company's common stock and (ii) the conversion rate on that date; and (c) upon the occurrence of specified corporate events, as defined in the 2021 Notes. From September 15, 2020 and until the close of business on the second scheduled trading day immediately preceding March 15, 2021, holders may convert their 2021 Notes at any time (regardless of the foregoing circumstances). The 2021 Notes can no longer be redeemed by the Company. The Company may not redeempreviously had the 2021 Notes priorability to March 20, 2019. The Company may redeem the 2021 Notes, at its option, in whole or in part beginning on or after March 20, 2019 until the close of business on the business day immediately preceding September 15, 2020 if the last reported sale price of the Company’s common stock hashad been at least 130% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company delivers written notice of a redemption. The redemption price will be equal to 100% of the principal amount of such 2021 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date. NoNaN principal payments are due on the 2021 Notes prior to maturity. Other than restrictions relating to certain fundamental changes and consolidations, mergers or asset sales and customary anti-dilution adjustments, the 2021 Notes do not contain any financial covenants and do not restrict the Company from paying dividends or issuing or repurchasing any of its other securities. The Company is unaware��
As of September 15, 2020, holders may convert their 2021 Notes at any current events or market conditions that would allow holderstime prior to convertthe close of business on the second scheduled trading day immediately preceding the maturity date. As a result, the 2021 Notes.Notes are considered redeemable as of December 31, 2020. A portion of the equity component that was recorded upon the issuance of the 2021 Notes was reclassified to temporary equity in the Consolidated Balance Sheet. Such amount was determined based on the cash consideration to be paid upon conversion and the carrying amount of the debt. The reclassification into temporary equity as of December 31, 2020 was $4.7 million based on the 2021 Notes principal of $650.0 million and the carrying value of $645.3 million.
2021 Hedge
In connection with the offering of the 2021 Notes, the Company entered into the hedge transaction with the initial purchasers of the 2021 Notes and/or their affiliates (the "2021 Counterparties") entitling the Company to purchase up to 10,865,270 shares of the Company's common stock at an initial stock price of $59.82 per share, each of which is subject to adjustment. The cost of the 2021 Hedge was $111.2 million and accounted for as an equity instrument by recognizing $111.2 million in additional paid-in-capital during 2016. The 2021 Hedge will expire on March 15, 2021. The 2021 Hedge is expected to reduce the potential equity dilution upon conversion of the 2021 Notes if the daily volume-weighted average price per share of the Company's common stock exceeds the strike price of the 2021 Hedge. An assumed exercise of the 2021 Hedge by the Company is considered anti-dilutive since the effect of the inclusion would always be anti-dilutive with respect to the calculation of diluted earnings per share.
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The Company sold warrants to the 2021 Counterparties to acquire up to 10,865,270 shares of the Company’s common stock. The 2021 Warrants will expire on various dates from June 2021 through December 2021 and may be settled in cash or net shares. It is the Company's current intent and policy to settle all conversions in shares of the Company’s common stock. The Company received $44.9 million in cash proceeds from the sale of the 2021 Warrants, which was recorded in additional paid-in-capital. The 2021 Warrants could have a dilutive effect on the Company's earnings per share to the extent that the price of the Company's common stock during a given measurement period exceeds the strike price of the 2021 Warrants, which is $80.00 per share. The Company uses the treasury share method for assumed conversion of its 2021 Warrants to compute the weighted average common shares outstanding for diluted earnings per share.
2.75%1.00% Senior Convertible Notes due 20172023
In June 2011,2020, the Company issued $402.5$450.0 million principal amount of the unsecured Senior Convertible Notes with a stated interest rate of 2.75%1.00% and a maturity date of JulyJune 1, 2017 (the “2017 Notes”).2023. The 2017net proceeds from the offering, after deducting initial purchasers’ discounts and costs directly related to the offering, were approximately $436.7 million. The 2023 Notes providedwere initially required to be settled in cash as the Company did not have sufficient reserved shares. On September 10, 2020, the Company held a Special Meeting of Stockholders and received stockholder approval to amend the Company’s Restated Certificate of Incorporation to increase the number of shares of its common stock authorized for settlementissuance from 120,000,000 shares to 150,000,000 shares. As a result of the increase in the number of shares of the Company’s common stock authorized for issuance, as of September 10, 2020 and as of December 31, 2020, the Company had sufficient reserved shares and therefore may settle conversions of the 2023 Notes in cash, stock, or a combination thereof, solely at the Company’s discretion. The initial conversion rate ofIt is the 2017 Notes was 23.7344 shares per $1,000 principal amount, which is equivalentCompany’s current intent and policy to a conversion price of approximately $42.13 per share, subject to adjustments. The Company used the treasury share method for assumed conversion of the 2017 Notes to compute the weighted average shares of common stock outstanding for diluted earnings per share.
During 2016, the Company repurchased a majority of the 2017 Notes, which resulted in a cumulative loss of approximately $19.1 million recorded in other expense on the accompanying Consolidated Statements of Operations for the year ended December 31, 2016. In July 2017, the Company settled the remaining 2017 Notes upon maturity viasettle all conversions through combination settlement, which involvedinvolves satisfying the principal amount outstanding with cash and any note conversion value over the principal amount in shares of the Company’s common stock. The initial conversion rate of the 2023 Notes is 11.8778 shares per $1,000 principal amount, which is equivalent to a conversion price of approximately $84.19 per share, subject to adjustments. In addition, following certain corporate events that occur prior to the maturity date, the Company will increase the conversion rate for a holder who elects to convert its 2023 Notes in connection with such a corporate event in certain circumstances. The Company also entered into transactions for a convertible notes hedge and warrants concurrently with the issuance of the 2023 Notes.
As discussed in Note 4, the Embedded Conversion Derivative requires bifurcation from the 2023 Notes and was initially accounted for as a liability, which was included in long-term liabilities in the Company’s Consolidated Balance Sheet. The fair value of the 2023 Notes Embedded Conversion Derivative at the time of issuance of the 2023 Notes was $57.2 million, and was recorded as the original debt discount for purposes of accounting for the debt component of the 2023 Notes. On September 10, 2020, as a result of the increase in the number of shares of the Company’s common stock. authorized for issuance, the Company had sufficient reserved shares to settle conversions of the 2023 Notes in cash, stock, or a combination thereof, and in accordance with authoritative literature, the Embedded Conversion Derivative was marked to fair value and reclassified to stockholders’ equity, which resulted in recognizing $37.3 million in additional paid-in-capital during the year ended December 31, 2020. The original discount will be recognized as interest expense using the effective interest method over the term of the 2023 Notes.
The interest expense recognized on the 20172023 Notes during the year ended December 31, 20172020 includes $0.9$2.6 million, $1.4$10.4 million and $0.2 million for the contractual coupon interest, the accretion of the debt discount and the amortization of the debt issuance costs, respectively. The interest expense recognized on the 2017 Notes during the year ended December 31, 2016 includes $4.9 million, $7.5 million and $1.0$2.2 million for the contractual coupon interest, the accretion of the debt discount and the amortization of the debt issuance costs, respectively. The effective interest rate on the 20172023 Notes was 8.0%is 6.8%, which includes the interest on the notes, amortization of the debt discount and debt issuance costs. Interest on the 20172023 Notes began accruing upon issuance and wasis payable semi-annually.
Prior to February 1, 2023, holders may convert their 2023 Notes only under the following conditions: (a) during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (b) during the 5 business day period after any five consecutive trading day period (the “measurement period”) in which the trading price of the 2023 Notes per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on such trading day; or (c) upon the occurrence of specified corporate events, as defined in the 2023 Notes. On or after February 1, 2023, until the close of business on the second scheduled trading day immediately preceding June 1, 2023, holders may convert their 2023 Notes at any time, regardless of the foregoing conditions.
The Company may not redeem the 2023 Notes prior to the maturity date and no principal payments are due on the 2023 Notes prior to maturity. Other than restrictions relating to certain fundamental changes and consolidations, mergers or asset sales and customary anti-dilution adjustments, the 2023 Notes do not contain any financial covenants and do not restrict the Company from conducting significant restructurings, paying dividends or issuing or repurchasing any of its other securities. As of December 31, 2020, the Company is unaware of any current events or market conditions that would allow holders to convert the 2023 Notes.
