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GMED Globus Medical

Filed: 28 Oct 20, 4:43pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

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 No. 001-35621

GLOBUS MEDICAL, INC.

(Exact name of registrant as specified in its charter)

DELAWARE

04-3744954

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

2560 General Armistead Avenue, Audubon, PA 19403

 

(610) 930-1800

(Address of principal executive offices) (Zip Code)

 

(Registrant’s telephone number, including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbols

Name of exchange on which registered

Class A Common Stock, par value $.001 per share

GMED

New York Stock Exchange

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 that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yes   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 (§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   No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large Accelerated Filer

Accelerated Filer

Non-accelerated Filer

Smaller Reporting Company

Emerging Growth Company

 

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes   No 

The number of shares outstanding of the issuer’s common stock (par value $0.001 per share) as of October 26, 2020 was 98,676,042 shares.

GLOBUS MEDICAL, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

GLOBUS MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

September 30,

December 31,

(In thousands, except par value)

2020

2019

ASSETS

Current assets:

Cash, cash equivalents, and restricted cash

$

250,607

$

195,724

Short-term marketable securities

159,030

115,763

Accounts receivable, net of allowances of $7,011 and $5,599, respectively

143,268

154,326

Inventories

231,858

196,314

Prepaid expenses and other current assets

19,091

17,243

Income taxes receivable

8,097

8,098

Total current assets

811,951

687,468

Property and equipment, net of accumulated depreciation of $267,364 and $243,732, respectively

215,274

199,841

Long-term marketable securities

275,587

409,514

Intangible assets, net

81,794

78,812

Goodwill

129,662

128,775

Other assets

22,851

21,741

Deferred income taxes

4,620

5,926

Total assets

$

1,541,739

$

1,532,077

LIABILITIES AND EQUITY

Current liabilities:

Accounts payable

$

30,022

$

24,614

Accrued expenses

61,803

63,283

Income taxes payable

979

1,057

Business acquisition liabilities

997

6,727

Deferred revenue

6,179

5,402

Payable to broker

-

10,320

Total current liabilities

99,980

111,403

Business acquisition liabilities, net of current portion

3,551

2,822

Deferred income taxes

4,128

6,023

Other liabilities

16,876

9,377

Total liabilities

124,535

129,625

Commitments and contingencies (Note 12)

 

 

Equity:

Class A common stock; $0.001 par value. Authorized 500,000,000 shares; issued and outstanding 76,241,618 and 77,394,983 shares at September 30, 2020 and December 31, 2019, respectively

76

77

Class B common stock; $0.001 par value. Authorized 275,000,000 shares; issued and outstanding 22,430,097 and 22,430,097 shares at September 30, 2020 and December 31, 2019, respectively

22

22

Additional paid-in capital

422,774

357,320

Accumulated other comprehensive income (loss)

2,207

(2,898)

Retained earnings

992,125

1,047,931

Total equity

1,417,204

1,402,452

Total liabilities and equity

$

1,541,739

$

1,532,077

See accompanying notes to unaudited condensed consolidated financial statements.


GLOBUS MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

Three Months Ended

Nine Months Ended

September 30,

September 30,

(In thousands, except per share amounts)

2020

2019

2020

2019

Net sales

$

216,098

$

196,215

$

555,597

$

573,701

Cost of goods sold

57,097

45,387

156,604

131,214

Gross profit

159,001

150,828

398,993

442,487

Operating expenses:

Research and development

14,421

14,508

69,278

44,577

Selling, general and administrative

89,152

88,455

262,710

262,618

Provision for litigation

1,625

197

1,625

Amortization of intangibles

4,152

3,620

12,043

10,412

Acquisition related costs

1,263

559

1,867

1,245

Total operating expenses

108,988

108,767

346,095

320,477

Operating income/(loss)

50,013

42,061

52,898

122,010

Other income, net

Interest income/(expense), net

3,085

4,377

10,999

12,954

Foreign currency transaction gain/(loss)

(170)

145

(806)

123

Other income/(expense)

202

169

595

410

Total other income/(expense), net

3,117

4,691

10,788

13,487

Income/(loss) before income taxes

53,130

46,752

63,686

135,497

Income tax provision

8,914

8,445

14,358

25,816

Net income/(loss)

$

44,216

$

38,307

$

49,328

$

109,681

Earnings per share:

Basic

$

0.45

$

0.39

$

0.50

$

1.11

Diluted

$

0.44

$

0.38

$

0.49

$

1.08

Weighted average shares outstanding:

Basic

98,217

99,238

98,453

98,998

Dilutive stock options

2,268

2,862

2,370

2,687

Diluted

100,485

102,100

100,823

101,685

Anti-dilutive stock options excluded from weighted average calculation

5,101

5,108

6,130

4,939

See accompanying notes to unaudited condensed consolidated financial statements.

 

GLOBUS MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

Three Months Ended

Nine Months Ended

September 30,

September 30,

(In thousands)

2020

2019

2020

2019

Net income/(loss)

$

44,216

$

38,307

$

49,328

$

109,681

Other comprehensive income/(loss):

Unrealized gain/(loss) on marketable securities, net of tax

(770)

244

2,285

4,027

Foreign currency translation gain/(loss)

1,679

(1,342)

2,820

319

Total other comprehensive income/(loss)

909

(1,098)

5,105

4,346

Comprehensive income/(loss)

$

45,125

$

37,209

$

54,433

$

114,027

See accompanying notes to unaudited condensed consolidated financial statements.

 

GLOBUS MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

Class A
Common Stock

Class B
Common Stock

Additional paid-in

Accumulated other comprehensive

Retained

(In thousands)

Shares

$

Shares

$

capital

income/(loss)

earnings

Total

Balance at December 31, 2019

77,394

$

77

22,431

$

22

$

357,320

$

(2,898)

$

1,047,931

$

1,402,452

Cumulative effects of adoption of accounting standards

(468)

(468)

Stock-based compensation

6,902

6,902

Exercise of stock options

190

1

5,762

5,763

Comprehensive income/(loss)

(3,368)

25,949

22,581

Repurchase and retirement of common stock

(1,920)

(2)

(73,862)

(73,864)

Balance at March 31, 2020

75,664

$

76

22,431

$

22

$

369,984

$

(6,266)

$

999,550

$

1,363,366

Stock-based compensation

7,426

7,426

Exercise of stock options

434

(1)

10,201

10,201

Comprehensive income/(loss)

7,564

(20,837)

(13,273)

Repurchase and retirement of common stock

(771)

(1)

(30,804)

(30,805)

Balance at June 30, 2020

75,327

$

75

22,430

$

22

$

387,611

$

1,298

$

947,909

$

1,336,915

Stock-based compensation

7,007

7,007

Exercise of stock options

915

1

28,156

28,157

Comprehensive income/(loss)

909

44,216

45,125

Balance at September 30, 2020

76,242

$

76

22,430

$

22

$

422,774

$

2,207

$

992,125

$

1,417,204

Class A
Common Stock

Class B
Common Stock

Additional paid-in

Accumulated other comprehensive

Retained

(In thousands)

Shares

$

Shares

$

capital

income/(loss)

earnings

Total

Balance at December 31, 2018

76,144

$

76

22,431

$

22

$

299,869

$

(7,172)

$

892,721

$

1,185,516

Stock-based compensation

6,541

6,541

Exercise of stock options

407

1

10,255

(1)

10,255

Comprehensive income/(loss)

1,692

33,210

34,902

Balance at March 31, 2019

76,551

$

77

22,431

$

22

$

316,665

$

(5,480)

$

925,930

$

1,237,214

Stock-based compensation

6,381

6,381

Exercise of stock options

96

2,015

1

2,016

Comprehensive income/(loss)

3,752

38,163

41,915

Balance at June 30, 2019

76,647

$

77

22,431

$

22

$

325,061

$

(1,728)

$

964,094

$

1,287,526

Stock-based compensation

6,978

6,978

Exercise of stock options

326

7,081

1

7,082

Comprehensive income/(loss)

(1,098)

38,307

37,209

Balance at September 30, 2019

76,973

$

77

22,431

$

22

$

339,120

$

(2,826)

$

1,002,402

$

1,338,795

See accompanying notes to unaudited condensed consolidated financial statements.

GLOBUS MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Nine Months Ended

September 30,

(In thousands)

2020

2019

Cash flows from operating activities:

Net income

$

49,328

$

109,681

Adjustments to reconcile net income to net cash provided by operating activities:

Acquired in-process research and development

24,418

Depreciation and amortization

45,970

38,688

Amortization of premium (discount) on marketable securities

215

(1,008)

Write-down for excess and obsolete inventories

12,411

1,939

Stock-based compensation expense

21,138

19,647

Allowance for doubtful accounts

2,741

2,732

Change in fair value of business acquisition liabilities

1,027

579

Change in deferred income taxes

(4,458)

2,434

(Gain)/loss on disposal of assets, net

714

518

Payment of business acquisition related liabilities

(700)

(Increase)/decrease in:

Accounts receivable

8,412

(5,367)

Inventories

(47,271)

(40,869)

Prepaid expenses and other assets

(4,381)

(3,044)

Increase/(decrease) in:

Accounts payable

5,401

(158)

Accrued expenses and other liabilities

3,749

1,225

Income taxes payable/receivable

(105)

(9,331)

Net cash provided by operating activities

118,609

117,666

Cash flows from investing activities:

Purchases of marketable securities

(57,418)

(277,446)

Maturities of marketable securities

100,830

205,818

Sales of marketable securities

39,944

46,474

Purchases of property and equipment

(49,595)

(54,957)

Acquisition of businesses, net of cash acquired, and purchases of intangible and other assets

(31,991)

(24,135)

Net cash used in investing activities

1,770

(104,246)

Cash flows from financing activities:

Payment of business acquisition related liabilities

(5,327)

(6,096)

Proceeds from exercise of stock options

44,121

19,350

Repurchase of common stock

(104,669)

Net cash used in/provided by financing activities

(65,875)

13,254

Effect of foreign exchange rate on cash

379

(231)

Net increase in cash, cash equivalents, and restricted cash

54,883

26,443

Cash, cash equivalents, and restricted cash at beginning of period

195,724

139,747

Cash, cash equivalents, and restricted cash at end of period

$

250,607

$

166,190

Supplemental disclosures of cash flow information:

Income taxes paid

$

19,328

$

34,056

Purchases of property and equipment included in accounts payable and accrued expenses

$

3,931

$

5,959

See accompanying notes to unaudited condensed consolidated financial statements.

