Globus Medical
Annual Report 2018

Plain-text annual report

Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549_________________________FORM 10-K(Mark One)xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2018oroTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from ______________ to _______________Commission File No. 001-35621GLOBUS 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(Address of principal executive offices) (Zip Code) Registrant’s telephone number, including Area Code: (610) 930-1800Securities registered pursuant to Section 12(b) of the Act:Title of each className of each exchange on which registeredClass A Common Stock, par value $.001 per shareNew York Stock ExchangeSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes ¨ No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act: Yes ¨ No xIndicate 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 12months (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 x 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 ofthis chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files): Yes x No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of theregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: oIndicate 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. (check one):Large accelerated filer xAccelerated filer oNon-accelerated filer oSmaller Reporting Company oEmerging Growth Company oIf 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 financialaccounting 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 Act): Yes ¨ No xThe aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, computed by reference to the closing sales price for the registrant’scommon stock on the last business day of the registrant’s most recently completed second quarter, June 30, 2018, as reported on the New York Stock Exchange, was approximately$3.8 billion.The number of shares outstanding of the registrant’s common stock (par value $0.001 per share) as of February 18, 2019 was 98,653,450 shares.DOCUMENTS INCORPORATED BY REFERENCEPortions of our Proxy Statement for our 2019 Annual Meeting of Stockholders, to be filed within 120 days of December 31, 2018, are incorporated by reference in Part III, Items 10,11, 12, 13 and 14 herein of this Annual Report. Such Proxy Statement, except for the parts therein which have been specifically incorporated by reference, shall not be deemed “filed”for the purposes of this Annual Report on Form 10-K.Table of ContentsGLOBUS MEDICAL, INC. AND SUBSIDIARIESTABLE OF CONTENTS Page PART I Item 1.Business4Item 1A.Risk Factors21Item 1B.Unresolved Staff Comments49Item 2.Properties49Item 3.Legal Proceedings49Item 4.Mine Safety Disclosures49 PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities50Item 6.Selected Financial Data52Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations53Item 7A.Quantitative and Qualitative Disclosures About Market Risk71Item 8.Financial Statements and Supplementary Data73Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure112Item 9A.Controls and Procedures112Item 9B.Other Information113 PART III Item 10.Directors, Executive Officers and Corporate Governance114Item 11.Executive Compensation114Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters114Item 13.Certain Relationships and Related Transactions, and Director Independence114Item 14.Principal Accountant Fees and Services114 PART IV Item 15Exhibits and Financial Statement Schedules115Item 16Form 10-K Summary118 SIGNATURES119 2Table of ContentsPART ICAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities LitigationReform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact are forward-lookingstatements. 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 basedon our current assumptions, expectations and estimates of future events and trends. Forward-looking statements are only predictionsand are subject to many risks, uncertainties and other factors that may affect our businesses and operations and could cause actualresults to differ materially from those predicted. These risks and uncertainties include, but are not limited to, factors affecting ourquarterly results, our ability to manage our growth, our ability to sustain our profitability, demand for our products, our ability tocompete successfully (including without limitation our ability to convince surgeons to use our products and our ability to attract andretain sales and other personnel), our ability to rapidly develop and introduce new products, our ability to develop and execute onsuccessful business strategies, our ability to comply with changes and applicable laws and regulations that are applicable to ourbusinesses, our ability to safeguard our intellectual property, our success in defending legal proceedings brought against us, trends inthe medical device industry, general economic conditions, and other risks set forth throughout this Annual Report, including under“Item 1, Business,” “Item 1A, Risk Factors,” and “Item 7, Management’s Discussion and Analysis of Financial Condition andResults of Operations,” 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 possiblefor 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 anyfactor, 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 Annual Report speak only as of the date of this Annual Report. We undertake noobligation to update any forward-looking statements as a result of new information, events or circumstances or other factors arising orcoming to our attention after the date hereof.3Table of ContentsItem 1. BusinessOverviewGlobus Medical, Inc. (together, as applicable, with its consolidated subsidiaries, “Globus,” “we,” “us” or “our”), headquarteredin Audubon, Pennsylvania, is a medical device company that develops and commercializes healthcare solutions whose mission is toimprove the quality of life of patients with musculoskeletal disorders. Founded in 2003, Globus is committed to medical deviceinnovation and delivering exceptional service to hospitals and physicians to advance patient care and improve efficiency. Sinceinception, Globus has listened to the voice of the surgeon to develop practical solutions and products to help surgeons effectively treatpatients and improve lives. We have expanded our sales operations across the globe and now serve customers in 52 countriesworldwide.Globus is an engineering-driven company with a history of rapidly developing and commercializing advanced products andprocedures to address treatment challenges. With over 190 products on the market, we offer a comprehensive portfolio of innovativeand differentiated technologies that are used to treat a variety of musculoskeletal conditions of the spine, extremities and pelvis.Although we manage our business globally within one operating segment, we separate our products into two major categories:Musculoskeletal Solutions and Enabling Technologies.Musculoskeletal SolutionsMusculoskeletal Solutions consist primarily of implantable devices, biologics, accessories, and unique surgical instruments usedin 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 degenerativeconditions, deformity, tumors, and trauma. With more than fifteen years in this competitive market, we provide comprehensivesolutions that facilitate both open and minimally invasive surgery (“MIS”) techniques. This includes traditional fusion implants such aspedicle screw and rod systems, plating systems, intervertebral spacers and corpectomy devices. We believe we pioneered innovativeexpandable solutions for interbody fusion, corpectomy and interspinous fixation that allow intraoperative customization of our devicesto the patient’s anatomy and save surgical time by eliminating sequential trialing. We have also developed treatment options for motionpreservation technologies, such as dynamic stabilization, total disc replacement and interspinous distraction devices, and interventionalpain management solutions to treat vertebral compression fractures. Regenerative biologic products such as allografts and syntheticalternatives are adjunctive treatments typically used in combination with stabilizing implant hardware.Our orthopedic trauma solutions are designed to treat a wide variety of orthopedic fracture patterns and patient anatomies in theupper and lower extremities as well as the hip. To date, Globus has received 510(k) clearance from the U.S. Food and DrugAdministration (“FDA”) for several orthopedic trauma and extremity products, covering four major segments of the orthopedic traumamarket - fracture plates, compression screws, intramedullary nails, and external fixation. We began marketing these products in 2018and 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.4Table of ContentsEnabling TechnologiesEnabling Technologies are advanced computer-assisted intelligent systems designed to enhance a surgeon’s capabilities andstreamline surgical procedures to be safer, less invasive, more accurate, and more reproducible, to ultimately improve patient care andreduce radiation exposure for all involved.Our current enabling technologies are comprised of imaging, navigation and robotic (“INR”) assisted surgery solutions. Thisincludes the ExcelsiusGPS® platform, a robotic guidance and navigation system that supports minimally invasive and open procedureswith screw placement applications. The ExcelsiusGPS® platform has a modular design that can be used for a variety of screwplacement applications, and we expect that it will serve as a foundation for future clinical applications using artificial intelligence andaugmented reality. Surgimap® pre-planning software is used for effortless and convenient surgical planning at any time.Globus’ innovative Enabling Technologies offer surgeons more information about patient anatomy and surgical options to helpthem to make well-informed surgical decisions. We believe the advantages of pre-planning implant position and viewing patientanatomy during surgery are self-evident, with significant secondary gains such as eliminating radiation exposure altogether.Overall BusinessWhile 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 anatomyand condition, and is customized to the surgeon’s training and surgical preference.To date, the primary market for our products has been the United States, where we sell our products through a combination ofdirect sales representatives employed by us and distributor sales representatives employed by our exclusive independent distributors,who distribute our products on our behalf for a commission that is generally based on a percentage of sales. We believe there issignificant opportunity to strengthen our position in the U.S. market by increasing the size of our U.S. sales force and we intend to addadditional direct and distributor sales representatives in the future.During the year ended December 31, 2018, our international sales accounted for approximately 17% of our total sales. Wecurrently sell our products through a combination of direct sales representatives employed by us and exclusive internationaldistributors. We believe there are significant opportunities for us to increase our presence in both existing and new internationalmarkets through the continued expansion of our direct and distributor sales forces and the commercialization of additional products.5Table of ContentsStrategyOur goal is to become the market leader in providing innovative Musculoskeletal Solutions and Enabling Technologies topromote healing in patients with musculoskeletal disorders. To achieve this goal, we employ the following business strategies:•Leverage our integrated product development engine. We plan to continue developing new Musculoskeletal Solutionsproducts and Enabling Technologies products, using our product development engine. We believe our team-orientedapproach, active surgeon input, and demonstrated capabilities position us to maintain a rapid rate of new product launches.We launched ten new products in 2018, have over 30 potential new products in various stages of development, and expectto regularly launch new products.•Increase the size, scope and productivity of our exclusive U.S. sales force. We believe there is significant opportunity for usto further penetrate existing markets and to enter new markets by increasing the size and geographic scope of our exclusiveU.S. sales force in the spine, trauma, and INR areas. We expect to increase the number of our direct and distributor salesrepresentatives in the United States to expand into new geographic territories and to deepen our penetration in existingterritories. We will also continue to provide our sales representatives with specialized development programs designed toimprove their productivity.•Continue to expand into international markets. As of December 31, 2018, we had an existing direct or distributor salespresence in 51 countries outside the United States. We expect to continue to increase our international presence through thecommercialization of additional Musculoskeletal Solutions and Enabling Technologies products and through the expansionof our international sales force.•Pursue strategic acquisitions and alliances. In 2016, we acquired the international operations and distribution channel ofAlphatec Holdings, Inc. (“Alphatec International”) to increase our worldwide footprint. In 2017, we acquired KB MedicalSA, developer of a computer-assisted robotic guidance system and in 2018, we acquired Nemaris Inc., a privately heldcompany that markets and develops Surgimap®, a leading surgical planning software platform, to further bolster our effortsto advance surgical procedures through Enabling Technologies. We intend to selectively pursue acquisitions and alliancesthat complement our strategic plan and provide innovative technologies, personnel with significant relevant experience, orincreased market penetration. We are currently evaluating possible acquisitions and strategic relationships and believe thatour resources and experience make us an attractive acquirer or partner.6Table of ContentsThe Musculoskeletal MarketMusculoskeletal disorders are a leading driver of healthcare costs worldwide. Disorders range in severity from mild pain andloss of feeling to extreme pain and paralysis. These disorders are primarily caused by degenerative and congenital conditions,deformity, tumors and traumatic injuries. Treatment alternatives for musculoskeletal disorders range from non-operative conservativetherapies to surgical interventions depending on the pathology. Conservative therapies include bed rest, medication, casting, bracing,and physical therapy. When conservative therapies are not indicated, or fail to provide adequate quality of life improvements, surgicalinterventions may be used. Surgical treatments for musculoskeletal disorders can be instrumented, which include the use of implants, ornon-instrumented, which forego the use of any such implants.We believe the musculoskeletal market will continue to experience growth as a result of the following market influences:•Favorable patient demographics. The worldwide population is growing and aging, and improvements in healthcare haveled to increasing life expectancies worldwide and the opportunity to lead more active lifestyles. This population is moreprone to musculoskeletal degeneration, traumatic fractures, and challenging complications. These trends are expected togenerate increased demand for surgical intervention.•Improving technologies within Musculoskeletal Solutions leading to increased use in surgical procedures. We expect thenumber of spinal and orthopedic surgery cases to grow as product innovation makes surgery a more attractive option forpatients. We also expect these innovations to differentiate Globus products from competitive products and make them moreattractive to surgeons.•Musculoskeletal Solutions driving earlier interventions and creating an expanded patient base. Newer technologicalinnovations have enabled novel surgical procedures, improvements to existing surgical procedures, the treatment ofmusculoskeletal disorders by new physician specialties, and surgical intervention earlier in the continuum of care, all ofwhich may result in better patient outcomes. As a result, we expect continued advancements within MusculoskeletalSolutions supported by surgical Enabling Technologies, including INR systems, to increase the size of the addressablepatient population for spine surgery.•Shift of MIS procedures performed using Enabling Technology in outpatient settings. The effectiveness and shorter surgicaltimes associated with MIS spine procedures is facilitating a larger number of treatments to be performed in ambulatorysurgery centers, which increases availability and access to patients. We believe Enabling Technologies provide more accessto MIS surgery and facilitate best-in-class treatment modalities.•Continued growth of musculoskeletal procedures worldwide. We believe that improvements to the standard of care outsideof the United States will increase the international demand for musculoskeletal products.7Table of ContentsThe Enabling Technologies MarketThe market for Enabling Technologies in spine and orthopedic surgery is still in the infancy stage and consists primarily ofimaging, navigation and robotic systems. In spine, a majority of these technologies are limited to surgical planning and assistance inimplant placement for increased accuracy and time savings with less intraoperative radiation exposure to the patient and surgical staff.As these Enabling Technologies become more fully integrated with various other Musculoskeletal Solutions, a continued rise inadoption is expected. Furthermore, we believe as new technologies such as augmented reality and artificial intelligence are introduced,Enabling Technologies have the potential to transform the way surgery is performed and most importantly, continue to improve patientoutcomes.We believe that growth in Enabling Technologies will result from the following market influences:•Demand for minimally invasive surgery. Patients are more actively seeking the least invasive and safest surgical treatmentoptions available. As the benefits of robotic assisted surgery in enabling less invasive surgical techniques become known,we believe hospitals will equip themselves with these technologies to satisfy patient demand.•Hospital cost reduction initiatives. Enabling Technologies products may facilitate less invasive surgical procedures leadingto shorter hospital stays with potentially fewer complications rates, which may lead to lower overall treatment costs perpatient for the hospital. As hospitals evaluate 30 day readmissions and surgical complication rates for possible cost savings,we expect that the use of Enabling Technologies across multiple surgical specialties will help facilitate less invasive and lesscostly procedures.•Integration of robotic training into medical residency programs. As more surgeon trainees, including fellows and residents,participate in programs incorporating imaging, navigation and robotics into their medical training, they are expected to drivewidespread adoption of Enabling Technologies within each surgical specialty.•Increased emphasis on physician and operating room staff safety. Orthopedic surgery currently requires significantintraoperative radiation exposure to facilitate implant placement. Repeated fluoroscopy exposure to patients, surgeons andtheir staff is hazardous and has been linked to cancer, cataracts, and other side effects. We believe that EnablingTechnologies have the potential to significantly reduce and potentially eliminate the need for intraoperative fluoroscopywhich we believe will help drive demand for its implementation.8Table of ContentsThe Globus SolutionWe believe that our focus on actively listening to the needs of our customers, and fostering a culture of urgency throughout theentire organization to quickly respond to these needs with high quality solutions, separates us from our industry peers. Since 2003 wehave introduced more than 190 products designed for the treatment of musculoskeletal disorders. Given our robust product portfolio ofunique and differentiated products, as well as the numerous disruptive products in various stages of development, we believe we arewell positioned for growth in the spine and orthopedic trauma markets.Musculoskeletal SolutionOur Spine product portfolio includes a wide range of implant and surgical approach options that can be used to treatdegenerative, deformity, tumor and trauma conditions affecting the entire spine, from the occiput to the sacrum, while accommodatingvarious surgical techniques preferred by surgeons.We believe that we have the most comprehensive expandable spacer portfolio in today’s market, with over 16 implant options,designed for a wide variety of procedures including Posterior Lumbar Interbody Fusion, Transforaminal Lumbar Interbody Fusion,Lateral Lumbar Interbody Fusion, Anterior Lumbar Interbody Fusion, Endoscopic Lumbar Interbody Fusion and Corpectomyprocedures. Expandable product families, which include RISE®, RISE-L®, CALIBER®, CALIBER®-L, ALTERA®, ELSA®,ELSA®-ATP, MAGNIFY®, MAGNIFY®-S, FORTIFY®, and XPand®, among others, are designed to be inserted at a minimizedheight and then expanded during surgery for optimal fit between vertebral bodies. This expandability feature eases insertion into thedisc space following disc removal to help reduce trauma to the vertebral endplates and surrounding tissue, while allowing forrestoration of height and lordosis.Our fixation portfolio, including pedicle screws, rods and plates, provide strength and stability for treating degenerative andmore complex spinal deformity procedures. The CREO® thoracolumbar stabilization platform enhances efficiency and ease of use withintuitively designed instruments and a complete array of implant options for treating complex pathologies. Within this platform,CREO® MIS and CREO MCS® provide percutaneous and mini-open midline approach options designed for less invasive surgery andminimal muscle disruption. CREO® Derotation and CREO® Rod Link Reducer systems help to streamline various derotationmaneuvers for deformity correction, such as segmental, rib hump correction, and translation of coronally displaced vertebrae. Forrevision procedures CREO® Addition provides a comprehensive range of connectors, including modular and top-loading styles, whichmakes extending fixation more streamlined and efficient. In 2018, we launched our first cement augmented pedicle screw system in theUnited States, CREO® Fenestrated, designed to enhance fixation using bone cement for patients with advanced stage tumors andlimited life expectancy.QUARTEX®, our most advanced Occipito-Cervico-Thoracic (“OCT”) stabilization system, is designed to address a number ofchallenges associated with posterior OCT fusion to aid in easier construct assembly with convenient implant options. The systemfeatures a threading locking cap to enable quick and efficient low-torque single step locking and high angle screw heads thataccommodate two different diameter rods.Regenerative biologics products, including bioactive glass-based KINEX® and SIGNIFY™ bone void fillers andCONDUCT® ceramic-collagen, are well suited for pelvic/extremity and posterolateral spinal fusion procedures. 9Table of ContentsInterventional spine products, such as the AFFIRM® bone tamp and the SHIELD® barrier implant, allow physicians tocustomize the treatment plan for vertebral compression fractures and control cement delivery in minimally invasive procedures.Our Orthopedic Trauma product portfolio features anatomic plating systems, compression screws, nailing systems, and externalfixation. ANTHEM® Fracture Systems are anatomically contoured plates designed for a wide variety of ankle, shoulder, and wristfractures as well as long and short bony anatomy. Combined with extensive screw options and unique instruments, the plates aredesigned to match patient anatomy, reduce operative time and minimize soft tissue irritation from implant prominence, a majorcontributor to revision surgery. They are available in numerous anatomic configurations for adult and pediatric indications.CAPTIVATE® Compression screws have an innovative feature for easy intraoperative compression and reduction of the fracture site.We believe they are a complement to plating for complex trauma.The AUTOBAHN™ nailing platform is comprised of the Trochanteric Nail designed for trochanteric and femoral neckfractures, Antegrade/Retrograde Femoral Nail that offers both a greater trochanter and piriformis fossa entry points, and the Tibial Nailwhich includes instruments for infrapatellar and suprapatellar approaches. Each system is designed to help streamline the procedure,increase versatility, reduce procedure time, and ultimately improve patient care.The ARBOR® External Fixation System provides a streamlined set of external fixation devices including clamps, pins, andbars. This system offers a one-clamp design for every procedure regardless of pin size. Innovative instruments allow surgeons toquickly create the frame of their choice.Enabling TechnologiesExcelsiusGPS®, a robotic guidance and navigation system, is our first INR technology product to market. FDA-cleared in 2017and CE-marked in 2016, our first commercial sale of ExcelsiusGPS® came in the fourth quarter of 2017. The ExcelsiusGPS®technology supports minimally invasive and open orthopedic and neurosurgical procedures, with potential applications ranging fromthe cervical spine to the sacroilium, long bones, and occiput. ExcelsiusGPS® seamlessly integrates with Globus implants andinstruments and is compatible with pre-operative CT, intraoperative CT, and fluoroscopic imaging modalities. The system is designedto reproducibly assist in implant placement, streamline workflows, and minimize radiation exposure.In 2018, we acquired Nemaris Inc., a privately held company that markets and develops Surgimap®, a leading surgicalplanning software platform. Surgimap®’s intuitive, patient-specific surgical planning and cloud-based infrastructure with predictivealgorithms and visual guides enable healthcare professionals to plan and simulate potential surgical outcomes in treating complexdeformities. The software also enables medical professionals to share medical imaging technology globally to improve proceduralworkflow and patient care.We believe that our innovative Musculoskeletal Solutions and Enabling Technologies products, combined with our ability toprovide world-class service through a highly trained and exclusive sales force, reimbursement education and assistance, and corporateaccount management, create significant value for our customers.10Table of ContentsProduct Development and ResearchGlobus believes in bringing products to market quickly by reducing the time from product conception to launch. We believeour approach to product development is unique and highly efficient. We employ an integrated team approach to product developmentinvolving collaboration among surgeons, our engineers, our dedicated researchers, our highly-skilled machinists, and our regulatorypersonnel. We believe that this team approach, as well as our extensive in-house facilities, allows us to design, test and obtainregulatory clearance and approvals of our products more effectively. We also believe that our product development engine provides uswith a competitive advantage in developing solutions to challenging clinical problems for surgeons and improving outcome forpatients.Our product development efforts are supported by our in-house research capabilities. We believe that centralizing andconsolidating the critical elements of the product development and commercialization process in one facility allows us to bring productsfrom the concept stage to the market more rapidly. Research resources available in-house include a mechanical testing laboratory,spinal kinematics laboratory, tribology laboratory, cadaveric laboratory, materials characterization laboratory, computational laboratory,and clinical and biomechanical research experts.The markets in which we operate are subject to rapid technological advancements. We must constantly improve existingproducts and introduce new products in order to continue to succeed. Accordingly, we have made significant investments in ourproduct development and research capabilities.Sales and MarketingWe market and sell our products through our exclusive global sales force. As of December 31, 2018, we had a direct ordistributor sales presence in the United States and in 51 countries outside the United States. We have dedicated spinal implant,orthopedic trauma and INR sales teams in place. We expect to continue to increase the number of our direct and distributor salesrepresentatives in each of these three areas, both in the U.S. and internationally, to expand into new geographic territories and todeepen our penetration in existing territories. We believe the expansion of our U.S. and international sales forces provides us withsignificant opportunities for future growth as we continue to penetrate existing geographic markets and enter new ones.Our implant sales representatives are present in the operating room during most surgeries in the United States and in many, butnot all, of the other countries in which our products are sold. These representatives have the responsibility to confirm that all of theitems needed in the surgery are available and are provided sterile or are capable of being sterilized at the hospital. Various sizes andquantities of implants are made available to be able to satisfy varying surgical requirements and patient anatomy, along with numeroussurgical instruments and cases needed to safely perform the surgery and implantation. As products are used in surgeries, replacementitems are shipped to our sales representatives and hospitals to replenish their supply.All of our U.S. independent distributors are compensated solely on commission. Most of our new direct sales representativesstart with a compensation arrangement that is largely based on salary. Our goal is for members of our direct sales force to move towarda compensation model based solely on commission as they become familiar with our products and drive higher sales.11Table of ContentsAdvancement of Musculoskeletal CareWe are committed to the advancement of musculoskeletal care through our support of numerous educational and researchprograms geared towards surgeons, such as:•national and regional educational courses;•intensive hands-on cadaveric training on new products and new techniques;•research collaboration and support;•educational support; and•fellowship support.We devote significant resources to training and educating surgeons on the safe and effective use of our products andtechniques. To that end, we have made significant investments in the creation, staffing and program offerings of our MusculoskeletalEducation and Research Center (“MERC”). Through MERC, educational and training programs are offered at our modern bioskillslaboratory and 100-person lecture facility, and through regionally-based didactic education and cadaveric bioskills training programs atoff-site facilities.We have a strong commitment to research performed in conjunction with surgeons from around the world as well as researchopportunities in collaboration with leading academic institutions. Supported by a dedicated research team, these efforts range frombasic biomechanical testing conducted internally with our six-degrees-of-freedom machine to major clinical outcomes studies. We arecommitted to providing the orthopedic surgeon community with high quality research to support new or improved surgical techniquesand novel product designs that we develop.CompetitionWe believe that our significant competitors are Medtronic, DePuy Synthes, Stryker, Zimmer Biomet, Smith and Nephew, andNuVasive. Wright Medical Group, Orthofix International, Integra, and other smaller public and private companies are also competitorsof ours. At any time, these or other market participants may develop alternative treatments, products or procedures for the treatment ofmusculoskeletal disorders that compete directly or indirectly with our products. They may also develop and patent processes orproducts earlier than we can, or obtain regulatory clearance or approvals for competing products more rapidly than we can.We compete in the marketplace to recruit and retain qualified scientific, management, and sales personnel, as well as inacquiring technologies and technology licenses complementary to our products or advantageous to our business.Our currently marketed products are, and any future products we commercialize will be, subject to intense competition. Manyof our current and potential competitors are major medical device companies that have substantially greater financial, technical, andmarketing resources than we do, and they may succeed in developing products that would render our products obsolete ornoncompetitive. In addition, many of these competitors have a significantly longer operating history and more established reputationsthan we do. The markets we compete in are intensely competitive, subject to rapid change and highly sensitive to the introduction ofnew products or other market activities of industry participants. Our ability to successfully compete is dependent on our ability todevelop proprietary products that reach the market in a timely manner, receive adequate coverage and reimbursement, and are safer,less invasive and more effective than alternatives available for similar purposes. Because of the size of12Table of Contentsthe potential market, we anticipate that companies will dedicate significant resources to developing competing products.Manufacturing and SupplyWe have greatly expanded our dedicated in-house manufacturing capabilities. A significant portion of our implant products ismanufactured in our facilities in Eagleville, Pennsylvania. Most of our regenerative biologics products are processed in our facilities inSan Antonio, Texas, and in Audubon, Pennsylvania. The ExcelsiusGPS® robotic guidance and navigation system is assembled in ourfacility in Methuen, Massachusetts.Of our implant and instrument products that are not manufactured in-house, a majority are generally manufactured through anetwork of over 100 third-party suppliers. Our suppliers use high precision, computer-aided manufacturing equipment to manufactureour products. We have focused on developing a strong supplier base as part of our manufacturing strategy. Our relationship with oursuppliers enables significant interaction between our design engineers and project managers and the suppliers’ engineers andschedulers to work through issues arising during the entire product development cycle. Many of our suppliers are domestic, whichaffords our engineers and other members of our product development team the opportunity to work closely with them to commercializeour products.We select our suppliers carefully and generally use a small number of suppliers for each of our key products for addedreliability. Our internal quality assurance group evaluates the potential vendor through a formal vendor approval process before weenter into a relationship with the vendor. Suppliers that meet our internal quality assurance standards are added to our approvedsupplier list. All of our suppliers that provide us with implants are ISO-13485 certified, meaning they meet the InternationalOrganization for Standardization (“ISO”) requirements for the manufacture of medical devices. Our quality assurance group conductsperiodic audits to ensure continued compliance with our standards. With every shipment of inventory that we receive, our suppliersprovide a certificate of compliance with our quality control standards. Our receiving group also performs inspections, packaging andlabeling on site at our headquarters facility.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 productionrequirements, and we have not experienced a meaningful backlog of sales orders. We believe our supplier relationships and facilitieswill support our potential capacity needs for the foreseeable future. A majority of our product inventory is held primarily with our salesrepresentatives and at hospitals throughout the United States. We stock inventory in our warehouse facilities and retain title toconsigned inventory which is maintained with our field representatives and hospitals in sufficient quantities so that products areavailable when needed for surgical procedures. Safety stock levels are determined based on a number of factors, including demand,manufacturing lead times, and quantities required to maintain service levels.Intellectual PropertyWe protect our proprietary rights through a variety of methods. In particular, we rely on patent, trademark, copyright, tradesecret and other intellectual property laws and also utilize nondisclosure agreements and other measures to protect our rights.As of December 31, 2018, we owned 855 issued U.S. patents (838 utility patents; 17 design patents) and had applicationspending for 480 U.S. patents (471 utility patents; 9 design patents), and we owned 301 issued foreign patents and had applicationspending for 373 foreign patents. Our issued patents expire between November 2019 and December 2036.13Table of ContentsOur trademark portfolio contains 196 registered trademarks and 70 pending trademarks. Our portfolio includes domestic andforeign trademarks with associated logos and tag lines.Third-Party Coverage and ReimbursementWe expect that, in the future, sales volumes and prices of our spinal implant and orthopedic trauma products may grow to bemore dependent on the availability of coverage and reimbursement from third-party payors, such as state and federal programsincluding Medicare, Medicaid and Worker’s Compensation as well as private insurance plans including Blue Cross Blue Shield plansand commercial insurers. Reimbursement is dynamic and is contingent on coding for given services or procedures, coverage by third-party payors, and adequate payment for the services or procedures.Physicians, hospital outpatient departments, and Ambulatory Surgery Centers (ASCs) use Current Procedural Terminology(“CPT®”) codes to bill for services and procedures, which are established by the American Medical Association (“AMA”). Specialtysocieties such as the North American Spine Society, the American Association of Neurological Surgeons, and the American Academyof Orthopaedic Surgeons provide advice to the AMA CPT® Editorial Panel for developing codes. The availability of existing codes tobill for services and procedures may impact the adoption of technology.The Centers for Medicare and Medicaid Services (“CMS”) and the National Center for Health Statistics are jointly responsiblefor overseeing changes and modifications to International Classification of Diseases, Clinical Modification/Procedure Coding System(“ICD-10-CM/PCS”) procedure codes used by all providers including physicians and facilities for reporting patient diagnosis(es)(ICD-10-CM codes) and hospitals for reporting inpatient procedures (ICD-10-PCS codes). ICD-10-CM/PCS was implemented in theU.S. on October 1, 2015. This represented the first major coding change for ICD coding in over 30 years. The granularity andspecificity of the new ICD-10-CM/PCS coding system may impact reimbursement in the future, particularly hospital inpatientreimbursement. Physician and hospital coding is subject to change, which could impact coverage and reimbursement and thuspotentially impact physician practice behavior.Independent of coding status, third-party payors may deny coverage based on their own criteria. Payor medical policies varyfrom payor to payor and contract to contract. There are thousands of payor medical policies which are continually reviewed andrevised at the discretion of payors. Payor medical policies may become more restrictive. Payors may deem the clinical efficacy of adevice or procedure to be experimental or investigational, not the most cost-effective treatment available, or used for an unapprovedindication. Additionally, many private payors use coverage decisions and payment amounts established by CMS for the Medicareprogram as guidelines in setting their coverage and reimbursement policies. Medicare may establish National Coverage Determinations(NCDs) or Medicare Administrative Contractors (MACs) may establish Local Coverage Determinations (LCDs) that provide coverageinformation and determine whether services are reasonable and necessary. As the portion of the U.S. population over the age of 65 andeligible for Medicare continues to grow, we may be more vulnerable to coverage and reimbursement limitations imposed by CMS.National and local coverage policy decisions are subject to unforeseeable change and have the potential to impact physician behavior.We will continue to provide the appropriate resources to patients, physicians, hospitals, and insurers in order to promote the best patientcare, provide clarity regarding coverage and reimbursement policies, and work to reverse any non-coverage policies.14Table of ContentsFor federal/state programs, such as Medicaid, coverage and reimbursement differ from state to state. Some state Medicaidprograms may not reimburse an adequate amount for the procedures performed with our products, if any payment is made at all. Inaddition, state-level worker’s compensation coverage and reimbursement vary from state to state. Payment by Medicare and otherthird-party payors may not be adequate to cover the cost of medical devices used in musculoskeletal procedures. Additionally, moremusculoskeletal procedures are being performed in the hospital outpatient and ambulatory surgery center settings, in part due toinnovation. Reimbursement levels in these settings are typically lower than for the hospital inpatient setting and may not be adequate tocover the cost of innovative and novel medical devices.In international markets, reimbursement and healthcare payment systems vary significantly by country and some countries haveinstituted price ceilings on specific product lines. There can be no assurance that our products will be accepted by third-party payors,that coverage and reimbursement will be available or, if available, that the third-party payors’ coverage and reimbursement policies willnot adversely affect our ability to sell our products profitably.We believe that the overall escalating cost of medical products and services has led to, and will continue to lead to, increasedpressures on the healthcare industry to reduce the costs of products and services. There can be no assurance that third-party coverageand reimbursement will be available or adequate, or that future legislation, regulation, coding or coverage and reimbursement policiesof third-party payors will not adversely affect the demand for our products or our ability to sell these products on a profitable basis.Government RegulationOur business is subject to extensive federal, state, local and foreign regulations. Some of the pertinent laws have not beendefinitively interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of subjective interpretations.In addition, these laws and their interpretations are subject to change.Both federal and state governmental agencies continue to subject the healthcare industry to intense regulatory scrutiny,including heightened civil and criminal enforcement efforts. We believe that we have structured our business operations andrelationships with our customers to comply with all applicable legal requirements. However, it is possible that governmental entities orother third parties could interpret these laws differently and assert otherwise. We discuss below the statutes and regulations that aremost relevant to our business.U.S. Food and Drug Administration RegulationOur products are medical devices and human tissue products subject to extensive regulation by the FDA and other federal,state, local and foreign regulatory bodies. FDA regulations govern, among other things, the following activities that we or our partnersperform and will continue to perform:•product design and development;•product testing, manufacturing and safety;•post-market surveillance and reporting;•product labeling;•complaint handling;•post-market approval studies; and•product advertising, marketing and promotion.15Table of ContentsFDA’s Pre-Market Clearance and Approval RequirementsUnless an exemption applies, each medical device we wish to commercially distribute in the United States requires either510(k) clearance, clearance of a de novo classification request, or a pre-market approval (“PMA”) from the FDA. The FDA classifiesmedical devices into one of three classes. Devices deemed to pose low or moderate risk are placed in either Class I or II. Unlessclassified as exempt from pre-market notification, Class I and II devices generally require the manufacturer to submit to the FDA a pre-market notification requesting permission for commercial distribution. This process is known as 510(k) clearance. Some low riskdevices are exempt from this requirement. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supportingor implantable devices, or devices deemed not substantially equivalent to a previously cleared 510(k) device are placed in Class III,which typically requires approval of a PMA application. For certain Class III devices that present low to moderate risk, a risk-basedclassification determination can be requested in accordance with the de novo request process, under which the FDA may determinethat the product can be appropriately regulated as a Class I or II device. 510(k) pre-market notifications, de novo requests, and PMAsare subject to the payment of user fees, paid at the time of submission for FDA review. The FDA can also impose restrictions on thesale, distribution or use of devices at the time of their clearance or approval, or subsequent to marketing.Human Cell, Tissue and Cellular and Tissue Based ProductsWe currently distribute a number of products processed from human tissue, some of which are manufactured by third-partysuppliers. FDA regulates human tissue products as Human Cells and Cellular and Tissue Based Products (“HCT/Ps”). Certain HCT/Psare regulated solely under Section 361 of the Public Health Service Act and are referred to as “Section 361 HCT/Ps,” while otherHCT/Ps are subject to FDA’s regulatory requirements for medical devices or biologics. Section 361 HCT/Ps do not require 510(k)clearance, PMA approval, or other premarket approvals from FDA before marketing. Tissue banks that handle HCT/Ps must registertheir establishments with FDA, list their HCT/P products with FDA, and comply with FDA donor eligibility and screening, currentGood Tissue Practice (“CGTP”), product labeling, and postmarket reporting requirements for HCT/Ps.The FDA periodically inspects tissue processors to determine compliance with these requirements. Entities that provide us withallograft bone tissue are responsible for performing donor recovery, donor screening and donor testing and our compliance with thoseaspects of the CGTP regulations that regulate those functions are dependent upon the actions of these independent entities.The procurement and transplantation of allograft bone tissue is subject to U.S. federal law pursuant to the National OrganTransplant Act (“NOTA”), a criminal statute which prohibits the purchase and sale of human organs used in human transplantation,including bone and related tissue, for “valuable consideration.” NOTA permits reasonable payments associated with the removal,transportation, processing, preservation, quality control, implantation and storage of human bone tissue. With the exception of removaland implantation, we provide services in all of these areas.The procurement of human tissue is also subject to state anatomical gift acts and some states have statutes similar to NOTA. Inaddition, some states require that tissue processors be licensed by that state.FDA EnforcementThe FDA enforces these requirements by inspection and market surveillance. Failure to comply with applicable regulatoryrequirements can result in enforcement action by the FDA, which may include any of the following sanctions:•untitled letters or warning letters;16Table of Contents•fines, injunctions and civil penalties;•recall or seizure of our products;•operating restrictions, partial suspension or total shutdown of production;•refusing our request for 510(k) or de novo clearance or PMA of new products;•withdrawing 510(k) clearance or PMAs that are already granted;•refusal to grant export approval of our products; and•criminal prosecution.We are subject to unannounced device inspections by the FDA’s Office of Regulatory Affairs, Office of Compliance, Centerfor Devices and Radiological Health, and Center for Biologics Evaluation and Research, as well as other regulatory agenciesoverseeing the implementation and adherence of applicable state and federal tissue licensing regulations. These inspections mayinclude our suppliers’ facilities.On October 31, 2018, we received a warning letter from the FDA resulting from an inspection of the facilities of our subsidiaryHuman Biologics of Texas, located in San Antonio, Texas, in April 2018. The letter described observed non-conformities toregulations for human cells, tissues, and cellular and tissue-based products relating to one allograft tissue product processed by HumanBiologics of Texas and sold to end users by us. We take the matters identified in the warning letter seriously and are workingdiligently to address the FDA’s observations. We responded to the FDA’s warning letter on November 20, 2018, and subsequentlyhave provided periodic updates regarding our progress towards addressing the FDA’s observations. As of December 31, 2018, thiswarning letter remains pending. We believe that the FDA’s concerns set forth in the warning letter can be resolved without a material impact to our financialresults. We cannot, however, give any assurances that the FDA will be satisfied with our response or as to the expected date of theresolution of the matters included in the warning letter. Until the issues cited in the warning letter are resolved to the FDA’ssatisfaction, additional legal or regulatory action may be taken without further notice. Any adverse action by the FDA, depending onits magnitude, may restrict us from effectively producing, marketing and selling the product that is the subject matter of the warningletter and could have a material adverse effect on our business, financial condition and results of operations.InternationalInternational sales of medical devices are subject to foreign government regulations, which vary substantially from country tocountry. In order to market our products in other countries, we must obtain regulatory approvals and comply with extensive safety andquality regulations in other countries. The time required to obtain approval by a foreign country may be longer or shorter than thatrequired for FDA clearance or approval, and the requirements may differ. The European Union/European Economic Area (“EEA”)requires a CE mark in order to market medical devices. Many other countries, such as Australia, India, New Zealand, Pakistan and SriLanka, accept CE or FDA clearance or approval. Other countries, such as Brazil, Canada and Japan, require separate regulatoryfilings.In the EEA, our devices are required to comply with the essential requirements of the EU Medical Device Directive (CouncilDirective 93/42/EEC). Compliance with these requirements entitles us to affix the CE conformity mark to our medical devices, withoutwhich they cannot be commercialized in the EEA. To demonstrate17Table of Contentscompliance with the essential requirements and obtain the right to affix the CE conformity mark we must undergo a conformityassessment procedure, which varies according to the type of medical device and its classification.Additionally, in the EEA the procurement, testing, processing, preservation, storage and distribution of human tissues and cellsis subject to the requirements of the laws of individual EEA Member States implementing Directive 2004/23/EC, Directive2006/17/EC and Directive 2006/86/EC.Further, the advertising and promotion of our products in the EEA is subject to the laws of individual EEA Member Statesimplementing the EU Medical Device Directive, Directive 2006/114/EC concerning misleading and comparative advertising, andDirective 2005/29/EC on unfair commercial practices, as well as other EEA Member State laws governing the advertising andpromotion of medical devices. These laws may limit or restrict the advertising and promotion of our products to the general public andmay impose limitations on our promotional activities with healthcare professionals.In 2020, the EEA Member States will implement the EU Medical Device Regulation (MDR 2017/745), which will replace thecurrent EU Medical Device Directive that governs medical devices in the EEA. All medical device companies manufacturing and/ormarketing products in the EEA, including Globus, will be required to comply with the new regulation, which increases technicaldocumentation requirements and may alter the classification of some products. Most devices that are CE marked under the EU MedicalDevice Directive prior to 2020 will continue to be marketed in the EU under certain conditions until 2024, at which point theseproducts must comply with the new regulation.We are subject to unannounced device inspections by the Notified Body (an organization accredited by a Member State of theEEA to conduct conformity assessments), as well as other regulatory agencies overseeing the implementation and adherence ofapplicable regulations. These inspections may include our suppliers’ facilities.Sales and Marketing Commercial ComplianceFederal anti-kickback laws and regulations prohibit, among other things, persons from knowingly and willfully soliciting,receiving, offering or paying remuneration, directly or indirectly, in exchange for, or to induce either the referral of an individual, or thepurchase, order or recommendation of, any good or service paid for under federal healthcare programs such as the Medicare andMedicaid programs.In addition, federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claimfor payment to the federal government, or knowingly making, or causing to be made, a false statement to get a false claim paid. Off-label promotion has been pursued as a violation of the federal false claims laws. Pursuant to FDA regulations, we can only market ourproducts for cleared or approved uses. Although surgeons are permitted to use medical devices for indications other than those clearedor approved by the FDA based on their medical judgment, we are prohibited from promoting products for such off-label uses. Additionally, the majority of states in which we market our products have similar anti-kickback, false claims, anti-fee splitting and self-referral laws, which may apply to items or services reimbursed by any third-party payor, including commercial insurers, and violationsmay result in substantial civil and criminal penalties.The U.S. Foreign Corrupt Practices Act (“FCPA”) and similar anti-bribery laws in non-U.S. jurisdictions, such as the UnitedKingdom’s Bribery Act, generally prohibit companies and their intermediaries from making improper payments to non-U.S.government officials for the purpose of obtaining or retaining business. Because of the predominance of government-administeredhealthcare systems in many jurisdictions around the world, many of our customer relationships outside of the U.S. are withgovernmental entities and are therefore potentially subject to such laws. Global enforcement of anti-corruption laws has increasedconsiderably in recent years, with more frequent voluntary self-disclosures by companies, aggressive investigations and enforcementproceedings by U.S. and non-U.S. governmental agencies, and assessment of significant fines and penalties against companies and18Table of Contentsindividuals. It is our policy to implement safeguards to educate our employees and agents on these legal requirements and prohibitimproper practices. The government may seek to hold us liable for FCPA violations committed by companies that we acquire.Violations of these laws may be punishable by criminal or civil sanctions, including substantial fines, imprisonment of current orformer employees and exclusion from participation in governmental healthcare programs.Additionally, we must comply with a variety of other laws that protect the privacy of individually identifiable healthcareinformation and impose extensive tracking and reporting related to transfers of value provided to certain healthcare professionals. ThePatient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act(collectively “PPACA”) imposes reporting and disclosure requirements on device manufacturers for any “transfer of value” made ordistributed to prescribers and other healthcare providers. The shifting compliance environment and the need to build and maintainrobust and expandable systems to comply in multiple jurisdictions with different compliance and/or reporting requirements increasesthe possibility that a healthcare company may run afoul of one or more of the requirements.Environmental MattersThe manufacture of certain of our products, including our allograft implants and products, and the handling of materials used inthe product testing process, including in our cadaveric laboratory, involve the controlled use of biological, hazardous and/or radioactivematerials and wastes. Our business and facilities and those of our suppliers are subject to foreign, federal, state and local laws andregulations relating to the protection of human health and the environment, including those governing the use, manufacture, storage,handling and disposal of, and exposure to, such materials and wastes. In addition, under some environmental laws and regulations, wecould be held responsible for costs relating to any contamination at our past or present facilities and at third-party waste disposal siteseven if such contamination was not caused by us.We are not currently aware of any material costs or liabilities relating to environmental matters, including any claims or actionsunder environmental laws or obligations to perform any cleanups at any of our facilities or any third-party waste disposal sites, that weexpect to have a material adverse effect on our business, financial condition or operating results. However, it is possible that materialenvironmental costs or liabilities may arise in the future.Seasonality and BacklogOur business is generally not seasonal in nature. However, our sales of Musculoskeletal Solutions products may be influencedby summer vacation and winter holiday periods during which we have experienced fewer surgeries taking place, as well as moresurgeries taking place later in the year when patients have met the deductibles under insurance plans. Our sales of EnablingTechnologies products may be influenced by longer capital purchase cycles and the timing of budget approvals for major capitalpurchases.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 productionrequirements, and we have not experienced a meaningful backlog of sales orders.EmployeesAs of December 31, 2018, we had over 1,800 employees, including sales and marketing, product development, generaladministrative and accounting, both domestically and internationally. Our employees are not subject to a collective bargainingagreement except in a single market outside the U.S., and we consider our relationship with our employees to be good.19Table of ContentsPropertiesOur corporate headquarters are located in Audubon, Pennsylvania and owned by us. We own research and manufacturingfacilities in Massachusetts, Pennsylvania and Texas, lease additional research and manufacturing facilities in Texas and also own adistribution center in Heerlen, Netherlands to support our international operations. We maintain sales and administrative offices infifteen additional countries, all of which are leased.InformationWe were incorporated in Delaware in March 2003. Our principal executive offices are located at 2560 General ArmisteadAvenue, Audubon, Pennsylvania 19403, and our telephone number at that location is (610) 930-1800. Our corporate website addressis http://www.globusmedical.com. The information contained in or accessible through our website or contained on other websites is notdeemed to be part of this Annual Report on Form 10-K.We are subject to the filing requirements of the Exchange Act. Therefore, we file annual reports, periodic reports, proxystatements and other information with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy andinformation statements, and other information regarding issuers that file electronically.We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendmentsto such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act available free of charge through a link on theInvestors section of our website located at http://www.globusmedical.com (under “SEC Filings”) as soon as reasonably practicableafter they are filed with or furnished to the SEC.20Table of ContentsItem 1A. Risk FactorsRisk factors that could cause our actual results to differ from our expectations and that could negatively impact our business,results of operations and financial condition are discussed below and elsewhere in this Annual Report on Form 10-K. If any of theserisks actually occurs, our business, results of operations, financial condition and future growth prospects could be materially andadversely affected. You should carefully read and consider each of these risks, together with all of the other information set forth inthis Annual Report on Form 10-K. The risks and uncertainties described below are not the only ones we face. Additional risks anduncertainties not presently known to us or that we currently believe are immaterial may also materially adversely affect our business,results of operations, financial condition and future growth prospects, and our stock price.Risks Related to Our Business and Our IndustryTo be commercially successful, we must convince surgeons and hospitals that our products are an attractive alternative to ourcompetitors’ products and that our Enabling Technologies and Musculoskeletal Solutions products are an attractive alternative toexisting surgical treatments of musculoskeletal disorders.Surgeons play a significant role in determining the course of treatment and, ultimately, the type of product that will be used totreat a patient, so we rely on effectively marketing to them. Hospitals, however, are increasingly involved in the evaluation of productsand product purchasing decisions. In order for us to sell our products, we must convince surgeons and hospitals that our products areattractive alternatives to competing products for use in procedures. Acceptance of our products depends on educating surgeons andhospitals as to the distinctive characteristics, perceived benefits, safety and cost-effectiveness of our products as compared to ourcompetitors’ products and on training surgeons in the proper application of our products. If we are not successful in convincingsurgeons and hospitals of the merit of our products or educating them on the use of our products, they may not use our products andwe will be unable to increase our sales and sustain growth or profitability.Furthermore, we believe surgeons will not widely adopt certain of our most novel Musculoskeletal Solutions or EnablingTechnologies products unless they determine, based on experience, clinical data and published peer-reviewed journal articles, that MIStechniques, our motion preservation, regenerative biologics, and INR technologies provide benefits or are an attractive alternative toconventional treatments of musculoskeletal disorders and incorporate improved technologies that permit novel surgical procedures.Surgeons, and in certain instances, hospitals, may be hesitant to change their medical treatment practices or the productsavailable for use to treat patients for the following reasons, among others:•lack of experience with MIS, motion preservation, regenerative biologics or INR technologies;•lack or perceived lack of evidence supporting additional patient benefits;•perceived liability risks generally associated with the use of new products and procedures;•limited or lack of availability of coverage and reimbursement within healthcare payment systems;•costs associated with the purchase of new products and equipment; and•the time commitment that may be required for training.If we are unable to convince surgeons and hospitals to use our products, we will not achieve expected sales or sustain ourgrowth, and our financial condition and results of operation may be adversely affected.In addition, we believe recommendations and support of our products by influential surgeons are essential for marketacceptance and adoption. If we do not receive support from such surgeons or long-term data does not show the benefits of using ourproducts, surgeons may not use our products. In such circumstances, we may not achieve expected sales or sustain our growth andmay be unable to maintain profitability.21Table of ContentsPricing pressure from our competitors and our customers may impact our ability to sell our products at prices necessary to supportour current business strategies.The musculoskeletal devices industry is characterized by intense competition and continues to attract numerous new companiesand technologies, which has encouraged more established companies to intensify competitive pricing pressure. As a result of thisincreased competition, as well as the challenges of third-party coverage and reimbursement practices, we believe there will becontinued pricing pressure in the future. If competitive forces drive down the prices we are able to charge for our products, our profitmargins will shrink, which will adversely affect our ability to maintain our profitability and to invest in and grow our business.If our hospital and other healthcare provider customers are unable to obtain adequate coverage and reimbursement for theirpurchases of our Musculoskeletal Solutions products, we may not be able to sell our Musculoskeletal Solutions products at pricesnecessary to maintain our profitability or at all.Maintaining and growing sales of our products depends on the availability of adequate coverage and reimbursement from thirdparty payors, including government programs such as Medicare and Medicaid, private insurance plans and managed care programs.Hospitals and other healthcare providers that purchase our Musculoskeletal Solutions products generally rely on third party payors tocover all or part of the costs associated with the procedures performed with these products, including the cost to purchase the product.Our customers’ access to adequate coverage and reimbursement for the procedures performed with our Musculoskeletal Solutionsproducts by government and private insurance plans is central to the acceptance of our current and future products. We may be unableto sell our Musculoskeletal Solutions products on a profitable basis, or at all, if third party payors deny coverage or reduce their currentlevels of payment. If our cost of production increases faster than increases in reimbursement levels for the Musculoskeletal Solutionsproducts, our profitability may be negatively impacted.Future action by CMS (which administers the Medicare program), other government agencies or private payors, may diminishpayments to physicians, outpatient surgery centers and/or hospitals, which could harm our ability to market and sell our products.Private payors may adopt coverage decisions and payment amounts determined by CMS as guidelines in setting their coverage andreimbursement policies. Private payors that do not follow the Medicare guidelines may adopt different coverage and reimbursementpolicies for procedures performed with our products. In addition, for governmental programs, such as Medicaid, coverage andreimbursement differs from state to state. Medicaid payments to physicians and facilities are often lower than payments by other thirdparty payors and some state Medicaid programs may not pay an adequate amount for the procedures performed with our products, ifany payment is made at all. Furthermore, the healthcare industry in the United States has experienced a trend toward cost containmentas government and private insurers seek to control rising healthcare costs by imposing lower payment rates and negotiating reducedcontract rates with service providers.Third party payors, including public and private payors, may develop negative coverage policies impacting ourMusculoskeletal Solutions products. For example, Aetna changed its medical policy from coverage in all or most cases to coverageonly for limited indications for biomechanical devices (e.g., spine cages) for cervical fusion procedures, stating that they have not beenproven more effective than bone graft for cervical fusions, which may limit demand for our products. In addition, some payors havechanged their coverage policies to be more restrictive as to the criteria under which they will cover and reimburse for vertebral fusionsin the lumbar spine to treat multilevel degenerative disc disease (“DDD”), initial primary laminectomy/discectomy for nerve rootdecompression, or spinal stenosis. Although these coverage policy changes have not had a material impact on our business, otherinsurers may adopt similar coverage decisions in the future. Patients covered by these insurers may be unwilling or unable to affordlumbar fusion surgeries to treat these conditions, which could materially harm or limit our ability to sell our Musculoskeletal Solutionsproducts designed for lumbar fusion procedures. Our22Table of Contentsbusiness would be negatively impacted if the trend by governmental agencies or third party payors continues to reduce coverage ofand/or reimbursement for procedures using our Musculoskeletal Solutions products.We cannot be certain that under current and future payment systems, such as those utilized by Medicare and in many privatemanaged care systems, the cost of our Musculoskeletal Solutions products will be adequately incorporated into the overall cost of theprocedure. Therefore, we cannot be certain that the procedures performed with our Musculoskeletal Solutions products will bereimbursed at a sufficiently profitable level, or at all.To the extent we sell our Musculoskeletal Solutions products internationally, market acceptance may depend, in part, upon theavailability of coverage and reimbursement within prevailing healthcare payment systems. Reimbursement and healthcare paymentsystems in international markets vary significantly by country, and include both government-sponsored healthcare and privateinsurance. Our Musculoskeletal Solutions products may not obtain international coverage and reimbursement approvals in a timelymanner, if at all. Our failure to receive such approvals would negatively impact market acceptance of our products in the internationalmarkets in which those approvals are sought.If we are unable to maintain and expand our network of direct sales representatives and independent distributors, we may not beable to generate anticipated sales.Our operating results are directly dependent upon the sales and marketing efforts of not only our employees, but also ourindependent distributors. We expect our direct sales representatives and independent distributors to develop long-lasting relationshipswith the surgeons they serve. If our direct sales representatives or independent distributors fail to adequately promote, market and sellour products, our sales could significantly decrease.We face significant challenges and risks in managing our geographically dispersed distribution network and retaining theindividuals who make up that network. If any of our direct sales representatives were to leave us, or if any of our independentdistributors were to cease to do business with us, our sales could be adversely affected. Some of our independent distributors accountfor a significant portion of our sales volume, and if any such independent distributor were to cease to distribute our products, our salescould be adversely affected. In such a situation, we may need to seek alternative independent distributors or increase our reliance onour direct sales representatives, which may not prevent our sales from being adversely affected. If a direct sales representative orindependent distributor were to depart and be retained by one of our competitors, we may be unable to prevent them from helpingcompetitors solicit business from our existing customers, which could further adversely affect our sales. Because of the intensecompetition for their services, we may be unable to recruit or retain additional qualified independent distributors or to hire additionaldirect sales representatives to work with us. We may not be able to enter into agreements with them on favorable or commerciallyreasonable terms, if at all. Failure to hire or retain qualified direct sales representatives or independent distributors would prevent usfrom maintaining or expanding our business and generating sales.As we launch new products and increase our marketing efforts with respect to existing products, we will need to expand thereach of our marketing and sales networks. Our future success will depend largely on our ability to continue to hire, train, retain andmotivate skilled direct sales representatives and independent distributors with significant technical knowledge in various areas. Newhires require training and take time to achieve full productivity. If we fail to train new hires adequately, or if we experience highturnover in our sales force in the future, we cannot be certain that new hires will become as productive as may be necessary to maintainor increase our sales.If we are unable to expand our sales and marketing capabilities domestically and internationally, we may not be able toeffectively commercialize our products, which would adversely affect our business, results of operations and financial condition.23Table of ContentsWe operate in a very competitive business environment and if we are unable to compete successfully against our existing orpotential competitors, our sales and operating results may be negatively affected and we may not grow.Our industry is intensely competitive, subject to rapid change and highly sensitive to the introduction of new products or othermarket activities of industry participants. We believe that our significant competitors are Medtronic, DePuy Synthes, Stryker, ZimmerBiomet, Smith and Nephew, and NuVasive. Wright Medical Group, Orthofix International, Integra, and other smaller public andprivate companies are also competitors of ours. At any time, these or other industry participants may develop alternative treatments,products or procedures for the treatment of musculoskeletal disorders that compete directly or indirectly with our products. They mayalso develop and patent processes or products earlier than we can or obtain regulatory clearance or approvals for competing productsmore rapidly than we can, which could impair our ability to develop and commercialize similar processes or products. If alternativetreatments are, or are perceived to be, superior to our musculoskeletal surgery products, sales of our products could be negativelyaffected and our results of operations could suffer.Many of our current and potential competitors are major medical device companies that have substantially greater financial,technical and marketing resources than we do, and they may succeed in developing products that would render our products obsoleteor noncompetitive.Many of our larger competitors enjoy several competitive advantages over us, including:•greater financial, human and other resources for product research and development, sales and marketing and litigation;•significantly greater name recognition;•established relationships with surgeons, hospitals and other healthcare providers;•large and established sales and marketing and distribution networks;•products supported by long-term clinical data;•greater experience in obtaining and maintaining regulatory clearances or approvals for products and product enhancements;•more expansive portfolios of intellectual property rights; and•greater ability to cross-sell their products or to incentivize hospitals or surgeons to use their products.The frequent introduction by competitors of products that compete with our existing or planned products may also make itdifficult to market or sell our products. In addition, the entry of multiple new products and competitors, including physician-owneddistributorships (“PODs”), may lead some of our competitors to employ pricing strategies that could adversely affect the pricing of ourproducts and pricing in the musculoskeletal implant and device market generally.As a result, our ability to compete successfully will depend on our ability to develop proprietary products that reach the marketin a timely manner, receive adequate coverage and reimbursement from third-party payors, and are safer, less invasive and moreeffective than alternatives available for similar purposes. If we are unable to do so, our sales or margins could decrease, therebyharming our business.We are dependent on a limited number of third-party suppliers for our Musculoskeletal Solutions products and components used inour Enabling Technologies products, and the loss of any of these suppliers, or their inability to provide us with an adequate supplyof materials, could harm our business.We rely on third-party suppliers to supply many of our Musculoskeletal Solutions products and the components used in ourEnabling Technologies products. For us to be successful, our suppliers must be able to provide us with products and components insubstantial quantities, in compliance with regulatory requirements, in accordance with agreed upon specifications, at acceptable costsand on a timely basis. Our anticipated growth24Table of Contentscould strain the ability of our suppliers to deliver an increasingly large supply of products, materials and components. Other issues,including shortages of raw materials or components, problems with production yields and quality control and assurance, especiallywith products such as allograft, which is processed human tissue, could impair a supplier’s ability to supply us with product quantitiesnecessary to support our sales. Furthermore, under our supplier agreements, our suppliers generally have no obligation to manufacturefor us or sell to us any specific quantity of products. If we are unable to obtain sufficient quantities of high quality components to meetdemand on a timely basis, we could lose customers, our reputation may be harmed and our business could suffer.We generally use a small number of suppliers for each of our products and components. Our dependence on such a limitednumber of suppliers exposes us to risks, including limited control over pricing, availability, quality and delivery schedules. If any oneor more of our suppliers cease to provide us with sufficient quantities of manufactured products in a timely manner or on termsacceptable to us, or cease to manufacture components of acceptable quality, we would have to seek alternative sources of supply.Because of the nature of our internal quality control requirements, regulatory requirements and the custom and proprietary nature of theparts, we cannot quickly engage additional or replacement suppliers for many of our critical components. Failure of any of our third-party suppliers to deliver products at the level our business requires would limit our ability to meet our sales commitments to ourcustomers and could have a material adverse effect on our business. We may also have difficulty obtaining similar components fromother suppliers that are acceptable to the FDA or other foreign regulatory authorities. We could incur delays while we locate andengage qualified alternative suppliers, and we may be unable to engage alternative suppliers on favorable terms or at all. Any suchdisruption or increased expenses could harm our commercialization efforts and adversely affect our ability to generate sales.If we do not successfully implement our business strategy, our business and results of operations will be adversely affected.Our business strategy was formed based on assumptions that might prove wrong. We believe that various demographics andindustry-specific trends will help drive growth in our markets and our business, but these demographics and trends are uncertain.Actual demand for our products could differ materially from projected demand if our assumptions regarding these factors prove to beincorrect or do not materialize, or if alternative treatments to those offered by our products gain widespread acceptance.We may not be able to successfully implement our business strategy. To implement our business strategy, we need to, amongother things, strengthen our brand, develop and introduce new musculoskeletal surgery products, find new applications for andimprove our existing products, obtain regulatory clearance or approval for new products and applications and educate surgeons aboutthe clinical and cost benefits of our products, all of which we believe could increase acceptance of our products by surgeons. Ourstrategy of focusing exclusively on the medical devices market may limit our ability to grow. In addition, we are seeking to increaseour sales and, in order to do so, will need to commercialize additional products and expand our direct and distributor sales forces inexisting and new territories, all of which could result in our becoming subject to additional or different foreign and domestic regulatoryrequirements, with which we may not be able to comply. Moreover, even if we successfully implement our business strategy, ouroperating results may not improve or may decline. We may decide to alter or discontinue aspects of our business strategy and mayadopt different strategies due to business or competitive factors not currently foreseen, such as new medical technologies that wouldmake our products obsolete. Any failure to implement our business strategy may adversely affect our business, results of operationsand financial condition.The proliferation of PODs could result in increased pricing pressure on our products or harm our ability to sell our products tophysicians who own or are affiliated with those distributorships.PODs are medical device distributors that are owned, directly or indirectly, by physicians. These physicians derive a proportionof their revenue from selling or arranging for the sale of medical devices for use in procedures25Table of Contentsthey perform on their own patients at hospitals that agree to purchase from or through the POD, or that otherwise furnish orderingphysicians with income that is based directly or indirectly on those orders of medical devices.We do not sell or distribute any of our products through PODs. The number of PODs may continue to grow as economicpressures increase throughout the industry, as hospitals, insurers and physicians search for ways to reduce costs, and, in the case of thephysicians, search for ways to increase their incomes. These companies and the physicians who own, or partially own, them havesignificant market knowledge and access to the surgeons who use our products and the hospitals that purchase our products, andgrowth in this area may reduce our ability to compete effectively for business from surgeons who own such distributorships.Our business could suffer if we lose the services of key members of our senior management, key advisors or personnel.We are dependent upon the continued services of key members of our senior management and a limited number of keyadvisors and personnel. In particular, we are highly dependent on the skills and leadership of our Executive Chairman, David C. Paul,and our Chief Executive Officer, David M. Demski. The loss of any one of these individuals could disrupt our operations or ourstrategic plans. Additionally, our future success will depend on, among other things, our ability to continue to hire and retain thenecessary qualified scientific, technical and managerial personnel, for whom we compete with numerous other companies, academicinstitutions and organizations. The loss of members of our management team, key advisors or personnel, or our inability to attract orretain other qualified personnel or advisors, could have a material adverse effect on our business, results of operations and financialcondition. Though members of our sales force generally enter into noncompetition agreements that restrict their ability to compete withus, most of the