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Table of ContentsConcurrently,
2023 Hedge
In connection with the offeringsale of the 20172023 Notes, the Company also entered into privately negotiated call option transactions for a convertible note hedgewith certain dealers, which included affiliates of certain of the initial purchasers of the 2023 Notes and other financial institutions (the “2017 Hedge”“2023 Counterparties”) and warrants (the “2017 Warrants”). The 2017 Hedge entitled, entitling the Company to purchase up to 9,553,0965,345,010 shares of the Company’s common stock at an initial stock price of $42.13$84.19 per share. Priorshare, each of which is subject to its maturity, anadjustment. The 2023 Hedge was initially required to be settled in cash as the Company did not have sufficient reserved shares with respect to the 2023 Notes. As a result, the 2023 Hedge was accounted for as a derivative asset, which was included in long-term assets in the Company’s Consolidated Balance Sheet. The cost of the 2023 Hedge was $69.5 million. On September 10, 2020, as a result of the increase in the number of shares of the Company’s common stock authorized for issuance, the Company had sufficient reserved shares to settle the 2023 Notes, which therefore allows for the 2023 Hedge to be settled in cash, stock, or a combination thereof. In accordance with authoritative literature, the Convertible Note Hedge Derivative was marked to fair value and reclassified to stockholders’ equity, which resulted in recognizing a reduction of $37.3 million in additional paid-in-capital during the year ended December 31, 2020. The 2023 Hedge will expire on the second scheduled trading day immediately preceding June 1, 2023. The 2023 Hedge is expected to reduce the potential equity dilution upon conversion of the 2023 Notes if the daily volume-weighted average price per share of the Company’s common stock exceeds the strike price of the 2023 Hedge. An assumed exercise of the 20172023 Hedge by the Company wasis considered anti-dilutive since the effect of the inclusion would always be anti-dilutive with respect to the calculation of diluted earnings per share. The 2017
2023 Warrants entitled its holders
In connection with the sale of the 2023 Notes, the Company sold warrants to the 2023 Counterparties (the “2023 Warrants”) to acquire up to 477,6545,345,010 shares of the Company’s Series A Participating Preferred Stock atcommon stock. The 2023 Warrants initially limited the amount of shares the Company was required to reserve for issuance under the 2023 Warrants to an initial strike priceaggregate of $988.51 per share. Each share of Series A Participating Preferred Stock was convertible into 203,093,500 shares of the Company’s common stock, or upsubject to 9,553,080adjustment upon the Company having a sufficient amount of authorized and unissued shares which are not reserved for other transactions. As a result of the Company receiving stockholder approval to increase the number of shares of the Company’s common stock authorized for issuance on September 10, 2020, the Company subsequently entered into amendment agreements with each of the 2023 Counterparties to increase the number of authorized shares in total.of the Company’s common stock required to be reserved under the 2023 Warrants to the aggregate amount of 6,948,512 shares. The 20172023 Warrants were scheduled towill expire on various dates from September 20172023 through January 2018 with settlementNovember 2023 and may be settled in net shares or cash, subject to certain conditions. It is the Company’s current intent and policy to settle all conversions in shares of the Company’s common stock. The Company received $46.8 million in cash or net shares.proceeds from the sale of the 2023 Warrants, which was recorded in additional paid-in-capital. The 2023 Warrants could have a dilutive effect on the Company’s earnings per share to the extent that the price of the Company's common stock during a given measurement period exceeds the strike price of the 2023 Warrants, which is $104.84 per share. The Company useduses the treasury share method for assumed conversion of its 20172023 Warrants to compute the weighted average common shares outstanding for diluted earnings per share.
0.375% Senior Convertible Notes due 2025
In 2017,March 2020, the Company exercisedissued $450.0 million principal amount of unsecured Senior Convertible Notes with a stated interest rate of 0.375% and a maturity date of March 15, 2025 (the “2025 Notes”). The net proceeds from the 2017 Hedgeoffering, after deducting initial purchasers’ discounts and costs directly related to the offering, were approximately $437.0 million. The 2025 Notes may be settled in cash, stock, or a combination thereof, solely at the Company’s discretion. It is the Company's current intent and policy to settle all conversions through combination settlement, which involves satisfying the principal amount outstanding with cash and any note conversion value over the principal amount in shares of the Company’s common stock. The initial conversion rate of the 2025 Notes is 10.7198 shares per $1,000 principal amount, which is equivalent to a conversion price of approximately $93.29 per share, subject to adjustments. In addition, following certain corporate events that occur prior to the maturity date or if the Company issues a notice of redemption, the Company will increase the conversion rate for a holder who elects to convert its 2025 Notes in connection with such a corporate event or in connection with such redemption in certain circumstances. The Company uses the treasury share method for assumed conversion of the 2025 Notes to compute the weighted average shares of common stock outstanding for diluted earnings per share. The Company also entered into warrant termination agreementstransactions for a convertible notes hedge (the “2025 Hedge”) and warrants (the “2025 Warrants”) concurrently with the issuance of the 2025 Notes.
The cash conversion feature of the 2025 Notes required bifurcation from the notes and was initially accounted for as an equity instrument classified to stockholders’ equity, which resulted in recognizing $78.3 million in additional paid-in-capital during the year ended December 31, 2020.
The interest expense recognized on the 2025 Notes during the year ended December 31, 2020 includes $1.4 million, $11.9 million and $1.5 million for the contractual coupon interest, the accretion of the debt discount and the amortization of the debt issuance costs, respectively. The effective interest rate on the 2025 Notes is 4.9%, which includes the interest on the notes, amortization of the debt discount and debt issuance costs. Interest on the 2025 Notes began accruing upon issuance and is payable semi-annually.
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Prior to September 15, 2024, holders may convert their 2025 Notes only under the following conditions: (a) during any calendar quarter commencing after the calendar quarter ending on June 30, 2020 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (b) during the 5 business day period after any five consecutive trading day period (the “measurement period”) in which the trading price of the 2025 Notes per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on such trading day; (c) if the Company calls any or all of the 2025 Notes for redemption, at any time prior to the close of business on the second scheduled trading day preceding the redemption date; or (d) upon the occurrence of specified corporate events, as defined in the 2025 Notes. On or after September 15, 2024, until the close of business on the second scheduled trading day immediately preceding March 15, 2025, holders may convert their 2025 Notes at any time, regardless of the foregoing conditions.
The Company may not redeem the 2025 Notes prior to March 20, 2023. The Company may redeem the 2025 Notes, at its option, in whole or in part, on or after March 20, 2023 until the close of business on the business day immediately preceding September 15, 2024, if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company delivers written notice of a redemption. The redemption price will be equal to 100% of the principal amount of such 2025 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date. NaN principal payments are due on the 2025 Notes prior to maturity. Other than restrictions relating to certain fundamental changes and consolidations, mergers or asset sales and customary anti-dilution adjustments, the 2025 Notes do not contain any financial covenants and do not restrict the Company from conducting significant restructurings, paying dividends or issuing or repurchasing any of its other securities. As of December 31, 2020, the Company is unaware of any current events or market conditions that would allow holders to convert the 2025 Notes.
2025 Hedge
In connection with the sale of the 2025 Notes, the Company entered into privately negotiated call option transactions with certain dealers, which included affiliates of certain of the initial purchasers of the 2025 Notes and other financial institutions (the “2025 Counterparties”), entitling the Company to purchase up to 4,823,910 shares of the Company’s common stock at an initial stock price of $93.29 per share, each of which is subject to adjustment. The cost of the 2025 Hedge was $78.3 million and accounted for as an equity instrument by recognizing $78.3 million in additional paid-in-capital during the year ended December 31, 2020. The 2025 Hedge will expire on the second scheduled trading day immediately preceding March 15, 2025. The 2025 Hedge is expected to reduce the potential equity dilution upon conversion of the 2025 Notes if the daily volume-weighted average price per share of the Company’s common stock exceeds the strike price of the 2025 Hedge. An assumed exercise of the 2025 Hedge by the Company is considered anti-dilutive since the effect of the inclusion would always be anti-dilutive with respect to the calculation of diluted earnings per share.
2025 Warrants
The Company sold warrants to the 2025 Counterparties to acquire up to 4,823,910 shares of the Company’s common stock. The 2025 Warrants will expire on various dates from June 2025 through October 2025 and may be settled in net shares or cash, subject to certain conditions. It is the 2017Company’s current intent and policy to settle all conversions in shares of the Company’s common stock. The Company received $47.1 million in cash proceeds from the sale of the 2025 Warrants, which was recorded in additional paid-in-capital. The 2025 Warrants could have a dilutive effect on the Company’s earnings per share to the extent that the price of the Company's common stock during a netgiven measurement period exceeds the strike price of the 2025 Warrants, which is $127.84 per share. The Company uses the treasury share basis.method for assumed conversion of its 2025 Warrants to compute the weighted average common shares outstanding for diluted earnings per share.
112
Revolving Senior Credit Facility
In April 2017,February 2020, the Company entered into ana Second Amended and Restated Credit Agreement (the “2017“2020 Credit Agreement”) for a revolving senior credit facility (the “2017“2020 Facility”), which replaced the previous Amended and Restated Credit Agreement the Company had entered into in February 2016.April 2017. The 20172020 Credit Agreement was further amended in May 2020 to, among other things, provide additional flexibility in determining the financial covenant leverage ratios for the second and third fiscal quarters of 2020 and to adjust certain margin and benchmark rates used to determine interest under the 2020 Facility. The 2020 Credit Agreement provides for secured revolving loans, multicurrency loan options and letters of credit in an aggregate amount of up to $500.0$550.0 million. The 20172020 Credit Agreement also contains an expansion feature, which allows the Company to increase the aggregate principal amount of the 20172020 Facility provided the Company remains in compliance with the underlying financial covenants on a pro forma basis, including but not limited to, compliance with the consolidated interest coverage ratio and certain consolidated leverage ratios. The 20172020 Facility matures in April 2022February 2025 (subject to an earlier springing maturity date), and includes a sublimit of $100.0 million for multicurrency borrowings, a sublimit of $50.0 million for the issuance of standby letters of credit, a sublimit of $250.0 million for multicurrency borrowings, and a sublimit of $5.0 million for swingline loans. All assets of the Company and its material domestic subsidiaries arecontinue to be pledged as collateral under the 20172020 Facility (subject to customary exceptions) pursuant to the termterms set forth in the Second Amended and Restated Security and Pledge Agreement (the “2017 Security Agreement”) executed in favor of the administrative agent by the Company. Each of the Company’s material domestic subsidiaries guaranteesguarantee the 20172020 Facility. In connection with the 20172020 Facility, the Company incurred issuance costs which will be amortized over the term of the 20172020 Facility.The Company did not0t carry any outstanding revolving loans under the 20172020 Facility as of December 31, 20182020 and 2017.2019.