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Table of Contents

GLOBUS MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) The Company

Globus Medical, Inc., together with its subsidiaries, is a medical device company that develops and commercializes healthcare solutions whose mission is to improve the quality of life of patients with musculoskeletal disorders. We are primarily focused on implants that promote healing in patients with musculoskeletal disorders, including the use of a robotic guidance and navigation system and products to treat patients who have experienced orthopedic traumas.

We are an engineering-driven company with a history of rapidly developing and commercializing advanced products and procedures to assist surgeons in effectively treating their patients and address new treatment options. With over 210 products on the market, we offer a comprehensive portfolio of innovative and differentiated technologies that address a variety of musculoskeletal pathologies, anatomies, and surgical approaches.

We are headquartered in Audubon, Pennsylvania, and market and sell our products through our exclusive sales force in the United States, as well as within North, Central & South America, Europe, Asia, Africa and Australia. The sales force consists of direct sales representatives and distributor sales representatives employed by exclusive independent distributors.

The terms the “Company,” “Globus,” “we,” “us” and “our” refer to Globus Medical, Inc. and, where applicable, our consolidated subsidiaries.

(b) COVID-19 Pandemic Impact

On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (“COVID-19”) a global pandemic and recommended containment and mitigation measures worldwide. The pandemic has significantly impacted the economic conditions in the U.S. and globally as federal, state and local governments react to the public health crisis, creating significant uncertainties in the economy. While emergency and time-sensitive surgical procedures continue, as of the date of this filing, the Company has been impacted by temporary postponement of elective surgeries in hospitals and surgical facilities worldwide.

The Company cannot reasonably estimate the length or severity of this pandemic, however, as a result of these developments the Company expects a material adverse impact on its sales, results of operations, and cash flows in fiscal 2020, and potentially fiscal 2021.

In response to these developments, the Company will continue to monitor liquidity and cash flow. The Company has the ability to borrow from our credit facility signed on August 6, 2020, if needed, although we do not expect to do so due to our cash, cash equivalents and short-term marketable securities balances.

(c) Basis of Presentation

The accompanying interim unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in complete financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). As such, the information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2019.

In the opinion of management, the statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of our financial position and of the results for the three and nine month periods presented. The results of operations for any interim period are not indicative of results for the full year.

(d) Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of Globus and its wholly-owned subsidiaries. All intercompany balances and transactions are eliminated in consolidation.

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Table of Contents

GLOBUS MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(e) Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates, in part, on historical experience that management believes to be reasonable under the circumstances. Actual results could differ from those estimates. Estimates and assumptions are periodically reviewed and the effects of revisions are reflected in the condensed consolidated financial statements in the period they are determined to be necessary.

Significant areas that require management’s estimates include intangible assets, business acquisition liabilities, stock-based compensation, write-down for excess and obsolete inventory, useful lives of assets, the outcome of litigation, recoverability of intangible assets and income taxes. We are subject to risks and uncertainties due to changes in the healthcare environment, regulatory oversight, competition, and legislation that may cause actual results to differ from estimated results.

(f) Cash, Cash Equivalents, and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the statement of financial position that sum to the total of the same such amounts shown in the statement of cash flows:

September 30,

December 31,

September 30,

December 31,

(In thousands)

2020

2019

2019

2018

Cash and cash equivalents

$

250,607

$

195,474

$

166,090

$

139,647

Restricted cash

250

100

100

Total cash, cash equivalents, and restricted cash as presented in the condensed consolidated statement of cash flows

$

250,607

$

195,724

$

166,190

$

139,747

(g) Marketable Securities

Our marketable securities include municipal bonds, corporate debt securities, commercial paper, securities of government, federal agency, and other sovereign obligations, and asset-backed securities, and are classified as available-for-sale as of September 30, 2020 and December 31, 2019. Available-for-sale securities are recorded at fair value in both short-term and long-term marketable securities on our condensed consolidated balance sheets. The change in fair value for available-for-sale securities, that do not result in recognition or reversal of an allowance for credit loss or write-down, is recorded, net of taxes, as a component of accumulated other comprehensive income or loss on our condensed consolidated balance sheets. Premiums and discounts are recognized over the life of the related security as an adjustment to yield using the straight-line method. Realized gains or losses from the sale of our marketable securities are determined on a specific identification basis. Realized gains and losses, along with interest income and the amortization/accretion of premiums/discounts are included as a component of other income/(expense), on our condensed consolidated statements of income. Interest receivable is recorded as a component of prepaid expenses and other current assets on our condensed consolidated balance sheets.

We maintain a portfolio of various holdings, types and maturities, though most of the securities in our portfolio could be liquidated at minimal cost at any time. We invest in securities that meet or exceed standards as defined in our investment policy. Our policy also limits the amount of credit exposure to any one issue, issuer or type of security. We review our securities for other-than-temporary impairment at each reporting period. If an unrealized loss for any security is expected, the loss will be recognized on an allowance basis, consistent with ASC 326-30, in our condensed consolidated statement of income in the period the determination is made.

(h) Fair Value Measurements

Assets and Liabilities That Are Measured at Fair Value on a Recurring Basis

Under the accounting for fair value measurements and disclosures, fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or the liability in an orderly transaction between market participants on the measurement date. Additionally, a fair value hierarchy was established that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. The level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

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GLOBUS MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Our assets and liabilities measured at fair value on a recurring basis are classified and disclosed in one of the following three categories:

Level 1—quoted prices (unadjusted) in active markets for identical assets and liabilities;

Level 2—observable inputs other than quoted prices in active markets for identical assets and liabilities; and

Level 3—unobservable inputs in which there is little or no market data available, which require the reporting entity to use significant unobservable inputs or valuation techniques.

Assets and Liabilities That Are Measured at Fair Value on a Nonrecurring Basis

The purchase price of business acquisitions is primarily allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition dates, with the excess recorded as goodwill. We utilize Level 3 inputs in the determination of the initial fair value. Non-financial assets such as goodwill, intangible assets, and property, plant, and equipment are subsequently measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment is recognized. We assess the impairment of intangible assets annually or whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable. The fair value of our goodwill and intangible assets is not estimated if there is no change in events or circumstances that indicate the carrying amount of an intangible asset may not be recoverable.

Contingent consideration represents our contingent milestone, performance and revenue-sharing payment obligations related to our acquisitions and is measured at fair value, based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The valuation of contingent consideration uses assumptions we believe would be made by a market participant. We assess these assumptions on an ongoing basis as additional data impacting the assumptions is obtained. The balances of the fair value of contingent consideration are recognized within business acquisition liabilities on our condensed consolidated balance sheets, and the changes in the fair value of contingent consideration are recognized within acquisition related costs in the condensed consolidated statements of income.

(i) Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined on a first-in, first-out basis. The majority of our inventories are finished goods and we utilize both in-house manufacturing and third-party suppliers to source our products. We periodically evaluate the carrying value of our inventories in relation to our estimated forecast of product demand, which takes into consideration the estimated life cycle of product releases. When quantities on hand exceed estimated sales forecasts, we record a write-down for such excess inventories. Once inventory has been written down, it creates a new cost basis for inventory that is not subsequently written up.

(j) Revenue Recognition

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. Sales and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. For purposes of disclosing disaggregated revenue, we disaggregate our revenue into two categories, Musculoskeletal Solutions and Enabling Technologies. Our Musculoskeletal Solutions products consist primarily of the implantable devices, disposables, and unique instruments used in an expansive range of spine, orthopedic trauma, hip, knee and extremity procedures. The majority of our Musculoskeletal Solutions contracts have a single performance obligation and revenue is recognized at a point in time. Our Enabling Technologies products are the advanced hardware and software systems and related technologies that are designed to enhance a surgeon’s capabilities and streamline surgical procedures by making them less invasive, more accurate, and more reproducible to improve patient care. The majority of our Enabling Technologies product contracts typically contain multiple performance obligations, including maintenance and support, and revenue is recognized as we fulfill each performance obligation. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. Our policy is to classify shipping and handling costs billed to customers as sales and the related expenses as cost of goods sold.

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GLOBUS MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Nature of Products and Services

A significant portion of our Musculoskeletal Solutions product revenue is generated from consigned inventory maintained at hospitals or with sales representatives. Revenue from the sale of consigned musculoskeletal products is recognized when we transfer control, which occurs at the time the product is used or implanted. For all other Musculoskeletal Solutions product transactions, we recognize revenue when we transfer title to the goods, provided there are no remaining performance obligations that will affect the customer’s final acceptance of the sale. We use an observable price to determine the stand-alone selling price for the identified performance obligation.

Revenue from the sale of Enabling Technologies products is generally recognized when control transfers to the customer which occurs at the time the product is shipped or delivered. Depending on the terms of the arrangement, we may also defer the recognition of a portion of the consideration received as we have to satisfy a future performance obligation to provide maintenance and support. We use an observable price to determine the stand-alone selling price for each separate performance obligation.

Contract Balances

Timing of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when revenue is recognized prior to invoicing, or deferred revenue when revenue is recognized subsequent to invoicing.

Deferred revenue is comprised mainly of unearned revenue related to the sales of certain Enabling Technologies products, which includes maintenance and support services. Deferred revenue is generally invoiced annually at the beginning of each contract period and recognized ratably over the coverage period. For the three and nine months ended September 30, 2020, there was an immaterial amount of revenue recognized from previously deferred revenue.

Disaggregation of Revenue

Net sales for the three and nine months ended September 30, 2020 and 2019, respectively included the following:

Three Months Ended

Nine Months Ended

September 30,

September 30,

(In thousands)

2020

2019

2020

2019

Musculoskeletal Solutions products

$

207,063

$

182,324

$

533,085

$

540,620

Enabling Technologies products

9,035

13,891

22,512

33,081

Total net sales

$

216,098

$

196,215

$

555,597

$

573,701

(k) Recently Issued Accounting Pronouncements

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.