members of our executive management team are not subject to such agreements. Accordingly, the adverse effectresulting from the loss of certain executives could be compounded by our inability to prevent them from competing with us.The safety and efficacy of our products is not yet supported by long-term clinical data, which could limit sales, and our productsmight therefore prove to be less safe and effective than initially thought.All of the products we currently market in the United States, other than our SECURE®-C cervical disc, have either receivedpre-market clearance under Section 510(k) of the Federal Food, Drug, and Cosmetic Act (“FDCA”) or are exempt from pre-marketreview. The FDA's 510(k) clearance process requires us to show that our proposed product is “substantially equivalent” to another510(k)-cleared product. This process is shorter and typically requires the submission of less supporting documentation than other FDAapproval processes and does not always require long-term clinical studies. Additionally, to date, we have not been required to completelong-term clinical studies in connection with the sale of our products outside the United States, except our SECURE®-C device whichwas prospectively studied through seven-year postoperative clinical study as part of the Post-Market Approval (PMA) process. As aresult, we currently lack the breadth of published long-term clinical data supporting the safety and efficacy of virtually all of ourproducts and the benefits they offer that might have been generated in connection with other approval processes. For these reasons,surgeons may be slow to adopt our products, we may not have comparative data that our competitors have or are generating, and wemay be subject to greater regulatory and product liability risks. Further, future patient studies or clinical experience may indicate thattreatment with our products does not improve patient outcomes. Such results would slow the adoption of our products by surgeons,significantly reduce our ability to achieve expected sales, and could prevent us from sustaining our profitability.Moreover, if future results and experience indicate that our products cause unexpected or serious complications or otherunforeseen negative effects, we could be subject to mandatory product recalls, product seizures, suspension or withdrawal of FDAclearance or approval, and significant legal liability or harm to our business reputation.26Table of ContentsIf we do not enhance our existing product offerings and introduce new products through our research and development andproduct development efforts, we may be unable to effectively compete.In order to increase our market share, we must enhance and broaden our product offerings in response to changing customerdemands and competitive pressures and technologies. The success of any new product offering or enhancement to an existing productwill depend on numerous factors, including our ability to:•properly identify and anticipate surgeon and patient needs;•develop and introduce new products or product enhancements in a timely manner;•adequately protect our intellectual property and avoid infringing upon the intellectual property rights of third parties;•demonstrate the safety and efficacy of new products; and•obtain the necessary regulatory clearances or approvals for new products or product enhancements.If we do not develop and obtain regulatory clearance or approval for new products or product enhancements in time to meetmarket demand, or if there is insufficient demand for these products or enhancements, our results of operations will suffer. Ourresearch and development and product development efforts may require a substantial investment of time and resources before we areadequately able to determine the commercial viability of a new product, technology, material or other innovation. In addition, even ifwe are able to successfully develop enhancements or new generations of our products, these enhancements or new generations ofproducts may not produce sales in excess of the costs of development and they may be quickly rendered obsolete by changingcustomer preferences or the introduction by our competitors of products embodying new technologies or features.We recently introduced the ExcelsiusGPS® platform as well as orthopedic trauma products. Prior to launching, we had noprior experience marketing these new products and we may launch new products in the future that we have no prior experiencemarketing. We will need to convince a new audience of surgeons and hospital personnel that our new products are attractivealternatives to competing products for use in applicable procedures. If we are not successful in convincing surgeons and hospitals ofthe merit of new products or educating them on their use, our sales and operating results may be negatively affected and we may notgrow as quickly as we anticipate.If we fail to properly manage our anticipated growth, our business could suffer.Our rapid growth has placed, and will continue to place, a significant strain on our management and on our operational andfinancial resources and systems. Failure to manage our growth effectively could cause us to over-invest or under-invest ininfrastructure, and result in losses or weaknesses in our infrastructure, which could materially adversely affect us. Additionally, ouranticipated growth will increase the demands placed on our suppliers, resulting in an increased need for us to carefully monitor forquality assurance. Any failure by us to manage our growth effectively could have an adverse effect on our ability to achieve ourdevelopment and commercialization goals.27Table of ContentsOur results of operations could suffer if we are unable to manage our planned international expansion effectively.Expansion into international markets is an element of our business strategy and involves risk. The sale and shipment of ourproducts across international borders, as well as the purchase of components and products from international sources, subject us toextensive U.S. and foreign governmental trade, import and export and customs regulations and laws. Compliance with theseregulations and laws is costly and exposes us to penalties for non-compliance. Other laws and regulations that can significantly affectus include various anti-bribery laws, including the FCPA and anti-boycott laws. Any failure to comply with applicable legal andregulatory obligations in the United States or abroad could adversely affect us in a variety of ways that include, but are not limited to,significant criminal, civil and administrative penalties, including imprisonment of individuals, fines and penalties, denial of exportprivileges, seizure of shipments and restrictions on certain business activities. Also, the failure to comply with applicable legal andregulatory obligations could result in the disruption of our distribution and sales activities.Our international operations expose us and our independent distributors to risks inherent in operating in foreign jurisdictions,including:•exposure to different legal and regulatory standards;•lack of stringent protection of intellectual property;•obstacles to obtaining domestic and foreign export, import and other governmental approvals, permits and licenses andcompliance with foreign laws;•potentially adverse tax consequences and the complexities of foreign value-added tax systems;•adverse changes in tariffs and trade restrictions;•foreign exchange rate risk;•limitations on the repatriation of earnings;•difficulties in staffing and managing foreign operations;•transportation delays and difficulties of managing international distribution channels;•longer collection periods and difficulties in collecting receivables from foreign entities;•increased financing costs; and•political, social and economic instability and increased security concerns.These risks may limit or disrupt our expansion, restrict the movement of funds or result in the deprivation of contractual rightsor the taking of property by nationalization or expropriation without fair compensation.Our goal of succeeding as an international company depends, in part, on our ability to develop and implement policies andstrategies that are effective in anticipating and managing these and other risks in the countries in which we do business. Failure tomanage these and other risks may have a material adverse effect on our operations in any particular country and on our business as awhole.We are subject to risks arising from currency exchange rate fluctuations on our international transactions and translation of localcurrency results into United States dollars, which could adversely affect our profitability.Our international operations account for approximately 17% of our total net sales, and we intend to continue to expand ourinternational presence. A significant portion of our foreign revenues and expenses are generated in Japan, the Euro zone, UnitedKingdom, Switzerland and Australia. As our reporting currency is the U.S. dollar, significant changes in currency exchange rates canresult in increased exposure to foreign exchange effects on our consolidated results of operations. We cannot predict changes incurrency exchange rates, the impact of exchange rate changes, nor the degree to which we will be able to manage the impact ofcurrency exchange rate changes.28Table of ContentsWe may seek to grow our business through acquisitions of or investments in new or complementary businesses, products ortechnologies, and the failure to manage acquisitions or investments, or the failure to integrate them with our existing business,could have a material adverse effect on us.From time to time we expect to consider opportunities to acquire or make investments in other technologies, products andbusinesses that may enhance our capabilities, complement our current products or expand the breadth of our markets or customer base.Potential and completed acquisitions and strategic investments involve numerous risks, including:•problems assimilating the purchased technologies, products or business operations;•issues maintaining uniform standards, procedures, controls and policies;•unanticipated costs associated with acquisitions;•diversion of management’s attention from our core business;•adverse effects on existing business relationships with suppliers and customers;•risks associated with entering new markets in which we have limited or no experience;•potential loss of key employees of acquired businesses; and•increased legal and accounting compliance costs.We do not know if we will be able to identify acquisitions we deem suitable, whether we will be able to successfully completeany such acquisitions on favorable terms or at all, or whether we will be able to successfully integrate any acquired business, productor technology into our business or retain any key personnel, suppliers or distributors. Our ability to successfully grow throughacquisitions depends upon our ability to identify, negotiate, complete and integrate suitable target businesses and to obtain anynecessary financing. These efforts could be expensive and time-consuming, and may disrupt our ongoing business and preventmanagement from focusing on our operations. If we are unable to integrate any acquired businesses, products or technologieseffectively, our business, results of operations and financial condition will be materially adversely affected.We are required to maintain high levels of inventory, which could consume a significant amount of our resources and reduce ourcash flows.As a result of the need to maintain substantial levels of inventory, we are subject to the risk of inventory obsolescence. Many ofour Musculoskeletal Solutions products come in sets, which feature components in a variety of sizes to satisfy the particular patient’sanatomical needs. In order to market our Musculoskeletal Solutions products effectively, we often must maintain implant setsconsisting of the full range of product sizes. For each surgery, fewer than all of the components of the set are used, and thereforecertain portions of the set, like uncommon sizes, may become obsolete before they can be used. In the event that a substantial portionof our inventory becomes obsolete, it could have a material adverse effect on our earnings and cash flows due to the resulting costsassociated with the inventory impairment charges and costs required to replace such inventory.We rely on information technology systems and network infrastructure to operate and manage our business, if we experience abreach, cyber-attack or other disruption to these systems or data, our business, results of operations and financial condition couldbe adversely affected.We are increasingly dependent on sophisticated information technology systems to operate our business, including to process,transmit and store sensitive data, and many of our products and services include or use integrated software and information technologythat may collect data regarding customers, patients, suppliers and third parties, or connects to our systems. Given the nature of ourbusiness, we also may maintain personally identifiable information (“PII”) or access to protected health information (“PHI”).Specifically, we rely on our information technology systems to effectively manage sales and marketing, accounting and financialfunctions, inventory management, engineering and product development tasks, and our research and development data. Our29Table of Contentsbusiness therefore depends on the continuous, effective, reliable, and secure operation of our computer hardware, software, networks,Internet servers, and related infrastructure.Although our computer and communications hardware is protected through physical and software safeguards, it is stillvulnerable to system malfunction, computer viruses, and cyber-attacks. These events could lead to the unauthorized access of ourinformation technology systems and result in the misappropriation or unauthorized disclosure of confidential information belonging tous, our employees, patients, partners, customers, or our suppliers. The techniques used by criminal elements to attack computer systemsare sophisticated, change frequently and may originate from less regulated and remote areas of the world. As a result, we may not beable to address these techniques proactively or implement adequate preventative measures. Additionally, the regulatory environmentgoverning information, security and privacy laws is increasingly demanding and continues to evolve. If our information technologysystems are compromised, we could be subject to fines, damages, litigation and enforcement actions and we could lose trade secrets orother confidential information, the occurrence of which could harm our reputation, business, results of operations and financialcondition.Our information systems, and those of third-parties with whom we contract, also require an ongoing commitment of significantresources to maintain, protect and enhance existing systems and develop new systems to keep pace with continuing changes ininformation technology. The failure of our information technology systems to perform as we anticipate or our failure to effectivelyimplement new systems could disrupt our operations and could result in decreased sales, increased overhead costs, excess inventoryand product shortages, all of which could have a material adverse effect on our reputation, business, results of operations and financialcondition.We are subject to data privacy laws and our failure to comply with them could subject us to substantial liabilities.Our business relies on the secure electronic transmission, storage and hosting of sensitive information, including personalinformation, PHI, financial information, intellectual property and other sensitive information related to our customers and workforce.The collection, maintenance, protection, use, transmission, disclosure and disposal of certain personal information and the security ofmedical devices are regulated at the U.S. federal and state, international and industry levels. U.S. federal and state laws, such as theHealth Insurance Portability and Accountability Act of 1996, protect the confidentiality of certain patient health information, includingpatient medical records, and restrict the use and disclosure of patient health information. In addition to the regulation of personal healthinformation, a number of states have also adopted laws and regulations that may affect our privacy and data security practices for otherkinds of PII, such as state laws that govern the use, disclosure and protection of sensitive personal information, such as social securitynumbers, or that are designed to protect credit card account data. State consumer protection laws may also establish privacy andsecurity standards for use and management of PII, including information related to customers, suppliers, and care providers.Outside the U.S., we are impacted by the privacy and data security requirements at the international, national and regionallevel, and on an industry specific basis. Legal requirements in the countries we serve relating to the collection, storage, handling andtransfer of personal data and potentially intellectual property continue to evolve with increasingly strict enforcement regimes. Moreprivacy and security laws and regulations are being adopted, and more are being enforced, with potential for significant financialpenalties. In the E.U., increasingly stringent data protection and privacy rules that will have substantial impact on the use of patient dataacross the healthcare industry became effective in May 2018. The E.U. General Data Protection Regulation (GDPR) applies uniformlyacross the E.U. and includes, among other things, a requirement for prompt notice of data breaches to data subjects and supervisoryauthorities in certain circumstances and significant fines for non-compliance. The GDPR also requires companies processing personaldata of individuals residing in the E.U. to comply with E.U. privacy and data protection rules.30Table of ContentsCompliance with these laws and regulations may require significant additional costs or changes in our business which couldadversely affect our results of operations or financial condition. Noncompliance with these laws and regulations could result in theimposition of fines and penalties or could result in significant civil and other liabilities.If we experience significant disruptions in our information technology systems, our business, results of operations and financialcondition could be adversely affected.The efficient operation of our business depends on our information technology systems. We rely on our information technologysystems to effectively manage:•sales and marketing, accounting and financial functions;•inventory management;•engineering and product development tasks; and•our research and development data.Our information technology systems are vulnerable to damage or interruption from:•earthquakes, fires, floods and other natural disasters;•terrorist attacks and attacks by computer viruses or hackers or other cybersecurity attacks or breaches;•power losses; and•computer systems, or Internet, telecommunications or data network failures.The failure of our information technology systems to perform as we anticipate or our failure to effectively implement newsystems could disrupt our entire operation and could result in decreased sales, increased overhead costs, excess inventory and productshortages, all of which could have a material adverse effect on our reputation, business, results of operations and financial condition.Consolidation in the healthcare industry could lead to demands for price concessions or to the exclusion of some suppliers fromcertain of our markets, which could have an adverse effect on our business, results of operations or financial condition.Because healthcare costs have risen significantly over the past decade, numerous initiatives and reforms initiated by legislators,regulators and third-party payors to curb these costs have resulted in a consolidation trend in the healthcare industry to aggregatepurchasing power. As the healthcare industry consolidates, competition to provide products and services to industry participants hasbecome and will continue to become more intense. This in turn has resulted and will likely continue to result in greater pricingpressures and the exclusion of certain suppliers from important market segments as group purchasing organizations, independentdelivery networks and large single accounts continue to use their market power to consolidate purchasing decisions for hospitals. Weexpect that market demand, government regulation, third-party coverage and reimbursement policies and societal pressures willcontinue to change the worldwide healthcare industry, resulting in further business consolidations and alliances among our customers,which may reduce competition, exert further downward pressure on the prices of our products and may adversely impact our business,results of operations or financial condition.Fluctuations in insurance cost and availability could adversely affect our profitability or our risk management profile.We hold a number of insurance policies, including product liability insurance, directors’ and officers’ liability insurance,property insurance, health insurance and workers’ compensation insurance. If the costs of maintaining adequate insurance coverageincrease significantly in the future, our operating results could be materially adversely affected. Likewise, if any of our currentinsurance coverage should become unavailable to us or become31Table of Contentseconomically impractical, we would be required to operate our business without indemnity from commercial insurance providers. If weoperate our business without insurance, we could be responsible for paying claims or judgments against us that would have otherwisebeen covered by insurance, which could adversely affect our results of operations or financial condition.If our Enabling Technologies products require significant amounts of service after sale or we receive a significant number ofwarranty claims, our costs may increase and our financial results may be adversely affected.Sales of certain of our Enabling Technologies products that are capital equipment typically include a warranty and maintenanceobligation on our part for services for a period of twelve months from the date the equipment is installed at a customer’s facility.Customers may also purchase a supplemental service plan for technical and other services for any required service beyond the initialwarranty and service period. If product warranty claims or required service under the service plans exceed our expectations, we mayincur additional expenditures for parts and service. In addition, our reputation could be damaged and our products may not achievemarket acceptance and could result in reductions in sales.We are exposed to the credit risk of some of our customers, which could result in material losses.Our business is subject to the risk of nonpayment by our customers. We sell our Enabling Technologies products throughvarious credit and installment payment arrangements. We may experience loss from a customer’s failure to make payments accordingto the contractual terms.Although we have systems in place to monitor and mitigate the associated risk, there can be no assurance that such systems willbe effective in reducing the credit risk relating to the sale of our Enabling Technologies products. If the level of credit losses weexperience in the future exceed our expectations, such losses could have a material adverse effect on our financial condition or resultsof operations.We experience long and variable capital sales cycles for our Enabling Technologies products, which may cause fluctuations in ourfinancial results.The sales and purchase order cycle of our Enabling Technologies capital equipment products, currently the ExcelsiusGPS®platform, is lengthy because they are major capital items and their purchase generally requires the approval of senior management ofhospitals, their parent organizations, purchasing groups, and government bodies, as applicable. In addition, sales to some of ourcustomers are subject to competitive bidding or public tender processes. These approval and bidding processes can be lengthy. Further,the introduction of new products could adversely impact our sales cycle as customers take additional time to assess the benefits andcosts of such products. As a result, it is difficult for us to predict the length of capital sales cycles and, therefore, the exact timing ofcapital sales.The above factors may contribute to fluctuations in our quarterly operating results. Because of these fluctuations, it is possiblethat in future periods our operating results will fall below the expectations of securities analysts or investors. If that happens, the marketprice of our stock would likely decrease.32Table of ContentsRisks Related to our Legal and Regulatory EnvironmentOur medical device products and operations are subject to extensive governmental regulation both in the United States and abroad,and our failure to comply with applicable requirements could cause our business to suffer.The medical device industry is regulated extensively by governmental authorities, principally the FDA and corresponding stateand foreign regulatory agencies. The FDA and other U.S. and foreign governmental agencies regulate, among other things, withrespect to medical devices:•design, development and manufacturing;•testing, labeling, content and language of instructions for use and storage;•clinical trials;•product safety;•marketing, sales and distribution;•pre-market clearance and approval;•record keeping procedures;•advertising and promotion;•recalls and field safety corrective actions;•post-market surveillance, including reporting of deaths or serious injuries and malfunctions that, if they were to recur, couldlead to death or serious injury;•post-market approval studies; and•product import and export.The regulations to which we are subject are complex and have tended to become more stringent over time; see “Item 1.Business; Government Regulation” above for a summary of certain regulations to which we are subject. Regulatory changes couldresult in restrictions on our ability to carry on or expand our operations, higher than anticipated costs or lower than anticipated sales.The processes by which 510(k) clearance, grant of a de novo classification request, or PMA approval is obtained can beexpensive and lengthy and require the payment of significant fees. The FDA’s 510(k) clearance process usually takes from three to 12months, but may last longer. The FDA’s goal is to review de novo classification requests within 120 to 150 days, but presently, lessthan 50 percent of the requests are reviewed in this time period and it often takes much longer. The process of obtaining a PMA ismuch costlier and more uncertain than the 510(k) clearance process and generally takes one to three years, or even longer, from thetime the application is submitted to the FDA until an approval is obtained. The process of obtaining regulatory clearances through the510(k) process, de novo classification, or approvals through the PMA process to market a medical device in the United States orinternationally can be costly and time-consuming, and we may not be able to obtain these clearances, grants of de novo classification,or approvals on a timely basis, if at all.In the United States, all of our currently commercialized medical device products, other than SECURE®-C have either receivedpre-market clearance under Section 510(k) of the FDCA or are exempt from pre-market review. If the FDA requires us to go through alengthier, more rigorous examination for future products or modifications to existing products than we had expected, our productintroductions or modifications could be delayed or canceled, which could cause our sales to decline and potentially harm our ability tocompete. In addition, if the FDA disagrees with our determination that a product we currently market is subject to an exemption frompre-market review, the FDA may require us to submit a 510(k), de novo, or PMA and may require us to cease distribution of theproduct and/or recall the product unless and until we obtain 510(k) or de novo clearance or PMA. Further, even with respect to thosefuture products where a PMA is not required, we cannot assure you that we will be able to obtain the 510(k) or de novo clearanceswith respect to those products. The FDA may also reclassify devices currently on the market from Class II to Class III, which couldresult in additional regulatory burden requiring submission and approval of a PMA prior to marketing, or could result in FDArescinding a 510(k) for a previously cleared device.33Table of ContentsThe FDA can delay, limit or deny clearance or approval of a device for many reasons, including:•we may not be able to demonstrate to the FDA’s satisfaction that our products are safe and effective for their intended uses;•the data from our pre-clinical studies and clinical trials may be insufficient to support clearance or approval, where required;and•the manufacturing process or facilities we use may not meet applicable requirements.In addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations,or take other actions which may prevent or delay approval or clearance of our products under development or impact our ability tomodify our currently approved or cleared products on a timely basis. It is also possible that, if we obtain new FDA regulatoryclearances or approvals, the clearances or approvals may contain limitations on the indicated uses or may prohibit certain uses whichmay impact the marketability of the product.Any delay in, or failure to receive or maintain, clearance or approval for our medical device products under development couldprevent us from generating revenue from these products or achieving profitability. Additionally, the FDA and other regulatoryauthorities have broad enforcement powers. Regulatory enforcement or inquiries, or other increased scrutiny on us, could dissuadesome surgeons from using our products and adversely affect our reputation and the perceived safety and efficacy of our products.In addition, even after we have obtained the proper regulatory approval to market a product, the FDA has the power to requireus to conduct postmarketing studies. For example, the FDA may issue a Section 522 Order to conduct postmarketing studies. Thesestudies can be very expensive and time-consuming to conduct. Failure to comply with those studies in a timely manner could result inthe revocation of the 510(k) clearance for the product that is subject to such a Section 522 Order and the recall or withdrawal of theproduct, which could prevent us from generating sales from that product in the United States.Similarly, we must comply with numerous international laws and regulations in order to market our products outside of theUnited States; see “Item 1. Business; Government Regulation; International” above for a summary of certain international lawsand regulations to which we are subject. As is the case in the United States, the applicable regulatory body may change its clearanceand approval policies, adopt additional regulations or revise existing regulations, or take other actions which may prevent or delayapproval or clearance of our products under development or impact our ability to modify our currently approved or cleared products ona timely basis. Any delay in, or failure to receive or maintain, clearance or approval for our products under development could preventus from generating revenue from these products or achieving profitability. Conducting clinical studies to obtain clinical data that mightbe required as part of the clinical evaluation process can be expensive and time-consuming. Additionally, the regulatory authoritieshave broad enforcement powers. Regulatory enforcement or inquiries, or other increased scrutiny on us, could dissuade some surgeonsfrom using our products and adversely affect the perceived safety and efficacy of our products and our reputation.Failure to comply with applicable regulations could jeopardize our ability to sell our products and result in enforcement actionssuch as:•warning letters;•fines;•injunctions;•civil penalties;•termination of distribution;•recalls or seizures of products;•delays in the introduction of products into the market;34Table of Contents•total or partial suspension of production;•refusal of the FDA or other regulator to grant future clearances or approvals;•withdrawals or suspensions of current clearances or approvals, resulting in prohibitions on sales of our products;•refusal to grant export approvals; and/or•in the most serious cases, criminal penalties.Any of these sanctions could result in higher than anticipated costs or lower than anticipated sales and have a material adverseeffect on our reputation, business, results of operations and financial condition.Modifications to our products may require new 510(k) or de novo clearances, PMAs or PMA supplements, or may require us tocease marketing or recall the modified products until clearances or approvals are obtained.Any modification to a 510(k)-cleared device that could significantly affect its safety or effectiveness or that would constitute amajor change in its intended use, requires a new 510(k) clearance or, possibly, a de novo petition or approval of a PMA. The FDArequires every manufacturer to make this determination in the first instance, but the FDA may review any manufacturer’s decision. TheFDA may not agree with our decisions regarding whether new clearances or approvals are necessary. We have modified some of our510(k)-cleared products, and have determined based on our review of the applicable FDA guidance that in certain instances new510(k) clearances or PMAs are not required. If the FDA disagrees with our determination and requires us to submit new 510(k)notifications, de novo petitions, PMAs or PMA supplements for modifications to our previously cleared products for which we haveconcluded that new clearances or approvals are unnecessary, we may be required to cease marketing or to recall the modified productuntil we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties.Our HCT/P products are subject to extensive government regulation and our failure to comply with these requirements couldcause our business to suffer.In the United States, we are marketing our human tissue products as Section 361 HCT/Ps, which are not subject to FDApremarket clearance or approval requirements. The FDA could disagree with our determination that our human tissue products areSection 361 HCT/Ps and could determine that these products are biologics requiring a biological license application approval ormedical devices requiring 510(k) or de novo clearance or PMA approval, or NDA (New Drug Application) approval. The FDA maythen require that we cease marketing our human tissue products and/or recall the products unless and until we receive the appropriateclearance or approval from the FDA.HCT/Ps also are subject to donor eligibility and screening, CGTP, product labeling, and postmarket reporting requirements. Ifwe or our suppliers fail to comply with these requirements, we could be subject to FDA enforcement action, including, for example,warning letters, fines, injunctions, product recalls or seizures, and, in the most serious cases, criminal penalties.We received an FDA warning letter on October 31, 2018 related to observed non-conformities to FDA’s HCT/P regulations.See “Item 1. Business; Government Regulation.”35Table of ContentsWe may fail to obtain or maintain foreign regulatory approvals to market our products in other countries.We currently market our products internationally and intend to expand our international marketing. International jurisdictionsrequire separate regulatory approvals and compliance with numerous and varying regulatory requirements. For example, we intend tocontinue to seek regulatory clearance to market our primary products in the EEA, Japan, Brazil, Canada and other key markets. Theapproval procedures vary among countries and may involve requirements for additional testing, and the time required to obtainapproval may differ from country to country and from that required to obtain FDA clearance or approval.Clearance or approval by the FDA does not ensure approval or certification by regulatory authorities in other countries orjurisdictions, and approval or certification by one foreign regulatory authority does not ensure approval or certification by regulatoryauthorities in other foreign countries or by the FDA. The foreign regulatory approval or certification process may include all of therisks associated with obtaining FDA clearance or approval. We may not obtain foreign regulatory approvals on a timely basis, if at all.We may not be able to file for regulatory approvals or certifications and may not receive necessary approvals to commercialize ourproducts in any market. If we fail to receive necessary approvals or certifications to commercialize our products in foreign jurisdictionson a timely basis, or at all, our business, results of operations and financial condition could be adversely affected.Additionally, in the EEA, we must inform the Notified Body that carried out the conformity assessment of the medical deviceswe market or sell in the EEA of any planned substantial changes to our quality system or changes to our devices which could affectcompliance with the essential requirements or the devices’ intended use. The Notified Body will then assess the changes and verifywhether they affect the products’ conformity. If the assessment is not favorable, it could prevent us from selling that product in theEEA, which could adversely impact our business and results of operations.We are subject to risks associated with our non-U.S. operations.The FCPA and similar worldwide anti-bribery laws in non-U.S. jurisdictions generally prohibit companies and theirintermediaries from making improper payments for the purpose of obtaining or retaining business. The FCPA also imposes accountingstandards and requirements on publicly traded U.S. corporations and their foreign affiliates, which are intended to prevent the diversionof corporate funds to the payment of bribes and other improper payments, and to prevent the establishment of “off books” slush fundsfrom which such improper payments can be made. Because of the predominance of government-sponsored healthcare systems aroundthe world, many of our customer relationships outside of the United States are with governmental entities and are therefore subject tosuch anti-bribery laws. Our internal control policies and procedures may not always protect us from reckless or criminal acts committedby our employees or agents. Violations of these laws, or allegations of such violations, could disrupt our operations, involve significantmanagement distraction and result in a material adverse effect on our business, results of operations and financial condition. We alsocould suffer severe penalties, including criminal and civil penalties, disgorgement and other remedial measures, including furtherchanges or enhancements to our procedures, policies and controls, as well as potential personnel changes and disciplinary actions.Furthermore, we are subject to the export controls and economic embargo rules and regulations of the United States, including,but not limited to, the Export Administration Regulations and trade sanctions against embargoed countries, which are administered bythe Office of Foreign Assets Control within the Department of the Treasury, as well as the laws and regulations administered by theDepartment of Commerce. These regulations limit our ability to market, sell, distribute or otherwise transfer our products or technologyto prohibited countries or persons. A determination that we have failed to comply, whether knowingly or inadvertently, may result insubstantial penalties, including fines and enforcement actions and civil and/or criminal sanctions, the disgorgement of profits and theimposition of a court-appointed monitor, as well as the denial of export privileges, and may have an adverse effect on our reputation.36Table of ContentsThese and other factors may have a material adverse effect on our international operations or on our business, results ofoperations and financial condition generally.If we or our suppliers fail to comply with the FDA’s good manufacturing practice regulations and similar internationalregulations, this could impair our ability to market our products in a cost-effective and timely manner.We and our third-party suppliers are required to comply with the FDA’s Quality System Regulation (“QSR”), which covers themethods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage andshipping of our products. In addition, suppliers and processors of allograft must comply with the CGTP, which govern the methodsused in and the facilities and controls used for the manufacture of human cell tissue and cellular and tissue-based products, record-keeping and the establishment of a quality program.The FDA audits compliance with the QSR and CGTP requirements through periodic announced and unannounced inspectionsof manufacturing and other facilities. The FDA may conduct inspections or audits at any time. If we or our suppliers have significantnon-compliance issues or if any corrective action plan that we or our suppliers propose in response to observed deficiencies is notsufficient, the FDA could take enforcement action, including any of the following sanctions:•untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;•customer notifications or repair, replacement, refunds, recall, detention or seizure of our products;•operating restrictions or partial suspension or total shutdown of production;•refusing or delaying our requests for 510(k) or de novo clearance or PMA of new products or modified products;•withdrawing 510(k) or de novo clearances or PMAs that have already been granted;•refusal to grant export approval for our products; or•criminal prosecution.Any of these sanctions could have a material adverse effect on our reputation, business, results of operations and financialcondition.Outside the United States, our products and operations are also often required to comply with standards set by industrialstandards bodies, such as the ISO. Foreign regulatory bodies may evaluate our products or the testing that our products undergo againstthese standards. The specific standards, types of evaluation and scope of review differ among foreign regulatory bodies. We intend tocomply with the standards enforced by such foreign regulatory bodies as needed to commercialize our products. If we fail toadequately comply with any of these standards, a foreign regulatory body may take adverse actions similar to those within the power ofthe FDA. Any such action may harm our reputation and business, and could have an adverse effect on our business, results ofoperations and financial condition.37Table of ContentsA recall of our products, either voluntarily or at the direction of the FDA or another governmental authority, or the discovery ofserious safety issues with our products, could have a significant adverse impact on us.The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in theevent of material deficiencies or defects in design or manufacture or in the event that a product poses an unacceptable risk to health.Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. Even if voluntary, theFDA requires that a medical device manufacturer report to the FDA any corrective action or removal of a device initiated to reduce arisk to health posed by the device. A government-mandated or voluntary recall by us or one of our distributors could occur as a resultof risk to health, component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any ofour products would divert managerial and financial resources and have an adverse effect on our reputation, results of operations andfinancial condition, which could impair our ability to produce our products in a cost-effective and timely manner in order to meet ourcustomers’ demands. We may also be required to bear other costs or take other actions that may have a negative impact on our futuresales and our ability to generate profits.In the EEA, we must comply with the EU Medical Device Vigilance System. Under this system, manufacturers are required totake Field Safety Corrective Actions (“FSCAs”) to reduce a risk of death or serious deterioration in the state of health associated withthe use of a medical device that is already placed on the market. A FSCA may include the recall, modification, exchange, destructionor retrofitting of the device.Any adverse event involving our products, whether in the United States or abroad, could result in future voluntary correctiveactions, such as recalls or customer notifications, or agency action, such as inspection, mandatory recall or other enforcement action.Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of ourtime and capital, distract management from operating our business and may harm our reputation and financial results.We may be subject to enforcement action if we engage in the off-label promotion of our products.Our promotional materials and training methods must comply with FDA and other applicable laws and regulations, includingthe prohibition of the promotion of off-label use. Physicians may use our products off-label, as the FDA does not restrict or regulate aphysician’s choice of treatment within the practice of medicine. However, if the FDA determines that our promotional effortsconstitutes promotion of an off-label use, it could request that we modify our training or promotional efforts or subject us to regulatoryor enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine and criminal penalties.It is also possible that other federal, state or foreign enforcement authorities, such as the Department of Justice (“DOJ”), might takeaction if they consider our promotional or training materials to constitute promotion of an unapproved/off-label use, which could resultin significant criminal and/or civil fines or penalties under other statutory authorities, such as laws prohibiting false claims forreimbursement (e.g., the False Claims Act). In that event, our reputation could be damaged and adoption of the products would beimpaired. Although our policy is to refrain from statements that could be considered off-label promotion of our products, the FDA oranother regulatory agency could disagree and conclude that we have engaged in off-label promotion. In addition, the off-label use ofour products may increase the risk of injury to patients, and, in turn, the risk of product liability claims. Product liability claims areexpensive to defend and could divert our management’s attention, result in substantial damage awards against us and harm ourreputation.Governmental regulation and limited sources and suppliers could restrict our procurement and use of tissue.In the United States, the procurement and transplantation of allograft bone tissue is subject to federal law pursuant to theNOTA, a criminal statute which prohibits the purchase and sale of human organs used in human transplantation, including bone andrelated tissue, for “valuable consideration.” NOTA permits reasonable payments38Table of Contentsassociated with the removal, transportation, processing, preservation, quality control, implantation and storage of human bone tissue.We provide services in all of these areas in the United States, with the exception of removal and implantation, and receive payments forall such services. We make payments to tissue banks for their services related to recovering allograft bone tissue on our behalf. IfNOTA is interpreted or enforced in a manner that prevents us from receiving payment for services we render or that prevents us frompaying tissue banks or certain of our clients for the services they render for us, our business could be materially adversely affected.We depend on a limited number of sources of human tissue for use in some of our regenerative biologics products and a limitednumber of entities to process the human tissue for use in those regenerative biologics products, and any failure to obtain tissue fromthese sources or to have the tissue processed by these entities for us in a timely manner will interfere with our ability to effectively meetdemand for our regenerative biologics products incorporating human tissue. Less than five third-party suppliers currently supply all ofour needs for allograft implants and products, other than those implants and products that we process ourselves. The processing ofhuman tissue into our regenerative biologics products is very labor-intensive and it is therefore difficult to maintain a steady supplystream. In addition, due to seasonal changes in mortality rates, some scarce tissues used in our regenerative biologics products are attimes in particularly short supply. We cannot be certain that our current supply of human tissue and allograft implants, plus anyadditional source that we identify in the future, will be sufficient to meet our needs. Our dependence on a small number of third-partysuppliers and the challenges we may face in obtaining adequate supplies of human tissue involve several risks, including limitedcontrol over pricing, availability, quality and delivery schedules. In addition, any interruption in the supply of any human tissuecomponent could materially harm our and our third-party suppliers’ ability to manufacture our regenerative biologics products until anew source of supply, if any, could be found. We may be unable to find a sufficient alternative supply channel in a reasonable timeperiod or on commercially reasonable terms, if at all, which would have a material adverse effect on our business, results of operationsand financial condition.Negative publicity concerning methods of tissue recovery and screening of donor tissue in our industry could reduce demand forour regenerative biologics products and impact the supply of available donor tissue.Media reports or other negative publicity concerning both alleged improper methods of tissue recovery from donors and diseasetransmission from donated tissue could limit widespread acceptance of some of our regenerative biologics products. Unfavorablereports of improper or illegal tissue recovery practices, both in the United States and internationally, as well as incidents of improperlyprocessed tissue leading to the transmission of disease, may broadly affect the rate of future tissue donation and market acceptance oftechnologies incorporating human tissue. In addition, such negative publicity could cause the families of potential donors to becomereluctant to agree to donate tissue to for-profit tissue processors. For example, the media has reported examples of alleged illegalharvesting of body parts from cadavers and resulting recalls conducted by certain companies selling human tissue based productsaffected by the alleged illegal harvesting. These reports and others could have a negative effect on our tissue regeneration business.We are subject to environmental laws and regulations that can impose significant costs and expose us to potential financialliabilities.The manufacture of certain of our products, including our allograft implants and products, and the handling of materials used inthe product testing process, including in our cadaveric laboratory, involve the controlled use of biological, hazardous and/or radioactivematerials and wastes. Our business and facilities and those of our suppliers are subject to foreign, federal, state and local laws andregulations relating to the protection of human health and the environment, including those governing the use, manufacture, storage,handling and disposal of, and exposure to, such materials and wastes. In addition, under some environmental laws and regulations, wecould be held responsible for costs relating to any contamination at our past or present facilities and at third-party waste disposal siteseven if such contamination was not caused by us. A failure to comply with current or future39Table of Contentsenvironmental laws and regulations could result in severe fines or penalties. Any such expenses or liability could have a significantnegative impact on our business, results of operations and financial condition.We or our suppliers may be the subject of claims for non-compliance with FDA regulations in connection with the processing,manufacturing or distribution of our proposed allograft or other regenerative biologics implants and products.Allegations may be made against us or against donor recovery groups or tissue banks, including those with which we have acontractual supplier relationship, claiming that the acquisition or processing of tissue for allograft implants and products or otherregenerative biologics products does not comply with applicable FDA regulations or other relevant statutes and regulations.Allegations like these could cause regulators or other authorities to take investigative or other action against us or our suppliers, orcould cause negative publicity for us or our industry generally. These actions or any negative publicity could cause us to incursubstantial costs, divert the attention of our management from our business and harm our reputation.We and our distributor sales representatives might be subject to claims for failing to comply with U.S. federal, state and foreignfraud and abuse laws, including anti-kickback laws and other anti-referral laws.There are numerous U.S. federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws andphysician self-referral laws. Our relationships with surgeons, hospitals and our independent distributors are subject to scrutiny underthese laws. Violations of these laws are punishable by criminal and civil sanctions, including, in some instances, imprisonment andexclusion from participation in federal and state healthcare programs, including the Medicare, Medicaid and Veterans Administrationhealth programs. Because of the broad and far-reaching nature of these laws, we may be required to alter or discontinue one or more ofour business practices to be in compliance with these laws.Healthcare fraud and abuse regulations are complex, and even minor irregularities can potentially give rise to claims that astatute or prohibition has been violated. Examples of laws that may affect our ability to operate include:•the Federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting,receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of anindividual for, or the purchase, order or recommendation of, any good or service for which payment may be made underfederal healthcare programs such as the Medicare and Medicaid programs;•federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causingto be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent;•the federal Health Insurance Portability and Accountability Act of 1996, which created federal criminal laws that prohibitexecuting a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;•the Federal Trade Commission Act and similar laws regulating advertisement and consumer protections;•the FCPA, which prohibits corrupt payments, gifts or transfers of value to foreign officials;•foreign and U.S. state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws whichmay apply to items or services reimbursed by any third-party payor, including commercial insurers; and•the Physician Payment Sunshine Act, which requires medical device companies to report all compensation, gifts andbenefits they have provided to certain healthcare professionals.40Table of ContentsPossible sanctions for violation of these laws include monetary fines, civil and criminal penalties, exclusion from Medicare andMedicaid programs and forfeiture of amounts collected in violation of such prohibitions. Any violations of these laws, or any actionagainst us for violation of these laws, even if we successfully defend against it, could result in a material adverse effect on ourreputation, business, results of operations and financial condition.We have entered into consulting, royalty and other agreements with surgeons, including some who make referrals to us. Inaddition, some of our referring surgeons own our stock, which they either purchased in an arm’s length transaction on terms identicalto those offered to non-referral sources or received from us as fair market value consideration for consulting services performed. Whilethese transactions were structured with the intention of complying with all applicable laws, including the federal ban on physician self-referrals, commonly known as the “Stark Law,” state anti-referral laws and other applicable anti-kickback laws, it is possible thatregulatory agencies may view these transactions as prohibited arrangements that must be restructured, or discontinued, or for which wecould be subject to other significant penalties. Regulators also could prohibit us from accepting payment for products ordered orrecommended by these surgeons. We would be materially and adversely affected if regulatory agencies interpret our financialrelationships with surgeons who order our products to be in violation of applicable laws and we were unable to comply with applicablelaws. This could subject us to monetary penalties for non-compliance, the cost of which could be substantial, or we may be unable toaccept referrals from such surgeons.To enforce compliance with the federal laws, the DOJ has increased its scrutiny of interactions between healthcare companiesand healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcareindustry. Dealing with investigations can be time- and resource-consuming and can divert management’s attention from the business.Additionally, if an investigation were initiated involving us and we decided to settle that investigation with the DOJ or other lawenforcement agencies, we may be forced to agree to additional onerous compliance and reporting requirements as part of a consentdecree or corporate integrity agreement. Any such investigation or settlement could increase our costs or otherwise have an adverseeffect on our business, financial condition and results of operations.In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians formarketing. Some states, such as California, Massachusetts and Vermont, mandate implementation of commercial compliance programs,along with the tracking and reporting of gifts, compensation and other remuneration to physicians. The shifting commercial complianceenvironment and the need to build and maintain robust and expandable systems to comply with different compliance and/or reportingrequirements in multiple jurisdictions increase the possibility that a healthcare company may run afoul of one or more of therequirements.The scope and enforcement of these laws is uncertain and subject to rapid change in the current environment of healthcarereform, especially in light of the lack of applicable precedent and regulations. Federal or state regulatory authorities might challenge ourcurrent or future activities under these laws. Any such challenge could have a material adverse effect on our reputation, business,results of operations and financial condition. In addition to the penalties described above, any state or federal regulatory review of us,regardless of the outcome, would be costly and time-consuming and could have a material adverse effect on our business, financialcondition and results of operations.Risks Related to our Financial Results and Need for FinancingWe will need to generate significant sales to remain profitable.We intend to increase our operating expenses substantially as we add sales representatives and distributors to increase ourgeographic sales coverage, submit additional investigational device exemption (“IDE”) applications to the FDA, increase ourmarketing capabilities, conduct clinical trials and increase our general and administrative functions to support our growing operations.We will need to generate significant sales to maintain profitability41Table of Contentsand we might not be able to do so. Even if we do generate significant sales, we might not be able to sustain or increase profitability ona quarterly or annual basis in the future. If our sales grow more slowly than we anticipate or if our operating expenses exceed ourexpectations, our business, financial condition and results of operations will likely be adversely affected.We may be unable to grow our revenue or earnings as anticipated, which may have a material adverse effect on our results ofoperations.We have experienced rapid growth since our inception and have increased our revenues to $713.0 million in 2018. Our abilityto achieve future growth will depend upon, among other things, the success of our growth strategies, which we cannot assure will besuccessful. In addition, we may have more difficulty maintaining our historical or prior rate of growth of revenues, profitability or cashflows. Our future success will depend upon numerous factors, including the strength of our brand, the market success of our currentand future products, competitive conditions, our ability to attract and retain our employees and our ability to manage our business andimplement our growth strategy. If we are unable to achieve future growth, our business, financial condition and results of operationscould be adversely affected. In addition, we anticipate significantly expanding our infrastructure and adding personnel in connectionwith our anticipated growth, which we expect will cause our selling, general and administrative expenses to increase, which couldadversely impact our results of operations.Our quarterly and annual operating results may fluctuate significantly.Our operating results are difficult to predict and may be subject to periodic fluctuations. Our sales and results of operations willbe affected by numerous factors, including:•our ability to drive increased sales of our products;•our ability to establish and maintain an effective and dedicated sales force;•pricing pressure applicable to our products, including adverse third-party coverage and reimbursement outcomes;•results of clinical research and trials on our existing products and products in development;•the mix of our products sold because profit margins differ amongst our products;•timing of new product offerings, acquisitions, licenses or other significant events by us or our competitors;•the ability of our suppliers to timely provide us with an adequate supply of materials and components;•the evolving product offerings of our competitors;•regulatory approvals and legislative changes affecting the products we may offer or those of our competitors;•interruption in the manufacturing or distribution of our products;•the effect of competing technological, industry and market developments;•changes in our ability to obtain regulatory clearance or approval for our products; and•our ability to expand the geographic reach of our sales and marketing efforts.Many of the products we may seek to develop and introduce in the future will require FDA approval or clearance beforecommercialization in the United States, and commercialization of such products outside of the United States would likely requireadditional regulatory approvals and import licenses. As a result, it will be difficult for us to forecast demand for these products with anydegree of certainty. In addition, we will be increasing our operating expenses as we expand our commercial capabilities. Accordingly,we may experience significant, unanticipated quarterly or annual losses. If our quarterly or annual operating results fall below theexpectations of investors or securities analysts, the price of our Class A common stock could decline substantially. Furthermore, anyquarterly or annual fluctuations in our operating results may, in turn, cause the price of our Class A common stock to fluctuatesubstantially. We believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be reliedupon as an indication of our future performance.42Table of ContentsThe availability of funding under existing credit arrangements might be limited, and our cash and cash equivalents are subject tovolatility.Any lender that is obligated to provide funding to us under any now existing or future credit agreement with us may not be ableto provide funding in a timely manner, or at all, when we require it. The cost of, or lack of, available credit or equity financing couldimpact our ability to develop sufficient liquidity to maintain or grow our company, which in turn may adversely affect our business,results of operations or financial condition. We also manage cash and cash equivalents and short-term investments through variousinstitutions. There may be a risk of loss on investments based on the volatility of the underlying instruments that will prevent us fromrecovering the full principal of our investments. Negative changes in domestic and global economic conditions or disruptions of eitheror both of the financial and credit markets may also affect third-party payors and may have a material adverse effect on our stock price,business, results of operations, financial condition and liquidity.Our future capital needs are uncertain and we may need to raise funds in the future, and such funds may not be available onacceptable terms or at all.Continued expansion of our business will be expensive and we may seek funds from public and private stock offerings,borrowings under our existing or future credit facilities or other sources. Our capital requirements will depend on many factors,including:•the revenues generated by sales of our products;•the costs associated with expanding our sales and marketing efforts;•the expenses we incur in manufacturing and selling our products;•the costs of developing and commercializing new products or technologies;•the cost of obtaining and maintaining regulatory approval or clearance of our products and products in development;•the number and timing of acquisitions and other strategic transactions;•the costs associated with our planned international expansion;•the costs associated with increased capital expenditures, including fixed asset purchases of instrument sets which we loan tohospitals to support surgeries; and•unanticipated general and administrative expenses.As a result of these factors, we may seek to raise capital, and such capital may not be available on favorable terms, or at all.Furthermore, if we issue equity or debt securities to raise capital, our existing stockholders may experience dilution, and the new equityor debt securities may have rights, preferences and privileges senior to those of our existing stockholders. In addition, if we raise capitalthrough collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to our products,potential products or proprietary technologies, or grant licenses on terms that are not favorable to us. If we cannot raise capital onacceptable terms, we may not be able to develop or enhance our products, execute our business plan, take advantage of futureopportunities, or respond to competitive pressures, changes in our supplier relationships, or unanticipated customer requirements. Anyof these events could adversely affect our ability to achieve our development and commercialization goals, which could have a materialadverse effect on our business, results of operations and financial condition.Our existing revolving credit facility contains restrictive covenants that may limit our operating flexibility.Our existing revolving credit facility contains certain restrictive covenants that limit our ability to transfer or dispose of assets,merge with other companies or consummate certain changes of control, acquire other companies, pay dividends, incur additionalindebtedness and liens, experience changes in management and enter into new businesses. We therefore may not be able to engage inany of the foregoing transactions unless we obtain the consent of the lender or terminate the revolving credit facility. There is noguarantee that we will be able to43Table of Contentsgenerate sufficient cash flow or sales to meet the financial covenants or pay the principal and interest on any such debt. Furthermore,there is no guarantee that future working capital, borrowings or equity financing will be available to repay or refinance any such debt.Risks Related to our Intellectual Property and Potential LitigationOur ability to protect our intellectual property and proprietary technology is uncertain.We rely primarily on patent, copyright, trademark and trade secret laws, as well as confidentiality and non-disclosureagreements and other methods, to protect our proprietary technologies and know-how. We have applied for patent protection relatingto certain existing and proposed products and processes. While we generally apply for patents in those countries where we intend tomake, have made, use or sell patented products, we may not accurately predict all of the countries where patent protection willultimately be desirable. If we fail to timely file a patent application in any such country, we may be precluded from doing so at a laterdate. Furthermore, we cannot assure you that any of our patent applications will be approved. The rights granted to us under ourpatents, including prospective rights sought in our pending patent applications, may not be meaningful or provide us with anycommercial advantage and they could be opposed, contested or circumvented by our competitors or be declared invalid orunenforceable in judicial or administrative proceedings. The failure of our patents to adequately protect our technology might make iteasier for our competitors to offer the same or similar products or technologies. Competitors may be able to design around our patentsor develop products that provide outcomes which are comparable to ours without infringing on our intellectual property rights. Wehave entered into confidentiality agreements and intellectual property assignment agreements with our officers, employees, consultantsand advisors regarding our intellectual property and proprietary technology. In the event of unauthorized use or disclosure or otherbreaches of such agreements, we may not be provided with meaningful protection for our trade secrets or other proprietary information.Due to differences between foreign and U.S. patent laws, our patented intellectual property rights may not receive the same degree ofprotection in foreign countries as they would in the United States. Even if patents are granted outside the United States, effectiveenforcement in those countries may not be available. Since most of our issued patents and pending patent applications are for theUnited States only, we lack a corresponding scope of patent protection in other countries. In countries where we do not havesignificant patent protection, we may not be able to stop a competitor from marketing products in such countries that are the same as orsimilar to our products.We rely on our trademarks, trade names and brand names to distinguish our products from the products of our competitors, andhave registered or applied to register many of these trademarks. We cannot assure you that our trademark applications will beapproved. Third parties may also oppose our trademark applications, or otherwise challenge our use of the trademarks. In the event thatour trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brandrecognition, and could require us to devote resources to advertising and marketing new brands. Further, we cannot assure you thatcompetitors will not infringe upon our trademarks, or that we will have adequate resources to enforce our trademarks.If a competitor infringes upon one of our patents, trademarks or other intellectual property rights, enforcing those patents,trademarks and other rights may be difficult and time consuming. Even if successful, litigation to defend our patents and trademarksagainst challenges or to enforce our intellectual property rights could be expensive and time consuming and could divert management’sattention from managing our business. Moreover, we may not have sufficient resources or desire to defend our patents or trademarksagainst challenges or to enforce our intellectual property rights.44Table of ContentsThe medical device industry is characterized by patent litigation and we could become subject to litigation that could be costly,result in the diversion of management’s time and efforts, require us to pay damages, and/or prevent us from marketing our existingor future products.Our commercial success will depend in part on not infringing the patents or violating the other proprietary rights of third parties.Significant litigation regarding patent rights exists in our industry. Our competitors in both the United States and abroad, many ofwhich have substantially greater resources and have made substantial investments in competing technologies, may have applied for orobtained or may in the future apply for and obtain, patents that will prevent, limit or otherwise interfere with our ability to make andsell our products. We have not conducted an independent review of patents issued to third parties. The large number of patents, therapid rate of new patent issuances, the complexities of the technology involved and uncertainty of litigation increase the risk ofbusiness assets and management’s attention being diverted to patent litigation. We have received in the past, and expect to receive inthe future, communications from various industry participants alleging our infringement of their patents, trade secrets or otherintellectual property rights and/or offering licenses to such intellectual property. We are currently subject to lawsuits, and have receivedother written allegations, claiming that we have infringed certain patents of others in the spine industry. A summary of these cases isprovided under “Item 3. Legal Proceedings” below. Any lawsuits resulting from such allegations could subject us to significantliability for damages, and invalidate our proprietary rights. Any potential intellectual property litigation also could force us to do one ormore of the following:•stop selling products or using technology that contains the allegedly infringing intellectual property;•lose the opportunity to license our technology to others or to collect royalty payments based upon successful protection andassertion of our intellectual property rights against others;•incur significant legal expenses;•pay substantial damages to the party whose intellectual property rights we may be found to be infringing;•redesign those products that contain the allegedly infringing intellectual property, which could be costly and disruptive; or•attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reasonableterms or at all.Any litigation or claim against us, even those without merit, may cause us to incur substantial costs, and could place asignificant strain on our financial resources, divert the attention of management from our core business, and harm our reputation.Further, as the number of participants in the musculoskeletal industry grows, the possibility of intellectual property infringement claimsagainst us increases. If we are found to infringe the intellectual property rights of third parties, we could be required to pay substantialdamages (including treble, or triple, damages if an infringement is found to be willful) and/or royalties and could be prevented fromselling our products unless we obtain a license or are able to redesign our products to avoid infringement. Any such license may not beavailable on reasonable terms, if at all, and there can be no assurance that we would be able to redesign our products in a way thatwould not infringe the intellectual property rights of others. If we fail to obtain any required licenses or make any necessary changes toour products or technologies, we may have to withdraw existing products from the market or may be unable to commercialize one ormore of our products, all of which could have a material adverse effect on our business, results of operations and financial condition.45Table of ContentsFurther, in the course of our regular review of pending legal matters, we determine whether it is probable that a potential lossrelating to a legal proceeding may have a material impact on our business, financial performance or cash position. However, estimatesof probable losses are inherently uncertain, and even if we determine that a loss is probable, in accordance with authoritativeaccounting guidance, if we are unable to estimate the possible loss or range of loss, we do not record an accrual related to suchlitigation. As a result of this accounting policy, we may experience variability in our results of operations if damages for which we arefound liable exceed the amounts we have accrued. For example, on January 17, 2014, the jury in a misappropriation of trade secret suitfiled against us in the Federal District Court for the Eastern District of Texas by Sabatino Bianco returned a verdict in favor of Bianco.In prior periods, we were unable to determine the probable outcome in that case or estimate the potential loss. As a result of thatverdict, we incurred $4.3 million in damages, which reduced our 2013 U.S. GAAP diluted earnings per share by approximately $0.03.See further discussion under “Part II; Item 7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations; Non-GAAP Financial Measures” below.In addition, we generally indemnify our customers and distributors with respect to infringement by our products of theproprietary rights of third parties. Third parties may assert infringement claims against our customers or distributors. These claims mayrequire us to initiate or defend protracted and costly litigation on behalf of our customers or distributors, regardless of the merits ofthese claims. If any of these claims succeed, we may be forced to pay damages on behalf of our customers or distributors or may berequired to obtain licenses for the products they use. If we cannot obtain all necessary licenses on commercially reasonable terms, ourcustomers may be forced to stop using our products.We may be subject to damages resulting from claims that we, our employees or our independent distributors have wrongfully usedor disclosed alleged trade secrets, proprietary or confidential information of our competitors or are in breach of non-competition ornon-solicitation agreements with our competitors.Many of our employees were previously employed at other medical device companies, including our competitors or potentialcompetitors, in some cases until recently. Many of our independent distributors sell, or in the past have sold, products of ourcompetitors. We may be subject to claims that we, our employees, or our independent distributors have inadvertently or otherwise usedor disclosed trade secrets or other proprietary information of these former employers or competitors. In addition, we have been and mayin the future be subject to claims that we caused an employee to breach the terms of his or her non-competition or non-solicitationagreement. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims,litigation could result in substantial costs and could be a distraction to management. If our defense to those claims fails, in addition topaying monetary damages, we may lose valuable personnel. There can be no assurance that this type of litigation will not continue, andany future litigation or the threat thereof may adversely affect our ability to hire additional direct sales representatives. A loss of keypersonnel or their work product could hamper or prevent our ability to commercialize product candidates, which could have an adverseeffect on our business, results of operations and financial condition.We may incur product liability losses and insurance coverage may be inadequate or unavailable to cover these losses.Our business exposes us to potential product liability claims that are inherent in the testing, design, manufacture and sale ofmedical devices for surgical procedures. The development of allograft implants and technologies for human tissue repair and treatmentmay entail particular risk of transmitting diseases to human recipients, which could result in the assertion of substantial product liabilityclaims against us. Surgery involves significant risk of serious complications, including bleeding, nerve injury, paralysis and even death.In addition, if longer-term patient results and experience indicates that our products or any component of a product cause tissuedamage, motor impairment or other adverse effects, we could be subject to significant liability. Furthermore, if surgeons are notsufficiently trained in the use of our products, they may misuse or ineffectively use our products,46Table of Contentswhich may result in unsatisfactory patient outcomes or patient injury. We could become the subject of product liability lawsuitsalleging that component failures, manufacturing flaws, design defects or inadequate disclosure of product-related risks or product-related information resulted in an unsafe condition or injury to patients. The medical devices industry has been particularly prone topotential product liability claims that are inherent in the testing, manufacture and sale of medical devices and products for surgeryprocedures.A product liability or other damages claim, product recall or product misuse, regardless of the outcome, could require us tospend significant time and money in litigation or to pay significant damages or costs, and could seriously harm our business. If ourproduct liability insurance is inadequate to pay a damages award, we may have to pay the excess out of our cash reserves, which mayharm our financial condition. Any product liability claim brought against us, with or without merit, could result in the increase of thecosts we incur to obtain product liability insurance or our inability to secure product liability coverage in the future. If any of ourproducts are found to cause tissue damage, motor impairment or other adverse effects, we could be subject to significant liability. Evena meritless or unsuccessful product liability claim could harm our reputation in the industry, impair our ability to sell one or more of ourproducts in the future, result in significant legal fees and cause significant diversion of management’s attention from managing ourbusiness. A product liability or other claim, product recall, or product misuse involving any of our products, whether or notmeritorious, could also materially and adversely harm our reputation and our ability to attract and retain customers.In addition, any product liability claim brought against us, with or without merit, could result in an increase of our productliability insurance rates. Insurance coverage varies in cost and can be difficult to obtain, and we cannot guarantee that we will be ableto obtain insurance coverage in the future on terms acceptable to us or at all.Risks Related to the Ownership of our Class A Common StockBecause of their significant stock ownership, our Executive Chairman, our chief executive officer, our other executive officers,and our directors and principal stockholders will be able to exert control over us and our significant corporate decisions.Because of their significant stock ownership, our Executive Chairman, our chief executive officer, our other executive officers,and our directors will be able to exert substantial control over us and our significant corporate decisions. Based on an aggregate of98,573,354 shares of our Class A and Class B common stock outstanding as of December 31, 2018, our executive officers anddirectors and their affiliates beneficially owned, in the aggregate, approximately 75% of the voting power of our outstanding capitalstock. In particular, as of December 31, 2018, David C. Paul, our Executive Chairman and his family members, controlledapproximately 22.8% of our Class A and Class B common stock, representing approximately 74.7% of the voting power of ouroutstanding capital stock as of that date.As a result, David C. Paul has, and these persons acting together have, the ability to significantly influence or determine theoutcome of all matters submitted to our stockholders for approval, including the election and removal of directors and any merger,consolidation, or sale of all or substantially all of our assets. Furthermore, as of December 31, 2018, we had 192,602,552 shares ofClass B common stock available for issuance. This amount exceeds 5% of our outstanding common stock, meaning our Board ofDirectors (“Board”) could issue Class B common stock without necessarily triggering the automatic conversion of that Class Bcommon stock to Class A common stock that, pursuant to our charter, will occur when any holder’s shares of Class B common stockrepresents less than 5% of the aggregate number of all outstanding shares of our common stock, thereby further concentrating thevoting power of our capital stock in a limited number of stockholders.The interests of our executive officers, directors and principal stockholders might not coincide with the interests of the otherholders of our capital stock. This concentration of ownership may harm the value of our Class A common stock by, among otherthings:47Table of Contents•delaying, deferring or preventing a change in control of our company;•impeding a merger, consolidation, takeover or other business combination involving our company; or•causing us to enter into transactions or agreements that are not in the best interests of all stockholders.We are a “controlled company” within the meaning of the New York Stock Exchange Rules, and we take, and intend to continueto take, advantage of exemptions from certain corporate governance requirements.David C. Paul, alone, and our management, directors and significant stockholders, collectively, beneficially own a majority ofthe voting power of our outstanding common stock. Under the New York Stock Exchange Rules, a company of which more than 50%of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply withcertain corporate governance requirements, including the requirement that a majority of our directors be independent, as defined in theNew York Stock Exchange Rules, and the requirement that our compensation and nominating and corporate governance committeesconsist entirely of independent directors. We rely, and intend to continue to rely, on the “controlled company” exemption under theNew York Stock Exchange Rules. As a result, a majority of the members of our Board may not be independent directors and ournominating and corporate governance and compensation committees will not consist entirely of independent directors. Accordingly,while we remain a controlled company and during any transition period following a time when we are no longer a controlled company,you will not have the same protections afforded to stockholders of companies that are subject to all of the New York Stock Exchange’scorporate governance requirements.Our Board is authorized to issue and designate shares of our preferred stock in additional series without stockholder approval.Our amended and restated certificate of incorporation authorizes our Board, without the approval of our stockholders, to issue35 million shares of our preferred stock, subject to limitations prescribed by applicable law, rules and regulations and the provisions ofour amended and restated certificate of incorporation, as shares of preferred stock in series, and to establish from time to time thenumber of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of eachsuch series and the qualifications, limitations or restrictions thereof. The powers, preferences and rights of these additional series ofpreferred stock may be senior to or on parity with our Class A common stock, which may reduce its value.Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change of control, evenif an acquisition would be beneficial to our stockholders, which could depress the price of our Class A common stock and preventattempts by our stockholders to replace or remove our current management.Our amended and restated certificate of incorporation and amended and restated bylaws contain other provisions that coulddelay or prevent a change of control of our company or changes in our Board that our stockholders might consider favorable.In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporatetakeovers, which may restrict or prohibit certain business combination transactions with stockholders owning 15% or more of ouroutstanding voting stock, including discouraging takeover attempts that might result in a premium over the market price for shares ofour Class A common stock.Section 203 and other provisions in our amended and restated certificate of incorporation, amended and restated bylaws andDelaware law could make it more difficult for stockholders or potential acquirers to obtain control of our Board or initiate actions thatare opposed by our then-current Board, including delay or impede a merger, tender offer, or proxy contest involving our company. Theexistence of these provisions could negatively affect the price of our Class A common stock and limit opportunities for you to realizevalue in a corporate transaction.48Table of ContentsItem 1B. Unresolved Staff CommentsNone.Item 2. PropertiesOur corporate headquarters are located in Audubon, Pennsylvania and owned by us. We own research and manufacturingfacilities in Massachusetts, Pennsylvania and Texas, lease additional research and manufacturing facilities in Texas and also own adistribution center in Heerlen, Netherlands to support our international operations. We maintain sales and administrative offices infifteen additional countries all of which are leased.Item 3. Legal ProceedingsWe are involved in a number of proceedings, legal actions and claims. Such matters are subject to many uncertainties, and theoutcomes of these matters are not within our control and may not be known for prolonged periods of time. In some actions, theclaimants seek damages, as well as other relief, including injunctions prohibiting us from engaging in certain activities, which, ifgranted, could require significant expenditures and/or result in lost revenues. For further details on the material legal proceedings towhich we are currently a party, please refer to “Part II; Item 8. Financial Statements and Supplementary Data; Notes toConsolidated Financial Statements; Note 15. Commitments and Contingencies” below.In addition, we are subject to legal proceedings arising in the ordinary course of business.Item 4. Mine Safety DisclosuresNot applicable.49Table of ContentsPART IIItem 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesClass A Common StockOur Class A common stock trades on The New York Stock Exchange, under the symbol “GMED.” We had approximately 56stockholders of record as of February 18, 2019. We believe that the number of beneficial owners is substantially greater than thenumber of record holders because a large portion of our Class A common stock is held of record through brokerage firms in “streetname.”Recent Sales of Unregistered SecuritiesNone.Issuer Purchases of Equity SecuritiesNone.Dividend PolicyWe have never declared or paid any cash dividends on our capital stock. We currently intend to retain future earnings, if any,for development of our business and do not anticipate that we will declare or pay cash dividends on our capital stock in the foreseeablefuture.50Table of ContentsComparative Stock Performance GraphThe following graph illustrates a comparison of the total cumulative stockholder return on our Class A common stock fromDecember 31, 2013 through December 31, 2018 to two indices: the S&P 500 Index and the S&P 500 Health Care Equipment Index.The graph assumes an initial investment of $100 on December 31, 2013, in each of our Class A common stock, the stocks comprisingthe S&P 500 Index, and the stocks comprising the S&P 500 Health Care Equipment Index, including reinvestment of dividends, ifany. Historical stockholder return is not necessarily indicative of the performance to be expected for any future periods.The following graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shallsuch information be incorporated by reference into any future filing, except to the extent that we specifically incorporate it by referenceinto such filing.Company/Index December 31,2013 December 31,2014 December 31,2015 December 31,2016 December 31,2017 December 31,2018Globus Medical, Inc. $100 $118 $138 $123 $204 $214S&P 500 Index $100 $114 $115 $129 $157 $150S&P 500 Health Care Equipment $100 $126 $134 $143 $187 $21751Table of ContentsItem 6. Selected Financial DataThe selected consolidated financial data set forth in the table below has been derived from our audited financial statements. Thedata set forth below should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and “Item 8. Financial Statements and Supplementary Data” below.Statement of Income Data:Year Ended December 31,(In thousands, except per share amounts)2018 2017 2016 2015 2014Sales$712,969 $635,977 $563,994 $544,753 $474,371Cost of goods sold159,410 150,453 134,705 132,333 110,769Gross profit553,559 485,524 429,289 412,420 363,602Operating expenses: Research and development55,496 43,679 44,532 36,312 31,166Selling, general and administrative311,591 267,817 222,156 210,241 188,632Provision for litigation5,878 2,668 3,156 (11,268) 5,667Amortization of intangibles9,588 7,909 3,478 1,561 712Acquisition related costs1,681 1,611 1,826 3,352 (937)Total operating expenses384,234 323,684 275,148 240,198 225,240Operating income169,325 161,840 154,141 172,222 138,362Other income/(expense), net19,280 8,088 3,138 583 280Income before income taxes188,605 169,928 157,279 172,805 138,642Income tax provision32,131 62,580 52,938 60,021 46,157Net income$156,474 $107,348 $104,341 $112,784 $92,485Net income per common share: Basic$1.60 $1.12 $1.09 $1.19 $0.98Diluted$1.54 $1.10 $1.08 $1.17 $0.97Weighted average number of commonshares: Basic97,884 96,243 95,647 95,046 94,227Diluted101,316 97,887 96,432 96,073 95,457Balance Sheet Data:As of December 31,(In thousands)2018 2017 2016 2015 2014Cash, cash equivalents, restricted cash, andmarketable securities$602,801 $429,840 $350,756 $329,791 $304,051Working capital534,563 527,269 433,874 462,108 380,613Total assets1,300,670 1,078,502 927,637 834,100 703,547Business acquisition liabilities, includingcurrent portion (1)10,118 15,919 20,080 33,314 26,276Stockholders’ equity$1,185,516 $967,778 $832,078 $715,324 $585,454(1) In connection with certain acquisitions completed in 2018 through 2011, we have certain contingent consideration obligations payable to the sellersin these transactions upon the achievement of certain regulatory and sales milestones. The maximum aggregate undiscounted amounts potentiallypayable were $24.1 million, $20.6 million, $29.1 million, $35.9 million and $38.9 million as of December 31, 2018, 2017, 2016, 2015 and 2014,respectively. The December 31, 2018 amount includes contingent consideration related to an asset acquisition for which no liability has beenrecognized in the financial statements.52Table of ContentsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion and analysis of our financial condition and results of operations should be read together with ourconsolidated financial statements and related notes included elsewhere in this Annual Report. This discussion and analysis containsforward-looking statements that involve risks, uncertainties and assumptions. You should review the “Risk Factors” and “CautionaryNote Concerning Forward-Looking Statements” sections of this Annual Report for a discussion of certain of the important factors thatcould cause actual results to differ materially from the results described in or implied by the forward-looking statements described inthe following discussion and analysis. Certain amounts and percentages in this discussion and analysis have been rounded forconvenience of presentation.OverviewWe are an engineering-driven company with a history of rapidly developing and commercializing advanced products andprocedures to address treatment challenges. With over 190 products on the market, we offer a comprehensive portfolio of innovativeand differentiated technologies that treat a variety of musculoskeletal conditions of the spine, extremities and pelvis. Although wemanage our business globally within one operating segment, we separate our products into two major categories: MusculoskeletalSolutions and Enabling Technologies.Musculoskeletal SolutionsMusculoskeletal Solutions consist primarily of implantable devices, biologics, accessories, and unique surgical instruments usedin 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 degenerativeconditions, deformity, tumors, and trauma. With more than fifteen years in this competitive market, we provide comprehensivesolutions that facilitate both open and minimally invasive surgery (“MIS”) techniques. This includes traditional fusion implants such aspedicle screw and rod systems, plating systems, intervertebral spacers and corpectomy devices. We believe we pioneered innovativeexpandable solutions for interbody fusion, corpectomy and interspinous fixation that allow intraoperative customization of our devicesto the patient’s anatomy and save surgical time by eliminating sequential trialing. We have also developed treatment options for motionpreservation technologies, such as dynamic stabilization, total disc replacement and interspinous distraction devices; and interventionalpain management solutions to treat vertebral compression fractures. Regenerative biologic products such as allografts and syntheticalternatives are adjunctive treatments typically used in combination with stabilizing implant hardware.Our orthopedic trauma solutions are designed to treat a wide variety of orthopedic fracture patterns and patient anatomies in theupper and lower extremities as well as the hip. To date, Globus has received 510(k) clearance from the U.S. Food and DrugAdministration (“FDA”) for numerous orthopedic trauma and extremity products, covering four major segments of the orthopedictrauma market - fracture plates, compression screws, intramedullary nails, and external fixation. We began marketing these products in2018 and intend to grow our presence in this field. Fracture plating includes proximal humerus, distal radius, proximal tibia, distalfibula, 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.53Table of ContentsEnabling TechnologiesEnabling Technologies are advanced computer-assisted intelligent systems designed to enhance a surgeon’s capabilities andstreamline surgical procedures to be safer, less invasive, more accurate, and more reproducible, to ultimately improve patient care andreduce radiation exposure for all involved.Our current enabling technologies are comprised of imaging, navigation and robotic (“INR”) assisted surgery solutions. Thisincludes the ExcelsiusGPS® platform, a robotic guidance and navigation system that supports minimally invasive and open procedureswith screw placement applications. The ExcelsiusGPS® platform has a modular design that can be used for a variety of screwplacement applications, and we expect that it will serve as a foundation for future clinical applications using artificial intelligence andaugmented reality.Globus’ innovative Enabling Technologies products offer surgeons more information about patient anatomy and surgicaloptions to help them to make well-informed surgical decisions. We believe the advantages of pre-planning implant position andviewing patient anatomy during surgery are self-evident, and also create significant secondary gains such as eliminating radiationexposure altogether. While we group our products into two categories, they are not limited to a particular technology, platform or surgical approach.Instead, our goal is to offer a comprehensive product suite that can be used to effectively treat patients based on their specific anatomyand condition, and is customized to the surgeon’s training and surgical preference.To date, the primary market for our products has been the United States, where we sell our products through a combination ofdirect sales representatives employed by us and distributor sales representatives employed by our exclusive independent distributors,who distribute our products on our behalf for a commission that is generally based on a percentage of sales. We believe there issignificant opportunity to strengthen our position in the U.S. market by increasing the size of our U.S. sales force and we intend to addadditional direct and distributor sales representatives in the future.During the year ended December 31, 2018, our international sales accounted for approximately 17% of our total sales. Wecurrently sell our products in 51 countries outside the United States through a combination of direct sales representatives employed byus and exclusive international distributors. We believe there are significant opportunities for us to increase our presence in both existingand new international markets through the continued expansion of our direct and distributor sales forces and the commercialization ofadditional products.54Table of ContentsComponents of our Results of OperationsWe manage our business globally within one operating segment, which is consistent with how our management reviews ourbusiness, makes investment and resource allocation decisions and assesses operating performance.SalesToday, we sell primarily implants and related disposables, primarily to hospitals, for use by surgeons to treat musculoskeletaldisorders. We generally consign our surgical sets, which contain our implants, disposables, surgical instruments and cases to our salesrepresentatives, and the sets are maintained with the sales representatives or at our hospital customers that purchase the implants andrelated disposables used in the surgeries. We recognize revenue when the consigned implants and related disposables have beenimplanted or used, or for sets that are sold directly and not consigned, when title to the goods and risk of loss are transferred tocustomers with no remaining performance obligations which affect the customer’s final acceptance of the sale.We completed our first sale of ExcelsiusGPS™ in the fourth quarter of 2017. We generally recognize revenue when controltransfers to the customer, which occurs at the time the product is shipped or delivered. Depending on the terms of the arrangement, wemay also defer the recognition of a portion of the consideration received as we have to satisfy a future performance obligation toprovide maintenance and support.We expect to expand our U.S. and international sales forces, which will provide us with significant opportunity to continue toincrease our penetration in existing markets and to enter new international markets. We also expect to increase sales bycommercializing new products, but expect the increase of sales from new products to be partially offset by decreased sales of earlier-generation products.Cost of Goods SoldWhile we have increased our in-house implant product manufacturing capacity and assemble the ExcelsiusGPS™ system in-house, we also have products manufactured by third-party suppliers. Substantially all of our suppliers manufacture our products in theUnited States. Our cost of goods sold consists primarily of costs from our in-house manufacturing, costs of products purchased fromthird-party suppliers, excess and obsolete inventory charges, depreciation of surgical instruments and cases, royalties, shipping,inspection and related costs incurred in making our products available for sale or use. Beginning in January 2013, our cost of goodssold increased as a result of a medical device excise tax (“MDET”) of up to 2.3% on the sale of certain medical devices in the UnitedStates. On December 18, 2015, the MDET was suspended for two years effective January 1, 2016. In January 2018, Congress furtherextended the moratorium on the medical device excise tax through January 1, 2020.Research and Development ExpensesOur research and development expenses primarily consist of engineering, product development, clinical and regulatoryexpenses, consulting services, outside prototyping services, internal and external research activities, materials, depreciation, and othercosts associated with development of our products. Research and development expenses also include related personnel andconsultants’ compensation and stock-based compensation expense. We expense research and development costs as they are incurred.55Table of ContentsWe expect to incur additional research and development costs as we continue to develop new products. These costs willincrease in absolute terms as we continue to expand our product pipeline and add personnel.Selling, General and Administrative ExpensesSelling, general and administrative expenses primarily consist of salaries, benefits and other related costs, including stock-basedcompensation for personnel employed in sales, marketing, finance, legal, compliance, administrative, information technology, medicaleducation and training, quality and human resource departments. Our selling, general and administrative expenses also includecommissions, generally based on a percentage of sales, to direct sales representatives and distributors. We expect our selling, generaland administrative expenses will increase in absolute terms with the continued expansion of our sales force and commercialization ofour current and pipeline products. We plan to hire more personnel to support the growth of our business.Provision for LitigationWe record a provision for litigation settlements when a loss is known or considered probable and the amount can be reasonablyestimated and in the case of a favorable settlement, income when realized.Amortization of IntangiblesWe amortize finite lived intangible assets over the period of estimated benefit using the straight-line method and estimated livesranging from one to seventeen years. Indefinite lived intangible assets are tested for impairment annually or whenever events orcircumstances indicate that the carrying amount of the asset (asset group) may not be recoverable. If impairment is indicated, wemeasure the amount of the impairment loss as the amount by which the carrying amount exceeds the fair value of the asset. Fair valueis generally determined using a discounted future cash flow analysis.Acquisition Related CostsAcquisition related costs represent: the change in fair value of business-acquisition-related contingent consideration; costsrelated 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 bankerfees, legal fees, and other acquisition related professional fees.Income Tax ProvisionWe are taxed at the rates applicable within each jurisdiction. The composite income tax rate, tax provisions, deferred tax assetsand deferred tax liabilities will vary according to the jurisdiction in which profits arise. Tax laws are complex and subject to differentinterpretations by management and the respective governmental taxing authorities, and require us to exercise judgment in determiningour income tax provision, our deferred tax assets and liabilities, and the valuation allowance recorded against our net deferred taxassets.Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets areexpected to be realized. A valuation allowance is established when it is more likely than not that the future realization of all or some ofthe deferred tax assets will not be achieved. See “Note 13. Income Taxes” below for further discussion on the impact of the U.S. TaxCuts and Jobs Act in the current year.56Table of ContentsCritical Accounting Policies and EstimatesThe preparation of the consolidated financial statements requires us to make assumptions, estimates and judgments that affectthe reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities as of the date of the consolidatedfinancial statements, and the reported amounts of sales and expenses during the reporting periods. Certain of our more criticalaccounting policies require the application of significant judgment by management in selecting the appropriate assumptions forcalculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. On an ongoing basis,we evaluate our judgments, including but not limited to those related to inventories, recoverability of long-lived assets and the fairvalue of our common stock. We use historical experience and other assumptions as the basis for our judgments and making theseestimates. Because future events and their effects cannot be determined with precision, actual results could differ significantly fromthese estimates. Any changes in those estimates will be reflected in our consolidated financial statements as they occur. While oursignificant accounting policies are more fully described in “Part II; Item 8. Financial Statements and Supplementary Data; Notesto Consolidated Financial Statements; Note 1. Background and Summary of Significant Accounting Policies” below in thisAnnual Report, we believe that the following accounting policies and estimates are most critical to a full understanding and evaluationof our reported financial results. The critical accounting policies addressed below reflect our most significant judgments and estimatesused in the preparation of our consolidated financial statements. We have reviewed these critical accounting policies with the auditcommittee of our Board.Revenue Recognition. Revenue is recognized upon transfer of control of promised products or services to customers in anamount that reflects the consideration we expect to receive in exchange for those products or services. Sales and other taxes we collectconcurrent with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of thecontract are recognized as expense. For purposes of disclosing disaggregated revenue, we disaggregate our revenue, into twocategories, Musculoskeletal Solutions and Enabling Technologies, based on the timing of revenue recognition. Our MusculoskeletalSolutions products consist primarily of the implantable devices, disposables, and unique instruments used in an expansive range ofspine, orthopedic trauma and extremity procedures. The majority of our Musculoskeletal Solutions contracts have a single performanceobligation and revenue is recognized at a point in time. Our Enabling Technologies products are the advanced hardware and softwaresystems and related technologies that are designed to enhance a surgeon’s capabilities and streamline surgical procedures by makingthem less invasive, more accurate, and more reproducible to improve patient care. The majority of our Enabling Technologies productcontracts typically contain multiple performance obligations, including maintenance and support, and revenue is recognized as wefulfill each performance obligation. For contracts with multiple performance obligations, we allocate the contract’s transaction price toeach performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. Ourpolicy is to classify shipping and handling costs billed to customers as sales and the related expenses as cost of goods sold.Excess and Obsolete Inventory. We state inventories at the lower of cost or market. We determine cost on a first-in, first-outbasis. The majority of our inventory is finished goods. We periodically evaluate the carrying value of our inventories in relation to theestimated forecast of product demand, which takes into consideration the estimated life cycle of product releases. When quantities onhand exceed estimated sales forecasts, we record a write-down for excess inventories, which results in a corresponding charge to costof goods sold. Charges incurred for excess and obsolete inventory were $10.5 million, $11.5 million and $12.8 million for the yearsended December 31, 2018, 2017 and 2016, respectively.57Table of ContentsThe need to maintain substantial levels of inventory impacts the risk of carrying excess inventory. Many of our MusculoskeletalSolutions products come in sets which feature components in a variety of sizes so that the implant or device may be customized to thepatient’s needs. In order to market our Musculoskeletal Solutions products effectively, we must often maintain and provide surgeonsand hospitals with consignment implant sets, back-up products and products of different sizes. For each surgery, fewer than all of thecomponents of the set are used, and therefore certain portions of the set may be considered excess inventory since they are not likely tobe used. One of our primary business goals is to focus on continual product innovation. Though we believe this provides us with acompetitive advantage, it also increases the risk that our products will become excess or obsolete inventory prior to sale or prior to theend of their anticipated useful lives. When we introduce new products or next-generation products, we may be required to take chargesfor excess and obsolete inventory that have a significant impact on the value of our inventory or on our operating results.Goodwill and Intangible Assets. Goodwill represents the excess purchase price over the fair values of the identifiable assetsacquired less the liabilities assumed. We acquired goodwill in connection with the various acquisitions completed. Goodwill is testedfor impairment at a minimum on an annual basis. The fair value is estimated using an income and discounted cash flow approach. Weperformed our qualitative goodwill and indefinite-lived intangible assets impairment tests in the fourth quarter of 2018 and determinedthat fair value of our reporting units is substantially in excess of carrying value.Intangible assets consist of purchased in-process research and development (“IPR&D”), developed technology, suppliernetworks, patents, customer relationships and non-compete agreements. Intangible assets with finite useful lives are amortized over theperiod of estimated benefit using the straight-line method and estimated useful lives ranging from one to seventeen years. Intangibleassets are tested for impairment annually or whenever events or circumstances indicate that a carrying amount of an asset (asset group)may not be recoverable. If impairment is indicated, we measure the amount of the impairment loss as the amount by which the carryingamount exceeds the fair value of the asset. Fair value is generally determined using a discounted future cash flow analysis.IPR&D has an indefinite life and is not amortized until completion and development of the project at which time the IPR&Dbecomes an amortizable asset. If the related project is not completed in a timely manner, we may have an impairment related to theIPR&D, calculated as the excess of the asset’s carrying value over its fair value. During 2016, we recorded an impairment charge of$3.5 million as a component of acquisition related costs.Long-Lived Assets. We periodically evaluate the recoverability of the carrying amount of long-lived assets, which includeproperty and equipment, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fullyrecoverable. We assess impairment when the undiscounted future cash flows from the use and eventual disposition of an asset are lessthan its carrying value. If impairment is indicated, we measure the amount of the impairment loss as the amount by which the carryingamount exceeds the fair value of the asset. We base our fair value methodology on quoted market prices, if available. If quoted marketprices are not available, we estimate fair value based on prices of similar assets or other valuation techniques including present valuetechniques.Income Taxes. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differencesbetween the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We measure deferredtax assets and liabilities using enacted tax rates expected to apply to taxable income in the year in which such items are expected to bereceived or settled. We recognize the effect on deferred tax assets and liabilities of a change in tax rates in the period that includes theenactment date. We establish a valuation allowance to offset any deferred tax assets if, based upon available evidence, it is more likelythan not that some or all of the deferred tax assets will not be realized.58Table of ContentsWhile we believe that our tax positions are fully supportable, there is a risk that certain positions could be challengedsuccessfully. In these instances, we look to establish reserves. If we determine that a tax position is more likely than not of beingsustained upon audit, based solely on the technical merits of the position, we recognize the benefit. We measure the benefit bydetermining the amount that has likelihood greater than 50% of being realized upon settlement. We presume that all tax positions willbe examined by a taxing authority with full knowledge of all relevant information. We regularly monitor our tax positions, tax assetsand tax liabilities. We reevaluate the technical merits of our tax positions and recognize an uncertain tax benefit or reverse a previouslyrecorded tax benefit when (i) a tax audit is completed, (ii) applicable tax law, including a tax case or legislative guidance, changes or(iii) the statute of limitations expires. Significant judgment is required in accounting for tax reserves.Legal Proceedings. We are involved in a number of legal actions involving both product liability and intellectual propertydisputes. The outcomes of these legal actions are not within our complete control and may not be known for prolonged periods of time.In some actions, the claimants seek damages as well as other relief, including injunctions barring the sale of products that are thesubject of the lawsuit, that could require significant expenditures or result in lost sales. In accordance with authoritative guidance, werecord a liability in our consolidated financial statements for these actions when a loss is known or considered probable and the amountcan be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is abetter estimate than any other, the minimum amount of the range is accrued. If a loss is reasonably possible, but not known or probable,and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. Inmost cases, significant judgment is required to estimate the amount and timing of a loss to be recorded. While it is not possible topredict the outcome for these matters, we believe it is possible that costs associated with them could have a material adverse impact onour consolidated earnings, financial position or cash flows.Stock-Based Compensation Expense. We measure the cost for employee and non-employee awards at the grant date based onthe fair value of the award. For employee awards, we amortize the expense, which is the fair value of the portion of the award that isultimately expected to vest, over the requisite service periods (generally the vesting period of the equity award). We record the awardsissued to non-employees at their fair value as determined in accordance with authoritative guidance, and we periodically revalue theawards as they vest, recognizing the expense over the requisite service period. We estimate the fair value of stock options using aBlack-Scholes option-pricing model. Our determination of the fair value is affected by our stock price and a number of assumptions,including expected volatility, expected term, risk-free interest rate and expected dividends.As we became a publicly traded entity in 2012, historic volatility for our common stock is insufficient to estimate expectedvolatility. As a result, we estimate volatility based on a consistently defined peer group of public companies that we believe collectivelyprovides a reasonable basis for estimating volatility. We intend to continue to use the consistently defined group of publicly traded peercompanies to determine volatility in the future until sufficient information regarding volatility of the price of our shares of Class Acommon stock becomes available or the selected companies are no longer suitable for this purpose.We also do not have sufficient history of stock option exercises as a public company available that is indicative of futureexercise and post-vesting behavior to estimate the expected term after our initial public offering (“IPO”). As a result, we use thesimplified method of estimating the expected term, under which the expected term is presumed to be the mid-point between the vestingdate and the contractual end of the term. We base the risk-free interest rate on observed interest rates of U.S. Treasury securitiesequivalent to the expected terms of the stock options. We estimate our pre-vesting forfeiture rate based on our historical experience.Our dividend yield assumption is based on the history and expectation of no dividend payouts.We estimate the weighted-average fair value of the options granted using a Black-Scholes option-pricing model, which requiresthe input of subjective assumptions, including the expected stock price volatility, the59Table of Contentscalculation of expected term and fair value of the underlying common stock on the date of grant, among other inputs.To the extent that further evidence regarding these variables is available and provides estimates that we believe are moreindicative of actual trends, we may refine or change our approach to deriving these input estimates. Any such changes could materiallyaffect the stock-based compensation expense we record in the future.We expect to continue to grant stock options in the future, and to the extent that we do, our actual stock-based compensationexpense recognized may increase.Results of OperationsYear Ended December 31, 2018 Compared to the Year Ended December 31, 2017SalesThe following table sets forth, for the periods indicated, our sales by geography expressed as dollar amounts and the changes insales between the specified periods expressed in dollar amounts and as percentages: Year Ended Change(In thousands, except percentages)December 31, 2018 December 31, 2017 $ %United States$593,878 $529,882 $63,996 12.1%International119,091 106,095 12,996 12.2%Total sales$712,969 $635,977 $76,992 12.1%In the United States, the increase in sales of $64.0 million was due primarily to increased spine product sales due to penetrationin existing territories, INR product sales, and associated implant and robotic instrument sales.Internationally, the increase in sales of $13.0 million was due primarily to increased sales in Japan and other existing countriesas well as sales of INR product and associated robotic instrument sales. On a constant currency basis, our international sales grew$11.5 million, or by 10.8%, and our worldwide sales increased by 11.9%.Cost of Goods Sold Year Ended Change(In thousands, except percentages)December 31, 2018 December 31, 2017 $ %Cost of goods sold$159,410 $150,453 $8,957 6.0%Percentage of sales22.4% 23.7% The increase in cost of goods sold was primarily due to higher volumes and was partially offset by a decrease in depreciation of$5.7 million primarily resulting from the change in accounting estimate for the depreciable lives of our instruments and cases.60Table of ContentsResearch and Development Expenses Year Ended Change(In thousands, except percentages)December 31, 2018 December 31, 2017 $ %Research and development$55,496 $43,679 $11,817 27.1%Percentage of sales7.8% 6.9% The increase in research and development expenses was due primarily to an increase in employee compensation costs fromadditional headcount, including our INR technology group, increased supplies for furthering research activities and developing newinnovative products, and an increase of $1.8 million from one-time technology licensing fees.Selling, General and Administrative Expenses Year Ended Change(In thousands, except percentages)December 31, 2018 December 31, 2017 $ %Selling, general and administrative$311,591 $267,817 $43,774 16.3%Percentage of sales43.7% 42.1% The increase in selling, general and administrative expenses was primarily due to increases of $18.1 million of costs to build theINR technology and orthopedic trauma sales forces, and a $12.6 million increase in the U.S. sales force expenses. Additionally, therewere increases in stock based compensation expenses of $5.1 million.Provision for Litigation Year Ended Change(In thousands, except percentages)December 31, 2018 December 31, 2017 $ %Provision for litigation$5,878 $2,668 $3,210 120.3%Percentage of sales0.8% 0.4% The increase in the provision for litigation was primarily due to the settlement of the L5 litigation, as well as other settlementpayments and costs recorded in the period.For additional information regarding litigation, please refer to “Part II; Item 8. Financial Statements and SupplementaryData; Notes to Consolidated Financial Statements; Note 15. Commitments and Contingencies.”Amortization of Intangibles Year Ended Change(In thousands, except percentages)December 31, 2018 December 31, 2017 $ %Amortization of intangibles$9,588 $7,909 $1,679 21.2%Percentage of sales1.3% 1.2% The increase in the amortization of intangibles is primarily due to the developed technology intangible asset acquired inconnection with the Nemaris acquisition.61Table of ContentsAcquisition Related Costs Year Ended Change(In thousands, except percentages)December 31, 2018 December 31, 2017 $ %Acquisition related costs$1,681 $1,611 $70 4.3%Percentage of sales0.2% 0.3% Acquisition related costs remained consistent for the year ended December 31, 2018 as compared to the year ended December31, 2017.Other Income, Net Year Ended Change(In thousands, except percentages)December 31, 2018 December 31, 2017 $ %Other income, net$19,280 $8,088 $11,192 138.4%Percentage of sales2.7% 1.3% The increase in other income, net, is due primarily to the gain on sale of assets of $4.6 million and increases in interest incomefrom marketable securities and the Alphatec Credit Agreement of $6.7 million. For additional information regarding the note receivablewith Alphatec Spine Inc., please refer to “Part II; Item 8. Financial Statements and Supplementary Data; Notes to ConsolidatedFinancial Statements; Note 3. Note Receivable.”Income Tax Provision Year Ended Change(In thousands, except percentages)December 31, 2018 December 31, 2017 $ %Income tax provision$32,131 $62,580 $(30,449) (48.7)%Effective income tax rate17.0% 36.8% The change in the effective income tax rate between the current year and prior year periods is primarily driven by the impact ofthe U.S. Tax Cuts and Jobs Act (“Tax Reform Act”) as further described in “Part II; Item 8. Financial Statements andSupplementary Data; Notes to Consolidated Financial Statements; Note 13. Income Taxes.” and stock option exercise benefit.Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016SalesThe following table sets forth, for the periods indicated, our sales by geography expressed as dollar amounts and the changes insales between the specified periods expressed in dollar amounts and as percentages: Year Ended Change(In thousands, except percentages)December 31, 2017 December 31, 2016 $ %United States$529,882 $500,226 $29,656 5.9%International106,095 63,768 42,327 66.4%Total sales$635,977 $563,994 $71,983 12.8%62Table of ContentsIn the United States, the increase in sales of $29.7 million was due primarily to expansion into new territories and increasedpenetration in existing territories.Internationally, the increase in sales of $42.3 million was primarily due to incremental sales from the Alphatec Internationalacquisition. On a constant currency basis, our international sales grew $41.1 million, or by 66.9%, due to expansion into newinternational territories. Our worldwide sales increased 12.8% on a constant currency basis.Cost of Goods Sold Year Ended Change(In thousands, except percentages)December 31, 2017 December 31, 2016 $ %Cost of goods sold$150,453 $134,705 $15,748 11.7%Percentage of sales23.7% 23.9% The increase in cost of goods sold was primarily due to increases from higher volumes, product mix and inventory write offs.Partially offsetting these increases was a cost benefit of $4.0 million from in-house manufacturing.Research and Development Expenses Year Ended Change(In thousands, except percentages)December 31, 2017 December 31, 2016 $ %Research and development$43,679 $44,532 $(853) (1.9)%Percentage of sales6.9% 7.9% The decrease in research and development expenses was due primarily to $4.0 million of one-time licensing costs incurred in2016, which was partially offset by increased investment into INR technology and orthopedic trauma for additional headcount tofurther research activities and development of new innovative products.Selling, General and Administrative Expenses Year Ended Change(In thousands, except percentages)December 31, 2017 December 31, 2016 $ %Selling, general and administrative$267,817 $222,156 $45,661 20.6%Percentage of sales42.1% 39.4% The increase in selling, general and administrative expenses was due primarily to increases of $15.8 million of costs to supportAlphatec International sales, $9.5 million of costs to build the INR technology and orthopedic trauma sales forces, and a $10.1million increase in the U.S. sales force expenses. In addition, there were cost increases of $6.5 million related to general andadministrative compensation costs.63Table of ContentsProvision for Litigation Year Ended Change(In thousands, except percentages)December 31, 2017 December 31, 2016 $ %Provision for litigation$2,668 $3,156 $(488) (15.5)%Percentage of sales0.4% 0.6% The current year provision for litigation, which is relatively consistent with the prior year provision, includes legal settlementand verdict costs.Amortization of Intangibles Year Ended Change(In thousands, except percentages)December 31, 2017 December 31, 2016 $ %Amortization of intangibles$7,909 $3,478 $4,431 127.4%Percentage of sales1.2% 0.6% The increase in the amortization of intangibles is primarily due to intangible assets acquired in connection with the AlphatecInternational acquisition.Acquisition Related Costs Year Ended Change(In thousands, except percentages)December 31, 2017 December 31, 2016 $ %Acquisition related costs$1,611 $1,826 $(215) (11.8)%Percentage of sales0.3% 0.3% Acquisition related costs remained consistent for the year ended December 31, 2017 as compared to the year ended December31, 2016. The current year balance primarily consists of costs associated with the KB Medical acquisition.Other Income, Net Year Ended Change(In thousands, except percentages)December 31, 2017 December 31, 2016 $ %Other income, net$8,088 $3,138 $4,950 157.7%Percentage of sales1.3% 0.6% The increase in other income, net is due primarily to increases in interest income from increased average investment balancesand the note receivable with Alphatec Spine Inc., coupled with increases in foreign exchange transaction gains. For additionalinformation regarding the note receivable with Alphatec Spine Inc., please refer to “Part II; Item 8. Financial Statements andSupplementary Data; Notes to Consolidated Financial Statements; Note 3. Note Receivable.”64Table of ContentsIncome Tax Provision Year Ended Change(In thousands, except percentages)December 31, 2017 December 31, 2016 $ %Income tax provision$62,580 $52,938 $9,642 18.2%Effective income tax rate36.8% 33.7% Our tax provision and effective tax rate for the year ended December 31, 2017 was higher than the prior year due primarily tothe impact of the U.S. Tax Cuts and Jobs Act (“Tax Reform Act”), as further described in “Part II; Item 8. Financial Statementsand Supplementary Data; Notes to Consolidated Financial Statements; Note 13. Income Taxes.”Non-GAAP Financial MeasuresTo 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 representsnet 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 and prior period adjustment excludingdepreciation, is useful as an additional measure of operating performance, and particularly as a measure of comparative operatingperformance from period to period, as it is reflective of changes in pricing decisions, cost controls and other factors that affect operatingperformance, and it removes the effect of our capital structure, asset base, income taxes and interest income and expense. Ourmanagement also uses non-GAAP Adjusted EBITDA for planning purposes, including the preparation of our annual operating budgetand financial projections. Provision for litigation represents costs incurred for litigation settlements or unfavorable verdicts when theloss is known or considered probable and the amount can be reasonably estimated, or in the case of a favorable settlement, whenincome is realized. Acquisition related costs/licensing represents the change in fair value of business-acquisition-related contingentconsideration; costs related to integrating recently acquired businesses, including but not limited to costs to exit or convert contractualobligations, severance, and information system conversion; and specific costs related to the consummation of the acquisition processsuch as banker fees, legal fees, and other acquisition related professional fees, as well as one-time licensing fees. Prior periodadjustment excluding depreciation represents the cumulative impact of prior year adjustments primarily related to a decrease in scrapadjustments of instruments and cases, none of which were individually material to the related year’s financial position or results ofoperations.65Table of ContentsThe following is a reconciliation of Net income to Adjusted EBITDA for the periods presented: Year Ended(In thousands, except percentages)December 31, 2018 December 31, 2017 December 31, 2016Net income$156,474 $107,348 $104,341Interest income, net(13,278) (6,608) (3,057)Provision for income taxes32,131 62,580 52,938Depreciation and amortization41,630 42,067*38,771EBITDA216,957 205,387 192,993Stock-based compensation expense21,899 14,686 11,382Provision for litigation5,878 2,668 3,156Acquisition related costs/licensing4,488 3,391 6,931Net gain from sale of assets(3,593) — —Prior period adjustment, excluding depreciation— — (3,697)Adjusted EBITDA$245,629 $226,132 $210,765 Net income as a percentage of sales21.9% 16.9% 18.5%Adjusted EBITDA as a percentage of sales34.5% 35.6% 37.4%______________* Included in this amount for the year ended December 31, 2016 is $5.5 million related to depreciation amounts recognized in the current year related to theprior period adjustment.For additional information regarding the prior period adjustment, please refer to “Part II; Item 8. Financial Statements andSupplementary Data; Notes to Consolidated Financial Statements; Note 1. Background and Summary of SignificantAccounting Policies; (b) Basis of Presentation.”In addition, for the year ended December 31, 2018 and for other comparative periods, we are presenting non-GAAP netincome and non-GAAP Diluted Earnings Per Share, which represents net income and diluted earnings per share excluding theprovision for litigation, amortization of intangibles, acquisition related costs/licensing, prior period adjustment and the tax effects of allof the foregoing adjustments. The tax effect adjustment represents the tax effect of the pre-tax non-GAAP adjustments excluded fromnon-GAAP net income. The tax impact of the non-GAAP adjustments is calculated based on the consolidated effective tax rate on aGAAP basis, applied to the non-GAAP adjustments, unless the underlying item has a materially different tax treatment, in which casethe estimated tax rate applicable to the adjustment is used. At December 31, 2017, we calculated the tax effect of adjusting itemsutilizing our effective tax rate prior to the one-time Tax Reform Act adjustment. The effective tax rate applied was 30.3%.We believe these non-GAAP measures are also useful indicators of our operating performance, and particularly as additionalmeasures of comparative operating performance from period to period as they remove the effects of litigation, amortization ofintangibles, acquisition related costs/licensing, and the tax effects of all of the foregoing adjustments, which we believe are notreflective of underlying business trends.66Table of ContentsThe following is a reconciliation of net income computed in accordance with U.S. GAAP to non-GAAP net income for theperiods presented. Year Ended(In thousands) December 31, 2018 December 31, 2017 December 31, 2016Net income $156,474 $107,348 $104,341Provision for litigation 5,878 2,668 3,156Amortization of intangibles 9,588 7,909 3,478Acquisition related costs/licensing 4,488 3,391 6,931Net gain from sale of assets (3,593) — —Prior period adjustment — — 1,765Tax reform impact — 11,014 —Tax effect of adjusting items (3,437) (4,239) (5,166)Non-GAAP net income $169,398 $128,091 $114,505The following is a reconciliation of Diluted Earnings Per Share as computed in accordance with U.S. GAAP to non-GAAPDiluted Earnings Per Share for the periods presented. Year Ended(Per share amounts) December 31, 2018 December 31, 2017 December 31, 2016Diluted earnings per share, as reported $1.54 $1.10 $1.08Provision for litigation 0.06 0.03 0.03Amortization of intangibles 0.09 0.08 0.04Acquisition related costs/licensing 0.05 0.03 0.07Net gain from sale of assets (0.04) — —Prior period adjustment — — 0.02Tax reform impact — 0.11 —Tax effect of adjusting items (0.03) (0.04) (0.05)Non-GAAP diluted earnings per share $1.67 $1.31 $1.19We also define the non-GAAP measure of Free Cash Flow as the net cash provided by operating activities, adjusted for theimpact of restricted cash, less the cash impact of purchases of property and equipment. We believe that this financial measure providesmeaningful information for evaluating our overall financial performance for comparative periods as it facilitates an assessment of fundsavailable 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 CashFlow for the periods presented. Year Ended(Per share amounts) December 31, 2018 December 31, 2017 December 31, 2016Net cash provided by operating activities $181,643 $159,058 $147,823Purchases of property and equipment (59,697) (51,303) (40,909)Free cash flow $121,946 $107,755 $106,91467Table of ContentsFurthermore, the non-GAAP measure of constant currency sales growth is calculated by translating current year sales at thesame average exchange rates in effect during the applicable prior year period. We believe constant currency sales growth providesinsight to the comparative increase or decrease in period sales, in dollar and percentage terms, excluding the effects of fluctuations inforeign currency exchange rates.Below is a reconciliation of sales growth as reported in accordance with U.S. GAAP compared to constant currency salesgrowth for the periods presented. Year Ended Reported SalesGrowth Currency Impact on2018 Sales Constant CurrencySales Growth(In thousands, except percentages)December 31, 2018 December 31, 2017 United States$593,878 $529,882 12.1% — 12.1%International119,091 106,095 12.2% $(1,494) 10.8%Total sales$712,969 $635,977 12.1% $(1,494) 11.9% Year Ended Reported SalesGrowth Currency Impact on2017 Sales Constant CurrencySales Growth(In thousands, except percentages)December 31, 2017 December 31, 2016 United States$529,882 $500,226 5.9% — 5.9%International106,095 63,768 66.4% $346 66.9%Total sales$635,977 $563,994 12.8% $346 12.8%Non-GAAP Adjusted EBITDA, non-GAAP net income, non-GAAP Diluted Earnings Per Share, Free Cash Flow andconstant currency sales growth are not calculated in conformity with U.S. GAAP within the meaning of Item 10(e) of Regulation S-K.Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute forfinancial measures prepared in accordance with U.S. GAAP. These measures do not include certain expenses that may be necessary toevaluate our liquidity or operating results. Our definitions of non-GAAP Adjusted EBITDA, non-GAAP net income, non-GAAPDiluted Earnings Per Share, Free Cash Flow and constant currency sales growth may differ from that of other companies and thereforemay not be comparable. Additionally, we have recast prior periods for non-GAAP net income and non-GAAP Diluted Earnings PerShare to conform with current period presentation.Cash FlowsThe following table summarizes, for the periods indicated, cash flows from operating, investing and financing activities: Year Ended 2018 - 2017Change 2017 - 2016Change(In thousands)December 31,2018 December 31,2017 December 31,2016 $ $Net cash provided by operating activities$181,643 $159,058 $147,823 $22,585 $11,235Net cash used in investing activities(193,027) (111,277) (162,738) (81,750) 51,461Net cash provided by financing activities$32,570 $1,626 $470 $30,944 $1,156Effect of foreign exchange rate changes on cash(256) 1,979 (1,894) (2,235) 3,873Increase/(decrease) in cash, cash equivalents, and restricted cash$20,930 $51,386 $(16,339) $(30,456) $67,72568Table of ContentsOur cash, cash equivalents, and marketable securities at December 31, 2018 and 2017 were $602.8 million and $429.8 million,respectively. We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities,whereby our principal source of liquidity is operating cash flows. Excess operating cash is primarily used to fund acquisitions toadvance the strategic growth of the Company, as well as continue our cash management program to generate returns on our cash andcash equivalents through investing in marketable securities, which include municipal bonds, corporate debt securities, commercialpaper, securities of government, federal agency, and other sovereign obligations and asset-backed securities. Our overall cash positionreflects our strong business results and a cash management strategy that takes into account liquidity, economic factors and taxconsiderations. We believe our future operating cash flows will be sufficient to meet our future operating cash needs. See “Liquidityand Capital Resources” below for further discussion of cash flow results.Cash Provided by Operating ActivitiesThe increase in net cash provided by operating activities for the year ended December 31, 2018 was due primarily to increasedoperational cash flows in 2018 related to timing of spending and cash receipts.The decrease in net cash provided by operating activities for the year ended December 31, 2017 was due primarily to thetiming of collection and billing of trade accounts receivable, which was partially offset by an increase in depreciation and amortizationexpense.Cash Used in Investing ActivitiesThe increase in net cash used in investing activities for the year ended December 31, 2018 was due primarily to higherinvestment in marketable securities and increased purchases of property and equipment, which was partially offset by the cash receivedfrom collection of the note receivable.The increase in net cash used in investing activities for the year ended December 31, 2017 was due primarily to higherinvestment in marketable securities and increased purchases of property and equipment, which was partially offset by the decrease incash used for the acquisition of businesses.Cash Provided by Financing ActivitiesThe increase in cash provided by financing activities for the year ended December 31, 2018 was due primarily to higherproceeds from exercises of stock options, which was partially offset by payments for business acquisition liabilities.The increase in cash provided by financing activities for the year ended December 31, 2017 was due primarily to proceedsfrom exercises of stock options, which was partially offset by payments for business acquisition liabilities.Liquidity and Capital ResourcesThe following table highlights certain information related to our liquidity and capital resources:(In thousands)December 31, 2018 December 31, 2017Cash, cash equivalents, and restricted cash$139,747 $118,817Short-term marketable securities199,937 254,890Long-term marketable securities263,117 56,133Total cash, cash equivalents, restricted cash, and marketable securities$602,801 $429,84069Table of ContentsDuring the year ended December 31, 2018, our total cash, cash equivalents, restricted cash, and marketable securities increased$173.0 million, primarily as a result of our cash provided by operating activities and increased investment in marketable securities. Ourinvestment in marketable securities includes municipal bonds, corporate debt securities, commercial paper, U.S. treasuries, securities ofgovernment, federal agency, and other sovereign obligations and asset-backed securities, and are classified as available-for-sale as ofDecember 31, 2018.During the fourth quarter of 2017, the Company identified and recorded an adjustment to its December 31, 2016 consolidatedbalance sheet to correct the presentation of $65.8 million of its Variable Rate Demand Notes (“VRDNs”) as short-term marketablesecurities instead of cash and cash equivalents (see “Part II; Item 8. Financial Statements and Supplementary Data; Notes toConsolidated Financial Statements; Note 1. Background and Summary of Significant Accounting Policies.”)On June 13, 2017, we acquired the international operations and distribution channel of KB Medical SA for $31.5 million incash, subject to certain closing adjustments (see “Part II; Item 8. Financial Statements and Supplementary Data; Notes toConsolidated Financial Statements; Note 2. Acquisitions.”)In May 2011, we entered into a credit agreement with Wells Fargo Bank related to a revolving credit facility that provides forborrowings 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 therevolving credit facility can be increased to $150.0 million. The revolving credit facility includes up to a $25.0 million sub-limit forletters of credit. As amended to date, the revolving credit facility expires in May 2019. Cash advances bear interest at our option eitherat a fluctuating rate per annum equal to the daily LIBOR in effect for a one-month period plus 0.75%, or a fixed rate for a one- orthree-month period equal to LIBOR plus 0.75%. The credit agreement governing the revolving credit facility also subjects us tovarious restrictive covenants, including the requirement to maintain maximum consolidated leverage. The covenants also includelimitations on our ability to repurchase shares, to pay cash dividends or to enter into a sale transaction. As of December 31, 2018, wewere in compliance with all financial covenants under the credit agreement, there were no outstanding borrowings under the revolvingcredit facility and available borrowings were $125.0 million. We may terminate the credit agreement at any time on ten days’ noticewithout premium or penalty.In addition to our existing cash and marketable securities balances, our principal sources of liquidity are cash flow fromoperating activities and our revolving credit facility, which was fully available as of December 31, 2018. We believe these sources willprovide sufficient liquidity for us to meet our liquidity requirements for the foreseeable future. Our principal liquidity requirements areto meet our working capital, research and development, including clinical trials, and capital expenditure needs, principally for oursurgical sets required to maintain and expand our business and potential future business or intellectual property acquisitions. We expectto continue to make investments in surgical sets as we launch new products, increase the size of our U.S. sales force, and expand intointernational markets. We may, however, require additional liquidity as we continue to execute our business strategy. Our liquidity maybe negatively impacted as a result of a decline in sales of our products, including declines due to changes in our customers’ ability toobtain third-party coverage and reimbursement for procedures that use our products, increased pricing pressures resulting fromintensifying competition, cost increases and slower product development cycles resulting from a changing regulatory environment; andunfavorable results from litigation which will affect our cash flow. We anticipate that to the extent that we require additional liquidity, itwill be funded through the incurrence of other indebtedness, additional equity financings or a combination of these potential sources ofliquidity. The sale of additional equity may result in dilution to our stockholders. There is no assurance that we will be able to securesuch additional funding on terms acceptable to us, or at all.70Table of ContentsContractual Obligations and CommitmentsThe following table summarizes our outstanding contractual obligations as of December 31, 2018. There have been no materialchanges in our remaining contractual obligations since that time. Payments Due by Period(In thousands) Total Less than 1Year 1-3 Years 3-5 Years More than 5YearsOperating leases $2,794 $1,581 $1,098 $115 $—Purchase obligations(1) 9,973 2,158 2,515 2,500 2,800Total(2) $12,767 $3,739 $3,613 $2,615 $2,800______________(1) Reflects minimum annual volume commitments to purchase inventory under certain of our supplier contracts as well as costs related to service agreements.(2) In connection with certain acquisitions completed in 2011 through 2018, we have certain contingent consideration obligations payable to the sellers inthese transactions upon the achievement of certain regulatory and sales milestones. The maximum aggregate undiscounted amounts potentially payablenot included in the table above total $24.1 million.Off-Balance Sheet ArrangementsWe do not have any off-balance sheet arrangements.Related-Party TransactionsWe do not have any related-party transactions.Recently Issued Accounting PronouncementsFor further details on recently issued accounting pronouncements, please refer to “Part II; Item 8. Financial Statements andSupplementary Data; Notes to Consolidated Financial Statements; Note 1. Background and Summary of SignificantAccounting Policies; (x) Recently Issued Accounting Pronouncements.”Item 7A. Quantitative and Qualitative Disclosure About Market RiskMarket risk is the potential loss arising from adverse changes in the financial markets. We are exposed to various market risks,which may result in potential losses arising from adverse changes in market rates, such as interest rates and foreign exchange rates. Wedo not enter into derivatives or other financial instruments for trading or speculative purposes and do not believe we are exposed tomaterial market risk with respect to our cash, cash equivalents and marketable debt securities. Except for the foreign exchange riskdescribed below, we believe there has been no material quantitative changes in our market risk exposure between December 31, 2018and December 31, 2017.Interest Rate RiskOur exposure to interest rate risk relates primarily to our revolving credit facility and our investments in cash equivalents andmarketable debt securities portfolio. At December 31, 2018, we had no debt outstanding under our revolving credit facility andtherefore were not exposed to interest rate risk with respect to interest payable under that facility.71Table of ContentsIn general, our investments in cash equivalents and marketable debt securities are governed by our investment policy, whichhas been approved by our Board of Directors. Our investment policy seeks to preserve the value of capital, consistent with maximizingreturn on our investments while maintaining adequate liquidity. To achieve our investment objectives, we maintain a portfolio ofvarious holdings, types and maturities and invest in securities that meet or exceed our investment policy standards, such as high creditquality debt securities.We continue to be exposed to interest rate risk related to our cash equivalents and marketable securities. Generally, our interestrate risk with respect to these investments is limited due to yields earned. Changes in the overall level of interest rates affect the interestincome generated by our cash, cash equivalents and marketable securities. Our investment policy limits the amount of credit exposureto any one issue, issuer or type of security. Our securities all have maturity dates within three years of the date of purchase and aredesignated as available for sale. As of December 31, 2018, we believe that a hypothetical 10% change in interest rates would notmaterially affect the underlying valuation of our marketable securities.Foreign Exchange RiskWe operate in countries other than the United States and, therefore, we are exposed to foreign currency risks. Most of our directsales outside of the United States are billed in local currencies. We expect that the percentage of our sales and certain operatingexpenses denominated in foreign currencies will increase in the foreseeable future as we continue to expand into international markets.When our sales or expenses are not denominated in U.S. dollars, a fluctuation in exchange rates could affect our net income. We donot currently hold derivatives to hedge our exposure to foreign currency exchange rate fluctuations; however, we may choose to hedgeour exposure in the future.72Table of ContentsItem 8. Financial Statements and Supplementary DataGLOBUS MEDICAL, INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTSReports of Independent Registered Public Accounting Firms74Consolidated Balance Sheets77Consolidated Statements of Income78Consolidated Statements of Comprehensive Income79Consolidated Statements of Equity80Consolidated Statements of Cash Flows81Notes to Consolidated Financial Statements8273Table of ContentsReport of Independent Registered Public Accounting FirmTo the shareholders and the Board of Directors of Globus Medical, Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Globus Medical, Inc. and subsidiaries (the "Company") asof December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, equity, and cash flows, for theyears ended December 31, 2018 and 2017, and the related notes and the schedule listed in the Index at Item 15(a)(2) (collectivelyreferred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financialposition of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years endedDecember 31, 2018 and 2017, in conformity with accounting principles generally accepted in the United States of America.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)(PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in InternalControl - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and ourreport dated February 21, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting.Basis for OpinionThese financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion onthe Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are requiredto be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules andregulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to erroror fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whetherdue to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accountingprinciples used and significant estimates made by management, as well as evaluating the overall presentation of the financialstatements. We believe that our audits provide a reasonable basis for our opinion./s/ DELOITTE & TOUCHE LLPPhiladelphia, PennsylvaniaFebruary 21, 2019We have served as the Company's auditor since 2017.74Table of ContentsReport of Independent Registered Public Accounting FirmTo the shareholders and the Board of Directors of Globus Medical, Inc.Opinion on Internal Control over Financial ReportingWe have audited the internal control over financial reporting of Globus Medical, Inc. and subsidiaries (the “Company”) as ofDecember 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control -Integrated Framework (2013) issued by COSO.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)(PCAOB), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2018, ofthe Company and our report dated February 21, 2019, expressed an unqualified opinion on those financial statements and financialstatement schedule.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report onInternal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financialreporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent withrespect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securitiesand Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a materialweakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, andperforming such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonablebasis for our opinion.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally acceptedaccounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain tothe maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of thecompany; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only inaccordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effecton the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies or procedures may deteriorate./s/ DELOITTE & TOUCHE LLPPhiladelphia, PennsylvaniaFebruary 21, 2019 75Table of ContentsReport of Independent Registered Public Accounting FirmBoard of Directors and StockholdersGlobus Medical, Inc.We have audited the consolidated balance sheet of Globus Medical, Inc. (a Delaware corporation) and subsidiaries (the“Company”) as of December 31, 2016 (not presented herein), and the related accompanying consolidated statements of income,comprehensive income, equity, and cash flows for the year then ended. Our audit of the basic consolidated financial statementsincluded the financial statement schedule listed in the index appearing under Item 15(a)(2). These financial statements and financialstatement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements and financial statement schedule based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (UnitedStates). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates madeby management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basisfor our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financialposition of Globus Medical, Inc. and subsidiaries as of December 31, 2016, and the results of their operations and their cash flows forthe year then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion,the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole,presents fairly, in all material respects, the information set forth therein./s/ GRANT THORNTON LLPPhiladelphia, PennsylvaniaMarch 16, 201776Table of ContentsGLOBUS MEDICAL, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(In thousands, except par value)December 31, 2018 December 31, 2017ASSETS Current assets: Cash, cash equivalents, and restricted cash$139,747 $118,817Short-term marketable securities199,937 254,890Accounts receivable, net of allowances of $4,226 and $3,963, respectively137,067 116,676Inventories131,254 108,409Prepaid expenses and other current assets15,387 11,166Current portion of note receivable— 1,667Income taxes receivable7,289 8,717Total current assets630,681 620,342Property and equipment, net of accumulated depreciation of $216,809 and $191,760, respectively171,873 143,167Long-term marketable securities263,117 56,133Note receivable— 28,333Intangible assets, net87,323 78,659Goodwill123,734 123,890Other assets10,364 7,947Deferred income taxes13,578 20,031Total assets$1,300,670 $1,078,502 LIABILITIES AND EQUITY Current liabilities: Accounts payable$25,895 $25,039Accrued expenses59,878 52,594Income taxes payable917 3,274Business acquisition liabilities6,830 11,411Deferred revenue2,598 755Total current liabilities96,118 93,073Business acquisition liabilities, net of current portion3,288 4,508Deferred income taxes8,114 10,669Other liabilities7,634 2,474Total liabilities115,154 110,724Commitments and contingencies (Note 15) Equity: Class A common stock; $0.001 par value. Authorized 500,000 shares; issued and outstanding 76,143and 72,780 shares at December 31, 2018 and 2017, respectively76 73Class B common stock; $0.001 par value. Authorized 275,000 shares; issued and outstanding 22,430and 23,878 shares at December 31, 2018 and 2017, respectively22 24Additional paid-in capital299,869 238,341Accumulated other comprehensive loss(7,172) (6,907)Retained earnings892,721 736,247Total equity1,185,516 967,778Total liabilities and equity$1,300,670 $1,078,502See accompanying notes to consolidated financial statements.77Table of ContentsGLOBUS MEDICAL, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME Year Ended(In thousands, except per share amounts) December 31, 2018 December 31, 2017 December 31, 2016Sales $712,969 $635,977 $563,994Cost of goods sold 159,410 150,453 134,705Gross profit 553,559 485,524 429,289 Operating expenses: Research and development 55,496 43,679 44,532Selling, general and administrative 311,591 267,817 222,156Provision for litigation 5,878 2,668 3,156Amortization of intangibles 9,588 7,909 3,478Acquisition related costs 1,681 1,611 1,826Total operating expenses 384,234 323,684 275,148 Operating income 169,325 161,840 154,141 Other income, net: Interest income/(expense), net 13,278 6,608 3,057Foreign currency transaction gain/(loss) 360 909 (482)Other income/(loss) 5,642 571 563Total other income/(expense), net 19,280 8,088 3,138 Income before income taxes 188,605 169,928 157,279Income tax provision 32,131 62,580 52,938 Net income $156,474 $107,348 $104,341 Earnings per share: Basic $1.60 $1.12 $1.09Diluted $1.54 $1.10 $1.08Weighted average shares outstanding: Basic 97,884 96,243 95,647Dilutive stock options 3,432 1,644 785Diluted 101,316 97,887 96,432 Anti-dilutive stock options excluded from weighted average calculation 2,451 2,873 5,481See accompanying notes to consolidated financial statements.78Table of ContentsGLOBUS MEDICAL, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended(In thousands) December 31, 2018 December 31, 2017 December 31, 2016Net income $156,474 $107,348 $104,341Other comprehensive income/(loss): Unrealized gain/(loss) on marketable securities, net of tax 145 (146) (48)Foreign currency translation gain/(loss) (410) 1,881 (6,636)Total other comprehensive income/(loss) (265) 1,735 (6,684)Comprehensive income $156,209 $109,083 $97,657See accompanying notes to consolidated financial statements.79Table of ContentsGLOBUS MEDICAL, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF EQUITY Class A Commonstock Class B CommonStock Additionalpaid-incapital Accumulated othercomprehensiveincome Retainedearnings (In thousands) Shares $ Shares $ TotalBalance at December 31, 2015 71,442 $71 23,878 $24 $192,629 $(1,958) $524,558 715,324Stock-based compensation — — — — 11,652 — — 11,652Exercise of stock options 610 1 — — 5,873 — — 5,874Tax benefit related to nonqualifiedstock options exercised — — — — 1,571 — — 1,571Comprehensive income — — — — — (6,684) 104,341 97,657Balance at December 31, 2016 72,052 $72 23,878 $24 $211,725 $(8,642) $628,899 $832,078Stock-based compensation — — — — 14,882 — — 14,882Exercise of stock options 728 1 — — 11,734 — — 11,735Comprehensive income — — — — — 1,735 107,348 109,083Balance at December 31, 2017 72,780 $73 23,878 $24 $238,341 $(6,907) $736,247 $967,778Conversion to Class A 1,447 1 (1,447) (1) — — — —Stock-based compensation — — — — 22,219 — — 22,219Exercise of stock options 1,917 2 — — 39,309 — — 39,311Comprehensive income — — — — — (265) 156,474 156,209Balance at December 31, 2018 76,144 $76 22,431 $22 $299,869 $(7,172) $892,721 $1,185,516See accompanying notes to consolidated financial statements.80Table of ContentsGLOBUS MEDICAL, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended(In thousands)December 31, 2018 December 31, 2017 December 31, 2016Cash flows from operating activities: Net income$156,474 $107,348 $104,341Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization41,630 42,067 38,771Amortization of premium on marketable securities1,677 2,671 4,068Write-down for excess and obsolete inventories10,475 11,519 12,836Stock-based compensation expense21,899 14,686 11,382Allowance for doubtful accounts957 1,718 685Change in fair value of business acquisition liabilities985 1,240 2,866Non-cash settlement of accrued expenses— — (4,632)Impairment of intangible assets— 516 3,472Change in deferred income taxes971 8,292 (3,810)(Gain)/loss on disposal of assets, net(3,557) — —(Increase)/decrease in: Accounts receivable(21,789) (24,955) (4,668)Inventories(31,382) (5,277) (10,503)Prepaid expenses and other assets(7,496) (4,774) 4,568Increase/(decrease) in: Accounts payable(3,008) 9,843 (23)Accrued expenses and other liabilities14,728 (2,064) (18,164)Income taxes payable/receivable(921) (3,772) 6,634Net cash provided by operating activities181,643 159,058 147,823 Cash flows from investing activities: Purchases of marketable securities(537,942) (392,895) (350,448)Maturities of marketable securities278,049 240,353 281,885Sales of marketable securities106,388 122,512 52,802Purchases of property and equipment(59,697) (51,303) (40,909)Collections/(issuance) of note receivable30,000 — (30,000)Proceeds from sale of assets5,000 — —Acquisition of businesses, net of cash acquired, and purchases of intangible and other assets(14,825) (29,944) (76,068)Net cash used in investing activities(193,027) (111,277) (162,738) Cash flows from financing activities: Payment of business acquisition liabilities(6,739) (10,109) (5,404)Proceeds from exercise of stock options39,309 11,735 5,874Net cash provided by financing activities32,570 1,626 470 Effect of foreign exchange rate on cash(256) 1,979 (1,894) Net increase/(decrease) in cash, cash equivalents, and restricted cash20,930 51,386 (16,339)Cash, cash equivalents, and restricted cash at beginning of period118,817 67,431 83,770Cash, cash equivalents, and restricted cash at end of period$139,747 $118,817 $67,431 Supplemental disclosures of cash flow information: Interest paid6 3 35Income taxes paid$30,552 $59,111 $50,087See accompanying notes to consolidated financial statements.81GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(a) The CompanyGlobus Medical, Inc., together with its subsidiaries, is a medical device company that develops and commercializes healthcaresolutions in a mission to improve the quality of life of patients with musculoskeletal disorders. We are primarily focused on implantsthat promote healing in patients with musculoskeletal disorders, including the use of a robotic guidance and navigation system andproducts to treat patients who have experienced orthopedic traumas.We are an engineering-driven company with a history of rapidly developing and commercializing advanced products andprocedures to assist surgeons in effectively treating their patients and address new treatment options. With over 190 products launched,we offer a comprehensive portfolio of innovative and differentiated technologies that address a variety of musculoskeletal pathologies,anatomies, and surgical approaches.We are headquartered in Audubon, Pennsylvania, and market and sell our products through our exclusive sales force in theUnited States, as well as within North, Central & South America, Europe, Asia, Africa and Australia. The sales force consists of directsales 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, ourconsolidated subsidiaries.(b) Basis of PresentationThe accompanying consolidated financial statements have been prepared in conformity with U.S. generally acceptedaccounting principles (“U.S. GAAP”).During the fourth quarter of 2016, we self-identified and recorded non-cash prior period adjustments primarily related todepreciation and scrap expense for our instruments and cases. This $1.8 million net cumulative adjustment related to the periodbeginning in 2013 and through 2015 and resulted in a $5.5 million pre-tax increase in depreciation and a $3.7 million pre-tax decreasein scrap and provision for excess and obsolete inventory, both of which are primarily components of our full fiscal year 2016 cost ofgoods sold on our consolidated statement of income. We performed the analysis required by Staff Accounting Bulletin No. 99,Materiality, and Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When QuantifyingMisstatements in Current Year Financial Statements, and determined that the effect of the adjustments was not material to the financialposition, results of operations or cash flows of any prior fiscal year from both a quantitative and qualitative perspective and is notmaterial to the full fiscal year 2016.82GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)During the fourth quarter of 2017, the Company identified and recorded an adjustment to its December 31, 2016 consolidatedbalance sheet to correct the presentation of $65.8 million of its Variable Rate Demand Notes (“VRDNs”) as short-term marketablesecurities instead of cash and cash equivalents. Accordingly, the statement of cash flows for the year ended December 31, 2016 hasbeen adjusted to appropriately increase purchases of marketable securities by $63.3 million, resulting in an increase in net cash used ininvesting activities and a decrease to cash and cash equivalents, end of period of $63.3 million. The statement of cash flows for theyear ended December 31, 2015 has been adjusted to appropriately increase purchases of marketable securities by $2.5 million,resulting in an increase in net cash used in investing activities and a decrease to cash and cash equivalents, end of period of $2.5million. As of December 31, 2016, this adjustment also resulted in the addition of VRDNs to the table in Note 5, MarketableSecurities and an adjustment to appropriately present VRDNs in the table in Note 6, Fair Value Measurements within Municipal bondsinstead of cash equivalents. The Company does not own VRDNs as of December 31, 2018 and December 31, 2017.