106
BorrowingsAny borrowings under the 20172020 Facility are intended to be used by the Company to provide financing for working capital and other general corporate purposes, including potential mergers and acquisitions.acquisitions and to refinance indebtedness. Borrowings under the 20172020 Facility bear interest, at the Company’s option, at a rate equal to an applicable margin plus: (a) the applicable Eurocurrency Rate (as defined in the 20172020 Credit Agreement), or (b) a base rate determined by reference to the highest of (1) the federal funds effective rate plus 0.50%, (2) the Bank of America prime rate, and (3) LIBORthe Eurocurrency Rate for an interest period of one month plus 1.00%. The margin for the 20172020 Facility ranges, based on the Company’s consolidated total net leverage ratio, from 0.00%0.50% to 1.00%1.25% in the case of base rate loans and from 1.00%1.50% to 2.00%2.25% in the case of Eurocurrency Rate loans. The 20172020 Facility includes an unused line fee ranging, based on the Company’s consolidated total net leverage ratio, from 0.20%0.35% to 0.35%0.50% per annum on the revolving commitment.
The 20172020 Credit Agreement contains affirmative, negative, permitted acquisition and financial covenants, and events of default customary for financings of this type. The financial covenants require the Company to maintain ratios of consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) in relation toa consolidated interest expensecoverage ratio and certain consolidated debt, respectively, as defined in the 2017 Credit Agreement.leverage ratios, which are measured on a quarterly basis. The 20172020 Facility grants the lenders preferred first priority liens and security interests in capital stock, intercompany debt and all of the present and future property and assets of the Company and each guarantor. The Company is currently in compliance with the 20172020 Credit Agreement covenants.
6.7. Commitments
Leases
At the inception of a contractual arrangement, the Company determines whether the contract contains a lease by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset in exchange for consideration over a period of time. If both criteria are met, the Company records the associated lease liability and corresponding right-of-use asset upon commencement of the lease using a discount rate based on a credit-adjusted secured borrowing rate commensurate with the term of the lease.
The Company records lease liabilities within current liabilities or long-term liabilities based upon the length of time associated with the lease payments. The Company records its operating lease right-of-use assets as long-term assets. Right-of-use assets for financing leases office facilitiesare recorded within property and equipment, under various operating and capitalnet in the Consolidated Balance Sheet. Leases with an initial term of 12 months or less are not recorded in the Consolidated Balance Sheet. The Company recognizes lease agreements. The initial terms of these leases range from 2 years to 17 years and generally provide for periodic rent increases and renewal options. Certain leases requireexpense on a straight-line basis over the Company to pay taxes, insurance and maintenance.lease term. In connection with certain operating leases, the Company has security deposits recorded and maintained as restricted cash totaling $2.4 million and $5.4$1.5 million as of December 31, 20182020 and 2017, respectively.December 31, 2019.
Rent expense is recognized on a straight-line basis overThe Company leases office and storage facilities and equipment under various operating and financing lease agreements. The initial terms of these leases range from 1 to 17 years and generally provide for periodic rent increases, and renewal and termination options. The Company’s lease agreements do not contain any material variable lease payments, residual value guarantees or material restrictive covenants.
Certain leases require the termCompany to pay taxes, insurance and maintenance. Payments for the transfer of goods or services such as common area maintenance and utilities represent non-lease components. The Company elected the lease. Accordingly, rent expense recognized in excesspackage of rent paid is reflected as a liability inpractical expedients and therefore does not separate non-lease components from lease components.
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The table below summarizes the accompanying Consolidated Balance Sheets. Company’s right-of-use assets and lease liabilities:
(in thousands, except years and rates) | December 31, 2020 |
|
| December 31, 2019 |
| ||
Assets |
|
|
|
|
|
|
|
Operating | $ | 102,270 |
|
| $ | 66,932 |
|
Financing |
| 2,956 |
|
|
| 1,453 |
|
Total leased assets | $ | 105,226 |
|
| $ | 68,385 |
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
Operating | $ | 7,875 |
|
| $ | 5,567 |
|
Financing |
| 1,355 |
|
|
| 672 |
|
Long-term: |
|
|
|
|
|
|
|
Operating |
| 111,634 |
|
|
| 73,153 |
|
Financing |
| 1,812 |
|
|
| 905 |
|
Total lease liabilities | $ | 122,676 |
|
| $ | 80,297 |
|
|
|
|
|
|
|
|
|
Supplemental non-cash information: |
|
|
|
|
|
|
|
Weighted-average remaining lease term (years) - operating leases |
| 12.8 |
|
|
| 12.4 |
|
Weighted-average remaining lease term (years) - finance leases |
| 2.2 |
|
|
| 2.3 |
|
Weighted-average discount rate - operating leases |
| 5.4 | % |
|
| 7.3 | % |
Weighted-average discount rate - finance leases |
| 4.9 | % |
|
| 5.4 | % |
The table below summarizes the Company’s lease costs, cash payments, and operating lease liabilities arising from obtaining right-of-use assets under its operating and financing lease obligations:
(in thousands) | December 31, 2020 |
|
| December 31, 2019 |
| ||
Lease expense: |
|
|
|
|
|
|
|
Operating lease expense | $ | 15,316 |
|
| $ | 11,859 |
|
Finance lease expense: |
|
|
|
|
|
|
|
Depreciation of right-of-use assets |
| 1,201 |
|
|
| 441 |
|
Interest expense on lease liabilities |
| 124 |
|
|
| 56 |
|
Total lease expense | $ | 16,641 |
|
| $ | 12,356 |
|
|
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows information: |
|
|
|
|
|
|
|
Operating cash flows used for operating leases | $ | 14,120 |
|
| $ | 12,140 |
|
Operating cash flows used for financing leases |
| 124 |
|
|
| 56 |
|
Financing cash flows used for financing leases |
| 1,113 |
|
|
| 420 |
|
Total cash paid for amounts included in the measurement of lease liabilities | $ | 15,357 |
|
| $ | 12,616 |
|
|
|
|
|
|
|
|
|
Supplemental non-cash information: |
|
|
|
|
|
|
|
Operating lease liabilities arising from obtaining right-of-use assets | $ | 41,148 |
|
| $ | 86,134 |
|
Rent expense, including costs directly associated with the facility leases, was approximately $12.8 million $12.6 million, and $10.6 million for the yearsyear ended December 31, 2018, 2017, and 2016, respectively.2018.
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The Company’s future minimum annual lease payments under capitaloperating and operatingfinancing leases including payments for costs directly associated with the facility leases, for years ending after at December 31, 20182020 are as follows:
|
| Capital |
|
| Operating |
|
| Financing |
|
| Operating |
| ||||
(in thousands) |
| Leases |
|
| Leases |
| ||||||||||
2019 |
| $ | 534 |
|
| $ | 13,750 |
| ||||||||
2020 |
|
| 507 |
|
|
| 13,007 |
| ||||||||
(in thousands) |
| Leases |
|
| Leases |
| ||||||||||
2021 |
|
| 244 |
|
|
| 10,954 |
|
| $ | 1,465 |
|
| $ | 14,140 |
|
2022 |
|
| 24 |
|
|
| 10,578 |
|
|
| 1,397 |
|
|
| 13,582 |
|
2023 |
|
| 5 |
|
|
| 10,515 |
|
|
| 466 |
|
|
| 13,158 |
|
2024 |
|
| 9 |
|
|
| 12,072 |
| ||||||||
2025 |
|
| — |
|
|
| 10,699 |
| ||||||||
Thereafter |
|
| — |
|
|
| 116,684 |
|
|
| — |
|
|
| 106,197 |
|
Total minimum lease payments |
| $ | 1,314 |
|
| $ | 175,488 |
|
| $ | 3,337 |
|
| $ | 169,848 |
|
Less amount representing interest |
|
| (59 | ) |
|
|
|
| ||||||||
Present value of obligations under capital leases |
|
| 1,255 |
|
|
|
|
| ||||||||
Less current portion |
|
| (449 | ) |
|
|
|
| ||||||||
Long-term capital lease obligations |
| $ | 806 |
|
|
|
|
| ||||||||
Less: amount representing interest |
|
| (170 | ) |
|
| (50,339 | ) | ||||||||
Present value of obligations under leases |
|
| 3,167 |
|
|
| 119,509 |
| ||||||||
Less: current portion |
|
| (1,355 | ) |
|
| (7,875 | ) | ||||||||
Long-term lease obligations |
| $ | 1,812 |
|
| $ | 111,634 |
|
Licensing and Purchasing Agreements
The Company has both minimum and contingent obligations to make payments of up to $75.2 50.4 million if specified future events occur or conditions are met as provided in certain revenue-based,net sales based, consulting, purchase and/or product development agreements. Not all of the respective agreements specify milestone payment timelines. Certain payments will be made in a combination of cash and the Company’s common shares as provided in the agreements. Any payments in satisfaction of these obligations are considered either a research and development expense or a cost of revenuesales depending on the nature of the arrangement and are recognized ratably as and if milestones are achieved.
107
The Company has employment contracts with key executives and maintains severance plans that provide for the payment of severance and other benefits if such executives are terminated for reasons other than cause, as defined in those agreements and plans. Certain agreements call for payments that are based on historical compensation, and accordingly, the amount of the contractual commitment will change over time commensurate with the executive’s applicable earnings. At December 31, 2018,2020, future commitments for such key executives were approximately $15.0$20.1 million. In certain circumstances, the agreements call for the acceleration of equity vesting. Those figures are not reflected in the above information.
7.8. Stockholders’ Equity
In October 2017, the Company announced that the Board of Directors approved a share repurchase program authorizing the repurchase of up to $100 million of the Company’s common stock over a three-year period. Under this program, the Company is authorized to repurchase common stock in open market purchases, privately negotiated purchases or other transactions through October 2020. In February 2020, the Company announced that the Board of Directors increased the share repurchase authorization from $100 million to $150 million of the Company’s common stock through December 31, 2021. In March 2020, in connection with the issuance of the 2025 Notes, the Company repurchased approximately 1,085,000 shares of its common stock for $75.0 million. As of December, 31 2020, $75.0 million remained authorized under the share repurchase program.