On March 12, 2020, the FASB issued ASU No. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is effective for all entities as of March 12, 2020, and will apply through December 31, 2022. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.

Management does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the Company’s consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(l) Recently Adopted Accounting Pronouncements

In February 2016, the FASB released ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). Under ASU 2016-02, a right-of-use asset and lease obligation will be recorded for all leases with terms greater than 12 months, whether operating or financing, while the income statement will reflect lease expense for operating leases and amortization/interest expense for financing leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted, and permits modified retrospective method or cumulative-effect adjustment method. We adopted the standard on January 1, 2019, using the cumulative-effect adjustment transition method.  As part of the adoption, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed carry forward of historical lease classifications. The adoption of this standard did not have a material impact on our financial position and results of operations. See “Note 13. Leases” for more detail regarding our disclosures.

In February 2018, the FASB released ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). Prior to ASU 2018-02, GAAP required the remeasurement of deferred tax assets and liabilities as a result of a change in tax laws or rates to be presented in net income from continuing operations, even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income. As a result, such items, referred to as stranded tax effects, did not reflect the appropriate tax rate. Under ASU 2018-02, entities are permitted, but not required, to reclassify from accumulated other comprehensive income to retained earnings those stranded tax effects resulting from the U.S. legislation commonly referred to as the Tax Cuts and Jobs Act enacted in December 2017.  ASU 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. We adopted ASU 2018-02 on January 1, 2019. Adoption of the standard did not have a material impact on our financial position, results of operations and disclosures.

In June 2018, the FASB released ASU 2018-07, Compensation—Stock Compensation (Topic 718), (“ASU 2018-07”), which expanded the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. This update is effective for public entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. We adopted ASU 2018-07 on January 1, 2019. Adoption of the standard did not have a material impact on our financial position, results of operations, and disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 replaces the incurred loss impairment methodology for measuring and recognizing credit losses with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This amendment is effective for fiscal years beginning after December 15, 2019. We adopted the updated guidance on January 1, 2020 on a prospective basis recording $0.5 million as a cumulative effect adjustment to retained earnings and as a result, prior period amounts were not adjusted. Adoption of the standard did not have a material impact on our financial position, results of operations, and disclosures.

In January 2017, the FASB released ASU 2017-04, Intangibles - Goodwill and Other (Topic 805): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which eliminates the Step 2 calculation for the implied fair value of goodwill to measure a goodwill impairment charge. Under the updated standard, an entity will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. ASU 2017-04 does not change the guidance on completing Step 1 of the goodwill impairment test and still allows an entity to perform the optional qualitative goodwill impairment assessment before determining whether to proceed to Step 1. This update is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption permitted for any impairment test performed on testing dates after January 1, 2017. We adopted ASU 2017-04 on January 1, 2020. Adoption of the standard did not have a material impact on our financial position, results of operations, and disclosures.

In August 2018, the FASB released ASU 2018-13, Fair Value Measurement (Topic 820), (“ASU 2018-13���), which modifies the disclosure requirements on fair value measurements in Topic 820, including the consideration of costs and benefits. This update is effective for public entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. We adopted ASU 2018-13 on January 1, 2020. Adoption of the standard did not have a material impact on our financial position, results of operations, and disclosures.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 2. ASSET ACQUISITIONS AND BUSINESS COMBINATIONS

Asset Acquisitions

During the second quarter of 2020, the Company acquired Synoste Oy (“Synoste”), a Finnish engineering company that specializes in the research and development of a limb lengthening system. The fair value of the net assets acquired was $25.3 million, and the consideration consisted of approximately $22.8 million of cash paid at closing plus $2.5 million of a contractual holdback obligation payable eighteen months from the closing date of the transaction, subject to net working capital and other post-closing adjustments, if applicable. The contractual holdback obligation is included in Other Liabilities in the Condensed Consolidated Balance Sheet.

The Company accounted for the transaction as an asset acquisition as substantially all of the estimated fair value of the gross assets acquired was concentrated in a single identified asset, in-process research and development (“IPR&D”) of the limb lengthening system, thus satisfying the requirements of the screen test in ASU 2017-1. Acquired IPR&D in the asset acquisition was accounted for in accordance with FASB ASC Topic 730, “Research and Development” (ASC 730). At the date of acquisition, the Company determined that the development of the projects underway at Synoste had not yet reached technological feasibility and that the research in process had no alternative future use. Accordingly, the acquired IPR&D of $24.4 million was charged to Research and Development expense in the Condensed Consolidated Statements of Income on the acquisition date. The Company also recorded the remaining immaterial identifiable net assets based on their estimated fair values, which primarily consisted of cash and assembled workforce.

The transaction also provides for additional consideration contingent upon the developed product obtaining approval from the U.S. Food and Drug Administration (the “FDA”) of $8.0 million within the third anniversary, or $4.0 million within the fourth anniversary of the acquisition closing date, respectively. Contingent consideration is not recorded in an asset acquisition until the milestone is met.

Business Combinations

During the second quarter of 2019, the Company acquired substantially all of the assets of StelKast, Inc. (the “StelKast Acquisition”), a privately held company that designs, manufactures and distributes orthopedic implants for knee and hip replacement surgeries. The Company has included the financial results from the StelKast Acquisition in our condensed financial statements from the acquisition date, and the results from the StelKast Acquisition were not material to our condensed financial statements. At the acquisition date, the fair value of the net assets acquired was $28.1 million, which consisted of approximately $23.8 million of cash paid at closing, plus a potential $4.3 million contingent consideration payment based on product sales milestones. The Company recorded identifiable net assets, based on their estimated fair values, related to inventory of $15.3 million, fixed assets of $4.2 million and customer relationships of $3.9 million and goodwill of $4.7 million.

The contingent consideration payable related to this acquisition of $5.0 million was paid during the third quarter of 2020. The payment up to the amount of the contingent consideration liability recognized at the acquisition date of $4.3 million is presented as a financing activity and the excess cash payment of $0.7 million is presented as an operating activity on the Condensed Consolidated Statement of Cash Flows as of the nine months ended September 30, 2020 in accordance with FASB ASC Topic 230, “Statement of Cash Flows” (ASC 230).

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 3. GOODWILL AND INTANGIBLE ASSETS

Intangible assets as of September 30, 2020 included the following:

September 30, 2020

(In thousands)

Weighted

Average

Amortization

Period

(in years)

Gross
Carrying
Amount

Accumulated
Amortization

Intangible
Assets,
net

Supplier network

10.0

$

4,000

$

(2,367)

$

1,633

Customer relationships & other intangibles

7.0

48,256

(29,506)

18,750

Developed technology

8.0

71,736

(16,745)

54,991

Patents

16.1

8,894

(2,474)

6,420

Total intangible assets

$

132,886

$

(51,092)

$

81,794

Due to the completion of contractual milestones related to the 2018 acquisition of Nemaris, in the first quarter of 2020, $13.0 million was capitalized to Developed technology and began to be amortized over a period of 5.4 years.

Intangible assets as of December 31, 2019 included the following:

December 31, 2019

(In thousands)

Weighted

Average

Amortization

Period

(in years)

Gross
Carrying
Amount

Accumulated
Amortization

Intangible
Assets,
net

Supplier network

10.0

4,000

(2,067)

1,933

Customer relationships & other intangibles

7.0

46,766

(24,264)

22,502

Developed technology

8.6

57,577

(10,189)

47,388

Patents

16.0

8,662

(1,673)

6,989

Total intangible assets

$

117,005

$

(38,193)

$

78,812

The change in the carrying amount of goodwill during the twelve months ended December 31, 2019 and the nine months ended September 30, 2020, respectively included the following:

(In thousands)

December 31, 2018

$

123,734

Additions and adjustments

4,817

Foreign exchange

224

December 31, 2019

128,775

Additions and adjustments

(123)

Foreign exchange

1,010

September 30, 2020

$

129,662

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 4. MARKETABLE SECURITIES

Short-term and long-term marketable securities as of September 30, 2020 and December 31, 2019, respectively included the following:

September 30, 2020

(In thousands)

Contractual
Maturity
(in years)

Amortized
Cost

Gross
Unrealized
Gains

Gross Unrealized Losses

Fair
Value

Short-term:

Municipal bonds

Less than 1

$

23,965

$

191

$

$

24,156

Corporate debt securities

Less than 1

99,461

849

100,310

Commercial paper

Less than 1

7,984

15

7,999

Asset-backed securities

Less than 1

13,962

106

14,068

Government, federal agency, and other sovereign obligations

Less than 1

12,380

117

12,497

Total short-term marketable securities

$

157,752

$

1,278

$

$

159,030

Long-term:

Municipal bonds

1 - 2

$

26,209

$

561

$

$

26,770

Corporate debt securities

1 - 3

119,164

3,559

122,723

Asset-backed securities

1 - 2

123,778

2,316

126,094

Total long-term marketable securities

$

269,151

$

6,436

$

$

275,587

December 31, 2019

(In thousands)

Contractual
Maturity
(in years)

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

Short-term:

Municipal bonds

Less than 1

$

7,840

$

23

$

(1)

$

7,862

Corporate debt securities

Less than 1

69,091

247

(3)

69,335

Commercial paper

Less than 1

34,747

6

(1)

34,752

Asset-backed securities

Less than 1

3,808

6

3,814

Total short-term marketable securities

$

115,486

$

282

$

(5)

$

115,763

Long-term:

Municipal bonds

1 - 3

$

45,010

$

254

$

(8)

$

45,256

Corporate debt securities

1 - 3

186,356

2,578

(5)

188,929

Asset-backed securities

1 - 3

161,347

1,583

(33)

162,897

Government, federal agency, and other sovereign obligations

1 - 2

12,366

66

12,432

Total long-term marketable securities

$

405,079

$

4,481

$

(46)

$

409,514

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 5. FAIR VALUE MEASUREMENTS

Assets and liabilities measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019, respectively included the following:

(In thousands)

Balance at

September 30,

2020

Level 1

Level 2

Level 3

Assets:

Cash equivalents

$

96,953

$

96,953

$

$

Municipal bonds

50,926

50,926

Corporate debt securities

223,033

223,033

Commercial paper

7,999

7,999

Asset-backed securities

140,162

140,162

Government, federal agency, and other sovereign obligations

12,497

12,497

Liabilities:

Business acquisition liabilities

4,548

4,548

(In thousands)

Balance at

December 31,

2019

Level 1

Level 2

Level 3

Assets:

Cash equivalents

$

18,218

$

4,988

$

13,230

$

Municipal bonds

53,118

53,118

Corporate debt securities

258,264

258,264

Commercial paper

34,752

34,752

Asset-backed securities

166,711

166,711

Government, federal agency, and other sovereign obligations

12,432

12,432

Liabilities:

Business acquisition liabilities

9,549

9,549

Our marketable securities are classified as Level 2 within the fair value hierarchy, as we measure their fair value using market prices for similar instruments and inputs such as actual trade data, benchmark yields, broker/dealer quotes and other similar data obtained from quoted market prices or independent pricing vendors.