(c) Principles of ConsolidationThe accompanying consolidated financial statements include the accounts of Globus and its wholly owned subsidiaries. Allintercompany balances and transactions are eliminated in consolidation.(d) Use of EstimatesThe preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities atthe date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Webase our estimates, in part, on historical experience that management believes to be reasonable under the circumstances. Actual resultscould differ from those estimates. Estimates and assumptions are periodically reviewed and the effects of revisions are reflected in theconsolidated financial statements in the period they are determined to be necessary.Significant areas that require management’s estimates include intangible assets, contingent payment liabilities, allowance fordoubtful accounts, stock-based compensation, write-down for excess and obsolete inventory, useful lives of assets, the outcome oflitigation, recoverability of intangible assets and income taxes. We are subject to risks and uncertainties due to changes in the healthcareenvironment, regulatory oversight, competition, and legislation that may cause actual results to differ from estimated results. During fourth quarter of 2017, we completed a review of the estimated useful life of our Instruments and Modules and cases.Based on historical useful life information, forecasted product life cycles and demand expectations, the useful life of Instruments andModules and cases were extended from three to five years. This was accounted for as a change in accounting estimate and was madeon a prospective basis effective October 1, 2017. For the three months ended December 31, 2018, depreciation expense was lower byapproximately $1.3 million than it would have been had the useful life of these assets not been extended. The effect of this change onbasic and diluted earnings per share for the three months ended December 31, 2018 was $0.01 per share. For the year endedDecember 31, 2018, depreciation expense was lower by approximately $5.7 million than it would have been had the useful life ofthese assets not been extended, with a diluted earnings per share impact of $0.05 per share.83GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(e) Foreign Currency TranslationThe functional currency of our foreign subsidiaries is generally their local currency. Assets and liabilities of the foreignsubsidiaries are translated at the period end currency exchange rate and revenues and expenses are translated at an average currencyexchange rate for the period. The resulting foreign currency translation gains and losses are included as a component of accumulatedother comprehensive income. Gains and losses arising from intercompany foreign transactions are included in other income, net on theconsolidated statement of income.(f) Cash, Cash Equivalents, and Restricted CashCash and cash equivalents include cash on hand and all highly liquid investments with a maturity of three months or less whenpurchased.In December 2014, we set aside cash for the payment of a portion of the DePuy Synthes and Bianco litigations. We classifiedthis cash as restricted, as the amount was placed in escrow to be used for payment of the litigation obligations, should we not besuccessful with our appeals. On January 13, 2016, we settled our litigation with DePuy Synthes and made a payment of $7.9 millionand recovered approximately $8.4 million related to that settlement shortly thereafter. See “Note 15. Commitments andContingencies” below for more details regarding these litigations.The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the statement offinancial position that sum to the total of the same such amounts shown in the statement of cash flows:(In thousands)December 31,2018 December 31,2017 December 31, 2016 December 31, 2015Cash and cash equivalents$139,647 $118,817 $66,954 $57,651Restricted cash100 — 477 26,119Total cash, cash equivalents, and restricted cash as presented in theconsolidated statement of cash flows$139,747 $118,817 $67,431 $83,770(g) Concentrations of Credit RiskFinancial instruments, which potentially subject us to concentrations of credit risk, are primarily marketable securities andaccounts receivable. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of entitiescomprising our customer base. We perform ongoing credit evaluations of our customers and generally do not require collateral.There was no customer that accounted for 10% or more of sales for the years ended December 31, 2018, 2017, and 2016,respectively.84GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(h) Marketable SecuritiesOur 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 December 31,2018 and 2017. Available-for-sale securities are recorded at fair value in both short-term and long-term marketable securities on ourconsolidated balance sheets. The change in fair value for available-for-sale securities is recorded, net of taxes, as a component ofaccumulated other comprehensive income or loss on our consolidated balance sheets. Premiums and discounts are recognized over thelife of the related security as an adjustment to yield using the straight-line method. Realized gains or losses from the sale of ourmarketable securities are determined on a specific identification basis. Realized gains and losses, along with interest income and theamortization/accretion of premiums/discounts are included as a component of other income, net, on our consolidated statements ofincome. Interest receivable is recorded as a component of prepaid expenses and other current assets on our consolidated balance sheets.We maintain a portfolio of various holdings, types and maturities, though most of the securities in our portfolio could beliquidated at minimal cost at any time. We invest in securities that meet or exceed standards as defined in our investment policy. Ourpolicy 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 considered to be other-than-temporary, the losswill be recognized in our consolidated statement of income in the period the determination is made.(i) InventoriesInventories are stated at the lower of cost or net realizable value. Cost is determined on a first-in, first-out basis. The majority ofour inventories are finished goods and we utilize both in-house manufacturing and third-party suppliers to source our products. Weperiodically evaluate the carrying value of our inventories in relation to our estimated forecast of product demand, which takes intoconsideration the estimated life cycle of product releases. When quantities on hand exceed estimated sales forecasts, we record a write-down for such excess inventories.(j) Property and EquipmentProperty and equipment are recorded at cost less accumulated depreciation. Additions or improvements are capitalized, whilerepairs and maintenance are expensed as incurred. Depreciation and amortization are provided using the straight-line method over therelated useful lives of the assets.When assets are sold or otherwise disposed of, the related property, equipment, and accumulated depreciation amounts arerelieved from the accounts, and any gain or loss is recorded in the consolidated statements of income.Purchases of property and equipment included in accounts payable and accrued expenses were $10.1 million, $6.5 million, and$5.2 million during the twelve months ended December 31, 2018, 2017, and 2016, respectively.85GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(k) Goodwill and Intangible AssetsGoodwill represents the excess purchase price over the fair values of the identifiable assets acquired less the liabilities assumed.Goodwill is tested for impairment at a minimum on an annual basis. Goodwill is tested for impairment at the reporting unit level bycomparing the reporting unit’s carrying amount to the fair value of the reporting unit. The fair values are estimated using an income anddiscounted cash flow approach. We perform our annual impairment test for goodwill in the fourth quarter of each year. We considerqualitative indicators of the fair value of a reporting unit when it is unlikely that a reporting unit has impaired goodwill. During theyears ended December 31, 2018, 2017 and 2016, we did not record any impairment charges related to goodwill.Intangible assets consist of purchased in-process research and development (“IPR&D”), developed technology, suppliernetwork, patents, customer relationships and non-compete agreements. Intangible assets with finite useful lives are amortized over theperiod of estimated benefit using the straight-line method and estimated useful lives ranging from one to seventeen years. Intangibleassets are tested for impairment annually or whenever events or circumstances indicate that a carrying amount of an asset (asset group)may not be recoverable. If impairment is indicated, we measure the amount of the impairment loss as the amount by which the carryingamount exceeds the fair value of the asset. Fair value is generally determined using a discounted future cash flow analysis. During2017, we recorded an impairment charge of $0.5 million related to one of our developed technologies related to one of our systems as acomponent of selling, general and administrative expense. There were no impairments of finite-lived intangible assets during the yearsended December 31, 2018 and 2016.IPR&D has an indefinite life and is not amortized until completion of the project at which time the IPR&D becomes anamortizable asset. If the related project is not completed in a timely manner, we may have an impairment related to the IPR&D,calculated as the excess of the asset’s carrying value over its fair value. During 2016, we recorded an impairment charge of $3.5million related to one of our IPR&D projects as a component of acquisition related costs. There were no impairments of IPR&D duringthe years ended December 31, 2018 or 2017.(m) Impairment of Long-Lived AssetsWe periodically evaluate the recoverability of the carrying amount of long-lived assets, which include property and equipment,as well as whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be fullyrecoverable. An impairment is assessed when the undiscounted future cash flows from the use and eventual disposition of an assetgroup are less than its carrying value. If impairment is indicated, we measure the amount of the impairment loss as the amount bywhich the carrying amount exceeds the fair value of the asset group. Our fair value methodology is based on quoted market prices, ifavailable. If quoted market prices are not available, an estimate of fair value is made based on prices of similar assets or other valuationtechniques including present value techniques. During the years ended December 31, 2018, 2017 and 2016, we did not record anyimpairment charges related to long-lived assets.(l) Revenue RecognitionRevenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects theconsideration we expect to receive in exchange for those products or services. Sales and other taxes we collect concurrent withrevenue-producing activities are excluded from revenue. Incidental86GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)items that are immaterial in the context of the contract are recognized as expense. For purposes of disclosing disaggregated revenue, wedisaggregate our revenue, into two categories, Musculoskeletal Solutions and Enabling Technologies, based on the timing of revenuerecognition. Our Musculoskeletal Solutions products consist primarily of the implantable devices, disposables, and unique instrumentsused in an expansive range of spine, orthopedic trauma and extremity procedures. The majority of our Musculoskeletal Solutionscontracts have a single performance obligation and revenue is recognized at a point in time. Our Enabling Technologies products arethe advanced hardware and software systems and related technologies that are designed to enhance a surgeon’s capabilities andstreamline surgical procedures by making them less invasive, more accurate, and more reproducible to improve patient care. Themajority of our Enabling Technologies product contracts typically contain multiple performance obligations, including maintenanceand 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 ofeach distinct good or service in the contract. Our policy is to classify shipping and handling costs billed to customers as sales and therelated expenses as cost of goods sold.Nature of Products and ServicesA significant portion of our Musculoskeletal Solutions product revenue is generated from consigned inventory maintained athospitals or with sales representatives. Revenue from the sale of consigned Musculoskeletal products is recognized when we transfercontrol, which occurs at the time the product is used or implanted. For all other Musculoskeletal Solutions product transactions, werecognize revenue when we transfer title to the goods, provided there are no remaining performance obligations that will affect thecustomer’s final acceptance of the sale. We use an observable price to determine the stand-alone selling price for the identifiedperformance obligation.Revenue from the sale of Enabling Technologies products is generally recognized when title transfers to the customer whichoccurs at the time the product is shipped or delivered. Depending on the terms of the arrangement, we may also defer the recognition ofa portion of the consideration received as we have to satisfy a future performance obligation to provide maintenance and support. Weuse an observable price to determine the stand-alone selling price for each separate performance obligation.Contract BalancesTiming of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when revenue isrecognized 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 contractperiod and recognized ratably over the coverage period. For the three months and year ended December 31, 2018, there was animmaterial amount of revenue recognized from previously deferred revenue.87GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Disaggregation of RevenueThe following table represents total sales by revenue stream: Three Months Ended Twelve Months Ended(In thousands)December 31, 2018 December 31, 2017 December 31, 2018 December 31, 2017Musculoskeletal Solutions products$181,638 $165,114 $666,040 $625,057Enabling Technologies products14,300 10,920 46,929 10,920Total sales$195,938 $176,034 $712,969 $635,977(m) Cost of Goods SoldCost of goods sold consists primarily of costs from our in-house manufacturing, costs of products purchased from third-partysuppliers, excess and obsolete inventory charges, depreciation of surgical instruments and cases, royalties, shipping, inspection andrelated costs incurred in making our products available for sale or use.(n) Research and DevelopmentResearch and development costs are expensed as incurred. Research and development costs include salaries, employeebenefits, supplies, consulting services, clinical services and clinical trial costs, and facilities costs. Costs incurred in obtainingtechnology licenses and patents are charged immediately to research and development expense if the technology licensed has notreached technological feasibility and has no alternative future use.(o) Other IncomeIn June 2018, we sold assets for $5.0 million, which resulted in a gain on sale of assets of $4.6 million.(p) Stock-Based CompensationThe cost for employee and non-employee director awards is measured at the grant date based on the fair value of the award.The fair value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period(generally the vesting period of the equity award). Awards issued to non-employees are recorded at their fair value as determined inaccordance with authoritative guidance, and are periodically revalued as the awards vest and are recognized as expense over therequisite service period.The determination of the fair value of stock options is made utilizing the Black-Scholes option-pricing model which is affectedby our stock price and a number of assumptions, including expected volatility, expected term, risk-free interest rate and expecteddividends. As we became a publicly traded entity in 2012, historic volatility for our common stock is insufficient to estimate expectedvolatility. As a result, we estimate volatility based on a consistently defined peer group of public companies that we believe collectivelyprovides a reasonable basis for estimating volatility. We intend to continue to use the consistently defined group of publicly traded peercompanies to determine volatility in the future until sufficient information regarding volatility of the price of our shares of Class Acommon stock becomes available or the selected companies are no longer suitable for this purpose.88GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)The expected term of the stock options is determined utilizing the simplified method given the limited extent of our historicaldata. The risk-free interest rate assumption is based on observed interest rates of U.S. Treasury securities appropriate for the expectedterms of the stock options. The dividend yield assumption is based on the history and expectation of no dividend payouts.(q) Income TaxesDeferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between thefinancial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilitiesare measured using enacted tax rates expected to apply to taxable income in the year in which such items are expected to be recoveredor settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactmentdate. A valuation allowance is established to offset any deferred tax assets if, based upon available evidence, it is more likely than notthat some or all of the deferred tax assets will not be realized.Significant judgment is required in determining income tax provisions and in evaluating tax positions. We will establishadditional provisions for income taxes when, despite the belief that tax positions are fully supportable, there remain certain positionsthat do not meet the minimum probability threshold that a tax position is more likely than not to be sustained upon examination by thetaxing authority. In the normal course of business, we and our subsidiaries are examined by various federal, state, and foreign taxauthorities. We regularly assess the potential outcomes of these examinations and any future examinations for the current or prior yearsin determining the adequacy of the provision for income taxes. We periodically assess the likelihood and amount of potentialadjustments and adjust the income tax provision, the current tax liability, and deferred taxes in the period in which the facts that giverise to a revision become known.(r) Fair Value of Financial InstrumentsAs of December 31, 2018, the carrying values of cash and cash equivalents, short and long-term investments, accountsreceivable, accounts payable and accrued expenses approximate their respective fair values based on their short and long-term nature.We classify our financial assets and liabilities that are measured at fair value into one of the three categories based upon inputs used todetermine fair value. See “Note 6. Fair Value Measurements” below for more details regarding inputs and classifications.(s) Advertising ExpenseWe expense advertising costs as they are incurred. Advertising expense was $1.9 million, $1.5 million and $0.9 million, for theyears ended December 31, 2018, 2017, and 2016, respectively.(t) Legal CostsWe are involved in a number of proceedings, legal actions, and claims. Such matters are subject to many uncertainties, and theoutcomes of these matters are not within our control and may not be known for prolonged periods of time. In some actions, theclaimants seek damages, as well as other relief, including injunctions prohibiting us from engaging in certain activities, which, ifgranted, could require significant expenditures and/or result in lost revenues. We record a liability in the consolidated financialstatements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If thereasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, theminimum amount of the range is accrued. If a loss is reasonably possible but not89GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed. In most cases, significantjudgment is required to estimate the amount and timing of a loss to be recorded. We expense legal costs related to loss contingencies asincurred.(u) Acquisition Related CostsAcquisition related costs represents the change in fair value of business acquisition related contingent consideration; costsrelated 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 bankerfees, legal fees, and other acquisition related professional fees.(v) Medical Device Excise TaxEffective as of January 1, 2013, the Patient Protection and Affordable Care Act, as amended by the Health Care and EducationAffordability Reconciliation Act (collectively “PPACA”) imposed a medical device excise tax (“MDET”) of 2.3% on any entity thatmanufactures or imports certain medical devices offered for sale in the United States. We have historically accounted for the MDET asa component of our cost of goods sold.The Consolidated Appropriations Act of 2016, which was signed into law in December 2015, included a two-year suspensionon the medical device excise tax, effective January 1, 2016. In January 2018, Congress further extended the moratorium on the medicaldevice excise tax through January 1, 2020.(w) Recently Issued Accounting PronouncementsIn 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, whilethe 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 retrospectivemethod or cumulative-effect adjustment method. We have elected to apply the cumulative-effect adjustment transition method and willrecord the adjustment to the opening balance of retained earnings in the period of adoption. Adoption of the standard will not have amaterial 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 forGoodwill Impairment (“ASU 2017-04”), which eliminates the Step 2 calculation for the implied fair value of goodwill to measure agoodwill impairment charge. Under the updated standard, an entity will record an impairment charge based on the excess of a reportingunit’s carrying amount over its fair value. ASU 2017-04 does not change the guidance on completing Step 1 of the goodwillimpairment test and still allows an entity to perform the optional qualitative goodwill impairment assessment before determiningwhether to proceed to Step 1. This update is effective for annual and interim goodwill impairment tests in fiscal years beginning afterDecember 15, 2019 with early adoption permitted for any impairment test performed on testing dates after January 1, 2017. We arecurrently evaluating the timing and impact of the new standard on our financial position, results of operations and disclosures.90GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)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 netincome from continuing operations, even in situations in which the related income tax effects of items in accumulated othercomprehensive income were originally recognized in other comprehensive income. As a result, such items, referred to as stranded taxeffects, did not reflect the appropriate tax rate. Under ASU 2018-02, entities are permitted, but not required, to reclassify fromaccumulated other comprehensive income to retained earnings those stranded tax effects resulting from the Tax Act. ASU 2018-02 iseffective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Earlyadoption is permitted. Adoption of the standard will not have a material impact on our financial position, results of operations anddisclosures.In June 2018, the FASB released ASU 2018-07, Compensation—Stock Compensation (Topic 718), (“ASU 2018-07”), whichexpanded 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 tobe used or consumed in a grantor’s own operations by issuing share-based payment awards. This update is effective for public entitiesfor fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. Adoptionof the standard will 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 modifiesthe disclosure requirements on fair value measurements in Topic 820, including the consideration of costs and benefits. This update iseffective for public entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Earlyadoption is permitted. We are currently evaluating the timing and impact of the new standard on our financial position, results ofoperations and disclosures.(x) Recently Adopted Accounting PronouncementsIn May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606)(“ASU 2014-09”). ASU 2014-09 amends the guidance in former Topic 605, Revenue Recognition, and most other existing revenueguidance in US GAAP. Under the new standard, an entity will recognize revenue to depict the transfer of goods or services tocustomers in amounts that reflect the payment to which the entity expects to be entitled in exchange for those goods or services andprovide additional disclosures. As amended, the effective date for public entities is annual reporting periods beginning after December15, 2017 and interim periods therein. We adopted the standard on January 1, 2018, using the modified retrospective method. Weimplemented internal controls to enable the preparation of financial information upon adoption. The adoption of this standard does nothave a material impact on our financial position and results of operations. See “Note 1. Background and Summary of SignificantAccounting Policies; (l) Revenue Recognition” above for more detail regarding our disclosures.91GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)In October 2016, the FASB released ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other ThanInventory (“ASU 2016-16”). ASU 2016-16 removes the current exception in US GAAP prohibiting entities from recognizing currentand deferred income tax expenses or benefits related to transfer of assets, other than inventory, within the consolidated entity. Thecurrent exception to defer the recognition of any tax impact on the transfer of inventory within the consolidated entity until it is sold toa third party remains unaffected. This update is effective for public entities for annual reporting periods beginning after December 15,2017. We adopted ASU 2016-16 on January 1, 2018. This standard does not have a material impact on our financial position, resultsof operations, and disclosures.In November 2016, the FASB released ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which requires that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cashequivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. Transfersbetween cash and cash equivalents and restricted cash and restricted cash equivalents will no longer be presented in the statement ofcash flows. The amendments in this update should be applied using a retrospective transition method to each period presented. Thisupdate is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years; early adoptionis permitted, including adoption in an interim period. We adopted ASU 2016-18 on January 1, 2018. This standard does not have amaterial impact on our financial position, results of operations, and disclosures.In January 2017, the FASB released ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of aBusiness (“ASU 2017-01”), which clarifies the definition of a business with the objective of adding guidance to assist entities withevaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The amendments in thisASU should be applied prospectively and are effective for fiscal years beginning after December 15, 2017, including interim periodswithin those fiscal years, with early application permitted. No disclosures are required at transition. We adopted ASU 2017-01 onJanuary 1, 2018. This standard does not have a material impact on our financial position, results of operations, and disclosures.In May 2017, the FASB released ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of ModificationAccounting (“ASU 2017-09”), which clarifies the changes to terms or conditions of a share based payment award that requiresapplication of modification accounting under Topic 718. A change to an award should be accounted for as a modification unless thefair value of the modified award is the same as the original award, the vesting conditions do not change, and the classification as anequity or liability instrument does not change. This update is effective for annual reporting periods, and interim periods within thoseannual periods, beginning after December 15, 2017. Early application is permitted and prospective application is required for awardsmodified on or after the adoption date. We adopted ASU 2017-09 on January 1, 2018. This standard does not have a material impacton our financial position, results of operations, and disclosures.92GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 2. BUSINESS COMBINATIONSKB MedicalOn June 13, 2017, we acquired KB Medical SA (“KB Medical”), a Swiss-based robotic developer, to further bolster ourdevelopment team, intellectual property, and product portfolio (the “KB Medical Acquisition”). We have included the financial resultsof KB Medical in our consolidated financial statements from the acquisition date, and the results from KB Medical were not material toour consolidated financial statements. We accounted for the KB Medical Acquisition under the purchase method of accounting.Amounts recognized for assets acquired and liabilities assumed are based on our purchase price allocations and on certain managementjudgments. These allocations are based on an analysis of the estimated fair values of assets acquired and liabilities assumed, includingidentifiable tangible assets, and estimates of the useful lives of tangible assets. The fair value of the consideration for the KB MedicalAcquisition was approximately $31.5 million of cash paid at closing, plus a potential $4.9 million contingent consideration paymentbased on product development milestones. We recorded $20.2 million of identifiable net assets, based on their estimated fair values,and goodwill of $16.2 million. None of the goodwill is expected to be deductible for tax purposes.As of December 31, 2018, the maximum aggregate undiscounted amount of contingent consideration potentially payablerelated to the KB Medical Acquisition is $5.1 million.The table below represents the purchase price allocation for the identifiable tangible and intangible assets and liabilities of KBMedical:(In thousands) Consideration: Cash paid at closing$31,501Purchase price contingent consideration4,871Fair value of consideration$36,372 Identifiable assets acquired and liabilities assumed: Cash acquired$1,557Prepaid and other current assets168Intangible assets, gross24,500Other assets18Accounts payable and accrued expenses(1,312)Deferred tax liabilities(4,727)Total identifiable net assets20,204 Goodwill16,168Total allocated purchase price$36,37293GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 3. NOTE RECEIVABLEOn September 1, 2016, in connection with the Alphatec Acquisition, we entered into a Credit, Security and GuarantyAgreement (the “Credit Agreement”) with Alphatec and Alphatec Spine, Inc. (“Alphatec Spine” and together with Alphatec, the“Alphatec Borrowers”), pursuant to which we made available to the Alphatec Borrowers a senior secured term loan facility in anamount not to exceed $30.0 million. The term loan interest rate for the first two years following the Closing Date was priced at theLondon Interbank Offered Rate (“LIBOR”) plus 8.0%, subject to a 9.5% floor. The term loan interest rate thereafter was LIBOR plus13.0%. On the Closing Date, we made an initial loan of $25.0 million and the Alphatec Borrowers issued a note for such amount to us.On December 20, 2016, the remaining $5.0 million was drawn by the Alphatec Borrowers and added to the note. On November 7,2018, the Alphatec Borrowers repaid all of the then outstanding principal and interest under the Credit Agreement in a total amountof $29.3 million.NOTE 4. GOODWILL AND INTANGIBLE ASSETSA summary of intangible assets is presented below: December 31, 2018(In thousands)Weighted- AverageAmortization Period (in years) Gross Carrying Amount AccumulatedAmortization Intangible Assets, net In-process research & development— $19,813 $— $19,813Supplier network10.0 4,000 (1,667) $2,333Customer relationships & other intangibles6.7 42,413 (17,746) $24,667Developed technology8.6 37,547 (3,498) $34,049Patents16.5 7,764 (1,303) $6,461Total intangible assets $111,537 $(24,214) $87,323On September 5, 2018, we acquired Nemaris, Inc. (“Nemaris”), a privately held company that markets and developsSurgimap® , a surgical planning software platform (“Nemaris Acquisition”). The assets of the Nemaris Acquisition consist primarily ofdeveloped technology. We determined that substantially all the fair value of the gross assets on the date of acquisition is captured inthe developed technology and as a result, the Nemaris acquisition was accounted for as an asset purchase. We allocated theconsideration paid of $15.2 million on a pro rata basis to the assets acquired on their respective fair values. The useful lives of thedeveloped technology is seven years and will be amortized on a straight-line basis. In addition to the cash paid at closing, there is apotential $10.0 million contingent consideration payment based on product development milestones.94GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2017(In thousands)Weighted- AverageAmortization Period (in years) Gross Carrying Amount AccumulatedAmortization Intangible Assets, net In-process research & development— $20,003 $— $20,003Supplier network10.0 4,000 (1,267) 2,733Customer relationships & other intangibles6.8 41,345 (11,589) 29,756Developed technology10.0 20,460 (682) 19,778Patents16.9 7,389 (1,000) 6,389Total intangible assets $93,197 $(14,538) $78,659Due to the FDA 510(k) clearance for the Company’s robotic guidance and navigation system in the third quarter of 2017,$20.5 million of IPR&D was transferred to developed technology and began to be amortized over a period of 10 years.During 2016, we recorded an impairment charge of $3.5 million related to one of our IPR&D projects as a component ofacquisition related costs. We used a discounted future cash flow analysis to determine the fair value used to determine the impairmentcharge.A summary of the net carrying value of goodwill is presented below:(In thousands) December 31, 2016$105,926Additions and adjustments17,907Foreign exchange57December 31, 2017123,890Additions and adjustments—Foreign exchange(156)December 31, 2018$123,734For intangible assets subject to amortization as of December 31, 2018, the following is the expected future amortization:(In thousands) AnnualAmortizationYear ending December 31: 2019 $11,5052020 10,8712021 10,6352022 10,0822023 8,514Thereafter 15,903Total $67,51095GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 5. MARKETABLE SECURITIESThe composition of our short-term and long-term marketable securities is as follows: December 31, 2018(In thousands)ContractualMaturity(in years) Amortized Cost Gross UnrealizedGains Gross UnrealizedLosses Fair ValueShort-term: Municipal bondsLess than 1 $14,923 $— $(25) $14,898Corporate debt securitiesLess than 1 118,823 — (185) 118,638Commercial paperLess than 1 50,202 3 (11) 50,194 Government, federal agency, and other sovereign obligationsLess than 1 4,497 — (1) 4,496Asset-backed securitiesLess than 1 11,765 — (54) 11,711Total short-term marketable securities $200,210 $3 $(276) $199,937 Long-term: Municipal bonds1-2 $2,676 $— $(4) $2,672Corporate debt securities1-3 127,676 196 (295) 127,577Asset backed securities1-3 128,297 262 (89) 128,470 Government, federal agency, and other sovereign obligations1-3 4,411 — (13) 4,398Total long-term marketable securities $263,060 $458 $(401) $263,117 December 31, 2017(In thousands)ContractualMaturity(in years) Amortized Cost Gross UnrealizedGains Gross UnrealizedLosses Fair ValueShort-term: Municipal bondsLess than 1 $124,817 $1 $(141) $124,677Corporate debt securitiesLess than 1 64,599 5 (68) 64,536Commercial paperLess than 1 55,768 — (27) 55,741U.S. government and agency securitiesLess than 1 9,960 — (24) 9,936Total short-term marketable securities $255,144 $6 $(260) $254,890 Long-term: Municipal bonds1-2 $15,285 $— $(48) $15,237Corporate debt securities1-2 17,155 3 (39) 17,119Asset backed securities1-2 23,841 — (64) 23,777Total long-term marketable securities $56,281 $3 $(151) $56,13396GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 6. FAIR VALUE MEASUREMENTSUnder the accounting for fair value measurements and disclosures, fair value is defined as the price that would be received foran asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or the liability in anorderly transaction between market participants on the measurement date. Additionally, a fair value hierarchy was established thatprioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quotedprices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. The level within the fair valuehierarchy is based on the lowest level of any input that is significant to the fair value measurement.Our assets and liabilities measured at fair value on a recurring basis are classified and disclosed in one of the following threecategories: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; andLevel 3—unobservable inputs in which there is little or no market data available, which require the reporting entity to usesignificant unobservable inputs or valuation techniques.The fair value of our assets and liabilities measured at fair value on a recurring basis was as follows: Balance at (In thousands)December 31, 2018 Level 1 Level 2 Level 3Assets Cash equivalents$48,040 $259 $47,781 $—Municipal bonds17,570 — 17,570 —Corporate debt securities246,215 — 246,215 —Commercial paper50,194 — 50,194 —Asset-backed securities140,181 — 140,181 —Government, federal agency, and other sovereign obligations8,894 — 8,894 — Liabilities Contingent consideration10,118 — — 10,11897GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Balance at (In thousands)December 31, 2017 Level 1 Level 2 Level 3Assets Cash equivalents$31,549 $5,927 $25,622 $—Municipal bonds139,914 — 139,914 —Corporate debt securities81,655 — 81,655 —Commercial paper55,741 — 55,741 —Asset-backed securities23,777 — 23,777 —U.S. government and agency securities9,936 — 9,936 — Liabilities Contingent consideration15,919 — — 15,919Our marketable securities are classified as Level 2 within the fair value hierarchy, as we measure their fair value using marketprices for similar instruments and inputs such as actual trade data, benchmark yields, broker/dealer quotes and other similar dataobtained from quoted market prices or independent pricing vendors.Assets and Liabilities That Are Measured at Fair Value on a Nonrecurring BasisThe purchase price of business acquisitions is primarily allocated to the tangible and identifiable intangible assets acquired andliabilities assumed based on their estimated fair values on the acquisition dates, with the excess recorded as goodwill. We utilize Level3 inputs in the determination of the initial fair value. Non-financial assets such as goodwill, intangible assets, and property, plant, andequipment are subsequently measured at fair value when there is an indicator of impairment and recorded at fair value only when animpairment is recognized. We assess the impairment of intangible assets annually or whenever events or changes in circumstancesindicate that the carrying amount of an intangible asset may not be recoverable. The fair value of our goodwill and intangible assets isnot estimated if there is no change in events or circumstances that indicate the carrying amount of an intangible asset may not berecoverable.Contingent consideration represents our contingent milestone, performance and revenue-sharing payment obligations related toour acquisitions and is measured at fair value, based on significant inputs not observable in the market, which represents a Level 3measurement within the fair value hierarchy. The valuation of contingent consideration uses assumptions we believe would be madeby a market participant. We assess these estimates on an ongoing basis as additional data impacting the assumptions is obtained. Thebalances of the fair value of contingent consideration are recognized within business acquisition liabilities on our consolidated balancesheets, and the changes in the fair value of contingent consideration are recognized within acquisition related costs in the consolidatedstatements of income. As part of the KB Medical Acquisition during the second quarter of 2017, we incurred a milestone-basedcontingent consideration liability.98GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)The recurring Level 3 fair value measurements of our contingent consideration liabilities include the following significantunobservable inputs, which have not materially changed since December 31, 2017: Fair Value at (In thousands) December 31, 2018 Valuation technique Unobservable input Range Discount rate 8.5%Revenue-based payments $5,289 Discounted cash flow Probability of payment 75%-100% Projected year of payment 2019-2029 Discount rate 4.4%Milestone-based payments $4,829 Discounted cash flow Probability of payment 100% Projected year of payment 2019The following table provides a reconciliation of the beginning and ending balances of contingent consideration: Year Ended(In thousands) December 31, 2018 December 31, 2017Beginning balance $15,919 $19,849Purchase price contingent consideration — 4,871Contingent payments (6,738) (10,109)Non-cash settlement of certain contingent consideration — —Changes resulting from foreign currency fluctuations (48) 68Changes in fair value of contingent consideration 985 1,240Ending balance $10,118 $15,919NOTE 7. INVENTORIES(In thousands)December 31, 2018 December 31, 2017Raw materials$20,740 $19,984Work in process13,179 10,012Finished goods97,335 78,413Total$131,254 $108,40999GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 8. PROPERTY AND EQUIPMENT(In thousands) Useful Life December 31, 2018 December 31, 2017Land — $8,298 $8,314Buildings and improvements 30 27,267 24,974Equipment 5-7 84,150 65,035Instruments* 5 219,451 189,974Modules and cases* 5 34,183 27,346Other property and equipment 3-5 15,333 19,284 388,682 334,927Less: accumulated depreciation (216,809) (191,760)Total $171,873 $143,167______________* As