On September 10, 2020, upon obtaining stockholder approval, the Company filed a Certificate of Amendment to its Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to increase the number of authorized shares of the Company’s common stock from 120,000,000 shares to 150,000,000 shares.
9. Stock-Based Compensation
Common Stock
There were 150,000,000 and 120,000,000 shares of common stock authorized at December 31, 20182020 and 2017.2019, respectively.
Preferred Stock
There are 5,000,000 shares of preferred stock authorized and noneNaN issued or outstanding at December 31, 20182020 and 2017.2019.
On June 28, 2011, in connection with the issuance
115
Stock-based Compensation
In March 2014, the Compensation Committee (the "Compensation Committee") of the Board of Directors of the Company adopted the 2014 Equity Incentive Plan of NuVasive, Inc. (the "2014 EIP"), replacing the 2004 Amended and Restated Equity Incentive Plan (the “2004 EIP”). No further awards may be granted under the 2004 EIP; however, that plan continues to govern all awards previously issued under it (of which awards remain outstanding). The 2014 EIP provides the Company with the ability to grant various types of equity awards to its workforce (including, without limitation, restricted stock units (“RSUs”), restricted stock awards, performance awards, and deferred stock awards). The 2014 EIP also provides for the issuance of performance RSUs (“PRSUs”) to be granted subject to time- and/or performance-based vesting requirements. In addition, the award agreements under the 2014 EIP generally provide for the acceleration of 50% of the unvested equity awards of all shareownersemployees upon a change in control and the vesting of the remaining unvested equity awards for those shareownersemployees that are involuntarily terminated within a year of the change in control.
Each of the 2004 EIP and the 2014 EIP allow for “net share settlement” of certain equity awards whereby, in lieu of (i) making cash payments in satisfaction of the exercise price owed respective to non-qualified stock option awards, or (ii) open market selling award shares to generate cash proceeds for use in satisfaction of statutory tax obligations respective to an award’s settlement or exercise, the company offsets the award shares being settled in a respective transaction by the number of shares of company stock with a value equal to the respective obligation, and, in the case of taxes, making a cash payment to the respective taxing authority on behalf of the shareowneremployee using Company cash. The net share settlement is accounted for with the cost of any award shares that are net settled being included in treasury stock and reported as a reduction in total equity at the time of settlement.
In connection with the acquisition of Ellipse Technologies in February 2016, the Company assumed the Ellipse Technologies, Inc. 2015 Incentive Award Plan and the shares thereunder, subject to an equity exchange adjustment, for future awards by the Company.
The compensation cost that has been included in the Consolidated Statements of Operations for the Company’s stock-based compensation plans was as follows:
|
| Year Ended December 31, |
|
| Year Ended December 31, |
| ||||||||||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
|
| 2018 |
| ||||||
Sales, marketing and administrative expense |
| $ | 22,190 |
|
| $ | 20,596 |
|
| $ | 25,466 |
| ||||||||||||
Selling, general and administrative expense |
| $ | 12,622 |
|
| $ | 25,968 |
|
| $ | 22,190 |
| ||||||||||||
Research and development expense |
|
| 3,052 |
|
|
| 1,445 |
|
|
| 1,231 |
|
|
| 5,259 |
|
|
| 3,798 |
|
|
| 3,052 |
|
Cost of goods sold |
|
| 431 |
|
|
| 350 |
|
|
| 227 |
| ||||||||||||
Cost of sales |
|
| 264 |
|
|
| 531 |
|
|
| 431 |
| ||||||||||||
Stock-based compensation expense before taxes |
|
| 25,673 |
|
|
| 22,391 |
|
|
| 26,924 |
|
|
| 18,145 |
|
|
| 30,297 |
|
|
| 25,673 |
|
Related income tax benefits |
|
| (6,418 | ) |
|
| (8,509 | ) |
|
| (10,770 | ) |
|
| (3,088 | ) |
|
| (6,191 | ) |
|
| (6,418 | ) |
Stock-based compensation expense, net of taxes |
| $ | 19,255 |
|
| $ | 13,882 |
|
| $ | 16,154 |
|
| $ | 15,057 |
|
| $ | 24,106 |
|
| $ | 19,255 |
|
108
As of December 31, 2018,2020, there was $25.1$21.0 million and $14.4$16.1 million of unrecognized compensation expense for RSUs and PRSUs, respectively, which is expected to be recognized over a weighted-average period of approximately 1.91.7 years and 2.62.7 years, respectively. In addition, as of December 31, 2018,2020, there was $0.9$1.0 million of unrecognized compensation expense for shares expected to be issued under the ESPP which is expected to be recognized through April 2019.2021. There was no0 unamortized expense for stock options as of December 31, 2018.2020.
Restricted Stock Units
The total fair value of RSUs that vested during the year ended December 31, 2020, 2019, and 2018 2017, and 2016 was $8.8$12.1 million, $19.9$21.5 million and $31.2$8.8 million, respectively.
Following is a summary of RSU activity for the year ended December 31, 2018:2020:
|
|
|
|
|
| Weighted |
|
|
|
|
|
| Weighted |
| ||
|
|
|
|
|
| Average |
|
|
|
|
|
| Average |
| ||
|
| Number of |
|
| Grant Date |
|
| Number of |
|
| Grant Date |
| ||||
(in thousands, except per share amounts) |
| Shares |
|
| Fair Value |
|
| Shares |
|
| Fair Value |
| ||||
Outstanding at December 31, 2017 |
|
| 996 |
|
| $ | 52.90 |
| ||||||||
Outstanding at December 31, 2019 |
|
| 945 |
|
| $ | 59.21 |
| ||||||||
Granted |
|
| 467 |
|
|
| 55.55 |
|
|
| 381 |
|
|
| 63.64 |
|
Vested |
|
| (169 | ) |
|
| 42.94 |
|
|
| (209 | ) |
|
| 68.67 |
|
Forfeited |
|
| (180 | ) |
|
| 55.63 |
|
|
| (123 | ) |
|
| 59.21 |
|
Outstanding at December 31, 2018 |
|
| 1,114 |
|
| $ | 55.25 |
| ||||||||
Outstanding at December 31, 2020 |
|
| 994 |
|
| $ | 58.94 |
|
For the majority of RSUs, shares are issued on the vesting dates net of the amount of shares needed to satisfy statutory tax withholding requirements to be paid by the Company on behalf of the employees. The total shares withheld related to vested RSUs were approximately 71,000, 122,000, and 42,000 103,000, and 227,000 in 2018,20172020,2019, and 20162018, respectively, and were based on the value of the awards on their vesting dates as determined by the Company’s closing stock price. Total payments for the employees’ tax obligations to the taxing authorities related to vesting RSUs were $2.2$4.1 million, $7.2 million and $11.4$2.2 million in 20182020, 20172019 and 20162018, respectively.
116
Performance-Based Restricted Stock Units
The Company has granted PRSUs since 2012 for which the ultimate issuance amount is determined by the Company’s Compensation Committee upon its certification of Company performance against a pre-determined matrix, includingwhich have included targets for revenue,net sales, operating margin, earnings per share and total shareholder return over pre-determined periods of time. Share payout levels range from 0% to 312.5%200% depending on the respective terms of an award. Based upon the company’sCompany’s actual performance against the performance conditions, approximately 21,000, 76,00061,000, 276,000 and 145,00021,000 shares of common stock vested pursuant to PRSUs in 2020, 2019 and 2018, 2017 and 2016, respectively.
In 2015, the Company granted a PRSU awardsaward with a five-year cliff vesting termsterm to its former Chief Executive Office, Gregory T. Lucier, in connection with his appointment asto the Company’s Chief Executive Officer,Company, for which the performance criteria was not based on Company or market specific performance metrics, and asbut rather stock price performance. As such, the Company recorded the award as a long-term liability as expensed over the service period. No amounts have beensubject to recurring fair value adjustments that affect stock-based compensation expense. The minimum performance criteria for this award was not met, thus no shares were paid out on this award, or are expected to become due untiland the entire liability was reversed during the year ended December 31, 2020. In November 2018, J. Christopher Barry succeeded Mr. Lucier as the Company’s Chief Executive Officer, and Mr. Lucier remained on the Company’s Board of Directors and entered into an agreement to provide services to the Company as a consultant. The PRSU awards granted to Mr. Lucier will continue to vest in accordance with the continued services provided by Mr. Lucier as a consultant and as a member of the Company’s Board of Directors through the vesting date.
The total fair value of PRSUs vested during 2020, 2019, 2018 2017, 2016 and was $3.8 million, $19.9 million and $2.1 million, $10.3 million and $12.6 million, respectively.
Following is a summary of PRSU activity for the year ended December 31, 2018:2020:
|
|
|
|
|
| Maximum Number |
|
|
|
|
|
|
|
|
|
| Maximum Number |
|
|
|
|
| ||
(in thousands, except per share amounts) |
| Shares |
|
| of Shares Eligible to be Issued |
|
| Average Grant Date Fair Value |
|
| Shares |
|
| of Shares Eligible to be Issued |
|
| Average Grant Date Fair Value |
| ||||||
Outstanding at December 31, 2017 |
|
| 765 |
|
|
| 1,462 |
|
| $ | 52.62 |
| ||||||||||||
Outstanding at December 31, 2019 |
|
| 731 |
|
|
| 1,116 |
|
| $ | 57.07 |
| ||||||||||||
Awarded at target |
|
| 369 |
|
|
| 479 |
|
|
| 54.86 |
|
|
| 172 |
|
|
| 248 |
|
|
| 69.72 |
|
Vested |
|
| (21 | ) |
|
| (21 | ) |
|
| 48.73 |
|
|
| (61 | ) |
|
| (61 | ) |
|
| 73.20 |
|
Forfeited |
|
| (126 | ) |
|
| (262 | ) |
|
| 55.39 |
|
|
| (223 | ) |
|
| (453 | ) |
|
| 56.48 |
|
Outstanding at December 31, 2018 |
|
| 987 |
|
|
| 1,658 |
|
| $ | 56.88 |
| ||||||||||||
Outstanding at December 31, 2020 |
|
| 619 |
|
|
| 850 |
|
| $ | 57.38 |
|
109
For the majority of PRSUs, shares are issued on the vesting dates net of the amount of shares needed to satisfy statutory tax withholding requirements to be paid by the Company on behalf of the employees. The total shares withheld related to vesting PRSUs were approximately 25,000, 121,000 and 8,000 35,000in 2020,2019 and 58,000 in 20182017 and 2016 respectively, and were based on the value of the awards on their vesting dates as determined by the Company’s closing stock price. Total payments for the employees’ tax obligations to the taxing authorities related to vesting PRSUs were $1.6 million, $7.2 million, and $0.4 million $2.5 million, and 2.7 million in 2018,20172020,2019, and 2016,2018, respectively.