Assets and Liabilities That Are Measured at Fair Value on a Nonrecurring Basis

The recurring Level 3 fair value measurements of our business acquisition liabilities include the following significant unobservable inputs, which have not materially changed since December 31, 2019, exclusive of the contractual payable reclassification to Accrued Expenses in the Condensed Consolidated Balance Sheet:

(In thousands)

Fair Value at September 30, 2020

Valuation

technique

Unobservable

input

Range

Discount rate

8.5%

Revenue-based payments

$

4,548

Discounted cash flow

Probability of payment

75%

-

100%

Projected year of payment

2020

-

2029

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The change in the carrying value of the business acquisition liabilities during the three and nine months ended September 30, 2020 and 2019, respectively included the following:

Three Months Ended

Nine Months Ended

September 30,

September 30,

(In thousands)

2020

2019

2020

2019

Beginning balance

$

4,216

$

9,304

$

9,549

$

10,118

Purchase price contingent consideration

4,299

Changes resulting from foreign currency fluctuations

(9)

Contingent payments

(175)

(463)

(1,028)

(6,096)

Changes in fair value of business acquisition liabilities

507

50

970

579

Contractual payable reclassification

(4,943)

Ending balance

$

4,548

$

8,891

$

4,548

$

8,891

NOTE 6. INVENTORIES

Inventories as of September 30, 2020 and December 31, 2019, respectively included the following:

September 30,

December 31,

(In thousands)

2020

2019

Raw materials

$

34,198

$

33,025

Work in process

19,314

15,940

Finished goods

178,346

147,349

Total inventories

$

231,858

$

196,314

 

During the three months ended September 30, 2020 and 2019, net adjustments to cost of sales related to excess and obsolete inventory were $5.2 million and ($0.6) million, respectively. The net adjustments for the three months ended September 30, 2020 and 2019 reflect a combination of additional expense for excess and obsolete related provisions ($7.9 million and $1.2 million, respectively) offset by sales and disposals ($2.7 million and $1.8 million, respectively) of inventory for which an excess and obsolete provision was provided previously through expense recognized in prior periods.

During the nine months ended September 30, 2020 and 2019, net adjustments to cost of sales related to excess and obsolete inventory were $12.4 million and $1.9 million, respectively. The net adjustments for the nine months ended September 30, 2020 and 2019 reflect a combination of additional expense for excess and obsolete related provisions ($18.9 million and $7.8 million, respectively) offset by sales and disposals ($6.5 million and $5.9 million, respectively) of inventory for which an excess and obsolete provision was provided previously through expense recognized in prior periods.

During the third quarter of 2020, the Company initiated a voluntary Class II recall of specific lots of ALTERA® Spacers. This recall was initiated because specific lots of ALTERA® implants have internal components that were manufactured using stainless steel rather than the specified cobalt chromium molybdenum alloy. Only devices made after February 12, 2020 from specific lots were affected, and some parts in some lots may not be affected. No reports of adverse reactions related to the affected ALTERA® implants have been received to date. A recall notification was issued to all relevant parties and Globus has collected and replaced impacted field inventory. The Company recorded an accrual in the second quarter of approximately $1.3 million in costs associated with this recall of which $1.0 million was charged to Cost of Goods Sold in the Condensed Consolidated Statements of Income.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 7. ACCRUED EXPENSES

Accrued expense as of September 30, 2020 and December 31, 2019, respectively included the following:

September 30,

December 31,

(In thousands)

2020

2019

Compensation and other employee-related costs

$

37,579

$

37,178

Legal and other settlements and expenses

960

1,538

Accrued non-income taxes

3,800

4,996

Royalties

2,656

2,370

Other

16,808

17,201

Total accrued expenses

$

61,803

$

63,283

   

NOTE 8. DEBT

Line of Credit

On August 6, 2020, we entered into a credit agreement with Citizens Bank, N.A. (the “Credit Agreement”) that provides a revolving credit facility permitting borrowings up to $125.0 million (the “Revolving Credit Facility”), and has a termination date of August 5, 2021. The Revolving Credit Facility includes up to a $25.0 million sub limit for letters of credit. Revolving loans under the Credit Agreement will bear interest, at the Company’s option, at either a base rate or the Adjusted LIBOR Rate (as defined in the Credit Agreement), plus, in each case, an applicable margin, as determined in accordance with the provisions of the Credit Agreement. The base rate will be the highest of: the rate of interest announced publicly by Citizens Bank, N.A. from time to time as its “prime rate”; the federal funds effective rate plus 1/2 of 1%; and the Adjusted LIBOR Rate for a one-month period plus 1%. The applicable margin is subject to adjustment as provided in the Credit Agreement. The Credit Agreement contains financial and other customary covenants, including a maximum leverage ratio.

In May 2011, we entered into a credit agreement with Wells Fargo Bank related to a revolving credit facility that provided for borrowings up to $50.0 million. In June 2018, we amended the credit agreement to increase the revolving credit facility amount from $50.0 million to $125.0 million. At our request, and with the approval of the bank, the amount of borrowings available under the revolving credit facility increased to $150.0 million. The revolving credit facility included up to a $25.0 million sub-limit for letters of credit. As amended to date, the revolving credit facility with Wells Fargo Bank expired in May 2020.

 

NOTE 9. EQUITY

Stock Repurchases

Under the current stock repurchase plan, announced on March 11, 2020, the Company is authorized to repurchase up to $200 million of the Company’s Class A common stock. As of September 30, 2020, $95.3 million of this authorization is remaining. The timing and actual number of shares repurchased will depend on various factors including price, corporate and regulatory requirements, debt covenant requirements, alternative investment opportunities and other market conditions. We continue to expect funding of share repurchases will come from operating cash flows and excess cash.

Shares repurchased by the Company are accounted for under the constructive retirement method, in which the shares repurchased, are immediately retired, as there is no plan to reissue. The Company made an accounting policy election to charge the excess of repurchase price over par value entirely to retained earnings.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table summarizes the activity related to share repurchases:

(In thousands except for per share prices)

Period

Total number of shares repurchased

Average Price Paid per Share

Dollar amount of shares repurchased (1)

Approximate dollar value of shares that may yet be purchased under the plan

January 1, 2020 - March 31, 2020

1,920

$

38.49

$

73,902

$

126,098

April 1, 2020 - June 30, 2020

771

39.95

30,804

95,294

July 1, 2020 - September 30,2020

95,294

January 1, 2020 - September 30, 2020

2,691

$

38.91

$

104,706

(1) Inclusive of an immaterial amount of commission fees

Common Stock

Our amended and restated Certificate of Incorporation provides for a total of 775,000,000 authorized shares of common stock. Of the authorized number of shares of common stock, 500,000,000 shares are designated as Class A common stock (“Class A Common”), and 275,000,000 shares are designated as Class B common stock (“Class B Common”).

Each share of our Class B common stock is convertible at any time at the option of the holder into one share of our Class A common stock. In addition, each share of our Class B common stock will convert automatically into one share of our Class A common stock upon any transfer, whether or not for value, except for permitted transfers. For more details relating to the conversion of our Class B common stock please see “Exhibit 4.2, Description of Securities of the Registrant filed with our amended Form 10-K on March 2, 2020.”

Accumulated Other Comprehensive Income (Loss)

The tables below present the changes in each component of accumulated other comprehensive income/(loss), including current period other comprehensive income/(loss) and reclassifications out of accumulated other comprehensive income/(loss) for the nine months ended September 30, 2020 and 2019, respectively:

(In thousands)

Unrealized
gain/(loss) on
marketable
securities,
net of tax

Foreign
currency
translation
adjustments

Accumulated
other
comprehensive
loss

Accumulated other comprehensive loss, net of tax, at December 31, 2019

$

3,599

$

(6,497)

$

(2,898)

Other comprehensive (loss)/income before reclassifications

3,001

2,820

5,821

Amounts reclassified from accumulated other comprehensive income, net of tax

(716)

(716)

Other comprehensive (loss)/income, net of tax

2,285

2,820

5,105

Accumulated other comprehensive loss, net of tax, at September 30, 2020

$

5,884

$

(3,677)

$

2,207

(In thousands)

Unrealized
gain/(loss) on
marketable
securities,
net of tax

Foreign
currency
translation
adjustments

Accumulated
other
comprehensive
loss

Accumulated other comprehensive loss, net of tax, at December 31, 2018

$

(168)

$

(7,004)

$

(7,172)

Other comprehensive (loss)/income before reclassifications

5,266

319

5,585

Amounts reclassified from accumulated other comprehensive income, net of tax

(1,239)

(1,239)

Other comprehensive (loss)/income, net of tax

4,027

319

4,346

Accumulated other comprehensive loss, net of tax, at September 30, 2019

$

3,859

$

(6,685)

$

(2,826)

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 10. STOCK-BASED COMPENSATION

We have 3 stock plans: our Amended and Restated 2003 Stock Plan, our 2008 Stock Plan, and our 2012 Equity Incentive Plan (the “2012 Plan”). The 2012 Plan is the only remaining active stock plan. The purpose of these stock plans was, and the 2012 Plan is, to provide incentive to employees, directors, and consultants of Globus. The Plans are administered by the Board of Directors of Globus (the “Board”) or its delegates. The number, type of option, exercise price, and vesting terms are determined by the Board or its delegates in accordance with the terms of the Plans. The options granted expire on a date specified by the Board, but generally not more than ten years from the grant date. Option grants to employees generally vest in varying installments over a four-year period.