of December 31, 2017, we completed a review of the estimated useful life of our Instruments and Modules and cases. Based on historical useful lifeinformation, as well as forecasted product life cycles and demand expectations, the useful life of Instruments and Modules and cases was extended fromthree to five years. For additional information regarding the change in estimate, please see “Note 1. Background and Summary of Significant AccountingPolicies; (d) Use of Estimates” above.Instruments are hand-held devices used by surgeons to install implants during surgery. Modules and cases are used to store andtransport the instruments and implants.Depreciation expense related to property and equipment was as follows: Year Ended(In thousands) December 31,2018 December 31, 2017 December 31, 2016Depreciation $32,042 $34,158 $35,293Included in the 2016 amount is $5.5 million related to the impact from prior periods and $2.1 million related to the 2016 activityas a result of the prior period adjustment. For additional information regarding the prior period adjustment, please see “Note 1.Background and Summary of Significant Accounting Policies; (b) Basis of Presentation” above.NOTE 9. ACCRUED EXPENSES(In thousands)December 31, 2018 December 31, 2017Compensation and other employee-related costs$32,465 $29,006Legal and other settlements and expenses6,684 1,177Accrued non-income taxes3,593 6,325Royalties2,500 2,139Other14,636 13,947Total accrued expenses$59,878 $52,594100GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 10. DEBTLine of CreditIn May 2011, we entered into a credit agreement with Wells Fargo Bank related to a revolving credit facility that provides forborrowings 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 therevolving credit facility can be increased to $150.0 million. The revolving credit facility includes up to a $25.0 million sub-limit forletters of credit. As amended to date, the revolving credit facility expires in May 2019. Cash advances bear interest at our option eitherat a fluctuating rate per annum equal to the daily LIBOR in effect for a one-month period plus 0.75%, or a fixed rate for a one- orthree-month period equal to LIBOR plus 0.75%. The credit agreement governing the revolving credit facility also subjects us tovarious restrictive covenants, including the requirement to maintain maximum consolidated leverage. The covenants also includelimitations on our ability to repurchase shares, to pay cash dividends or to enter into a sale transaction. As of December 31, 2018, wewere in compliance with all financial covenants under the credit agreement, there were no outstanding borrowings under the revolvingcredit facility and available borrowings were $125.0 million. We may terminate the credit agreement at any time on ten days’ noticewithout premium or penalty.NOTE 11. EQUITYOur amended and restated Certificate of Incorporation provides for a total of 785,000,000 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 ACommon”), 275,000,000 shares are designated as Class B common stock (“Class B Common”) and 10,000,000 shares are designatedas Class C common stock (“Class C Common”).The holders of Class A Common are entitled to one vote for each share of Class A Common held. The holders of Class BCommon are entitled to 10 votes for each share of Class B Common held. The holders of Class A Common and Class B Commonvote together as one class of common stock. The Class C Common is nonvoting. Except for voting rights, the Class A Common, ClassB Common and Class C Common have the same rights and privileges.Our issued and outstanding common shares by Class were as follows:(Shares)Class A Common Class B Common Class C Common TotalDecember 31, 201876,143,257 22,430,097 — 98,573,354December 31, 201772,780,325 23,877,556 — 96,657,881101GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)The tables below present the changes in each component of accumulated other comprehensive income (loss), including currentperiod other comprehensive loss and reclassifications out of accumulated other comprehensive income (loss):(In thousands) Unrealized loss onmarketablesecurities, net of tax Foreign currencytranslationadjustments Accumulated othercomprehensive lossAccumulated other comprehensive loss, net of tax, at December 31, 2016 $(167) $(8,475) $(8,642)Other comprehensive loss before reclassifications (143) 1,881 1,738Amounts reclassified from accumulated other comprehensive loss, net of tax (3) — (3)Other comprehensive loss, net of tax (146) 1,881 1,735Accumulated other comprehensive loss, net of tax, at December 31, 2017 (313) (6,594) (6,907)Other comprehensive (loss)/income before reclassifications 160 (410) (250)Amounts reclassified from accumulated other comprehensive loss, net of tax (15) — (15)Other comprehensive (loss)/income, net of tax 145 (410) (265)Accumulated other comprehensive loss, net of tax, at December 31, 2018 (168) (7,004) (7,172)Amounts reclassified from accumulated other comprehensive loss, net of tax, related to unrealized gains/losses on marketablesecurities were released to other income, net in our consolidated statements of income.NOTE 12. STOCK-BASED COMPENSATIONWe have three stock plans: our Amended and Restated 2003 Stock Plan, our 2008 Stock Plan, and our 2012 Equity IncentivePlan (the “2012 Plan”). The 2012 Plan is the only remaining active stock plan. The purpose of these stock plans was, and the 2012Plan is, to provide incentive to employees, directors, and consultants of Globus. The Plans are administered by the Board of Directorsof Globus (the “Board”) or its delegates. The number, type of option, exercise price, and vesting terms are determined by the Board orits delegates in accordance with the terms of the Plans. The options granted expire on a date specified by the Board, but generally notmore 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, theaggregate 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 underlyingawards outstanding under the 2008 Plan as of March 13, 2012 that, on or after that date, are forfeited, terminated, expired or lapse forany reason, or are settled for cash without delivery of shares and (iv) starting January 1, 2013, an annual increase in the number ofshares available under the 2012 Plan equal to up to 3% of the number of shares of our common and preferred stock outstanding at theend of the previous year, as determined by our Board. The number of shares that may be issued or transferred pursuant to incentivestock options under the 2012 Plan is limited to 10,769,230 shares. The shares of Class A Common stock covered by the 2012 Planinclude authorized but unissued shares, treasury shares or shares of common stock purchased on the open market.102GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)As of December 31, 2018, pursuant to the 2012 Plan, there were 14,889,882 shares of Class A Common stock reserved and3,027,462 shares of Class A Common stock available for future grants.The weighted average grant date per share fair values of the options awarded to employees were as follows: Year Ended December 31, 2018 December 31, 2017 December 31, 2016Weighted average grant date per share fair value $14.90 $9.12 $7.62The fair value of the options was estimated on the date of the grant using a Black-Scholes option pricing model with thefollowing assumptions: Year Ended December 31, 2018 December 31, 2017 December 31, 2016Risk-free interest rate2.30%-3.09% 1.74%-2.20% 1.03%-2.01%Expected term (years)5.8-7.5 5.8-6.4 5.8-6.5Expected volatility23.0%-28.0% 26.0%-29.0% 28.0%-29.0%Expected dividend yield—% —% —%Stock option activity during the year ended December 31, 2018 is summarized as follows: Option Shares(thousands) Weighted averageexercise price Weighted averageremainingcontractual life(years) Aggregate intrinsicvalue (thousands)Outstanding at January 1, 20189,041 $23.40 Granted3,167 47.78 Exercised(1,917) 20.48 Forfeited(623) 31.42 Outstanding at December 31, 20189,668 $31.45 7.5 $128,067Exercisable at December 31, 20184,308 22.87 6.1 87,972Expected to vest at December 31, 20185,360 $38.34 8.6 $40,094We use the Black Scholes pricing model to determine the fair value of our stock options (see “Note 1. Background andSummary of Significant Accounting Policies, (q) Stock-Based Compensation” above).103GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Compensation expense related to stock options granted to employees and non-employees under the Plans and the intrinsicvalue of stock options exercised was as follows: Year Ended(In thousands) December 31, 2018 December 31, 2017 December 31, 2016Intrinsic value of stock options exercised $59,345 $12,217 $8,824 Stock-based compensation expense $21,899 $14,686 $11,382Net stock-based compensation capitalized into inventory 320 196 270Total stock-based compensation cost $22,219 $14,882 $11,652As of December 31, 2018, there was $52.9 million of unrecognized compensation expense related to unvested employee stockoptions that vest over a weighted average period of three years.NOTE 13. INCOME TAXESThe components of income before income taxes are as follows: Year ended (In thousands) December 31,2018 December 31, 2017 December 31, 2016Domestic $180,701 $155,051 $154,377Foreign 7,904 14,877 2,902Total $188,605 $169,928 $157,279The components of the provision for income taxes are as follows: Year ended (In thousands) December 31,2018 December 31, 2017 December 31, 2016Current: Federal $23,774 $46,728 $51,785State 4,662 5,009 4,533Foreign 2,724 2,638 748 31,160 54,375 57,066Deferred: Federal 4,155 10,553 (4,527)State (587) (1,123) 204Foreign (2,597) (1,225) 195 971 8,205 (4,128)Total $32,131 $62,580 $52,938104GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)A reconciliation of the statutory U.S. federal tax rate to our effective rate is as follows: Year ended December 31, 2018 December 31, 2017 December 31, 2016Statutory U.S. federal tax rate 21.0 % 35.0 % 35.0 %State income taxes, net of federal benefit 2.3 1.9 2.2Foreign taxes 1.7 1.0 0.4Domestic production activities deduction (0.7) (2.3) (2.7)Tax credits (1.6) (3.8) (1.3)Stock compensation windfall (5.2) (1.4) —Nondeductible expenses (0.6) 0.1 0.1Other 0.1 (0.2) —Tax reform impact — 6.5 —Effective tax rate 17.0 % 36.8 % 33.7 %Deferred income taxes reflect the tax effects of temporary differences between the basis of assets and liabilities recognized forfinancial reporting purposes and tax purposes. Significant components of our deferred income taxes are as follows:(In thousands) December 31,2018 December 31, 2017Deferred tax assets: Inventory reserve $25,398 $23,087Accruals, reserves, and other currently not deductible 10,377 7,812Stock-based compensation 10,959 9,109Net operating loss carryforwards 3,852 1,924Total deferred tax assets 50,586 41,932Valuation allowance (2,683) (1,821)Total deferred tax assets, net of valuation allowance 47,903 40,111Deferred tax liabilities: Depreciation and amortization (42,439) (30,749)Total deferred tax liabilities (42,439) (30,749)Net deferred tax assets $5,464 $9,362In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portionor all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation offuture taxable income during the periods in which those temporary differences become deductible. Based upon the level of historicaltaxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, managementbelieves it is more likely than not that we will realize a portion of the benefits of these deductible differences at December 31, 2018 and2017. The Company has established valuation allowances of $2.7 million and $1.8 million at December 31, 2018 and 2017,respectively, primarily related to the uncertainty of the utilization of certain deferred tax assets and primarily comprised of tax losscarryforwards in various jurisdictions. The increase in the valuation allowance during fiscal year 2018 is primarily driven by currentyear foreign tax losses that are not expected to be realized. The amount of the deferred tax asset considered105GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period arereduced.As of December 31, 2018 and 2017, we have NOL carryforwards of $3.9 million and $1.9 million, respectively, which, ifunused, will expire in years 2020 through 2037.A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: Year ended (In thousands) December 31, 2018 December 31, 2017 December 31, 2016Unrecognized tax benefits at the beginning of the year $2,601 $1,862 $1,575Additions related to current year tax positions — — —Additions related to prior year tax positions 2,176 739 287Reductions related to prior year tax positions — — —Unrecognized tax benefits at the end of the year $4,777 $2,601 $1,862The impact of our unrecognized tax benefits to the effective income tax rate is as follows:(In thousands) December 31, 2018 December 31, 2017 December 31, 2016Portion of total unrecognized tax benefits that, if recognized, would affect the effectiveincome tax rate $4,084 $2,076 $1,542The Company intends to indefinitely reinvest its foreign earnings abroad to ensure sufficient working capital for furtherexpansion of its existing operations outside the United States, therefore the Company has not recorded income taxes on theundistributed earnings of its foreign subsidiaries. The undistributed earnings of our foreign subsidiaries as of December 31, 2018 areimmaterial. In the event we are required to repatriate funds from outside of the United States, such repatriation may be subject to locallaws, customs, and tax consequences.Interest and penalties are recorded in the statement of income as provision for income taxes. The total interest and penaltiesrecorded in the statement of income was nominal for the years ended December 31, 2018, 2017 and 2016. We do not expect asignificant change in our uncertain tax benefits in the next twelve months. We are subject to federal income tax as well as income taxof multiple state and foreign jurisdictions. With few exceptions, we are no longer subject to income tax examination by tax authoritiesin major jurisdictions for years prior to 2013 as of December 31, 2018.On December 22, 2017, the Tax Reform Act was enacted. The Tax Reform Act includes a number of changes to existing U.S.tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35% to 21%, repeals thededuction for domestic production activities, implements a territorial tax system and imposes a repatriation tax on earnings of foreignsubsidiaries, among other things.106GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)The Company recognized the income tax effects of the Tax Reform Act in its 2017 financial statements in accordance withStaff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in thereporting period in which the Tax Reform Act was signed into law. As such, the Company has recorded a net tax charge of $10.3million related to the re-measurement of its deferred tax assets as well as a current tax charge of $0.7 million related to the deemedrepatriation of its foreign earnings for the three months and year ended December 31, 2017.December 22, 2018 marked the end of the measurement period for purposes of SAB 118. As such, we have completed ouranalysis based on legislative updates relating to the Act currently available which resulted in an immaterial change to provisionalamounts previously recorded in its December 31, 2017 financial statements.NOTE 14. LEASESThe Company leases certain equipment and facilities under operating leases. As of December 31, 2018, minimum future rentalpayments under operating leases for each of the next five years are as follows:(In thousands) Year ending December 31: 2019 $1,5812020 8632021 2352022 782023 37Total $2,794Rent expense related to all operating leases recognized as a component of selling, general and administrative expenses was asfollows: Year ended (In thousands) December 31, 2018 December 31, 2017 December 31, 2016Rent expense $2,950 $2,123 $1,500107GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 15. COMMITMENTS AND CONTINGENCIESWe are involved in a number of proceedings, legal actions, and claims. Such matters are subject to many uncertainties, and theoutcomes of these matters are not within our control and may not be known for prolonged periods of time. In some actions, theclaimants seek damages, as well as other relief, including injunctions prohibiting us from engaging in certain activities, which, ifgranted, could require significant expenditures and/or result in lost revenues. We record a liability in the consolidated financialstatements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If thereasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, theminimum 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 aloss to be recorded. While it is not possible to predict the outcome for most of the matters discussed, we believe it is possible that costsassociated with them could have a material adverse impact on our consolidated earnings, financial position or cash flows.N-Spine, Synthes and DePuy Synthes LitigationIn April 2010, N-Spine, Inc. and Synthes USA Sales, LLC filed suit against us in the U.S. District Court for the District ofDelaware for patent infringement. N-Spine, the patent owner, and Synthes USA, a licensee of the subject patent, alleged that weinfringed one or more claims of the patent by making, using, offering for sale or selling our TRANSITION® stabilization systemproduct. This matter was one of the four patent infringement lawsuits concerning spinal implant technologies between Globus Medical,Inc. and DePuy Synthes settled on January 13, 2016 for $7.9 million.In a related matter, on January 8, 2014, DePuy Synthes Products, LLC (“Depuy Synthes”) filed suit against us in the U.S.District Court for the District of Delaware for patent infringement. DePuy Synthes alleged that we infringed one or more claims of theasserted patent by making, using, offering for sale or selling our TRANSITION® stabilization system product. This matter was one ofthe four patent infringement lawsuits concerning spinal implant technologies between Globus Medical, Inc. and DePuy Synthes settledon January 13, 2016 for $7.9 million.Synthes USA, LLC, Synthes USA Products, LLC and Synthes USA Sales, LLC LitigationIn July 2011, Synthes USA, LLC, Synthes USA Products, LLC and Synthes USA Sales, LLC filed suit against us in the U.S.District Court for the District of Delaware for patent infringement. Synthes USA LLC, the patent owner, Synthes USA Products,LLC, a licensee to manufacture products of the subject patents, and Synthes USA Sales LLC, a licensee to sell products of the subjectpatents, alleged that we infringed one or more claims of three patents by making, using, offering for sale or selling our COALITION®,INDEPENDENCE® and INTERCONTINENTAL® products. This matter was one of the four patent infringement lawsuitsconcerning spinal implant technologies between Globus Medical, Inc. and DePuy Synthes settled on January 13, 2016 for $7.9million.L5 LitigationIn December 2009, we filed suit in the Court of Common Pleas of Montgomery County, Pennsylvania against our formerexclusive independent distributor L5 Surgical, LLC and its principals, seeking an injunction and declaratory judgment concerningcertain restrictive covenants made to L5 by its sales representatives.108GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)L5 brought counterclaims against us alleging tortious interference, unfair competition and conspiracy. The injunction phase wasresolved in September 2010 and the remaining claims were fully resolved through settlement by the parties on February 6, 2019. Bianco LitigationOn March 21, 2012, Sabatino Bianco filed suit against us in the Federal District Court for the Eastern District of Texasclaiming that we misappropriated his trade secret and confidential information and improperly utilized it in developing our CALIBER®product. On October 1, 2013, Bianco amended his complaint to claim that his trade secrets and confidential information were also usedimproperly in developing our RISE® and CALIBER®-L products.On September 13, 2017, we settled this matter with Bianco for $11.5 million in cash, which resulted in the reversal of apreviously recorded accrual of $2.5 million and the recording of $9.0 million in other assets that will be amortized through June 30,2022, as a component of cost of goods sold.Bonutti Skeletal Innovations, LLC LitigationOn November 19, 2014, Bonutti Skeletal Innovations, LLC (“Bonutti Skeletal”) filed suit against us in the U.S. District Courtfor the Eastern District of Pennsylvania for patent infringement. Bonutti Skeletal, a non-practicing entity, alleged that Globus willfullyinfringed one or more claims of six patents by making, using, offering for sale or selling the CALIBER®, CALIBER®-L,COALITION®, CONTINENTAL®, FORGE®, FORTIFY®, INDEPENDENCE®, INTERCONTINENTAL®, MONUMENT®,NIKO®, RISE®, SIGNATURE®, SUSTAIN®, and TRANSCONTINENTAL® products. Globus Medical, Inc. and Bonutti Skeletalsettled this matter on June 9, 2016.Flexuspine, Inc. LitigationOn March 11, 2015, Flexuspine, Inc. filed suit against us in the U.S. District Court for the Eastern District of Texas for patentinfringement. Flexuspine, Inc. alleged that Globus willfully infringed one or more claims of five patents by making, using, offering forsale or selling the CALIBER®, CALIBER®-L, and ALTERA® products. On August 19, 2016, a jury returned a verdict in our favorfinding no infringement of the asserted patents. On January 19, 2018 the United States Court of Appeals for the Federal Circuitaffirmed the decisions of the lower court. On February 19, 2018, Flexuspine, Inc. filed a petition for panel rehearing in the UnitedStates Court of Appeals for the Federal Circuit. On March 7, 2018, the United States Court of Appeals for the Federal Circuit deniedFlexuspine Inc.’s petition for panel rehearing.In addition, we are subject to legal proceedings arising in the ordinary course of business.109GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 16. RETIREMENT BENEFIT PLANSWe sponsor a 401(k) Plan covering all eligible U.S. employees. Under the 401(k) Plan, we make nondiscretionary matchingcontributions at the rate of 100% of employee’s contributions up to a maximum annual contribution of $6,000 per eligible employee,limited to 3% of the employee’s compensation for the period.Additionally, we contribute to various foreign retirement benefit plans required by local law or coordinated with governmentsponsored plans which cover many of our international employees. The benefits offered under these plans are reflective of localcustoms and practices in the countries concerned.Company contributions to these retirement plans were as follows: Year ended(In thousands) December 31, 2018 December 31, 2017 December 31, 2016401(k) and other retirement plan contributions $4,682 $3,597 $2,772NOTE 17. SEGMENT AND GEOGRAPHIC INFORMATIONOperating segments are defined as components of an enterprise for which separate financial information is available andevaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and inassessing performance. We globally manage the business within one operating segment. Segment information is consistent with howmanagement reviews the business, makes investing and resource allocation decisions and assesses operating performance.The following table represents total sales by geographic area, based on the location of the customer: Year Ended(In thousands) December 31, 2018 December 31, 2017 December 31, 2016United States $593,878 $529,882 $500,226International 119,091 106,095 63,768Total sales $712,969 $635,977 $563,994 110GLOBUS MEDICAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 18. QUARTERLY FINANCIAL DATA (unaudited) (unaudited)(In thousands, except per share amounts) March 31, 2018 June 30, 2018 September 30, 2018 December 31, 2018Sales $174,411 $173,384 $169,236 $195,938Gross profit 136,441 135,747 131,387 149,984Net income 39,538 44,977 35,208 36,751Net earnings per common share - basic 0.41 0.46 0.36 0.37Net earnings per common share - diluted 0.39 0.44 0.35 0.36 (unaudited)(In thousands, except per share amounts) March 31, 2017 June 30, 2017 September 30, 2017 December 31, 2017Sales $155,809 $152,390 $151,744 $176,034Gross profit 120,209 115,191 114,946 135,178Net income 28,714 28,667 25,591 24,376Net earnings per common share - basic 0.30 0.30 0.27 0.25Net earnings per common share - diluted 0.30 0.29 0.26 0.25111Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A. Controls and ProceduresEvaluation of Disclosure Controls and ProceduresOur disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of1934, as amended) are designed to ensure that information required to be disclosed in the reports that we file or submit under theExchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of theSecurities and Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated tomanagement, including our principal executive officer and principal financial officer, to allow timely decisions regarding disclosure.The Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) have reviewed the design and effectiveness of ourdisclosure controls and procedures as of December 31, 2018 and, based on their evaluation, have concluded that the disclosure controlsand procedures were effective as of such date.Management’s Report on Internal Control over Financial ReportingManagement of Globus Medical, Inc. (“Globus”) is responsible for establishing and maintaining adequate internal control overfinancial reporting, as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act. Internal control over financial reportingis a process designed to provide reasonable, but not absolute, assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with accounting principles generally accepted in the UnitedStates of America. A company’s internal control over financial reporting includes those policies and procedures that pertain to themaintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of thecompany; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements inaccordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management and directors of the company; and provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that couldhave a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies or procedures may deteriorate.Management evaluated the internal control over financial reporting of Globus as of December 31, 2018. In making thisassessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission inInternal Control-Integrated Framework (2013) (“COSO”).Based on the foregoing and as a result of this assessment and based on the criteria in the COSO framework, management hasconcluded that, as of December 31, 2018, the internal control over financial reporting of Globus was effective.112Table of ContentsReport of Independent Registered Public Accounting FirmDeloitte & Touche LLP, our independent registered public accounting firm, has audited the effectiveness of our internal controlover financial reporting as of December 31, 2018 as stated in its report that is included in Item 8 of this Form 10-K.Changes in Internal Control over Financial ReportingThere was no change in our internal control over financial reporting identified in connection with the evaluation required byRule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during our most recent fiscal quarter that has materially affected, or isreasonably likely to materially affect, our internal control over financial reporting.Item 9B. Other InformationNone.113Table of ContentsPART IIICertain information required by Part III is omitted from this Annual Report and will be included in the definitive proxystatement for our 2019 annual meeting of stockholders, which will be filed within 120 days after the end of our fiscal year.Item 10. Directors, Executive Officers and Corporate GovernanceCode of EthicsWe have adopted a Code of Ethics for all employees, officers, directors, as well as a Code of Ethics specifically for ourprincipal executive officer and senior financial officers, both of which are available on our website, www.globusmedical.com. Weintend to disclose future amendments to, or waivers from, provisions of our Code of Ethics that apply to our Principal ExecutiveOfficer, Principal Financial Officer, Principal Accounting Officer, or Controller, or persons performing similar functions, within fourbusiness days of such amendment or waiver.The other information required by this Item 10 will be set forth in the Company's proxy statement for its 2019 annual meetingof stockholders, which information is incorporated herein by reference.Item 11. Executive CompensationThe information required by this Item 11 will be set forth in the Company's proxy statement for its 2019 annual meeting ofstockholders, which information is incorporated herein by reference.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by this Item 12 will be set forth in the Company's proxy statement for its 2019 annual meeting ofstockholders, which information is incorporated herein by reference.Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe information required by this Item 13 will be set forth in the Company's proxy statement for its 2019 annual meeting ofstockholders, which information is incorporated herein by reference.Item 14. Principal Accountant Fees and ServicesThe information required by this Item 14 will be set forth in the Company's proxy statement for its 2019 annual meeting ofstockholders, which information is incorporated herein by reference.114Table of ContentsPART IVItem 15. Exhibits and Financial Statement Schedules(a) (1) Financial Statements PageReport of Independent Registered Public Accounting Firm74Consolidated Balance Sheets77Consolidated Statements of Income78Consolidated Statements of Comprehensive Income79Consolidated Statements of Equity80Consolidated Statements of Cash Flows81Notes to Consolidated Financial Statements82(a) (2) Financial Statement SchedulesSCHEDULE II. VALUATION ACCOUNTS AND QUALIFYING ACCOUNTSAllowance for doubtful accounts:(In thousands)Beginning ofperiod Charged toexpenses Write-offs End of periodYear ended December 31, 2016$2,513 $865 $(607) $2,771Year ended December 31, 20172,771 1,718 (526) 3,963Year ended December 31, 2018$3,963 $960 $(697) $4,226Deferred tax valuation allowance: Additions Deductions (In thousands)Beginning ofperiod Charged toexpenses Charged to otheraccounts Other deductions End of periodYear ended December 31, 2016$43 $42 $— $(2)(b)$83Year ended December 31, 201783 511 1,227(a)— 1,821Year ended December 31, 2018$1,821 $924 $— $(62)(b)$2,683(a) Reflects primarily the impact of acquisitions.(b) Reflects primarily the effects of currency fluctuations.115Table of Contents(b) Exhibits, including those incorporated by referenceExhibit No. Item 3.1 Amended and Restated Certificate of Incorporation of Globus Medical, Inc. (incorporated by reference toExhibit 3.1 of the Registrant’s Amendment No. 5 to the Registration Statement on Form S-1 filed on August2, 2012).3.2 Certificate of Amendment of the Amended and Restated Certificate of Incorporation, dated July 31, 2012(incorporated by reference to Exhibit 3.2 of the Registrant’s Amendment No. 5 to the Registration Statementon Form S-1 filed on August 2, 2012).3.3 Certificate of Amendment of the Amended and Restated Certificate of Incorporation, dated August 20, 2012(incorporated by reference to Exhibit 3.1 of the Registrant’s Form 10-Q/A filed on September 19, 2012).3.4 Amended and Restated Bylaws of Globus Medical, Inc. (incorporated by reference to Exhibit 3.4 of theRegistrant’s Form 10-K filed on February 29, 2016).4.1 Specimen Certificate for Class A Common Stock (incorporated by reference to Exhibit 4.1 of theRegistrant’s Amendment No. 3 to the Registration Statement on Form S-1 filed on July 16, 2012).10.1 Globus Medical, Inc. Amended and Restated 2003 Stock Plan (incorporated by reference to Exhibit 10.4 ofthe Registrant’s Amendment No. 1 to the Registration Statement on Form S-1 filed on May 8, 2012).10.2 First Amendment to the Globus Medical, Inc. Amended and Restated 2003 Stock Plan (incorporated byreference to Exhibit 10.5 of the Registrant’s Amendment No. 1 to the Registration Statement on Form S-1filed on May 8, 2012).10.3 Globus Medical, Inc. 2008 Stock Plan (incorporated by reference to Exhibit 10.6 of the Registrant’sAmendment No. 1 to the Registration Statement on Form S-1 filed on May 8, 2012).10.4 Globus Medical, Inc. 2012 Equity Incentive Plan (incorporated by reference to Exhibit 10.7 of theRegistrant’s Amendment No. 1 to the Registration Statement on Form S-1 filed on May 8, 2012).10.5 Form of Grant Notice and Stock Option Agreement under 2003 Stock Plan (incorporated by reference toExhibit 10.8 of the Registrant’s Amendment No. 1 to the Registration Statement on Form S-1 filed on May8, 2012).10.6 Form of Grant Notice and Stock Option Agreement under 2008 Stock Plan (incorporated by reference toExhibit 10.9 of the Registrant’s Amendment No. 1 to the Registration Statement on Form S-1 filed on May8, 2012).10.7 Form of Incentive Stock Option Grant Notice and Incentive Stock Option Agreement under 2012 EquityIncentive Plan (incorporated by reference to Exhibit 10.10 of the Registrant’s Amendment No. 1 to theRegistration Statement on Form S-1 filed on May 8, 2012).10.8 Form of Nonqualified Stock Option Grant Notice and Nonqualified Stock Option Agreement under 2012Equity Incentive Plan (incorporated by reference to Exhibit 10.11 of the Registrant’s Amendment No. 1 tothe Registration Statement on Form S-1 filed on May 8, 2012).10.9 Form of Indemnification Agreement (incorporated by reference to Exhibit 10.18 of the Registrant’sAmendment No. 1 to the Registration Statement on Form S-1 filed on May 8, 2012).116Table of Contents10.10 Form of No Competition and Non-Disclosure Agreement (incorporated by reference to Exhibit 10.19 of theRegistrant’s Amendment No. 1 to the Registration Statement on Form S-1 filed on May 8, 2012).10.11 Executive Employment Agreement, dated June 26, 2014, by and between Globus Medical, Inc. andAnthony L. Williams (incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on May 5, 2015).10.12 Employment Agreement, dated September 14, 2015, by and between Globus Medical, Inc. and David M.Demski (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on September17, 2015).10.13 Executive Employment Agreement, dated May 3, 2016 by and between Globus Medical, Inc. and Daniel T.Scavilla (incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on May 4, 2016).10.14 Credit Agreement, dated May 3, 2016, by and between Globus Medical, Inc. and Globus Medical NorthAmerica, Inc., and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.1 to ourForm 10-Q filed on July 27, 2016).10.15 First Amendment to Credit Agreement, dated June 7, 2017, by and between Globus Medical, Inc. andGlobus Medical North America, Inc., and Wells Fargo Bank, National Association (incorporated byreference to Exhibit 10.1 to our Form 10-Q filed on August 3, 2017).10.16 Second Amendment to Credit Agreement, dated June 1, 2018, by and between Globus Medical, Inc., GlobusMedical North America, Inc. and Wells Fargo Bank, National Association (incorporated by reference toExhibit 10.1 to our Form 10-Q filed on August 2, 2018)16.1 Letter from Grant Thornton LLP, dated April 18, 2017 to the Securities and Exchange Commission(incorporated by reference to Exhibit 16.1 to our Current Report on Form 8-K filed on April 18, 2017)21.1* Subsidiaries of Globus Medical, Inc.23.1* Consent of independent registered public accounting firm - Deloitte & Touche LLP.23.2* Consent of independent registered public accounting firm - Grant Thornton LLP.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-OxleyAct of 2002.101.INS* XBRL Instance Document101.SCH* XBRL Taxonomy Extension Schema Document101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document101.LAB* XBRL Taxonomy Extension Label Linkbase Document101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document101.DEF* XBRL Taxonomy Extension Definition Linkbase Document * Filed herewith.** Furnished herewith.117Table of ContentsItem 16. Form 10-K Summary None.118Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto duly authorized. GLOBUS MEDICAL, INC. Dated:February 21, 2019/s/ DAVID M. DEMSKI David M. Demski Chief Executive Officer (Principal Executive Officer) Dated:February 21, 2019/s/ DANIEL T. SCAVILLA Daniel T. Scavilla Executive Vice President Chief Financial Officer Chief Commercial Officer (Principal Financial Officer) Dated:February 21, 2019/s/ STEVEN M. PAYNE Steven M. Payne Chief Accounting Officer (Principal Accounting Officer)119Table of ContentsPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons onbehalf of the Registrant and in the capacities and on the dates indicated. SIGNATURETITLEDATE /s/ David M. DemskiChief Executive Officer and DirectorFebruary 21, 2019 David M. Demski(Principal Executive Officer) /s/ Daniel T. ScavillaExecutive Vice PresidentFebruary 21, 2019 Daniel T. ScavillaChief Financial Officer Chief Commercial Officer (Principal Financial Officer) /s/ Steven M. PayneChief Accounting OfficerFebruary 21, 2019 Steven M. Payne(Principal Accounting Officer) /s/ David C. PaulExecutive Chairman and DirectorFebruary 21, 2019 David C. Paul /s/ David D. DavidarDirectorFebruary 21, 2019 David D. Davidar /s/ Kurt C. WheelerDirectorFebruary 21, 2019 Kurt C. Wheeler /s/ Robert W. LiptakDirectorFebruary 21, 2019 Robert W. Liptak /s/ Daniel T. LemaitreDirectorFebruary 21, 2019 Daniel T. Lemaitre /s/ Ann D. RhoadsDirectorFebruary 21, 2019 Ann D. Rhoads /s/ James R. TobinDirectorFebruary 21, 2019 James R. Tobin 120EXHIBIT 21.1Subsidiaries of Globus Medical, Inc.The following is a list of our subsidiaries as of December 31, 2018. Certain subsidiaries are not named because they were notsignificant in the aggregate.Subsidiary JurisdictionGlobus Medical North America, Inc. Pennsylvania Branch Medical Group, LLC Delaware Transplant Technologies of Texas, Ltd. Texas Human Biologics of Texas, Ltd. Texas Tissue Transplant Technology, Ltd. Texas Globus Medical India Private Limited India Globus Medical SARL Switzerland Globus Medical South Africa Pty Limited South Africa Globus Medical Poland Sp. z o.o. Poland Globus Medical Australia Pty Limited Australia Globus Medical UK Limited United Kingdom Globus Medical Belgium BVBA Belgium Globus Medical Germany GmbH Germany Globus Medical Denmark ApS Denmark Globus Medical Sweden AB Sweden Globus Medical Israel Limited Israel Globus Medical France SARL France Globus Medical Netherlands B.V. Netherlands Globus Medical Austria GmbH Austria Globus Medical Japan GK Japan Scient'X Asia Pacific Pte. Ltd. Singapore Scient'X Australia Pty. Ltd. Australia Globus Medical Netherlands Biologics B.V. NetherlandsSubsidiary JurisdictionGlobus Medical Italy S.r.l. Italy Globus Medical Ireland, Ltd. Ireland Globus Medical GP, LLC Delaware Globus Medical Latin America, LLC Delaware Cibramed Produtos Medicos Descartaveis Comercio Importacao e Exportaca Ltda Brazil Japan Ortho Medical Co., Ltd. Japan GM International CV Netherlands KB Medical S.A. Switzerland Nemaris, Inc. DelawareConsent of Independent Registered Public Accounting FirmWe consent to the incorporation by reference in Registration Statements on Form S-8 (Nos. 333-198698 and 333-184196) ofour reports dated February 21, 2019, relating to the consolidated financial statements and consolidated financial statement schedule ofGlobus Medical, Inc. and subsidiaries and the effectiveness of Globus Medical, Inc. and subsidiaries’ internal control over financialreporting, appearing in this Annual Report on Form 10-K of Globus Medical, Inc. for the year ended December 31, 2018./s/ DELOITTE & TOUCHE LLPPhiladelphia, PennsylvaniaFebruary 21, 2019Consent of Independent Registered Public Accounting FirmWe have issued our report dated March 16, 2017, with respect to the consolidated financial statements and schedule as ofDecember 31, 2016 and for the year then ended included in the Annual Report of Globus Medical, Inc. and subsidiaries on Form 10-Kfor the year ended December 31, 2018. We consent to the incorporation by reference of said report in the Registration Statements ofGlobus Medical, Inc. on Forms S-8 (File No. 333-198698 and File No. 333-184196). /s/ Grant Thornton LLPPhiladelphia, PennsylvaniaFebruary 21, 2019EXHIBIT 31.1Certification By Principal Executive OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002I, David M. Demski, certify that:1.I have reviewed this Annual Report on Form 10-K of Globus Medical, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared;b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; andb)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.Date:February 21, 2019/s/ DAVID M. DEMSKI David M. Demski Chief Executive Officer and DirectorEXHIBIT 31.2Certification By Principal Financial OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002I, Daniel T. Scavilla, certify that:1.I have reviewed this Annual Report on Form 10-K of Globus Medical, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared;b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; andb)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date:February 21, 2019/s/ DANIEL T. SCAVILLA Daniel T. Scavilla Executive Vice President Chief Financial Officer Chief Commercial OfficerEXHIBIT 32Certification Pursuant to 18 U.S.C. Section 1350, as AdoptedPursuant to Section 906 of The Sarbanes-Oxley Act of 2002 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United StatesCode), David M. Demski, Chief Executive Officer, and Daniel T. Scavilla, Executive Vice President, Chief Financial Officer, andChief Commercial Officer of Globus Medical, Inc. (the “Company”), each certifies with respect to the Annual Report of the Companyon Form 10-K for the period ended December 31, 2018 (the “Report”) that, to the best of his knowledge:(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operationsof the Company. Dated:February 21, 2019/s/ DAVID M. DEMSKI David M. Demski Chief Executive Officer Dated:February 21, 2019/s/ DANIEL T. SCAVILLA Daniel T. Scavilla Executive Vice President Chief Financial Officer Chief Commercial Officer The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 ofChapter 63 of Title 18 of the United States Code) and is not being filed as part of the Report or as a separate disclosure document.

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