Stock Options
The Company has not granted any stock options since 2011. The stock options previously granted are exercisable for a period of up to ten years after the date of grant.
The aggregate intrinsic value of outstanding stock options at December 31, 20182020 is based on the Company’s closing stock price on December 31, 20182020 of $49.56.$56.33. Stock option exercises during the years ended December 31, 2020 and 2019 were primarily all executed with net share settlements, for which the Company does 0t receive any cash proceeds. The Company received $1.3 million, $2.4 million and $3.0 million in proceeds from the exercise of stock options during the yearsyear ended December 31, 2018, 2017 and 2016, respectively.2018. The total intrinsic value of stock options exercised was $2.5$0.4 million, $8.3$1.0 million, and $29.0$2.5 million during the years ended December 31, 2018, 20172020, 2019 and 2016,2018, respectively. There were no0 stock options that vested during the yearyears ended December 31, 2018, 20172020, 2019 or 2016.2018.
117
Following is a summary of stock option activity for the year ended December 31, 20182020 under all stock plans:
|
|
|
|
|
|
|
|
|
| Weighted-Average |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| Remaining |
|
|
|
|
| |
|
|
|
|
|
| Weighted |
|
| Contractual |
|
| Aggregate |
| |||
|
|
|
|
|
| Avg. Exercise |
|
| Term |
|
| Intrinsic |
| |||
(in thousands, except years and per share amounts) |
| Shares |
|
| Price |
|
| (Years) |
|
| Value |
| ||||
Outstanding at December 31, 2017 |
|
| 178 |
|
| $ | 35.41 |
|
|
| 1.33 |
|
| $ | 4,105 |
|
Exercised |
|
| (128 | ) |
|
| 35.28 |
|
|
|
|
|
|
|
|
|
Cancelled |
|
| (1 | ) |
|
| 34.49 |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018 |
|
| 49 |
|
|
| 35.76 |
|
|
| 1.52 |
|
| $ | 680 |
|
Exercisable at December 31, 2018 |
|
| 49 |
|
| $ | 35.76 |
|
|
| 1.52 |
|
| $ | 680 |
|
Vested or expected to vest at December 31, 2018 |
|
| 49 |
|
| $ | 35.76 |
|
|
| 1.52 |
|
| $ | 680 |
|
|
|
|
|
|
|
|
|
|
| Weighted-Average |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| Remaining |
|
|
|
|
| |
|
|
|
|
|
| Weighted |
|
| Contractual |
|
| Aggregate |
| |||
|
|
|
|
|
| Avg. Exercise |
|
| Term |
|
| Intrinsic |
| |||
(in thousands, except years and per share amounts) |
| Shares |
|
| Price |
|
| (Years) |
|
| Value |
| ||||
Outstanding at December 31, 2019 |
|
| 16 |
|
| $ | 29.18 |
|
|
| 0.89 |
|
| $ | 747 |
|
Exercised |
|
| (16 | ) |
|
| 29.18 |
|
|
|
|
|
|
|
|
|
Cancelled |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2020 |
|
| — |
|
|
| — |
|
|
| — |
|
| $ | — |
|
Exercisable at December 31, 2020 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | — |
|
Vested or expected to vest at December 31, 2020 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | — |
|
For the majority of stock options, shares are issued on the exercise dates net of the amount of shares needed to satisfy each of the exercise price (in lieu of cash) and statutory tax withholding requirements, the latter to be paid by the Company on behalf of the employee. The total shares withheld related to exercised stock options were approximately 8,000, 21,000, and 65,000 105,000, and 1,157,000 in 20182020, 20172019, and 2016,2018 respectively, and were based on the value of the stock options on their exercise dates as determined by the Company’s closing stock price. There were 0 cash payments for the employees’ tax obligations to the taxing authorities related to exercised stock options in 2020. Total cash payments for the employees’ tax obligations to the taxing authorities related to exercised stock options were $0.1 million and $0.4 million $2.1 million,in 2019 and $10.7 million in 20182017, and 2016, respectively.
Employee Stock Purchase Plan
The NuVasive, Inc. 2004 Amended and Restated Employee Stock Purchase Plan (the “ESPP”), provides eligible employees with a means of acquiring equity in the Company at a discounted purchase price using their own accumulated payroll deductions. Under the terms of the ESPP, employees can elect to have up to 15% of their annual compensation, up to a maximum of $21,250 per year, withheld to purchase shares of Company common stock for a purchase price equal to 85% of the lower of the fair market value per share (at closing) of Company common stock on (i) the commencement date of the six-month offering period or (ii) the respective purchase date. In the years ended December 31, 2020, 2019 and 2018, 2017 and 2016, 151,000, 154,000136,000, 129,000, and 152,000151,000 shares, respectively, were purchased under the ESPP.
The weighted average assumptions used to estimate the fair value of stock options granted and stock purchase rights under the ESPP are as follows:
|
| Year Ended December 31, |
|
| Year Ended December 31, |
| ||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
|
| 2018 |
| ||||||
ESPP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility |
|
| 33 | % |
|
| 26 | % |
|
| 29 | % |
|
| 56 | % |
|
| 35 | % |
|
| 33 | % |
Expected term (years) |
|
| 0.5 |
|
|
| 0.5 |
|
|
| 0.5 |
|
|
| 0.5 |
|
|
| 0.5 |
|
|
| 0.5 |
|
Risk free interest rate |
|
| 1.8 | % |
|
| 0.9 | % |
|
| 0.4 | % |
|
| 0.5 | % |
|
| 2.3 | % |
|
| 1.8 | % |
Expected dividend yield |
|
| — | % |
|
| — | % |
|
| — | % |
|
| — | % |
|
| — | % |
|
| — | % |
110
Common Stock Reserved for Future Issuance
The following table summarizes common shares reserved for issuance on exercise or conversion at December 31, 20182020:
(in thousands) |
|
|
| |
|
|
| ||
Issued and outstanding RSUs and PRSUs |
|
|
|
|
Available for issuance under the ESPP |
|
|
|
|
Available for future grant |
|
|
|
|
2021 Notes |
|
| 14,396 |
|
2021 Warrants |
|
|
| |
2023 Notes | 7,082 | |||
2023 Warrants | 6,949 | |||
2025 Notes | 6,512 | |||
2025 Warrants | 6,271 |
| ||
Total shares reserved for future issuance |
|
|
|
|
Pursuant to the terms of the 2014 EIP, shares subject to awards granted under the 2004 EIP may be utilized for future grants of awards under the 2014 EIP, to the extent such awards are terminated, cancelled or they expire, or shares subject thereto are withheld to cover taxes. During the year ended December 31, 2016, the Company filed a registration statement with the Securities and Exchange Commission with respect to 2.2 million of such shares for future issuance under the 2014 EIP. These shares are reflected in the number of shares available for future grants.
8.