The 2012 Plan was approved by our Board in March 2012, and by our stockholders in June 2012. Under the 2012 Plan, the aggregate number of shares of Class A Common stock that may be issued subject to options and other awards is equal to the sum of (i) 3,076,923 shares, (ii) any shares available for issuance under the 2008 Plan as of March 13, 2012, (iii) any shares underlying awards outstanding under the 2008 Plan as of March 13, 2012 that, on or after that date, are forfeited, terminated, expired or lapse for any reason, or are settled for cash without delivery of shares and (iv) starting January 1, 2013, an annual increase in the number of shares available under the 2012 Plan equal to up to 3% of the number of shares of our common and preferred stock outstanding at the end of the previous year, as determined by our Board. The number of shares that may be issued or transferred pursuant to incentive stock options under the 2012 Plan is limited to 10,769,230 shares. The shares of Class A Common stock issuable under the 2012 Plan include authorized but unissued shares, treasury shares or shares of common stock purchased on the open market.

As of September 30, 2020, pursuant to the 2012 Plan, there were 17,899,947 shares of Class A Common stock reserved and 2,206,992 shares of Class A Common stock available for future grants.

The weighted average grant date fair value per share of the options awarded to employees for the three and nine months ended September 30, 2020 and 2019, respectively were as follows:

Three Months Ended

Nine Months Ended

September 30,

September 30,

2020

2019

2020

2019

Weighted average grant date fair value per share

$

16.98

$

13.43

$

14.54

$

13.61

Stock option activity during the nine months ended September 30, 2020 is summarized as follows:

Option
Shares (thousands)

Weighted
average
exercise
price

Weighted
average
remaining
contractual
life (years)

Aggregate
intrinsic
value
(thousands)

Outstanding at December 31, 2019

10,650

$

35.80

Granted

2,071

52.43

Exercised

(1,539)

28.69

Forfeited

(488)

47.41

Outstanding at September 30, 2020

10,694

$

39.50

7.2

$

117,826

Exercisable at September 30, 2020

5,204

$

31.71

5.9

$

93,761

Expected to vest at September 30, 2020

5,490

$

46.85

8.4

$

24,065

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The intrinsic value of stock options exercised and the compensation cost related to stock options granted to employees and non-employees under our stock plans for the three and nine months ended September 30, 2020 and 2019, respectively was as follows:

Three Months Ended

Nine Months Ended

September 30,

September 30,

(In thousands)

2020

2019

2020

2019

Intrinsic value of stock options exercised

$

23,268

$

7,565

$

39,425

$

19,533

Stock-based compensation expense

$

7,020

$

5,545

$

21,138

$

19,647

Net stock-based compensation capitalized into inventory

(13)

86

197

255

Total stock-based compensation cost

$

7,007

$

5,631

$

21,335

$

19,902

As of September 30, 2020, there was $62.0 million of unrecognized compensation expense related to unvested employee stock options that are expected to vest over a weighted average period of three years.

 

NOTE 11. INCOME TAXES

In computing our income tax provision, we make certain estimates and management judgments, such as estimated annual taxable income or loss, annual effective tax rate, the nature and timing of permanent and temporary differences between taxable income for financial reporting and tax reporting, and the recoverability of deferred tax assets. Our estimates and assumptions may change as new events occur, additional information is obtained, or as the tax environment changes. Should facts and circumstances change during a quarter causing a material change to the estimated effective income tax rate, a cumulative adjustment is recorded.

The following table provides a summary of our effective tax rate for the three and nine months ended September 30, 2020 and 2019, respectively:

Three Months Ended

Nine Months Ended

September 30,

September 30,

2020

2019

2020

2019

Effective income tax rate

16.8%

18.1%

22.5%

19.1%

The change in the effective income tax rates for the three month period ended September 30, 2020 and 2019 is primarily a result of tax benefits due to an increase in stock option exercises in the current year. The change in the effective income tax rates for the nine month period ended September 30, 2020 and 2019 is primarily driven by the non-deductible expense of acquired IPR&D of $24.4 million, offset by tax benefits due to an increase in stock option exercises in the current year.

 

NOTE 12. COMMITMENTS AND CONTINGENCIES

We are involved in a number of proceedings, legal actions, and claims arising in the ordinary course of business. Such matters are subject to many uncertainties, and the outcomes of these matters are not within our control and may not be known for prolonged periods of time. In some actions, the claimants seek damages, as well as other relief, including injunctions prohibiting us from engaging in certain activities, which, if granted, could require significant expenditures and/or result in lost revenues. We record a liability in the condensed consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is reasonably possible but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded. While it is not possible to predict the outcome for most of the matters discussed, we believe it is possible that costs associated with them could have a material adverse impact on our consolidated earnings, financial position or cash flows.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

L5 Litigation

In December 2009, we filed suit in the Court of Common Pleas of Montgomery County, Pennsylvania against our former exclusive independent distributor L5 Surgical, LLC and its principals, seeking an injunction and declaratory judgment concerning certain restrictive covenants made to L5 by its sales representatives. L5 brought counterclaims against us alleging tortious interference, unfair competition and conspiracy. The injunction phase was resolved in September 2010 and the remaining claims were fully resolved through settlement by the parties on February 6, 2019.

Moskowitz Family LLC Litigation

On November 20, 2019, Moskowitz Family LLC filed suit against us in the U.S. District Court for the Western District of Texas for patent infringement. Moskowitz, a non-practicing entity, alleges that Globus willfully infringes one or more claims of eight patents by making, using, offering for sale or selling the COALITION®, COALITION MIS®, COALITION AGX®, MONUMENT®, MAGNIFY®-S, HEDRON IATM, HEDRON ICTM, INDEPENDENCE®, INDEPENDENCE MIS®, FORTIFY® and XPAND® families, SABLETM, RISE®, RISE® INTRALIF, RISE®-L, ELSA®, ELSA® ATP, RASS, ALTERA®, ARIEL®, LATIS®, CALIBER® and CALIBER®-L products. Moskowitz seeks an unspecified amount in damages and injunctive relief. On July 2, 2020, this suit was transferred from the U.S. District Court for the Western District of Texas to the U.S. District Court for the Eastern District of Pennsylvania and was stayed on September 25, 2020 pending the outcome of earlier filed Inter Partes Reviews. The probable outcome of this litigation cannot be determined, nor can we estimate a range of potential loss. Therefore, in accordance with authoritative guidance on the evaluation of loss contingencies, we have not recorded an accrual related to this litigation.

 

NOTE 13. LEASES

The Company leases certain equipment, vehicles, and facilities under operating leases. Certain leases contain options to extend terms beyond the lease termination date. In these leases, we use judgment to determine whether it is reasonably possible that we will extend the lease beyond the initial term and for how long. Leases that have terms of less than 12 months are treated as short-term and are not recognized as right of use assets or lease liabilities. As most leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. As of September 30, 2020, the Company’s short-term lease commitments and sublease income are immaterial.

The Company classifies right-of-use assets as Other assets, short-term lease liabilities as Accrued expenses, and long-term lease liabilities as Other liabilities on the Condensed Consolidated Balance Sheet. Lease expense is recognized, on a straight-line basis over the term of the lease, as a component of operating income on the Condensed Consolidated Statement of Income.

Amounts reported in the Condensed Consolidated Balance Sheet as of September 30, 2020 were as follows:

(In thousands, except weighted average lease term and discount rate)

Operating leases:

Right of use assets

$

4,255

Lease liability - short term

1,645

Lease liability - long term

2,610

Total operating lease liability

$

4,255

Lease expense as of September 30, 2020

$

2,652

Weighted-average remaining lease term - operating leases (in years)

3.2

Weighted-average discount rate

3.0%

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Future minimum lease payments under non-cancellable leases as of September 30, 2020 are as follows:

(In thousands)

Operating
Leases

2020 (excluding the nine months ended September 30, 2020)

$

526

2021

1,515

2022

1,231

2023

676

2024

506

2025

136

Total undiscounted leases payments

$

4,590

Less: imputed interest

335

Total lease liabilities

$

4,255

 

NOTE 14. SEGMENT AND GEOGRAPHIC INFORMATION

Operating segments are defined as components of an enterprise for which separate discrete financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. We globally manage the business within 1 operating segment. Segment information is consistent with how management reviews the business, makes investing and resource allocation decisions and assesses operating performance.

The following table represents total net sales by geographic area, based on the location of the customer for the three and nine months ended September 30, 2020 and 2019, respectively:

Three Months Ended

Nine Months Ended

September 30,

September 30,

(In thousands)

2020

2019

2020

2019

United States

$

182,104

$

162,697

$

465,705

$

470,224

International

33,994

33,518

89,892

103,477

Total net sales

$

216,098

$

196,215

$

555,597

$

573,701

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes that appear in Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes for the year ended December 31, 2019, which are included in our Annual Report on Form 10-K filed with the SEC on February 20, 2020.

Overview

Globus Medical, Inc. (together with its consolidated subsidiaries, “Globus,” “we,” “us” or “our”), headquartered in Audubon, Pennsylvania, is a medical device company that develops and commercializes healthcare solutions whose mission is to improve the quality of life of patients with musculoskeletal disorders. Founded in 2003, Globus is committed to medical device innovation and delivering exceptional service to hospitals and physicians to advance patient care and improve efficiency. Since inception, Globus has listened to the voice of the surgeon to develop practical solutions and products to help surgeons effectively treat patients and improve lives. With over 210 products on the market, we offer a comprehensive portfolio of innovative and differentiated technologies that treat a variety of musculoskeletal conditions of the spine, extremities, pelvis, hip and knee. Although we manage our business globally within one operating segment, we separate our products into two major categories: Musculoskeletal Solutions and Enabling Technologies.

COVID-19 Update

We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities and may need to make changes to our business based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. As such, given the dynamic nature of this situation, the Company cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows in the future. However, while the government mandated restrictions, including elective surgeries, are in place, we do expect that it could continue to have a material adverse impact on our revenue growth, operating profit and cash flow and may lead to higher than normal inventory levels, revised payment terms with certain of our customers, and a change in effective tax rate driven by changes in the mix of earnings across the Company's jurisdictions.

We are focused on navigating these recent challenges presented by COVID-19 and believe we are in a strong position to continue to not only sustain, but grow our business once the restrictions are lifted and elective surgeries fully resume. To date, COVID-19 has not materially affected our supply chain or production schedule, although delays may be possible in the future due to the dynamic nature of the situation.

Product Categories

While we group our products into two categories, they are not limited to a particular technology, platform or surgical approach. Instead, our goal is to offer a comprehensive product suite that can be used to effectively treat patients based on their specific anatomy and condition, and is customized to the surgeon’s training and surgical preference.

Musculoskeletal Solutions

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

Our broad spectrum of spine products addresses the vast majority of conditions affecting the spine including degenerative conditions, deformity, tumors, and trauma. With more than fifteen years in this competitive market, we provide comprehensive solutions that facilitate both open and minimally invasive surgery (“MIS”) techniques. This includes traditional fusion implants such as pedicle screw and rod systems, plating systems, intervertebral spacers and corpectomy devices. We believe we pioneered innovative expandable solutions for interbody fusion, corpectomy and interspinous fixation that allow intraoperative customization of our devices to the patient’s anatomy and save surgical time by eliminating sequential trialing. We have also developed treatment options for motion preservation technologies, such as dynamic stabilization, total disc replacement and interspinous distraction devices; as well as interventional pain management solutions to treat vertebral compression fractures. Our biologic solutions include regenerative biologic products such as allografts and synthetic alternatives, which are adjunctive treatments typically used in combination with stabilizing implant hardware.

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Our orthopedic trauma solutions are designed to treat a wide variety of orthopedic fracture patterns and patient anatomies in the upper and lower extremities as well as the hip. To date, Globus has received 510(k) clearance from the U.S. Food and Drug Administration (the “FDA”) for numerous orthopedic trauma and extremity products covering four major segments of the orthopedic trauma market - fracture plates, compression screws, intramedullary nails, and external fixation. We began marketing these products in 2018 and intend to grow our presence in this field. Fracture plating includes proximal humerus, distal radius, proximal tibia, distal fibula, small fragment, mini-fragment and clavicle plates. Intramedullary nailing includes tibial, trochanteric, and femoral nail systems. Regenerative biologic products such as bone void fillers and allograft struts are also used in orthopedic procedures where applicable.

Our hip and knee joint solutions for the treatment of degenerative conditions or failed previous reconstruction have a long history of clinical use with StelKast, Inc.  Over 13 different implants have been marketed to date, including modular hip stems and acetabular cups for total hip arthroplasty as well as posterior stabilizing and cruciate retaining knee arthroplasty implants.

Enabling Technologies

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

These include the ExcelsiusGPS® platform which is a robotic guidance and navigation system that supports minimally invasive and open procedures with screw placement applications. The ExcelsiusGPS® platform has a modular design that can be used for a variety of screw placement applications, and we expect that it will serve as a foundation for future clinical applications using artificial intelligence and augmented reality.

Globus’ innovative Enabling Technologies products offer surgeons more information about patient anatomy and surgical options to help them to make well-informed surgical decisions. We believe the advantages of pre-planning implant position and viewing patient anatomy during surgery are self-evident, and also create significant secondary gains such as eliminating radiation exposure altogether.

 

Geographic Information

To date, the primary market for our products has been the United States, where we sell our products through a combination of direct sales representatives employed by us and distributor sales representatives employed by exclusive independent distributors, who distribute our products for a commission that is generally based on a percentage of sales. We believe there is significant opportunity to strengthen our position in the U.S. market by increasing the size of our U.S. sales force and we intend to add additional direct and distributor sales representatives in the future.

During the nine months ended September 30, 2020, our international net sales accounted for approximately 16% of our total net sales. We have sold our products in approximately 50 countries outside the United States through a combination of sales representatives employed by us and exclusive international distributors. We believe there are significant opportunities for us to increase our presence in both existing and new international markets through the continued expansion of our direct and distributor sales forces and through the commercialization of additional products.

Seasonality

Our business is generally not seasonal in nature. However, our sales of Musculoskeletal Solutions products may be influenced by summer vacation and winter holiday periods during which we have experienced fewer surgeries taking place, as well as more surgeries taking place later in the year when patients have met the deductibles under insurance plans. Our sales of Enabling Technologies products may be influenced by longer capital purchase cycles and the timing of budget approvals for major capital purchases.

 

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Results of Operations

Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019

Net Sales

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

Three Months Ended

September 30,

Change

(In thousands, except percentages)

2020

2019

$

%

United States

$

182,104

$

162,697

$

19,407

11.9%

International

33,994

33,518

476

1.4%

Total net sales

$

216,098

$

196,215

$

19,883

10.1%

In the United States, the increase in net sales of $19.4 million was due primarily to increased spine product sales resulting from penetration in existing territories.

International net sales increased by $0.5 million, which was due primarily to increased spine product sales resulting from penetration in existing territories, partially offset by the postponement of elective surgeries at hospitals and surgical centers due to the COVID-19 pandemic, particularly in Japan, the U.K. and India.

Cost of Goods Sold

Three Months Ended

September 30,

Change

(In thousands, except percentages)

2020

2019

$

%

Cost of goods sold

$

57,097

$

45,387

$

11,710

25.8%

Percentage of net sales

26.4%

23.1%

The $11.7 million increase in cost of goods sold was primarily due to higher write-downs of excess and obsolete inventory on less frequently used product sizes, non-recurring inventory write-offs and other manufacturing expense, depreciation, and increased product costs as a result of higher product sales.

Research and Development Expenses

Three Months Ended

September 30,

Change

(In thousands, except percentages)

2020

2019

$

%

Research and development

$

14,421

$

14,508

$

(87)

-0.6%

Percentage of net sales

6.7%

7.4%

Research and development expenses remained consistent with the three months ended September 30, 2019.

Selling, General and Administrative Expenses

Three Months Ended

September 30,

Change

(In thousands, except percentages)

2020

2019

$

%

Selling, general and administrative

$

89,152

$

88,455

$

697

0.8%

Percentage of net sales

41.3%

45.1%

The increase in selling, general and administrative expenses was primarily due to an increase in commission expenses resulting from higher product sales and by the continued build out of the spine, INR technology, joints and orthopedic trauma sales forces. These increases were partially offset by decreased travel and surgeon educational activities as a result of COVID-19 restrictions.

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Provision for Litigation

Three Months Ended

September 30,

Change

(In thousands, except percentages)

2020

2019

$

%

Provision for litigation

$

$

1,625

$

(1,625)

100.0%

Percentage of net sales

0.0%

0.8%

There was no provision for litigation for the three month period ending September 30, 2020. The provision for litigation for the three month period ending September 30, 2019 includes settlement and verdict costs.

Amortization of Intangibles

Three Months Ended

September 30,

Change

(In thousands, except percentages)

2020

2019

$

%

Amortization of intangibles

$

4,152

$

3,620

$

532

14.7%

Percentage of net sales

1.9%

1.8%

The increase in the amortization of intangibles is primarily due to the developed technology intangible asset acquired in connection with the Nemaris acquisition.

Acquisition Related Costs

Three Months Ended

September 30,

Change

(In thousands, except percentages)

2020

2019

$

%

Acquisition related costs

$

1,263

$

559

$

704

125.9%

Percentage of net sales

0.6%

0.3%

Acquisition related costs increased due to business development-related activities.

Other Income/(expense), Net

Three Months Ended

September 30,

Change

(In thousands, except percentages)

2020

2019

$

%

Other income/(expense), net

$

3,117

$

4,691

$

(1,574)

-33.6%

Percentage of net sales

1.4%

2.4%

The decrease in other income/(expense), net was primarily the result of lower interest income from lower yields on marketable securities during the three month period ended September 30, 2020.

Income Tax Provision

Three Months Ended

September 30,

Change

(In thousands, except percentages)

2020

2019

$

%

Income tax provision

$

8,914

$

8,445

$

469

5.6%

Effective income tax rate

16.8%

18.1%

The change in the effective income tax rates between the current year and prior year periods is primarily a result of higher tax benefits resulting from an increase in stock option exercises in the current year period.

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Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019

Net Sales

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

Nine Months Ended

September 30,

Change

(In thousands, except percentages)

2020

2019

$

%

United States

$

465,705

$

470,224

$

(4,519)

-1.0%

International

89,892

103,477

(13,585)

-13.1%

Total net sales

$

555,597

$

573,701

$

(18,104)

-3.2%

In the United States, the decrease in net sales of $4.5 million was due to the postponement of elective surgeries at hospitals and surgical centers and longer selling cycles for INR capital equipment due to the COVID-19 pandemic.

International net sales decreased by $13.6 million, and was due primarily to the postponement of elective surgeries at hospitals and surgical centers and longer selling cycles for INR capital equipment due to the COVID-19 pandemic as well as a one-time distributor stocking order in the period ended March 31, 2019.

Cost of Goods Sold

Nine Months Ended

September 30,

Change

(In thousands, except percentages)

2020

2019

$

%

Cost of goods sold

$

156,604

$

131,214

$

25,390

19.4%

Percentage of net sales

28.2%

22.9%

The $25.4 million increase in cost of goods sold was primarily due to higher write-downs of excess and obsolete inventory on less frequently used product sizes, non-recurring inventory write-offs and other manufacturing expenses, and depreciation.