118
10. Income Taxes
Total (loss) income before income taxes summarized by region for the years ended December 31 iswas as follows:
|
| Year Ended December 31, |
|
| Year Ended December 31, |
| ||||||||||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
|
| 2018 |
| ||||||
United States |
| $ | 8,939 |
|
| $ | 76,480 |
|
| $ | 77,610 |
|
| $ | (45,534 | ) |
| $ | 74,721 |
|
| $ | 8,939 |
|
Foreign |
|
| (216 | ) |
|
| (4,117 | ) |
|
| (12,830 | ) |
|
| (2,011 | ) |
|
| 5,796 |
|
|
| (216 | ) |
Total income before income taxes |
| $ | 8,723 |
|
| $ | 72,363 |
|
| $ | 64,780 |
| ||||||||||||
Total (loss) income before income taxes |
| $ | (47,545 | ) |
| $ | 80,517 |
|
| $ | 8,723 |
|
The income tax (benefit) provision for the years ended December 31 consists of the following: was as follows:
|
| Year Ended December 31, |
|
| Year Ended December 31, |
| ||||||||||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
|
| 2018 |
| ||||||
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
| $ | (4,188 | ) |
| $ | 5,972 |
|
| $ | (14,837 | ) |
| $ | (35 | ) |
| $ | 4,802 |
|
| $ | (4,188 | ) |
State |
|
| 2,043 |
|
|
| 776 |
|
|
| 1,283 |
|
|
| 2,309 |
|
|
| 4,638 |
|
|
| 2,043 |
|
Foreign |
|
| 5,972 |
|
|
| 2,793 |
|
|
| 2,350 |
|
|
| 4,675 |
|
|
| 2,205 |
|
|
| 5,972 |
|
Total current provision |
|
| 3,827 |
|
|
| 9,541 |
|
|
| (11,204 | ) |
|
| 6,949 |
|
|
| 11,645 |
|
|
| 3,827 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
| (5,944 | ) |
|
| (1,565 | ) |
|
| 40,363 |
|
|
| (13,800 | ) |
|
| 5,873 |
|
|
| (5,944 | ) |
State |
|
| (7,092 | ) |
|
| (4,276 | ) |
|
| 1,455 |
|
|
| (8,315 | ) |
|
| (4,565 | ) |
|
| (7,092 | ) |
Foreign |
|
| (98,795 | ) |
|
| (2,223 | ) |
|
| (2,583 | ) |
|
| (3,849 | ) |
|
| (819 | ) |
|
| (98,795 | ) |
Total deferred provision |
|
| (111,831 | ) |
|
| (8,064 | ) |
|
| 39,235 |
|
|
| (25,964 | ) |
|
| 489 |
|
|
| (111,831 | ) |
Changes in tax rate |
|
| 258 |
|
|
| (14,668 | ) |
|
| (216 | ) |
|
| (579 | ) |
|
| 606 |
|
|
| 258 |
|
Changes in valuation allowance |
|
| 103,990 |
|
|
| 5,699 |
|
|
| 1,494 |
|
|
| 9,202 |
|
|
| 2,543 |
|
|
| 103,990 |
|
Total (benefit) provision |
| $ | (3,756 | ) |
| $ | (7,492 | ) |
| $ | 29,309 |
|
| $ | (10,392 | ) |
| $ | 15,283 |
|
| $ | (3,756 | ) |
111
The differences between the income tax provision at the United States federal statutory tax rate and the Company’s effective tax rate for the years ended December 31 are the following: were as follows:
|
| Year Ended December 31, |
|
| Year Ended December 31, |
| ||||||||||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
|
| 2018 |
| ||||||
Tax provision at federal statutory rate |
| $ | 1,832 |
|
| $ | 25,327 |
|
| $ | 22,673 |
| ||||||||||||
Tax (benefit) provision at federal statutory rate |
| $ | (9,984 | ) |
| $ | 16,909 |
|
| $ | 1,832 |
| ||||||||||||
Income tax credits and incentives |
|
| (7,155 | ) |
|
| (7,209 | ) |
|
| (5,525 | ) | ||||||||||||
State income tax |
|
| (1,243 | ) |
|
| 3,763 |
|
|
| 90 |
| ||||||||||||
Valuation allowance |
|
| 103,990 |
|
|
| 5,703 |
|
|
| 1,494 |
|
|
| 9,202 |
|
|
| 2,543 |
|
|
| 103,990 |
|
Net tax benefit on international restructuring |
|
| (97,028 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (97,028 | ) |
Return to provision adjustments |
|
| (881 | ) |
|
| (2,323 | ) |
|
| (4,180 | ) | ||||||||||||
Acquisition related charges |
|
| 687 |
|
|
| (1,808 | ) |
|
| (221 | ) | ||||||||||||
Compensation expense |
|
| 3,314 |
|
|
| 1,643 |
|
|
| 2,008 |
| ||||||||||||
Income tax reserves |
|
| (6,717 | ) |
|
| 1,184 |
|
|
| 759 |
|
|
| (4,217 | ) |
|
| (1,146 | ) |
|
| (6,717 | ) |
Income tax credits and incentives |
|
| (5,525 | ) |
|
| (3,462 | ) |
|
| (3,426 | ) | ||||||||||||
Return to provision adjustments |
|
| (4,180 | ) |
|
| (2,443 | ) |
|
| (1,188 | ) | ||||||||||||
Compensation expense |
|
| 2,008 |
|
|
| (5,619 | ) |
|
| (8,013 | ) | ||||||||||||
Globalization initiative |
|
| 1,264 |
|
|
| 306 |
|
|
| 6,290 |
| ||||||||||||
Nondeductible meals and entertainment |
|
| 769 |
|
|
| 922 |
|
|
| 1,013 |
|
|
| 351 |
|
|
| 717 |
|
|
| 769 |
|
Foreign tax rate differences from federal statutory rate |
|
| (688 | ) |
|
| 378 |
|
|
| 605 |
|
|
| (1,215 | ) |
|
| 716 |
|
|
| 576 |
|
Change in tax rates |
|
| 258 |
|
|
| (14,668 | ) |
|
| (216 | ) |
|
| (579 | ) |
|
| 606 |
|
|
| 258 |
|
Acquisition related charges |
|
| (221 | ) |
|
| (489 | ) |
|
| 5,167 |
| ||||||||||||
State income tax |
|
| 90 |
|
|
| 3,553 |
|
|
| 3,245 |
| ||||||||||||
Recovery of tax basis in United States subsidiary |
|
| — |
|
|
| (19,540 | ) |
|
| — |
| ||||||||||||
Other |
|
| 392 |
|
|
| 1,356 |
|
|
| 906 |
|
|
| 1,328 |
|
|
| 872 |
|
|
| 392 |
|
Total (benefit) provision |
| $ | (3,756 | ) |
| $ | (7,492 | ) |
| $ | 29,309 |
|
| $ | (10,392 | ) |
| $ | 15,283 |
|
| $ | (3,756 | ) |
119
Significant components of the Company’s deferred tax assets and liabilities atwere as follows:
|
| December 31, |
| |||||
(in thousands) |
| 2020 |
|
| 2019 |
| ||
Deferred tax assets: |
|
|
|
|
|
|
|
|
Amortization |
| $ | 67,945 |
|
| $ | 87,296 |
|
Net operating loss carryforwards |
|
| 47,407 |
|
|
| 24,656 |
|
Inventory |
|
| 35,763 |
|
|
| 24,069 |
|
General business and other credit carryforwards |
|
| 26,542 |
|
|
| 23,168 |
|
Lease liability |
|
| 28,356 |
|
|
| 17,636 |
|
Stock-based compensation |
|
| 9,918 |
|
|
| 11,562 |
|
Original issue discount |
|
| 3,735 |
|
|
| 1,840 |
|
Other |
|
| 27,479 |
|
|
| 22,591 |
|
Gross deferred tax assets |
|
| 247,145 |
|
|
| 212,818 |
|
Less valuation allowance |
|
| (130,434 | ) |
|
| (122,534 | ) |
Net deferred tax assets |
|
| 116,711 |
|
|
| 90,284 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation |
|
| (44,760 | ) |
|
| (37,045 | ) |
Acquired intangibles |
|
| (27,544 | ) |
|
| (34,799 | ) |
Right-of-use assets |
|
| (24,122 | ) |
|
| (14,891 | ) |
Other |
|
| (5,176 | ) |
|
| (6,260 | ) |
Total deferred tax liabilities |
|
| (101,602 | ) |
|
| (92,995 | ) |
Net deferred tax assets (liabilities) |
| $ | 15,109 |
|
| $ | (2,711 | ) |
The Company consolidates subsidiaries in foreign jurisdictions which use the local currency as their functional currency. Since income taxes for these subsidiaries are assessed in their local currency, deferred tax balances are translated into the Company’s reporting currency and adjusted for changes in the exchange rates over time through the cumulative translation account. Additionally, the Company established certain deferred taxes associated with the issuance of convertible debt in 2020 the benefit of which was recorded to equity. Accordingly, changes in the deferred tax balances associated with revaluations and convertible debt issuances are not reflected in income tax expense and create disparities between the changes in total deferred taxes for the year and deferred tax expense. In the year ended December 31, are composed2020, net decreases in deferred taxes of the following:
|
| December 31, |
| |||||
(in thousands) |
| 2018 |
|
| 2017 |
| ||
Deferred tax assets: |
|
|
|
|
|
|
|
|
Amortization |
| $ | 106,769 |
|
| $ | 6,742 |
|
General business and other credit carryforwards |
|
| 25,846 |
|
|
| 18,928 |
|
Stock-based compensation |
|
| 14,914 |
|
|
| 13,502 |
|
Inventory |
|
| 12,385 |
|
|
| 10,075 |
|
Net operating loss carryforwards |
|
| 7,516 |
|
|
| 14,991 |
|
Deferred rent |
|
| 4,628 |
|
|
| 2,532 |
|
Original issue discount |
|
| 3,322 |
|
|
| 4,606 |
|
Other |
|
| 23,241 |
|
|
| 14,859 |
|
Gross deferred tax assets |
|
| 198,621 |
|
|
| 86,235 |
|
Less valuation allowance |
|
| (120,233 | ) |
|
| (16,247 | ) |
Net deferred tax assets |
|
| 78,388 |
|
|
| 69,988 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Acquired intangibles |
|
| (42,767 | ) |
|
| (53,076 | ) |
Depreciation |
|
| (32,851 | ) |
|
| (23,132 | ) |
Other |
|
| (1,843 | ) |
|
| (1,752 | ) |
Total deferred tax liabilities |
|
| (77,461 | ) |
|
| (77,960 | ) |
Consolidated net deferred tax assets (liabilities) |
| $ | 927 |
|
| $ | (7,972 | ) |
Add deferred tax liability, net, attributable to non-controlling interests |
|
| — |
|
|
| 199 |
|
Net deferred tax assets (liabilities) |
| $ | 927 |
|
| $ | (7,773 | ) |
approximately $0.8 million and decreases in valuation allowances of approximately $1.3 million were recorded against equity and, therefore, not reflected in deferred tax expense.