Research and Development Expenses

Nine Months Ended

September 30,

Change

(In thousands, except percentages)

2020

2019

$

%

Research and development

$

69,278

$

44,577

$

24,701

55.4%

Percentage of net sales

12.5%

7.8%

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

Selling, General and Administrative Expenses

Nine Months Ended

September 30,

Change

(In thousands, except percentages)

2020

2019

$

%

Selling, general and administrative

$

262,710

$

262,618

$

92

0.0%

Percentage of net sales

47.3%

45.8%

Selling, general and administrative expenses remained consistent with the nine months ended September 30, 2019.

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Provision for Litigation

Nine Months Ended

September 30,

Change

(In thousands, except percentages)

2020

2019

$

%

Provision for litigation

$

197

$

1,625

$

(1,428)

100.0%

Percentage of net sales

0.0%

0.3%

Provision for litigation was immaterial for the nine month period ending September 30, 2020. The provision for litigation for the nine month period ending September 30, 2019 includes settlement and verdict costs.

Amortization of Intangibles

Nine Months Ended

September 30,

Change

(In thousands, except percentages)

2020

2019

$

%

Amortization of intangibles

$

12,043

$

10,412

$

1,631

15.7%

Percentage of net sales

2.2%

1.8%

The increase in the amortization of intangibles is primarily due to the developed technology intangible assets acquired in connection with the Nemaris and StelKast acquisitions.

Acquisition Related Costs

Nine Months Ended

September 30,

Change

(In thousands, except percentages)

2020

2019

$

%

Acquisition related costs

$

1,867

$

1,245

$

622

50.0%

Percentage of net sales

0.3%

0.2%

Acquisition related costs increased due to business development-related activities.

Other Income/(expense), Net

Nine Months Ended

September 30,

Change

(In thousands, except percentages)

2020

2019

$

%

Other income/(expense), net

$

10,788

$

13,487

$

(2,699)

-20.0%

Percentage of net sales

1.9%

2.4%

The decrease in other income, net was due primarily to lower interest income from lower yields on marketable securities during the nine month period ended September 30, 2020.

Income Tax Provision

Nine Months Ended

September 30,

Change

(In thousands, except percentages)

2020

2019

$

%

Income tax provision

$

14,358

$

25,816

$

(11,458)

-44.4%

Effective income tax rate

22.5%

19.1%

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

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Non-GAAP Financial Measures

To supplement our financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), management uses certain non-GAAP financial measures. For example, non-GAAP Adjusted EBITDA, which represents net income before interest income, net and other non-operating expenses, provision for income taxes, depreciation and amortization, stock-based compensation expense, provision for litigation, acquisition related costs/licensing, acquisition of in-process research and development, is useful as an additional measure of operating performance, and particularly as a measure of comparative operating performance from period to period, as it is reflective of changes in pricing decisions, cost controls and other factors that affect operating performance, and it removes the effect of our capital structure, asset base, income taxes and interest income and expense. Our management also uses non-GAAP Adjusted EBITDA for planning purposes, including the preparation of our annual operating budget and financial projections. Provision for litigation represents costs incurred for litigation settlements or unfavorable verdicts when the loss is known or considered probable and the amount can be reasonably estimated, or in the case of a favorable settlement, when income is realized. Acquisition related costs/licensing represents the change in fair value of business-acquisition-related contingent consideration; costs related to integrating recently acquired businesses, including but not limited to costs to exit or convert contractual obligations, severance, and information system conversion; and specific costs related to the consummation of the acquisition process such as banker fees, legal fees, and other acquisition related professional fees, as well as one-time licensing fees. Acquisition of in-process research and development represents the expensing of acquired assets with no alternative future use and related fees.

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

Three Months Ended

Nine Months Ended

September 30,

September 30,

(In thousands, except percentages)

2020

2019

2020

2019

Net income/(loss)

$

44,216

$

38,307

$

49,328

$

109,681

Interest income/(expense), net

(3,085)

(4,377)

(10,999)

(12,954)

Provision for income taxes

8,914

8,445

14,358

25,816

Depreciation and amortization

16,301

13,575

45,970

38,688

EBITDA

66,346

55,950

98,657

161,231

Stock-based compensation expense

7,020

6,898

21,138

19,647

Provision for litigation

1,625

197

1,625

Acquisition related costs/licensing

1,753

1,040

3,179

2,011

Acquisition of in-process research and development

24,418

Adjusted EBITDA

$

75,119

$

65,513

$

147,589

$

184,514

Net income as a percentage of net sales

20.5%

19.5%

8.9%

19.1%

Adjusted EBITDA as a percentage of net sales

34.8%

33.4%

26.6%

32.2%

In addition, for the period ended September 30, 2020 and for other comparative periods, we are presenting non-GAAP net income and non-GAAP Diluted Earnings Per Share, which represents net income and diluted earnings per share excluding the provision for litigation, amortization of intangibles, acquisition related costs/licensing, acquisition of in-process research and development, and the tax effects of all of the foregoing adjustments. The tax effect adjustment represents the tax effect of the pre-tax non-GAAP adjustments excluded from non-GAAP net income. The tax impact of the non-GAAP adjustments is calculated based on the consolidated effective tax rate on a GAAP basis, applied to the non-GAAP adjustments, unless the underlying item has a materially different tax treatment, in which case the estimated tax rate applicable to the adjustment is used.

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

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The following is a reconciliation of net income computed in accordance with U.S. GAAP to non-GAAP net income for the periods presented:

Three Months Ended

Nine Months Ended

September 30,

September 30,

(In thousands)

2020

2019

2020

2019

Net income/(loss)

$

44,216

$

38,307

$

49,328

$

109,681

Provision for litigation

1,625

197

1,625

Amortization of intangibles

4,152

3,620

12,043

10,412

Acquisition related costs/licensing

1,753

1,040

3,179

2,011

Acquisition of in-process research and development

24,418

Tax effect of adjusting items

(992)

(1,135)

(3,418)

(2,659)

Non-GAAP net income

$

49,129

$

43,457

$

85,747

$

121,070

The following is a reconciliation of Diluted Earnings Per Share as computed in accordance with U.S. GAAP to non-GAAP Diluted Earnings Per Share for the periods presented:

Three Months Ended

Nine Months Ended

September 30,

September 30,

(Per share amounts)

2020

2019

2020

2019

Diluted earnings per share, as reported

$

0.44

$

0.38

$

0.49

$

1.08

Provision for litigation

0.02

0.02

Amortization of intangibles

0.04

0.04

0.12

0.10

Acquisition related costs/licensing

0.02

0.01

0.03

0.02

Acquisition of in-process research and development

0.24

Tax effect of adjusting items

(0.01)

(0.01)

(0.03)

(0.03)

Non-GAAP diluted earnings per share

$

0.49

$

0.43

$

0.85

$

1.19

* Amounts might not add due to rounding

We also define the non-GAAP measure of Free Cash Flow as the net cash provided by operating activities, less the cash impact of purchases of property and equipment. We believe that this financial measure provides meaningful information for evaluating our overall liquidity for comparative periods as it facilitates an assessment of funds available to satisfy current and future obligations and fund acquisitions.

Below is a reconciliation of net cash provided by operating activities as computed in accordance with U.S. GAAP to Free Cash Flow for the periods presented:

Three Months Ended

Nine Months Ended

September 30,

September 30,

(In thousands)

2020

2019

2020

2019

Net cash provided by operating activities

$

53,248

$

55,866

$

118,609

$

117,666

Purchases of property and equipment

(17,325)

(12,062)

(49,595)

(54,957)

Free cash flow

$

35,923

$

43,804

$

69,014

$

62,709

Furthermore, the non-GAAP measure of constant currency net sales growth is calculated by translating current year net sales at the same average exchange rates in effect during the applicable prior year period. We believe constant currency net sales growth provides insight to the comparative increase or decrease in period net sales, in dollar and percentage terms, excluding the effects of fluctuations in foreign currency exchange rates.

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Below is a reconciliation of net sales growth as reported in accordance with U.S. GAAP compared to constant currency reflected net sales growth for the periods presented:

Three Months Ended

Reported

Currency
Impact on 

Constant
Currency

September 30,

Net Sales

Current

Net Sales

(In thousands, except percentages)

2020

2019

Growth

Period Net Sales

Growth

United States

$

182,104

$

162,697

11.9%

$

11.9%

International

33,994

33,518

1.4%

348

0.4%

Total net sales

$

216,098

$

196,215

10.1%

$

348

10.0%

Nine Months Ended

Reported

Currency
Impact on 

Constant
Currency

September 30,

Net Sales

Current

Net Sales

(In thousands, except percentages)

2020

2019

Growth

Period Net Sales

Growth

United States

$

465,705

$

470,224

-1.0%

$

-1.0%

International

89,892

103,477

-13.1%

(215)

-12.9%

Total net sales

$

555,597

$

573,701

-3.2%

$

(215)

-3.1%

Non-GAAP Adjusted EBITDA, non-GAAP net income, non-GAAP Diluted Earnings Per Share, Free Cash Flow and constant currency reflected net sales growth are not calculated in conformity with U.S. GAAP within the meaning of Item 10(e) of Regulation S-K. Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for financial measures prepared in accordance with U.S. GAAP. These measures do not include certain expenses that may be necessary to evaluate our liquidity or operating results. Our definitions of non-GAAP Adjusted EBITDA, non-GAAP net income, non-GAAP Diluted Earnings Per Share, Free Cash Flow and constant currency reflected net sales growth may differ from that of other companies and therefore may not be comparable.

 

Liquidity and Capital Resources

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

September 30,

December 31,

(In thousands)

2020

2019

Cash, cash equivalents, and restricted cash

$

250,607

$

195,724

Short-term marketable securities

159,030

115,763

Long-term marketable securities

275,587

409,514

Total cash, cash equivalents, restricted cash and marketable securities

$

685,224

$

721,001

On August 6, 2020, we entered into a credit agreement with Citizens Bank, N.A. (the “Credit Agreement”) that provides a revolving credit facility permitting borrowings up to $125.0 million (the “Revolving Credit Facility”), and has a termination date of August 5, 2021. The Revolving Credit Facility includes up to a $25.0 million sub limit for letters of credit.