112
The following table summarizes the activity related to the Company’s unrecognized tax benefits:
|
| Year Ended December 31, |
|
| Year Ended December 31, |
| ||||||||||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
|
| 2018 |
| ||||||
Gross unrecognized tax benefits at January 1 |
| $ | 25,356 |
|
| $ | 23,322 |
|
| $ | 12,448 |
|
| $ | 20,328 |
|
| $ | 19,545 |
|
| $ | 25,356 |
|
Increases in tax positions for prior years |
|
| 499 |
|
|
| 1,692 |
|
|
| 1,716 |
|
|
| 1,758 |
|
|
| 62 |
|
|
| 499 |
|
Decreases in tax positions for prior years |
|
| (756 | ) |
|
| (24 | ) |
|
| (270 | ) |
|
| — |
|
|
| (112 | ) |
|
| (756 | ) |
Increases in tax positions for current year relating to ongoing operations |
|
| 1,913 |
|
|
| 968 |
|
|
| 6,205 |
|
|
| 2,159 |
|
|
| 2,073 |
|
|
| 1,913 |
|
Decreases in tax positions as a result of a lapse of statute of limitations |
|
| (6,446 | ) |
|
| (402 | ) |
|
| — |
|
|
| (5,929 | ) |
|
| (616 | ) |
|
| (6,446 | ) |
Increases in tax positions for current year relating to acquisitions |
|
| 169 |
|
|
| — |
|
|
| 3,223 |
|
|
| — |
|
|
| — |
|
|
| 169 |
|
Decreases in tax positions due to settlements with taxing authorities |
|
| (1,190 | ) |
|
| (200 | ) |
|
| — |
|
|
| — |
|
|
| (624 | ) |
|
| (1,190 | ) |
Gross unrecognized tax benefits at December 31 |
| $ | 19,545 |
|
| $ | 25,356 |
|
| $ | 23,322 |
|
| $ | 18,316 |
|
| $ | 20,328 |
|
| $ | 19,545 |
|
At December 31, 2020, 2019, and 2018, 2017, and 2016, $18.1$16.5 million, $24.1$18.7 million, and $12.5$18.1 million, respectively, of the Company’s total unrecognized tax benefits, if recognized, would impact the effective income tax rate.
In accordance with the disclosure requirements as described in ASC Topic 740, Income Taxes,, the Company has classified uncertain tax positions as non-current income tax liabilities unless expected to be paid in one year. The Company’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. For the years ended December 31, 2018, 2017,2020, 2019, and 2016,2018, the Company recognized approximately $(0.5) million, $(0.1) million, $0.1 million, and $0.3$(0.5) million, respectively, in interest and penalties as income tax (benefit) expense in the Consolidated Statements of Operations. The Company had approximately $0.1 million and $0.4 million for the payment of interest and penalties accrued at both December 31, 20182020 and December 31, 2017, respectively,2019 in the Consolidated Balance Sheets.
120
The Company believes it is reasonably possible that approximately $0.8$2.4 million of its remaining unrecognized tax positions, primarily attributable to withholding obligations and the valuation of intercompany transactions, may be recognizeddecrease by the end of 20192021 as we reach settlements with taxing authorities or certain statute of limitations expire, the amount of which is primarily attributable to tax positions involving the valuation of intercompany transactions.expire.
In November 2018, the Company completed a reorganization of its international intellectual property company structure. This international restructuring generated a step-up in local tax basis, which under ASC Topic 740-10-25-20as amended by ASU 2016-16, required the Company to record deferred tax assets of $100.8 million. Due to uncertainties surrounding the realization of a portion of these deferred tax assets, a valuation allowance of approximately $96.7 million was recorded.
The Company is subject to routine compliance reviews on various tax matters around the world in the ordinary course of business. Currently, incomethe only active audit is with the U.S. Internal Revenue Service for 2014 – 2016 tax audits are being conducted in the state of New York, the state of Louisiana and Germany. U.S. and most foreign jurisdictions remainyears. California is subject to examination in all years due to prior year net operating losses and R&Dresearch and development credits. Other major state and foreign jurisdictions remain subject to examination from 2016 and 2013 forward, respectively.
During 2018 the Company completed its tax accounting in connection with the Tax Cuts and Jobs Act (the “Act”) which was enacted into law on December 22, 2017. In 2018, the Company recorded approximately $0.3 million of tax expense attributable to 2017 during SAB 118 measurement period, which would have increased the 2017 effective tax rate by 0.5%. The Company has elected anmade the accounting policy election to treat the tax impact of the global intangible low taxedtaxes due on U.S. inclusions in taxable income provision of the Actrelated to Global Intangible Low-Taxed Income as a futurecurrent period charge rather than a current component of deferred taxes.expense when incurred (the "period cost method").
The Company has a net deficitapproximately $13.2 million of undistributed earnings attributable to operations in earnings and profits from its controlled foreign subsidiariescorporations as of December 31, 2018. In the event the Company is required2020. Due to repatriate funds from outside ofrecent tax reform in the United States such repatriation would not generate additionaland favorable treaties between the United States and countries in which its controlled foreign corporations operate, the Company has the ability to repatriate earnings without incurring additional tax liabilities, but could be subject to local laws and customs generating immaterial tax consequences inliabilities. Accordingly, the subsidiaries’ jurisdictions.Company has not recorded a liability for taxes associated with any future distributions of these undistributed earnings.
At December 31, 2018,2020, the Company had $2.3$2.0 million, $71.8$50.9 million and $6.8$0.1 million of federal, state and foreign net operating loss carryforwards, respectively, which willrespectively. Federal net operating loss carryforwards begin to expire in 2020. Valuation allowance reserves of $53.8 million are recorded against California2026, state net operating loss carryforwards begin to expire in 2021, and foreign net operating losses of $53.8 million due to uncertainty surrounding their realization.carry forward indefinitely.
There wereThe Company also has federal and California research and development income tax credit carryforwards of $22.3$11.4 million and $25.9$35.7 million, respectively. The federal credits will begin to expire in 2027. The2038, while the California credits can be carried forward indefinitely. Valuation allowance reserves of $25.9 million are recorded against the California credits due to uncertainty surrounding their realization.
Due to the “change of ownership” provision of the Tax Reform Act of 1986, utilization of the Company’s net operating loss and credit carryforwards may be subject to an annual limitation against taxable income in future periods. As a result of any future ownership changes, the annual limitation of loss and credit carryforwards may cause them to expire before ultimately becoming available to reduce future income tax liabilities.
113
9.11. Business Segment, Product and Geographic Information
The Company operates in one1 segment based upon the Company’s organizational structure, the way in which the operations and investments are managed and evaluated by the chief operating decision maker (“CODM”) as well as the lack of availability of discrete financial information at a lower level. The Company’s CODM reviews revenuenet sales at the product line offering level, and manufacturing, operating income and expenses, and net income at the Company wideCompany-wide level to allocate resources and assess the Company’s overall performance. The Company shares common, centralized support functions, including finance, human resources, legal, information technology, and corporate marketing, all of which report directly to the CODM. Accordingly, decision-making regarding the Company’s overall operating performance and allocation of Company resources is assessed on a consolidated basis. As such, the Company operates as one reporting segment. The Company has disclosed the revenuesnet sales for each of its product line offerings to provide the reader of the financial statements transparency into the operations of the Company.
The Company reports under two distinct product lines; spinal hardware and surgical support. The Company’s spinal hardware product line offerings include implants and fixation products. The Company’s surgical support product offerings include IOMIONM services, disposables and biologics, and our capital equipment, all of which are used to aid spinal surgery.
Revenue
121
Net sales by product line was as follows:
|
| Year Ended December 31, |
| |||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
Spinal Hardware |
| $ | 788,650 |
|
| $ | 737,534 |
|
| $ | 683,703 |
|
Surgical Support |
|
| 313,064 |
|
|
| 289,151 |
|
|
| 278,429 |
|
Total Revenue |
| $ | 1,101,714 |
|
| $ | 1,026,685 |
|
| $ | 962,132 |
|
|
| Year Ended December 31, |
| |||||||||
(in thousands) |
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
Spinal hardware |
| $ | 783,510 |
|
| $ | 851,440 |
|
| $ | 788,649 |
|
Surgical support |
|
| 267,072 |
|
|
| 316,630 |
|
|
| 313,065 |
|
Total net sales |
| $ | 1,050,582 |
|
| $ | 1,168,070 |
|
| $ | 1,101,714 |
|
Revenue
Net sales and property and equipment, net, by geographic area were as follows:
|
| Revenue |
|
| Property and Equipment, Net |
|
| Net Sales |
|
| Property and Equipment, Net |
| ||||||||||||||||||||||||||||
|
| Year Ended December 31, |
|
| December 31, |
|
| Year Ended December 31, |
|
| December 31, |
| ||||||||||||||||||||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2018 |
|
| 2017 |
|
| 2020 |
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
| ||||||||||
United States |
| $ | 896,152 |
|
| $ | 850,410 |
|
| $ | 831,778 |
|
| $ | 200,404 |
|
| $ | 179,891 |
|
| $ | 821,824 |
|
| $ | 941,086 |
|
| $ | 896,152 |
|
| $ | 239,802 |
|
| $ | 218,771 |
|
International (excludes Puerto Rico) |
|
| 205,562 |
|
|
| 176,275 |
|
|
| 130,354 |
|
|
| 38,437 |
|
|
| 35,435 |
|
|
| 228,758 |
|
|
| 226,984 |
|
|
| 205,562 |
|
|
| 46,567 |
|
|
| 47,547 |
|
Total |
| $ | 1,101,714 |
|
| $ | 1,026,685 |
|
| $ | 962,132 |
|
| $ | 238,841 |
|
| $ | 215,326 |
|
| $ | 1,050,582 |
|
| $ | 1,168,070 |
|
| $ | 1,101,714 |
|
| $ | 286,369 |
|
| $ | 266,318 |
|
10.12. Contingencies
The Company is subject to potential liabilities under government regulations and various claims and legal actions that are pending or may be asserted from time-to-time. These matters arise in the ordinary course and conduct of the Company’s business and include, for example, commercial, intellectual property, environmental, securities and employment matters. The Company intends to continue to defend itself vigorously in such matters and when warranted, take legal action against others. Furthermore, the Company regularly assesses contingencies to determine the degree of probability and range of possible loss for potential accrual in its financial statements.