In addition to our existing cash and marketable securities balances, our principal sources of liquidity are our cash flows from operating activities and our revolving credit facility. We believe these sources will provide sufficient liquidity for us to meet our liquidity requirements for the foreseeable future. Our principal liquidity requirements are to meet our working capital, research and development, including clinical trials, and capital expenditure needs, principally for our surgical sets required to maintain and expand our business and potential future business or intellectual property acquisitions. We expect to continue to make investments in surgical sets as we launch new products, increase the size of our U.S. sales force, and expand into international markets. We may, however, require additional liquidity as we continue to execute our business strategy. Our liquidity may be negatively impacted as a result of a decline in sales of our products, including declines due to changes in our customers’ ability to obtain third-party coverage and reimbursement for procedures that use our products, increased pricing pressures resulting from intensifying competition, cost increases and slower product development cycles resulting from a changing regulatory environment; and unfavorable results from litigation which will affect our cash flow. We anticipate that to the extent that we require additional liquidity, it will be funded through the incurrence of other indebtedness, additional equity financings or a combination of these potential sources of liquidity. The sale of additional equity may result in dilution to our stockholders. There is no assurance that we will be able to secure such additional funding on terms acceptable to us, or at all.

 

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Cash Flows

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

Nine Months Ended

September 30,

Change

(In thousands)

2020

2019

$

Net cash provided by operating activities

$

118,609

$

117,666

$

943

Net cash used in investing activities

1,770

(104,246)

106,016

Net cash used in/provided by financing activities

(65,875)

13,254

(79,129)

Effect of foreign exchange rate changes on cash

379

(231)

610

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

$

54,883

$

26,443

$

28,440

Cash Provided by Operating Activities

The increase in net cash provided by operating activities for the nine months ended September 30, 2020 was primarily due to the increase of cash flow from net income and cash flow from accounts receivable as a result of improved collections. These were partially offset by cash outflows for inventories.

The decrease in net cash provided by operating activities for the nine months ended September 30, 2019 was primarily due to the decrease of cash flow from inventories and lower net income, which were offset partially by the increase of cash flow from accounts payable and accrued expenses.

Cash Used in Investing Activities

The increase in net cash provided by investing activities for the nine months ended September 30, 2020 was due primarily to the net inflows of purchases, maturities and sales of marketable securities, which was partially offset by increased purchases of property and equipment and payments related to asset acquisitions.

The decrease in net cash used in investing activities for the nine months ended September 30, 2019 was due primarily to the decrease in net impact of purchases, maturities and sales of marketable securities, partially offset by increased purchases of property and equipment.

Cash Used in Financing Activities

The increase in net cash used in financing activities for the nine months ended September 30, 2020 was primarily the result of the repurchase of common stock and payments for business acquisition related liabilities, partially offset by the increase in proceeds from option exercises.

 

The decrease in cash provided by financing activities for the nine months ended September 30, 2019 was the result of the decrease in proceeds from option exercises.

Contractual Obligations and Commitments

During the three months ended September 30, 2020 there was a material change in our contractual obligations related to the purchase obligation payables within less than one year. In connection with the Nemaris and StelKast acquisitions completed in 2018 and 2019, respectively, we paid the contingent consideration obligation payables of $10.0 million and $5.0 million, respectively, during the three months ended September 30, 2020.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Backlog

We work closely with our suppliers to ensure that our inventory needs are met while maintaining high quality and reliability. To date, we have not experienced significant difficulty in locating and obtaining the materials necessary to fulfill our production requirements, and we have not experienced a meaningful backlog of sales orders.

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The COVID-19 pandemic may lead to higher than normal inventory levels, as there has not been a material effect to our supply chain or production schedule and we may experience decreased revenues while government mandated restrictions on elective surgeries are in place.

Recently Issued Accounting Pronouncements

For further details on recently issued accounting pronouncements, please refer to “Part I; Item 1. Financial Statements; Notes to Condensed Consolidated Financial Statements (Unaudited); Note 1. Background and Summary of Significant Accounting Policies; (k) Recently Issued Accounting Pronouncements” above.

Cautionary Note Concerning Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact are forward-looking statements. We have tried to identify forward-looking statements by using words such as “believe,” “may,” “might,” “could,” “will,” “aim,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “plan” and similar words. These forward-looking statements are based on our current assumptions, expectations and estimates of future events and trends. Forward-looking statements are only predictions and are subject to many risks, uncertainties and other factors that may affect our businesses and operations and could cause actual results to differ materially from those predicted. These risks and uncertainties include, but are not limited to, health epidemics, pandemics and similar outbreaks, including the COVID-19 pandemic, factors affecting our quarterly results, our ability to manage our growth, our ability to sustain our profitability, demand for our products, our ability to compete successfully (including without limitation our ability to convince surgeons to use our products and our ability to attract and retain sales and other personnel), our ability to rapidly develop and introduce new products, our ability to develop and execute on successful business strategies, our ability to comply with changes and applicable laws and regulations that are applicable to our businesses, our ability to safeguard our intellectual property, our success in defending legal proceedings brought against us, trends in the medical device industry, and general economic conditions, and other risks set forth throughout our Annual Report on Form 10-K for the year ended December 31, 2019 (the “Form 10-K”), particularly those set forth under “Item 1A, Risk Factors” of the Form 10-K, and those discussed in other documents we file with the Securities and Exchange Commission (the “SEC”). Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for us to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Given these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements. Forward-looking statements contained in this Quarterly Report speak only as of the date of this Quarterly Report. We undertake no obligation to update any forward-looking statements as a result of new information, events or circumstances or other factors arising or coming to our attention after the date hereof.

 

Item 3. Quantitative and Qualitative Disclosure About Market Risk

We have evaluated the information required under this item that was disclosed under Item 7A in our Annual Report on Form 10-K for the year ended December 31, 2019 and there have been no significant changes to this information.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2020. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on their evaluation of our disclosure controls and procedures as of September 30, 2020, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures were effective.

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Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our CEO and CFO, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. For example, these inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are involved in a number of proceedings, legal actions and claims.  Such matters are subject to many uncertainties, and the outcomes of these matters are not within our control and may not be known for prolonged periods of time.  In some actions, the claimants seek damages, as well as other relief, including injunctions prohibiting us from engaging in certain activities, which, if granted, could require significant expenditures and/or result in lost revenues.  For further details on the material legal proceedings to which we are currently a party, please refer to “Part I; Item 1. Financial Statements; Notes to Condensed Consolidated Financial Statements (Unaudited); Note 12. Commitments and Contingencies” above.

In addition, we are subject to legal proceedings arising in the ordinary course of business.

Item 1A. Risk Factors

The following represents a material change in our risk factors from those disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

The widespread outbreak of a communicable disease, or any other public health crisis, could adversely affect our financial condition and results of operations.

We could be negatively affected by the widespread outbreak of a communicable disease, or any other public health crisis that results in disruptions to hospitals and other healthcare facilities.

A novel strain of coronavirus was first identified in Wuhan, China in December 2019, and the disease caused by it, COVID-19, was subsequently declared a pandemic by the World Health Organization in March 2020. The pandemic has significantly impacted the economic conditions in the U.S. and globally, accelerating during March and April, as federal, state and local governments have reacted to the public health crisis, creating significant uncertainties in the economy. While emergency and time-sensitive surgical procedures continue, the outbreak and preventive measures taken to help curb the spread of COVID-19 has negatively impacted the markets we serve, in particular, hospitals and surgical centers globally where elective surgeries have been temporarily postponed.  We believe that certain of these patient volume declines reflect a deferral of elective surgeries to a later period, rather than a permanent reduction in demand; however, there is no assurance that will occur. We are considered a provider of “Life-sustaining” goods and services in Pennsylvania and an essential business in other areas. To date, COVID-19 has not materially affected our supply chain or production schedule, although delays may be possible in the future due to the dynamic nature of the situation. 

Given the dynamic nature of this situation, the Company cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows in the future. However, while the government mandated restrictions, including elective surgeries, are in place, we do expect that it could continue to have a material adverse impact on our future revenue growth, operating profit and cash flow and may lead to higher than normal inventory levels, revised payment terms with certain of our customers, and a change in effective tax rate driven by changes in the mix of earnings across the Company’s jurisdictions.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

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Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

The following is a list of exhibits filed as part of this Quarterly Report on Form 10-Q.  Where so indicated, exhibits that were previously filed are incorporated by reference.  For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated in parentheses.

Exhibit No.

 

Item

10.1

Executive Employment Agreement, dated August 5, 2020, by and between Globus Medical, Inc. and Kelly Huller (incorporated by reference to Exhibit 10.1 of the Registrant’s Form 10-Q filed on August 5, 2020).

10.2

Executive Employment Agreement, dated August 5, 2020, by and between Globus Medical, Inc. and Keith Pfeil (incorporated by reference to Exhibit 10.2 of the Registrant’s Form 10-Q filed on August 5, 2020).

10.3

Credit Agreement, dated as of August 6, 2020, by and among Globus Medical, Inc. and Globus Medical North America, Inc., as borrowers, and Citizens Bank, N.A., as lender (incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed on August 10, 2020).

31.1*

 

Certification by Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*

 

Certification by Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32**

 

Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*

 

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*

 

XBRL Taxonomy Extension Schema Document

101.CAL*

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB*

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE*

 

XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF*

 

XBRL Taxonomy Extension Definition Linkbase Document

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

 

 

*

 

Filed herewith.

**

 

Furnished herewith.


SIGNATURES

Pursuant to the requirements 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.

 

 

GLOBUS MEDICAL, INC.

 

 

 

 

 

 

Dated:

October 28, 2020

/s/ DAVID M. DEMSKI

 

 

 

 

 

David M. Demski

 

 

Chief Executive Officer

 

 

President

 

 

(Principal Executive Officer)

 

 

 

Dated:

October 28, 2020

/s/ KEITH PFEIL

 

 

 

 

 

Keith Pfeil

 

 

Senior Vice President

 

 

Chief Financial Officer

Chief Accounting Officer

 

 

(Principal Financial Officer)

 

 

 

39