During the year ended December 31, 2018, the Company settled all outstanding matters with Madsen Medical, Inc. for $27.8 million, which was funded by cash on hand and credit available under its revolving senior credit facility.million. The Company no longer has any remaining liability related to this matter.
During the year ended December 31, 2017, the Company paid $4.5 million for the settlement of fees associated with the outcome of the litigation matter with Warsaw Orthopedic, Inc., Medtronic Sofamor Danek USA, Inc. and other Medtronic related entities (collectively, “Medtronic”).
During the year December 31, 2016, the Company settled its ongoing litigation with Medtronic. As a result of the settlement, the Company paid $45.0 million to Medtronic and accordingly recorded a gain of $43.3 million related to the settlement by reducing its previous accrual of $88.3 million related to the matter.
114
An estimated loss contingency is accrued in the Company’s financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Based on the Company’s assessment, it has adequately accrued an amount for contingent liabilities currently in existence. The Company does not accrue amounts for liabilities that it does not believe are probable or that it considers immaterial to its overall financial position.probable. Litigation is inherently unpredictable, and unfavorable resolutions could occur. As a result, assessing contingencies is highly subjective and requires judgment about future events. The amount of ultimate loss may exceed the Company’s current accruals, and it is possible that its cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies.
Legal Proceedings
Securities Litigation13. Subsequent Events
On August 28, 2013, a purported securities class action lawsuit was filed in the U.S. District Court for the Southern District of California namingFebruary 24, 2021, the Company and certaincompleted the acquisition of its current and former executive officersSimplify Medical Pty Limited, or Simplify Medical, a developer of cervical artificial disc technology for allegedly making false and materially misleading statements regarding the Company’s business and financial results, specifically relatingcervical total disc replacement procedures. Pursuant to the purported improper submission of false claims to Medicare and Medicaid. The operative complaint asserts a putative class period stemming from October 22, 2008 to July 30, 2013. The complaint alleges violations of Sections 10(b) and 20(a)terms of the Securities Exchange Actdefinitive agreement, the Company agreed to make an upfront payment of 1934, as amended,$150.0 million at closing, subject to customary purchase price adjustments, plus additional future payments contingent upon milestones related to regulatory approval and Rule 10b-5 promulgated thereundernet sales from products incorporating the Simplify Medical cervical artificial disc technology. In connection with the closing, the Company funded the $150.0 million upfront payment using available cash and seeks unspecified monetary relief, interest, and attorneys’ fees. On February 13, 2014, Brad Mauss, the lead plaintiff in the case, filed an Amended Class Action Complaint for Violationsinvestments on hand. Upon achievement of the Federal Securities Laws. The Company answered the complaint on August 25, 2016, and discovery commenced. The plaintiffs filed motions for class certification on October 28, 2016 and the Company’s opposition papers were filed on January 9, 2017. On March 22, 2017, the court issued an order granting class certification. The Company filedregulatory milestone, Simplify Medical will be entitled to a petitionone-time payment of up to appeal the order granting class certification with the U.S. Court of Appeals for the Ninth Circuit (the “Ninth Circuit”) on April 5, 2017 and the plaintiffs filed an opposition to the petition. On August 15, 2017, the Ninth Circuit denied the Company’s petition. The Company filed a motion for summary judgment on September 8, 2017. On February 1, 2018, the court entered an order denying the Company’s motion for summary judgment. On February 13, 2018, the Company entered into a memorandum of understanding with the plaintiffs to settle the case for $7.9 million. On March 23, 2018, the parties executed a stipulation of settlement, which was preliminarily approved by the court on June 11, 2018. On December 6, 2018, the court issued an order and judgment granting final approval of the settlement. The settlement of $7.9 million was fully funded by insurance proceeds and includes the dismissal of all claims against the Company and the named individuals in the lawsuit without any liability or wrongdoing attributed to them. The Company no longer has any remaining liability related to this matter as of December 31, 2018.
Madsen Medical, Inc. Litigation
On February 19, 2016, an unfavorable jury verdict was delivered against the Company in its litigation in the U.S. District Court for the Southern District of California against Madsen Medical, Inc. (“MMI”), a former sales agent. Specifically, the jury awarded MMI $7.5 million in lost profits for tortious interference, $14.0 million for unjust enrichment, $20.0 million in punitive damages, and approximately $0.3 million in damages for breach of contract. On March 18, 2016, the trial court entered judgment in favor of MMI in the amount of $27.8$45.9 million which amount excludedcould become due and payable at any time between 2021 and 2024. Additional milestone payments, which are contingent upon net sales from products incorporating the $14.0 million disgorgement awarded by the jury. On July 5, 2016, the trial court also awarded MMI attorney’s feesSimplify Medical cervical artificial disc technology, will become payable in calendar years 2023, 2024 and costs of approximately $1.1 million. The Company’s post-trial motions for judgment as a matter of law and/or for a new trial were denied, and the Company appealed both the verdict and the court’s subsequent award of attorney’s fees and costs. The U.S. Court of Appeals for the Ninth Circuit held oral argument on April 12, 2018. During pendency of the appeal, the Company secured a bond to cover the amount of the judgment and attorneys’ fees and costs.
As of December 31, 2017, the Company believed that the outcome of the case did not constitute a probable nor an estimable loss associated with the litigation, but rather a reasonably possible loss. The Company, based on its own assessment as well as that of outside counsel, believed that it was probable upon appeal the judgment would be vacated. Accordingly, the Company did not record a loss contingency at December 31, 2017, but assessed a reasonable range of potential loss, which would be from zero to the current amount entered as a judgment, as well as attorney’s fees and interest.
Following the April 12, 2018 oral argument, the Company believed that the prior judgments against it, in part or as a whole, may be upheld. Accordingly, at March 31, 2018, the Company believed that the outcome of the case constituted a probable loss. While the actual amount of the probable loss was not known, the Company assessed a range of potential loss in accordance with Accounting Standards Codification 450, Contingencies, which would be from zero to $29.0 million, and recorded an additional estimated loss contingency in the amount of $29.0 million as a current litigation liability in the Consolidated Balance Sheet as of March 31, 2018, resulting in an aggregate litigation liability of $29.0 million accrued for this matter. In May 2018, the Company entered into an agreement to settle all outstanding matters with MMI for $27.8 million. The Company has paid the settlement amount and no longer has any remaining liability related to this matter as of December 31, 2018.2025.
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11. Regulatory Matters
On August 31, 2015, the Company received a civil investigative demand (“CID”) issued by the Department of Justice (“DOJ”) pursuant to the federal False Claims Act. The CID requires the delivery of a wide range of documents and information related to an investigation by the DOJ concerning allegations that the Company assisted a physician group customer in submitting improper claims for reimbursement and made improper payments to the physician group in violation of the Anti-Kickback Statute. The Company is cooperating with the DOJ in regards to this matter. No assurance can be given as to the timing or outcome of this investigation. As of December 31, 2018, the probable outcome of this matter cannot be determined, nor can the Company estimate a range of potential loss. In accordance with authoritative guidance on the evaluation of loss contingencies, the Company has not recorded an accrual related to this matter.
On June 9, 2017, the Company received a subpoena from the Office of the Inspector General of the U.S. Department of Health and Human Services (“OIG”) in connection with an investigation into possible false or otherwise improper claims submitted to Medicare and Medicaid. The subpoena sought discovery of documents for the period January 2014 through June 2017, primarily associated with sales to a particular customer and relationships related to that customer account. In February 2019, the Company received notice that the OIG had concluded its investigation and is not pursuing the matter further.
12. Quarterly Data (unaudited)
The following quarterly financial data, in the opinion of management, reflects all adjustments, consisting of normal recurring adjustments necessary, for a fair presentation of results for the periods presented:
|
| Year Ended December 31, 2018 (1) (2) (3) |
| |||||||||||||
(in thousands, except per share amounts) |
| First Quarter |
|
| Second Quarter |
|
| Third Quarter |
|
| Fourth Quarter |
| ||||
Revenue |
| $ | 260,522 |
|
| $ | 281,564 |
|
| $ | 271,301 |
|
| $ | 288,327 |
|
Gross profit |
|
| 186,708 |
|
|
| 204,508 |
|
|
| 197,141 |
|
|
| 202,198 |
|
Consolidated net (loss) income |
|
| (27,132 | ) |
|
| 11,531 |
|
|
| 15,923 |
|
|
| 12,157 |
|
Basic net (loss) income per common |
|
| (0.53 | ) |
|
| 0.22 |
|
| 0.31 |
|
| 0.24 |
| ||
Diluted net (loss) income per common share |
|
| (0.53 | ) |
|
| 0.22 |
|
|
| 0.30 |
|
| 0.23 |
|
|
| Year Ended December 31, 2017 (4) |
| |||||||||||||
|
| First Quarter |
|
| Second Quarter |
|
| Third Quarter |
|
| Fourth Quarter |
| ||||
Revenue |
| $ | 249,013 |
|
| $ | 259,399 |
|
| $ | 247,051 |
|
| $ | 271,222 |
|
Gross profit |
|
| 187,570 |
|
|
| 193,213 |
|
|
| 181,544 |
|
|
| 195,917 |
|
Consolidated net income |
|
| 11,983 |
|
|
| 11,735 |
|
|
| 33,096 |
|
|
| 23,041 |
|
Net income attributable to NuVasive, Inc. |
|
| 12,426 |
|
|
| 12,167 |
|
|
| 33,528 |
|
|
| 23,477 |
|
Basic net income per common share attributable to NuVasive, Inc. |
|
| 0.25 |
|
|
| 0.24 |
|
|
| 0.66 |
|
| 0.46 |
| |
Diluted net income per common share attributable to NuVasive, Inc. |
|
| 0.22 |
|
|
| 0.21 |
|
|
| 0.64 |
|
| 0.45 |
|
|
|
|
|
|
|
|
|
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